Chief Financial Officer at United Parcel Service
Thanks. Carol, and good morning. My comments will cover three areas, starting with our fourth quarter results, then I'll cover our full year 2021 results, including cash and shareowner returns, and lastly, I'll share our financial outlook for 2022.
In the fourth quarter, supply chain challenges and the emergence of the Omicron COVID-19 variant weighed on global economic growth. In fact, the U.S. December retail sales report came in lower than forecasted and the inventory to sales ratio remained at historic lows. Despite these factors, our financial performance was better than we expected, as the progress we've made executing our strategy continues to deliver strong results.
Consolidated revenue increased 11.5% to $27.8 billion. Consolidated operating profit totaled $4 billion, 37.7% higher than last year. Consolidated operating margin expanded to 14.2%, which was 270 basis points above last year. For the fourth quarter, diluted earnings per share was $3.59, up 35% from the same period last year and full year EPS was $12.13 per diluted share, an increase of 47.4% year-over-year.
Now let's look at our business segments. U.S. Domestic delivered outstanding fourth quarter results. Our success was driven by gains in revenue quality and productivity, as well as our ability to quickly adjust our network to match capacity with the needs of our customers, while providing industry-leading service. Average daily volume increased by 39,000 packages per day or 0.2% year-over-year to a total of 25.2 million packages per day. This was below our expectations due to the soft retail environment in December.
Regarding revenue quality, the impact of our Better not Bigger approach is continuing to drive improvement in customer mix. In fact, SMB average daily volume, including platforms, grew 8.4%, outpacing the market. And in the fourth quarter, SMBs made up 25.8% of U.S. Domestic volume, up 240 basis points versus last year. Mix also shifted positively toward commercial volume as our B2B average daily volume continued to recover and was up 8.8%. B2B represented 36% of our volume compared to 33% in the fourth quarter of 2020.
For the quarter, U.S. Domestic generated revenue of $17.7 billion, up 12.4% driven by a 10.5% increase in revenue per piece. Fuel drove 380 basis points of the revenue per piece growth rate and demand-related surcharges drove 110 basis points of the growth rate increase. Revenue per piece grew across all products and customer segments with ground revenue per piece up 10%.
Turning to costs. Total expense grew 8.1%. Fuel drove 230 basis points of the expense growth rate increase. Wages and benefits, which included market rate adjustments drove 410 basis points of the increase and the remaining increase in the expense growth rate was due to several factors, including higher depreciation, federal excise taxes and weekend expansion costs. Productivity improvements helped partially offset the increase in expense. For example, through our ongoing efforts to optimize our trailer loads, we eliminated over 1,000 loads per day compared to the same time period last year.
Turning to the holiday season in the U.S., our teams did an excellent job executing our plan and adjusting where appropriate. Early in the quarter, volume came in stronger than expected and we quickly adjusted the network by leveraging our weekend operations, package flow technology and automated facilities. Late in the quarter, volume levels were lower than we expected as Omicron and inventory challenges negatively impacted the enterprise retail sector. Again, our operators adjusted the network and importantly also pulled out costs. We decreased staffing levels and returned rental equipment early, which helped to lower the year-over-year operating expense growth rate. The U.S. Domestic segment delivered $2.2 billion in operating profit, an increase of $786 million or 57% compared to the fourth quarter of 2020 and operating margin expanded 340 basis points to 12.2%.
Moving to International. The segment delivered excellent results by focusing on revenue quality and adjusting network capacity. Because of tough year-over-year comps and COVID-19 dynamics, we anticipated a fourth quarter decline in average daily volume, which was down 4.8%. On a more positive note, product mix was favorable with B2B average daily volume up 4.7% on a year-over-year basis. This partially offset a decline in B2C volume, which was down 18.4% compared to an increase of 104% during the same period last year.
In addition to tough year-over-year comps, total export average daily volume declined by 5.2% due to the decrease in volume between the U.K. and Europe arising from Brexit disruptions and from fewer flights coming out of Asia. In the fourth quarter, we operated 105 fewer flights than planned, primarily due to COVID-19. Despite these factors, for the fourth quarter, International revenue increased 13.1% to $5.4 billion. Revenue per piece increased 16.4%, including a 730 basis point benefit from fuel and a 340 basis point benefit from demand-related surcharges. The International segment delivered record operating profit and fourth quarter operating margin. Operating profit was $1.3 billion, an increase of 14.7% and operating margin was 24.7%.
Now looking at Supply Chain Solutions. The business segment delivered record fourth quarter top and bottom line results as our team executed extremely well in a challenging environment. Revenue increased to $4.7 billion, up 6.7% despite a $789 million reduction in revenue from the divestiture of UPS Freight. Looking at the key performance drivers, forwarding revenue was up 37.9% and operating profit more than doubled as global market demand remained strong and capacity stayed tight. International Air Freight kilos increased 3.3% and in Ocean Freight, volume growth on the transpacific eastbound lane, our largest trade lane, grew 7.8%, which was more than twice the market growth rate. Within forwarding, our truckload brokerage unit grew revenue and profit by double-digits, driven by revenue quality initiatives and strong cost management. And our healthcare portfolio delivered strong profits in the fourth quarter led by pharma and medical device customers. In the fourth quarter, Supply Chain Solutions generated strong operating profit of $456 million and delivered an operating margin of 9.7%.
Walking through the rest of the income statement, we had $173 million of interest expense. Other pension income was $267 million. And lastly, our effective tax rate came in at 22%.
Now, let me comment on our full year 2021 results. Starting at the consolidated level, revenue increased $12.7 billion to $97.3 billion. We reduced our cost to serve through a combination of non-operating cost reductions, along with improved productivity. We grew operating profit by $4.4 billion, an increase of 50.8%, finishing the year at $13.1 billion. Operating margin was 13.5%, an increase of 320 basis points. And for context, this is the highest consolidated operating margin we've had in 14 years. We increased our ROIC to 30.8%, an increase of 910 basis points. We generated $10.9 billion of free cash flow, an increase of 114% over 2020. And we strengthened the balance sheet by paying off $2.55 billion of long-term debt and we reduced our pension liabilities by $7.8 billion, which improved our debt to EBITDA ratio to 1.9 turns compared to 3.6 turns last year. And we returned over $3.9 billion of cash to shareholders through dividends and share buybacks.
Now for a few full year highlights for the segments. In U.S. Domestic, operating profit was up 62.7%, an increase of $2.6 billion to reach $6.7 billion for the full year and we expanded operating margin to 11.1%, a year-over-year increase of 340 basis points. International grew operating profit by $1.2 billion, ending the year at a record $4.7 billion in profit and operating margin was 24.2%, an increase of 200 basis points. And Supply Chain Solutions increased operating profit by $649 million, up 61.3% and delivered operating margin of 9.8%, 280 basis points above 2020.
2021 was an outstanding year for UPS, which brings us back to our outlook for 2022. Global GDP is expected to grow 4.2%. We are continuing to pay close attention to, and manage through several external factors, including COVID-19, inflationary pressures, upstream supply chain constraints, and labor shortages. As a result, we expect the environment to remain dynamic in 2022. Most importantly, within this backdrop, we will focus on controlling what we can control, and continuing to advance our strategic initiatives. And as Carol stated, we expect to deliver our 2023 consolidated financial targets one year early.
So looking at 2022 on a consolidated basis, revenues are expected to be about $102 billion, which takes into account the divestiture of UPS Freight. Additionally, consolidated operating margin is expected to be approximately 13.7%. In U.S. Domestic, we anticipate revenue growth of around 5.5% with revenue per piece growing faster than volume. We expect pricing in the industry to remain firm and we'll continue to price based on the value we provide to our customers. As a result, we anticipate Domestic operating margin will expand around 50 basis points in 2022. Lastly, in the U.S., we expect to deliver an incremental revenue-to-profit conversion percentage in the low-20s for the full year.
Moving to the International segment, we expect to continue growing faster than the market. Revenue growth is anticipated to be approximately 7.7%, with volume growing slightly faster than revenue. More specifically, we expect to grow fastest in our transborder ground products. Additionally, we expect International demand-related surcharges to remain elevated in 2022. Pulling it all together, operating profit in the International segment is expected to increase around 5% and operating margin is anticipated to be around 23.6%.
In Supply Chain Solutions, we expect revenue to be around $17 billion, driven by continued strong growth in healthcare and elevated demand in forwarding. However, we expect ocean surcharge rates to moderate below 2021 peak levels. Therefore, we expect operating profit to be down from what we reported in 2021. Operating margin is expected to be about 9.4%. And for modeling purposes, below the line, we anticipate $1.2 billion in other pension income, partly offset by $665 million in interest expense. The full year net impact is expected to be around $570 million, which can be spread evenly across the quarters.
Now let's turn to full year 2022 capital allocation. As we discussed at last year's Investor and Analyst Day, we've transitioned to a disciplined and programmatic approach to capital expenditures. In line with the capex range we shared then, we expect 2022 capital expenditures to be about 5.4% of revenue or $5.5 billion. These investments will continue to improve overall network efficiency and move us further down the path to achieving our 2050 carbon-neutral goal. About 60% of our capital spending plan will be allocated to growth projects and about 40% to maintenance.
Let me give you a few project highlights. We have 30 delivery centers and two automated hub projects planned to be delivered this year. Combined, these projects will enable us to drive greater efficiency by better balancing sort capacity with delivery capacity. We will purchase over 3,700 alternative fuel vehicles this year, including around 425 arrival electric delivery vehicles to be deployed in the U.S. and in Europe. We will take delivery of two new 747-8 aircraft in 2022 which adds international capacity and we'll make pre-delivery payments on the 19 Boeing 767 freighters that we announced in December. The 767s are planned to enter our fleet between 2023 and 2025. And lastly, across these projects and others, our annual capital expenditures will again include over $1 billion of investments that support our carbon-neutral goals.
Now let's turn to our expectations for cash and the balance sheet. We expect free cash flow of around $9 billion, including our annual pension contributions, which are equal to our expected service costs. As Carol mentioned, the Board has approved a dividend per share of $1.52 for the first quarter, which represents a 49% increase in our dividend. We are planning to pay out around $5.2 billion in dividends in 2022 subject to Board approval. We expect to buy back at least $1 billion of our shares and we'll evaluate additional opportunities as the year progresses. We expect diluted share count to be about 880 million shares throughout the year. Finally, our effective tax rate is expected to be around 23%.
In closing, the strategic and financial progress we made in 2021 delivered consistent returns and created strong momentum as we enter 2022. We remain laser-focused on continuously improving our financial performance by enhancing revenue quality, reducing our cost to serve and staying disciplined on capital allocation.
Thank you. And operator, please open the lines.