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UTi Worldwide Inc. (NASDAQ:UTIW)

F3Q 2013 Earnings Conference Call

December 06, 2012, 11:00 AM ET

Executives

Eric Kirchner – CEO

Rick Rodick – CFO

Ed Feitzinger – EVP, Global Operations

Jeff Misakian – VP, IR

Analysts

William Greene – Morgan Stanley

Tom Wadewitz – JPMorgan

Scott Group – Wolfe Trahan

Ben Hartford – Baird

Jack Atkins – Stephens

David Ross – Stifel Nicolaus

Elliott Waller – Jefferies & Company

Nate Brochmann – William Blair

Todd Fowler – KeyBanc Capital Markets

David Campbell – Thompson Davis & Company

Ryan Bouchard – Avondale Partners

Matt Young – Morningstar

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the UTi 2013 Third Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

I would now like to turn the conference over to Jeff Misakian. Please, sir, go ahead.

Jeff Misakian

Thank you, Richard, and good morning, everyone. Welcome to UTi Worldwide's fiscal 2013 third quarter results conference call. Joining us on the call today are Eric Kirchner, Chief Executive Officer; and Rick Rodick, Chief Financial Officer. Ed Feitzinger, Executive Vice President, Global Operations, is also here and available to answer questions during the Q&A session.

Before we begin the presentation, I would like to point out that certain statements made on today's call are not historical facts. They may be deemed therefore to be forward-looking statements under the Private Litigation Reform Act of 1995. Many important factors may cause the company's actual results to differ materially from those discussed in any forward-looking statements.

These risks and uncertainties are described in further detail in the company's filings with the Securities and Exchange Commission. Please refer to these filings for more information regarding the risks and uncertainties that the company faces. UTi undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Now, I would like to turn the call over to Eric Kirchner. Eric?

Eric Kirchner

Thank you, Jeff. Good morning, everyone. Results for our fiscal 2013 third quarter were unsatisfactory. The combination of weak airfreight volumes, reduced activity in contract logistics, changes in currency translation, our inefficient platform and a number of one-time items led to a 36% decline in adjusted operating income and a 45% decrease in adjusted net income for the quarter.

Many of the same issues that negatively impacted our results throughout the year continued into our third quarter. Global economies have slowed, consumer demand tepid and clients have grown increasingly cautious. Freight demand remained weak in a quarter that saw no appreciable peak shipping season. Meanwhile, competition and pricing pressures have intensified.

This impacted our revenues through some lost business and reduced pricing to retain existing clients. We continued to win new business through our sales efforts but at a pace that was insufficient to offset the decline from existing clients and we will not chase unprofitable business.

These factors led to a 10.7% decrease in revenue and a 9% decline in net revenue in the third quarter. In Freight Forwarding, airfreight tonnage fell 12% in the third quarter while ocean freight TEUs were consistent with the same period last year. Airfreight tonnage decreased 18% in the month of September with the largest decline coming out of EMENA.

October tonnage saw 10%, a sequential improvement that partly reflects an easier comparison. Dynamics seen all year in airfreight continued to play out in the third quarter where wafer shipments fell and clients increasingly favored the less expensive mode of ocean freight. The flat volumes in ocean freight reflect a lack of a peak season.

At the same time we did not experience the offsetting expansion in net revenue per unit of cargo that traditionally comes with a soft volume environment. Clients who start to maintain stability in their transportation costs and many freight forwarders are trying to capture market share. And carriers are determined to maintain higher rates as long as possible. This dynamic is pressuring net revenue per unit throughout the entire industry. Because of our pricing initiatives and productivity measures, we've managed to keep our net revenue per unit relatively flat with the prior year and quarter when adjusted for currency.

Contract Logistics and Distribution revenue was down in the third quarter primarily because of currency and lower volumes from existing Contract Logistics clients. An increase in distribution volumes partially offset these factors. We saw declines in the EMENA, in the Americas regions due to lower volumes in existing facilities and the impact from some lost business as anticipated.

In our Africa and Asia-Pacific regions, we continued to see higher volumes through existing business and new clients. Because operating expenses are largely tied to shipments rather than tonnage or TEUs, they declined less than net revenue. We're taking additional actions to adjust our expensed base in response to the lower volumes, some expensed actions which we have planned to execute through our transformation in fiscal 2014. We expect to save approximately $25 million in annualized operating expenses as a result of these actions.

These cost reductions are designed to stabilize productivity in a very weak environment. On the transformation front, we've launched our new Freight Forwarding operating system and our new financial system in multiple countries with plans to add more by the end of this fiscal year. I have more to say about our transformation progress in our closing remarks.

I'll now ask Rick to walk through the financial results. Rick?

Rick Rodick

Thanks, Eric. Net income attributable to common shareholders in the fiscal year 2013 third quarter was $0.10 per diluted share. Excluding severance and other costs, adjusted net income was $0.16 per diluted share in the fiscal year 2013 third quarter compared to $0.29 per diluted share recorded in the same period last year.

Currency changes had a negative impact on our third quarter results. We effect was smaller than we experienced in previous quarters. The US dollar strengthened against most currencies, particularly against the South African rand. This reduced reported revenues and expenses in the third quarter, though the impact on the bottom line was only about $0.01 per diluted share.

Revenues and net revenues decreased 10.7% and 9%, respectively, in the fiscal year 2013 third quarter compared to the same period last year. The decrease in revenues reflects the impact of currency, declining airfreight volumes and lower pricing. On an organic basis, revenues decreased 6.5%, while net revenues fell 4.2%, compared to the same period last year.

In the third quarter, we incurred severance costs of $3.9 million associated with the transformation as well as legal expenses of $5.2 million from a recent adverse judgment relating to a warehouse fire that occurred in 2006.

We've provided reconciliations of GAAP to non-GAAP results in the tables of our press release and posted more details on our website. The rest of my remarks will refer to our results as adjusted to exclude these severance and other costs.

Adjusted operating expenses in the fiscal year 2013 third quarter were 5.5% lower than the same period last year. The impact of currency reduced expenses significantly in the fiscal year 2013 third quarter.

On an organic basis, adjusted operating expenses would have been 0.6% lower than the same period last year. Adjusted operating profit fell 36% in the third quarter compared to the same quarter last year, almost entirely due to lower volumes. Our adjusted operating margin in the fiscal year 2013 third quarter was 7.9% compared to 11.3% in the third quarter last year.

For the quarter, we were negatively impacted by approximately 1.1 million in the United States from Superstorm Sandy and approximately 2.4 million from the transportation strike in South Africa.

Revenues from the Freight Forwarding segment were down 14.2%, primarily due to currency effects, declined airfreight tonnage and lower pricing. Airfreight tonnage fell 12% compared to last year's third quarter and flipped 6% on a sequential basis versus the second quarter.

Ocean freight TEUs were flat for the quarter compared to the same quarter last year and the previous quarter. Net revenues in Freight Forwarding decreased 10.8% in the fiscal year 2013 third quarter, primarily due to currency effects and the airfreight tonnage decline.

Net revenue per kilo declined 5%, while net revenue per TEU fell 4% in the third quarter compared to the same period last year, primarily due to currency effects. Adjusting for currency, net revenue per kilo was down 0.9% while net revenue per TEU increased 0.6% compared to the third quarter last year.

Adjusted operating profit in Freight Forwarding decreased 32% in the fiscal year 2013 third quarter compared to the same period last year. The Freight Forwarding adjusted operating margin in the third quarter was 14.4% compared to 18.9% a year ago. The decline in profit and margin was primarily due to lower airfreight volumes.

Contract Logistics and Distribution revenues and net revenues decreased 3.4% and 7.4%, respectively, versus the same period a year ago, primarily due to currency and lower volumes in Contract Logistics. On an organic basis, revenues were up 0.5% while net revenues fell 2.2% versus the same period last year.

Adjusted operating profit in Contract Logistics and Distribution decreased 22% in the third quarter of fiscal year 2013 compared to the same period last year. The adjusted operating margin in Contract Logistics and Distribution was 8.8% in the third quarter compared to 10.4% recorded in the third quarter last year.

The declines in profitability and margin primarily reflect lower volumes, the impact of the South African strike and site specific moving expenses in Taiwan, Hong Kong and our South African pharmaceutical distribution facility. Our effective tax rate was 36% in the third quarter. We continue to expect that our effective tax rate for the full fiscal year will be approximately 32%.

As Eric mentioned, we've taken steps to move approximately 25 million in annualized expenses. This will be achieved primarily through staff reductions throughout the organization. Severance costs are expected to be approximately $5 million in the fourth quarter as a result of these reductions.

Cash flow from operations was a negative $57.5 million for the first nine months of the fiscal year 2013 compared to a positive $21.7 million for the same period last year. The change primarily reflects a decline in net income and a deterioration of working capital during the year.

I thought I'd conclude my remarks by providing you with a brief overview of what I've been concentrating on during my first 60 days at UTi. Since I joined UTi, I've focused most of my time familiarizing myself with the company and refreshing my knowledge of the industry.

As part of this process, I've met a significant number of UTi people in many of our locations around the world. In addition, we're in a process of finalizing our fiscal year 2014 budget and our next five-year strategic plan. And as you can see, we're in the midst of a difficult working capital environment as our clients pushed to extent their payment terms and our vendors want to be paid quickly.

Improving our working capital will be a key focus of mine for the remainder of the year and throughout fiscal year 2014. I've also initiated an analysis of our current capital structure and I'm evaluating potential options. I expect to provide a more detailed vision of our capital structure in the near future.

With that, I'll turn the call back over to Eric for his closing remarks. Eric?

Eric Kirchner

Thank you, Rick. The industry has dealt with the effects of the weak macroeconomic climate and freight environment for the entire year. For the quarter, while the persistence of these conditions was not unexpected, the results were nonetheless unsatisfactory. Some experts are predicting a turn in the global economy soon, we're not seeing it and don't expect material improvement in the foreseeable future.

Our actions to remove costs in the near term should help offset these challenges, but can only partially mitigate the impact of lower volumes and these intense pricing pressures. We will continue to focus on controllable items and the global economy will improve at some point. We expect to be positioned for greatest success when it does. Longer term, we expect that changes that we're making will deliver sustainable improvement in our operations.

Our transformation is progressing. We launched our new Freight Forwarding operating system in three more countries in the third quarter with another added at the beginning of December. The system is now live and processing transactions in five countries. More are expected by the end of the fiscal year. We still expect to be largely deployed by the end of fiscal 2014.

Our new financial system is now functioning in 12 countries with more to be added by the end of the year. This progress is encouraging and we remain focused on achieving our operating margin targets within fiscal 2015.

With that, I'll turn the call back to Jeff to direct the Q&A period. Jeff?

Jeff Misakian

Thank you, Eric. We will now open up the call for your questions. As a reminder, we ask that you limit your questions to one initially to allow as many as possible to have an opportunity to participate. Richard, may we have the first question please?

Question-and-Answer Session

Operator

Thank you. Yes. Our first question comes from the line of William Greene from Morgan Stanley. Please go ahead.

William Greene – Morgan Stanley

Hi. Good morning. Eric, I'm curious about your view about something that seems to be going on and may have some longer term implications. So if we look at near sourcing of manufacturing, so we see it in Mexico a bit, we hear about manufacturing in Asia primarily for Asian markets. Do you think that's having any effect – we all think of sort of what we're going through now is a bit cyclical, so things are down for cyclical reasons, but is there any way to think about if you're seeing changes in the freight flows that maybe suggest the levels of demand are being affected by more of a secular pressure than just cyclical? Are you able to sort of see any of that – any color or thoughts you'd have would be appreciated?

Eric Kirchner

Sure. We're in the midst of a deep dive and looking at strategic options for our next longer term strategy. So that's at the forefront of what we're analyzing. There certainly is the possibility because extended supply chains, volatility and fuel costs and really the relative changing cost of labor in countries like China come into play. And so we're thinking very diligently around those issues. And then looking at what we need to do to improve our capabilities to compete regionally and not just between our regions. So I think that that is an area that's at the forefront of our thinking just to make sure that we're prepared in the event that near shoring or changes in the manufacturing base do in fact recur and it is a longer term trend.

William Greene – Morgan Stanley

And just to be clear, that's not an area where you have expertise, for example, surface transport from Mexico?

Eric Kirchner

No, that's not accurate because of the distribution that we have within the US and the acquisitions that the company have made over time, I think we're reasonably well positioned. We would benefit by more surface area on the borders, I'd say is a fair comment. So to improve our – the surface area of our customs brokerage capabilities and our cross back capabilities on the borders would be a focus area for us. But in terms of the ability to affect ground transportation, I think we're reasonably well positioned.

William Greene – Morgan Stanley

Okay. Thanks for the time.

Eric Kirchner

Sure.

Rick Rodick

Thanks, Bill.

Operator

Thank you. And our next question comes from the line of Tom Wadewitz from JPMorgan. Please go ahead.

Tom Wadewitz – JPMorgan

Yes. Good morning. I wanted to see if you can talk a little bit more about the competitive dynamic and whether you're seeing the pressure on certain lanes or whether you're seeing that from other major forwarders? And kind of how you think that that's being manifested in the results? The yields, I guess the yields look like they were pretty good but obviously some pressure on the tonnage. So more on a competitive dynamic and where you think that is coming through in the numbers?

Eric Kirchner

We're trying to work collaboratively with our clients because obviously the macro-environment has had some volatility with regard to the underlying pricing from carriers and that's both up and down. If you look at what's happened in ocean, it's actually been on the way up. But respect to competing with other forwarders or our key peer group, I would say there's a cast of usual suspects that are more aggressive than others. And I would also say that there have been more than a few instances where we've elected not to chase business at pricing levels that weren't compensatory. And then we've reengaged with those clients after they made a switch for a short period of time because they didn't get the service that they expected for the pricing that was in the market.

So it's a mixed bag. We're continuing to work diligently on things like our gateway initiatives and combining volumes to tender to few more carriers and more stronger partnerships with carriers and that's helping to somewhat mitigate the effect of the pressure in the market. But you're right, we do have some challenges in terms of volumes and that's more related to the markets where we have concentration in our particular client base. So, I'm not satisfied in our business acquisition efforts and we're really focused on that for the coming year. And we can't control if certain competitors elect a price of levels that we don't find appealing.

Tom Wadewitz – JPMorgan

So you're comments on competition indicate that it's kind of dissimilar with what you've seen before or are you trying to say that the competitive pressures are getting worse?

Eric Kirchner

I'd say it's more similar to what we've seen before. I think there is a different dynamic at play because absolute volumes are down. So the available market has contracted as opposed to stay the same or expanded. So it might be a little bit more aggressive behavior based on the concern that there are fewer available shipments in the market in general, but I wouldn't say that it's a step function worst than it normally is.

Tom Wadewitz – JPMorgan

Right. Okay. Thank you.

Eric Kirchner

Sure.

Operator

Thank you. And our next question comes from the line of Scott Group from Wolfe Trahan. Please go ahead.

Scott Group – Wolfe Trahan

Thanks. Good morning, guys.

Eric Kirchner

Good morning, Scott.

Scott Group – Wolfe Trahan

So, Eric, I don't know if I heard it or not, but do you have November air and ocean volumes? And I want to then dig down on the airfreight a little bit. If I think back, you've been, I think, more right than anyone warning that it was going to be a really challenging year for airfreight volumes and want to get your sense as we head into 2013, what you're thinking for the airfreight market and how much of this in your mind is cyclical and how much of it structure? I mean, is there a case that airfreight for the forwarders is not going to be a growing segment anymore as things shift from air to ocean?

Eric Kirchner

Yeah, we did mention the November volumes. I would say that they were more -- less of a decline than we'd been experiencing when we compare same month prior year, and it was a little bit surprising because normally if you look at November versus October, that wouldn't necessarily -- you wouldn't expect that. But the issues around November are still very unclear in terms of it being way too early to call any kind of trend.

So I would say our decline will be less in November than it's been in recent months, in airfreight. I think ocean freight, we were about -- what were we in ocean? About flat for November of last year. So it's not early enough to say that there's any big trend or positive coming, but it was slightly better than our performance in October. I guess that's the best way to put it.

Longer term, as I mentioned, our view on strategy, I think it's fair to predict that ocean has the potential to grow more consistently over a longer period of time than air will and we're starting to focus more efforts in that space. We've already added significant capabilities with Christian Boettcher as our Global Product Leader and then supported by product and pricing leaders in each region. So I think ocean is -- it's fair to say a larger focus area for us in the future.

With regard -- I think you've asked about airfreight next year. We think that it's more prudent to plan for no growth in terms of an increase in airfreight tonnage and then build the cost base around that that can scale up in the event that things do improve. So in the feedback from our clients, and I've mentioned this before, people try to avoid using airfreight on a programmed basis and it's more in response to supply chain disruption or emergencies, quality control problems and things like that.

So we're not going to bank on airfreight coming back in a huge way, but that doesn't mean we can't continue to move forward with the things that we're focused on and achieve better results without a huge return in airfreight. If it comes back, it'd be great but I think if anyone plans on that and builds their expectations around that for the coming year, there is a chance to be dissatisfied about that.

Scott Group – Wolfe Trahan

Yeah, and that makes sense. How flexible is the cost structure between air and ocean? Meaning if things continue to shift from air to ocean, is that -- do you have kind of separate cost structures where there is some negative operating leverage on the airfreight side or is the cost structure pretty fungible where it can move over with the revenue to the ocean side?

Ed Feitzinger

Yeah. This is Ed Feitzinger. I can answer that question. The cost structure is very flexible. If you look at our branch activities, a person who is processing an ocean shipment can process an air shipment. So the sales force is the same. So realistically, we can leverage most of our organization. The only things that are really different are the product teams and the procurement teams which is a very small percentage of our cost structure.

Scott Group – Wolfe Trahan

Okay. Thanks a lot guys. I'll get back in line.

Eric Kirchner

Thanks, Scott.

Operator

Thank you. And our next question comes from the line of Ben Hartford from Baird. Please go ahead.

Ben Hartford – Baird

Good morning, guys.

Eric Kirchner

Good morning, Ben.

Ben Hartford – Baird

Can you provide -- maybe this is the question for Rick, but can you provide some itemization when we look at the $25 million in annual cost savings that you've identified, how much of that is incremental from Investor Day a year and a half ago versus pulling forward some of the $75 million to $95 million in transformational savings that you had outlined there?

Rick Rodick

Well, first off, the components of the $25 million, primarily that comes from a -- taking out approximately 300 headcount. The reductions are throughout the organization, but primarily focused on management structure and the regions. The costs are going to start in the fourth quarter. As I said before, it's going to generate about $5 million and expected severance cost in the fourth quarter also. Some of this is a pull forward. I think Eric, maybe you could comment on how that compared with what we had in the Investor Day, but some of it is things we're going to do during the year, Ben, in fiscal 2014, but we pull them forward to the fourth quarter.

Eric Kirchner

Ben, I think the way to think about it is, when we spent time at Investor Day that was about 18 months ago, and our expectation when we laid out the plan was that the transformation benefits would produce the result with flat volumes. Since volumes haven't been flat, it's producing a different dynamic from a financial perspective. So, some of these actions arguably would have occurred in the course of deployment and transformation throughout fiscal '14. We did post pull some things forward. Other actions and it's kind of hard because you mix -- it's hard to mix and mingle which action applies to what I guess, but some of these actions are more in response to business one-on-one and taking definitive action in the face of declined volumes.

We've talked a lot about this as a team in terms of how to share this information with the release and on the call, and what we didn't want to imply was that this is -- take $25 million of a lower cost base on top of all the expectations for the transformation in 2014. So to answer the question, the starting point with regard to net revenue is different than we would have predicted in the middle of calendar year 2011, because the economy has changed and the volumes have changed so much. So I'm not giving you a real good answer that could be plugged into the model, but it's a combination of actions that we felt were prudent to execute to set ourselves on a better entry point in 2014. But again, with the caveat that we're responding to a different environment in terms of volumes than we would have predicted when we had the Investor Day.

Ben Hartford – Baird

Understood. And I guess, just to clarify, putting Investor Day aside, maybe thinking about these savings. Have you taken any of the actions yet, meaning any of the actions included in fiscal 3Q and will they be concluded by the end of fiscal 4Q, so this run rate of $25 million should be realized in 2014, fiscal '14?

Eric Kirchner

The intent would be to have the actions concluded by the end of the fiscal year. And I would say that by and large, they're mostly done already.

Ben Hartford – Baird

Okay, that's helpful. I'll jump back in. Thanks.

Operator

Thank you. Our next question comes from the line of Jack Atkins from Stephens. Please go ahead.

Jack Atkins – Stephens

Good morning, guys. Thanks for taking my questions.

Eric Kirchner

Hey, Jack.

Rick Rodick

Good morning.

Jack Atkins – Stephens

I guess, first off, now that we're live in five countries on the new operating system and live in 12 countries on the financial system, I was wondering if maybe you guys could quantify the annualized costs that have already been taken out of the business just from what you've rolled out so far?

Eric Kirchner

Sure. The answer is very little cost has come out because again, the opportunity to start to realize the benefits manifests itself when multiple countries are on the system with high transaction volumes, so that we get to the point that we can retire legacy systems and then that eliminates the duplicate entry. But today one way to -- the original descriptor of this action way back was called 4as1 because there are four regions and four main blocks of systems consequently that requires access to all those systems in each country, because you don't know where a shipment might originate. So until we can retire an entire block, so let's say everybody in Europe gets on one operating system today, gets onto the new system and we can take that legacy system out, we still have to maintain those systems throughout the Company.

So I can say that it was very pleasing to see the results of the shipments that we have processed between two countries that are on the system because the benefits to the users were obvious. I mean it was really a great revelation and it's very helpful in terms of the internal change of management and adoption of the system. But when those shipments came through from the new system to the new system, anyone that didn't have the understanding of those benefits, the light bulb went off and it was a great day. So I think we've got some really positives around the deployment process as we can move it look forward, but we're moving cautiously so that we don't have business disruption and that we roll this thing out in a way that produces a stable outcome. And I'm real bullish on where we're headed with it.

Jack Atkins – Stephens

Okay, great. And then just as a follow-up to that, I mean when we think about the expected savings in FY '14 knowing what you know now about the overall macro-environment, that you didn't know back in 2011, how should we think about the expected savings? Will it be more, less or greater than what you outlined at the Analyst Day including this $25 million reduction that you talked about this morning? And then when should we begin to see the cost begin to ramp associated with depreciation from this two system?

Eric Kirchner

So there are a couple of questions in there. The deployment schedule really will cause some of the -- will really determine some of the answers to the question. So the -- earlier in the year, we can get larger countries on the bigger the potential. My guess is we have to declare something from an accounting perspective that says this is the magic moment when we need to start to take the depreciation. You could argue something like more than 50% of the transactions are on the new system. And I can't predict exactly when that's going to happen based on the deployment schedule. So our preference would be to have it sooner rather than later, but I can't tell you exactly when it's going to happen.

With regard to expected costs versus benefits, I would say that we're slightly behind the pace that we were expected to be, so it would be later in the year rather than earlier in the year. Therefore, when the larger countries do come online, the cost opportunities versus the expense are going to be loaded towards the backend which implies if you have to take severance and actions later in the year, then you've got less time to recover and produce benefits. So as a long-winded answer and to be more succinct about it, it would be likely that the cost and the benefits are going to cancel out or wash out in FY '14, which is slightly worst than we had predicted at Investor Day, but not materially.

Jack Atkins – Stephens

Okay. Thank you for the color. I appreciate it.

Eric Kirchner

Sure.

Operator

Thank you. Our next question comes from the line of David Ross from Stifel Nicolaus. Please go ahead.

David Ross – Stifel Nicolaus

Good morning, gentlemen.

Eric Kirchner

Good morning.

Rick Rodick

Good morning, Dave.

David Ross – Stifel Nicolaus

Eric, can you talk about headcount management adjusting to lower volumes? And the question I have was whether or not that puts you at a disadvantage when the market rebounds, you did mention that you wanted to kind of preserve your capacity for growth, how do you do that?

Eric Kirchner

Well, to put it in context, the capabilities -- look, a lot of the cost takeout was more focused on management, so that's a little bit less onerous than shipment processing capabilities within the operations. So I'm confident that we're positioned in the event if volumes come back, because we've got excess capacity in the system that exists today with regard to the headcount. And this isn't like we took out 10% headcount. I mean, it's a reasonably prudent amount of headcount.

And I'd like to add that it's not as if we haven't been adjusting headcount to volumes throughout the year. This has not been something that we have just happened upon in the fourth quarter, but because these volumes have persisted at these levels, it just made sense to align the workforce there. And if we need capacity -- the type of capacity that we would need to process additional volumes, we can get back into the system fairly readily.

David Ross – Stifel Nicolaus

Do you have a separate airfreight sales force than ocean freight sales force, or are they combined?

Eric Kirchner

No, they're combined. We have an overlay of subject matter experts that probably you could characterize as having more focus at the product level for air and for ocean, and also for customs brokerage. But that sales force is very small in terms of the percentage of the total. And it also exists to help facilitate knowledge transfer and be actively involved in pursuing large opportunities that require a higher level of expertise. But our general sales people sell in the forwarding space, sell air, ocean and brokerage.

David Ross – Stifel Nicolaus

Okay. And has there been any retraining need to go on there? Do you have like air guys, they don't know as much about ocean, or ocean guys that are having trouble selling air or are you kind of where you want them to be?

Eric Kirchner

No, I would say our company has been biased towards air, but that we've initiated probably over a year ago, more training on the ocean side. And it's not -- I would not characterize the difference in selling ocean and air as being as big of a skill difference as selling 40 versus Contract Logistics. So I think that the adjacency of air and ocean transfers pretty readily to the sales force. And as I said, we have -- we've got distributed learning through a learning management system online. We have ongoing physical training and then we have the ocean subject matter experts that would be out with key sales resources to jointly make sales calls and help them along. So I think we're on the right track.

David Ross – Stifel Nicolaus

Great. Thank you very much.

Eric Kirchner

Sure.

Operator

Thank you. And our next question comes from the line of Elliott Waller from Jefferies & Company. Please go ahead.

Elliott Waller – Jefferies & Company

Hi. Good morning, guys. Thanks for the time. I wanted to ask about the trend in the air to ocean switching that you're seeing. During the quarter, would you say that the trends pretty much stayed the same as it was the previous quarter, accelerated, slowed down? And then also, are you seeing the trend more prevalent in any particular industry verticals or regions of the world?

Eric Kirchner

I think it's hard because of the volatility in absolute volumes. I mean the sum total of goods that we've seen moving through the supply chain is less absolutely. So, it's hard to make -- I think companies are more focused in some cases through a procurement driven exercise to a lower cost, which would imply shifting from air to ocean because of the differential. The challenge with that, and it's exacerbated I think if you look at it from a procurement perspective by the low cost of capital, so there's no penalty to take a longer period of time in transit for a high value good, because the cost of carrying it is much less than it used to be. But if there's an uptick in demand, then that puts our company in a disadvantage and causes us to go to airfreight.

So it's logical to say if you can live with a longer transit time and it's going to cost you 10% roughly of what it might cost to go by air with the longer transit time, and that's been more practical in the recent environment because demand is so low that you're not rushing to get something on store shelves because somebody is not at the other end lined up to buy it. It's hard to say where that's going to go next year. But as I said, if you look at the longer term forecast from IATA, Boeing and others, which admittedly have some bias in them, there's still a prediction that into the future you should expect a 4% to 5% increase in airfreight volumes.

So, as I mentioned earlier, we're going to be very cautious about expectations for air in the coming year, but there is the chance that it does come back to some extent. There's some commodities that are always going to move by air because of their nature, like perishables or certain pharmaceuticals or certain high value, high turn consumer electronics, but we're again going to focus our efforts on continuing to improve our capabilities in air and then building out new capabilities in ocean.

Elliott Waller – Jefferies & Company

Got you. Okay. Thank you. And a quick follow-up. The labor disruptions on East and West Coast here in the United States, any impact on the quarter or so far in the new quarter?

Ed Feitzinger

So, no impact in the current quarter and we're expecting probably about $1 million of impact in Q4 based on the Long Beach, LA port disruption that just ended yesterday. And then everyone's in a little bit of a wait and see mode on what's going to happen towards the end of the month with the East Coast action. The West Coast action realistically, it snuck up I think on the industry a little bit. People don't think expected it to be shut down for eight days. It will take two or three weeks to get things through the system based on what our discussions are with the carriers and. But at least on the West Coast, you could offload your ship in Ensenada or in Oakland. That caused some disruption in the trucking side, but the East Coast would be a little bit more widespread and would cause a larger disruption and we're developing our contingency plans for that.

Elliott Waller – Jefferies & Company

Got you. Okay, great. Thanks for the time.

Operator

Thank you. And our next question comes from the line of Nate Brochmann from William Blair. Please go ahead.

Nate Brochmann – William Blair

Good morning, everyone.

Eric Kirchner

Hi, Nate.

Nate Brochmann – William Blair

I wanted to talk a little bit on the Contract Logistics side, Eric, if we could in terms of what you're seeing there in terms of -- I understand volumes are down, but in terms of new business wins and continued acceptance there in terms of where the opportunities are?

Eric Kirchner

I'll pass it over to the expert, Nate.

Nate Brochmann – William Blair

Fair enough.

Ed Feitzinger

Thanks, Nate. So we're seeing -- that's through good synergies across the organization that we're beginning to achieve from the acquisitions we made quite some time ago in North America and across business units synergies in Africa, and I think a really good cross-selling of those services as well as some backend synergies on the cost side to make our products as attractive as possible. In Africa, we've had quite a bit of success in project business off late that has some cyclicality to it, but it's been some very nice business with multiple customer wins in that area.

We've also had good growth in our -- like I said, our distribution business there as well as our core warehousing business there. In Asia, we've had good revenue growth in general. And as you've seen from Eric's discussion, we've made investments in a couple of new facilities there, particularly in Taiwan where we moved from number of disparate facilities into one large new facility that positions us well. We have a very good market position there. We're growing our connected services between Freight Forwarding and Logistics in the Hong Kong area and moved into a better facility there as well.

And then on the pharma side, we talked about that, as you've all known about that for a couple of years now. We invested in that facility. Part of the issue I think you see is sort of a confluence of events. To be honest with you about the pharma facility, the Hong Kong move, the Taiwan move all coming at about the same time, which is driving some expense growth relative to those facilities.

And then in the Americas and EMENA, our focus has been on profit and making sure that any new account we bring on meets -- basically beats our weighted average cost of capital by enough to justify the activity. So we're being more cautious in those regions. And then obviously EMENA, particularly Southern EMENA, is a pretty tough market right now from a revenue perspective. So I hope that -- that's a little bit of a longwinded answer, but I hope that covers the general issue there.

Nate Brochmann – William Blair

No, that helps, but -- so if we take some of the one-time moves kind of out of the equation a little bit, it sounds like the underlying cost structure within that business though that -- you're pretty happy with where you're at there for what you're managing?

Eric Kirchner

The trick in the CL&D space is to run with as lean as possible a cost structure. So there's not a lot of overhead in that business in general. So we're pleased with where things have gone and we're pleased particularly in places like EMENA, we've been able and we've talked about that for some time. And that's an area where we've been looking for profit improvement and we've been seeing that. So the team has delivered well there this year.

Nate Brochmann – William Blair

Okay, great. Thanks.

Operator

Thank you. And our next question comes from the line of Todd Fowler from KeyBanc Capital Markets. Please go ahead.

Todd Fowler – KeyBanc Capital Markets

Thanks. Hi. Good morning. Rick, in your prepared remarks, did I hear your correctly that you're evaluating the capital structure? And if that is what you mentioned, can you talk a little bit about what you're thinking there? Is that something like fixing some of the variable debt or reworking the credit facilities? I just wasn't sure what that comment was related to?

Rick Rodick

Yes, that's what I said. And it's related to a few things, definitely the point you brought up. But also looking to see in the future how we use our cash and really just taking a step back, finishing the budgeting process and seeing what our cash flows are going to look like. And also we're just wrapping up our five-year strategic plan. So I thought at the end of that, it'd be a good time to then look at our capital structure and address some of the things I think people have been asking over the last few quarters and such.

Todd Fowler – KeyBanc Capital Markets

What would be the timing when you would communicate? I mean, is that something that we can expect with the fourth quarter update or how you're planning on communicating the expectations for that?

Rick Rodick

Probably during the first quarter, because we'll be wrapping things up in the fourth quarter and probably no later than the first quarter.

Todd Fowler – KeyBanc Capital Markets

Got it, okay. And then just lastly with the free cash flow where you're at year-to-date, is the expectation that you won't be free cash flow positive here this year? And do you have any sort of preliminary expectations for CapEx and any sort of thoughts on free cash, I guess going into next year at this point?

Rick Rodick

Right now I'm not sure if we'll be free cash flow negative for the year, but it doesn't look good right now. While the working capital year-to-date is poor, it's actually similar to where we were last year and we finished, I think, about a negative 40 million free cash flow. Historically, our fourth quarter is our strongest.

Todd Fowler – KeyBanc Capital Markets

Right.

Rick Rodick

As I mentioned, I'm going to be very focused on working capital for the remainder of this fiscal year, but also next year. So I'm not really sure what it will look like yet, but I can tell you we'll be very focused on improving net free cash flow and driving it in the positive area. It's just too early to tell you what the quarter is going to look like.

Todd Fowler – KeyBanc Capital Markets

Has the quality of the receivables deteriorated or is it just a function of staying on top of the collections, or what's driving the working capital pressure this year?

Rick Rodick

I think it was a little both. I think the receivables were doing a pretty good job. They haven't deteriorated much. I think some of our liabilities we paid a little quicker than in the past that shrunk a bit. And we just got to manage it. There's a lot of pressure from clients to slow down payments, but we need to manage that. And then also manage our accounts payable.

Todd Fowler – KeyBanc Capital Markets

Got it, okay. Thanks for the time. Good luck.

Rick Rodick

One thing before we take any other questions, I just want to clarify one thing that we spoke on a few minutes ago. Eric had mentioned that the system was -- the amortization of the new system would begin when about 50% of the transactions are in. That could be the factor. Really, the determining fact or decision point is we begin the amortization when the system is ready for functionality intended use and having passed our user accepted -- acceptance testing. So when the system's ready to go and there's a certain amount of mass and it's ready for its intended purpose, and we passed all our testing as I said, then we'll begin the amortization. So I just want to clarify that, make it a little clear.

Jeff Misakian

Next question.

Operator

Our next question comes from the line of David Campbell from Thompson Davis & Company. Please go ahead.

David Campbell – Thompson Davis & Company

Hi. Good morning. Just wanted to ask you a couple of things. So one of the storm affect now on the East Coast in October, you've mentioned that it was $1.2 million -- I think you said $1.2 million impact. Was that in lost revenue that was diverted to November or was that some other -- or was that expense impact?

Eric Kirchner

David, most of it was revenue because many of our clients were shut down and couldn't ship. So it's yet to be seen whether or not that activity will go into November. So I can't answer whether or not we'll see revenue substitution from October to November, because there was just a lot of those -- the client base shut down and they didn't produce, so they didn't ship. So whether or not any individual client can catch up I guess is one way to look at it is the question. So, I wouldn't be able to say definitively but it did help November.

David Campbell – Thompson Davis & Company

So you don't think it's a reason why November tonnage was down less than October?

Eric Kirchner

No. I don't think so. Those macro numbers were more on a global level. It wasn't something that we really saw in terms of the big pick up in the northeast.

Ed Feitzinger

Yeah, we looked at that in detail at the commodity level, and the commodities that we saw moving were not the ones that you would -- generators and gas tanks and things that you might normally expect to see as a result of a response to a storm.

David Campbell – Thompson Davis & Company

Right. And Rick, can you give me the number of employees at the end of October and what you may -- so you're going to have 300 less at the end of January, is that the way to look at it?

Rick Rodick

At the end of October, we had approximately 22,000 employees and generally we'd be down by 300 by year end.

Eric Kirchner

But one challenge, David, when you look at the headcount numbers is as you're looking at an increase in Contract Logistics business particularly in Asia and Africa, those tend to be relatively labor intense, so you really have to look at the Freight Forwarding headcounts and the CL&D headcount. So when we go into the fourth quarter, you'll say, okay, if we added a warehouse that had 200 people in it, you might look at the numbers and go awarded the 300 go because then that would be 100. But the CL&D headcount is about 60% of our total headcount and that tends to move back and forth based on the business volumes and the added new business or lost business in fairly large chunks.

Rick Rodick

Then I think you could summarize that there's a direct correlation between more headcounts in CL&D and higher business activity, which is a positive. So if you're adding heads in CL&D, it means you're bringing on new clients. So I would say that splitting those two is probably more instructive.

David Campbell – Thompson Davis & Company

Right. Okay. Last question is on the strikes in South Africa, was that a revenue loss or you talking expense loss or expense increase?

Eric Kirchner

It was a combination. So the transport -- the strike started in the mine, it spilled over into the transport workers. When we solved our issues with our driver force in South Africa there were still some business disruption because there was no gasoline. So you couldn't drive. There's a combination of factors. Ed, you want to get on that?

Ed Feitzinger

So the number you're seeing is the overall net impact on an income basis, but we needed additional security during the activity itself. We had some damage to a small portion on our vehicles that's not really material amount. There is a significant amount of disruption in things they were set in various different parts of the line haul network that needed to be readjusted. So it's basically when the whole thing shuts down for a while, you're going to incur a bunch of expenses to bring that back up. And the total for that were about $1.3 million in net revenue and about $1 million in cost.

David Campbell – Thompson Davis & Company

Okay, thanks.

Eric Kirchner

Thanks, David.

Operator

(Operator Instructions). Our next question comes from the line of Ryan Bouchard from Avondale Partners. Please go ahead.

Ryan Bouchard – Avondale Partners

Hi. Good morning. Thanks for taking my question. On the ocean side, unless I've misunderstood, you've indicated that you're shifting more volume to fewer carriers in exchange for longer term contracts. Does that mean that your net revenue margins there won't benefit from the recent easing of ocean rates? Because this quarter, yields were up about 100 basis points year-over-year in your ocean side, which is not really intuitive. So can you help me kind of reconcile that?

Eric Kirchner

Maybe to put more color on it, what the underlying logic behind what we're doing is, is if we were spreading volume across 50 carriers or some bigger number because candidly, it could be that many and we now deal with 10, the concentration of volumes with the carriers is helpful in terms of the pricing that we're able to negotiate. That doesn't preclude us from getting spot quotes or bullet quotes as the industry term is. And the arrangement with the steamship lines is predicated on a number of units over the course of the year. So we do have flexibility to ship volumes between carriers, but the underlying agreements would say that we commit to give XYZ carrier 200,000 TEUs per year and where and how we give tend to those containers has some material impact.

So, for example, there is more value in an export container going to Asia from the US because of the trade-in balance. But, we're taking or I don't know if it's fair to say for the first time, but we're taking a much more comprehensive center-led view of who gets what volumes and it's been helpful for us to strike different kinds of agreements with our carrier partners. But as I said, that doesn't preclude us from taking advantage of spot market opportunities. So if, as an example you say I'm going to commit these 200,000 TEU to you this year and last year we traded 150,000 to carrier is normally more receptive to better service and a different kind of discussion on the pricing.

Ryan Bouchard – Avondale Partners

Okay. That makes sense. That's helpful. As a follow-up, you had also said before that you were -- I think it was last quarter that you were shedding some of the unprofitable Contract Logistics business in EMENA. Is that over or do you kind of expect that to continue for the next couple quarters or so?

Eric Kirchner

The EMENA revenue numbers reflect a reduction in revenue. You'll see I'd say a little bit, I can't give you an exact bridge on how many quarters that will last. Our business in a couple other countries is declining by design, because those are just not profitable areas for us and we're pulling back in a couple of select markets. So you may see some small additional revenue declines. I don't think it's going to be massive, but the intent obviously is to drive the margins up and to keep the business about flat on a longer term basis.

Ryan Bouchard – Avondale Partners

Okay, all right. Thanks. That's all I have. Thanks for the time.

Eric Kirchner

Thanks, Ryan.

Operator

Thank you. And our next question comes from the line of Matt Young from Morningstar. Please go ahead.

Matt Young – Morningstar

Good morning. Thanks for taking my call. Just a follow up on the EMENA region real quick there. So is the sluggish profitability more the result of the macro conditions there or is it kind of more related to the customer mix or customer optimization, things that are more within your control? Just wanted to get a sense of how much of that improvement is in your hands at this point despite the macro environment?

Eric Kirchner

So I think in general in EMENA, we'd like to believe that in the long term, everything is within our control how we approach our business planning. Realistically in the last six months between Israel, Egypt, Spain, Portugal, those are markets that we have reasonable amount of presence. There have been events that have been outside of our control. That means we need to plan around those and we need to figure out ways to grow our business and to focus in markets where there's going to be more macroeconomic growth, more stability than those four.

Matt Young – Morningstar

Okay. And then just quickly on the forwarding system rollout, you may have explained this, but do you guys still expect most of the transactions to be on that system by -- I think in the past, you've said by January of calendar '14. Is that still what you're saying, is it still on the cards?

Ed Feitzinger

Yes. Look, we're very positive about where we are with this system. And the fact that we're moving forward with this prudently is basic to our business plan, but we're excited about where we are with it. The benefits are going to manifest themselves as we get more countries trading one country to another country on the new system. And the feedback from the users and the functionality is exactly where we want it to be. So, I'm very positive about where we are right now with it. And we're going to start to build more momentum in the deployment schedule throughout next year. And we're going to get to where we said we're going to be at the end of FY '14.

Matt Young – Morningstar

Okay, great. That's all I had. Thank you.

Eric Kirchner

Thank you.

Operator

Ladies and gentlemen, that does conclude our question-and-answer session. I'd like to turn it back over to management for any closing remarks.

Jeff Misakian

Alright. Thank you, Richard. I'd like to thank all of you for participating in our call this morning. On behalf of all of us here at UTi, thanks for your continued interest and your ongoing support. Have a great day.

Operator

Ladies and gentlemen, that does conclude the UTi's 2013 third quarter conference call. We would like to thank you for your participation and you may now disconnect.

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