UTi Worldwide Management Discusses Q1 2014 Results - Earnings Call Transcript

Jun. 6.13 | About: UTi Worldwide (UTIW)

UTi Worldwide (NASDAQ:UTIW)

Q1 2014 Earnings Call

June 06, 2013 11:00 am ET

Executives

Jeffrey D. Misakian - Global Vice President of Investor Relations

Eric W. Kirchner - Chief Executive Officer and Director

Richard G. Rodick - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Edward G. Feitzinger - Executive Vice President of Global Operations

Analysts

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

Elizabeth Thys - Morgan Stanley, Research Division

Scott H. Group - Wolfe Research, LLC

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

Glenn Primack

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

Kelly A. Dougherty - Macquarie Research

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

Jack Atkins - Stephens Inc., Research Division

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

David P. Campbell - Thompson, Davis & Company

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Matthew Young - Morningstar Inc., Research Division

William J. Greene - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the UTi Fiscal 2014 First Quarter Results Conference Call. [Operator Instructions] This conference is being recorded today, June 6, 2013. I would now like to turn the conference over to Jeff Misakian, Vice President of Investor Relations. Please go ahead, sir.

Jeffrey D. Misakian

Thank you, Doug, and good morning, everyone. Welcome to UTi Worldwide's Fiscal 2014 First Quarter Results Conference Call. Joining us on the call today are Eric Kirchner, Chief Executive Officer; and Rick Rodick, Chief Financial Officer. Ed Feitzinger, Executive Vice President, Global Operations, is also here and available to answer questions during the Q&A session.

Before we begin the presentation, I would like to point out that certain statements made on today's call are not historical facts. They may be deemed, therefore, to be forward-looking statements under the Private Litigation Reform Act of 1995. Many important factors may cause the company's actual results to differ materially from those discussed in any forward-looking statements. These risks and uncertainties are described in further detail in the company's filings with the Securities and Exchange Commission. Please refer to these filings for more information regarding the risks and uncertainties that the company faces.

UTi undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

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

Eric W. Kirchner

Thank you, Jeff. Good morning, everyone. Our first quarter started slowly, which wasn't surprising, but momentum was built as the quarter progressed. Results were impacted by lower pricing in Freight Forwarding, reduced activity in Contract Logistics and Distribution and currency translation. However, we also saw signs of greater stability in the industry and began to realize some modest benefits from new business.

We reported a small pretax profit in the first 3 months of fiscal 2014 as results improved each month. We started the quarter with a loss in February, then recorded breakeven results in March, and ended with a profit in April.

Net revenue improved progressively in the quarter, as well, with the month of April being higher than the same period last year. This is the first time in 13 months that we experienced year-over-year net revenue growth. The net revenue increase in April was led by improving trends in Freight Forwarding.

One month doesn't make a trend and we still face many challenges. Industry's volume percentage growth in part reflects easier comparisons, not necessarily stronger demand. In addition, the environment remains every bit as competitive as we saw last year.

Finally, the decline in the South African rand has continued to weigh on results. At the end of the first quarter, the rand was trading at approximately ZAR 9 for every U.S. dollar. On May 31, it had fallen to nearly ZAR 10, a deterioration of almost 10% in 1 month. So while we're somewhat encouraged by recent improvements, we're cognizant that there are a variety of continued challenges presented by the external environment.

In Freight Forwarding, airfreight volumes were slightly lower in the first quarter compared to the same period last year. Tonnage in the month of April was higher than the comparable month last year for only the second time since June 2011, led by a rebound in Asia Pacific shipment. Ocean Freight volumes in the first quarter were relatively strong, led by improvements in our EMENA regions.

Net revenue per unit of cargo was lower in the first quarter, particularly in Ocean Freight. Currency weighed on pricing in the quarter, but pressure was also felt in lower sell rates. We saw somewhat better performance in airfreight pricing in the quarter. Net revenue per kilo declined 5% compared to last year's first quarter, but improved slightly on a sequential basis. Net revenue per TEU fell 11% in the first quarter on a year-over-year basis and weakened further sequentially.

Contract Logistics and Distribution revenue was lower in the first quarter due to many of the same factors we saw in the fourth quarter of last year. Revenues were impacted by the loss of a few large accounts that we previously told you about. Currency had a larger impact on Contract Logistics and Distribution in the first quarter due to the decline in the South African rand.

On the positive side, we saw improvement in North American volumes in both Contract Logistics and Distribution Operations. New business implemented in the first quarter provided a modestly positive tail wind to our results, but greater benefits are expected in the second half of the year.

Our Asia Pacific and Africa regions continue to provide strong business growth. And our North American Contract Logistics pipeline remains robust.

Expenses were lower in fiscal 2014's first quarter compared to the same period last year, but increased on a constant currency basis. The trend line is moving in the right direction, however, as our previously announced cost reduction efforts led to a sequential decline in expenses of approximately $7 million on a constant currency basis. This sequential decrease is in line with our previously announced cost-reduction plan.

We continue to see some short-term duplicative costs in our shared service centers as we ramp up our system rollout and invest in North American local sales initiatives. As we told you on our last earnings call, these duplicative cost pressures are expected to ease later this year. I'll provide you with an update on our transformation activities after Rick reviews financial details for the first quarter. Rick?

Richard G. Rodick

Thanks, Eric. On a GAAP basis, we reported a net loss attributable to common shareholders of $0.12 per diluted share in fiscal 2014 first quarter. Excluding adjustments to GAAP results that I'll discuss in a moment, our adjusted net loss was $2.4 million or $0.02 per diluted share. Adjusting further for a temporarily higher-than-normal tax rate in the first quarter and the impact of currency changes, we have had a profit of $0.02 per diluted share. This compares to an adjusted net income of $0.15 per diluted share recorded in the same period last year.

Currency changes had a larger impact -- larger negative impact on our first quarter results than we saw in the previous quarter. The U.S. dollar was stronger against most currencies, particularly the South African rand. Reported revenues and expenses in the first quarter were negatively impacted by more than 4 percentage points. Currency translation also had a negative impact of about 8 percentage points on operating income.

Revenues and net revenues decreased 7.5% and 7.4%, respectively, in the first quarter, compared to the same period last year. The decrease in revenues reflects impact of currency changes and reduced pricing.

On an organic basis, revenues decreased 3.9%, while net revenues fell 2.7% compared to the same period last year. First quarter adjustments to GAAP results included severance cost of $3 million and $2 million in the first quarter of fiscal 2014 and 2013, respectively. Severance costs were primarily related to the transformation activities.

In addition, we increased our valuation allowance on deferred tax assets by $8 million and $1 million in the first quarter of fiscal 2014 and 2013, respectively. As I mentioned last quarter, this is pursuant to accounting rules related to income taxes and does not affect our ability to utilize the operating loss carryforwards once these operations become profitable.

We 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 the severance and valuation allowances on deferred tax assets.

Adjusted operating expenses in the first quarter were 3% lower than the same period last year. On an organic basis, adjusted operating expenses were 1.5% higher than the same period last year, primarily due to additional costs in corporate relating to the implementation of Oracle Financials, higher audit fees and consulting costs, and a short-term duplication of some finance costs in our shared service centers.

As we complete the transformation, the duplicative costs will be removed from our field operation. Our adjusted operating income was $7 million in the first quarter compared to $25 million in the same period last year. The decrease was primarily due to lower revenues in Contract Logistics and Distribution and reduced pricing in Freight Forwarding. In addition, currency negatively impacted operating income by $2 million.

Revenues from the Freight Forwarding segment were down 8%, primarily due to reduced pricing and impact of currency, partially offset by higher volumes in Ocean Freight.

Ocean freight TEUs were up 5% in the first quarter compared with the prior year, which was better than market. In the month of April, Ocean Freight volumes were up almost 11% higher than the same month last year.

Airfreight tonnage fell 2.5% in the first quarter. But in April, airfreight volumes were up 3.4% compared to the same month last year. Preliminary volumes in May were consistent with the same month last year for both Airfreight and Ocean Freight.

Net revenues in Freight Forwarding decreased 3.8% in the first quarter, primarily due to lower sell rates, partially offset by reduced carrier buy rates in Airfreight and higher Ocean Freight volumes. Net revenue per kilo declined 5%, while net revenue per TEU fell 11% in the first quarter compared to the same period last year.

Adjusted operating profit in Freight Forwarding fell 28% in the first quarter compared to the same period last year, reflecting the lower revenue per kilo and TEU. Operating expenses were slightly lower in the first quarter, but not enough to offset the decline in revenue per unit -- net revenue per unit.

Contract Logistics and Distribution revenues and net revenues decreased 6.6% and 10.1% in the first quarter, respectively, versus the same period a year ago, primarily due to the previously announced loss of business and impact of currency, partially offset by increased activity in North America. The decline in revenue led to a $0.47 decrease in operating profit for Contract Logistics and Distribution in the first quarter.

We recorded a tax provision in the first quarter of $11 million on pretax income of $442,000. This was primarily for 2 reasons.

First, I mentioned earlier, we recorded an additional valuation allowance on deferred tax assets of $8 million. Secondly, a mixed issue in which losses for certain operations recorded in jurisdictions with very low or no tax rates, while certain operations in higher tax jurisdictions were very profitable. This led to a first quarter tax provision that was higher-than-normal.

Nonetheless, we still estimate that our annual tax rate will be approximately 37%. Cash flow from operations was an outflow of $53 million in the first quarter, compared to last year's outflow of $10 million. Working capital decreased $69 million, compared to a decline of $46 million in last year's first quarter. The first quarter decline was primarily due to the timing of receivables collections in South Africa due to record duty settlement payments during the quarter. I anticipate a significant improvement in collections during the second quarter.

As I've mentioned on the 2 previous earnings calls, I've been reviewing our capital structure for the past several months. I recently presented a detailed analysis and recommendation to our Board of Directors. Management and the Board have agreed to a balanced approach of investing the business and returning cash to shareholders.

During the last couple of years, we've invested a significant amount in the business, most notably, in our Freight Forwarding operating system and our new South African pharmaceutical facility. As we conclude the transformation investment and our financial results improve, we will be in a position to consider returning additional cash to our shareholders.

One final comment regarding the use of cash. Any time we identify a significant opportunity for the use of cash, we will always perform an analysis to determine if that is the best use of cash at that time and always compare this with other alternatives.

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

Eric W. Kirchner

Thank you, Rick. We see positives in the sequential progress in industry trends and operating performance. The industry still faces many headwinds, but we're somewhat encouraged by the modest improvements we've seen in April.

The new business wins that we told you about earlier should allow us to show better performance as we look for the market to show more sustainable improvement. We launched our Freight Forwarding system in 9 additional countries, as we projected on our last investor call. That brings to 15 the total number of countries on the system, including Thailand, Malaysia and Canada, our largest countries to date in terms of shipments.

The operating system is performing well. We plan to deploy the new system in 3 to 5 additional countries before our next earnings call. However, most of our time will be spent on pre-implementation activities for larger countries that we expect to add in the third quarter. We also plan to refine the linkage between our Freight Forwarding operating system and Oracle Financials. We estimate that at least 70% of shipments will be on the new system by the end of fiscal '14.

Our new cost savings target of approximately $30 million to $35 million in fiscal 2014 remains on track. Cost savings at fiscal 2015 are still estimated to be in the range of $45 million to $50 million, and we remain on track to achieve our goal of $75 million to $95 million by 2016. We're also on schedule to reach our targeted operating margin run rate of 20% in Freight Forwarding and 10% in Contract Logistics and Distribution in late fiscal 2015.

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] Last quarter, there were a few participants who could not participate because we ran out of time. We want to allow as many as possible to have the opportunity to participate, and we do appreciate your assistance in this process. Doug, may we have the first question, please?

Question-and-Answer Session

Operator

Our first question is from the line of Tom Wadewitz with JPMorgan.

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

I wanted to see if you could provide some additional detail or on, I guess, I don't know if you want to give us like the buy months on the air and ocean volumes. I think you said some of the numbers fairly quickly. But if you want to give us those numbers and maybe a little more commentary just on how much conviction you have on that improvement that you saw in April air tons?

Edward G. Feitzinger

Sure, this is Ed Feitzinger, Tom. I'll try to answer that question. So in terms of the air tonnage, we've seen improvement with each month against our performance last year. As we -- as Eric mentioned and Rick mentioned, April was positive. We've looked at some initial data for May, and that seems to indicate that the trend is continuing and that we're expecting the numbers to be marginally better than last year, but not spectacularly better. So that gives us some hope that the market has slightly improved, and it's -- that the general environment, I think, where if there's still some concern with all the manufacturing data and other stuff out there. But our air tonnage has definitely shown signs of improvement over the quarter.

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

And do you care to give some of the buy months numbers aside from, I guess, I think you said April up 3.4%?

Edward G. Feitzinger

So yes, I'd have to get that in detail. I don't have that right in front of me. Do you have that, Rick?

Richard G. Rodick

Yes. I'll give it. The tonnage was down 4% in February and approximately 6% in March, up 3% in April. Thus, we were down a little over 2% for the quarter. And then -- those are the numbers.

Eric W. Kirchner

May.

Richard G. Rodick

And May is -- we think, is up slightly.

Operator

Next question is from the line of William Greene with Morgan Stanley.

Elizabeth Thys - Morgan Stanley, Research Division

This is Elizabeth Thys on for Bill. I wanted to follow up on the transformation. What are the key milestones that we should be watching for over the next quarter? And are there any lessons that you learned so far with the numbers with countries that you rolled out, that you can update us on?

Eric W. Kirchner

Sure. It's a challenge to try to peg specific milestones by quarter because there are movements within the deployment schedule based on specific conditions. But our expectation, as we've said, is to be over 70% of our transactions on the system by the end of this fiscal year. And some of that just had -- the quarterly view just had to do with the timing of which countries go on when. We have probably 8 or 9 countries that are already in queue to go based on the pre-implementation work. But we're doing a deeper dive on the larger countries that would come online because they're just bigger. There are more locations to deal with and it is a slightly larger endeavor to bring in U.S. onto the system versus of a smaller country. But as we've said, we remain on track for that 70% of transactions metric by the end of this fiscal year. We anticipate 3 to 5 more countries coming on the system in this coming quarter. That would take our transaction volumes somewhere in the neighborhood of 25% of our total transactions, depending again on which countries. So we have specific nuances within the system deployment, so we might have a different proposition in a country that has more complexity around linkage to the customs system, an automated custom system in our systems, or depending on the existing functionality that resides in a country on its legacy system and how that compares to our new system deployment. There are a couple of different factors that will tend to move countries around in the queue. But as I said, we have about, I think 8 or 9 that are ready to go with all the pre-implementation activities done and the initial training done of our field forward operating people. So I don't know if that's precise enough. But I'd say 3 to 5 additional countries by the next call. And then, with the anticipation that we're spending more time on pre-implementation activities in the larger countries, that will drive a higher percentage of transactions going forward.

Elizabeth Thys - Morgan Stanley, Research Division

Sure, that make sense. And then one quick follow-up. Is there any service updates in terms of feedback from customers? Have you -- has that been coming in? Is that changing your timeline at all?

Eric W. Kirchner

No. We had some learnings in the pilot phase that we went through in the Netherlands. And we've implemented that -- I'm sorry, incorporated that in the subsequent rollout. And actually, this last round of countries that came online in the last 2 or 3 months has had very positive feedback and has been our smoothest implementations to date. So it's a positive reflection that we are integrating learnings into the go-forward deployments. And with respect to any issues with customers, there's not been any service deterioration associated with the system. And the thing that we're mindful of and continuing to work on, as it relates to our customers, is the visibility from a reporting standpoint because often, customers rely on us to provide them detailed reports about their transportation and logistics activities. And we do have some refinement to do with that going forward, but it's not impacted our ability to service those customers.

Jeffrey D. Misakian

Thanks. And just a reminder again, everyone, limit your questions to 1 initially so we can allow enough time for everybody to have a chance. Thanks.

Operator

The next question is from the line of Scott Group, Wolfe Research.

Scott H. Group - Wolfe Research, LLC

So, I guess my question is on the ocean side. And you talked about net revenue per TEU down 11% and down sequentially. Can you give us your perspective on how you think that progresses going forward, with ocean spot rates that have come down the last couple of months? Are you starting to see any recovery there? And are you seeing the gross yields turn positive yet?

Eric W. Kirchner

Yes, it's very interesting and dynamic. And I don't know how long it will take for it to play itself out, but we still see the imbalance between capacity and demand and the fact that more capacity is coming into the markets. So we have to be mindful with our relationship with our customers to pass on changes in that pricing. So in many cases, we have -- you've got different agreements depending on the customer. Some are fixed, where we manage the TEU and the price fluctuates and we don't produce specific margin off of change in price. We have others that, as market conditions change, we obviously want to maintain and improve our margins. But when there are volatile radical swings, that we've seen in certain time period, we've got to react to that. So I don't know if Ed's got any other color around expectation going forward, but it's not extremely clear right now.

Edward G. Feitzinger

Yes. So certainly, I think one of the things that we also look at is the mix of our business between the LCL and FCL as we go forward. So we've had some nice growth in our full container business. That tends to be at a slightly lower margin as well. So as we move between adding LCL services and growing our FCL business, you may see quarter-to-quarter shifts in the yields just as result of the mix within that ocean number.

Scott H. Group - Wolfe Research, LLC

Okay. I guess it's not clear to me if it's getting better or not. I guess it's not so clear to you. But if you have any additional color, great. If not, I'll pass along.

Operator

Our next question is from the line of Ben Hartford with Robert W. Baird.

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

This is Kenton on for Ben. I guess I wanted to talk a little bit about the Contract Logistics results. Could you give -- maybe give us a little bit of a breakdown in terms of what the impact was from currency business loss. And then maybe some of the economic weakness in Europe. What type of drag that's having on the results, both from a top line and then, obviously, looking at the margins. What's happening there and how do we get back to that 10% target.

Edward G. Feitzinger

Sure. So let's -- I think the easiest thing you'd look at is the gross revenue number. So if you look, the year ago quarter gross revenue was $387 million. Current quarter is $361 million. That was a decline of about 6.5%. Of that 6.5%, 4.3% was currency. So $16.9 million and about $8.7 million, plus or minus, was volume. We saw increases in volume in our Distribution business, which was primarily in the United States and in Southern Africa. We saw some increase in new business. And that was offset by decrease in business from contracts that we had ceased and some reduction in volumes. On the European side, Europe remains flat. We've taken steps to improve our performance in spite of the economic conditions, and our expectation is that we'll continue to hold the line on those. As you guys know, a significant portion of our business is based in Southern Europe, particularly in Spain and Portugal, which has been particularly hard hit. So the team has done a good job of holding the line there, but certainly, there is no evidence of improving economic conditions or volume flow-throughs in Europe, which is certainly a different condition than what we're seeing in the states where were starting to see existing customer volumes increase at the same warehouses.

Kenton Moorhead - Robert W. Baird & Co. Incorporated, Research Division

Yes. And then, again, I was just sort of wondering, sort of as to follow up. What -- is there a bigger impact maybe on the profitability side of it from some of this weight in Europe? Or are you -- when you get in these new business, are you seeing increased yield pressure competitiveness that's weighing on the margin currently?

Edward G. Feitzinger

So I wouldn't say there's anything different in terms of the competitiveness in Europe. I think the major established markets, Europe and North America, are very price sensitive. So when the contracts do come up for renewal every 3 to 4 years, which is our typical cycle, on the CL [ph] contract, you'll see some margin compression there. We have, as we've talked about before, we've called out a number of low-performing clients over the past couple of years. You see that in both the revenue numbers there. And as we've also talked about, we think that this is a cyclical, that we're in a little bit of a valley here. And in terms of the expectation, I just reiterate Rick's comments that we do expect to get to the 10% goal in the FY '15, the late FY '15 period. So I would -- we look at this as a valley that we intend to climb out of.

Operator

Next question is from the line of Glenn Primack with PEAK6 Investments.

Glenn Primack

I'm just wondering, on your Distribution business in North America, is that a function of increased market share that you're seeing growth there? Or is it just having a better customer base than perhaps others?

Eric W. Kirchner

I would attribute the growth there to a mix of improvement in cooperation between the business units that's yielding some growth and a very modest increase in the base volumes of our existing customer base.

Operator

Our next question is from the line of Peter Nesvold with Jefferies.

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

On the buyback, so definitely encouraged to hear the dialogue moving in that direction. I guess, I'm a little surprised to hear you talk about it being a sequential process, where you want to execute the turnaround first and then do the buyback. And I say that for 2 reasons. Number one, I mean, assuming you're successful at the IT deployment, the stocks can be a lot higher than 15 when you get around to the buyback. And number two, you have asymmetrical information. I mean, you guys know where you are in terms of progress on the buy -- on the turnarounds, whereas, it's very difficult for us to track that. So why not dual track both of these efforts?

Richard G. Rodick

Maybe, Peter, let me -- I'll just start. It's Rick. When I mentioned -- just so we're clear, when I said when we finished the investment in the transformation, which were very near, I think we said we'd, in the past, we said that we would begin amortizing the system late summer. I wasn't saying once the transformation was completely implemented. I'm just saying, it's really more the cash flow right now. In recent years, we've invested a lot in the business with the transformation and the new pharma building. And what I was saying was, once those investments are done, which we're very close to, and financial results improve, that's when we're open to reconsidering that. So it's not as far off as I think you believe. Does that help?

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

Yes, absolutely.

Operator

Our next question is from the line of Kelly Dougherty with Macquarie.

Kelly A. Dougherty - Macquarie Research

Just wondering if any of the 8 or 9 countries that you've got keyed up to go, is there any other major countries, like U.S., South Africa, China? And then if you were to put any of those big countries on a system, can you give us a sense on how much of a boost you would see from -- you're kind of expecting that the 25% level after you completed things this quarter. If you were to put any of those major countries on there, any sense of magnitude for how much more you get above that level?

Richard G. Rodick

Again, it's hard to say. But those are the 3 largest countries that we're focused on in terms of transaction volume are the U.S., South Africa and Germany. And so, again, the -- each of those represent more than double-digit percentage of transactions. So I don't know how much upside there is from the 25% level for this quarter that we're looking at. But all those countries are in that 8 or 9 country queue. And again, some of them, specifically, South Africa, had some more complexity about interacting with other systems that are going to cause us to move forward with caution. But I would say that, that 25% number is a good thing to consider for this quarter. And then, into the third quarter, you could expect some of these larger countries to start coming online, and that's where we'll see a bigger pop in the third quarter.

Operator

Our next question is from the line of David Ross with Stifel, Nicolaus.

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

On the Contract Logistics side, can you talk a little bit about the competitive environment, and what you're seeing on pricing for contract renewals? And then just on the segment reporting within Contract Logistics. I was looking at geographic reporting. Asia-Pac has a very high EBIT margin. Just want to know what's going on there, and why that may be the case?

Edward G. Feitzinger

Okay. Why don't I take the first part of that, and then maybe Rick can take the second part. So in terms of the competitiveness. So the -- around the world, I think its pretty clear that in the CL -- above from the CL and the distribution side, particularly again in the mature markets, it's a competitive environment. Customers still -- outsourcing your warehouse, as an example, is a trust-based sale. There are some customers out there that are looking for the cheapest possible solution. We try to avoid those, in general, or they're looking for labor plays, where we can't add value to systems or providing much innovation. We try to avoid those as well. The market, I think, is -- I would say, is mature, and it's somewhat stable. If you look at the large competitors, ourselves included, we need to make a return on our invested capital in these projects. And all of the competitors that I know of and us have thresholds. And so there may be some small local heroes that are willing to work below that threshold. But I think there's a minimum floor that most of the competitors will work with that you'd trust to do this work for you, if you're going to outsource a large warehouse. And I think that creates a floor on the pricing that most of the competitors are not going to go beneath. So I don't view this as something where -- people don't typically buy the business in the warehousing side, because you're stuck with a contract for 3 or 4 years. So again, I don't -- while the customers are always pushing to reduce the cost, we try to drive that through innovation and finding other ways to add value and reduce the cost of the supply chain. And I don't see that the market is going to drag people down to some incredibly low point because of pressure and desire to get these buildings. Because at some point, all of our competitors are rational, and they're going to -- they'll just turn it back to the customer and say, "I can't make a return of my capital, so you can take this project back."

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

And is that a change in attitude from a couple of years ago with the main competitors?

Edward G. Feitzinger

I think it's -- I would say the market -- the competitors have matured over time. And you see pressure, I think, from -- on all the calls that you'd see from our competitors and all of their quarter releases that they're all looking to make a reasonable margin in their warehousing businesses. So if you look over the last 5 years, I think that the market has differently matured. I think, at one point, particularly companies that had Freight Forwarding arms, were looking at warehousing as a loss leader to the forwarding business. And I think that has really gone away in the market, for the most part, over the last 5 years.

Richard G. Rodick

Hey, David, this is Rick. Were you looking at the schedules in the press release?

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

Yes.

Richard G. Rodick

Yes, that's really combined Freight Forwarding and Contract Logistics.

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

Okay. Because I was just look at the operating income. Okay, got it.

Richard G. Rodick

Yes, it's for the combined.

Operator

The next question is from the line of Jack Atkins with Stephens.

Jack Atkins - Stephens Inc., Research Division

So, I guess, my first question is really a 2-part one to get around Jeff's concerns. But when you think about how many -- I guess, where do we stand today as far as the number of transactions, the percentage of your transactions on your existing -- or on your new platform after the 9-country rollout in April? And then what portion of your $30 million to $35 million in cost reductions have already been captured to date?

Eric W. Kirchner

The percentage of transactions on the system today is between 10% and 15%. And then the cost capture for the first quarter was between $6 million and $7 million. So if you look at that total amount that we've talked about, $30 million to $35 million, that's a combination of cost actions that we initiated in the fourth quarter in response to business conditions and what we expect at the tail end of this year to [indiscernible] with regard to the system, so -- and that benefited the system, but that's, obviously, back-end loaded. So the amount that we saw in the first quarter was really related to basic blocking and tackling within the business because, obviously, volumes has continued to be anemic. And we wanted to make sure that we had that cost action in place before this year started.

Jack Atkins - Stephens Inc., Research Division

Okay. Just to be clear, Eric, the $6 million to $7 million, is that an annual run rate? Or is that just actual hard dollars taken out in -- on a -- as it relates just to the first quarter?

Richard G. Rodick

Jack, that's actual hard dollars taken out in the first quarter, so the ongoing run rate.

Operator

Next question is from the line of Nate Brochmann with William Blair & Company.

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

I wanted to talk a little bit on the -- too on the pricing side but moving over to the Freight Forwarding side. In terms of some of the new business that you've won, Eric, in terms of kind of talking about where the pricing on that business is. And also, kind of at the end of last quarter, you're talking about pricing becoming a little bit more rational as you're winning some business that maybe was coming back that wasn't being serviced at various price commitments. I'm wondering if you could kind of talk about how that trended through the quarter and kind of where you see kind of that pricing pressure going for the rest of the year?

Eric W. Kirchner

Okay, Nate. The -- what we saw in the quarter was improvement in -- on our buy rates and reduction in pricing. So those things in tandem, we saw, I think about a $0.50 reduction in the sell rate -- I'm sorry, $0.55 reduction in the sell rate and a $0.50 reduction in the buy. So we did lose a little bit on the net revenue per unit side there. But we're encouraged, because we've been more active in the gateway process, so that we can help keep relative margin as pricing is more competitive by taking better use of the capacity that we're purchasing. So I think that we've trended reasonably well in staying competitive on the pricing, but also offsetting that through both procurement initiatives and then capacity utilization initiatives. There is evidence, and I've seen more since the last call, of customers wanting to come back and reengage, because they've taken a lower priced option and the service has been unsatisfactory. So I think that will tend to firm up some of the pricing, because, again, in some sense, you end up getting what you pay for. And the only way that -- there's only 2 ways that someone can underprice the market, one is to go to carriers that don't provide as reliable service, and the other is to sustain insufficient margins. And I think that we've seen evidence from a couple of data points back from these customers that the trend is continuing, that service is coming into a more balanced part of the discussion as opposed to just price. Because the penalty of not making service requirements, especially, if you're going to pay the premium for airfreight, you've got to get the service, will tend to bring that in line. So we're going to continue to work the procurement and capacity utilization initiatives, so that we can provide market competitive pricing to our customers. But we're hopeful that there's continued acknowledgment within the customer base, that this service cost equation is important, and it's not just a cost decision.

Operator

Our next question is from the line of David Campbell with Thompson, Davis & Company.

David P. Campbell - Thompson, Davis & Company

I just had one question. That is the corporate overhead cost, $17.7 million in the first fiscal quarter, that's up again from the fourth quarter. Does that include -- you mentioned to us, you've got a lot of nonrecurring -- sort of nonrecurring expense duplications from putting in the new operating systems. Is that where part of this savings will come? And in terms of -- or is that a -- is that $17 million a -- something we look for on a continuing basis each quarter?

Richard G. Rodick

Hi, David. This is Rick. No, you'll see that go down over time. The duplicative costs will go away. We had some timing differences when we talked about the audit and the tax consulting fees that were in there. Those were budgeted for the year, but they were kind of in there earlier than budgeted. But we should see these costs go down as we roll out and get more of the countries on the system. And we can continue taking costs out of the field and not have the duplicative costs in the shared service center. Right now, we're ramping up the shared service centers to take on the countries, and we've got the duplicative costs, so those numbers should start going down.

Operator

Our next question is from the line of Ryan Bouchard with Avondale Partners.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

You said earlier that April net revenue was higher year-over-year, and you also talked about airfreight and Ocean Freight volumes were slightly positive in May. But I was also wondering if you could say that consolidated net revenue for May was higher year-over-year, or at least what you know so far about May?

Richard G. Rodick

Ryan, I think it's too early. We're just starting the closing process, so we get the volumes in. And that's when we see that -- the volumes in that right now, we're getting all the information from the field, so it's too early for us to tell if, actually, net revenues will be up year-over-year in May.

Operator

Your next question is from the line of Ryan Cieslak with KeyBanc Capital Markets.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

The one I had is on the transformation initiative, the incremental depreciation expense guidance that you gave of roughly $10 million here in fiscal 2014. If I see this right, we have not had any incremental expense at this point. I just was curious to know how we should expect that to ramp up for the balance of the year. And then, also, the incremental $10 million again into '15?

Richard G. Rodick

Okay, so -- and what we said was it would be approximately $20 million a year. We thought that we would begin amortizing the system in late summer. So it'll be somewhere around $10 million this year. But we've said in the past that it'll cost us, all in, about $140 million for the transformation, amortized over 7 years, about $20 million annually. So we'll be -- probably a little less than $10 million this year.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Okay. And then once you begin to amortize that late summer, is there any lumpiness to that? Or is that a gradual sort of amortization, going forward?

Richard G. Rodick

Straight line amortization, so it would be $10 million for the -- well, basically, $20 million a year divided by 12. So just under $2 million a month.

Operator

Next question is from the line of Matthew Young with Morningstar.

Matthew Young - Morningstar Inc., Research Division

Just a quick follow-up on the pricing on the airfreight side. Are you seeing that pricing pressure coming from some of your -- the larger providers out there? Or is it more coming from the smaller, less capable guys? It sounds like the latter, if some of that -- if customers are getting less service and coming back to you.

Edward G. Feitzinger

So is your question about the competitors or the customers?

Richard G. Rodick

No, the competitors in terms of the pricing pressure, and whether they're under pricing in the market? Whether pricing is rational and so forth. Is that coming from some of the larger freight forwarders?

Edward G. Feitzinger

Yes, I would say that the larger freight forwarders have displayed a much greater degree of rationality in the past 2 quarters, let's say, than we've seen in the past. Occasionally, you get people that would want to buy business in bursts to achieve some growth. And I think as we're seeing the maturity in the market, it's, I think, a natural evolution of the market for people to be a little bit more rational. The customers are still pushing on cost, liability and terms. And so, obviously, as we certainly push back on those, because we have to make a return. And I think, again, it's a -- I look at it as a rational competitive behavior on a mature market for most of our larger competitors there. And the small guys are always going to be out there.

Matthew Young - Morningstar Inc., Research Division

Fair enough. And then just as a quick follow up. Are you seeing much of a differential between the shipment count versus tonnage trends? I know that in the past, the tonnage has fallen -- maybe in the last year, tonnage has fallen more than shipments. And that's often a pressure on productivity.

Richard G. Rodick

For the -- Matt, it's Rick. For the quarter, you're asking shipments versus tonnage?

Matthew Young - Morningstar Inc., Research Division

Yes.

Richard G. Rodick

They're both down a similar amount. For April, actually, the tonnage was up and the shipments were down slightly. So the trend is that the tonnage is growing. And as I said, in April we were down just a little bit below last year, while -- in shipments, while tonnage was up 3%.

Operator

Our next question is a follow-up from the line of Scott Group with Wolfe Research.

Scott H. Group - Wolfe Research, LLC

I've got just 2 things. One, can you give us the monthly Ocean numbers, if you have it first?

Richard G. Rodick

You want shipment or TEUs? Volume or weight? TEUs -- how about TEUs?

Scott H. Group - Wolfe Research, LLC

You typically gave us TEUs, so we'll...

Richard G. Rodick

So February, we're flat year-over-year. March, we were up about 4%. April, we're up about 11%. For the quarter, that got us the approximately 5% increase.

Scott H. Group - Wolfe Research, LLC

Okay, that's helpful. The $35 million of cost savings, is that inclusive of the $10 million increase in depreciation? Or is it $25 million, net of the depreciation increase?

Richard G. Rodick

Well, it'd be net. But I mean, in -- we have those totally separate. We'll have some cost -- part of that $30 million to $35 million is related. You could look at it that way, and say it's net $20 million to $25 million. Similarly, the long-term $75 million to $95 million is prior to the $20 million annual net -- $20 million annual amortization.

Scott H. Group - Wolfe Research, LLC

Okay. But that $75 million to $95 million, that's cash savings, and depreciation is noncash?

Richard G. Rodick

Correct.

Scott H. Group - Wolfe Research, LLC

Okay, and then just last thing, when we just think about this. If you're at a, call it a 7.5% margin of forwarding in the first quarter, a 5% in logistics and you're talking about getting to 20% and 10% by the end of next year, is it -- does it happen kind of equally in '13, in '14? Is it all kind of really back-end loaded? What's the trajectory we should think about of margin improvement over the next couple of years?

Eric W. Kirchner

I think that the forwarding number is more back-end loaded than the CL number, because the forwarding thing is dependent on execution throughout the remainder of the transformation and then enabling that with the system. Whereas, the CL&D numbers are more dependent on getting some growth back in the business and then managing individual operations to profitability or to better margins than they exhibit today. So we've had a series of actions that are ongoing, where we basically look at the bottom-performing operations. And then you have specific plans to -- that either involve adjusting the pricing or improving the productivity within the operations to get them to adequate margins, and it's a site-by-site basis. Freight Forwarding is more networked. And as I said, dependent on execution of these specific transformation initiatives that relate to -- working with these new standard operating processes and then enabling those with the system.

Scott H. Group - Wolfe Research, LLC

Okay, that's great. And just with that, just one last thing, sorry. The -- all of the depreciation or other implementation costs, anything that's ongoing, is that showing up in forwarding expenses or corporate?

Richard G. Rodick

It'll be in forwarding. Just stick to forwarding.

Jeffrey D. Misakian

[Operator Instructions]

Operator

Our next question is a follow-up from the line of Kelly Dougherty with Macquarie.

Kelly A. Dougherty - Macquarie Research

Can you give us a sense in South Africa, which are the industries you're most levered to? And whether there's anything going on in the country that gets you more optimistic or maybe on the flip side, more concerned about the exposure you have there? And then, I guess, finally, what you're seeing from a competitive standpoint, specifically, in that region?

Edward G. Feitzinger

This is Ed. So, certainly, in South Africa, I think most people have seen the issues on the news with the labor unions and the ANC and the issues that, that's had that on the mining and the export industry, which has put a lot of pressure in the rand over the course of the past couple of months. We do have some exposure to the mining industry. You would typically see that in our ocean shipments. And so as if the mining industry slows down, not so much the -- we have some in South Africa, we also have a fair amount of sub-Saharan African business, which flows through South Africa, which will be unimpacted, that's more touched by the commodity prices. So we're cautious about South Africa. We're very careful to look at how we can get growth. We do have the -- a predominant market position in South Africa in many different businesses. We have a full spectrum of businesses there that cover both the customer supply chain and the value chains. And we see, frankly, we see, not only solidifying the position in South Africa, but we see the growth of sub-Saharan Africa, which is somewhat unrelated to South Africa's problems as a growth opportunity for us, going forward. So while South Africa may have its issues, we also expect to be able to lever our position on the continent to grow as the rest of Africa grows.

Kelly A. Dougherty - Macquarie Research

Are you seeing more competition coming into the market or...

Edward G. Feitzinger

So our -- so the European competitors come into South Africa on a cyclical basis. So I would say, every year, another competitor mounts an effort in the market and puts a big investment in. And we've seen that, that's no different. What we see now is really no different that we've seen over the past 5 or 6 years. And I would expect, to be honest with you, that some of the issues in South Africa may actually deter some of our customers from mounting their next effort there. But every year to 18 months, we see one of our other particularly European competitors try to make a big push and get in roads and up to date, we've been able to thwart those efforts.

Kelly A. Dougherty - Macquarie Research

I just had one more quick clarification. The $6 million to $7 million cost savings you guys mentioned for the first quarter, is that net of -- or growth of any of kind of the redundancies that you talked about having more financial redundancies of things because of the multiple systems?

Richard G. Rodick

It's Rick. The cost savings are there, and we also have the duplicate of costs, so it'd be net.

Kelly A. Dougherty - Macquarie Research

So that $6 million to $7 million is net of any kind of duplications?

Richard G. Rodick

Yes.

Operator

Our next question is a follow up from the line of Nate Brochmann with William Blair & Company.

William J. Greene - Morgan Stanley, Research Division

Kind of in line with my previous question, as well as Scott's follow-up question. I was looking like -- we talk a lot about the transformation in terms of the systems, but you mentioned a couple of times, like, particularly, still kind of combing through some of the underperforming contracts or areas in CL&D. And then, also in terms of continuing to focus on improving your buy rates and leveraging that. Obviously, those have been like kind of ongoing-type projects for a long time. Just kind of wondering in terms of how far through all those you feel that we are. How much more is there really to go in terms of -- once we even get this whole system up and running on the freight forwarding side, how much more process improvements or combing through underperforming-type things do you feel that you still need to go through?

Eric W. Kirchner

I -- there are, I guess, a couple of different questions within your question, Nate. So on the CL&D side, it's just math. There's always going to be a bottom 10. We're always going to need to focus on improvement initiative on those. So we're -- I think we've become so much better in the contracting process, in the -- we've got a process called Advanced Quality Planning, where we have in-depth discussions with our customers before we initiate operations, so that there's a very clear alignment between their expectations and then our preparedness to execute to those expectations. And we're getting better and better at those things. So what we should expect to see, and I think we have seen, the absence of big misses as we've had in this business even years back. So we've had much better account selection in terms of the type of clients that we can provide value to and then derive margin from. And then better execution as we agreed to the terms and then subsequently moved in to start the business. We have an initiative that's been both forwarding and logistics, which is 5 star quality. So we have a very prescribed approach to ensure that we're improving operations, that involves an audit process and it's, I think, very detailed. And it's helping us get better in terms of our performance. With regard to forwarding, we have now built out product leadership, which the company didn't have before. So we have an air leader, an ocean leader and a customs brokerage and compliance leader. And we are seeing better collaboration and cooperation across the geographic execution. And then there's higher level product function to just help us iterate and get better and better. So I'd say on the CL&D side, we're building on a lot of progress already, and we'll continue to incrementally improve. On the Freight Forwarding side, there's still ample opportunity for additional improvement, because as we implement the new system, and along with the new system, coming different management-type reports that give us visibility for operations, it'll make problem recognition and resolution a lot straighter and quicker than we've ever seen it before, because we'll be able to do a different type of stack ranking and then compare -- it's a little bit different than CL&D, because CL&D is within the 4 walls. Within the Freight Forwarding operation, you'll still have varying levels of performance across multiple operations. And then we'll be able to derive trends from the top performers and apply those to the bottom and work them up. So I think the forwarding is -- still has more upside opportunity than the CL&D. Although we've got opportunity on both of those business lines.

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

Okay, that's great. But it sounds like, generally, the platforms, process improvement on both sides are definitely in place. And in the Freight Forwarding, it's about leveraging what you have in place, and then even be able to leverage that even further once the system's in place?

Eric W. Kirchner

Yes, that's fair.

Operator

Our final question is from the line of Jack Atkins with Stephens.

Jack Atkins - Stephens Inc., Research Division

Just wondering if you all could comment on the initial customer conversations you're having about peak season. Just any feedback if you could give us there, I think, will be helpful.

Eric W. Kirchner

What is that? That's an antiquated term. I don't know. Ed, do you have any input there?

Edward G. Feitzinger

Yes, I mean, I think it is really dependent on how that market unfolds, particularly outbound out of Asia. And then peak season varies by trade line, obviously. But we're watching the trade line carefully up and out of Asia. If the U.S. economy takes off, it's really a question of with all the extra capacity that's been in the market on the air side, is that going to be able to pick it up or not. And we're monitoring that carefully, and we're watching it. We -- at this point, I think it's too early to call it. If things stayed the way they were, aggregate for the first quarter, I don't think we'd see one. If April and May -- if we see a June that starts to uptick and U.S. inventory volumes are low and the U.S. economy starts to accelerate, then you might start to see a Trans-Pacific eastbound segment. But, generally, I think it's a longer shot. I would say the odds are lower that it will not happen, then it will happen.

Operator

Ladies and gentlemen, that is all the time that we have for questions at this time. I'd like to turn the call back over to management for closing remarks.

Eric W. Kirchner

Okay. Thank you, Doug. Thank you very much to all of you for participating in our call this morning. On behalf of all of us here at UTi, we thank you for your continued interest and your ongoing support. Have a great day.

Operator

And ladies and gentlemen, that does conclude our conference for today. I would like to thank you for your participation, and you may now disconnect.

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