Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

UTi Worldwide, Inc. (NASDAQ:UTIW)

F3Q09 Earnings Call

December 4, 2008 11:00 am ET

Executives

Jeff Misakian – Vice President, Investor Relations

Roger MacFarlane - Chief Executive Officer, Director

Lawrence Samuels - Chief Financial Officer, Executive Vice President Finance

Analysts

Alexander Brand - Stephens, Inc.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Ed Wolfe - Wolfe Research

Thomas Wadewitz - J.P. Morgan

Nathan Brochmann - William Blair & Company, LLC

David Campbell - Thompson, Davis & Co.

Todd Fowler - Keybanc Capital Markets

Operator

At this time I would like to welcome everyone to the UTi Worldwide Q3 Fiscal 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions)

Mr. Misakian you may begin your conference.

Jeff Misakian

Welcome to UTi Worldwide’s fiscal 2009 third quarter results conference call. Joining us on the call today are Roger MacFarlane, Chief Executive Officer and Lawrence Samuels, Chief Financial Officer.

Before we begin the presentation I would like to point out that certain statements made in today’s call are not historical fact. 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 Roger MacFarlane.

Roger MacFarlane

Thank you Jeff. Good morning everyone. We are pleased to report growth in revenues and operating income as well as an improvement in our operating margin in the fiscal third quarter as we begin to see meaningful benefits from our cost reduction plans and the organizational changes implemented earlier this year.

Though we still have plenty of work to do, these results demonstrate the value of our ClientasOne strategy and our ability to successfully manage our business in tough conditions. Volumes in our freight forwarding segment weakened during the quarter partly due to market conditions but mostly due to our efforts to eliminate low-yielding business.

During the quarter we saw considerable deceleration in ocean freight growth rates and negative growth in air freight for the first time in many years. As we talked about earlier in the year, we have been taking a more disciplined approach to net revenue growth. As a result we have analyzed our revenue streams and pro-actively decided to part with low-yielding air freight business on certain lanes.

To be sure, market conditions also played a significant role. As we mentioned earlier in the year we anticipated some slowing of both domestic and international trade. Clearly, no one expected the freezing of credit markets that followed the unprecedented events in the financial industry and the widespread impacts these events have had on global economies.

This had a sudden and pronounced impact on international trade resulting in freight volume declines that accelerated in late September and October. Offsetting the reduced volume was a significant yield expansion in the quarter. Our yield expanded for four primary reasons; continued progress in our internal procurement efforts, the elimination of low-yielding business, overall market conditions and finally the lack of a peak season this year.

The yield expansion resulted in double digit net revenue growth in freight forwarding helping to offset the decline in volumes and demonstrating the flexibility of our forwarding model.

We are especially pleased by our improvement in our contract logistics and distribution segment. Net revenue growth was slightly negative in this segment partly due to revenue shed through our cost reduction plan and the loss of the WalMart Baytown facility earlier in the year. But we continue to win new business as we benefited from clients’ focus on higher quality outsourcing.

Our operating margin in contract logistics and distribution improved due to our cost reduction plan, our efforts to improve operations and our continued focus on profitable growth.

Our overall operating margin in the third quarter improved 70 basis points compared to last year. We are pleased with this achievement and believe all the actions taken this year have given us the right foundation for improved margin performance in the future.

The economic environment is considerably more difficult than when we last spoke to you. While we cannot control the global economy we are taking action in those areas that we can control. Therefore, we have taken additional pro-active steps to tighten our belts in all areas of the company.

We are increasing our focus externally on building and maintaining client relationships, continuing our efforts to reduce carrier costs, maintaining discipline in cash management and lowering operating costs through actions such as hiring freezes, travel restrictions and further streamlining of operations.

One such action is the restructuring of our global IT organization that you saw in our 8K filing this morning. We are moving to a more centrally led IT organization where we can achieve greater economies of scale and streamline our costs.

This is the first tangible step in our [Four as One] implementation and one that will reduce business risk, improve scalability and also customer service. Ultimately we expect to save $5-6 million in costs per annum once fully deployed.

Lawrence will discuss the timing and impact of this action further in his remarks. Now I will hand the call over to Lawrence who will provide you more details in his review of our financial performance in the third quarter.

Lawrence?

Lawrence Samuels

Thank you Roger. This morning we reported fiscal 2009 third quarter income from continuing operations of $0.36 per diluted share, slightly ahead of the third quarter last year. Net revenues in the quarter grew at a faster rate than operating expenses leading to an improvement in our operating margin.

Revenues increased 3% in the fiscal 2009 third quarter while net revenues grew 5% in the same period last year. The pace of revenue growth relative to recent quarters has slowed with the decline in forwarding volumes and the shedding of businesses in the contract logistics and distribution operations through our cost reduction plan.

Acquisitions added 2% to net revenue growth in the quarter but this was more than offset by the loss of the net revenue associated with our cost reduction plan of 7% as well as the strengthening of the U.S. dollar against most other major currencies.

Operating expenses excluding freight consolidation costs in the fiscal 2009 third quarter increased 4% over the same quarter last year. Stock costs, the largest component of operating expenses were 51.9% of net revenues in the fiscal 2009 third quarter, an improvement over the 52.9% reported in the year-ago quarter.

Other operating costs were 31.4% of net revenues in the third quarter, slightly below the 31.5% reported last year. We continue to incur costs related to the Department of Justice investigation and this was approximately $1 million in the quarter, similar to last year’s third quarter.

Operating income grew 11% in the fiscal 2009 third quarter compared to the same period last year. Our operating margin was 13.2% in the third quarter, 70 basis points better than the 12.5% reported in the same quarter last year. This is a considerable improvement given the current economic climate and demonstrates the first meaningful benefits from our cost reduction plan and all the other actions taken this year.

Operating expenses declined each month in the quarter despite an overall increase in net revenues. While we continue to manage our day-to-day expenses we also continue to look for areas to re-engineer our cost structure. As Roger mentioned we disclosed this morning a restructuring of our global IT organization which we will expect to save $5-6 million per year and reduce the IT organization by between 250-275 employees once fully implemented. We expect to incur one-time restructuring costs of $7-8 million of which most will be in the fourth quarter.

In fiscal 2010 we expect to incur net costs of $1.5 to $2.5 million as we transition into the new structure with initial benefits beginning in the second half of the year. The full annual benefit will be realized in fiscal 2011.

Freight forwarding segment revenues increased 4% while net revenues increased 15% over the prior-year third quarter reflecting organic growth as well as contributions from our Israeli acquisition. The much larger increase in net revenues relative to total revenue reflects our yield expansion in the quarter.

Air freight forwarding revenues were down 2% over the prior-year third quarter while net revenues were up 2%. Air freight tonnage decreased 14% in the third quarter compared to a year ago. This was primarily due to our focus to shed marginal net revenue business and optimize our freight forwarding operations as well as the decline in global air freight which accelerated month on month in the third quarter.

Ocean freight forwarding revenues increased 9% over the third quarter last year while net revenues were up 22%. Ocean freight TEU’s increased 3% in the third quarter compared to a year ago which also represents a deceleration from levels seen earlier in the year and in the prior fiscal year and is consistent with the overall market.

The yield expansion in the fiscal 2009 third quarter reflects market dynamics as well as our internal efforts to reduce carrier costs and optimize operations. Fuel surcharges weighed on overall yields but not to the same degree we saw earlier this year as aviation fuel costs began declining rapidly late in the quarter.

Air freight yield in the third quarter expanded 100 basis points to 20.2% compared to 19.2% in the same period last year. Fuel surcharges added approximately $109 million to the revenues in the third quarter compared to $67 million a year ago. Excluding the surcharge impact air freight yield in the quarter would have increased 430 basis points to 27% from an adjusted yield in last year’s third quarter of 22.7%.

Yield expansion was even more pronounced in ocean freight as transportation costs on certain lanes have declined significantly. Ocean yields are complicated by the manner and timing in which carriers manage fuel costs. This led to bunker fuel surcharges that were far in excess of base rates on many lanes even as the cost of fuel has been declining. Including the higher fuel surcharges the reported ocean yield increased 180 basis points to 17.1% in the third quarter compared to 15.3% in the same period last year. Bunker fuel costs were approximately $85 million in the third quarter compared to $47 million in costs a year ago.

Excluding the impact of fuel, ocean yields would have expanded by 490 basis points to 23.1% in the third quarter compared to an adjusted yield of 18.2% in the same period last year.

The operating margin in freight forwarding in the fiscal 2009 third quarter declined to 23% versus 23.8% in the same period last year reflecting the volume declines discussed earlier and the lack of a peak season in air freight.

Contract logistics and distribution segment revenues decreased less than 1% over the prior year third quarter while net revenues decreased 2%. The decrease in net revenues was primarily due to a loss of revenue from businesses disposed through our previously announced cost reduction efforts and the loss of revenues under our former Baytown contract with WalMart which together represented approximately $28 million in less net revenue for the quarter. This was partially offset by new business wins during the quarter.

The operating margin for contract logistics and distribution improved to 7.5% in the fiscal 2009 third quarter compared to the 6.5% reported a year ago representing the first meaningful benefits from our cost reduction plan and all the other actions taken since the beginning of the year.

The decline in other income in fiscal 2009 third quarter compared to the same period last year was primarily due to a $2.5 million gain reported last year resulting from a merger of entities that are part of the Israeli acquisition.

Our effective tax rate in the quarter was 28%. We continue to expect that the effective tax rate for the year will be in our estimated range of 27-29%.

During the third quarter we sold the remainder of our art packing business which generated a gain on sale of $2.1 million or $0.02 per diluted share. The gain was reported in discontinued operations consistent with the treatment last quarter when we sold the majority of this business.

Our balance sheet remains strong. We generated $73 million in cash from operations in the first nine months of fiscal 2009 compared to $37 million in the same period last year. We continue to expect free cash flow for the full fiscal year to approximate net income for fiscal 2009. Keep in mind we expect to make the first fiscal payment of $33 million on our senior note due January 2009. Including interest, the total cash outlay is expected to be about $40 million.

We are also very focused on cash and liquidity and managing our DSO ratio. I am pleased that October represented one of the lowest DSO months we have had. Our working capital facilities expire in July of next year and we have already signed an engagement letter with our bankers to negotiate a replacement of this facility well ahead of the July expiry date.

With that I will turn the call back to Roger for closing remarks.

Roger MacFarlane

Thank you Lawrence. On balance we review the results for our fiscal 2009 third quarter to be a solid performance in a tough economy that included no peak season. Volume in freight forwarding slowed in the quarter but we were able to offset this reduced volume with yield expansion, cost containment and the removal of unprofitable businesses.

Because of these efforts, we were able to keep the pace of expense growth below that of net revenue, yielding double digit growth in operating income and an improvement in operating margin.

We are determined to deliver margin improvement. We remain confident in our ClientasOne strategy despite the reduced visibility we and our clients have in this market. We will continue to focus on building and maintaining client relationships and managing those areas we can control, taking action at every opportunity to improve operating performance and cash flows.

Our people remain focused on our core outcomes; to deepen existing client relationships and gain market share, to drive higher levels of operating excellence, to deliver on our business plan and financial goals and to protect and nurture our core values.

We have been through tough environments in the past. We believe we have the right strategy and the right people in place to deliver results and achieve our goals. With that I’d now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alexander Brand - Stephens, Inc.

Alexander Brand - Stephens, Inc.

Roger, you have the first quarter here very visible cost reductions. Can you update us on how much of the run rate of cost reductions is actually reflected in this quarter versus what we should see going forward and also update us on some of those unprofitable contracts you have talked about in the past?

Lawrence Samuels

As we said, really the last step of the implementation of the plan was at the end of the second quarter so we saw all the benefits in this third quarter and we will continue to see those going forward.

Alexander Brand - Stephens, Inc.

And the contracts?

Lawrence Samuels

In regards to the contracts we are making progress there although it has taken a little longer than expected. Obviously the improvement in the overall contract logistic margin to some degree reflects the improvements we have made there as well.

Roger MacFarlane

I think we should add to that, those two contracts are part of the overall relationship with those clients. I can report to you those two clients are profitable to UTi as a whole.

Alexander Brand - Stephens, Inc.

Roger, as you think about sort of planning for what is coming and it has gotten worse perhaps materially worse than you thought it would and your macro environment which we haven’t seen before, which is sort of nowhere to hide globally…there is nowhere that has strength, how are you thinking about what your opportunities are to get new business and you have to have some level of spending versus you also have to keep reducing your costs if you are going to grow your earnings in this environment?

Roger MacFarlane

We’re doing a number of things. The first thing is that we are trying to make sure the vast majority of time our field, regional and global management are focusing on our clients. Our clients are also in a very difficult situation not only with their business being affected, they are under the similar pressures we are. So we are trying to make sure we are looking for opportunities that help them in a way that offers more business to UTi and provides them with more value.

So the first thing is the greatest asset we have is our relationships with those clients and their ability to produce revenue for us. So that is our number one priority. The second thing is we are tightening our belts everywhere and looking at sizing the operating costs as we mentioned to be relevant to the right level of business we have everywhere across the organization. And we are in the fortunate position of having worked very hard over the past year to get focused on the things that really matter to drive performance. We are seeing the effects of that now and we will continue to see the effects of that going forward.

We don’t really have any initiatives in the works that are going to distract us from delivering greater performance.

Alexander Brand - Stephens, Inc.

With such rapid changes in the currency values, can you just speak to if that has any impact on the financials and particularly the bottom line we should think about?

Lawrence Samuels

Clearly it has an impact on the levels of growth in revenue. Some of the costs are predominately in local currencies as well so we get the same effect there. Because we have a number of clients where revenues are generated in dollars even in non-dollar countries plus the benefits of exchange movements on trading assets as well, the net impact overall at the bottom line we believe is very marginal. We do expect some exchange gains in certain areas that does offset some of the lost revenue so overall I would say the impact on the bottom line is very small.

Operator

The next question comes from Jon Langenfeld - Robert W. Baird & Co., Inc.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Talking on the margin side, nice job there in the quarter. I am wondering what your thoughts process here is. You talked about 200 basis point goal of expanding margin 200 basis points on a run rate leaving fiscal 2009. Clearly the environment has changed a lot. What is your thought on that today?

Roger MacFarlane

We reconfirmed our confidence in delivering 200 basis points by the time of the fourth quarter when we had our last conference call in early September. Clearly late in September and October and what we are seeing now is the overall market conditions are considerably tougher than they were then. So what we really are focused on at the moment is making sure as we go forward quarter by quarter that we are delivering margin improvement and I think that is really what our objective is as we have done now in the third quarter. We aim at margin improvement quarter by quarter. Whether it is going to be as much as 200 basis points given the current conditions is very difficult to say.

Jon Langenfeld - Robert W. Baird & Co., Inc.

How do you feel about, you also had a goal of 100 basis point improvement on the net revenue line, how do you feel about your progress there, the aggregate numbers suggest you are there. I’m just trying to distinguish between what the market has given you and what some of your internal initiatives have driven to.

Roger MacFarlane

I think regarding our yield improvements I think we are demonstrating we are achieving the objectives we set out for yield improvements for the year. That is why we have been reporting yield numbers on the basis of excluding the fuel surcharge so that you can get a good reading on how we are progressing. I think we are demonstrating we are more than meeting those objectives.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Do you feel a lot of that is internally driven versus the dropping freight rates in the market?

Roger MacFarlane

Yes. I think what we have indicated is that at least half of the improvement has come directly from procurement efforts. Part of the improvement has come from shedding of unprofitable business and part of the benefit is the overall market situation.

Jon Langenfeld - Robert W. Baird & Co., Inc.

If you look at the growth in the freight forwarding side that revenue versus the profit growth, EBIT growth, at what point are we going to see the profit growth on freight forwarding grow in line or in excess of the net revenue growth? Maybe a little color on why that is not occurring thus far.

Lawrence Samuels

I think the main reason we didn’t see that this quarter was the lack of the peak season compared to last year. Obviously last year’s third quarter had the peak season in. Obviously the revenues were significantly higher last year than this year. I think the main reason is the lack of peak season this year.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Would you expect profit to grow in line or better on the forwarding side like you are expecting on the contract logistics side?

Lawrence Samuels

Yes. That is obviously the goal, to have both segments grow the operating margin.

Operator

The next question comes from Ed Wolfe - Wolfe Research.

Ed Wolfe - Wolfe Research

Just a follow-up in terms of margins next quarter you had talked about give or take flat margins in the third quarter with some margin improvement towards 200 basis points for fourth quarter. My sense is you just said the world has changed a bit, don’t expect 200 but expect margin improvement. Is it fair to say with an easier comp the margin improvement should be better than the 70 basis points you just put out year-over-year on third when we get to the fourth?

Roger MacFarlane

I wish I could be specific and answer that question. But the situation is so unclear to us at the moment. It is very hard to know what the business levels are going to be in the rest of December and into January. It is very hard to know. We are very focused on, as I think our third quarter demonstrates, on delivering performance and we are trying to manage all the things we can control. You can be sure we will be trying to deliver the best performance we can.

Ed Wolfe - Wolfe Research

Can we take a look month by month for the quarter how revenue tracked to get a sense if it was 5% for the quarter how bad was it in October?

Roger MacFarlane

October was the toughest volume month that we had. We saw a deceleration in volume levels in freight forwarding progressively over the quarter.

Ed Wolfe - Wolfe Research

I understand the volumes, can you maybe break out the volumes and then what the yields and/or the net revenue was by month through the quarter?

Roger MacFarlane

I don’t think we have that information to share with you. We can say as we moved through the quarter we were constantly managing our yield situation to the best of our ability. We did get some assistance when volume falls off. As you know, our model works and we tend to have an opportunity with some spot processing with carriers and things like that.

So, one of the reasons why we have managed to get the yield improvement was because we sat down some time ago and looked at how we could utilize our focus on procurement to have a strategy to weather the conditions as we saw them developing.

Ed Wolfe - Wolfe Research

When I look at the fourth quarter versus third I’ve got much lower fuel costs which net/net should improve my operating margin and I’ve got much easier comps. You are saying we have the same cost savings, nothing has slipped and nothing has changed really. I would think even with the world feeling worse less net revenue is only from the positive 5 to negative 20. My margin should at least extend that 70. Am I thinking of that incorrectly?

Lawrence Samuels

I think obviously with fuel coming down and fuel surcharge is a pass through so we don’t get any real…

Ed Wolfe - Wolfe Research

I understand but if it is in the revenue and in the cost then it is depressing margins when it is higher, right?

Lawrence Samuels

Yes. But, clearly with the benefit of the yield expansion that is the goal. I think you are thinking of it correctly. I think obviously the lack of visibility we have to the revenues for December and January is the issue we are facing.

Ed Wolfe - Wolfe Research

Can you give us some sense of how November started in terms of total net revenue?

Roger MacFarlane

We don’t give information month-by-month but I think if you just look at the trend line that we are seeing in all the published data certainly we are not seeing any improvement in the overall market into November.

Ed Wolfe - Wolfe Research

I’m still trying to get, if you can’t give me November, at least October some sense of where total net revenue growth was. Maybe if you can just give me volumes. I’ll take whatever I can get for October if that is possible.

Roger MacFarlane

I think the way to think about October is the fact that last year in October we had a peak season. This year we didn’t have any. From that standpoint October was an extremely tough month.

Ed Wolfe - Wolfe Research

Again, I would think your yields would expand into that so when I think about net revenue it offsets some of that.

Roger MacFarlane

Our yields did expand throughout the quarter. That is correct.

Ed Wolfe - Wolfe Research

Did they expand more in October than they did in August?

Roger MacFarlane

I don’t have that information.

Ed Wolfe - Wolfe Research

On the IT system can you give a little bit more detail, from the press release it looks like you consolidate and you reduce a bunch of headcount. Is that where all the $5-6 million in cost savings comes from or is there something other than the headcount?

Roger MacFarlane

We need to remember that what we are saying is we are going to be outsourcing so we have a headcount reduction in the area for two basic reasons. One is because we are going to a more enterprise and central led configuration of delivering our IT services and support so that is one reason for the reduction. The second reason is that we are outsourcing those functions of infrastructure management and application support functions and so while we have a headcount reduction part of that is replaced by outsource costs. The net effect of all of that is the $5-6 million number we gave.

Ed Wolfe - Wolfe Research

So if I just took out a number per head and multiply it I get a higher number than $5-6 million.

Roger MacFarlane

That is because you need to offset that with the outsourcing costs for the third party.

Ed Wolfe - Wolfe Research

What does this mean in terms of the timing of the rolling out of [Four as one] as a system? Does that come right after?

Roger MacFarlane

What we are doing is during this phase, given the economic climate during this phase, what we are doing is we are conducting a blueprinting phase with the help of an outside party to evaluate how and when and in what order and in what configuration we can roll out the technology part. So, what we are doing is we releasing this value at this point in time and we are essentially doing a revalidation planning process during a period of time when the market is a lot tougher. So we will come up with a firmed up direction sort of in the middle of next year.

Ed Wolfe - Wolfe Research

So we still have six months or so until you have a more…

Roger MacFarlane

Yes.

Ed Wolfe - Wolfe Research

On air pricing Lawrence you said the yields for air I think were improved 430 net of fuel. Is the implication there that air pricing and that finding capacity pricing is dropping similar or even more than ocean right now outside of fuel? Or am I missing something here?

Lawrence Samuels

No, I don’t think the capacity is dropping that much. I think part of it has been as a result of the peak season. The improvement this year over last year there was no peak season. Also we aren’t using [charters] to the extent as we did last year. Those are part of the reasons for our increase.

Ed Wolfe - Wolfe Research

Would you expect the yields net of fuel to continue to expand going forward? The reason I’m asking is expeditors reported, obviously for different months, but it didn’t show the air expansion. I’m trying to figure out is it because we are starting to see more expansion as we go out, which I would expect, or is there something just very unique to what you are doing with your culling and so forth?

Lawrence Samuels

I think year-over-year we would expect to see that continue.

Ed Wolfe - Wolfe Research

Any earn-out payments coming in the next four quarters?

Lawrence Samuels

Nothing significant at all. The one we made to [Span] earlier this year was a loss major earn-out prehead.

Ed Wolfe - Wolfe Research

Roger, do you care to give any public update on your succession and where you are in that process?

Roger MacFarlane

All I can say is that is an ongoing process. We are very happy with the progress the process is delivering. When we have something final to communicate we will obviously do so.

Operator

The next question comes from Thomas Wadewitz - J.P. Morgan.

Thomas Wadewitz - J.P. Morgan

There was a question earlier on about some of the money losing contracts and I just wanted to clarify and make sure I understand it. You were originally going to exit them at the end of July but you have to this point been unable to leave those contracts. Is that correct or were you talking about something else?

Lawrence Samuels

No, the one we planned to exit at the end of July was part of the cost reduction plan which was done. That was the final step in our cost reduction plan which was accomplished at the end of July. What we were talking about were the other two operations that weren’t performing as well as they should have been. Those are the ongoing ones where we are making progress.

Thomas Wadewitz - J.P. Morgan

So do you have optimism you are going to be able to get out of those contracts in the next couple quarters or is that something you’ll probably have to stick with and you just try to kind of work hard to make them more efficient?

Lawrence Samuels

I think the goal is to make them more efficient and turn them to profitability. They are, as Roger mentioned, two operations with existing customers who we have significant other operations globally which overall both of those customers are profitable.

Thomas Wadewitz - J.P. Morgan

In terms of a broader question on logistics I would have expected that somewhere in your logistics books you would have contracts which would have some operating leverage, some volume sensitivity where even if there is a base rate they are paying you there would be some element of paying you on a per-piece basis and that as the global economy has weakened pretty significantly you might see some margin pressure in logistics from that. Is that the case or you pretty much don’t have those contracts in logistics? Is the risk going forward that we would see some margin pressure due to operating leverage in some of the contracts?

Lawrence Samuels

We do have some of those but most of our contracts are on a cost plus basis as opposed to a unit basis. So, as the volumes decline in some of those they could have an impact but as I said most of the operations are cost plus and also remember most of the operations again are in customer-owned facilities so our fixed costs are quite low in those operations.

Thomas Wadewitz - J.P. Morgan

Do you have a broad brush number for what the split might be in terms of cost plus contracts versus other types of contracts?

Lawrence Samuels

No we don’t. But certainly the cost plus would be the majority.

Roger MacFarlane

The majority of the revenue would be the right way to say that. I think the majority of the square footage that we operate is in client-owned facilities as well. So that just gives you a flavor of the model.

Thomas Wadewitz - J.P. Morgan

What about going back a ways, some of the more opportunistic multi-client facilities you had looked at in Asia? Where are you at with those and is the risk of volume leverage within some of those facilities?

Roger MacFarlane

One of them we talked about some while ago was a new facility we put up in Hong Kong which was a multi-client facility tied more to our freight forwarding business. I can report that is contributing positively now whereas when we first started up it was really an investment in the long-term. So, certainly in multi-client facilities if the volume from those clients reduces we are trying to make sure that we are expanding our relationships with the existing clients and other clients in a way that enables that facility to be optimally utilized. That is really no different from any operation we have in freight forwarding. We are doing exactly the same thing because we have our facilities in freight forwarding as well around the world.

Thomas Wadewitz - J.P. Morgan

The air freight volume decline you talked about a lot of that being your own doing. I might have missed this but did you part it out to say the 14% volume decline, take a shot at what was actually market versus what was kind of your own initiatives?

Roger MacFarlane

The majority was our own.

Thomas Wadewitz - J.P. Morgan

So about 8% was market and 6% was market? Do you have any sense of what market was down?

Roger MacFarlane

If you look at the statistics that we have been seeing in regard to what [IOPA] has been publishing it progressively has declined during the quarter though I don’t think the October numbers are announced yet. Maybe the October numbers have come out and I think they were 7-8% or 7.5%. So that is for global air freight. The majority of what we were doing we were looking at individual lane segments for existing clients. We were looking at some clients overall and the majority of that decline in air freight came from actions we have taken ourselves.

Thomas Wadewitz - J.P. Morgan

Looking out at a time when visibility is pretty limited but if you look at fiscal 2010 and you assume that some of the current volume trends that are pretty tough continue, do you have enough cost opportunities you are working on to see earnings growth if this difficult volume environment continues or given some level of leverage in the system is it pretty tough to grow earnings if you see volumes that are down at the same pace?

Roger MacFarlane

The last statement is correct. It is going to be tough. Given the statement I made earlier we are trying to run our business in such a way that we deliver margin improvement and we intend to do that into next year. So we need to do everything possible to deliver improved performance for next year. However, because of the lack of visibility for the level of trade and the depth of the recession it is very hard to predict exactly what will be the outcome. What we are trying to do is run the business to deliver a better performance next year than this year.

Operator

The next question comes from Nathan Brochmann - William Blair & Company, LLC.

Nathan Brochmann - William Blair & Company, LLC

Just to follow-up on Tom’s question a little bit further on the contract logistics talking about primarily from the volume side, not so much in terms of how the contracts are set up, but just kind of what you are seeing out there from your existing client base in terms of their volumes and also new business wins whether that process is any lengthier in terms of getting people set up and wanting to spend some money to save some money and kind of talking to their desire to do so.

Roger MacFarlane

Let me take the second part first. We still have an active effort to develop new opportunities and that is part of the momentum we have in opportunities out in the marketplace. So, of course you would always like to have a thicker pipeline but we are still findings companies that are looking for improvement in their outsourcing arrangements or are thinking about outsourcing differently.

So, in some cases of course the client wants to move a lot quicker than they would in the past because they have already realized the value quickly to improve their own performance.

On the other side we certainly are seeing clients throughout our facilities that are having volume decline. Some, for example, are shutting factories for longer over the Christmas period than they did last year for example as a way of controlling inventory levels. Of course in some cases that is going to affect us negatively and in other cases positively depending on what we are doing for the client.

It is a very tough environment out there and we are trying to find ways we can help our clients to generate more revenue for us as well. We can’t pretend that it isn’t a very difficult environment.

Nathan Brochmann - William Blair & Company, LLC

A housekeeping update, I’m wondering you had spent a lot of time earlier this year kind of talking about a lot of issues related to IHD and maybe just an update on how the performance is there?

Roger MacFarlane

That operation is performing in accordance with our expectations. There are no issues to talk about.

Operator

The next question comes from David Campbell - Thompson, Davis & Co.

David Campbell - Thompson, Davis & Co.

I just wanted to ask you why Europe was so strong and net revenues in Europe in the forwarding operations. Do you have any explanation for that and how sustainable it is?

Lawrence Samuels

Part of that is the Israeli acquisition which really only closed in October last year. So we only had it in for one month last year and obviously the full few months this year. That is one reason. That particular operation has actually performed well this year. It is just improved performance in general in Europe and really taking market share there as well.

David Campbell - Thompson, Davis & Co.

In terms of the overall outlook the market turns are comparable there to the rest of the world that is deceleration as we go through the quarter?

Lawrence Samuels

Yes, correct.

David Campbell - Thompson, Davis & Co.

Are you going to update your page on the website about the gross revenues for forwarding in the third quarter?

Lawrence Samuels

Yes it has already been posted.

David Campbell - Thompson, Davis & Co.

Ocean Freight TEU’s, from their discussion and remarks they were down at the end of the quarter. They were rough for the whole quarter but it sounds like they were really down in October. Is that roughly right?

Lawrence Samuels

For us for the quarter they were up 3%.

David Campbell - Thompson, Davis & Co.

I know, but we don’t have a lot of data industry wide what was the growth in October?

Lawrence Samuels

October was likely down.

David Campbell - Thompson, Davis & Co.

I was a little disappointed or surprised with the decrease in gross profit margin for air freight from the July quarter to the October quarter. You explained some of it. Was it a down fuel adjustment like it was or because fuel surcharge revenues were still relatively high?

Roger MacFarlane

I think it is related to the fact if you look at the seasonal pattern I think we find that yield in the third quarter specifically for air freight is not as strong as the second quarter. I think it is really just a seasonal pattern.

David Campbell - Thompson, Davis & Co.

Despite the lack of a peak?

Roger MacFarlane

Yes.

David Campbell - Thompson, Davis & Co.

Explain to me quickly again the IT restructuring. There will be a $7-8 million non-recurring charge in the fourth quarter and then the first six months of next year the way I heard it there will be $1.5-$2 million of quarterly net costs?

Lawrence Samuels

Just to clarify there will be a one-time cost between $7-8 million most of which will be in the fourth quarter. Some of that relates to what we call retention bonuses during the transition which will pay over the retention period. So that will stretch into the first part of next year as well. In terms of the savings, we really during the first half of the year during that transition phase we will incur net costs but $1.5 to $2.5 million is for the full fiscal year. It is not for the quarter. We will start getting the actual savings coming through in the second half of the year. So from all of that you can gather that the net impact in the first half of the year will be around the $2.5 million cost.

David Campbell - Thompson, Davis & Co.

After that we should see this $5-6 million net benefit on an annual basis?

Lawrence Samuels

That is correct.

David Campbell - Thompson, Davis & Co.

That is just the first phase of the IT implementation, there is more coming in future years right?

Lawrence Samuels

That is correct, yes.

David Campbell - Thompson, Davis & Co.

So you are going to see some improvement in the gross margins in the fourth fiscal quarter as normally you do excluding fuel surcharges that is the way of looking at it right now?

Lawrence Samuels

That is what we would expect to see. Yes.

David Campbell - Thompson, Davis & Co.

So the major problem with hitting your target at 2% increase in gross profit margins is just that there is less business out there than you thought there was going to be?

Lawrence Samuels

Yes, that is accurate.

Operator

The next question comes from Todd Fowler - Keybanc Capital Markets.

Todd Fowler - Keybanc Capital Markets

Roger, back to the air freight side and the time to decline here in the quarter looking ahead is there still opportunity to take out lower margin freight or should that normalize a bit and maybe trend more in line with the market in the coming quarters?

Roger MacFarlane

We are constantly looking at ways to improve our business. What is going to happen if we remove some volume is you are going to see the impact of that for the next three quarters until it grandfathers.

Todd Fowler - Keybanc Capital Markets

Right. Is there still more freight, I guess as you look at the profitability that you still have in the network that you would consider taking out at this point?

Roger MacFarlane

What we are doing is we are working on the operation and in some cases we are really hoping the client will take different pricing or be able to do different things to keep the business. We are trying to work to have the right pricing and the right flow and the right cost structure lane by lane so that we can retain the customers. We are not setting out not to have those customers. If we can’t solve the problem or the customer won’t agree to the pricing changes then we have been much more disciplined in saying in that case we can’t handle the business any longer.

We are doing that all the time. I would say the majority of what we wanted to accomplish we have already accomplished.

Todd Fowler - Keybanc Capital Markets

What was the air freight tonnage in the year-ago quarter? What sort of comparison was the down 14% against?

Roger MacFarlane

I don’t think we give the actual numbers.

Todd Fowler - Keybanc Capital Markets

What was the tonnage increase in air freight in the third quarter of fiscal 2008 on a percent basis? We are down 14%.

Roger MacFarlane

I don’t have that information on hand.

Todd Fowler - Keybanc Capital Markets

Thinking about obviously looking at visibility for the macro environment what you are seeing with your own customers, given where you guys are in the market and it is a big market I’m assuming there is some opportunity to continue to grow or take share. How do you feel about air freight volumes and ocean TEU’s seeing growth for the full year in 2010? Is that something that it is just very difficult to get a sense of or is there enough share that you can gain where you can still have volume growth despite the macro headwinds and macro challenges right now?

Roger MacFarlane

I think it is extremely difficult to predict. To be honest I was with one of our major clients earlier in the week and they have done their annual plan and they have just sort of a huge range of what they think their business will look like. So our clients really don’t have a good idea themselves. So it is really difficult for us to know.

I think everybody is hoping that things don’t get worse before they get better but it is very hard to know. We are trying to manage that situation with very little visibility.

Todd Fowler - Keybanc Capital Markets

Lawrence, in the prepared remarks you made a couple of comments about the yield on the ocean side and you were talking about the decline in bunker fuel prices or a decline in prices and I guess I want to make sure I understand that correctly. Were you saying that yield might have actually looked better except that the full decline in bunker fuel did come through in the quarter so there should be some more yield expansion going forward once that catches up or I guess maybe if you could clarify a little bit on those comments that would be helpful.

Lawrence Samuels

I think the remark was that the base rates declined significantly. The bunker fuel stayed at similar levels because it just takes longer for that to be passed on. So, I think what we will see in the fourth quarter is fuel rates declining but probably not the same reduction in base rates.

Todd Fowler - Keybanc Capital Markets

There were a few comments in the actual release about some improvement in performance of the distribution network. I would be curious what you are exactly seeing there. Is most of that still predominately domestic flatbed or has the profile changed a little bit? It was a little bit surprising to see that business was trending a little bit better than what you were expecting.

Roger MacFarlane

Most of the business is in fact truck brokerage business which has been performing very, very well. So we do have flat beds which have been doing very well. In fact all our surface operations, despite the general trucking market, we are very happy with their performance.

Todd Fowler - Keybanc Capital Markets

Is there anything specific driving that or is that just the fact that there is available capacity and it is probably more of a brokers market than anything else right now?

Roger MacFarlane

I think the fact there is a brokers market it is definitely affected. I think the way we look at it is all of our businesses there are very tightly managed. Our freight optimization business has been gaining a lot of traction and growth and reception from clients. So we have definitely been growing that business at a fast clip.

So, all of those things I think actually is from the strength of our management in those operations.

Roger MacFarlane

If there are no further questions I’d like to thank everyone for your participation on the call this morning. On behalf of all of us here at UTi thank you for your interest in UTi Worldwide and your ongoing support.

Operator

This concludes today’s conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: UTi Worldwide, Inc. F3Q09 (Qtr End 10/31/08) Earnings Call Transcript
This Transcript
All Transcripts