Brian Newman
Executive Vice President & Chief Financial Officer at United Parcel Service
Thanks, Carol, and good morning.
In my comments, I'll cover 4 areas, starting with the macro environment, then our third quarter results. Next, I'll cover cash and shareowner returns. And lastly, I'll wrap up with some comments on our outlook for the rest of the year.
In the third quarter, the macro environment remained dynamic. In the US, we continue to see crosscurrents driven by the strong job market and healthy consumer spending, despite higher inflation and interest rates. Internationally, the macro environment weakened more than we expected due to high inflation, volatile energy prices, lockdowns in Asia and the war in Eastern Europe. We responded quickly to the changing market conditions by leveraging the agility of our global integrated network to provide excellent service to our customers and deliver our bottom line commitments to shareowners.
In the third quarter, consolidated revenue increased 4.2% to $24.2 billion. Consolidated operating profit totaled $3.1 billion, 6% higher than last year. Consolidated operating margin expanded to 13%, which was 20 basis points above last year. For the third quarter, diluted earnings per share was $2.99, up 10.3% from the same period last year.
Now let's look at our business segments. In US Domestic, our revenue quality efforts and the execution of our planned cost initiatives drove third quarter results above our expectations. In the third quarter, average daily volume was down 1.5% versus the same time period last year, but the growth rate was an improvement over the first half of 2022, as new volume from the record number of wins we had in the second quarter came into the network. In the third quarter, the gap between year-over-year B2C and B2B average daily volume growth rates narrowed, as we lapped more normalized consumer shopping behaviors. B2C average daily volume declined 2.2% driven by contractual agreements we reached with certain enterprise customers. B2B average daily volume was down 0.5% year-over-year due to declines in manufacturing volumes, which was partially offset by growth in retail B2B driven by returns volume. In the third quarter, B2B represented 42.8% of our volume, which was up slightly from the 42.4% in the same period last year.
Looking at customer mix. The execution of our strategy is continuing to drive improvement. In the third quarter, we grew SMB average daily volume, including platforms, 1.9%, and SMBs made up 28.3% of our total US Domestic volume in the quarter, an increase of 90 basis points from 1 year ago. For the quarter, US Domestic generated revenue of $15.4 billion, up 8.2%. Revenue per piece increased 9.8%, more than offsetting the decline in volume. Our revenue quality efforts continue to deliver results. In the third quarter, about one-third of the revenue per piece growth rate increase came from continued strength in base pricing. Another one-third of the revenue per piece growth rate increase came from changes in fuel price per gallon, and the final one-third came from the combination of mix and our fuel pricing actions.
Turning to costs. Total expense grew 7%. Wages and benefits contributed about 310 basis points of the increase driven by the annual increase for our Teamster employees that went into effect in August. Fuel drove 220 basis points of the expense growth rate increase due primarily to the rise in price per gallon compared to last year. And the remaining variance was driven by multiple factors, including maintenance and depreciation. Cost in US Domestic came in as we expected due to our planned productivity initiatives, which drove our cost per piece growth rate to be lower in the third quarter than it was in the second quarter and partially offsetting wage and benefit increases. We are continuing to see the benefits of our cube utilization and other productivity efforts, including total service plan, which launched on July 11. I'll share more about our productivity initiatives in a moment.
To sum it up, revenue growth was above expense growth, which created positive operating leverage for the seventh consecutive quarter. The US Domestic segment delivered $1.7 billion in operating profit, an increase of $272 million or 19.2% compared to the third quarter of 2021, and operating margin expanded 100 basis points to 11%.
Moving to our International segment. The global macro environment continued to soften, but we remained agile and flexed our network in response to changing market conditions and delivered excellent service to our customers. At the beginning of the quarter, we expected the international average daily volume growth rate to improve compared to the first half of 2022, and it did. However, it did not improve as much as we anticipated due to continued macro softening. In the third quarter, international average daily volume was down 5.2%.
Total export average daily volume declined 0.6% on a year-over-year basis. China export volume declined due to lockdown and disruptions to manufacturing output. In response, we quickly adjusted the network and canceled 75 China and Hong Kong origin flights and rerouted 27 flights to other gateways in support of our customers. These changes enabled us to move volume for our customers where it was available, maintain high levels of service and achieve a payload utilization of over 98% on our Asia outbound intercontinental flights in the third quarter.
Looking at Europe. We continue to win on our speed and service advantages at strong revenue quality, despite softer market conditions. We grew transborder average daily volume 2.6%, and total Europe export average daily volume grew 0.6% in the third quarter. In the third quarter, international revenue increased 1.7% to $4.8 billion, which included a negative currency impact of $335 million and a fuel benefit of $363 million. Revenue per piece increased 6.4%, which included the fuel and currency impacts I just covered and a 510 basis point increase from the combination of product mix and revenue quality actions we took.
Operating profit in the International segment was $1 billion, which included an $82 million negative impact from currency. There was no year-over-year impact from fuel on international operating profit. Operating margin in the third quarter was 20.9%, which was down from the same period last year due to the delevering of our fixed costs and the impact of a stronger US dollar.
Now looking at Supply Chain Solutions. Our teams continue to navigate a dynamic macro environment in the third quarter and did an excellent job serving our customers and managing costs to deliver year-over-year operating margin expansion. In the third quarter, revenue was $4 billion, down $268 million year-over-year, which included a $92 million negative impact from currency. Looking at the key drivers. In freight forwarding, declines in volume and market rates reduced revenue and operating profit. However, the team was able to effectively manage buy/sell spreads and continued supporting our customers.
Within Forwarding, our truckload brokerage unit delivered strong operating profit growth driven by revenue quality initiatives, and Logistics delivered strong top and bottom line growth driven by our complex health care business from cold chain, clinical trials and medical device customers. In the third quarter, Supply Chain Solutions generated operating profit of $459 million and delivered a record third quarter operating margin of 11.5%, an increase of 100 basis points over last year. Walking through the rest of the income statement, we had $177 million of interest expense. Our other pension income was $297 million, and our effective tax rate for the third quarter was 21%, which was better than we expected due primarily to discrete items.
Let's turn to cash and shareholder returns. Year-to-date, we've generated $10.8 billion in cash from operations, and free cash flow was $8.5 billion. And so far this year, UPS has paid $3.8 billion in dividends and completed $2.2 billion in share buybacks.
Now I'll make a few comments regarding our outlook. According to IHS, full year global GDP is expected to grow 2.8%, and US GDP is expected to grow 1.7%. Both are lower than their forecast at the beginning of the year. We are continuing to pay close attention to macro elements, including lockdowns in Asia, inflationary pressures, the health of the consumer and the geopolitical environment. Needless to say, the macroeconomic environment is much different now versus our expectations when we started the year. But by controlling what we can control, quickly adjusting the network to match changes in volume levels and delivering excellent service to our customers, we are still on track to deliver our full year financial targets. We expect consolidated revenues to be around $102 billion. Consolidated operating margin is expected to be about 13.7%, and return on invested capital is anticipated to be above 30%.
Now let me give a little color on the fourth quarter. Starting with US Domestic, we anticipate fourth quarter 2022 revenue growth of around 4.5% driven by strong revenue quality, and we expect fourth quarter operating margin to expand year-over-year to around 12.4%. Looking at peak in the US, we expect peak volume to come in heavier later in the peak period, and we have one additional delivery day compared to last year, which gives us more flexibility. As you update your models for US Domestic, there are a few things to keep in mind. We anticipate the average daily volume growth rate will be lower in the fourth quarter of 2022 than in the third quarter due to contractual agreements we have reached with certain enterprise customers.
Second, we expect increases in wage and benefit rates will be higher than the same time period last year due to the annual increase our Teamster employees received in August. And third, we are continuing to execute our productivity initiatives to help offset wage and benefit rate increases. Our biggest productivity initiative is total service plan, which is performing as planned. Since the launch on July 11, we've improved our driver dispatch timeliness by 13%. This is about getting our drivers out of the building on time, which creates a more predictable environment for our employees and better service for our customers. Also in regard to productivity in the third quarter, we brought on additional automation in the network prior to peak, including automated bagging, robotic small sort induction and autonomous irreg vehicles. As a result of all these efforts, we expect the US Domestic fourth quarter 2022 cost per piece growth rate to be lower than it was in the third quarter of 2022.
Moving to international. We expect revenue in the fourth quarter of 2022 to be relatively flat to the fourth quarter of last year. We anticipate our share growth and revenue quality initiatives will offset the weaker macroeconomic environment and negative currency impacts. And we expect international operating margin to increase sequentially in the fourth quarter of 2022 to around 21.5% as we continue to respond to market changes with agility. In Supply Chain Solutions, we expect revenue in the fourth quarter to be above $4 billion as we partially offset declines in the air and ocean freight forwarding revenue, with continued growth in logistics and our health care business. Operating margin for Supply Chain Solutions in the fourth quarter of 2022 is expected to be around 11.4%, as we continue to effectively manage the buy/sell spreads in a dynamic environment.
Turning to capital allocation for the full year. In 2022, we expect free cash flow to be above $9 billion, including pension contributions to fund annual service costs. Capital expenditures are now expected to be about $5 billion, which is $500 million less than our original plan. The largest driver of the variance is the result of our decision to lease certain facilities, instead of purchasing them. This approach enables us to maintain higher levels of agility and further improve our overall capital structure. We plan to pay out around $5.2 billion in dividends, subject to Board approval. We have repaid $2 billion in debt this year as planned, including $1 billion in October. We expect to complete at least $3 billion in share repurchases for the year. And lastly, we expect the tax rate for the full year to be around 22%.
Before I wrap up, last week, we announced our US general rate increase. The 2023 increase will be 6.9%, reflecting the value of the services we offer and cost inflation in the market. The details have been posted to ups.com. Executing our strategy under better not bigger has led to a greater agility across our business and stronger financial performance. Our move to better and bolder enables future growth in revenue and margin. By combining the strength of our physical network with new digital capabilities, we will continue providing excellent service to our customers, win in the most attractive parts of the market, increase the efficiency of our operations and create value for our shareowners.
Thank you. And operator, please open the lines.
