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Executives

Jeffrey D. Misakian - Global Vice President of Investor Relations

Eric W. Kirchner - Chief Executive Officer and Director

Richard G. Rodick - Chief Financial Officer and Executive Vice President

Edward G. Feitzinger - Executive Vice President of Global Operations

Analysts

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

William J. Greene - Morgan Stanley, Research Division

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Scott H. Group - Wolfe Trahan & Co.

Kelly A. Dougherty - Macquarie Research

Jack Atkins - Stephens Inc., Research Division

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Nathan Brochmann - William Blair & Company L.L.C., Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Kevin W. Sterling - BB&T Capital Markets, Research Division

UTi Worldwide (UTIW) Q4 2013 Earnings Call March 28, 2013 11:00 AM ET

Operator

Welcome to the UTi 2013 Fourth Quarter Conference Call on the 28th of March, 2013. [Operator Instructions] I will now hand the conference over to Jeff Misakian. Please go ahead, sir.

Jeffrey D. Misakian

Thank you, Danny, and good morning, everyone. Welcome to UTi Worldwide's Fiscal 2013 Fourth 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 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, except 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 W. Kirchner

Thank you, Jeff, and good morning, everyone. Our fourth quarter results reflect ongoing weakness in the airfreight market, reduced activity in contract logistics and a very challenging pricing environment. While we maintained our focus on expense control, we could not adjust cost quickly enough to respond to the soft market conditions and pricing declines. In addition, there were several material unusual items that were recorded in the fourth quarter that Rick will explain shortly.

As a result, we reported a loss this morning for the first time since the fourth quarter of fiscal 2009. Clearly, these results are not satisfactory, and we're taking a number of steps to address them, which I'll talk about in a minute.

In Freight Forwarding, airfreight tonnage was down slightly in the fourth quarter compared to the same quarter last year. We've not seen any signs of sustainable improvement in the airfreight market. Ocean freight volumes were a bit better in the fourth quarter when compared to last year, particularly in the month of January as a result of the timing of Chinese New Year.

Net revenue per unit of cargo deteriorated in the fourth quarter. On our last earnings call, we told you about the challenges facing the industry with carriers maintaining rates by removing CAT capacity while competitive pressures were driving down sell rates. In the fourth quarter, buy rates in certain markets eased slightly, but sell rates declined further due to even tougher pricing conditions. As result of this pressure, net revenue per kilo in airfreight declined 15% and net revenue per TEU in ocean freight fell 13% in the fourth quarter compared to the same period last year.

Contract Logistics and Distribution revenue was also down in the fourth quarter. Contract Logistics revenues dropped due to lower volumes on some existing clients, the timing of project-related business and the loss of our -- of a North American contract that was previously reported. Our Distribution revenues increased as expected on improvements in our North American and African businesses.

We continued to win new business in both segments during the fourth quarter, but not at a pace that was sufficient to offset the decline in activity from existing accounts. In spite of the soft markets in Freight Forwarding, we're encouraged by our new business wins so far this calendar year, the first promising sign we've seen in several quarters. In Contract Logistics and Distribution, we continue to register strong growth in our Asia Pacific and Africa regions, while our North American Contract Logistics funnel is the healthiest it's been in some time. While we're focused on on-boarding new wins in Freight Forwarding as quickly as possible, it will take some time to see those results in our numbers.

We've made a number of changes to the sales function to improve growth in fiscal 2014. This has been a primary focus of mine since the management changes we announced last September. We recently appointed a new head of sales for our Asia Pacific region, and we're in the process of appointing a new head of sales for the Americas region. We made investments in personnel, training and other sales initiatives, and we've increased our focus on capturing the client-facing benefits of our investments in people, processes and systems.

Expenses increased in the fiscal 2013 fourth quarter compared to the same period last year, while net revenue declined. This was primarily due to investments in Contract Logistics to improve efficiency and prepare for newly won business; some duplicative cost in our shared service centers as we ramp up our system rollout; and the local sales initiatives in North America. We expect the duplicative shared service center cost pressures to ease later this year as the Freight Forwarding and finance systems are implemented more broadly and various local costs shift to the shared service center environment.

As we told you on our last earnings call, we took steps to improve operating expenses to stabilize productivity in a weak market. Those actions were completed in January and February, and the cost savings are in place. We will continue to evaluate our cost structure if the environment deteriorates further.

Our transformation efforts continue to gain traction, and our system rollout is picking up speed. We've launched our new Freight Forwarding operating system in 6 countries and our new financial system in 15 countries.

I'll share more with you on our plans this year after Rick's remarks. I'll now ask Rick to walk through the financial results. Rick?

Richard G. Rodick

Thank you, Eric. On a GAAP basis, the net loss attributable to common shareholders in the fiscal 2013 fourth quarter was $1.38 per diluted share. As Eric mentioned, there were several adjustments to the GAAP results in both periods, which I'll discuss in a moment. Excluding these items, our adjusted net loss was $0.13 per diluted share in the fourth quarter compared to adjusted net income of $0.15 per diluted share recorded in the same period last year.

Currency changes had a smaller negative impact on our fourth quarter results than in previous quarters. The U.S. dollar was stronger against most currencies, including the South African rand, but our reported revenues and expenses in the fourth quarter were negatively impacted by less than 2 percentage points.

Revenues and net revenues decreased 4.7% and 8.7%, respectively, in the fourth quarter compared to the same period last year. The decrease in revenues reflects reduced pricing and impact of currency. On an organic basis, revenues decreased 3.2%, while net revenues fell 6.9% compared to the same period last year.

Fourth quarter adjustments to GAAP results included impairment of goodwill and intangible assets plus severance costs for a total of $100 million. During the fourth quarter, we performed an analysis on the value of our goodwill and other intangible assets as of January 31, 2013. And based on our current business conditions, we determined that impairment of these assets had occurred. Accordingly, we recorded a noncash charge for this impairment of $95 million. We also incurred severance costs of $5 million during the quarter, primarily related to transformation activities.

Also during the quarter, we increased our valuation allowance on deferred tax assets by $34 million, pursuant to the accounting rules related to income taxes. The allowance was recorded in the provision for income taxes, but it does not impact our ability to utilize these operating loss carryforwards once these operations become profitable.

In the fiscal 2012 fourth quarter, adjustments to GAAP results were comprised of intangible asset impairment charges and other costs for a total of $10 million. This included intangible asset impairment charge of $5 million, severance and exit costs of $2 million, and an accrual of $3 million relating to a legal claim that was settled in fiscal 2013. We also reduced our valuation allowance on deferred tax assets by $6 million. We have provided reconciliations of GAAP to non-GAAP results in the tables in today's press release and posted more details on our website. The rest of my remarks will refer to our results as adjusted to exclude these items.

Adjusted operating expenses in the fourth quarter were 1.2% higher than the same period last year. On an organic basis, adjusted operating expenses were 3% higher than the same period last year, primarily due to project work, onetime costs associated with 3 separate warehouse moves in Contract Logistics, some additional Oracle costs in corporate and short-term duplication of some finance cost in our shared service centers. As we complete the transformation, the duplicative cost will be removed from the field operations.

The adjusted operating loss was $8 million in the fourth quarter compared to an adjusted operating profit of $32 million in the same period last year. The decrease was primarily due to the weak airfreight environment and reduced pricing in Freight Forwarding as well as lower revenues and higher expenses in Contract Logistics and Distribution. In addition, we were negatively impacted by approximately $12 million in unusual items during the quarter that included $2 million in additional interest expense related to our debt refinancing, which I'll discuss in a few minutes.

Revenues from the Freight Forwarding segment were down 5.5%, primarily due to reduced pricing and impact of currency. Airfreight tonnage fell 1.4% compared to last year's fourth quarter but increased 0.7% on a sequential basis versus the third quarter of fiscal 2013.

Ocean freight TEUs were up 4.1% in the fourth quarter as compared with the prior year but fell 6.2% from the previous quarter.

Net revenues in Freight Forwarding decreased 12.8% in the fourth quarter, primarily due to lower net revenue per unit. Net revenue per kilo declined 15%, while net revenue per TEU fell 13% in the fourth quarter compared to the same period last year, primarily due to lower sell rates. This was partially offset by reduced carrier buy rates.

Adjusted operating profit in Freight Forwarding fell 81% in the fourth quarter compared to the same period last year, reflecting the weak airfreight environment and lower net revenue per unit of cargo in both airfreight and ocean freight.

Operating expenses were lower in the fourth quarter, but not enough to offset the decline in the net revenue per unit. As a result, productivity ratios deteriorated in the fourth quarter.

Contract Logistics and Distribution revenues and net revenues decreased 2.9% and 5.1% in the fourth quarter, respectively, over the same period a year ago, primarily due to lower volumes in Contract Logistics and impact of currency.

Adjusted operating profit in Contract Logistics and Distribution decreased 80% in the fourth quarter compared to the same period last year. The decline in profitability was primarily due to the loss of high-margin business in North America, pricing pressures, the timing of project work and costs associated with facilities moves. We had a small tax provision in the fourth quarter on a non-GAAP basis, primarily due to a mix of results in various taxing jurisdictions. We expect our effective tax rate for fiscal 2014 will be approximately 35%.

A significant positive development during the fourth quarter was the strengthening of our capital structure through the debt refinancing we announced in late January. We issued $200 million in senior unsecured guaranteed notes, a portion of which was used to prepay the previously outstanding 2009 senior notes. We mentioned earlier, this led to a $2 million -- led to $2 million in additional make-whole interest expense in the quarter. 2013 notes also replaced $150 million in our previously outstanding 2011 senior unsecured notes. The refinancing eliminated scheduled principal payments of approximately $18 million that otherwise would have come due this year. The deal also extends debt maturities and eliminates any principal payments for the next 5 years. More details on the debt refinancing can be found in our Form 8-K that we filed in January.

Cash flow stabilized in the fourth quarter when compared to the same period last year. Cash flow from operations was approximately $98 million, which was slightly higher than last year. Working capital improved significantly in the fourth quarter, increasing $100 million compared to the $67 million improvement in last year's fourth quarter, but the increase was largely offset by the decline in profitability for the period.

Free cash flow was $71 million in the fourth quarter, which was 5.4% lower than the same period last year. The decline in free cash flow in the fourth quarter was primarily due to lower earnings.

We expect to make further progress in the cash flow improvements this year. To that end, I'm pleased to announce that Tom Irvin [ph] joined the company in mid-March as our new Treasurer. He has more than 30 years of treasury experience and more than 8 years as a public company treasurer. Tom will be working closely with me to improve our cash position and cash utilization.

I'm also pleased to announce that in February, we hired Steven Ryan [ph] as our new finance leader in the EMENA region. Steven has more than 20 years of experience within the industry. Tom and Steven will help me and the rest of the finance team to continue to improve our capital structure, strengthen our balance sheet and focus on cost controls.

As Eric mentioned, we continue to move forward aggressively with the rollout of our new systems. He will share our deployment schedule and cost savings goals for this year and the next year in a moment. Based on the current schedule, we expect to begin amortizing the new system this summer. This is expected to result in an increase in amortization of approximately $10 million this year. Using a 7-year life, we expect depreciation to be approximately $20 million annually. This is in line with our previous guidance.

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

Eric W. Kirchner

Thank you, Rick. We accomplished a great deal in fiscal 2013 that's not reflected in our financial results. We launched our Freight Forwarding system in 6 countries and deployed Oracle financials in 15 countries. We've made further improvements to our operating processes; launched new products in air, ocean and customs brokerage; and deployed our new Human Resources information system globally, among other activities.

The year ahead is very important, with much work to be done. We have made positive changes to our organizational structure, including those details that I mentioned earlier. Our efforts to improve growth will unfold throughout the year, particularly since we're not expecting any help from the market in fiscal 2014, but we believe we've already taken the steps necessary to get us back on track for growth that's ahead of the market and improve bottom line performance over the long term.

Our comprehensive business process transformation continues to move forward. We plan to launch our Freight Forwarding system in 35 additional countries this year, including 8 to 10 countries before the next earnings call. We estimate that at least 70% of shipments will be on the new system by the end of fiscal 2014. This is about 6 months behind the pace that we originally targeted, but that's not surprising for a system this large and complex.

At our Investor Day in June 2011, we told you that we expect to achieve $75 million to $95 million in cost savings on a gross basis due to transformation in fiscal 2016. At that time, we were less definitive about the years in between because we'd not yet deployed our new systems. At this point in the process, we believe we have enough information to provide you with more details on our expectation. Because we're confident in our progress, we are turning our attention to maximizing the client-facing capabilities of the new system in ways that will help accelerate growth.

We expect to generate cost savings of approximately $30 million to $35 million in fiscal 2014. This includes the expense reductions that we announced in December. Cost savings in fiscal 2015 are estimated to be in the range of $45 million to $50 million, positioning us to achieve our goal of $75 million to $95 million by fiscal 2016. Again, all of these savings are on a gross basis and do not factor in severance or amortization of the new systems.

We also told you at our June 2011 Investor Day that we're targeting operating margins of 20% in Freight Forwarding and 10% in Contract Logistics and Distribution by no later than fiscal 2015. These targets assumed that net revenue would be flat over the projected period. We did not assume that net revenue would decline or that the quality of the net revenue would diminish. Since that time, the macroeconomic and freight environment has pressured margins and impacted profitability to a much greater degree than could have been anticipated. While we remain focused on improving margins, we now expect to reach our targeted run rate later than expected in fiscal 2015, primarily because of these pressures. This also assumes that there is no further deterioration in the environment. With that, I'll turn the call back to Jeff to direct the Q&A period. Jeff?

Jeffrey D. Misakian

Thank you, Eric. We will now open up the call for your questions. [Operator Instructions] Danny, may we have the first question, please?

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Tom Wadewitz from JPMorgan.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

I wanted to get a sense -- I think you had mentioned $12 million, maybe, that you thought was, I guess, somewhat unusual -- I don't know, Contract Logistics expense, maybe some in Forwarding, but somewhat unusual in the quarter. I'm not sure how you would look at -- so I wanted to hear if you could give more details on that, and then how you would look at profitability in the next quarter. The loss in this quarter was pretty surprising. So do you think you'll be profitable in the first quarter, or any kind of broad parameters for how we might think about that?

Richard G. Rodick

Tom, this is Rick Rodick. The $12 million, they're unusual items. They included the $2 million in interest. They included -- we had a large bankruptcy that we had to write off some bad debts. So the things that would not be -- we'd not reclassify them as non-GAAP, but they're nonrecurring, and they -- just a lot of them happened during the year. There were some things that we had to write off the balance sheet, things that had come to fruition that made us have to write them off. So there are approximately $12 million in things that don't occur on a regular basis, but they would not be included in our non-GAAP numbers.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

So that $12 million in the $0.13 loss, and you think that in large part, those wouldn't keep going?

Richard G. Rodick

These would not keep going, exactly.

Eric W. Kirchner

With regard to the first quarter, it remains a very tough environment out there. We might talk to some volume changes later in the Q&A period. But we're doing everything we can do to maintain our cost base and reduce it. As we talked about the fact that we had the cost takeout that occurred in January and February, it's a tough environment out there right now. So we don't give guidance, but it's a challenging time for us and others in the industry, and we're going to keep our head down and work our way through it.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

So you can't really comment on whether you expect to be profitable or not in the first quarter?

Eric W. Kirchner

We don't give guidance.

Operator

[Operator Instructions] The next question comes from William Greene from Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Eric, can you maybe comment a little bit about how the trends in the first quarter maybe are? Because I think there's a lot of uncertainty among all of us, given the shift in the Chinese New Year, the loss of the leap day and whatnot. So maybe any volume commentary you might have, given how uncertain the picture is. I assume you have some sense for now -- sorry, February and March?

Eric W. Kirchner

We'll have Ed Feitzinger talk to that question.

Edward G. Feitzinger

Thanks. It's a good question. So obviously, what we're trying to do is look at the January and February year-over-year because of the shift in Chinese New Year between the 2 years. There's also some little bit of the complexities we're looking forward of Easter being in March versus April of last year, or the earlier Easter. The February tonnage was down about 4% over year-over-year. TEUs were flat for the same month last year. Our attribution there is that we think the resumption of manufacturing post Chinese New Year was a little bit slower than expected, both for us and the market. When we look at January and February together to try to neutralize the impact of Chinese New Year, the sequential change is about negative 11% in airfreight and negative 5% in ocean freight. That airfreight is a little bit worse than the average of the last 5 years, which is consistent with an overall weakness in the mode, while ocean is better. If you take a look at some specific industry data -- as an example, on Hactl, what you can see is Hactl shows a decrease in January, February of about 22%. Our historical numbers for January, February are about 18% if you looked at that over the last 5 years, and our numbers, we think, are coming in about that. Again, that's just for the Hactl type information, so it's a small segment of the business export out of that China environment. And so...

Eric W. Kirchner

That's not year-over-year, though. That's the comparison between -- that's the drop from December to a combined January, February, right?

Edward G. Feitzinger

Exactly, yes. So hopefully, that's the general indication...

William J. Greene - Morgan Stanley, Research Division

Yes, that's helpful. Do you have any sort of read on March at all?

Eric W. Kirchner

March looks like it's in line with our past several months. So I would say that -- within a range of 2% or 3%. It could be up or down over the previous March. So we've got the end of the month coming up, the last couple shipping days this week. Again, with Easter pulled forward, we're not sure what kind of production we're going to have on Friday of this week, but it will be in the range of a couple of percent, up or down, of last March, I think.

Operator

The next question comes from Ben Hartford from Baird.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

I guess, building off of that question, if we look out, Eric and Ed, to 2013, most of the -- I guess, the airfreight carriers seem to be budgeting for low single-digit volume growth in the industry. I know that you guys have made some investments on the sales side, and it sounds like that traction could build in the back half of the year. And Eric, you mentioned the possibility of resuming share gains. So what are your early expectations for '13? Do you see a line of sight to stabilizing low single-digit volume growth and your ability to take share into that?

Eric W. Kirchner

We've been extremely encouraged, Ben, by some early new business wins that we've seen already this year. And it will take a little bit of time to onboard that business, but we're trying not to factor in any help from the general market, especially for the first 2 quarters and maybe into the third. So we're trying to take our destiny into our own hands on the business acquisition side. We've made some moves to help facilitate that. And again, we would expect to see those start to bear some fruit towards the middle to the back half of the year. But in terms of the general market, there's not a lot of exuberance out there from anyone. I hesitate to be too realistic about it, because we get accused of being negative all the time, but it's generally what we're seeing out there. And again, we want to make sure that we're taking advantage of the opportunities and creating opportunities for ourself and not having an expectation that the market is going to flip all the ships, right?

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Yes. And then maybe Rick, if I can just clarify the cost savings guidance that you guys delineated. The $45 million to $50 million in benefits in fiscal '15, it sounds like we should interpret that as all incremental. The $45 million to $50 million in incremental savings in '15, that will probably be partially offset by the full run rate of the amortization of, say, $10 million in fiscal '15. Is that interpretation correct? And then, I guess, building on that and the changes that you have made within the finance organization, how should we think about uses of potential excess cash as we go through the balance of '14 and into '15, all things equal?

Richard G. Rodick

Okay. So on the cost savings of the $40 million to $50 million in FY '15, that's really on -- that's the combined cost savings on top of the $30 million to $35 million we're projecting this year. Amortization this year will be $10 million on the system. Amortization FY '15 would be $20 million. So it's kind of building. In Eric's script, he talked about $30 million to $35 million -- I think it was $45 million to $50 million, and then we -- in '16, we get to the full cost savings we talked about at Investor Day. Now the one thing that would offset some of that, too, is, Ben, as we're doing this, we'll incur severance probably later this year. As we implement all these countries and they come on within 60 to 90 days, the costs come up in those areas. So we think severance could be similar to what we had this year. And then there'll be some in FY '15 also as we wrap up the transformation.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Okay. So Rick, just to be clear, I guess, on the $45 million to $50 million, you'll have $30 million to $35 million in savings in '14. And then this $45 million to $50 million, is that incremental to that $30 million to $35 million, or does that include the $30 million to $35 million?

Richard G. Rodick

That includes the $30 million to $35 million.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then in fiscal '15, [indiscernible] you talked at Investor Day, that's still in play, but those savings would come on an incremental basis in fiscal '16?

Richard G. Rodick

Yes. Offset by the $20 million in amortization in 2016.

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then the follow-on to my question was in terms of the attitude toward any excess cash that you generate from these savings, in terms of what you would do with it?

Richard G. Rodick

Right now, Ben, the -- our uses of cash are investing in the business, and that's what we've done in the last couple of years, last few years of the transformation. Right now, I think it's prudent that we're conserving cash at this time. We've got some debt-to-EBITDA covenant ratios that are based on gross debt, not net debt. We've got cushion at this time. But we're just, at this time with the earnings where they are, we're -- I think it's prudent to be conserving cash and not leveraging up to do anything at this time other than investing in the transformation and wrapping up the transformation.

Operator

The next question comes from Scott Group from Wolf Trahan.

Scott H. Group - Wolfe Trahan & Co.

Can you just give us, first, a little bit more color on where the write-down in the quarter occurred? And it looks like there's another roughly $450 million of goodwill and intangibles still on the balance sheet. How comfortable are you that there's not additional write-downs coming in? Did you do a fair value assessment of everything in the quarter?

Richard G. Rodick

This is Rick. Yes, we did. Just trying to find my notes. We did -- we actually do it twice a year. We did it at year end and -- I'm sorry, midyear, and then at year end, we do an analysis. So at January 31, we did an analysis based on the current market conditions. We look at the entire goodwill balance, and there were 3 countries where the earnings were less than what we needed them to be, and we took goodwill write-off so that the goodwill was impaired. We do not anticipate any additional coming in anywhere in the near term based on the analysis we did. The rest all have what we think is significant cushion.

Scott H. Group - Wolfe Trahan & Co.

Okay. That's helpful. And then can you just maybe give us some thoughts on -- you've implemented the forwarding system with, I think you said 6 countries, what you're hearing from customers and service levels in those countries and if there's any benefit that you're seeing yet? And then with that, do you think that's having any impact on the market share in those countries? So as you roll out another 35 countries this year, do you think that's a risk to your plan to start taking market share again?

Edward G. Feitzinger

Scott, this is Ed. I'll try to unpack that question. There's, I think, a bunch of different questions inside that. Maybe I'll just talk a little bit about how I view the system rollouts. We've been through this before. The first country that you put on is really a test of whether your bits and bytes work, right? So does the system work? You have the theory, and then you're applying the theory in your country. Certainly -- and because this is a network where you have 1 country interfacing with another, we have 1 country on the new system and then every other country and the world on the old system. And The Netherlands was our first country to go live on that. So you certainly are not going to see a lot of benefits there other than cost or in market share, and if anything, you get a couple of bumps along the way as it goes in. As you get to the 5- or 6-country phase, that would really what I would see -- you start to see more issues about the productivity of the system, you start to see the lights go off -- go on, at least, between the 2 countries that are on the new system now instead of being on disparate systems before. We started to see that already. People get excited about that. But it's not -- it's a small percentage of our overall shipments, as the team has discussed. And that's where you test the system to see whether it scales. That's where you see how the change management's working as people adopt their processes to the system in the different countries. And that's kind of what's behind us now at this point. So as we roll on and we get a significant portion of our business on, that's where you're going to start to see some of the savings start to materialize. That's where we start to see some of the efficiencies and visibility for customers, better service for us and the benefits that we expect from the market side. So there are benefits out there from a customer growth perspective. Certainly, we think it's going to improve our service. But we have to get to a critical mass of number of countries on it so that the customers are going to be able to see that and see the material difference, so that the average transaction that would pop up between Branch A and Branch Z that might come in the next transaction in the system would be on the new system instead of maybe A is on the new system and Z is still on a local system. I hope that helps answer that question for you, Scott.

Scott H. Group - Wolfe Trahan & Co.

Yes, it does. If I can just follow up with it, though. How come, if 70% of the shipments are going to be on the new system by the end of this year, why wouldn't we see 70% of the targeted savings by next year?

Eric W. Kirchner

One of the ways that we've come to describe the initiative -- so the original business process change was labeled 4-as-1 because we had 4 regions, 4 major blocks of systems, and the idea was that we needed one. You could start thinking about where we are or where we will be, rather than 4-as-1, being 5-as-1, because you still have, now, the introduction of the new system, and you'll have other countries that remain on the old system. And until a complete region retires that block of systems, you don't start to see the benefit. So the concern, from an appearance standpoint, is it starts to look like a hockey stick. But, in fact, that's how it works. Until you get past the critical mass, where you have the preponderance of transactions moving between 2 countries on the new system -- between countries that are both on the new systems, you don't get the full benefit. And that relates to retiring the old blocks of systems that these countries still operate on today.

Scott H. Group - Wolfe Trahan & Co.

Eric, that actually makes a lot of sense and is really helpful. And it sounds like maybe the timing is a little bit delayed but, overall, you still are just as confident in the ultimate savings from this rollout, is that right? Is that fair?

Eric W. Kirchner

No. I'm more confident than before, because we're at the point where we're getting ready to ramp, and we've really taken some steps forward since the last call. We just got done with a global roadshow. So the senior management team, the executive board, in our vernacular, went out and met with our people around the world and hit the Top 300 leaders. And we've come to hear this phrase several times about transformation fatigue or things associated with UTi, so I look back at an old quote from Vince Lombardi, which was, "Fatigue makes cowards of us all." And I didn't see any cowards out there when we went through this process. We've got people out there that are resilient. They've got a lot of resolve to make this thing happen. And they're actually waiting and ready to go to get this system stood up. So I'm more bullish on where we are than I've been in this process.

Operator

The next question comes from Kelly Dougherty from Macquarie.

Kelly A. Dougherty - Macquarie Research

I just wanted to see if we could talk about how your air and ocean freight businesses stack up from an operating margin perspective. So when I think about the goal to get to 20% forwarding margins, just wonder if that bogey is tougher these days, given the shift: more lower-margin CL&D business, more pressure on the Forwarding side. So can you help us think about how mix impacts this, and maybe some, if you have any, interim targets you can offer us, maybe for where operating margins can go in fiscal '14?

Eric W. Kirchner

I'm not sure about talking to interim targets. There has been a shift from -- generally, from air to ocean because it's a lower-cost mode, and the margins on ocean are traditionally less than air. I'm not convinced that it's a forever thing, and I'm also not convinced that there aren't additional steps we can continue to take to mitigate market pressures. If you look at one of our key competitors, their annualized results were about a 30% margin, and they're predominantly Freight Forwarding. So that gives us a very tangible target to reach for, which says, from where we are today, 20% is a reasonable target as a floor number that we expect to get to. It has been pushed out somewhat because of the pressure on the transportation part of the margin. So if you look at broad buckets of where our costs are, the net revenue number is impacted by the buy-sell dynamic between what we pay carriers and what we are able to charge our clients. Things that we can do to help mitigate the compression in that area are to take better advantage of the capacity that we purchased, and we've got some good early signs that the gateway initiatives that we've been working on pretty diligently for the past couple of years are showing some benefit. So the more that we can build on that with these new business wins and the more we can take advantage of density on specific trade lanes, the better we can drive that net revenue dynamic to help mitigate and offset basic market pressures. So -- Ed, I don't know if you want to comment anymore on other aspects of that?

Edward G. Feitzinger

I think another important aspect of that is if you -- someone asked a question about the system and how is that going to help us from a market share perspective. The system is going to help us get more smaller and midsized customers on board, which we think have a lot value for us. So Eric talked earlier about but the investment in the salesforce. So we're not putting salespeople in to go chase market share just to go bludgeon ourselves with our competitors and drop our margins. We're putting salespeople in the right places where we haven't had necessarily investment in pursuing local customers, country-based customers, subregional customers, again, in our vernacular, that we think will be -- fit well in the new system and to create volume in the system that's going to help us improve profitability and absorb our costs. So it's all part of the strategy wrapped up in there. We're being very specific about what customers we want to target going forward, and again, the system should allow us to improve the quality of the service that we can have for some of those small and midsized customers.

Kelly A. Dougherty - Macquarie Research

That's helpful. Can I just have a quick follow-up, though, on mix of -- how you think about the mix between the Contract Logistics and Distribution business versus the mix of the Forwarding business. One obviously has much higher margins than the other. So are you focusing more on growing the Forwarding side to help get to that combined 12% to 13% margin over time, or how should we think about that?

Eric W. Kirchner

The growth in the forwarding part of the business will help take advantage of the investment in this new system, which is predominantly built around Freight Forwarding, although it will have follow-on effects to improve CL&D. So Forwarding is a network business, and it does have scale advantages when you're able to grow and build density in these trade lanes. Contract Logistics -- and Ed is expert in this area, I'll let him weigh in, but Contract Logistics is somewhat different in that growth for growth's sake is not a real objective. I mean, we want to grow, and it's important to our business to be growing, but only in engagements where we can produce the types of margins that are attractive to us, and those are the types -- those type of engagements are where we can provide value-added services for clients as opposed to just pure labor arbitrage or things like that, so...

Edward G. Feitzinger

And if you look at our CL&D growth, I mean, we're really focused on where we can get a ROIC or RONA improvement. So it's not only the margins, it's looking at the assets deployed for that and making sure that we're getting a healthy return on the net assets that are deployed.

Operator

The next question comes from Jack Atkins from Stephens.

Jack Atkins - Stephens Inc., Research Division

First off, if we could maybe just kind of go back to just the competitive landscape right now and maybe talk about how you guys are seeing the more challenging competitive pressures manifest themselves in your business, whether it's on the airfreight side, the ocean freight side. Just sort of curious what you all are doing internally to combat that, because we're hearing this from more and more folks that this is sort of the most challenging competitive market they've seen in quite some time.

Edward G. Feitzinger

This is Ed. Thanks, Jack. I'm going to be optimistic here. I think that, if you look back on '13, that there was -- the competitive dynamic, I think, was, in some cases, irrational, all right? I think people took positions. We were fairly conservative in protecting margin. You can see that in our results, and I think some folks in the global competitive spectrum went after market share, which in the Forwarding industry in the last 10 years, and the air market, when things are growing, everybody just wants to sort of grab share, and you figure out how to make money later. We see that trend changing now. We see, I think, indications, and it's obviously a little bit of a crystal ball here, indications of a return to a more rational, competitive environment, less speculation. So I'm cautiously optimistic, I guess I would say, that I think in the airfreight market, that as the market has matured and there's not a lot of growth in it, which I think is sort of a natural course of events for a maturing market, is the competitive behavior becomes slightly more rational. And that's my personal opinion on where '14 looks a little bit better from that perspective than '13 did.

Eric W. Kirchner

It was interesting. There's 1 data point. A very large multinational customer that we handled some business for curbed it out last year. We didn't win as large a portion of that bid as we would've preferred. They've come back, not just to us, but to the base of transportation providers that they have engaged, to rebid portions of that business because a competitor decided that they could not have the pricing that they put in and went back and said that they had to have a pricing increase, and the customer basically said, well, if you are not honoring the price, we're going to put the business back out to the market. So that's an indicator. And I don't think that's not -- that's a single data point, but it's not the only place this is happening. So, look, we didn't see any virtue in going very low on price in the past year just to win business for adding volume's sake. We are becoming more refined in how we price and being aggressive, but it's got to make sense for us. I think there are some signs, as Ed mentioned, out in the market that some of our competitors may have gone too far in that dynamic.

Jack Atkins - Stephens Inc., Research Division

Okay, great. That's helpful color. And then just a last thing here. Just curious, Rick or Ed, if you could maybe kind of give us the changes year-over-year for airfreight kilos and ocean freight kilos one more time in the fourth quarter. I missed that. And then Ed, also, your comment on combined January and February volume trends, was that on a year-over-year basis, or was that sequentially that you were talking about there?

Edward G. Feitzinger

While Rick's getting the numbers for you -- the numbers I was talking about relative to Hactl and our historical numbers were from December to January, February.

Jack Atkins - Stephens Inc., Research Division

Right. But they're down 11% for airfreight for January and February and down 5% for ocean freight. That was from December, or that was year-over-year?

Edward G. Feitzinger

That was from December, yes.

Richard G. Rodick

You'd asked, Jack, about the -- for the quarter, airfreight was down quarter-v-quarter, year-over-year, 1%. Ocean was up 4% for the fourth quarter.

Then again, part of the data point there, though, is remember, our quarter is not aligned with the competition's. So our quarter is November, December, January, and there may be a little bit of change when you look at us compared to the competition.

Operator

The next question comes from David Ross from Stifel.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

Questions on the Contract Logistics segment. Aside from the North American customer loss, if you just look at the same-store sales weakness that caused some of the margin miss, was there any timing to that in the quarter? Was it weaker in December, or was it weaker in kind of year-to-date in 2013? And then, any particular industry groups or regions that felt the softness more than others?

Eric W. Kirchner

Yes. I mean, if you -- to Rick's original point, this is as, again, we had -- there were some volume issues there. We did have currency, so most of the impact that exists in the company was relative to South Africa because our operations in CL&D are quite significant there. The rand was, I think -- if you look back a year ago, the rand was around high 7s. I think it was 7, 8, and now the rand is about 9. There's a cyclical nature of the project work we talked about. We did have the margin compression, some new business startup, and we had those 3 facilities. So the pharma facility was planned and the Taiwan -- we had a Taiwan facility that we brought up that was a large facility. That's our anchor for that whole region. And then the Hong Kong, as well, we moved in the new facility. Those were driven by a need to change to new locations. In Taiwan, actually, they took our -- the government was redeveloping the entire park that we were in, so we had to move to a new park. So those things are all contribute to the number you talked about. In terms of the volumes, we're not -- I don't think we're seeing any particular customer industry that's up or down significantly. I think, if you look at Europe, macroeconomic, as you guys know, particularly Southern Europe, is quite weak. North America is a little bit spotty, but nobody is -- we can't point to anybody and say this industry is doing great and this industry is indicating that it's heading to the toilet, unfortunately.

David G. Ross - Stifel, Nicolaus & Co., Inc., Research Division

And then the sales changes you talked about, Eric, are they solely in Freight Forwarding, or is that going on in Contract Logistics as well?

Eric W. Kirchner

The sales leadership at the regional level is responsible for both Freight Forwarding and Contract Logistics. So there have been -- the changes would affect both segments. And then we've also bolstered our sales approach within Contract Logistics, specifically in North America, with some key additions. So it impacts both.

Operator

The next question comes from Nate Brochmann from William Blair & Company.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

I was wanting to go back to Tom's original first question on just the expenses and some of the onetime things. I know that you threw out the $12 million in terms of the mix of some bad debt and some write-offs and some interest and whatnot, but I wanted to see if we could get maybe a number for what some of the other kind of upfront costs might have been during the quarter for some of the new business that you're bringing on in terms of what you have to establish ahead of that, as well as, if we take out some of the unusual things in terms of the facility moves and whatnot, what kind of the run rate might look like if we take out those issues out?

Richard G. Rodick

Well. So, Nate, I think first you're talking about the $12 million, and I think I've mentioned we had some interest expense, some bad debt write-offs, some assets -- some things on the balance sheet, some revenue items that went away. The...

Nathan Brochmann - William Blair & Company L.L.C., Research Division

So on top of that is kind of what I'm saying in terms of some of these other things within the businesses that we're looking at, if we -- what would the number be on top of that if we looked at a run rate?

Richard G. Rodick

Right. They'd be -- for example, the facility moves were about another $3.5 million in expense that Ed mentioned, the 3 facility moves for the locations in CL&D.

Eric W. Kirchner

So I think, Nate, to answer the question I think you're asking, we would've shown a slight loss in the quarter if not for these items. So in the $1 million to $2 million range on a pure, straight operations basis.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay. That's helpful. So, I mean, granted I understand if we get a new business, you always maybe have some upfront cost, et cetera, particularly in CL&D business. But if we excluded those issues, we'd definitely see a higher level of getting closer to profitability if we exclude that.

Eric W. Kirchner

No, that would be -- yes, it would have been higher level relative to what we reported, but it would have produced about a $1 million to $2 million loss, in that range.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

Okay, that's helpful. And then regarding some of the duplicative costs -- and I certainly understand that, with the financial structure. And kind of going back to a similar question, do we have to wait until the system is 100% implemented to get rid of those? Or as you bring on the countries individually online, do we eliminate some of those duplicative things?

Eric W. Kirchner

Our expectation is that, as we get further into the deployment process, that those costs will start to come out incrementally in the deployment process. So it's not a big bang. It should start to come over time when we pick up momentum with the deployments, because the work will shift from localized to the shared service environment.

Nathan Brochmann - William Blair & Company L.L.C., Research Division

And do we get any of that at all at the end of this fiscal year, or would that mainly be next fiscal year that we'd start to see the incremental small impact from that?

Eric W. Kirchner

That would build into the $30 million to $35 million number that we talked about in gross cost savings for this current year.

Operator

The next question comes from Peter Nesvold from Jefferies & Company.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

I understand why the -- I think I understand why the restructuring benefits are back-end-loaded. I mean, you essentially have to create a global network from the ground up. You've got to test the system. You've got to migrate the transactions over, and then eventually get the labor productivity benefits from that. What's a little less clear to me right now is, as those, the big numbers start coming through in the out-years, the $75 million to $95 million, how much of those savings would you characterize as being volume-dependent, and how much of those savings would you say would be sort of execution-dependent, i.e. your ability to actually roll out the system successfully and start to get those productivity savings outside of volumes?

Eric W. Kirchner

Virtually all of them are execution-dependent. So as we've stated in my remarks earlier, when we modeled and shared the information with everyone at Investor Day in June of 2011, it was built that -- those assumptions were built on virtually no growth in revenue. So that portion of what this deployment represents is centered around improvements in efficiency and it should not be dependent on volume. But the overall margin target, so this is -- you can almost separate the 2 issues. The overall margin targets that we talked about are impacted by changes to net revenue because of margin compression in the short term, and we talked about actions that we're going to take to mitigate that. But those cost numbers -- or the benefit numbers of the system building to the $75 million to $90 million range are based on improved efficiencies of our operation.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Okay. And then as my follow-up question, you've rolled out the Freight Forwarding system in 6 countries so far. You've mentioned that you're looking to deploy them in 35 additional countries this summer. What's the risk that we get a repeat of what happened in the first 6 rollout. Obviously you got through it. It took a little longer, cost a little bit more money, but it was in 6 countries. You're going now into 35. How can you get as comfortable that we don't get a much bigger push out and a much bigger run-up in the cost.

Eric W. Kirchner

Most of the costs are already behind us in terms of the capital for building the system. So from a cost perspective, regarding the deployment or the system itself, that should be relatively stable. The only area that cost could have impact otherwise is if we don't start to achieve the productivity improvements that we expect as we implement the system. We took great care in the pilot phase, and as Ed walked through the first country and the learnings from a first country pilot to then this current model where we have 6 countries that we're building on that, both in the performance, in terms of speed and the functionality of the system. The system is now ready to scale so that the system itself will be able to handle the additional transactions as we add the volume into it. And then we've developed the right processes around the transfer of information from the Freight Forwarding operating system into Oracle to help smooth out some process changes there. The company, quite frankly, had a fairly complex intercompany billing process that we learned -- in this deployment in The Netherlands, we learned a lot about things that we could do to improve there, and that also helps build toward the efficiency improvements over time, because as that work shifts to the shared service environment and it actually gets done in the background where the country-level people don't have to get involved in that, it's going to really help accelerate the productivity improvements going forward. So we've got a very methodical plan to move through it. We're not going to put the business at risk. I think the fact that we roll out on a country-by-country basis gives us the right calibration in the event that we do need to look at different aspects of the system in terms of performance, but this is pretty much how these things go, having gone through it 3 times.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Yes. I mean, I guess I understand it. At the back -- if there's one fear in the back of my mind, it's that you don't know what the system is going to do until you turn it on. But if I understand what you are saying correctly, it sounds like by deploying it in a half-dozen markets initially, you figured out where the inefficiencies are in the system and the processes that you've developed to address those are repeatable to the other markets in that it's more or less just repeating the same process over and over again in the deployment. Is that fair?

Eric W. Kirchner

I'd say so, yes. It's not like National Lampoon Christmas Vacation where Chevy Chase plugs the lights in and the whole place lights up at once. I mean, it kind of comes on incrementally and builds over time, and we're going to make sure that we're doing it in that way.

Operator

The next question comes from Kevin Sterling from BB&T Capital Markets.

Kevin W. Sterling - BB&T Capital Markets, Research Division

Eric, maybe if I could ask the competitive dynamic question a little bit differently. You talked about the competitive dynamics in the industry being the toughest you've seen in many years. And besides the sluggish market, freight environment, the business -- the mix shift you talked about from air to ocean, are you seeing more competition coming in the marketplace, particularly from the integrators? I know FedEx is talking a lot about really growing their FedEx trade networks.

Eric W. Kirchner

Not particularly. Obviously, we are very mindful of FedEx and UPS and DHL from a competitive standpoint. I wouldn't say there's been any major shift in terms of who we run up against on an ongoing basis, because they've been in the same market. So we haven't seen -- I wouldn't say there's evidence of a big change there.

Operator

We do not have any further questions. Please continue with any points you wish to raise.

Eric W. Kirchner

Thanks, Danny. As there are no further questions, I would like to thank all of you for participating in our call this morning. On behalf of all of us here at UTi, thank you for your continued interest and ongoing support. Have a great day.

Operator

This concludes today's presentation. Thank you for your participation, and you may now disconnect.

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