UTi Worldwide's (UTIW) CEO Eric Kirchner on Q1 2015 Results - Earnings Call Transcript

Jun. 5.14 | About: UTi Worldwide (UTIW)

UTi Worldwide Inc. (NASDAQ:UTIW)

Q1 2015 Earnings Conference Call

June 05, 2014 11:00 AM ET

Executives

Jeff Misakian – Vice President-Investor Relations

Eric Kirchner – Chief Executive Officer

Richard Rodick – Executive Vice President-Finance and Chief Financial Officer

Edward Feitzinger – Executive Vice President-Global Operations

Analysts

Jack Atkins – Stephens, Inc.

Bill J. Greene – Morgan Stanley & Co. LLC

Benjamin Hartford – Robert W. Baird & Co., Inc.

Eduardo A. Brea – Sterling Capital Management LLC

Dave G. Ross – Stifel, Nicolaus & Co., Inc.

Kelly A. Dougherty – Macquarie Capital, Inc.

Chris M. Carey – FBR Capital Markets & Co.

Arthur W. Hatfield – Raymond James & Associates, Inc.

Operator

Good day. Welcome to the UTi 2015 First Quarter Conference Call. As a reminder, today’s call is being recorded.

At this time, I’d like to turn the conference over to Mr. Jeff Misakian. Please go ahead, sir.

Jeff Misakian

Okay. Thank you, Alan, and good morning, everyone. Welcome to UTi Worldwide’s fiscal 2015 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.

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.

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. Results for the first quarter of fiscal 2015 were in line with our expectations. Revenues and net revenues were down slightly compared to last year’s first quarter. However, on a constant currency basis we saw improvement in net revenue in both business segments.

Freight forwarding volumes increased slightly led by strong growth in our Asia Pacific region. As expected, pricing remained volatile in the first quarter. Contract logistics and distribution recorded solid top line growth on a constant-currency basis, due to increased activity from existing clients and new business wins.

We made further progress in our transformation activities. Cost savings taken at the end of the year were in place in the first quarter, but they were more than offset by the restoration of bonus accruals, expensing of previously capitalized costs and IT, temporary duplicative costs and expenses associated in contract logistics and distribution.

On a pro forma basis to adjust for these and other similar costs, our adjusted EBITDA in the fiscal 2015 first quarter was higher than in the same period last year. We expect adjusted EBITDA to increase significantly this year as we complete our cost reduction measures. Rick will cover this in more detail in a moment.

Please turn to Slide 4. Volumes and freight forwarding reflected the seasonal levels we generally see in the first quarter. Air freight tonnage and ocean freight TEUs were slightly higher than in the first quarter of last year. Pressure on sell rates continued consistent with industry trends while buy rates improved toward the latter part of the quarter. Freight forwarding was impacted the most by transformation costs.

Contract logistics and distribution saw broad based gains in revenue on a constant currency basis. Adjusted EBITDA improved solidly in the first quarter on good cost control that delivered stronger results in Africa, EMENA and Asia Pacific.

Please turn to Slide 5. We launched our 1View freight forwarding operating system in five new countries since our last earnings call at the end of March. This brings the total to 37 in terms of the number of countries on the new system, which equates to approximately 77% of transactions. This represents significant improvement in the last 12 months. Last year at this time, we had launched 1View in 15 countries, which produced just 10% of transactions.

As we told you last quarter, we launched 1View in China and South Africa on March 1. These are two of our largest markets, representing a substantial portion of our import and export shipments every month. Our 1View system is performing as expected in these markets.

We expect to launch in eight to 10 additional countries before our next earnings call in early September. At that point, we anticipate having approximately 85% of transactions on the new systems, which will prove very near to our goal of completing the deployment by the end of the third quarter of this fiscal year. We continue to expect to complete our transformation related cost reduction measures by the end of fiscal 2015.

Please turn to Slide 6. The benefits from our transformation are clear. For a long time now, we’ve talked about how our transformation will allow us to generate meaningful cost savings and that is still true. But the benefits are broader than that and they are coming into greater focus as we near completion of the system deployment.

First, the new system will allow us to take advantage of growth opportunities, while we deliver these cost savings. For example, we’ve talked in the past about adding small and medium sized customers in a more cost effective manner, once we are on a single global platform. When fully deployed the one world environment will allow us to scale this and other new business opportunities at lower incremental cost.

Further benefits declines are expected to be substantial. These benefits include providing integrated information, greater shipment visibility, enhanced data analytics and inventory optimization functions among other features. We plan to share more about these customer facing tools later this year.

Once fully implemented the 1View system is expected to be one of three global systems in the entire industry providing us with real competitive advantage. As we’ve always said our transformation is about more than just a new IT sytem, it represents a fundamental change in how we operate and in the consistency of solutions we provide clients.

In one very tangible proof point, the well respected Gartner Magic Quadrant study named UTi an industry leader among 3PL providers. We were the only headquartered in the U.S. to receive this designation. The study evaluates the largest third party logistics companies ability to be a global preferred provider.

Potential clients use this research to evaluate 3PLs and their capabilities by identifying and selecting providers to meet their global logistics needs. It is the authoritative procurement source for companies and it’s an instrumental tool in supply chain decision making process and evaluating global 3PLs Gartner conducts exhaustive reviews of companies systems, financial strength and then also interviews its clients.

This recognition is extremely gratifying because it validates the fact that our transformation is making a positive impact on our client’s perception of UTi. They acknowledge the value and the benefits we offer now with one consistent reliable global operating system.

Now please turn to Slide 7. Based on progress to-date and increased confidence in our ability to execute the remainder of our system deployment, we now expect to achieve $95 million in annualized cost savings, the high end of our previous range by the end of fiscal 2015.

As we mentioned last quarter $50 million of these savings were in place at the end of fiscal 2014. This was achieved primarily through organizational realignment and staff reductions have just under 900 full time equivalents.

We plan similar reductions this year, which expect to lead to additional run rate cost savings of $45 million by the end of 2015. A portion of these savings are expected to be realized in the latter part of this year. Rick will talk about this in greater detail in a moment. The full $95 million in cost savings is expected to be realized in fiscal 2016 as previously explained.

Please turn to Slide 8. We’ve updated the chart of estimated cost savings related to the transformation and the facing of these benefits over the course of this fiscal year. Of the $45 million in additional run rate savings this year, we anticipate realizing between $15 million and $20 million with the remainder to be realized in fiscal 2016.

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

Richard Rodick

Thanks Eric. Please turn to Slide #9. On a GAAP basis we reported a net loss attributable to common shareholders after dividends on preferred stock of $0.43 per diluted share in the fiscal 2015 first quarter, excluding adjustments to GAAP results which I’ll discuss in a moment, we reported an adjusted net loss of $8 million.

Adjusted net loss attributable to common shareholders after preferred stock dividends was $0.09 per diluted share on a non-GAAP basis. This compares to an adjusted net loss of $0.02 per diluted share recorded in the same period last year.

Currency changes continue to have a negative impact on our first quarter results compared to the same quarter last year. 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 approximately 3 to 4 percentage points. Currency translation also had a negative affect on operating income.

Revenue decreased 3.3% while net revenue decreased 0.8% in the first quarter compared to the same period last year. The decrease in revenue reflects lower pricing and the impact of currency partially offset by activity gains in both segments. Net revenue benefited from improved buy rates and freight forwarding in the quarter.

On a constant currency basis revenue decreased 0.3% while net revenues rose 3.8% compared to the same period last year. Adjustments to GAAP results in the fiscal 2015 first quarter include severance and other costs. The debt extinguishment payment of $22 million, that was part of our refinancing transaction earlier this year and tax expense in excess of our normalized rate. We recorded tax provision in the first quarter of fiscal 2015 of $9 million on a pre-tax loss of $34 million. This was primarily the result of adjustments to valuation allowances on deferred tax assets of $13 million.

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 loss of debt extinguishment and the impact of tax valuation allowances.

Adjusted operating expenses in the first quarter of fiscal 2015 were higher than the same period last year and on a constant currency basis adjusted operating expenses increased 5.7%. The increase was driven by the bonus accrual, previously capitalized costs, 1View amortization, temporary duplicated costs and expenses incurred to support growth in contract logistics and distribution that Eric mentioned earlier.

The increase was partially offset by cost reductions related to the $50 million in annual transformation savings implemented at the end of fiscal 2014. It may appear that the increased costs have neutralized transformation cost savings; however that is not the case. The increased cost will occur ratable throughout the year but our planned revenue growth and productivity improvement that are independent of the transformation are expected to offset the increased costs in the second half of the year.

As Eric mentioned we plan to take action to move an additional $45 million in annualized costs this year of which approximately $15 million to $20 million are expected to be realized in the second half of the year. As a result we expect total transformation related savings of approximately $65 million to $70 million in fiscal 2015.

In addition, despite the bonus accrual and previously capitalized costs seen in the first quarter. We expect most of the transformation related savings in fiscal 2015 to benefit our EBITDA results for the full fiscal year. We expect these cost savings become more visible during the second half of our fiscal year.

In fiscal 2016, we expect to realize the full $95 million in cost savings relating to the transformation plus about an additional $10 million picked up from the removal of duplicated costs. Please turn to Slide #10.

The bonus accrual and previously capitalized cost that I just mentioned were not in last year’s expenses or EBITDA run rate. The bonus accrual is required by accounting rules and reflects the fact that we plan to achieve our business plan this year. It is a variable component of staff costs that does not get paid unless we achieve our performance targets.

Costs that were previously capitalized also were not in last year’s figures. Our business plan costs for these costs to be funded by revenue growth and productivity improvements later this year.

The bonus accrual totaled approximately $4 million while previously capitalized and other transformation costs were almost $5 million. Because of these costs we are not in last year’s run rate, we have removed them to arrive at a pro forma adjusted EBITDA that is comparable to this year. We've also adjusted fiscal 2015’s first quarter results for currency and incremental temporary labor and overtime costs associated with the transformation.

This is how we look at adjusted EBITDA internally to measure our progress. On this pro forma basis, adjusted EBITDA is much higher in the fiscal 2015 first quarter than the same period last year.

Now please turn to Slide #11. Revenue in the freight forwarding segment declined 5% primarily due to lower pricing and the impact of currency. This was partially offset by an increase in volumes.

Air freight tonnage increased approximately 2% in the fiscal 2015 first quarter compared to the same period last year, primarily due to volume growth in the Asia-Pacific region. Ocean freight TEUs were up 1% in the first quarter also led by gains in Asia-Pacific. Automotive saw the best growth in the first quarter.

As Eric mentioned volumes can be seasonally soft in our fiscal first quarter as they are often impacted by the timing of Chinese New Year and the Easter holidays. In air freight we saw a solid growth in the months of February and March but tonnage fell in the month of April. Conversely ocean TEUs were weak in February but grew in March and April.

Net revenue in freight forwarding was relatively consistent with the first quarter of last year, and improvement in buy rates was offset by lower sell rates in the impact of currency.

Please turn to Slide 12. Adjusted for currency freight forwarding net revenue increased 3% compared to the same period last year. More importantly, the trend for net revenue in the segment has improved recently with growth in the last three quarters compared to declines in the previous six quarters.

Please turn to Slide #13. The bonus accrual and transformation related cost discussed earlier obviously have a greater impact on freight forwarding results than on contract logistics and distribution.

Here we present a pro forma comparison for these items and adjusted EBITDA for freight forwarding as well. As you can see on this basis the segments adjusted EBITDA is higher in fiscal 2015 first quarter compared to the same period last year.

Please turn to Slide 14, contract logistics and distribution revenues in the fiscal 2015 first quarter were consistent with the same quarter last year. Net revenues in contract logistics and distribution decreased to 1.6% primarily due to the impact of negative currency movements. On a constant currency basis, contract logistics revenues and net revenues increased to 4.3% and 4.6% respectively due to new sales and increases in existing accounts. We do the good job of managing cost again in the contract logistics and distribution.

Adjusted operating expenses in this segment were down 2.8% compared to last year’s first quarter partially due to currency. On a constant currency basis, operating expenses rose 3% primarily as a result of increased cost to support the revenue growth. Adjusted operating profit in contract logistics and distribution gained 19% in the first quarter.

If you turn to Slide 15, you will see the constant currency net revenue growth in contract logistics and distribution has been on an accelerating trend since the third quarter of last year.

Please turn to Slide #16. Consistent with prior years and as expected the Company have significant negative free cash flow in the first quarter. Free cash flow decreased $130 million in the first three months of the year.

The decline was directly related to an increase of $130 million of working capital. A $139 million rise in accounts receivable was the primary driver of the working capital change.

Turn to Slide 17, as noted in the previous slide the $139 million growth and receivables is primarily related to normal seasonal factors, which contributed approximately 60% of the increase. We also experienced a raise and pass-through billings in contract logistics and distribution which accounted for about 15% of the higher receivable balance.

The final component of the increase approximately 25% is attributable to the temporarily higher balances resulting from the 1View implementations. The increase occurred primarily in United States and receivables as expected grows in almost every country where 1View has been implemented.

Trade receivables are comprised of two components; billed account receivables and work in process, which is more commonly preferred to in industry as WIP. WIP balance require additional information to conclude the billing process and subsequently become bills as accounts receivables. The growth in billed receivables related to the 1View country occurred primarily in the United States. We've continued to improve billing quality in the U.S. that has resulted in billed receivables growing as we have rectified the majority of our issues.

We have put into place working capital plan that is already beginning – that has already begun paying dividends in April and May. We began working down the temporarily high U.S. receivables balance late in the first quarter and made even more progress in the month of May. When we collected more cash than any month since we went live on 1View. We expect to eliminate the majority of the temporarily high U.S. receivables balance by the end of the second quarter.

To provide greater context, WIP generally rises in every country as it goes live on 1View. These balances begin to decline as the learning curve improves. In our experience, this improvement takes about three to six months. In the U.S. this improvement took longer, but WIP has now stabilized and began to decline. While WIP has grown less in countries that went live after the United States, the overall trend of increases followed by decreases continues.

Countries implemented after the United States have benefited from lessons learned there. We've also focused on additional training and improved reporting. We believe we will see a significant decrease in company-wide WIP by fiscal year-end and we anticipate improvement each quarter as transformation winds down. As a result we anticipate that we will be free cash flow positive for the full fiscal year. This implies an increase of more than $130 million during the rest of fiscal 2015 through a combination of seasonal factors as well as improvements of the U.S. billed receivables and WIP balances.

Once the system deployment is completed, we would expect a normalized ratio of working capital to revenue more consistent with what we experienced at the end of fiscal year 2013, we intend to provide additional clarity in future quarters.

Please turn to Slide 18. I want to close my remarks with an update on liquidity. We ended the first quarter with a balance in cash and cash equivalents of $207 million. In addition to the $207 million in cash balances UTi had $50 million in cash collateral at April 30 to facilitate letters of credit needs around the world. We are pursuing various banking solutions that we expect will free up this $50 million in additional funds.

We also have $150 million ABL revolver in place. As of April 30, we had drawn $27 million against the revolver, which reflects the occasional need we have when business activity increases and cash is not readily available in all areas of the world. The outstanding balance on the ABL facility has been paid down since April 30 and there are no borrowings under the ABL as of today.

In summary, we are confident, we have sufficient liquidity to fund all of our business needs for the foreseeable future. With that I will turn the call back to Eric for closing remarks. Eric.

Eric Kirchner

Thank you, Rick. Please turn to Slide 19. As we noted earlier, our first quarter results came in as expected and we expect to see meaningful improvement throughout the year. As our transformation nears completion we are increasingly turning our attention to growth.

Last week, we announced the appointment of Jeff Hammond to the role of Senior Vice President of Global Sales, Jeff joined UTi in 2010 as Head of our Customs Brokerage product line. He's been transitioning into the sales leadership role for the past several months working with Gene Ochi our Executive Vice President and Chief Marketing Officer. Gene announced his plan to retire at the end of this fiscal year after which he will continue to focus on corporate strategy and client experience as a consultant to the Company.

As the global sales leader, Jeff directs the regional sales vice presidents, global vertical market sales leaders, sales operations and the supply chain design and innovation team. He's also a member of the Company’s Executive Board. Jeff has made an immediate impact with our global sales team and builds an excellent foundation for growth this year. We have made continued progress in our system deployment and continue to expect completion by the end of our fiscal 2015 third quarter.

Our expense reduction measures are in place and on track to deliver $95 million in run rate cost savings by the end of this fiscal year. Our working capital improvement plan is under way as Rick noted, we made substantial progress since the end of the first quarter and expect free cash flow to be positive for the full fiscal year.

We are looking forward to completing our transformation and system rollouts so that we can once again turn our full attention to growing ahead of the market, a hallmark of UTi that expect to resume in the months ahead. As I mentioned earlier our new system should aid us greatly in these efforts. We still have much work ahead of us and I remain excited about our future.

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 do appreciate your assistance in this process. Alan, may we have the first question please?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll first go to Jack Atkins with Stephens.

Jack Atkins – Stephens, Inc.

Thanks for the time. So, I guess my question if I can just focus on current business trends you referenced a little bit softer April in terms of air freight, a little stronger April in terms of ocean freight. Could you maybe comment on what was driving both of those and do you feel like it's more of a market dynamic or do you feel like it's company specific and then also can you comment on the month of May and what you're seeing thus far through the quarter?

Edward Feitzinger

Jack, this is Ed. April was interesting from compared to last year particularly because of the Easter holidays. So, last year Easter fell between March 31, so it was equally split between the end of March and early April. This year it was solidly in April with April 20, what we saw as realistically the western world seem to take two weeks off from a manufacturing perspective.

So, that’s from an air perspective that’s one of the reasons that we see a decline in April and comparison to March and February especially compared to last year. On the ocean side the February numbers for us I think are more indicative of some port congestion issues that we saw in the East Coast as well as in certain ports in Southern Africa. And then we're starting to see the ramp in ocean as people are concerned about issues relative to potential port strike, so that would I think be the view that we have, so we're continuing to see growth in ocean over those numbers that we showed in May, and air is more typical of what in May is in the low single digits so hopefully that's helpful, Jack.

Jack Atkins – Stephens, Inc.

Okay, and thank you very much.

Operator

Next we’ll go to Bill Greene with Morgan Stanley.

Bill J. Greene – Morgan Stanley & Co. LLC

Hi, thanks for taking my question. Rick or Eric maybe I can just ask for a little bit of clarification about how to interpret some of these in adjustments that you’ve got. So, if I look at the cumulative cost savings that you report here for the first quarter given that it’s the same as the fourth quarter. Is it safe to assume then that run rate that you’ve achieved by the end of the fiscal 2014, you got all of that so in other words like $12.5 million of the savings number for the first quarter. Is that the right way to think about that?

Eric Kirchner

Yes. That’s embedded in our numbers. So, we got that cost savings by the end of FY 2014 and it should be embedded in the first quarter.

Bill J. Greene – Morgan Stanley & Co. LLC

And so the $31 million in EBITDA on adjust basis, that’s a fair base line just sort to be thinking about that embeds the $12.5 million. So that’s why you get this improvement over the $22 million. Is that the right way to think about that?

Eric Kirchner

Yes, so…

Bill J. Greene – Morgan Stanley & Co. LLC

Okay.

Eric Kirchner

Yes. That’s the right way to interpret that.

Bill J. Greene – Morgan Stanley & Co. LLC

Okay, all right. So, when we look forward from here, is it – I know you don’t give guidance, but I’m trying to figure out the high basis of which to shortest model from here on a go forward basis. So that as I think about the $31million and I think about the cost savings that you outlined in the different slide then, is it should we see normal seasonality plus savings. Is that kind of what we should look at? I mean who knows what will happen in the market, but is that a fair way to kind of think about what these trends should look like before you go down this path of growth? Am I thinking about that right?

Eric Kirchner

Yes.

Bill J. Greene – Morgan Stanley & Co. LLC

Okay. Fair enough. All right then. Thank you for the time.

Eric Kirchner

Thank you, Bill.

Richard Rodick

Thanks.

Operator

And now we’ll take questions from Ben Hartford with Baird. Mr. Hartford, your line maybe muted. Please go ahead. Your line is open.

Benjamin Hartford – Robert W. Baird & Co., Inc.

Sorry about that guys. Rick, I thought the working capital update was helpful. I did want to spend a little bit of time there understanding some of the drivers of the claw-back in terms of working capital this quarter. It seems as though just recouping some of the cash that you didn’t collect in the fourth quarter and the first quarter is going to be a big driver of the incremental cash flow in addition to normal seasonality through the remaining nine months.

I mean is there any way to splice out how much of it is just normal free cash flow generation that comes with improvement in business trends and underlying profitability versus how much of is it just collecting on the cash from the receivables owed to you in the U.S. that you didn’t collect upon in the fourth quarter and the first quarter?

Richard Rodick

Okay. So the amount that we believe we would collect from the U.S. is that $40 million we spoke about last quarter. We took that down a little bit in Q1 and probably another $5 million in Q2. So we’re working down the U.S. impact. We think we’ll see complete claw-back by the end of Q2, maybe up a little bit, but a substantial reduction.

Benjamin Hartford – Robert W. Baird & Co., Inc.

Okay. And so by the time that we get into the back half of the year, what is owed to you that’s slightly smaller than $40 million total you think you’ll have that more or less in hand?

Richard Rodick

Yes. And then the other opportunity is to work down the WIP associated with the U.S. and the other countries. And then there’s some benefit we get from last year, higher balances will collect that’s primarily in the U.S. So we collect those this year. The seasonality by year-end would go away. The increased billings to the pass through costs I talked about in contract logistics that was primarily some new business. That will go down slowly during the year and at year-end will be a little better. So that’s where I’m being conservative, but I think we turnaround at least $130 million or more and then pick up some additional items.

Eric Kirchner

So then our focus primarily has been on the collection of the outstanding receivables that related to the delayed billings in the U.S. towards the end of last year and we’ve got a good plan in place for that. We’re making progress. We’ve expanded that plan globally. So there is a little bit of help coming from that. And then the bigger area of opportunity, as Rick mentioned, is looking through this WIP and unbilled category so that we then get these shipments billed that were delayed as each country goes wide as he mentioned in his remarks.

There is some learning curve and some slight delay in billings immediately after the go live. Nothing new what experienced in the U.S. and we’ve seen very positive results and a quicker turnaround in South Africa and China in that regard. So this happened as we go live. We worked through it and within the three to six-month period we should be normalized in every county where we go live. So we’re going to see things get back. I think we talked about to the levels that we experienced at the end of 2012 and we expect to get this thing in hand by the end of the year and that’s going to lead us to the improvements that will get us cash flow positive for the year.

Benjamin Hartford – Robert W. Baird & Co., Inc.

And I guess just more conceptually net working capital was a percent of sales has risen across the industry over the past cycle, but certainly for you guys, you got some of it that you’re working down from the collections that you’ve talked about, but do you still believe that with the system rolled out that there is an opportunity to reduce net working capital intensity as a percent of sales from current levels over a multi-year period given what the system provides you or should we think about this business as being one that that is more capital intensive than it’s been in the past?

And maybe you could hold serve or you can hold par here at these levels of net working capital as a percent of sales, but just not see those rise any further. Can you understand the point of the question?

Eric Kirchner

Yes, I do and I think it’s consistent or similar to how we look at the transportation, continuous transformation and transportation sometimes, but the procurement process for us compared to our peers, right. So we didn’t operate in gateways before. We do now and that leaves us to some opportunities to help offset pressure on margin, right. So if you look at the working capital issue, there is some similarities there.

When you consider that we weren’t the best biller in our previous state. So what we hope to see is to offset some effect of the demand for longer payment terms by customers by improving or going to levels that were better than before we got into the 1View deployment. So if our billing gets better than it was in our legacy environment that should serve to somewhat mitigate this demand by the general customer base for longer payment terms. It’s hard to calibrate that.

We’ve seen receivables grow in South Africa as an example relating to payment terms because South Africa has been on 1View for just a very recent period of time, but we’re calibrating what’s been driven by changes in terms with customers versus what we can achieve to lower our billing cycle at the front end and our hope is to mitigate some of the customer driven increases that we’ve experienced.

Benjamin Hartford – Robert W. Baird & Co., Inc.

That’s helpful. Thank you.

Eric Kirchner

Sure.

Richard Rodick

Thanks, Ben.

Operator

Now we’ll go to Ed Brea with Sterling Capital Management.

Eduardo A. Brea – Sterling Capital Management LLC

Good morning. We have been long time shareholders in the company and we talked different times to all of you. And Eric, I have to go back and kind of reflect on the first five years, 10-year at the company. So as I went back and looked at the numbers, your sales on a net base, net sales were down about $25 million since 2009. Your staff costs were up about 5% or $42 million and your operating expenses were up about $40 million or 8%. That’s just right out of the 10-K. So that in and itself is $100 million swing to the negative. In the meantime, corporate overhead has gone up about $50 million in those five years and that’s all out of the K. So, the first question I had is where is this $50 million savings if on a reported basis we’re $100 million to negative?

Eric Kirchner

Well, I think the driving factor of our result in addition to expenses incurred to grow this system and execute the transformation has been related to a big decline in net revenue. So when we had our Investor Day in 2011 and modeled the benefit to the transformation that was on a base of $1.7 million in net revenue and was down about $200 million from that point. So the challenge that we’ve experienced is that as we progress through the system implementation and this investment were between two business models. We’ve not gotten to the point yet where we’re operating in the new environment across the entire company, which is when the benefits are expected to come through.

And this macro environment, which we’re not using as an excuse by any means, but it has had an effect or an impact on how we’ve been able to take costs out because being between these two models it’s a not a simple exercise. The growth in corporate costs is a combination of things.

One is an investment in this transformation and another is the fact that some of the resources, especially if you go back to 2009 that were classified field OpEx have been migrated or moved into either an enterprise led or an enterprise functional bucket of cost. So, some of the change in cost is the movement of existing resources into a different structure and a reclassification of that cost. So I’m not sure that it satisfies your question.

Eduardo A. Brea – Sterling Capital Management LLC

Yes, I guess I hear that and I know we’re trying to tease out a lot of numbers, but at least since 2009 net revenues aren’t down a lot. I know they’re down since 2011, but in 2009 they’re down $25 million. So little over 1% and EBITDA at the time was in and around $200 million, and if you are saying that there has been some overhead shifting toward overhead, you sure don’t see it in the margins out of the two divisions.

So I guess maybe you can just help us with what is the financial model that you are shooting for in terms of either EBITDA or EBITDA margins. I mean is this $200 million business in EBITDA again and it seems like we spend $100 million in OpEx and then also another over a $100 million in software and we are trying to get back to where we were five, six years ago so or maybe you can just talk about what the model is supposed to look like when you get through?

Eric Kirchner

Sure, I think that’s a fair question and I would say that it is $200 million EBITDA business. We would expect to see levels in that range for FY 2016. So we expect to be back there again it’s been a long road to get back to the starting point I agree with you. But we are still targeting a 20% margin in freight forwarding, 10% in contract logistics and distribution, and then in the long term margin goal between 12% and 13% for the Company.

Some of that is depended on getting growth back into the business, so we were going to have the company setup to scale extremely well as we add the next dollar of new net revenue in freight forwarding you can imagine or imply that once the system is fully deployed that the next incremental dollar of net revenue could drop 50% to the bottom line, because we are not going to have to add proportional, operational expense to grow the business.

We’ve got a strategy in terms of customer segmentation. That is targeting the small to medium size business, which traditionally in this market segment produces higher net revenue per unit or better margins on those smaller customers so that’s what we are working towards, so I don’t know, if that answers the question but…

Eduardo A. Brea – Sterling Capital Management LLC

No, I mean it helps. The last question with regards to the sales leadership, with Jeff Hammond one of the goals here is to get growth in net revenue and the leveraging of the expenses and I appreciate the incremental margin comment you gave about $0.50 and $1 hitting the operating line.

But it’s been a brutal year for shareholders you talked about unlocking value for stake holders as the cover of your 2014 or 2013 annual report and between the dilutive capital raise and the operating results it’s been a very unfortunate experience for shareholders, long time shareholder, and I guess we are on the other side of that we’ll approach it, but I would really be laser focused on shareholder value creation going forward, so just a comment. Thank you.

Richard Rodick

Thanks Ed.

Eric Kirchner

Thank you.

Operator

Now we go to David Ross with Stifel.

Dave G. Ross – Stifel, Nicolaus & Co., Inc.

Good morning, just wanted to ask about the African business, it looks like it was down year-over-year, profitability was also lower, you keep coming on what’s going on there and should that get worse given the weak economic conditions over in South Africa right now?

Eric Kirchner

The South Africa has been one of our growth engines obviously and it’s the macro economic conditions in South Africa are not fantastic, I don’t think we view them as – I think we are just kind of muddling along right now from a growth perspective. If you look at things on a constant currency basis for example, the CL&D side which is a reasonable portion of South Africa, we grew about 1% or 2% year-over-year in the quarter.

Typically in the past we have seen that growth rate more towards the 5% to 10% range if you look to on average quarter. So the growth has definitely slow down in South Africa in particular and but it continues to be a good source of profit we continue to make margin improvement there on cost management and creative growth in new businesses, so we expect to see the growth in that same range we don’t expect to shrink as we want some new businesses there and take advantage of leveraging some skills that we have in the Americas into a more emerging market in Southern Africa.

So, overall we aren’t concerned about the macro economics, but our strategy is to build out another businesses and do expand our space there to offset against any declines that we might see in through the economy.

Dave G. Ross – Stifel, Nicolaus & Co., Inc.

What was the main reason behind the nearly your 50% drop in operating income in Africa?

Eric Kirchner

It’s just the currency.

Richard Rodick

Primarily currency, Dave this is Rick. The CL&D business was very strong in Q1 reporting not quite a strong but we are in constant currency they had a pretty good Q1. Just when you look at them overtime that the rand has declined against the U.S. dollar so much.

Dave G. Ross – Stifel, Nicolaus & Co., Inc.

Okay, and is that mainly due to the translation impact or is there some fundamental kind of impact transactional risk there?

Richard Rodick

No, it’s just the translation, so we are not doing hedging or anything like that, it’s more just converting to U.S. dollars for external reporting purposes.

Dave G. Ross – Stifel, Nicolaus & Co., Inc.

Okay, so if the rand recovers versus the dollar we should see a significant increase in income.

Richard Rodick

Yes.

Dave G. Ross – Stifel, Nicolaus & Co., Inc.

Okay, thank you.

Eric Kirchner

Thanks Dave.

Now go to Kelly Dougherty with Macquarie.

Kelly A. Dougherty – Macquarie Capital, Inc.

Hi, thanks for taking my question. Just a quick clarification on accounts receivable, then a question on cost, outside of the seasonality were you expecting receivables to continue to rise. I know that it would take few quarters or so for to be rectified, but were you expecting it to play out in the first quarter or in some of these new markets as you put the system on as it actually had?

Richard Rodick

Kelly, this is Rick. I would say, yes, we expected to be up. We are little disappointed in the U.S. we went further along, but we made really good progress in the last two months, and that’s what we feel confident about getting that balance down in Q2. And the other spike that was we really had in plan was the increase in the contract logistics and distribution pass-through billings, but that’s tied to new businesses such a bad thing and I think by year-end we will see that balance down significantly.

Kelly A. Dougherty – Macquarie Capital, Inc.

Is there like you are going to be talking about confidence in being free cash flow positive for the year, are there kind of changes and procedures that you have implemented to make sure that it doesn’t happen again. I guess the concern is it just seems to be a surprise on a quarterly basis and things should kept push out one quarter so are there things that you kind of implemented at this point or maybe now that most of the countries are on the new system it shouldn’t be as much of an issue. Just kind of comfort around why your confidence in being free cash flow positive for the full year?

Eric Kirchner

Sure, so a big component that seasonality turns around, but the next biggest component is improving our processes around the countries that have gone live on 1View and the biggest test case is the U.S. It was the most impacted, but it’s also making the best progress right now, so these additional countries have been added in SA and China, Germany and Australia. Those were not as impacted as much, but we are seeing improvement there too.

So, that’s why we feel confident about full year seasonality turns around, we will clawback some of what we didn’t get back last year, and then we improve on these increases that we’ve seen early Q1 or early fiscal 2015.

Richard Rodick

We developed a much more laser focused on the AR issue, so we have very specific objectives by region to attack the AR issue. We are working to revise and improve the processes in our shared services environment to make sure that these billings go out in our process timely from the beginning.

So it help to shorten the payment cycle and then a lot of focus on adoption of the system and ensuring that we are inputting the right information up front, so that we can reduce these WIP and unbilled amount, so there is a combination of very specific initiatives that are targeted at improving the billing and the collection which should then lead to improvement in working capital.

Kelly A. Dougherty – Macquarie Capital, Inc.

Okay, that’s helpful, thanks. And just a quick question on the cost, can you help us think about it was great that you are more confident the high end of that $95 million from a growth basis but you made mention of some higher cost that were included in the business plan. Can you help us think about what the crack net number is to kind of use to benchmark how things are improving?

Richard Rodick

Hi, Kelly, this is Rick. So those additional cost we had talked about that it’s been incurred the bonus accrual we did not have a bonus accrual last year. So that’s incremental cost, there is cost of living adjustments, there is some increased amortization, and those costs have all been incurred through in Q1, but we also built on our plan revenue growth and productivity improvements will offset all those non-cost transformational cost, cost savings. So, the $60 million to $75 million that Eric talked about that we benefit from this year that would mainly fall to the bottom line. And all these other costs will be offset as year goes on with the revenue growth and the productivity improvements.

Kelly A. Dougherty – Macquarie Capital, Inc.

Okay. So, that $60 million to $75 million is kind of a good net number on a run rate basis to which you said enter into fiscal 2016?

Eric Kirchner

Yes, fiscal 2016.

Kelly A. Dougherty – Macquarie Capital, Inc.

Fiscal 2016. So you’ll see all else being equal this cost to be better by net basis $60 million to $75 million next year, next fiscal year?

Eric Kirchner

Yes.

Kelly A. Dougherty – Macquarie Capital, Inc.

Okay. Thanks very much guys.

Eric Kirchner

Thanks, Kelly.

Operator

And now we’ll go [Wang Zhou] (ph) with Wolfe Research.

Unidentified Analyst

Hi, this is Wang. I’m in for Scott Group. Just a follow-up on the working capital question. I was wondering if you could provide us with cash flow and/or cash balances as of May 31. And also I guess walk us through a bridge to positive free cash flow. And finally on the working capital improvement plan, I was wondering, if you can provide some additional color there. Wondering if it’s a significant change from what you’ve been doing before or if you just continuing to work down the temporary high accounts receivable balance?

Richard Rodick

Hi, Wang, this is Rick. The cash balance at May and cash improvement in May, we wouldn’t know yet. We know we have strong cash flows, but we are just starting our closing process for the month of May, so that information is not available.

Unidentified Analyst

Okay.

Richard Rodick

The bridge that you talked about to get back to the positive free cash flow, we have talked about the seasonality was up about 60% of that $138 million increase, so that would all reverse, we believe by year end.

Unidentified Analyst

Okay.

Richard Rodick

I would say a portion of the 15% because that was from new business that will turnaround by this year end. And then that incremental 25% that we talked about there was driven up by slightly higher receivables in the 1View countries in with. Most of that will turnaround.

Unidentified Analyst

Okay.

Richard Rodick

And then we know that we are going to improve and we talked about the end of last year that the U.S. had $40 million, I am not will collect most of that in Q2. So when you look at that adds up to more than $130 million that right now the negative free cash flow and that’s why we are confident will exceed that number. Being conservative to say what that total number would be, but we believe we will get back to positive by the end of this fiscal year.

Unidentified Analyst

Okay.

Richard Rodick

And then the last question you mentioned improvement plan, which is really more formalized a lot of the processes and learn best practices. During the quarter, we also broaden a working capital expert has helped us design additional procedures, quantify, measure things little differently and it’s really improved our focus, and has led to what we saw was these better cash flow collections, our cash collections in the last couple of months. And we are expanding those around the world. So that’s really the improvement plan and as Eric said that too is get the billings out sooner and that will also lead to collecting these receivables quicker also.

Unidentified Analyst

Okay, thanks. That’s helpful.

Richard Rodick

Thank you.

Operator

All right. I’ll go to John Mims with FBR Capital Markets.

Chris M. Carey – FBR Capital Markets & Co.

Hey guys, this is Chris Carey on for John.

Eric Kirchner

Hi, Chris.

Chris M. Carey – FBR Capital Markets & Co.

I appreciate taking my question here at the end. Just a quick question on the timing of the rollout. I know in the last quarter I think 1View is on about 72% of the network following the China and South Africa rollouts. Looks like we made about 5% more progress here with the 77% total now and if I'm not mistaken, I think 85% by next earnings call with the final 15% to be done by the end of third quarter fiscal 2015. I think that should all be what you guys have said.

Just kind of given the progression over the last couple of quarters here, it seems as if maybe it’s a little more back-end loaded. It’s maybe a little over 20% in the last two quarters. Is there a reason for that or the rollouts maybe a bit less complex in those locations versus for example the U.S. China and South Africa rollout?

Eric Kirchner

Sure. If you back into the number of countries I think we’re going to be in 59. And if you then look at the gap we’ve got 22 countries left to go on, which represent 23% of the volume right now. So each individual country, there are a couple of material ones that have some complexity, Brazil for example, based on the custom systems and tax structure there and other things, but the majority of these countries are smaller. The implementations are less complex and we’re continuing to tune the system in the larger countries that have already gone live. So we’re confident in this deployment plan and we’re working both enhancements and improvements to the system as it’s already installed and then the remainder of the deployments.

Chris M. Carey – FBR Capital Markets & Co.

Okay. So kind of just a function at getting better at, rolling up larger countries with kind of these previous experiences and then additional smaller countries which obviously should be a bit easier than these larger rollouts.

Eric Kirchner

Yes.

Chris M. Carey – FBR Capital Markets & Co.

That’s what I’m hearing. Okay. And then just because the working capital is such a big part of that rollout, it sounds like you’re bringing a specialist to address just some of these issues and kind of from what I’m hearing it sounds like really it’s training, it’s kind of improving the processes and are there any updates you need to make for the software and the system or is this just a matter of getting people better executing and kind of making process improvements there?

Eric Kirchner

I would attribute the majority of our improvement opportunities to be the latter. There are always things that we’re continuing to automate and fine-tune within the system process because we pass the information from 1View to Oracle financials and we’re tweaking that, but the majority of our opportunity to restore the working capital to previous levels is in the adoption and training on the front end of the system and the data entry that goes into it. We’re doing considerably better than we were and that, I think, is reflective in the subsequent go lives to the U.S. We learned a lot from that U.S. experience. We’re going to continue to enhance it and move forward.

Chris M. Carey – FBR Capital Markets & Co.

Okay. That’s great. And then just kind of a housekeeping issue. I think I heard earlier in the call that you kind of think a more normalized run rate for the working capital as more kind of fiscal 2013 year-end, which I think was about 20% below what we ended this quarter. Is that kind of the right way to think about where we should be going given kind of prevailing industry trends with working capital?

Richard Rodick

This is Rick. We believe we can get back to where we were at the end of FY 2013. We’ll know more and give more guidance, but that’s what we’re targeting to get back to.

Chris M. Carey – FBR Capital Markets & Co.

Okay. Thank you very much.

Operator

And we’ll take our last question from Art Hatfield with Raymond James.

Arthur W. Hatfield – Raymond James & Associates, Inc.

Hey. Thanks for taking my question. You got a lot of questions on the working capital, if you could help me just one last clarification. In the quarter, the 25% of the increase in trade receivables related to the 1View implementation, was that just related to the company or the countries that were rolled out in the quarter? Is there some lingering effect from prior quarter rollouts?

Eric Kirchner

There is a little of both. There is definitely in the new countries some lingering effects is – we’re in that three to six-month timeframe that we talked about. Most of the countries that have been on longer than that or all the countries longer than that have seen a decline, but we have some peaks and valleys even countries that develop well might have a blip and then they come back down and we’re seeing that consistently. So that’s where we talked about the three to six-month timeframe to get over that learning curve.

Arthur W. Hatfield – Raymond James & Associates, Inc.

Right, and that’s understood. And so, as I think about kind of where you’ve been and where you’re going, could we potentially be over the hump with regards to the quarters going forward, what that initial rollout impact will be?

Eric Kirchner

I believe. So that’s what I’d mentioned in my remarks that we’ve seen improvement in WIP in each of the quarters going forward. The one thing that’s positive about WIP going down is it moves over to build and then we collect it.

Arthur W. Hatfield – Raymond James & Associates, Inc.

Right, right. That’s what I had heard. I just wanted to make sure I understood you correctly. That’s all I got this morning. Thank you for the time.

Eric Kirchner

Thank you, Art. Operator?

Operator

Yes, sir. That’s all the time we have for questions today. So I would like to turn it back over to you for any additional or closing remarks.

Eric Kirchner

All right. Thank you everyone for joining us this morning. Thanks again for your support with UTi and have a great day.

Operator

And that does conclude today’s call. We thank everyone again for their participation.

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UTi Worldwide (UTIW): Q1 EPS of -$0.09 misses by $0.05. Revenue of $1.05B (-2.8% Y/Y) misses by $50M.