Good morning. My name is Steven, and I will be your facilitator today. I would like to welcome everyone to the UPS Investor Relations second quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. Any analyst that wants to ask a question, now is the time to press 1 then 0 on your telephone keypad. It is now my pleasure to turn the floor over to your host, Mr. Ken Cook, Investor Relations Officer. Sir, the floor is yours.
Good morning, and welcome to the UPS second quarter 2022 earnings call. Joining me today are Carol Tomé, our CEO, and Brian Newman, our CFO. Before we begin, I want to remind you that some of the comments we'll make today are forward-looking statements within the federal securities laws and address our expectations for the future performance or operating results of our company. These statements are subject to risks and uncertainties, which are described in our 2021 Form 10-K, our first quarter 2022 Form 10-Q, and other reports we file with or furnish to the Securities and Exchange Commission. These reports, when filed, are available on the UPS Investor Relations website and from the SEC. Unless stated otherwise, our discussion refers to adjusted results.
For the second quarter of 2022, GAAP results include after-tax transformation and other charges of $31 million or $0.04 per diluted share. A reconciliation to GAAP financial results is available on the UPS Investor Relations website, along with the webcast of today's call. Following our prepared remarks, we will take questions from those joining us via the teleconference. If you wish to ask a question, press one and then zero on your phone to enter the queue. Please ask only one question so that we may allow as many as possible to participate. You may rejoin the queue for the opportunity to ask an additional question. Now I'll turn the call over to Carol.
Thank you, Ken, and good morning. Let me begin by recognizing our more than 500,000 UPSers around the world for their dedication, hard work, and efforts. Our founder, Jim Casey, said, "We do what we promise." In the second quarter, our UPSers did just that. They not only met, they exceeded our promises to our customers, our share owners, and each other. In the second quarter, the macro environment remained dynamic. We expected volume levels to decline from last year. They did, but more than we planned, given a number of factors that Brian will detail. Despite the decline in volume, we continued to win in the most attractive parts of the market with strong gains in revenue quality. Under our better, not bigger strategy, our actions are creating a more resilient UPS.
We are delivering better service for our customers and stronger financial results for our share owners. For the second quarter, consolidated revenue rose 5.7% from last year to $24.8 billion, and operating profit grew 9.3% to $3.6 billion. Consolidated operating margin expanded to 14.4%, a 40 basis point improvement from last year, and it was our highest quarterly consolidated operating margin in nearly 15 years. All business segments delivered operating profit growth. I'd like to give a shout-out to our Supply Chain Solutions businesses, which delivered operating profit of $517 million, a record high performance. Moving to our strategic update, our customer-first, people-led, innovation-driven strategy is powering consistent improvement across our company. Starting with customer first, which is about creating a frictionless customer experience.
We are growing in the parts of the market where we want to grow, like SMBs, healthcare, B2B, and certain large enterprise accounts. How are we doing that? By providing outstanding service and focusing on the capabilities that matter the most to our customers. Let me share a few new highlights with you, starting with our recent acquisition of Delivery Solutions. This is a carrier-agnostic digital platform that enables companies to easily optimize their deliveries across dozens of physical networks through a single connection. Carriers include Roadie and other same-day services, along with curbside pickup and small package shipping, further adding to UPS's array of digital commerce solutions for our customers. Next, we are continuing to win with SMBs by making it easier for them to ship with us.
Our new digital pricing platform called Deal Manager that we discussed last quarter simplifies and accelerates the pricing process for larger SMB customers and is performing better than we expected. Our win rate is 12 percentage points higher than we anticipated, which helped drive our U.S. SMB growth rate in the second quarter. Later this year, Deal Manager will be rolled out to our international small package business, starting with Canada and Germany. Additionally, DAP, our digital access program, is continuing to grow in the U.S. and internationally. In the first six months of this year, DAP generated more than $1 billion in revenue, putting us well on our way to achieving our $2 billion revenue target in 2022. Looking at SMBs.
In the U.S. in the second quarter, we grew SMB average daily volume, including platforms, by 3.3%, which was faster than the market. SMBs made up 29.2% of our total U.S. volume in the quarter, an increase of 200 basis points from one year ago. While our international volume levels were challenged in the second quarter due to the ongoing war in Eastern Europe and COVID-19 lockdowns in Asia, that didn't stop us from investing in our business. We recently launched a new daily flight from our Cologne air hub that connects key manufacturing cities in Asia. This flight speeds up transit times across multiple intra-Asia trade lanes and provides greater connectivity to the UPS global network, including to the U.S. and Europe. Speaking of Europe, did you know that UPS has the fastest ground network in Europe?
In fact, we are faster by at least one day on the ground in over 1/3 of the market, and we will continue to leverage our competitive advantage here to win on speed and service. Our international expansion didn't stop in the air. In the second quarter, we announced a new joint venture in India, which we call MOVIN. MOVIN offers a range of extensive express and premium service coverage across India with a strong portfolio of B2B domestic services. Moving to healthcare, we've expanded UPS Premier, our advanced technology solution. UPS Premier gives complex healthcare shipments a priority lane in our network with enhanced visibility and near-perfect service. So far this year, we've added 14 new countries to UPS Premier, bringing the total availability to 33 countries. By the end of this year, we will add another 15 countries in Europe, Asia, and Latin America.
These efforts and more are keeping us on track to hit our $10 billion healthcare revenue target in 2023. Moving to people-led. I'm delighted that Bala Subramanian has joined the company as UPS's new Chief Digital and Technology Officer. He is tasked with supercharging digital transformation across every aspect of our business and will unleash even more innovation for our customers. We are moving from digital literacy to digital fluency. To help us get there, we are investing in our people and have created training to equip them with new skills. The entire executive leadership team, including me, has completed this digital fluency training, and we are moving quickly to train our next two levels of leadership. Which brings me to innovation-driven. This is about the future of UPS and driving more productivity from the assets we own.
The changes we've already made have significantly increased the agility of our network and are driving productivity improvements. In the second quarter in the United States, we were able to manage hours in line with volume levels, and we optimized our trailer loads by eliminating 1,600 loads per day compared to the same time frame last year. We will continue to deploy additional technology prior to peak. To give you a couple of examples, we are on track with our deployment of Smart Package Smart Facility to the first 100 buildings in our network. Prior to peak this year, we will bring 2 automated facilities online, including the first 2 phases of our new 800,000 sq ft regional hub in Harrisburg, Pennsylvania. Additionally, on July eleventh, we launched our Total Service Plan across the U.S. network.
Brian will share the details, but our total service plan approach creates a more predictable operating environment, enabling us to take more cost out and make our industry-leading service even better. We are also working on another big efficiency opportunity, and that's how to improve delivery density. We are approaching this differently by attacking density upstream in fulfillment. We recently completed two pilots, and we're really excited about the results. We are building a new digital platform that can scale, and we look forward to sharing more detail with you in the coming quarters. Innovation driven will also help us reach carbon neutrality by 2050. On Thursday of this week, we will publish our set of annual sustainability reports, which includes our twentieth GRI content index.
In these reports, we share some new technologies that we are using, like the eQuad electric assist bikes we are piloting in New York and London. These eQuads are a great zero-emission last mile solution for super urban environments. Before I turn it over to Brian, let me end by reaffirming our 2022 consolidated financial targets. In 2022, we expect to generate about $102 billion in revenue, consolidated operating margin of approximately 13.7%, and we expect return on invested capital to be greater than 30%. Lastly, we are again increasing our targeted share repurchases for 2022, taking the target up to $3 billion for the year. In the face of a very dynamic macro environment, we remain agile and on strategy. We have multiple revenue and cost levers to pull.
We remain focused on controlling what we can control. Now I'll turn the call over to Brian.
Thanks, Carol. Good morning. In my comments, I'll cover four areas, starting with the macro environment, then our second quarter results. Next, I'll cover cash and share owner returns. Lastly, I'll wrap up with our financial outlook for the second half of 2022. In the second quarter, there were many crosscurrents 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 remain 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 the air and ground volume we bring into our network. 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. 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 two 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. 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. 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. 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. 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 increase of 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.
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 share owner returns. Year to date, we've generated $8.3 billion in cash from operations, and free cash flow was $6.9 billion.
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 Teamster 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.
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 cost 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. 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 healthcare businesses.
We've already begun to see ocean forwarding rates moderate, and we expect that trend to continue through the remainder of the 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. 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-$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. Operator, please open the lines.
Thank you. We'll now conduct a question and answer session. Our first question will come from the line of Christian Wetherbee of Citi. Please go ahead.
You know, maybe starting, Brian, where you left off on sort of the cost side, thinking about the ramp up in the back half of the year. I know it's early, but you know, want to get a sense of what you think sort of the expense profile of the business, particularly on the domestic side, is gonna look like exiting 2022. As we think about 2023, I know you have the Teamsters contract coming up next year, probably a little too early to talk about that, but it seems like there's some cost inflation kind of picking up. Want to get a sense of maybe how you think about that exiting the year, and what are the buckets you can kind of attack to maybe offset that?
Yeah, Chris, thanks for the question and good morning. Look, we expect CPP in the back half of the year to actually improve versus the first half. As I think about 2H, we're looking to put about $1.7 billion up in revenue growth in domestic, and there'll be a comparable increase in cost of about $1.7 billion. But Nando and the team in the U.S. are taking a number of actions to actually drive productivity and efficiency. We just launched the Total Service Plan. We've got Smart Package, Smart Facility, cube automation, a number of initiatives. Those will drive about $300 million to reduce that 1.7 in cost increase. As I think about exiting, I actually think CPP will be high single digit in the second half of the year.
As we exit, I think we'll be in good shape going into 2023.
Maybe just a little color on the Total Service Plan. This is a transformative initiative for our company, and it's really running our integrated network the way it was designed to run. To make that real for you, sometimes we're a little late with feeder arrivals and departures. With the initiative that we just kicked off on July 11, it's about getting back on time. To dimensionalize that for you, a 10-minute improvement within the integrated network is worth $257 million. We're really excited about this. We just kicked it off. It was a monumental effort. Get this, Nando and his team had to have one-on-one conversations with 64,000 drivers in our company, talking to them about their individualized service plan because some people wanna get home for dinner at night and some people wanna have some overtime.
We built individualized plans for our drivers, and we retrained hundreds of thousands of people on our methods, and we're very, very excited about the Total Service Plan.
Okay, great. Thank you very much.
Our next question comes from the line of Allison Poliniak-Cusic of Wells Fargo. Please go ahead.
Hi, good morning. I just wanna ask a question on SMBs. You know, obviously you're growing faster than the market. Deal Manager obviously impacting that as well. Is there a way to think about that as we kind of look to the back half? Does that outperformance still continue? I think, you know, Deal Manager also touches on pricing a little bit. Does that, I guess, strengthen that revenue quality, the SMBs that you guys are onboarding at this point?
Yeah, from a numbers perspective, Allison, we had guided to 150 basis points of SMB improvement as a percentage of volume mix in the U.S. We're right on track to do that. We had a bit stronger performance in the second quarter, 200 basis points, but we're holding to that full year 150. That obviously does contribute to the revenue quality that we saw in the first half and we'll see in the second half.
You know, our SMB initiative is multifaceted, and certainly Deal Manager is part of it. We saw our win rate at 71% in the second quarter. That was 12 percentage points higher than we had planned. We were super excited about that, and we're looking forward to rolling that to outside the United States. But it's not just Deal Manager. You know, by the way, I should say with Deal Manager, we're holding more of the base rate, which is great too. That's part of the RPP strategy here. But it's much more than Deal Manager. Think about DAP. We have $1 billion of DAP revenue in the first six months of the year. In fact, the revenue in the second quarter grew by about 100%.
We are on track to have $2 billion in DAP in the back half of the year. We've got 18 key partners, 2.5 million merchants on the DAP platform, and we're taking that outside the United States as well. There's more to it. It's about creating a seamless and frictionless experience for our customers. As you know, we have 16 customer journeys. We've actually identified 3 of those that really matter. One of those is we've kind of thrown our wall in the middle of the road, and we're going after it, and that's how to manage claims. The claims process here is pretty clunky, and it's not a good customer experience. We are staffing that, Brian, aren't we?
We're staffing that, and we're gonna fix the claims experience because we think if we eliminate that pain point, we're gonna grow even faster than the market, which we're already doing.
Great. Thank you for the color. Our next question comes from the line of Jeff Kauffman of Vertical Research Partners. Please go ahead.
Congratulations. The inbound questions I'm getting on this release are, volumes came in a little lower than expected. Why isn't this a negative economic signal? Now, you had a couple anomalies that Brian went through in the quarter, and you talked about second half growth improving. How do you read the economic tea leaves? I know you mentioned that, GDP forecasts had come down, but it sounds like you're more optimistic about volume returning to the network in the second half in part because you're de-emphasizing the volumes you don't want. But what are our takeaways here?
Well, maybe I'll start, Brian, and then you could add. If you recall, at the end of the first quarter, we told you we thought our volumes would be down in the second quarter. They were. They were down a little bit more than we thought. We missed our forecast by 222,000 packages a day, and that miss was split evenly between the U.S. business and the international business. I would call that pretty close to being on forecast. As Brian detailed in his prepared remarks, more than half of the volume decline in the United States was based on actions that we took with a few of our customers under our better, not bigger framework. One of those customers is Amazon, so I'm just gonna talk about Amazon right now. We have a great relationship with Amazon. They are our largest customer.
As we've shared with you in the past, we have reached contractual agreement with Amazon about the volume that we will take into our network and the volume that they will deliver. You know, by the way, they've got a lot of volume to deliver. The last time I looked, they had $35 billion of inventory, so they've got a lot of volume to deliver. We've contractually agreed on what makes sense for us versus what makes sense for them. That means that both volume and revenue for Amazon is coming down. We project by the end of this year that Amazon revenue will be less than 11% of our total revenue. That gives us room to grow in the parts of the market that we wanna grow, like SMB and B2B and healthcare and others. Part of this is a glide path that's occurring.
We thought we could fill up the divots with more enterprise volumes than we got. Part of that is macro, but here are a few fun facts. Of our top 20 customers in the second quarter, more than 65% of them grew volume with us. Another fun fact is that in the second quarter, we won new rate revenue quality business in the enterprise part of our segments than we have in the past 5 years. Now, that volume hasn't come into the network yet 'cause we just won it, but it's coming in in the back half. We are running our business the way that we wanna run it in this better, not bigger framework, despite the macro environment. Brian, what else do you wanna share?
Carol, I only add the RPP side of that equation. Carol just painted the better, not bigger picture that we're running, Jeff, but on the back of that is revenue quality, and you see that in the domestic margin of 12% in the second quarter. I think we committed to 11.6% in the first half and 11.6% in the second half. We feel good about that running this play Carol just described.
We're holding on to the more of the GRI, aren't we? We're not discounting as much. Part of that is because our customers value the service that we provide. Our end-to-end network is allowing us to deliver record high service levels, and that matters. That really matters.
Thanks, Jeff.
Well, thank you for that answer. That's my one.
Our next question comes to the line of Ken Hoexter of Bank of America. Please go ahead, sir.
Great. Good morning, Carol, Brian, and Ken. Maybe thoughts, can you continue that discussion a bit? Maybe thoughts on the RPP there, Brian, as fuel comes down, we're moving under $100 per barrel. You talked a bit about the splits. Does that start to impact or is there profitability built into that revenue stream from fuel? Maybe just kinda walk through that a bit. Thanks.
Yeah, Ken, thanks for the question. I think we feel fine about the fuel. It's obviously gone up at record levels in terms of the increase versus last year. As we see fuel costs rise, Ken, our profit dollars actually increase, margins contract a bit on the upside. In the quarter, about a third of RPP growth came from fuel. We're splitting that out. That's fuel price per gallon. We're splitting that out from the management actions we've taken on pricing, which would go into a different bucket. We've tried to provide more transparency. As fuel goes down, I think the efficiency of our one-week lag on the fuel service charge, we feel like we're protected or insulated from a margin perspective.
Fuel okay, and the construct of Q2 RPP, a third was fuel, a third was what Carol talked about, the revenue quality led by service, and then the last piece of that was the combination of mix, Ken, plus the management actions on fuel. That's how we're looking at it and thinking about it.
Thanks, Brian.
Yep.
Our next question will come from the line of Amit Mehrotra of Deutsche Bank. Please go ahead.
Hi, everybody. I guess just related to the domestic margin question. You know, I think the algorithm when you guys provided your multiyear forecast was kind of 20-ish% incremental margins, and you're pretty darn close in the second quarter. I think you're actually forecasting that or pretty close on the back half of the year. The world has changed since then from an inflation perspective, so I think it's pretty impressive that you're still hitting that number. But is that, Brian, as you look out in 2023, which is still within that multiyear forecast period, does that 20% plus still hold in terms of an incremental margin target for domestic? Then, Carol, I think, one of the key questions and the overhangs on the stock at least is this union renegotiation that's coming up next year.
I understand it's sensitive and highly strategic, but any color, because it is a $30 billion-$35 billion expense base for the company, and any additional color, at least in terms of how you're strategically thinking about that renegotiation that helps us form what type of inflation the company is gonna have over the next several years starting next year would be helpful.
Yeah. Amit, good question. So, the answer to the first part of the question is, as we think about, the walk on margins, that low twenties number that we're delivering, it's a bit challenged in a down volume environment. We need to pull other levers to make sure we get there. What we're focused on was the guidance that I had given at the investor conference in 2021, which is 12% op margin in the U.S. We are still very much on track to do that. I think the guidance we gave for this year was to go from 11.1% to 11.6%. We're on track to do that and then to lift the balance next year.
Still tracking to the 12% and looking to expand margin on a longer term basis.
We have additional productivity levers today that we didn't have in our investor conference one year ago. One of those would be the Total Service Plan. Maybe Nando was thinking about it, but we hadn't kicked it off or put it into any of our financial plans one year ago. We're also seeing some real opportunities with our Smart Package Smart Facility initiative, which we hadn't thought of one year ago. When we get that rolled out, we're gonna eliminate all the manual scans, all those preload scans that are done manually, all that will be eliminated. All the tens of thousands of misloads that occur every day, sorry to say, we do misload a package from time to time, or lots of times. All of that's gonna be eliminated.
We've got additional productivity initiatives that we didn't have one year ago, which even in an environment where, yes, costs are up more than we thought they would be, we're able to offset those costs. I think it's pretty impressive that we planned for the $1 an hour increase for our Teamsters starting in August. We didn't plan for the COLA that we're seeing. We knew there'd be some inflation, but not the amount that we are seeing, and yet we're able to offset all that, aren't we, Brian?
Yeah, that's, Carol, that's actually a big number. You know, we're gonna see. We saw $0.33 in COLA, the cost of living adjustment last year. We're gonna see $0.82 this year. You combine that into the bucket and contractual wage increase. Last year, we went up $1.23. This year, it'll be $1.82. The fact that we're able to manage through that and drive the additional productivity you talked about when the environment turns around in an up volume environment should be cooking on all cylinders.
To your question on the union negotiation first, are incredibly important to us, and we've had Teamsters in our company for 100 years or thereabout. As we think about the upcoming contract negotiation, we're gonna leave the negotiations at the bargaining table. Just a few things for you to remember. Our Teamsters are the highest paid in the industry, both wage and benefits. In fact, you know, if you're a four-year driver here, you're making $40 an hour and fully loaded with benefits close to $150,000 a year. Our workforce is very different than a lot of the workforce that you hear in the media every day where that are trying to be organized. They're not paid the way that our Teamsters are paid. These are great jobs that we value very much.
Our goal with the Teamsters is win, win. That's our goal. Again, we'll keep the details of that win, win strategy at the bargaining table. The other thing I'll leave with you, and this is, I think, an important point, is we're winning business today with customers who know we have an upcoming negotiation because we've told our customers we're gonna take care of them. We are building contingency plans, and we will take care of our customers.
Okay. Very good. Thank you very much.
Our next question will come from the line of Scott Group of Wolfe Research. Please go ahead, sir.
Hey. Thanks. Good morning. Brian, just a couple few things I wanna just follow up with you. Can you talk about the net impact of fuel in the quarter?
How you're thinking about currency in the back half of the year? I think you gave a comment about fourth quarter margins, but I didn't hear anything about third quarter margins. If you could just help there. Thank you very much.
Sure, Scott. From a margin perspective, look, I guess as a whole company, we'd expect all business segments to have higher margins in Q4 relative to Q3, based on the seasonality, Scott. We expect the back half domestic margin seasonality to be very similar to last year relative to Q2. If you go back last year and look at Q2, the sequential Q3, Q4, the change should be comparable. As far as the currency and fuel that you laid in, look, a stronger USD in Q2, it reduced our reported international revenue by, I think it was $261 million and reduced international op profit by $60 million.
I think you're familiar, Scott, with the layered hedge we use as a percentage of our revenue to manage that. In terms of fuel prices increase. We take a layered approach and start hedging that out about a few years in advance. We try to be 100% hedged so the revenue impact will be more than the profit impact. net-net, I think we feel fuel prices will moderate in the back end of the year. The net impact in the quarter was 400 basis points. as we look at dimensionalizing it further, we're splitting out the elements of management control pricing actions versus the price per gallon, Scott, to give you more transparency.
Yeah, I think, Scott, the way I think about it is this: the change in the price per gallon is one component of the RPP, and as Brian called it out, that was a 400 basis point to the RPP in the second quarter. The cost associated with that also impacted cost per piece or our overall increase in expenses of 370 basis points related to fuel. So as the price per gallon goes up or down, the margin's pretty protected. To the change in price per gallon, we also have a pricing algorithm, but it's just used for fuel as a simple way to price. It's just price. So don't think of those pricing actions as anything different than price. Fuel margins will just hold tight.
If you look up change in price per gallon on the revenue line and change in price per gallon on the expense line. That's how I think about it.
Thank you.
Welcome.
Our next question will come from the line of Todd Fowler of KeyBanc Capital Markets. Please go ahead.
Hey, great. Thanks, and good morning. So I guess I wanted to ask on your peak expectations. It sounds like that there was maybe a little bit of cost here in the quarter from a hiring standpoint as you prepare for the peak. I guess I'm curious, you know, what your expectation would be. It seems like that the second half outlook is a little bit uncertain, just how the peak this year would compare to last year. With the $300 million of productivity improvement that you're expecting in the back half of the year, is that something that you hold on to and carries forward into 2023, or how do we think about the sustainability of those cost improvements? Thanks.
Yeah, certainly the productivity piece, we would hold on to that. To Carol's earlier comment, we're gonna build on it. So that would carry forward.
On peak, we're getting a forecast from all of our large customers now as we build our peak planning, and we expect it to be a good peak. Inventory levels are good. Retailers have product to sell, where last year they didn't. That should help the peak demand. The comment about expenses and we could have done better is we managed hours relative to the volume. I'm really proud of that. A few years ago, we wouldn't have been able to do that. We would have delevered, but we were able to manage our hours. Nando and his team and Kate and her team did a great job of that. We kept the bench, though.
Because if we let the bench go, then we'd have to rehire them for peak, and that doesn't seem like a good idea. Now, the bench, obviously, we don't pay an hourly wage if they're not working, but they do get benefits. That I would say that's the money that we left on the table, but we'll get that back in spades by giving great service to our customers during peak.
Thank you.
Our next question will come from the line of Jordan Alliger of Goldman Sachs. Please go ahead.
Yeah. Hi, this morning, can you talk a little bit more about the Total Service Plan? Just trying to understand a little bit perhaps what the implementation or rollout aspect of that may be and, you know, how quickly that starts to dig in, and is that a part of the contribution to this year's second half cost saves, etc.? Thanks.
Yeah, Jordan. It's included in my $300 million that I talked about in terms of driver productivity. As Carol mentioned, it just kicked off, I think July 11. We're just getting going here. Net-net, it's to run a precision on-time network. We don't have late deliveries or late departures, and it's worth quite a bit to us. It'll ramp up over time. Carol mentioned that Nando and the team met with over 60,000 people talking about their specific service plans. Pretty exciting when you think about what can be accomplished from a TSP perspective.
Well, Brian, again, I'm gonna call an audible here, and I'm gonna throw that question over to Nando. Nando, you wanna talk a little bit more about the Total Service Plan?
Yeah, sure. The plan is really based on, as Brian mentioned, a predictable environment where our operators can plan with a lot of confidence on start times, finish times, sort spans, how we can better utilize our automated facilities and move volume from legacy facilities to our newer, more automated facilities. In addition to that, we've created a very unique dispatch for our full-time drivers. We expect that the efficiencies coming out of those customized dispatches and the service we provide are gonna allow us to run a really great efficient network for our customers and our employees.
Thanks, Nando. The cool thing is, we're not trying to integrate the network. We already have an integrated network. Now we're just running it the way it was designed.
Thank you.
Our next question will come from the line of David Vernon of Bernstein. Please go ahead.
Hey, good morning, everybody. Thanks for taking the time. I wanted to see if you could comment a little bit about sort of revenue quality and the efforts you're making on revenue quality and how sensitive they may be to sort of a weaker economic environment. You did a great job, I guess, managing down hours to volume. I think the market's looking at, you know, the global financial crisis, past recessions to kind of get a sense for earnings cyclicality. I'm just trying to get a sense for what's different about the business today that might limit some of that downside to a downturn or pullback in overall shipping volume versus kind of maybe what we've seen in the past.
Yeah. I think in the past, as I understand it, when the air volume softened up, the end was near. Prices softened up. That's just not happening now. As Brian detailed in his prepared remarks, more than half of the volume decline in our business, including air, was because of agreements that we reached with a few of our customers on the volume that we will take and the volume that we won't take. The revenue quality is very good. It is sticking. As we bring in new customers, we're bringing them in and at very good revenue quality. Why? Because of what we have to offer. In service is our life. So part of it is what we have to offer from a service perspective, dependability, reliability. What else do you want to add in terms of revenue quality?
Perhaps talk a little bit about, you know, the technology of the future.
I think we've talked before, as we think about dynamic pricing, and we're running some pilots that we feel good about. There's a technology component to that, but you know, from a lag perspective. The tools that we've been rolling out with our accounts, whether it's Deal Manager or some of the others, it allows us to be more efficient, more timely, and quite candidly, the revenue quality is showing. 11.9% was the growth in revenue quality for, or the RPP growth in the second quarter. That's a good number. We expect that to moderate for a few reasons in the back half of the year to high single digit. What's critical there is managing that spread.
As Carol talked about, driving the productivity, we'll bring the CPP down and then deliver on our margin commitments.
You know, I love Deal Manager for so many ways. It makes it easier for our salespeople first. It makes it better and faster for our customers, which is awesome. We're also bringing intelligence to the decision-making. Before, candidly, it was a bit of tribal knowledge. Now we're using AI to help inform the decisions, and we're coming in at better pricing as a result.
All right. Thanks for that. Maybe, Brian, can you just clarify the EBIT dollar impact of fuel in the quarter, and if there's any risk that as fuel prices moderate, there's gonna be an earnings headwind in sort of 3Q, 4Q?
No, I don't see a headwind. With the US dollar, with the fuel prices moderating, it's factored into our guidance.
Okay. Thank you.
Our next question will come from the line of Bruce Chan of Stifel. Please go ahead, sir.
Hey, thanks, operator, and good morning, everyone. Just wanna get your sense of how supply chains are flowing right now. Maybe just, you know, broadly upfront, but also in the context of your CapEx plans for, you know, rolling stock and automated facility rollouts. You know, Brian, maybe if you see any risk to guidance there, if, you know, we see any additional delays on the supply chain. Thank you.
Yeah. Why don't I pick up the back half of that on CapEx, Carol, and if you wanna add any color on supply chains. The guide we're holding at $5.5 billion, we feel good about. We're not immune. You know, there are supply chain challenges around the world, and some of the parts and motors and trucks are more challenging to get. But I think we look at capital now from a sort of a perpetual rolling cycle. It's not, you know, episodic. We're looking at opportunities to invest in different areas that may not have been in the original plan to drive automation, et cetera. We'll hold the $5.5 billion.
That you can hold, and we'll continue to remain agile and keep you updated if there's any change. I don't expect a big change.
The supply chains are flowing better than they were a year ago, but we're not out of the woods. A lot of it has to do with the rolling COVID lockdowns in China. We're shut down in Shenzhen again, and we thought we'd gotten through the worst in the second quarter. Kate and her team did a masterful job of managing through this. Get this. Because of the rolling lockdowns in China, in different cities, when you add up the number of days that we were effectively shut down cumulatively, and if you look at all the cities combined, 106 days, we had people, UPSers sleeping on the floor of our hubs to try to keep commerce moving. Manufacturers couldn't manufacture because they were shut down.
Ocean freight volume levels were down in the second quarter because of the lockdowns in China. We see what's happening with the current variant of COVID, and you just wonder about when will we ever get through it? What you have to do is get through it. You have to manage through it. That's what we as a team said we will do. We are going to run our business. We're not gonna let the business run us. We're gonna get through it, and that's what we're doing.
Great. Thank you.
Our next-
Steven, we have time for one more question.
Our last question will come from the line of Brian Ossenbeck of JP Morgan. Please go ahead, sir.
All right. Thanks. Good morning. Appreciate taking the question. Maybe one more quick one for Brian on fuel. Can you just talk about the management actions on fuel that you've quantified? I think about a third of the RPP was that and mix.
Yes, I think where some of the concern is that you might not be able to hang on to that in a weaker fuel price environment. Are those getting built into these contracts and these renegotiations that you're talking about? For Carol, if you can just give us a little more update on the upstream density program. Sounds like another new initiative, but I think the company tried that a few years ago, didn't quite pan out. Maybe what's different this time? What sort of visibility and partnership do you think it can drive to pretty much help everybody in the supply chain, including those who sign up for these pilots? Thanks.
Yeah. Brian, thanks. On the fuel surcharge, look, as Carol mentioned, we run a pass-through on the fuel surcharge on the price per gallon piece, and we've now isolated that for you for transparency. That's a very efficient mechanism, and we'll move up and down. The pricing actions we've taken over the last couple of years, we've actually taken 4 or 5 pricing actions, and those we feel are embedded. As Carol said, it's a different type of price. We don't think of it as fuel. It's an element of pricing, and we're embedding some of that in the base rate.
I'm just so happy you asked about delivery density, because we've tried to move the needle in this area for a long time, and we haven't been successful, principally because we've been focused on downstream, improving delivery density through access points or SurePost redirect, and we just really haven't moved the needle. Yes, the density was the best this quarter since 2019, but fractionally. We're like, All right, what we're doing isn't working. We've got to go upstream. What I mean upstream, when you think about e-commerce retailers, their upstream supply chain is from the manufacturer to their warehouse or store. Their upstream supply chain is also their order management system. We have been in a pilot with a third-party technology company that powers order management systems for most of the retailers in the country.
The pilot is a virtual hold, where in the order management system, the third party technology company is holding the order until it can match another order going to the same address, and then it releases two orders. This pilot has been working very well. Now you may say, "Well, what about the service level agreement to the customer?" Well, the virtual hold is only as long as the service level agreement allows. There's a lot of hours in that service level agreement, 9 hours, 12 hours. What we found through the pilot is enough time to be able to match. We release, and we deliver the density. Just to make this real for you, and this is just an estimate, but we estimate the cost of the last mile for us is $5.50.
That incremental package cost us $0.60. Imagine the value that can be released if we improve the density. We're gonna give some of that value back to our customers. Why not? Their service level is not disruptive, and we are gonna value share. The pilot has been so successful. We're going live in the third quarter with the customer. We've got 9 other customers lined up who are anxious to talk to us about this. More to come. Early days, but super exciting because it's different from what we've done in the past.
All right. Thank you, everybody, for joining us today and look forward to talking to you all next quarter. That concludes our call.