Brian Newman
Executive Vice President and Chief Financial Officer at United Parcel Service
Thanks, Carol, and good morning. Let me begin by echoing Carol's comment on how pleased we are on achieving a win, win, win labor agreement, covering more than 300,000 Teamster employees. This contract provides UPS a significant measure of certainty around labor, gives us operational flexibility to increase productivity and continue providing industry-leading service to our customers, and it will help us attract and retain the best employees in the industry.
Now in my comments today, I'll cover four areas. I'll start with the macro, followed by our second quarter results. Next, I'll cover cash and shareowner returns. And lastly, I'll provide some comments on the second half of the year.
In the second quarter, the overall macro conditions in the U.S. were in line with our expectations. Internationally, conditions were a little worse than we expected due to lower growth in both real exports and industrial production.
Moving to our financial results. For the quarter, consolidated revenue was $22.1 billion, down 10.9% from last year. All three of our segments demonstrated agility, and on a combined basis drove down total expense by $2.1 billion in the second quarter year-over-year. This enabled us to deliver $2.9 billion in operating profit, which is the target we communicated to you last quarter and was a decrease of 18.4% compared to last year. Consolidated operating margin was 13.2%, a decline of 120 basis points compared to the same period last year with all three segments achieving double-digit operating margins. For the second quarter, diluted earnings per share was $2.54, down 22.8% from the same period last year.
Now let's look at our business segments. In U.S. domestic, our disciplined approach to revenue quality partially offset the decrease in volume. As volume declined throughout the quarter, the team did an excellent job adjusting the network to match demand and drive out costs in real time, all while maintaining industry-leading service levels. We expected volume to decline in the second quarter and it did, but we saw more volume diversion than anticipated as noise levels around our labor negotiations increased. We estimate the impact of volume diversion combined with a slowdown in our sales pipeline pull-through reduced volume in the second quarter by approximately 1.2 million packages per day. For the quarter, total average daily volume was down 9.9%, with June down 12.2%.
Moving to mix. In the second quarter, we saw lower volumes across all industry sectors with the largest declines from retail and high-tech. B2C average daily volume declined 11.5% compared to last year, and B2B average daily volume was down 7.7%. In the second quarter, B2B represented 43.7% of our volume, which was an increase of 100 basis points from a year ago. Also in the second quarter, we continued to see customers shift volume out of the air onto the ground. Total air average daily volume was down 16.5% year-over-year and ground average daily volume declined 8.6%.
In terms of customer mix, in the second quarter, SMB average daily volumes declined less than volume from our enterprise customers. SMBs, including [Technical Issues] quarter U.S. domestic generated revenue of $14.4 billion, down 6.9%. Revenue per piece increased 3.3%, partially offsetting the decline in volume. The combination of strong base rates and improved customer mix increased the revenue per piece growth rate by 670 basis points. Changes in fuel prices decreased the revenue per piece growth rate by 220 basis points. The remaining 120 basis point decline was due to multiple factors, including package characteristics and product mix.
Turning to costs. The U.S. domestic team took out $889 million of expense year-over-year, which is the largest year-over-year cost reduction in our history. How did we do it? We leveraged our technology and the agility of our integrated network. Let me walk you through some of the levers we pulled. We continued to execute our Total Service Plan and reduced labor hours by nearly 10% to maintain our high levels of productivity. We leveraged the power of our network planning tools to optimize package flows and pull volume out of smaller non-automated buildings and flow it into our larger automated facilities. While total volume was down 9.9%, we reduced the volume in our non-automated buildings by 18%. This enabled us to close stores and reduce operations headcount by 7% compared to last year. We reduced feeder movements by continuing to manage cube utilization in our trailers and brought on more UPS feeder drivers to support our Fastest Ground Ever lane.
Looking at air volumes, we pulled more activity into Worldport, our global air hub in Louisville. This enabled us to move more volume via our next-day flights and reduce second-day flights. As a result, domestic block hours were lower by 6.5% versus last year and we exited the second quarter with block hours down more than 10%. And lastly, we reduced management headcount by over 2,500 positions year-over-year. All of these actions helped us reduce U.S. domestic expense in the second quarter. Specifically, compensation and benefits was down $205 million [Phonetic] year-over-year despite a 6.5% increase in average union wage rates. Purchase transportation declined $207 million, fuel expense was lower by $394 million, and there were multiple factors that drove the remaining $83 million reduction in expense.
Our results are proof of our agility. And in the second quarter, we took out a record amount of costs and held the cost per piece growth rate at 3.7%, while volume was down nearly 10%. The U.S. Domestic segment delivered $1.7 billion in operating profit, in line with our expectations and down 9.4% compared to the second quarter of 2022. Operating margin was 11.7%, an increase of 180 basis points from the first quarter of this year.
Moving to our International segment, macro conditions remained sluggish in the second quarter. In Europe, persistent high inflation and tight financial conditions weighed on the consumer. And in Asia, the slow recovery we experienced in the first quarter stalled in the second quarter. In the quarter, international total average daily volume was down 6.6% year-over-year. About two-thirds of the decline came from lower domestic average daily volume, which was down 8.7% driven primarily by declines in Europe. On the export side, average daily volume declined 4.5% on a year-over-year basis.
Looking at Asia, export average daily volume was down 10.1%. Export volume on the China to U.S. lane was down 7% year-over-year, which was an improvement from the first quarter. In the second quarter, international revenue was $4.4 billion, which was down 13% from last year due to the decline in volume and a 5.7% reduction in revenue per piece. The decline in revenue per piece was primarily driven by a 570 basis point decrease from fuel surcharge revenue. Additionally, a reduction in demand-related surcharge revenue contributed 240 basis points to the decline, and there was an 80 basis point decline in revenue per piece due to a stronger U.S. dollar. Partially offsetting the decline, multiple factors increased the revenue per piece growth rate by 320 basis points, including the strong base rate and favorable volume mix and export volume outperformed domestic volume.
Moving to cost, in the second quarter total international cost was down $356 million, primarily driven by lower fuel expense. We leveraged the agility of our integrated network to match capacity with demand and focused on controlling what we could control. These actions included flight reduction, which drove international block hours down 9.4% compared to last year, which includes a 16.5% [Phonetic] block hour reduction on Asia outbound transcontinental flights. We also reduced headcount in operations and overhead functions by a total of more than 1,700 positions. And we did all of this while continuing to deliver excellent service to our customers. Operating profit in the International segment was $902 million, down $302 million year-over-year, which included a $123 million reduction in demand-related surcharge revenue. Operating margin in the second quarter was 20.4%, in line with our expectations.
Now looking at supply chain solutions. Our teams continued to navigate a challenging macro environment and executed our plans to reduce cost. In the second quarter, revenue was $3.2 billion, down $990 million year-over-year. Looking at the key drivers. Forwarding continued to be impacted by softer global demand, especially out of Asia, which drove market rate and volume lower. This resulted in a decline in revenue and operating profit. In response, we cut operating costs and are continuing to manage buy/sell spreads.
Logistics delivered revenue and operating profit growth, including gains in our healthcare business. In the second quarter, supply chain solutions generated operating profit of $336 million and an operating margin of 10.4%. Walking through the rest of the income statement, we had $190 million of interest expense, our other pension income was $66 million, and our effective tax rate for the second quarter was 23.5%.
Now let's turn to cash and shareowner returns. Year-to-date, we've generated $5.6 billion in cash from operations and free cash flow was $3.8 billion, including our annual pension contribution of $1.2 billion that we made in the first quarter. Also this year, in the first quarter, we issued $2.5 billion in long-term debt. We've used $1.6 billion to pay off debt maturities in the second quarter and we plan to use $900 million to pay off debt maturing in the second half of this year. And in the first half of 2023, UPS paid $2.7 billion in dividends. We also completed $1.5 billion in share buybacks at an average price of around $178 per share.
Now, I'll share a few comments about our outlook. As Carol mentioned, with the contract out for ratification, we have updated our consolidated revenue and adjusted operating margin guidance. For the full year 2023, we expect consolidated revenues of about $93 billion and consolidated operating margin of around 11.8%.
Now let me provide some color to help you update your models for the second half of the year. The U.S. Domestic segment is navigating a couple of unique factors in the back half of the year. First, in the second quarter and into July, we experienced more volume diversion than we anticipated. Because of this, our volume ramp-up for the second half of the year is starting from a lower base. We're already executing our initiatives to win back diverted volume and accelerate the pull-through from our sales pipeline, while remaining disciplined on revenue quality. As a result of our efforts, by the end of the year we expect our average daily volume levels to be about even with December of last year. And overall for the second half of 2023, we expect the U.S. average daily volume to be down by a mid-single-digit percentage year-over-year.
And second, looking at expense in the U.S. Domestic segment, the union wage rate increases included in our new labor agreements for the first year are higher than we originally planned. We started to accrue for the terms of the tentative agreement on August 1st, while the contract is out for ratification. Further, we will address wage compression that resulted from the new labor contract. These additional labor costs in the back half of the year will be partially offset by the network adjustments we made in the second quarter.
Turning to the International segment. In the second half of the year, we expect the year-over-year volume growth rate to be similar to what we saw in the second quarter, and revenue per piece growth to be flattish compared to the same period last year. And in supply chain solutions, we expect second half revenue to be down by a high single-digit percentage year-over-year, with full year revenue approaching $14 billion.
Moving to capital allocation. Our 2023 full year targets have not changed. We will continue to stay on strategy and invest in both efficiency and growth opportunities. Capital expenditures are still expected to be about $5.3 billion, which includes completing the deployment of the first phase Smart Package, Smart Facility in the U.S., continuing to expand our healthcare logistics footprint globally, expanding DAP internationally, and investing in our logistics as a service platform. We are still planning to pay out around $5.4 billion in dividends in 2023 subject to Board approval. And for the full year, we still plan to buy back around $3 billion of our shares.
With negotiations behind us, we are moving our business forward. For our people, we have a platform for the future that continues to reward our employees, which helps us to deliver industry-leading service to our customers and enables us to win back volume and drive revenue quality. We will control what we can control, which means continuing to manage costs as we scale up the network with volume, and we are staying on strategy and investing through this cycle, which will enable us to grow in the most attractive parts of the market, make our integrated network even more efficient and continue to reward our shareowners.
Thank you. And operator, please open the lines.
