Brian Newman
Executive Vice President and Chief Financial Officer at United Parcel Service
Thanks, Carol, and good morning. In my comments, I'll cover three areas, starting with the macro and our fourth quarter results, then I'll review our full-year 2023 results, including cash and shareowner returns. And lastly, I'll provide comments on expectations for the market and our financial outlook for 2024.
The macro environment in the fourth quarter showed improvement. However, in the transportation and logistics sector, conditions remained under pressure, both in the US and internationally due to soft demand and overcapacity in the market. Throughout the quarter, we leveraged the agility of our integrated network to match capacity with demand. And we were recognized by an independent third party for providing industry-leading service for the sixth peak in a row. Looking at our financial results, in the fourth quarter, consolidated revenue was $24.9 billion, down 7.8% from the fourth quarter of 2022. All three of our segments demonstrated agility and on a combined basis drove down total expense by $1.1 billion in the fourth quarter year-over-year. This enabled us to deliver operating profit within the range we communicated to you last quarter. Consolidated operating margin was 11.2% for the quarter and in line with our expectations. For the fourth quarter, diluted earnings per share was $2.47, down 31.8% from the fourth quarter of 2022.
Now, let's look at our business segments. In US domestic, we knew going into the fourth quarter that volume will be ramping up of an exceptionally low third quarter. Our efforts to win back diverted volume and pull through new volume resulted in a record sequential volume surge. Throughout peak, we delivered excellent service to our customers while managing expenses. In the fourth quarter, average daily volume came in at the low end of our range and was down 7.4% year-over-year. B2B average daily volume in the fourth quarter was down 6.8% year-over-year, driven by declines in the retail, manufacturing, and high-tech sectors. In the fourth quarter, B2B represented 35.5% of our volume, which was up slightly from 35.3% in the same period last year.
Also in the fourth quarter, continued macro pressures drove customers to seek economy products as we saw customers shift volumes out of the air onto the ground. Total air average daily volume was down 15% year-over-year and ground average daily volume was down 5.8% versus the fourth quarter of last year. For the quarter, US domestic generated revenue of $16.9 billion, down 7.3%. Revenue per piece was slightly positive year-over-year with a number of moving parts. A combination of strong base rates and customer mix increased the revenue per piece growth rate by about 390 basis points. This was offset by a few factors. First, changes in product mix and package characteristics decreased the revenue per piece growth rate by 140 basis points. Second, reflecting the lower volume in the quarter, peak season surcharge revenue declined, which reduced the revenue per piece growth rate by about 120 basis points. And lastly, changes in fuel prices decreased the revenue per piece growth rate by 110 basis points.
Turning to cost. Total expense was down 3.6% and in the face of a 12.1% increase in union wage rates, which was driven by the contractual increase that went into effect last August, we pulled several levers to more than offset the higher expense. First, we leveraged our network planning tools and total service plan to reduce total hours in the fourth quarter by 10.2% which was more than the decline in average daily volume. This enabled us to decrease compensation and benefits, which drove down the total expense growth rate by around 30 basis points. Second, lower purchase transportation expenditures reduced the expense growth rate by around 70 basis points, primarily from lower volume levels and our continued optimization efforts. Next, lower fuel costs contributed 160 basis points to the decrease in the total expense growth rate. And lastly, the net of all other expense items and allocations reduced the expense growth rate by 100 basis points. Pulling it all together, these actions helped us reduce US domestic expense in the fourth quarter by $578 million, which was our largest fourth quarter dollar-cost reduction ever.
Looking specifically at peak as volume returned to the network and our biggest customers drove a surge and peak volume, we ran our integrated network with agility. In fact, in 2023, we closed over 30 sorts and they remain closed during peak. By leveraging our network planning tools, we took advantage of the flexibility of our integrated network and flowed more volume into our automated buildings. And with Smart Package Smart Facility in over 1,000 buildings, misload frequency improved 67%, contributing to the superior service we deliver to our customers. The US domestic segment delivered $1.6 billion in operating profit, down 32.6% compared to the fourth quarter of 2022. However, compared to the third quarter of 2023, operating profit in US domestic increased $904 million and was our highest sequential operating profit increased ever. Operating margin in the fourth quarter was 9.3%, a 440 basis-point improvement over the third quarter of 2023.
Moving to our international segment. Soft demand continued to pressure volumes out of Asia and in Europe, several key economies remain in recession, which pressured demand and drove a shift away from express services. In response, we focused on revenue quality and adjusted our global network to match changes in geographic demand. Looking at volume, in the fourth quarter, international total average daily volume was down 8.3% year-over-year. The decline was primarily due to lower domestic average daily volume, which was down 10.8% driven by declines in Europe and Canada, areas of the world that continue to face persistent inflationary pressures. On the export side, total average daily volume declined 5.9% on a year-over-year basis, driven by declines in Europe due to weak macro conditions. Looking at Asia, export average daily volume was down 8.9%, driven by soft demand in the retail and high-tech sectors. However, export volume on the China to US lane, which is our most profitable lane, increased 2.7% driven by SMBs. Nearly offsetting the decline in Asia over in the Americas region, export average daily volume grew 11.9%, led by customers in Canada and Mexico, leveraging our cross-border ground service.
In the fourth quarter, international revenue was $4.6 billion, which is down 6.9% from last year, primarily due to the decline in volume. Revenue per piece increased 3.1%. Strong base pricing and a change in customer mix drove a 420 basis-point increase in the revenue per piece growth rate. A reduction in fuel surcharge revenue negatively impacted the revenue per piece growth rate by 60 basis points and lower demand-related surcharge revenue, which was partially offset by the impact of a weaker US dollar, decreased the revenue per piece growth rate by 50 basis points.
Moving to expense. In the fourth quarter, total international expense was down $152 million, primarily driven by lower fuel expense. Additionally, in response to the lower demand environment, we managed our network to match capacity with demand, which included reducing international block hours by 9.4%. Operating profit in the International segment was $899 million, down $192 million year-over-year. Operating margin in the fourth quarter was 19.5%.
Now, looking at Supply Chain Solutions, in the fourth quarter, revenue was $3.4 billion, down $435 million year-over-year. Looking at the key drivers, in international air fright, overall volumes were down despite a mid quarter spike in e-commerce. Market rates continued to be pressured, resulting in lower revenue and operating profit. On the Ocean side, volume increased, driven by the retail sector. However, excess market capacity pressured revenue and operating profit. Within forwarding, our truckload brokerage unit known as Coyote continued to face pressure from excess capacity in the market, which drove revenue and operating profit down. In the fourth quarter, Supply Chain Solutions generated operating profit of $319 million and an operating margin of 9.4%. Walking through the rest of the income statement, we had $207 million of interest expense, our other pension income was $66 million, and our effective tax rate for the fourth quarter was 22.5%.
Now, let me comment on our full-year 2023 results. For the full-year 2023, revenue declined 9.3% to $91 billion and we generated operating profit of $9.9 billion, a decrease of 28.7% compared to full-year 2022. Consolidated operating margin was 10.9%. We generated $10.2 billion in cash from operations and continued to follow our capital allocation priorities. We invested $5.2 billion in capex. Additionally, we acquired MNX Global Logistics and Happy Returns. We distributed $5.4 billion in dividends, which represented a 6% increase on a per-share basis over 2022. We repaid $2.4 billion in debt that matured during the year and at the end of the year, our debt-to-EBITDA ratio was 2.2 times. Lastly, we completed $2.25 billion in share buybacks in 2023. And in the segments for the full year, in US domestic, operating profit was $5.4 billion and operating margin was 9%. The International segment generated $3.3 billion in operating profit and operating margin was 18.4%. And Supply Chain Solutions delivered operating profit of $1.2 billion and an operating margin was 9%.
With 2023 behind us, let us move to our outlook for 2024. S&P Global is forecasting an improvement in global macro conditions as the year progresses. Outside the US, real exports in Europe are expected to improve each quarter throughout the year. Looking at Asia, we saw positive momentum on the China to US lane exiting the year and remain cautious on the outlook for 2024. In the US, the projected small package market growth rate is just under 1% excluding Amazon. A slight improvement is expected in US manufacturing and the consumer is expected to remain resilient despite lingering inflationary pressures.
We've built a plan that reflects the current environment and potential risks that we see. This includes getting our organization to our strategy and aligning execution to our wildly important initiatives under what we call fit to serve. As Carol mentioned, we are exploring strategic alternatives for Coyote, our truckload brokerage business, which will enable us to address some of the cyclical impacts in our forwarding business and we are reducing our workforce by approximately 12,000 positions. This will cut around $1 billion in costs in 2024.
Moving to our 2024 financial outlook. We are providing a range based on volume growth. The low end of the range as UPS growing at market rate and the high end of the range as us gaining share. For the full-year 2024, on a consolidated basis, revenues are expected to range from approximately $92 billion to $94.5 billion and operating margin is expected to range from approximately 10% to 10.6%. In the range provided, we expect to move total average daily volume from negative growth in the first half of the year to positive growth in the back half. This was primarily driven by lapping the volume diversion we experienced in the US last year during our labor negotiations. Additionally, cost will weigh on us in the first half of the year, primarily due to the high labor cost inflation associated with the new contract. Looking at consolidated revenue, in the first half of the year, we expect the growth rate to decline with a range of approximately 1% to 2%, with the first quarter driving the decline. And in the back half of the year, revenue growth is anticipated to be up within a range of mid to-high single digits. Looking at consolidated operating profit, we expect material improvement as the year progresses, with the second half of the year outperforming the first half. Lastly, we expect to generate our lowest consolidated operating margin of the year in the first quarter.
Now let me give you a little color on the segments. Looking at US domestic, average daily volume growth is expected to be within a range of approximately flat to up 2% for the full year. At both the low and high ends of the range, we expect the revenue per piece growth rate to outpace the cost per piece growth rate beginning in the third quarter and we expect to exit the year at a 10% operating margin. Moving to the International segment, we expect 2024 average daily volume to be within a range of approximately flat to up around 3%. At both ends of the guidance range, operating margin is anticipated to be in the high-teens. And in Supply Chain Solutions, for the full year in 2024, we expect revenue to be within a range of approximately $13 billion to $13.5 billion. At both ends of the guidance range, operating margin for SCS is expected to be high single digits. And for modeling purposes in total below the line, we expect approximately $400 million in expense in 2024. This is net of $262 million in pension income. We included a slide in the appendix of today's webcast deck to provide you more detail on pension. The webcast deck will be posted to the UPS Investor Relations website following this call.
Now, let's turn to full-year 2024 capital allocation. Our capital allocation priorities have not changed. We are staying on strategy and we'll make the best long-term decisions to capture growth, improved efficiency and deliver value to our shareowners. We expect 2024 capital expenditures to be within our target of around 5% of revenue or $4.5 billion. Now let's turn to our expectations for cash and the balance sheet. We expect free cash flow to be within a range of approximately $4.5 billion to $5.3 billion, including our annual pension contributions of $1.4 billion, which are equal to our expected service costs. As Carol mentioned, the Board has approved a dividend per share of $1.63 for the first quarter. We are planning to pay out around $5.4 billion in dividends in 2024 subject to Board approval. Finally, our effective tax rate in 2024 is expected to be approximately 23.5%.
In closing, we look at 2024 as a year to pivot away from negative volume to positive volume growth, and from high labor cost inflation to a much lower growth rate. We are laser-focused on executing our strategy, controlling what we can control and improving our financial performance. We look forward to sharing our multi-year targets and details on our strategy at our Investor Day event on March 26.
Thank you. And operator, please open the lines.
