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UTi Worldwide Inc. (NASDAQ:UTIW)

F4Q2014 Earnings Conference Call

March 31, 2014, 08:00 AM ET

Executives

Eric Kirchner - CEO

Richard Rodick – EVP, Finance and CFO

Edward Feitzinger - EVP of Global Operations

Jeff Misakian - Global VP, IR

Analysts

Alexander Vecchio - Morgan Stanley

David Ross - Stifel, Nicolaus & Co., Inc.

Benjamin Hartford - Robert W. Baird

Kelly Dougherty - Macquarie

Scott Group - Wolfe Research

Jack Atkins - Stephens Inc.

Todd Fowler - KeyBanc Capital Markets Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the UTi 2014 Fourth Quarter Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided. (Operator Instructions). I would like to remind everyone that this conference is being recorded.

I will now turn the conference over to Mr. Jeff Misakian. Please go ahead.

Jeff Misakian

Thank you, Luke, and good morning, everyone. Welcome to UTi Worldwide's fiscal 2014 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.

We've included slides with today's presentation to help illustrate some of the points being made and discussed during the call. These slides can be accessed by visiting our website at www.go2uti.com, and clicking on Investor Relations and then clicking on Webcast and Presentations. Now please turn to Slide #2.

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

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

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

Eric Kirchner

Thank you, Jeff. Good morning, everyone. Please turn to Slide 3. During the past several weeks the company has completed a number of key milestones. First, we executed a $725 million refinancing including a new asset backed revolving credit facility that closed last week that provides commitments to up to $150 million of additional borrowing capacity with availability determined based on borrowing based formula.

The full refinancing strengthens our balance sheet and provides the company with greater financial flexibility. Second, we filed our fiscal 2014 Form 10-K this morning which includes our audited consolidated financial statements. The audit opinion covers the company's consolidated results for fiscal 2014, 2013 and 2012 and does not include a going concern qualification. Finally, we successfully launched our 1View freight forwarding operating system in South Africa and China, two of our largest markets.

Please turn now to Slide 4. Our fourth quarter results was also disappointing and continue to reflect a lackluster global economy and difficult operating conditions. However, we were encouraged to see greater business activity in both business segments in the quarter, the higher volume levels were to solid organic net revenue growth. While this represents encouraging improvement, the level of net revenue was still subpar constrained by yield compression that was felt throughout the industry.

Please turn to Slide 5. At the same time, operating expenses were too high for the level of net revenue. This was primarily due to severance costs, increased amortization and temporary implementation expenses associated with the system deployments as well as operating efficiencies that will exist until we complete our transformation initiatives. We mitigated this in part by the removal of costs through our expense reduction measures which I will discuss in a moment.

Please turn to Slide 6. We're pleased that we made strides in our system deployment. We've added five new countries on our 1View operating systems since our last earnings call including as I mentioned, China and South Africa. The deployments in China and South Africa had proceeded according to plan. We're now live in 32 countries which represent approximately 72% of freight forwarding transactions. More importantly, we now are able to pair origin and destination transactions in most major markets.

As a key step in completing our transformation, we took actions to remove approximately $50 million in annualized gross pre-tax cost savings at the end of fiscal 2014. About $10 million of these savings were realized in the fourth quarter financial results. We've updated this slide from our previous earnings call with estimates on the phasing of these reductions in the first and second half of fiscal 2015.

As Rick will describe, we believe that our redundant cost of $18 million would be removed by the end of fiscal 2015. By the end of fiscal 2015, we expect to have in place approximately $75 million to $95 million in annualized gross pre-tax cost savings. We continue to target completion of the system deployment in the third quarter of fiscal 2015.

Now please turn to Slide 7. Freight forwarding revenues declined in the fourth quarter. Airfreight tonnage increased and we saw solid growth in Ocean Freight TEUs. The Asia Pacific region once again led out growth. Offsetting these volume increases, however, were declines in net revenue per kilo and TEU in the fourth quarter primarily as a result of the pricing environment. Pressure on sell rates continued throughout the quarter while buy rates remain volatile.

Contract logistics and distribution recorded a slight decline in revenues in the fourth quarter but growth in adjusted operating profit. We saw increased activity from new business wins in the Americas and in our Africa operation as well as improvement in our European and Asia Pacific contract logistics businesses. These positive developments were offset by negative currency affects. We also exited un-performing businesses in Europe and Africa.

Now, I'll ask Rick to cover our financial results in greater detail. Rick?

Richard Rodick

Thanks, Eric. Please turn to Slide #8. On a GAAP basis we reported net loss attributable to common shareholders of $0.48 per diluted share in the fiscal 2014 fourth quarter. Excluding adjustments to GAAP results, which I'll discuss in a moment, we reported an adjusted net loss of $16 million or $0.15 per diluted share. This compares to an adjusted net loss of $0.13 per diluted share recorded in the same period last year.

GAAP net loss in the fourth quarter was greater than the preliminary results we reported in our Form 8-K filing last month, primarily because of additional bad debt write-offs associated with a customer bankruptcy and income taxes. Increased write-off in the bad debt was primarily because a customer seized operations after our preliminary results were announced. While we have previously reserved a portion of the receivables associated with this client, the client announced last week that it was liquidating its operations as of March 27 and we wrote-off all remaining amounts.

Currency changes continue to have a negative impact on our fourth quarter results. U.S. dollar was stronger against most currencies, particularly the South African rand. Reported revenues and expenses in the fourth quarter were negatively impacted by approximately 4 to 5 percentage points. Currency translation also had a negative impact on operating income.

Revenue decreased 2.1% while net revenue decreased 0.3% in the fourth quarter compared to the same period last year. The decrease in revenue reflects lower pricing and impact of currency. This was partially offset by increased activity in both segments. On an organic basis, revenue increased 1.7% while net revenue rose 4.5% compared to the same period last year.

Adjustments to GAAP results in the fiscal 2014 fourth quarter included severance and other costs of $11 million and in addition, we accrued 7 million related to customer bankruptcies. In the fourth quarter fiscal 2013 we incurred goodwill and intangible asset impairment charges of $95 million and severance costs of $5 billion.

We reported tax provision in the fourth quarter of fiscal 2014 of $11 million on a pre-tax loss of $38 million. This was primarily the result of adjustments to valuation allowances on deferred tax assets of $23 million. As previously stated, adjustments to our valuation allowances have been made in accordance with the accounting rules related to income taxes and do not affect our ability to utilize operating loss carryforwards once the operations associated with the valuation allowances become profitable.

We have provided reconciliations of GAAP to non-GAAP results in the table in today's press release and posted more details on our Web site. The rest of my remarks will refer to our results as adjusted to exclude the impact of severance and other costs, the bad debt write-off and the impact of tax valuation allowances.

Adjusted operating expenses in the fourth quarter of fiscal 2014 were higher than the same period last year. On an organic basis, adjusted operating expenses increased 5.7% primarily due to transformation costs. These included approximately 5 million in implementation and duplicative costs during the fourth quarter fiscal 2014.

Amortization costs were 5 million higher than the same quarter last year, primarily due to the system costs that we began amortizing in September 2013. During the 2014 fourth quarter, we also recorded a higher audit and professional fees, cost implement oracle and other expenses totaling $8 million. The implementation and duplicative costs will carry on through most of fiscal 2015 as a result of the ongoing 1View implementation. Amortization costs will continue for seven years. Offsetting these factors were $10 million in expense reductions realized in the fourth quarter based primarily on actions completed at end of our third quarter.

Adjusted EBITDA in the fourth quarter fiscal 2014 declined to $14 million as compared with $17 million in the fourth quarter of last year. This is the first time we are reporting adjusted EBITDA which we believe is a better way to measure and evaluate our business. The decline was primarily due to currency effects as on a constant currency basis, adjusted EBITDA in the base business was stable.

Now please turn to Slide #9. Revenues from the freight forwarding segment declined 2.6% primarily due to lower pricing and the impact of currency. This was partially offset by the increase in volume. Airfreight tonnage increased approximately 1% and we reported solid growth in ocean freight volumes in the fiscal 2014 fourth quarter compared to the same period last year.

The higher volumes drove a 2.9% increase in net revenues in freight forwarding. This was partially offset by margin compression and negative currency movement. Net revenue per kilo and TEU in the fiscal 2014 fourth quarter were lower than the fourth quarter of last year. Adjusted operating profit in freight forwarding decreased in the fourth quarter compared to the same period last year. Higher volumes were offset by transformation-related expenses and currency translation.

Now please turn to Slide #10. Contract logistics and distribution revenues and net revenues decreased 1.1% and 2.9% in the fourth quarter, respectively, compared to the same period last year. The declines were primarily due to the impact of negative currency movement. This was partially offset by increased activity in contract logistics operations in the Americas and Africa.

We did a good job managing costs in our contract logistics and distribution segments. Adjusted operating expenses in the segment fell 5% compared to last year's fourth quarter. As a result, adjusted operating profit in contract logistics and distribution more than doubled.

Please turn to Slide #11. I'd like to conclude my remarks by addressing some of the issues that culminated in the recent refinancing. Our liquidity and capital resources have decreased over the last several fiscal quarters primarily as a result of weak financial performance due to poor macroeconomic conditions, capital expenditures associated with end of our spending on the transformation, severance expenses and recent invoicing delays primarily in the U.S. in connection with the rollout of our 1View freight forwarding system.

Ultimately we had a suboptimal capital structure with financial covenants that did not provide us with the operating flexibility we needed. First, to summarize working capital in fiscal 2014 cash flow used in operations was $98 million compared to last year's cash provided by operations of $41 million. Working capital increased 142 million in fiscal 2014 compared to a decline of 60 million last year.

In the fiscal 2014 fourth quarter, working capital decreased $2 million compared to a decline of $100 million in the same period last year. As I have mentioned on each of our earnings calls related to fiscal year 2014, liquidity was deteriorating each quarter. In addition we had to seek amendments to our financial covenants with each of the three quarters which put a significant strain on our relationship with our lenders.

However, we had finished the third quarter on a strong note financially and we expected strong cash collections in the fourth quarter which is historically our strongest cash flow period of the year. Accordingly, based on historical performance at end of the third quarter, we expected to be in compliance with our financial debt covenants at year end. Our fourth quarter operating performance turned out to be weaker than expected and as a result of the factors we discussed early on this call.

Compared with poor operating results, we were implementing our 1View freight forwarding business in numerous countries and transitioning to new processes. Each new country deployment led to a temporary deterioration of liquidity due to the learning curve associated with implementing new operating and financial systems. This primarily stems from employees learning to use a new system.

So, prior to launch in the United States is our teams adapted to the new systems we would normally see working capital normalize in each country. We launched 1View in the United States, our largest and most complex market, our working capital issues reached a tipping point. You may recall we also launched Oracle Financials and a new custom broker system at the same time in all 28 branches in the United States. The learning curve was steep and our associates fell behind on certain tasks and by necessity they focused on servicing our clients and we fell behind in our borrowings.

We immediately focused our attention on additional training for billing personnel and correcting the issues. We believe we have substantially resolved our billing issues in the U.S. but it was not until very late in the fiscal year. Consequently, we've experienced a year-over-year increase in accounts receivable at January 31, 2014. We estimate that these issues created an account receivable bubble for approximately $40 million in the U.S. and we expect to collect these amounts during the first and second quarters of fiscal year 2015.

We've learned a lot from our experience with the United States deployment and all of our subsequent implementations have benefitted from these learnings. While there is a learning curve with each implementation, all have fared better than the United States implementation. We have not experienced a material impact to working capital in Germany and Australia and based on our feedback from deployments in South Africa and China so far, we are not seeing nor do we expect to see similar challenges in those countries.

The confluence of our sustained weak operating results, our need to obtain repeated waivers from our lenders and the short-term billing challenges in the U.S. led to the refinanced transaction that we previously disclosed. Ultimately, we emerged with a much stronger balance sheet and significantly improved financial flexibility.

Please turn to Slide #12. We issued $400 million in convertible notes and $175 million in convertible preferred stock and just last week we closed on an asset-based revolving credit facility that provides commitments for up to $150 million of additional borrowing capacity with availability determined based on a borrowing base formula. The net proceeds from the refinancing we'll use to repay all amounts outstanding under three separate credit facilities. Those facilities were also terminated. Going forward our financial and operational covenants are limited and our pro forma debt leverage is now reduced from 2.7 times adjusted EBITDA to 1.3 times.

As I previously described, we believe the problems that precipitated the billing issues in the United States are largely behind us. We have a more aggressive focus on collections and a higher degree of accountability in credit terms. We are experiencing improved collections in the United States but it has not yet made significant headway in reducing U.S. accounts receivable balance.

However, we expect to reduce that balance in the next few months due to this increased focus. We anticipate improved liquidity throughout the world in fiscal 2015. We've learned a lot from these issues but we are now looking forward with optimism about completing the transformation and reducing our operating costs over the next several quarters.

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

Eric Kirchner

Thank you, Rick. Please turn to Slide 13. As we noted earlier we're encouraged by the volume improvements seen in the fourth quarter and the early part of the first quarter, however, we remain mindful of the challenging external environment. We're pleased with the progress made on the transformation. As I said earlier, we've launched our 1View system in 32 countries representing about 72% of transactions including the U.S., Germany, South Africa and China, our largest markets. We now have origin and destination transactions paired in most major markets which will allow us to begin seeing the full benefit of having one common global system.

While we have more work ahead of us, we feel good about our progress today and are encouraged that we're nearing conclusion of this multiyear business transformation. The functionality of the system and the revenue and cost benefits we expect to derive are in line with what we expected before launching the transformation. Ultimately, we expect to have greater visibility into our business and improved customer offering, the ability to grow above the market as the company has done historically and a more efficient platform that will allow us to scale with lower incremental costs and removal of redundant costs.

We believe the system and improved processes will provide a competitive advantage that will drive shareholder value. Our recent refinancing provides us with a stronger balance sheet and significantly improves our financial flexibility. It also allows us to complete the transformation so that we can turn our full attention to growing the business. We increased our efforts in a number of areas along this front. We expanded our vertical focus including making incremental investments in our projects, mining and energy group and growing our automotive business where we've seen much success just to name two examples.

We've also taken a number of steps to increase our position in cross-border trade to take advantage of recent trends. We will have more to say about these initiatives and others later this year. Fiscal 2015 will be a pivotal year in UTi's history. I'm excited about our future and look forward to providing you with an update on our progress on our next earnings call.

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

Jeff Misakian

Thank you, Eric. We will now open up the call for your questions. As a reminder, we ask that you limit your questions to one initially and then get back in the queue. We want to allow as many as possible to have the opportunity to participate and we appreciate your assistance in this process. Luke, may we have the first question please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Bill Greene of Morgan Stanley. Please go ahead.

Alexander Vecchio - Morgan Stanley

Hi there. Good morning. This is Alex Vecchio in for Bill. So I know you guys have mentioned in the prepared remarks that the customer bankruptcy resulted in a higher than expected bad debt expense in the quarter, but it looks like you still generated a bigger operating loss on an adjusted basis than you had originally expected. Can you just give us some more color on sort of what is some of the additional costs you incurred in the fourth quarter that you hadn't anticipated in a preliminary 4Q expectation you provided late February were in addition to the customer bankruptcy?

Richard Rodick

Sure. This is Rick, Alex. The customer bankruptcy was the largest amount. We also had some adjustments to our tax provision. When we gave our preliminary numbers, it was early in our closed process and as we continue closing the books, we had to record some additional tax provision. And then some other miscellaneous items, a million here or there, but it was primarily adjusting the books as we closed. That debt provision was over 50%. It was about 2.5 million in tax provision, additional tax provision as we looked at the analysis and there was some things that we had recorded in the tax provision for potential recoverable and tax receivables that we don't believe we're going to be able to collect. Those were the two major components and were about 70% or 80% of that number.

Alexander Vecchio - Morgan Stanley

Okay. That's helpful. All right, I'll pass it along and get back in queue. Thanks very much.

Richard Rodick

Thanks, Alex.

Operator

Your next question comes from the line of David Ross of Stifel. Please go ahead.

David Ross - Stifel, Nicolaus & Co., Inc.

Yes. Good morning, gentlemen. Eric, can you comment on the international airfreight and ocean freight markets, maybe quarter to-date? We saw what they did through January but January and February are usually clouded by Chinese New Year and the last four weeks in March, have you seen any uptick in the air and ocean volumes?

Edward Feitzinger

Thanks, David. So heading into February and March for us has – you've seen a feasible increase in our tonnages. Shipments are tracking on new markets, the tonnages are greater out of very specific market and we were – if you look back at Q4, Q4 was more focused on high tech and product launches and a lot of ton activity. We're a little bit more industrial base in our portfolio and we're starting to see that come in February and March in part because of catch-up of some of the weather-related issues that have showed up the U.S. East Coast slowdown due to weather and backlog has driven some more airfreight shipments and some of our customers have been pushing out some significant volume, so not very much from our perspective but fairly good. If you look in the industry though, China's looking quite soft, particularly South but other markets like Korea are looking fairly good. So it's very, very market specific right now.

David Ross - Stifel, Nicolaus & Co., Inc.

And then the growth you have seen in freight forwarding, is it lane specific based on kind of end customer demand or whether you have rolled out the 1View system, because you had about half of it rolled out going into the quarter. Are you seeing anymore growth in those markets than you are in the ones that haven't had 1View rolled out?

Eric Kirchner

No. We can't attribute any of the volume growth to one customer or another, it's very customer specific, industry specific.

David Ross - Stifel, Nicolaus & Co., Inc.

Okay. And last question is just any of the other country rollouts yet to be done going to have Oracle Financials and 1View rolled out simultaneously or is the process going forward to have Oracle Financials in place first and then 1View?

Richard Rodick

David, this is Rick. In most cases we're rolling out Oracle Financials at the same time.

David Ross - Stifel, Nicolaus & Co., Inc.

Okay.

Richard Rodick

It's worked much better recently, so the SA – in South Africa and China we did it the same time.

David Ross - Stifel, Nicolaus & Co., Inc.

Okay, because I guess my understanding was that you had been doing Oracle Financials first and then the U.S., when you tried to roll them simultaneously with 1View is when you ran into some issues? Is that not correct?

Richard Rodick

Right. That was just I'd say more that we rolled out three systems at the same time and it was much larger, many, many more branches. Most of our other countries have far fewer branches than the implementations have not been as difficult. And also we learned a lot from the U.S. rollout and we used those learnings and the future implementations have been much smoother.

David Ross - Stifel, Nicolaus & Co., Inc.

Okay. Thank you very much.

Operator

Your next question will come from the line of Ben Hartford of Baird. Please go ahead.

Benjamin Hartford - Robert W. Baird

Eric and maybe Ed as well, I'm just interested in your point of view on the bid season as it stands obviously the yield environment last year was challenging. It sounds like it continues to be. Volumes are still relatively weak, but obviously throw on a complication of the recapitalization over the course of the past month. I'm just curious about your point of view in terms of the customer conversations here in March as it relates to the bid environment and the yield dynamics? And then also managing expectations from a customer's point of view as you do finalize the system, as you've gotten so close to finalizing it here over the next couple of quarters and what are those customer conversations like given the recapitalization, given the fact that you're very close but not yet quite done with the system rollout plus the industry dynamics are still challenging, if you can provide some perspective on that, that would be helpful?

Eric Kirchner

Sure, Ben. I would say that the competitive landscape is as challenging as it has been, so that's not really changed a whole lot. If you look at the generally – I wouldn't say static but if you look at the volumes which aren't going organically, then everyone's after the same business which does tend to continue the pressure on the margin. But we've been seeing some good success with specific customers in specific industry groups and we're continuing our focus to build on those successes. We've had a pretty good pipeline coming through, so the fact that we've been very proactive in terms of our sales efforts is starting to show some benefits. But again, we're not going to get a lot of help from the macro environment and we understand that we're going to have to make our own luck. With regard to the system and getting very close to the comprehensive business process transformation that we've been working on, we think that there are tremendous number of benefits for customers in the marketplace. Specifically we are now configured to be able to sell in a much more standardized product set and that allows us to pursue small to medium-sized businesses which haven't been really in the radar for UTi in the past. Those customers give us the opportunity to add value in different ways and really provide more interesting margin opportunities sometimes in the very large clients that want to drive down price, especially on the transportation side. So it's our goal as many of our competitors but our goal to avoid commoditization on the transportation to the greatest degree possible but then on top of that, to be able to sell ancillary services like order management, vendor management, customs brokerage, compliance. So the build out that we've had over the past several years in these other products has been very positive and we expect that that's going to help again going into the future with the new system. The recapitalization had very minor impact I think with our customer base because we were able to explain that it positions us with a very strong balance sheet and enough capitalization that allows us to complete the transformation and fund growth. So as you're aware, as we sell the business often there is a lag time from the start up of that business until we start to see the billings come through from the customers and we believe that the refinancing has put us in a position that we're not going to have to have a concern about growth and again, this will help fund growth in addition to help us complete the transformation.

Benjamin Hartford - Robert W. Baird

That's helpful. If I could get one quick follow-up then from Rick. In the fourth quarter is there an estimate of the level of operating expense that you incur that was specific to the liquidity issues in January as it relates to cash collections, et cetera? Can you put a number around that and just give us a sense for how long do you expect that to persist in the first quarter, if at all? Thanks.

Richard Rodick

Ben, are you asking maybe how much was the cash shortfall potentially?

Benjamin Hartford - Robert W. Baird

I guess I'm looking at the suggested EBITDA number here in the fourth quarter which is helpful. I'm just trying to get a sense for how much operating expense that number might include that would be specifically associated with the cash collection issues in January, so temporary staff costs, et cetera that you incurred during the fourth quarter that would be truly one-time in nature?

Richard Rodick

It's very small, Ben. I mean it's really we are focused on training and things like that, but it wasn't a large dollar amount really. We've got the right people in place to collect, to bill. It was more training and such, but we didn't incur a lot of costs to try to improve those collections.

Benjamin Hartford - Robert W. Baird

Okay. Thank you.

Operator

Your next question will come from the line of Kelly Dougherty of Macquarie. Please go ahead.

Kelly Dougherty - Macquarie

Hi. Thanks for taking my question. I guess I'm going to focus a little bit more on freight forwarding. You mentioned a 1% airfreight volume increase but wondering if you can quantify what you saw in the ocean side and maybe then the magnitude of the net revenue per kilo and TEU declines? And then I guess how are you thinking about volume and net revenue over the next few quarters? You mentioned I think on the refinancing call that you aren't sure if the increased activity was sustainable. Earlier you kind of chalked some of the recent volume up to weather. So just wanted to see if you see anything on the horizon that would suggest that the market gets anymore accommodative or anything concrete you can show about gaining share?

Eric Kirchner

Why don't I talk about the overall market and then turn it over to Rick to talk about the specific volume from the revenue yield numbers. So I think Ben had also asked a question in terms of what's the market look like in terms of the asset providers I think and almost all the markets are fairly low profitability point is probably the generous way to describe it. So any opportunity that they can buy lane to drive up prices or we think they're going to try to take that. But right now in both air and in ocean we see a significant overcapacity in many lanes, most lanes is probably the best way to describe that. So I think we'll see volatility similar to what we saw last year in terms of the ocean providers particularly on that Asia to Europe lane trying to push GRIs through sporadically. I expect that behavior to continue. There's various movement along alliances, the peace re-alliance is an example and depending on government regulators that will have an impact in U.S. West Coast (indiscernible), even things like the East Coast weather related but I know they'll have impacts on the market both in the air and on the ocean side. In terms of the sustainability we ask ourselves that question. I think the first quarter looked good from a volume perspective and tonnage. If you look at ocean growth in the fourth quarter that was low double digits and we're seeing that project into February and March as well. So our ocean numbers look sustainable and strong and as with freight forwarder those are also in the – the target is at the low and the medium-sized customer segment unlike air, which is a mix between small and large customers. So, as we look forward I'd say that the ocean piece is – we feel good that we're seeing some underlying growth there that's going to stick and that's the market share gain. On the air side, it's difficult for us to predict what's going to happen in the second quarter relative to that, again because of the way in specificity and because of some of the tonnages that are coming from individual customers. So we're watching that one closely. We'd like to say that we think we've taken share, but at this point it's too early to make that call.

Kelly Dougherty - Macquarie

Thank you. That's helpful.

Richard Rodick

I'm sorry, Kelly this is Rick. You can go ahead.

Kelly Dougherty - Macquarie

That was helpful. I just wanted to see – you mentioned that you can look out and see that the capacity providers are looking to raise price. That obviously makes sense. Can you have that conversation with customer or is the pricing environment such that it just looks like if any of those GRIs stick or any of the price increases stick, you're going to really have to just take it from a margin perspective because the pricing environment is just that competitive out there?

Eric Kirchner

You can't have that conversation with a customer. I mean we were – if you look back…

Kelly Dougherty - Macquarie

I was worried I said competitor.

Eric Kirchner

No, no, I need another cup of coffee. So for the customers, most customers I think understand that we're looking at a market that's quite volatile. They want to get the lowest price they possibly can and they're obviously trying to drive that down. I do think it would be hazier that we're seeing in the markets – it's a maturing market and people are – the competitors are defining their niches and figuring out where they're going to play and we're certainly doing that ourselves. Last year if you looked at some of the GRIs that came through, the carriers have put a GRI in a particular lane, it might stick for two weeks or three weeks, those are the tough ones where everyone waiting around to see whether it sticks, so that definitely causes margin compression. If the industry think that something is going to stick and things are ridiculously low like one of the trades is going to stick, then it's easier to go with customer and say, look, this is going to stay and the customers are generally receptive to it. So I think that most customers understand how the market is working right now and it's just the question of seeing how long a particular GRI will hold for. And if it does hold then the customers understand that and then you can pass that along.

Kelly Dougherty - Macquarie

Thanks very much.

Operator

Your next question will come from the line of Scott Group of Wolfe Research. Please go ahead.

Scott Group - Wolfe Research

Hi. Thanks. Good morning, guys. So, Rick, just wanted to follow-up with you and some of your comments on the cash flow and can you provide us some view or expectation on when you think you might start to see cash flow and liquidity start to improve? And maybe if you have any guidance on CapEx for this year and severance and if you have a view on where working capital does for the year? And then just along the same lines just from an earnings perspective, when we look at the expectation for some of the incremental savings to be a little bit more in the back half of the year than the first half of the year, when you guys look at expectations for – my modestly positive earnings the next two quarters, do you think that's realistic or should we reset to maybe expect in continued earnings losses just in the next quarter or two?

Richard Rodick

These are a lot of questions, I'm going to try to capture them. So I think expectations for cash flow was your first one for the FY '15?

Scott Group - Wolfe Research

Correct, yes.

Richard Rodick

Okay. So for FY '15 we're anticipating positive free cash flow and improvement over the two most recent years. Historically, our first few quarters are difficult. Q1 is probably our weakest cash flow quarter, Q1 and Q3; Q2 is a little better then Q4 is the best. But we think overall for the year we'll see an improvement in free cash flow around the world.

Scott Group - Wolfe Research

And when you say improvement, you mean positive free cash flow or…?

Richard Rodick

Positive, yes. It's Scott right?

Scott Group - Wolfe Research

Yes.

Richard Rodick

We anticipate positive free cash flow in FY '15.

Scott Group - Wolfe Research

Okay, great.

Richard Rodick

And then guidance on CapEx, you should anticipate lower CapEx and we've had about 80 million in the last two or three years and now that we're pretty much wrapping up the capitalization of the cost associated with 1View, we'll see that decline this year. So in FY '15 you'll see a lower CapEx than what we've seen historically down – I think we've capitalized the $20 million to $30 million each of the last years, so that number should be down dramatically this year. I'd probably run with $60 million range or so. And then in severance I think you had asked, I think we're around 30 million this year and we should be down to around the $20 million range this year because we still have – to get to those cost savings long term, the $75 million to $95 million range we've talked about we'll incur some more severance this year. What were your other questions? I'm sorry.

Scott Group - Wolfe Research

I think the last one was just around when you look at – if you have a view on the recovery in earnings and is it realistic to have positive earnings the next couple of quarters or do you think we need to reset those down a little bit?

Richard Rodick

We don't give guidance on earnings.

Scott Group - Wolfe Research

Directionally if you have a view but if not, then thanks for the time and I'll get back in queue.

Richard Rodick

Okay. We don't give guidance.

Operator

Your next question will come from the line of Jack Atkins of Stephens. Please go ahead.

Jack Atkins - Stephens Inc.

Good morning, guys. So I guess first when we think about the overall airfreight capacity environment and Ed, I know you just touched on overcapacity both in air and ocean but I think a lot of that extra air capacity is coming from increased billing space that we've been seeing come on line over the last couple of years. So I guess I'm curious to know whether you think incremental billing capacity and just sort of an increased share of billing capacity in the overall airfreight market. If that is a positive or a negative longer term for your net revenue margins and then more importantly I guess your net revenue per kilo?

Edward Feitzinger

Yes, Jack, that's a pretty interesting topic in the industry right now because essentially without the passenger on the top of the plane, the freighter market is just very, very difficult for many of the operators and you've seen the bankruptcies, the succession of operations of a number of peer freighter providers over the course of the last year. So that has an impact in a couple of different ways. It has an impact on the dimension of cargo that you can carry and it certainly has an impact – a lot of these freighter operators are not going to bring a plane back out of the desert for a six week spike in activity in our particular lane. So we do have concerns. I think the whole industry has concerns about if the volumes come back, how is that going to be served effectively by the existing billing capacity and how long will it take for the freighters to come back in the marketplace to serve that in a scheduled manner not necessarily for charters. So it's really crystal ball kind of question. I think if we had a perfect answer to that, it'd be very good but I think it's a concern but the billing capacity just keeps coming in and the freighters are – it's not a great market to be a freighter operator in a lot of trade lanes right now. So it's just part of the factors and the market dynamics. Today, we continue to watch it. We work with all the different providers and we're trying to stay on top of that. I don't know if it's going to have a material impact this year, it really depends on whether the market tightens and how long it's tight for, so if it's a four to six week tight period then you're not going to get freighters back in the market. If it's longer than that, then you're likely to see people try to put some freighters back up to seize that opportunity if they can make a margin.

Eric Kirchner

There's quite a bit of variability in the equation because you see the miniaturization of things, so consignments has tended to be smaller recently than they were in years past and the frequency of operations of the passenger specifically the growth in the Middle East carriers does afford aggregate capacity for the marketplace, as Ed mentioned, at sometimes an incrementally lower cost because it's quite subsidized with passenger revenue. So if you don't have outside consignments, very, very odd sized shipments then the passenger space works adequately and it is changing some of the dynamics of the marketplace and as I mentioned, we're very attuned to what those changes are by lane and by carrier.

Jack Atkins - Stephens Inc.

Okay, great. And just a quick follow-up. Rick, I think it would be helpful if you could maybe walk us through the impact of the refinancing on the P&L. Assuming that you're GAAP profitable, I guess could you maybe walk us through what the run rate should be for both diluted share count and for interest expense?

Richard Rodick

Right now the only increase in the share count would be related to the preferred stock. I think it's approximately 11 million shares if I remember right and right now there is no dilution from the convertible debt because until the stock is in excess of $14.50, there is no dilution and it's just incrementally on top of that – I don't anticipate a significant dilution from the convertible at this time. And then the interest – our debt balances will be slightly lower, so I think interest expense will be pretty consistent year-over-year. What you might see is a slight increase in interest expense because as part of the 1View capitalization, we were capitalizing some interest. So you'll see interest expense increase in the P&L but the actual cash interest expense probably will not change much.

Jack Atkins - Stephens Inc.

Okay. And just a quick follow-up on that. The interest expense associated with the convertible preference shares; those are being paid in kind at least right now. Will that flow through share count or will that flow through the interest expense?

Richard Rodick

Share count.

Jack Atkins - Stephens Inc.

Okay. Thank you.

Richard Rodick

Welcome.

Jeff Misakian

Just a reminder if everyone can hold their questions to one that way we can get through everybody. Thanks a lot.

Operator

Your next question will come from the line of Todd Fowler of KeyBanc Capital Markets. Please go ahead.

Todd Fowler - KeyBanc Capital Markets Inc.

Great. Good morning. Thanks. Rick, I was just hoping this hopefully is a simple question if you can give us what the pro forma availability that you have post the refinancing is right now, so how much cash on hand do you have access to that's not subject to repatriation? And then what is the availability underneath the credit facility?

Richard Rodick

Okay, so cash on hand as of January 31?

Todd Fowler - KeyBanc Capital Markets Inc.

Well, what I'm trying to get a sense of is post the refinancing, so if I'm pro forma in the balance sheet, do you know how much cash can you guys – how much capital availability do you have today going into fiscal 2015?

Richard Rodick

Sure. The transaction after repaying the debt that was outstanding that we are refinancing gave us about an incremental $100 million in cash and then the ABL that we just closed on, depending on the borrowing base have up to 150 million in additional liquidity and that can vary month to month depending on the amount of our borrowing base and then there is certain deductions from that with different reasons and such, but it's available up to 150 million.

Todd Fowler - KeyBanc Capital Markets Inc.

And would the 150 million be above cash you get to set aside for letters of credit or does that include the letters of credit?

Richard Rodick

That's above and beyond the letters of credit, so it excludes – there is not letters of credit associated with that balance.

Todd Fowler - KeyBanc Capital Markets Inc.

Okay, so give or take you got 100 million of cash and then you got 150 million of availability, so 250 million depending on what the borrowing base would be?

Richard Rodick

That's correct.

Todd Fowler - KeyBanc Capital Markets Inc.

Okay. Just as a follow-up to Jack's question, what would the cash interest expense what's that expected to be in fiscal '15? Thanks a lot.

Richard Rodick

As I said it will be slightly higher than last year because we were capitalizing a certain amount and I think that's really – since we don't give guidance what you'll see is there is a certain amount that's capitalized in the 1View capitalization and so the cash interest expense will really remain unchanged. But since we don't give guidance, you should just assume interest expense on the P&L will be up slightly.

Todd Fowler - KeyBanc Capital Markets Inc.

Okay. Thanks for the time.

Richard Rodick

Sure.

Operator

Your next question is a follow-up from Bill Greene of Morgan Stanley. Please go ahead.

Alexander Vecchio - Morgan Stanley

Hi, there. It's Alex again. I just wanted to follow-up. You guys had historically provided a goal of improving average shipments per employee by around 15% to 20% and I know you guys don't provide volumes, so it's a little bit difficult for us to track that, but can you sort of provide an update on the progress on this metric? How much improvement and productivity have you garnered so far through the cost realignment program?

Eric Kirchner

I would say that that goal is reasonably consistent with what we're targeting for our run rate by the end of this year. With regards to what we've already achieved, we have made some small gains there but really the benefit that we'll begin to see is just occurring because we've gotten these large markets on the systems. So our focus specifically going into the second and third quarters of this year will be to start to sort of really gain in those efficiencies, but I would say that you can attribute a large amount of efficiency improvement to the transformation initiatives. So we're working very diligently as we continue to refine our processes and take advantage of the new operational processes and systems and that will occur throughout the remainder of this year.

Alexander Vecchio - Morgan Stanley

Okay. That's helpful. And then just to review the question on the balance sheet pro forma, did you say you had a 100 million in cash right now and then how much in availability? Can you just review those liquidity metrics one more time?

Richard Rodick

Sure. Alex, I wasn't saying that there was a 100 million right now, what I was saying is it is a result of the capital market transaction that added $100 million in cash and then the ABL has up to $150 million available based on our borrowing base and that varies every month. So the maximum we'll ever had is 150 million and look to be close to that when we issue the ABL this last week.

Alexander Vecchio - Morgan Stanley

Okay. So what was the 100 million incremental to – what was the original base amount cash that 100 million was incremental on?

Richard Rodick

We had about 204 million in cash of January 31.

Alexander Vecchio - Morgan Stanley

Okay, that's helpful. All right, that's all I had. Thanks very much.

Operator

Your next question is from Ben Hartford of Baird. Please go ahead.

Benjamin Hartford - Robert W. Baird & Co.

Yes, just to follow-up on what we were talking about earlier, Rick, in terms of the fourth quarter kind of one-time expense issues and what I'm trying to get a sense for was what the operating expense run rate should be in the first quarter given the events of the fourth quarter? If I look back historically first quarter operating expenses are more or less flat relative to the fourth quarter and then you guys had said that you had realized 10 million of the 50 million annualized savings in the fourth quarter. So if I take that difference 40 million in annualized expenses that should hit that first quarter on a quarterly basis 10 million in operating expenses should come out in the first quarter. So if I look at the first quarter, operating expense level and I take the fourth quarter total and just back out 10 million and be in the ballpark in terms of how we should think about level setting the operating expense here in the first quarter?

Eric Kirchner

I think generally – so Ben, the only offset and we saw this when we went live in the U.S. and subsequently Germany in that we have added some resources on a temporary basis to ensure that the learning curve doesn't generate some of the challenges we saw in the U.S. So, there is a slight uptick in OpEx as we go live. It then comes up very quickly after we go live. But I think you're directionally correct in the way you're viewing the cost take out that occurred towards the end of the year, so that 10 million a quarter is about the right number.

Benjamin Hartford - Robert W. Baird & Co.

Okay. Thank you.

Eric Kirchner

Thanks, Ben.

Operator

Your next question is a follow-up from Scott Group of Wolfe Research. Please go ahead.

Scott Group - Wolfe Research

Hi. Thanks for the follow-up. So I actually have a follow-up to just kind of the last question. Is there – maybe you guys can help us, what are you thinking for the full year fiscal '14, what is the total amount of savings that you've realized and then what was the total amount of redundant costs that you had to face? I just want to think about it, we were to take out the redundant costs and then assume some amount of incremental savings to get to the 75 to 95, kind of what the earnings power can be here but I'm still not entirely clear on what the total would benefit in this year and how much of the 75 to 95 you think you have realized this past year?

Eric Kirchner

We call out in terms of the redundant costs about $18 million; $12 million to $13 million of that is within finance due to the transition between field finance activities and the shared service centers, about $3 million had to do with freight forwarding system deployment and then about a $1.5 million had to do with the additional labor that I referenced earlier in terms of insuring that we have adequate personnel to get the work done as we transition to the new system. We would anticipate a good portion of that coming off and by the end of the year of FY '15, we would anticipate all of that coming off, a portion of it being envisioned in the 75 to 95 and then a portion of it is additive to that. So we're still shaking out the composition of the shared service centers so that the biggest chunk of that that the 12 to 13 in finance we're still working through, but I would expect around half of the 18 to be as the 75 to 95. With regard to what we realized in FY '14 as we mentioned, we took out 50 million in the third and fourth quarters, saw the effect of about 10 million in the fourth quarter and that should – as we were talking a moment ago that should pull through in FY '15.

Scott Group - Wolfe Research

So if I'm hearing there's only 10 million of the 75 to 95 do you think you've realized in full year '14?

Eric Kirchner

Yes.

Scott Group - Wolfe Research

Okay, great. Thank you, guys. That's helpful.

Eric Kirchner

Thanks Scott.

Operator

Your next question comes from Jack Atkins of Stephens. Please go ahead.

Jack Atkins - Stephens Inc.

Great. Thanks for the follow-up. So, Rick, I guess going back to the accounts receivable bubble that you mentioned in your prepared remarks. You called that a $40 million AR bubble. That seems I guess a little bit low relative to what I was thinking going into the, I guess, 10-Q file and just because over the last couple of years you guys have realized you're north of a $100 million in operating cash flow in the fourth quarter but you saw an operating loss or a decrease in operating cash flow in the fourth quarter this year. So can you maybe help us understand why it's not or I guess help us walk though why it's only 40 million and not closer to 60 million to 80 million?

Richard Rodick

Sure. What I said was the majority of that amount would be the U.S., I think when you look at our fourth quarter balance sheet you see our receivables came down quite a bit. I think it was about 67 million, but one of the offsets was our payables declined also that offset some of that. So I think when you look at those together it makes more sense. You'll see the 40 million of the U.S. if we had that incremental 40 million down, our receivables actually would have declined $100 million. And I think our payables when you look at the offset, that's some of the difference in that working capital changes and our payables actually went down in Q4 this year versus last year they went up a bit.

Jack Atkins - Stephens Inc.

That's helpful. And then just to follow-up, just to make sure – I think everybody is on the same page about the liquidity. Of the $204 million in cash that you ended the fourth quarter with, how much of that can you drawdown and is not restricted by foreign repatriation issues? And then secondly as we stand here today, what is your borrowing capacity under the new ABL?

Richard Rodick

Okay. So the borrowing capacity under the new ABL is just under 150 based on our borrowing base.

Jack Atkins - Stephens Inc.

Okay.

Richard Rodick

Because our borrowing base was a little lower than 150 at this time. And then I'd say about 70% of that 204 million is in countries where it's difficult to repatriate or costly to repatriate.

Jack Atkins - Stephens Inc.

Okay.

Richard Rodick

But we can get the cash up if it's costly.

Jack Atkins - Stephens Inc.

Okay. That's helpful. Thank you.

Operator

Mr. Misakian, there are no further questions at this time. Please continue.

Jeff Misakian

All right. Thanks, Luke. If there are no further questions, we want to thank you all for participating in our call this morning. On behalf of all of us here at UTi, thanks for your continued interest and your ongoing support. Have a great day.

Operator

Thank you. Ladies and gentlemen, this does conclude the conference call for today. Again, we thank you for your participation. You may now disconnect your lines.

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