Brian Newman
Executive Vice President and Chief Financial Officer at United Parcel Service
Thanks, Carol, and good morning. In my comments today, I'll cover four areas. I'll start with the macro followed by our third quarter results. Next, I'll cover cash and shareowner returns, then I'll provide detail around our updated guidance. The macro environment in the third quarter was challenging. The weakness we saw on the second quarter continued into the third quarter specially in Asia and Europe. We will export and industrial production moved lower due to following demand and global consumer conditions did not significantly changed. In the US, we faced touch conditions due to several factors. To begin, the volume diversion we experienced in the second quarter continued into the third quarter, which led to more volume diversions than we anticipated. Next, some customers that diverted waited until our Teamster contract was fully ratified in September before returning volume to our network. And lastly, we incurred higher labor costs associated with the new contract and added headcount earlier than normal to ramp up for peak so that we can ensure we maintain our industry-leading service levels. Through the end of the quarter, we adjusted our integrated network to support our customers needs, manage costs, and stayed focused on bringing volume back into our network. Looking at our financial results. For the quarter, consolidate revenue was $21.1 billion, down 12.8% from last year. Consolidated operating profit was $1.6 billion, down 48.7% compared to the same period last year. Consolidated operating margin was 7.7%.
For the third quarter diluted earnings per share was $1.57, down 47.5% from the same period last year. Now let's look at our business segments. In U.S. domestic, we knew the third quarter would be a challenge, and it was due to our labor negotiations, higher costs and a dynamic economic backdrop. As we discussed on our last call, we ended the second quarter with average daily volume in June, down 12.2%.As contract negotiations became later and louder, we saw more volume diverse than we anticipated. August represented the low watermark when average daily volume was down 15.2% year-over-year. Post ratification, we exited the third quarter at half that rate and we are continuing to see our week-over-week volume levels improve despite a challenging retail backdrop. In the US, in the third quarter, average daily volume was down 11.5%. And we estimate the impact of volume diversion reduced our volume by approximately 1.5 million packages per day. Moving to mix. In the third quarter we saw lower volumes across all industry sectors with the largest clients from retail and Hitech. B2C average daily volume declined 13.4% compared to last year and B2B average daily volume was down 9%. In the third quarter, B2B represented 44% of our volume, which was an increase of 120 basis points from a year ago. Also in the third quarter, we continued to see customers shift volume out of the air onto the ground. Total air average daily volume was down 15.8% year-over-year with about half of the decline coming from our largest customer as anticipated.
Ground average daily volume was down 10.7%. In terms of customer mix, in the third quarter, SMBs, including platforms made up 28.5% of our total US volume, an increase of 20 basis points year-over-year. For the quarter, US domestic generated revenue of $13.7 billion, down 11.1%. Despite lower volume, we remain disciplined on revenue quality. In the third quarter, revenue per piece increased 2%.Looking at the key drivers. The combination of strong base rates and improved customer and product mix increased the revenue per piece growth rate by 410 basis points. Changes in fuel prices decreased the revenue per piece growth rate by 190 basis points. The remaining 20 basis points of decline was driven by multiple factors, including package characteristics. Turning to costs. Total expense was down 5.1% in the third quarter. Compensation and benefits decreased the total expense growth rate by around 50 basis points. Total union wage rates were up 11.5% in the third quarter primarily driven by the contractual wage increase that went into effect on August 1. Additionally, we began network preparations for peak. Offsetting the total increase in compensation and benefits, we leveraged our total service plan and network planning tools to reduce total hours in the third quarter by 11.4%. We reduced the expense growth rate for purchase transportation by around 190 basis points primarily from lower volume levels and our continued optimization efforts. Lower fuel costs contributed 170 basis points to the decrease in total expense growth rate.
The net of all other expense items and allocations reduced the expense growth rate by 100 basis points. The US Domestic segment delivered $665 million in operating profit, down 60.6% compared to the third quarter of 2022, and operating margin was 4.9%.Moving to our International segment. Macro conditions were uneven in the third quarter, with some regions of the world more challenged than others. Continued falling demand pressured Asia. And in Europe, consumers continue to contend with high inflation and tight financial conditions. In response, we adjusted headcount and block hours and our global network to match changes in geographic demand. In the quarter, International total average daily volume was down 6.6% year-over-year. Nearly 3/4 of the decline came from lower domestic average daily volume, which was down 9.1%, driven primarily by declines in Europe. On the export side, average daily volume declined 4.1% on a year-over-year basis. Looking at Asia, export average daily volume was down 8%. And export volume on the China to US lean, which is our most profitable lane was down 10.3% year-over-year. One bright spot was the Americas region, where export average daily volume grew 4.7% led by Canada and Mexico, leveraging our cross-border ground service. In the third quarter, international revenue was $4.3 billion, which was down 11.1% from last year due to the decline in volume and a 1.4% reduction in revenue per piece. The decline in revenue per piece was driven by several factors. Lower fuel surcharge revenue contributed 230 basis points to the revenue per piece growth rate decrease.
A reduction in demand-related surcharge revenue contributed 200 basis points to the decline. Partially offsetting the decline, multiple factors increased the revenue per piece growth rate by 290 basis points, including strong base rates and a weaker US dollar. Moving to costs. In the third quarter, total international cost was down $203 million, primarily driven by lower fuel expense. In response to lower demand, we adjusted our integrated network and cut costs, which included reducing international block hours by 13.9% compared to last year and reducing headcount in operations and overhead functions by a total of 2,300 positions. And we did all of this while continuing to deliver excellent service to our customers. Operating profit in the International segment was $675 million, down $329 million year-over-year, which included a $98 million reduction in demand-related surcharge revenue. Operating margin in the third quarter was 15.8%.Now looking at Supply Chain Solutions. In the third quarter, revenue was $3.1 billion, down $854 million year-over-year. Looking at the key drivers, let's start with Ford. In international air freight, softer global demand and lower volume resulted in a decline in revenue and operating profit. On the Ocean side, demand flipped positive, driven by the retail sector and generated volume growth. However, excess market capacity pressured revenue and operating profit. In response to the dynamic forwarding market, we cut operating costs. Within forwarding, our truckload brokerage unit continued to face pressure from excess capacity in the market, which drove revenue and operating profit down.
Logistics delivered revenue and operating profit growth. In the third quarter, Supply Chain Solutions generated operating profit of $275 million, an operating margin of 8.8%.Walking through the rest of the income statement, we had $199 million of interest expense. Our other pension income was $66 million and our effective tax rate for the third quarter was 12.6%, which benefited from certain discrete items, including tax credits and global audit resolutions. Now let's turn to cash and shareowner returns. Year-to-date, we generated $7.8 billion in cash from operations, and free cash flow was $4.9 billion. And so far this year, UPS has paid $4 billion in dividends and we've completed $2.25 billion in share buybacks. Now I'll share a few comments about our outlook. We expected 2023 to be a bumpy year and it has been. We've navigated record high inflation rising interest rates, disruptions in China, a war in Eastern Europe, now a humanitarian crisis in Israel and Gaza and the disruption around our US labor negotiations. Through all of this, we remain focused on controlling what we can control and are continuing to adjust the network to match volume levels and deliver industry-leading service to our customers. Since our last earnings call, the global demand environment has slowed and macroeconomic conditions remain challenging. As a result, we've lowered our full year guidance and have provided a range to reflect the uncertainty in the market. We now expect consolidated revenue to be between $91.3 billion and $92.3 billion and consolidated operating margin to be between 10.8% and 11.3%.
Let me walk you through our assumptions for the guidance range. In the US, we are winning back volume at a rapid pace, but we've also seen demand softness due to several factors with many of our customers who did not divert. Additionally, while consumer spending has been resilient in 2023, headwinds are mounting for the consumer in the fourth quarter. And looking at estimates for holiday retail sales this year, increases range from 4% to 12%.Moving to international, our further downturn exports and lower consumer spending in some of the largest European markets including Germany and the UK are negatively impacting volume and exports are more profitable trade lane which is China to the US are not improving at the pace we had expected. Finally and forwarding, ocean capacity has increased, which is putting additional downward pressure on market rates. In fact, in ocean, there is extreme overcapacity versus demand in the market and the forwarding demand outlook in the fourth quarter remains weak. Turning to capital allocation for the full year. Capital expenditures are still expected to be about $5.3 billion. We are still planning to pay out around $5.4 billion of dividends in 2023 and subject to Board approval. We have repaid $1.6 billion in debt this year as planned and expect to repay an additional $700 million of debt in the fourth quarter. We now expect $2.25 billion in share buybacks in 2023, which we have already completed. In the fourth quarter, we are redeploying cash back into the business for growth initiatives such as strategic acquisitions to drive shareowner value. And lastly, we expect the tax rate for the full year to be approximately 22%.In closing, while navigating a very challenging macro environment, we remain focused on the job at hand. For the past five years, we have held the record as the industry leader in service during peak. We intend to do it again this year.
Thank you. And operator, please open the line.
