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 second quarter results; next, I'll cover cash and shareowner returns; and lastly, I'll wrap up with our financial outlook for the second half of 2022.
In the second quarter, there were many cross-currents that contributed to a dynamic macro environment. In the U.S., even with high inflation and increasing interest rates, the job market and consumer spending remains strong with a growing share of wallet spent on services. Internationally, the environment continued to be negatively impacted by COVID-19 lockdowns in Asia and geopolitical issues, both of which drove complexity in the market for customers. Despite these external factors, we remained agile and delivered strong second quarter results as we expected.
In the second quarter, consolidated revenue increased 5.7% to $24.8 billion. Consolidated operating profit totaled $3.6 billion, 9.3% higher than last year. Consolidated operating margin expanded to 14.4%, which was 40 basis points above last year and was our highest consolidated operating margin in nearly 15 years. For the second quarter, diluted earnings per share was $3.29, up 7.5% from the same period last year.
Now let's look at our business segments. In U.S. Domestic, revenue quality initiatives more than offset the volume decline and drove strong second quarter results. Average daily volume in the U.S. was down 4% or 823,000 packages per day versus the second quarter of last year. More than half of the decrease was due to actions we took with a few of our largest customers, to optimize air and ground volume we bring into our network. And the majority of the volume reduction from these customers was residential. We expected to fill this gap with other enterprise volume, but macro conditions made that challenging.
In the second quarter, residential volume declined 8.2% and was partially offset by a 2.3% increase in B2B average daily volume. B2B represented 43% of our volume, which was up from 40% in the second quarter of 2021. We are continuing to win in the most attractive parts of the market due to our industry-leading service and enabling capabilities.
In the second quarter, SMB average daily volume, including platforms, grew 3.3% year-over-year. And SMBs made up 29.2% of our U.S. domestic volume, an increase of 200 basis points over last year, putting us well on our way to achieving our 2023 target of 30%. For the quarter, U.S. Domestic generated revenue of $15.5 billion, up 7.3%.
Revenue per piece increased 11.9%, with double-digit increases across all products. Changes to price per gallon for fuel drove 400 basis points of the revenue per piece growth rate increase, and the remaining 790 basis points of revenue per piece improvement came from the actions we took, which included base rates, fuel pricing and mix improvements.
Turning to costs. Total expense grew 6.9%, primarily driven by 2 factors: first, fuel drove 370 basis points of the expense growth rate increase due primarily to the rise in price per gallon compared to last year; and second, wages and benefits contributed about 200 basis points of the increase due to the rise in health, welfare and pension rates. The remaining variance was driven by multiple factors, including maintenance and depreciation. Had we managed our second quarter cost for the short term, they could have been better. But we made the decision to manage for the longer term. So we pulled on most cost levers, but not all of them. Knowing that we would need to hire for peak soon, we did not want to make a short-term decision that would negatively impact service later in the year.
Our industry-leading service is driving revenue quality and is bringing new customers in the door. Helping to offset cost increases, we are continuing to see the benefits of our cube utilization and other productivity efforts. Our latest initiative is called Total Service Plan, which we launched earlier this month across the U.S. network. This is about running an on-time precision network every day. Specifically, we've optimized our operating plans to minimize driver wait times and execute an on-time dispatch across our network. We are happy with the early results, including a marked improvement in on-time feeder departures, which reduces idle time across the network. Total Service Plan is a key initiative that will drive lower cost and provide greater predictability for our customers and our operators.
To wrap up U.S. Domestic, the segment delivered $1.9 billion in operating profit, an increase of $180 million or 10.7% compared to the second quarter of 2021. And operating margin expanded 40 basis points to 12%.
Moving to our International segment. A softer macro environment, the war in Eastern Europe and lockdowns in China pressured volumes, but our team stayed agile in the air and on the ground as we adjusted the network to match our volume levels. Total average daily volume was down 9.2% in the second quarter, reflecting more normal shopping behaviors in parts of the world like Canada and Germany. In the second quarter of this year, international domestic average daily volume was down 13.4%, which represented more than three-quarters of the total decrease in international volume.
Total export average daily volume declined 4.4% due to a combination of factors, including high global inflation and COVID-19 lockdowns in Asia, which disrupted manufacturing output. As we did last quarter, we adjusted the network and were able to keep our operations moving in Asia to serve our customers.
In the second quarter, international revenue increased 5.3% to $5.1 billion. Revenue per piece increased 14.8%, including a 610 basis point decline due to currency, which was more than offset by a 1,300 basis point benefit from fuel. The remaining revenue per piece growth rate increased 790 basis points was from base pricing, product mix and revenue quality actions that we took. Operating profit grew to $1.2 billion, including a $60 million negative impact from currency. Operating margin in the second quarter was 23.7%.
Now looking at Supply Chain Solutions. Our team did a great job leaning into the dynamic macro conditions and responding to the needs of our customers. In the second quarter, revenue was $4.2 billion, up 0.7% despite the divestiture of UPS Freight, which accounted for $297 million of Supply Chain Solutions revenue in the second quarter of 2021.
Looking at the key performance drivers. In Forwarding, our Ocean Freight product had strong revenue growth due to higher rates, and both Air and Ocean Freight forwarding generated strong operating profit growth by managing the buy/sell spreads. Within Forwarding, our truckload brokerage unit delivered excellent operating profit growth driven by revenue quality initiatives and customer mix. And our Healthcare business again delivered record top and bottom line results driven by complex customers in cold chain, clinical trials and labs.
In the second quarter, Supply Chain Solutions generated record operating profit of $517 million and delivered a record operating margin of 12.2%, an increase of 250 basis points from last year.
Walking through the rest of the income statement, we had $171 million of interest expense. Other pension income was $298 million and our effective tax rate for the second quarter was 23%.
Now let's turn to cash and shareowner returns. Year-to-date, we've generated $8.3 billion in cash from operations and free cash flow was $6.9 billion. And in the first half of 2022, UPS paid $2.6 billion in dividends and completed $1.2 billion in share buybacks, which brings us to our outlook for the second half of 2022.
According to IHS, GDP expectations for the full year have again been lowered from previous forecasts. Global GDP is now expected to grow 2.9% and U.S. GDP is expected to grow 1.4%. We are continuing to pay close attention to macro elements, including COVID-19, inflationary pressures, the health of the consumer and the geopolitical environment.
The execution of our strategy under our better not bigger framework is enabling greater agility and resiliency against an uncertain macro environment. Despite this backdrop, we are reaffirming our consolidated financial targets for 2022, driven by our results in the first half of the year and the progress we are making on our strategic initiatives.
For the full year 2022, consolidated revenues are expected to be about $102 billion, which takes into account the divestiture of UPS Freight. Consolidated operating margin is expected to be approximately 13.7%, and return on invested capital is anticipated to be above 30%.
Looking specifically at the second half of 2022, in U.S. Domestic, we anticipate back half 2022 revenue growth of around 5.5%, driven by strong revenue quality and we expect second half operating margin to expand to about 11.6%, which is consistent with our full year guidance.
As you update your models for U.S. Domestic, there are a few things to keep in mind. First, we anticipate volume growth rates will improve slightly in the second half of the year compared to the first half, and we expect revenue per piece to continue to increase year-over-year but at a slower rate than in the front half of the year.
Second, we expect an increase in compensation expense in the second half of the year. Our annual wage increase for our Teamsters employees goes into effect in August and is $1 per hour, which is higher than last year. Additionally, our current contract includes a cost of living adjustment that will be significantly higher this year compared to last year, and we expect to continue to pay market rate adjustments in certain geographies around the country.
And third, union benefit rates will also increase in August. Together with pension service costs, these union wage and benefit rate increases will add nearly $600 million to our costs in the second half of 2022 compared to the second half of 2021. The investments we are making in our integrated network, like our new Harrisburg, Pennsylvania automated hub, Smart Package Smart Facility, additional labeling and bagging automation, plus our total service plan will help to offset the increase in wages and benefits in the back half of the year. And we expect our cost per piece growth rate will be lower than in the first half of the year as we continue to implement our productivity initiatives. The combination of our revenue and cost initiatives will enable us to grow revenue per piece faster than cost per piece and achieve our 11.6% full year operating margin target.
Moving to the International segment. In the second half of the year, we anticipate volume growth rates will improve relative to the first half, driven by our speed and service advantages in Europe. We expect revenue growth to be in the low single digits. Additionally, we expect currency will remain a headwind in the second half of the year. Operating margin in the International segment is anticipated to be about 23%.
In Supply Chain Solutions, we expect revenue in the second half of 2022 of nearly $9 billion, driven by our logistics and health care businesses. We've already begun to see ocean forwarding rates moderate, and we expect that trend to continue further year-over-year. Operating margin in the Supply Chain Solutions segment is expected to be about 10%. On a consolidated basis, we anticipate operating margin will be around 13.6% in the back half of 2022, with the fourth quarter increasing about 20 basis points year-over-year. And lastly, we expect the tax rate to be around 23% for the remainder of the year.
Turning to capital allocation. For the full year in 2022, we still expect free cash flow to be around $9 billion, including our annual pension contributions. Capital expenditures are still planned to be about 5.4% of revenue or $5.5 billion. We plan to pay out around $5.2 billion in dividends, subject to Board approval. We plan to repay $2 billion in debt at maturity this year, including the $1 billion we've already paid in the first half of the year.
Lastly, in terms of share repurchases, we are, again, increasing the amount of cash we plan to allocate to share repurchases, taking the target up from $2 billion to $3 billion in 2022, further rewarding our shareowners. The execution of our strategy is enabling greater agility and has driven fundamental changes to nearly every aspect of our business.
As we discussed last quarter, there are multiple ways for us to deliver our targets, including offsetting softer volume through revenue quality and productivity. We have many levers to pull, and we are confident that we will deliver the targets we've laid out.
Thank you, and operator, please open the lines.