Brian Newman
EVP & Chief Financial Officer at United Parcel Service
Thanks, Carol, and good morning. In my comments, I'll cover four areas, starting with the macro environment, then our first quarter results. Next, I'll cover cash and shareowner returns, and lastly, I'll review our updated financial outlook for 2023.
Okay. Let's start with the macro. In the first quarter, the macro environment was challenging, from both a commercial and consumer perspective. The growth rate for U.S. manufacturing production fell throughout the quarter and was down 0.9% in March year-over-year. On the consumer side of the U.S. economy, the growth rate on services spending is continuing to outpace the growth rate on goods spending. And within the goods bucket, consumers spent more on essential items like groceries, which tend to be purchased in store. These factors, plus a five point drop in consumer sentiment from February to March contributed to the reduction in our volume levels.
Outside the U.S., in the first quarter, Asia exports remained weak, while Europe narrowly avoided a winter recession. In the face of all this, we responded with agility and remain focused on controlling what we could control, to deliver great service for our customers and bottom line results for share owners.
In the first quarter, consolidated revenue was $22.9 billion, down 6% from last year, and slightly below our base plan expectations.
Operating profit was $2.6 billion, a decrease of 22.8%. However, we achieved our base plan operating profit. Consolidated operating margin was 11.1%, a decline of 250 basis points compared to last year. For the first quarter, diluted earnings per share was $2.20, down 27.9% from the same period last year.
Now let's look at our business segments. In U.S. Domestic, revenue quality initiatives nearly offset the decrease in volume. And as the decline in volume accelerated toward the end of the quarter, we responded quickly by adjusting the network to eliminate costs, while maintaining our industry-leading service levels. In the first quarter, we expected average daily volume to decline between 3% and 4%. For the quarter, average daily volume was down 5.4% year-over-year, primarily because volume in March moved lower than we expected.
Looking at mix in the first quarter, we saw lower volume across all industry sectors with the largest declines from retail and high-tech. B2C average daily volume declined 5.5% compared to last year and B2B average daily volume declined 5.4%. A bright spot in B2B in the quarter was returns, which was up 6.8% year-over-year. In the first quarter, B2B represented 42.7% of our volume, which was unchanged from a year ago. Additionally, the shift in product mix from air to ground that we saw in the fourth quarter of 2022 continued in the first quarter as customers made cost trade-offs and took advantage of the speed improvements we made in our ground network and further leveraged our SurePost product.
Compared to the first quarter of last year, total air average daily volume was down 16.7%, ground declined 3% and within ground, SurePost grew 1.8%.
Looking at customer mix, SMB average daily volume declined significantly less than our enterprise customers in the first quarter. SMBs including platforms made up 29.6% of our total U.S. volume, an increase of 120 basis points year-over-year.
For the quarter, U.S. Domestic generated revenue of $15 billion, down 0.9%. Revenue per piece increased 4.8%, nearly offsetting the decline in volume. The combination of base rates and customer mix increased the revenue per piece growth rate by 500 basis points, driven by strong keep rates from our general rate increase and increased SMB penetration. Fuel drove 200 basis points of the revenue per piece growth rate increase, remaining factors reduced the revenue per piece growth rate by 220 basis points, driven by the combination of negative product mix with ground packages outpacing air growth and lighter package weights.
Turning to cost. Total expense was relatively flat with an increase of 0.6% or $80 million in the first quarter. Higher union wage and benefit rates increased expense by over $300 million, primarily from a 6.1% increase in average union wage rates driven by the annual pay increase for our Teamster employees that went into effect in August of 2022.
The U.S. Domestic team did an excellent job pulling costs out of the network in response to lower volume. We managed hours down 5.6%, which was more than the decrease in average daily volume, and we reduced headcounts throughout the quarter as volume growth rates decline. Together, these actions reduced expenses by more than $220 million, partially offsetting the increase in wage and benefit rates.
Additionally, we reduced purchase transportation by $100 million, primarily from utilizing UPS feeder drivers to support our fastest ground ever and from continued optimization efforts, which enabled us to reduce trailer loads per day by 7.5% compared to the same period last year. The remaining variance was driven by multiple factors, including maintenance and depreciation. The U.S. Domestic segment delivered $1.5 billion in operating profit, which was slightly above our base plan and down 12.7% compared to the first quarter of 2022, and operating margin was 9.9%.
Moving to our International segment, we expected the macro environment to be bumpy and it was. Looking at Asia, export activity started off very weak due to the extended Lunar New Year holiday. It gradually recovered through the quarter, but at a slower pace than we anticipated. In Europe, the macro environment was a little better than we expected, which helped to offset the weakness in Asia relative to our base plan.
In the first quarter, international total average daily volume came in as expected and was down 6.2% year-over-year. Domestic average daily volume was down 9.5%, which drove 3/4 of the total average daily volume decline. Total export average daily volume declined 2.8% on a year-over-year basis, driven by declines in retail and high-tech market demand. Asia export average daily volume was down 8.9% and included a 20% year-over-year decline on the China to U.S. lane.
Through the first quarter, we remained agile and we flex the network to match demand, reduced Asia block hours by more than the decline in Asia export volume and delivered excellent service to our customers.
In the first quarter, international revenue was $4.5 billion, down 6.8% from last year, due to the decline in volume and $161 million negative revenue impact from a stronger U.S. dollar. Revenue per piece was relatively flat year-over-year, but there were a number of moving parts, including a 370 basis point decline due to currency and a 180 basis point decline from demand-related surcharges. These were offset by an increase in the fuel surcharge of 230 basis points and an increase of 330 basis points due to the combination of a high GRI at keep rate, and a favorable product mix as export volume outperformed domestic volume.
Operating profit in the International segment was $806 million, down $314 million from the same period last year, primarily due to the decline in exports out of Asia and included a $97 million reduction in demand-related surcharge revenue and a $51 million negative operating profit impact from currency. Operating margin in the first quarter was 17.7%.
Now, looking at Supply Chain Solutions. In the first quarter, revenue was $3.4 billion, down $983 million year-over-year.
Looking at key drivers in forwarding softer global demand, especially out of Asia drove down-market rates and volume, resulting in lower revenue and operating profit. We are continuing to manage buy/sell spreads and have taken steps to reduce operating costs in this business. Logistics delivered revenue growth, driven by gains in our healthcare logistics and clinical trials business and increased operating profit.
In the first quarter, Supply Chain Solutions generated an operating profit of $258 million and an operating margin of 7.6%. Walking through the rest of the income statement, we had $188 million of interest expense. Our other pension income was $66 million, and our effective tax rate for the first quarter was 24.8%, which was less than we anticipated in our base plan due to lower tax impacts from our employee stock awards.
Now let's turn to cash and shareowner returns. In the first quarter, we generated $2.4 billion in cash from operations. Free cash flow for the period was $1.8 billion, including our annual pension contributions of $1.2 billion that we made in the first quarter. Also in the first quarter, we issued $2.5 billion in long-term debt that we are using to pay off debt maturing in 2023. And in the first quarter, UPS distributed $1.3 billion in dividends and completed $751 million in share buybacks.
Moving to our outlook for the full year 2023. In January, we provided a range of our 2023 financial targets due to the uncertain macroeconomic environment we saw at that time. Since then, the volume environment has deteriorated, especially in the U.S., driven by continued challenging macro conditions and changes in consumer behavior. As a result, we expect full year revenue and operating margin to be at the low end of the previously provided range.
For the full year 2023, we expect consolidated revenues of around $97 billion and consolidated operating margin of around 12.8% with about 56% of our operating profit coming in the second half of the year.
In U.S. Domestic, we expect full year volume to decline around 3% versus 2022 with revenue per piece growth nearly offsetting the decline in volume. And operating margin is expected to be around 11%. In International, we anticipate both volume and revenue to be down by around 4%, and we expect to generate an operating margin of around 20%, and in Supply Chain Solutions, we expect full year revenue to be around $14.3 billion and operating margin is expected to be around 10%.
We have proven our ability to adapt in a dynamic environment. We have many levers to pull on the cost side, and we will continue to control what we can control by delivering industry-leading service and remaining disciplined on revenue quality. We will also continue investing in growth and efficiency initiatives like international debt, healthcare and smart package smart facility, which will help us come out of this economic cycle faster and stronger.
Specifically, now that our volume is trending at the downside of our range, we are executing our plan to take out semi-variable and fixed costs, including in the U.S. air network, we are adjusting package flows to maximize utilization on our next day flights, which enables us to reduce block hours in our two day operation.
On the ground, we are pulling more volume into our large regional hubs, further leveraging the automation in those buildings and enabling us to eliminate sorts in smaller buildings. Driving more consolidation on the ground could potentially allow us to reduce our overall building footprint in the U.S.
Internationally, based on the volume levels over the last couple of quarters, we further reduced scheduled flights to reflect lower market demand while ensuring we maintain agility in the network to quickly add flights where needed if volume returns more strongly than we expect.
Across our global business, we will continue to manage headcount with volume levels. And in terms of overhead, we see opportunities to further reduce costs by leveraging technology.
Now let's turn to capital allocation. Our plans have not changed. We will continue to make long-term investments to support our strategy and capture growth coming out of this cycle. We still expect 2023 capital expenditures to be about $5.3 billion, including investments in automation, and we'll add 2.3 million square feet of healthcare logistics space to our global network this year. We'll also complete the deployment of the first phase of smart package smart facility in the U.S., expand DAP internationally, and continue building out 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. We still plan to buy back around $3 billion of our shares. And lastly, our effective tax rate for the full year is expected to be around 23.5%.
In closing, despite the challenging macro backdrop, we will continue to provide industry-leading service to our customers, and we will stay on strategy. We are investing to make our network even more efficient and to strengthen our customer value proposition, to enable us to capture growth coming out of this cycle.
Thank you, and operator, please open the lines.
