UTi Worldwide CEO Discusses F2Q12 Results - Earnings Call Transcript

Sep. 1.11 | About: UTi Worldwide (UTIW)

UTi Worldwide Inc. (NASDAQ:UTIW)

F2Q12 (Qtr End 07/31/2011) Earnings Call

September 1, 2011 11:00 am ET

Executives

Jeff Misakian - VP, IR

Eric Kirchner - CEO

Lawrence Samuels - CFO

Ed Feitzinger - EVP, Global Contract Logistics and Distribution

Analysts

Ben Hartford - Robert W. Baird & Company

Matt Brooklier - Piper Jaffray

Nathan Brochmann - William Blair & Company

Tom Wadewitz - JPMorgan

Sterling Adlakha - SunTrust Robinson Humphrey

Scott Group - Wolfe Trahan & Company

Elliott Waller - Jefferies & Company

David Ross - Stifel Nicolaus

Todd Fowler - KeyBanc Capital Markets

David Campbell - Thompson Davis & Company

Kevin Sterling - BB&T Capital Markets

Operator

Welcome to the UTi fiscal 2012 second quarter conference call. (Operator Instructions) This conference is being recorded today, September 1, 2011, and I would now like to turn the conference over to Mr. Jeff Misakian, Vice President of Investor Relations.

Jeff Misakian

Thank you, Alisa, and good morning everyone. Welcome to UTi Worldwide's fiscal 2012 second quarter results conference call. Joining us on the call today are Eric Kirchner, Chief Executive Officer; and Lawrence Samuels, Chief Financial Officer.

Before we begin the presentation, I would like to point out that certain statements made in today's call are not historical facts. They may be deemed therefore to be forward-looking statements under the Private Securities 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 & 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, and good morning everyone. Second quarter results reflect solid performance in both our freight forwarding and contract logistics and distribution segments. Yield expansion and improved control over costs drove most of the freight forwarding improvement, while increased activity in contract logistics and margin improvement in our U.S. distribution business led to stronger performance in this segment.

Air freight volumes declined against challenging comparisons from a year ago, but the decrease was less than the contraction in the overall market. A general swiveling in the overall economy and freight environment also contributed to weaker volumes for the entire industry. This is unlikely to change much in the third quarter given the macroeconomic climate. So preliminary volumes for us in August were relatively consistent with the prior year.

Ocean freight TEUs were ahead of last year, performing a little better than expected and in line with the market. Preliminary volumes in August were up slightly compared to August of last year, which was our best volume month of fiscal year 2011.

So far we're seeing mixed signs of a peak season. Yields and net revenue per unit increased over the prior year due to process improvements that include better buying and our gateway initiatives as well as movement in carrier rates. The rate environment remained supporting of the yield development, but comparisons in the second half of the year become more challenging, particularly in the fourth quarter.

Our contract logistics and distribution segment continued to see volume gains from existing clients and new business wins, especially in our Africa and Asia-Pacific regions.

We were particularly pleased to see our U.S. distribution business improve in the second quarter, consistent with the market, but also reflective of our efforts to develop better margins. While these improvements are encouraging, we continue to review our operations as part of our ongoing plan to fix underperforming businesses and contracts.

At this point, I'll ask Lawrence to walk through the financial results. Lawrence?

Lawrence Samuels

Thank you, Eric. Net income attributable to common shareholders in the fiscal 2012 second quarter was $0.22 per diluted share compared to $0.19 per diluted share recorded in the same period last year. When adjusted for severance costs, net income attributable to common shareholders was $0.24 per diluted share.

Revenue and net revenue increased 12.7% and 17% respectively in the fiscal 2012 second quarter compared to the same period last year. The increase in revenues reflects the translation of foreign currencies into the weaker U.S. dollar for reporting purposes, increased net revenue per unit of cargo, greater activity in contract logistics and distribution and higher fuel surcharges which we passed through to clients. On an organic basis, net revenue increased 8.4% in the second quarter.

We incurred severance cost of $3.5 million in the second quarter, primarily related to our transformation activities and proactive efforts to keep overall costs in line. These costs are reported separately in our statement of operations. We have also included reconciliations of GAAP to non-GAAP results in the tables in today's press release and posted more details on our website.

The rest of my remarks will refer to our results as adjusted to exclude these costs.

Adjusted operating expenses less purchased transportation costs were 15.9% higher than the same period last year. On an organic basis, adjusted operating expenses increased by 7.4% based on the comparable increase in net revenue.

Our adjusted operating margin in the fiscal 2012 second quarter was 9.7%, an increase over the 8.9% margin in the second quarter last year. The improvement was primarily due to increased activity and higher net revenue per unit, partially offset by increased expenses.

Revenues from the freight forwarding segment were up 11.5%, while net revenues increased 19.1% in the fiscal 2012 second quarter over the same period last year. Air freight tonnage declined 2% compared with the robust quarter last year. Our ocean freight TEUs were up 2% in the second quarter. As we told you previously, we exited a high-volume, low-yielding contract in the middle of the second quarter of last year, which impacts a comparable growth rate.

Air freight and ocean freight yields were each up 150 basis points in the second quarter. Sharply higher fuel costs contributed to way on yield percentages even though we're past through these cost declines with no margin.

Net revenue per kilo in air freight improved 22%, while ocean freight net revenue per TEU increased 13% in the second quarter compared to the same period last year. On a sequential basis, air freight yield increased by 120 basis points and ocean freight yield increased by 10 basis points. Sequentially from the first quarter, net revenue per kilo was up 12%, while net revenue per TEU was up slightly.

Adjusted operating profit in the freight forwarding increased 28% in the fiscal 2012 second quarter compared to the same period last year. The adjusted freight forwarding operating margin in the second quarter widened to 17.4% from 16.1% a year ago. The improvement reflects higher net revenues per unit and positive currency effects, partially offset by higher expenses.

Contract logistics and distribution revenue increased 15.6% and net revenues increased 15.1% over the same period a year ago due to higher business levels, particularly in Asia and Africa. Adjusted operating expenses in contract logistics and distribution were 15.3% higher in the fiscal 2012 second quarter compared to the same period last year, primarily due to costs associated with increased client activity and new business wins.

Adjusted operating profit in contract logistics and distribution increased 14% in the second quarter of fiscal 2012 compared to the same period last year. The adjusted operating margin in contract logistics and distribution was 8.2% in the second quarter compared to 8.3% recorded in the second quarter last year. Adjusted corporate costs were $12.1 million in the second quarter compared to $11.2 million in the same quarter last year.

Our effective tax rate was 31% in the fiscal 2012 second quarter. The second quarter tax rate was slightly lower than our expectation for the full year due to certain discreet items that are accounted for in this quarter as opposed to using the estimated annual tax rate. We still expect that our effective tax rate for the full fiscal 2012 year will be in the region of 32%.

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

Eric Kirchner

Thank you, Lawrence. While we're encouraged by the progress we made in the second quarter, we're mindful of the economic headwinds that the industry faces. Clearly, freight volumes have slowed and commentary on peak season is mixed. Still, volumes are holding up well.

Contract logistics and distribution continues to deliver respectable revenue growth. Future growth depends in part on how our clients' businesses perform in a slowing economy. As always, we will pursue profitable new business opportunities while helping clients meet their supply chain needs. We will also continue to make improvements in low-margin operations as we move towards our long-term margin target of 10%.

Regardless of the external environment, we remain focused on those things we can control, including keeping a tight reign on expenses and improving our margins in the near term while we continue to work on transforming our business. This approach remains consistent with what we've told you at Investor Day in June, and we remain on track with our transformation goals.

Our pilot of the base freight forwarding system in Northern Europe remains on target for the fourth quarter of this year. Development of the system is moving ahead as planned. Once the pilot is complete, we plan to begin the rollout of the operating and finance systems throughout the company next year.

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

Jeff Misakian

Thank you, Eric. With that, we'll open up the call for your questions. As a reminder, we ask that you limit your questions to two initially to allow as many as possible to have an opportunity to participate. Alisa, may we have the first question please?

Question-and-Answer Session

Operator

Our first question comes from the line of Ben Hartford with Robert W. Baird & Company.

Ben Hartford - Robert W. Baird & Company

Eric and I guess Lawrence as well, I was hoping to get a little bit more color on the severance. It looks like it was certainly within the freight forwarding segment, and I think Lawrence here discussed, because it was primarily due to transformation efforts. So when you're referring to transformation efforts, the severance that we're seeing now in front of the freight forwarding system implementation next year, is it part of the standardization of the operational processes ahead of the freight forwarding system? Is it in any way related to the financial system? Or is it some early times of success or confidence that the freight forwarding system will be successful when you do implement it in the first half of the next year? Can you provide a little bit of context there?

Eric Kirchner

Sure, Ben. I think that is the way to look at that severance in the quarter related to two things. The specific part about the transformation is keeping in mind that it's a business process transformation rather than just the system implementation. Part of that is to have a consistent ops structure across all of our regions. And we undertook an exercise starting at the beginning of the year and then worked our way through that to have much more consistency in the way that operations are structured. And that would be one bucket of the movement that you saw.

And then additionally, we've had changes within the contract logistics and distribution business specifically because of operational requirements of our customers. So as an example, given our amount of business in countries like Spain, if our clients have elected to change how they do view European distribution and rather than distribute directly in Spain gone through a more Pan-European model, that would potentially result in the reduction of some headcount and the resulting severance of restructuring, because their operations are no longer there and they've moved somewhere to Central Europe, as an example. So that might be a little color. I don't know if Lawrence has any more to add there.

Lawrence Samuels

Really not much in terms of the financial systems at this point. We do expect that once the pilot is rolled out in Northern Europe and those activities transfer to the shared service environment, we will start seeing the impact on the finance side. But that's really going into the next fiscal year, Ben.

Ben Hartford - Robert W. Baird & Company

So could we assume that we could see additional severance or reductions in stamp levels in Europe in particular over the course of the next six months as it relates to weaker trends in that region?

Eric Kirchner

That potential is there. As kind of an ongoing day-to-day managing of business, we're going to size the headcount appropriate to the amount of volume or revenue that we have in any specific area. So that's a possibility.

Ben Hartford - Robert W. Baird & Company

And then one last one just as it relates to the capital structure and given the movement of the stock over the pas few months, I was wondering given that weakness and given some of the capacity that you have on the balance sheet whether you've evaluated or would evaluate using free cash or some of the capacity on the balance sheet going forward to do a share buyback to not only support the initiatives internally, but to endorse your view of the long-term potential for the transformational efforts.

Lawrence Samuels

Ben, obviously that's something we constantly monitor and focus on. Just to reconfirm that when we look at our cash balances on the balance sheet at quarter-end and we do have significant movement in our cash flows during into month and into quarter, we bear that in mind. But obviously we're focused on growing the company as well and funding these transformational efforts to internally generate cash.

We do look at all of those factors and reconcile all of those and evaluate the best use of the cash that we've got. So certainly looking at share buyback is something we constantly monitor and consider.

Ben Hartford - Robert W. Baird & Company

And I guess said differently, you haven't done share buybacks historically to any meaningful extent. The recent weakness into the transformation, does it change your view on buyback? Does it make you anymore interested in doing share buybacks as a means to deploy capital?

Lawrence Samuels

We constantly monitor that and look at the best use of cash and capital on an ongoing basis, Ben.

Eric Kirchner

Ben, it's a challenging balance from the perspective, as Lawrence mentioned, that we wanted to execute this transformation as expeditiously as possible so that we can get on with things on one hand. In the company's history, we've shown the willingness to grow through acquisitions, and that's not something that's on the near-term horizon.

However, when we get the company with consistent operating processes and one finance platform and something that can accept the integration of a potential acquisition down the road, don't take this as a signal that we're changing our philosophy there, but that would require the potential use of capital downstream.

So we're keeping a mindful eye on both the opportunities, whether it be putting some cash aside for that potentially or the potential for share buybacks, as Lawrence mentioned.

Operator

And our next question comes from the line of Matt Brooklier with Piper Jaffray.

Matt Brooklier - Piper Jaffray

I guess what's kind of on everyone's mind right now just in the current environment, maybe you could provide a little color on what your customers are telling you in terms of their expectations for peak both on the air and on the ocean?

Eric Kirchner

I would characterize the feedback is still mixed as to not being real directional. I think some clients, depending on either the regions that they operate in or the market segments that they're in, has different feedback.

So the auto and high-tech for us has been fairly robust. But then you look at some other industries that are in the middle of the pack, chemicals, and then you look at the industries that aren't doing as well, and I would say that's retail and fashion right now because of the uncertainty around demand. Then it's a little bit different by mode as well.

If we look at on the horizon, and again every one on this call has a crystal ball and we can all speculate who is most accurate, because I think there is such a mixed feedback, the potential for a very late and compressed peak as it relates to ocean, because we've not seen significant activity there. Again, it depends on trade lane, it depends on the mix of the clients.

And then from the air perspective, if there is an uptick in demand, it would appear that inventories may be a little bit low and that might lead to some semblance of a peak season in air. But we're planning for steady volumes. The good news is where the volumes have settled in is that a reasonable level, but we're not expecting a very large or protracted peak season based on the feedback we've gotten from our client base.

Everybody's client bases are a little bit different. Everyone's geographic base is a little different. One of the benefits that we have is if you look at our distribution of business and revenue, it's fairly evenly spread across our four regions. So the weakness in Southern Europe is offset by some strength in Africa. The balance is a plus for our company.

Matt Brooklier - Piper Jaffray

And just from your August commentary versus the trends in your fiscal second quarter, it doesn't sound like there has been a meaningful deceleration in terms of demand from your customers. Is that a fair assessment?

Lawrence Samuels

Our volumes are consistent with where they were in last August. They'll be a percent or two above or below. We've got preliminary numbers. The month just closed yesterday. Our expectation is again it's the air and ocean volumes look to be about consistent with last August, but again it's preliminary.

Matt Brooklier - Piper Jaffray

The question is if I look at August behavior with your customers versus the behavior you saw in fiscal '12, it doesn't sound like there has been a big change. It doesn't sound like you've had costumers running to you, telling you our freight volumes are going to be down 10%, 15%. That's kind of the new-new, if you will, going forward. Is that a fair assessment?

Lawrence Samuels

No, I would say that maybe some have done that and others are up a little bit. So it kind of balances out. It's hard to make a generalization across a broad base of business. We're seeing lower volumes from certain customers and better volumes from others. So it's not something that we can easily generalize.

Operator

Our next question comes from the line of Nathan Brochmann with William Blair & Company.

Nathan Brochmann - William Blair & Company

I want to talk a little bit more on the margin side, Eric. I mean clearly now this is like the fifth quarter in a row that we've seen decent year-over-year improvement. I was wondering how much of that is coming from your consistent efforts to improve efficiency and productivity versus just the improving business trends and how sustainable that kind of level of year-over-year improvement feels right now.

Eric Kirchner

I was a little bit disappointed in the beginning of the year that we didn't make more progress. So we've had some discussions around what we needed to do course correct, and those started at the beginning of the second quarter.

If you look at freight forwarding business particularly, the shipment curve, they're about the same as they were in the second quarter last year, but they were a little bit better than the first quarter by about 8.5%. So it's up well over where we were two years ago. Again, we were kind of in that dip two years ago. It's about what it was last year in the quarter. So we're really focused on the productivity from a tactical perspective. And I have the confidence that if we do see any uptick in volume, we should be able to handle that with the existing headcount.

So as we've talked and I think we shared a little bit in the Investor Day, we're focused on both performing transform with the trades that we're using internally, but we understand that there are incremental productivity improvements to continue to focus on as we're working through this broader business process transformation. And we've got our eye very closely on the cost side, given the uncertainty in the macroeconomic environment.

Nathan Brochmann - William Blair & Company

And then a little bit on the revenue side in the contract logistics business. Again, I think you continue to show better performance there and winning more business. Do you think that's a result of just the industry adoption of contract logistics or are there some bigger, better certain things that you're doing individually to kind of foster that?

Eric Kirchner

We have Ed Feitzinger with us on the call today. So I'll have Ed give his thoughts on that.

Ed Feitzinger

I think that would be a mix. So I think certainly some of that is that the economy is improving and we're seeing general acceptance around the world of the contract logistics model.

If you look at our performance in Asia and in Africa in particular, I think we performed exceptionally well, particularly in the last quarter in there from a new revenue growth perspective. And we believe that at least a portion of that is due to the fact that we've had a much more integrated sales approach. We've been doing a lot of work to get the regions to work together to bring customers from one region to another as we talked about on Investor Day. So that and then also bringing the resources to bear to help make those projects successful.

So it's very difficult in the end to say exactly why we won this project or that project, but we certainly would like to believe that some of that outcome is the result of our strategy of really sinking up or sales efforts across the globe and leveraging the freight forwarding sales force as well.

Operator

We have a question from the line of Tom Wadewitz with JPMorgan.

Tom Wadewitz - JPMorgan

I wanted to ask you questions I guess related to the operating margin performance. It seems like you've got some good momentum in improving the operating margin in forwarding, but not as much on the contract logistics side. How do you view the contract logistics margin looking forward and what do you think is necessary to see that margin begin to show some improvement on a year-over-year basis?

Ed Feitzinger

So taking a look specifically at quarter two on a year-over-year basis, the improvements that we made in the Americas distribution business were offset by softness in our automotive volumes. We do a fair amount of automotive line supply and we had a number of clients that were shut down due to the parts shortages. We believe that that's mostly past us. So I would describe that for the most part as a one-time event.

There is also a small amount in the quarter-to-quarter comparison over last year of seasonal project work that for whatever reason customers have pushed it into August, which is obviously going to show up in the third quarter.

So we continue to focus, as we mentioned on Investor Day, on the margin improvement, on getting synergies in the back half that we just talked about. So the quarterly results in Q2 certainly our hope is and our efforts are focused on improving that number over time.

Tom Wadewitz - JPMorgan

I think Eric mentioned a couple of times about some contracts which were underperforming that you continue to focus on that. Is that a significant issue where there are some things that in the next few quarters you can make adjustments or exit the business and that would have a material effect, or is that really an ongoing activity no different than normal that you look at the lower end of your contracts?

Eric Kirchner

I think it's an ongoing activity. If you cycle through the bottom 10 performers, I mean it's math. So you continue to look at those that aren't at or better than the average level that we're shooting for and there is always potential.

Part of the improvement that we showed in the distribution side was that we were in a position where several contracts weren't performing well, and we took steps to remedy that and it came out favorably that we were able to a combination of process change and doing negotiation with the client to improve the picture there. It doesn't always break that way.

So there may be occasion where if we do get to the point with the client that we can't achieve an acceptable margin that we might have to exit the business. So that's certainly not our intent. Our first approach is always to examine how effectively we're operating within that contract and if we're performing with efficiency and if there is anything that we can do to improve the operations.

And then the second step in that is if there are unrealistic expectations that we didn't construct the agreement appropriately, we go back to the client. But again, those examples are fewer and farther between today than they were a year ago or six months ago. And then the third option is if we can't come to terms either through operational improvement or an adjustment in the pricing, then we are faced with the alternative of exiting the business if necessary.

So it is an ongoing process. And as I said, I think we had some positive developments in that dynamic in this most recent quarter. We're going to continue to work through those issues as we go forward to drive the margin up to that long-term goal of 10%.

Tom Wadewitz - JPMorgan

But that takes some time to play out. You're not talking about something next quarter necessarily that you'd change in the margin?

Eric Kirchner

I think it's a matter of course. So I wouldn't expect any significant changes other than the blocking and tackling that we're doing in the business.

Operator

Our next question comes from the line of Alex Brand with SunTrust Robinson Humphrey.

Sterling Adlakha - SunTrust Robinson Humphrey

This is Sterling in for Alex. Just wanted to start off by asking you about ocean volume. 2% growth is sort of in line with the industry, which is actually a positive improvement from the last couple of quarters. Can you talk about, Eric, the type of initiatives you put in place there to drive that improvement?

Eric Kirchner

I think any improvement that we saw in the most recent quarter would likely be just any change in our given client volume. So I wouldn't raise up our hand and take credit for a lot of changed activity that drove that improvement.

However, we've talked at several occasions about an approach that now has come to fruition, which is we've named a person as the ocean product leader. And in fact, he is in Europe right now, negotiating with a couple of European-based lines, and we believe we're going to be able to have some opportunities to improve our cost structure with those lines based on the volumes that we're providing them, and it's going to bring a different dimension which we've already begun to execute in customs brokerage in an air freight.

And that is to have this global overarching strategy driven by one specific person and philosophy in how we go to market with ocean and then what our strategy is in terms of consolidating volume with fewer carriers and operating ocean in more of a gateway concept, specifically for the less than container load business similarly to the way that we're operating in the air freight environment today or moving towards operating in the air freight environment today.

So I'm optimistic now that we have this person on the Board as the leader of the ocean freight product that we will start to pick up some momentum and be in a much better position as the carrier negotiation cycle comes around in early next year. So we're expecting improvements there. We're going to integrate that into our business planning process, so that everyone has specific goals to grow ocean more aggressively and that we're focused on that as tightly as we have been on air and customs brokerage over the last cycle.

Sterling Adlakha - SunTrust Robinson Humphrey

I wanted a follow up Tom's first question there on the operating margin, but more on the freight forwarding side. At Investor Day, which sort of ended June, you talked about getting back to a peak of something like 20% on the freight forwarding side of the business. That's really just a return that kind of fiscal '07 to fiscal '08 levels and you had talked about doing that in fiscal '15. Here we are, and as you've described, a pretty mixed freight environment. And if I axe off the one-times, you're somewhere around the 17.5% op margin there.

I mean this 20% in fiscal '15 with all you're doing, can you just talk about is that being conservative or have you changed your thoughts on what a peak potential there is?

Eric Kirchner

Well, how we've described the 20% is that the company achieved those levels and it was not obviously sustainable. So if you look at our peers or at the top end of the competitors in our space, 20% is kind of a starting point and we need to get back there. The reason that we've not been there consistently is the fact that the process had again developed regionally in not in a comprehensive way and that we need to address the systems issues. So we are working through.

I'm very pleased that the approach that we're taking, which is we're evolving these operating processes. We've got a global operations process team that's identifying best practice within the company. This is mostly around the freight forwarding business that we are talking about. This team then interfaces with a group of field representatives which are the freight forwarding counsel more or a less to ensure that these process changes are agreed to and adopted within each region.

And then we're rolling those things out through our global intranet, which again is a tool that we have today that we wouldn't have a year ago or a year-and-a-half ago to train on changes in our operating in advance of using the system as an enabler to be even more efficient.

The reason that we've projected this to be in the '15 timeframe is because as we're evolving these processes, again the final step of that is getting the system in, and it's going to take us close to a couple of years to get that thing rolled out. So at a point, it should start to tip over. Once we have most of our volume within that system, then we should start to see more progress toward the margin goals.

But everything remains on track and it's consistent with what we talked about at Invetor Day. And again, the expectation is that once we pass 20 on a consistent basis, we don't plan to go back and we only plan to get better in terms of our comparison to the peer group or the top competitors within the forwarding space.

Operator

And our next question comes from the line of Scott Group with Wolfe Trahan & Company.

Scott Group - Wolfe Trahan & Company

Eric, I was wondering given your views on peak season, what are your expectations for having to pay peak season surcharges and what's your view on the trajectory of gross yields as we look out at the back half for the year?

Eric Kirchner

We work as closely as we can with the group of carriers, and we certainly are in conversation with them as they approach us with any kind of peak season add-on to the surcharges. It's difficult to generalize it.

I think if you look at specific trade lanes, there maybe slightly more pressure than on others. But generally speaking, there is still a challenge for the asset operators on the ocean side based on the capacity that's in the market versus the real demand.

So there is the potential I guess if things get tighter toward the end of the year, but there is not much capacity that's been taken out of rotation at this point. And we just we keep our eye on it and monitor it on an ongoing basis. And as it relates to air, it's yet to be seen what the demand curve will be as you get to any change in consumer spending would be my guess on that.

As far as the margins, I believe we'll be coming up against some more challenging comps in the second half of the year. So again, we're trying to focus it on controllable such as better gateway utilization and consolidation of volumes with fewer carriers and better mix within those consolidations, so that we take advantage of the capacity that we're buying on behalf of our clients and trying to again focus on what we can do there and be mindful of the spot market when we can take advantage of that either on the air or the ocean side to get the best deal we can for our clients.

Scott Group - Wolfe Trahan & Company

If you think about on the ocean side, the yields are pretty flattish sequentially. I understand the comps are getting a little tougher in the back half of the year. Do you think you can keep up flattish or is there an opportunity for those to expand further sequentially? And then similar on the air freights, very good, sequential improvement in the second quarter. Does it feel like that strength is continuing or do you get a little bit back as to maybe fix up seasonally?

Eric Kirchner

I'm not sure how much will be driven by the demand, and again, it's going to depend on really how quickly we organize this ocean product leadership role and approach. I think we'll have some opportunities on the table because we priced very conservatively, and we're working to make sure that we're prizing to the market and then adjusting our operations so that we can keep reasonable margins from that. So at a point we're going to be pursuing more clients and it's just going to depend on what the competitive environment is out there.

From the macro perspective, I would expect the trends to abate a little bit in terms of margins improvement on the ocean side. But again, we're not at where we've been in terms of peak levels in ocean margins right now. So it does give us some opportunities to get a little bit better potentially in the second half, again with the fact that we've got tougher comps in the second half.

Scott Group - Wolfe Trahan & Company

And then just second question on the severance side, the $3.5 million in the quarter. Are you still expecting $8 million to $10 million for the year? And then as we look out to fiscal '13, when do you think we can start to get a little bit of color or guidance on the costs and benefits associated with the transformation for fiscal '13?

Lawrence Samuels

Just to confirm, the $8 million to $10 million figure that you mentioned, I assume, relates to the discussion we had on the first quarter which related to the costs of rolling out the Oracle Financial System. The severance is separate to that. As Eric mentioned earlier, the severance will be ongoing as we got to this whole transformation, as we begin incrementing the new processes and deploying the system.

Scott Group - Wolfe Trahan & Company

So the $3.5 million in addition to IT cost of $8 million to $10 million for the year?

Lawrence Samuels

That's correct, yes.

Scott Group - Wolfe Trahan & Company

Are you still expecting $8 million to $10 million on the IT rollout?

Lawrence Samuels

Just confirm that's on the Oracle Financial's side, and yes, we still expect to be in that range. My estimate now is that it will probably be at the lower point of that range for the year.

Scott Group - Wolfe Trahan & Company

Were there any costs for that this quarter?

Lawrence Samuels

Yes, in the first quarter, we had about $1.6 million and have a similar for this quarter.

Scott Group - Wolfe Trahan & Company

Any views on fiscal '13 for that?

Lawrence Samuels

As we explained at the Investor Day, we're still on track and that we would expect that we will start generating some benefits in fiscal '13, and that will effectively balance out with the additional costs. So there has been really no change in terms of our estimates for next year that we gave at Investor Day.

Operator

We have a question from the line of Peter Nesvold with Jefferies & Company.

Elliott Waller - Jefferies & Company

It's Elliott Waller in for Peter. You mentioned in the press release and in the prepared remarks about some new business plans in Africa and Asia. If you could elaborate on those and give us some sense of impact for the quarter and then for the rest of the fiscal year.

Lawrence Samuels

Those are mostly in the CO&D side.

Eric Kirchner

You'll see a little bit of impact on that in Q2. The bulk of the impact from those wins is going to show up as we go through in Q3 and Q4.

Elliott Waller - Jefferies & Company

Anyway to quantify the magnitude in Q2 and how to think about that going forward?

Eric Kirchner

Again, Q2 is pretty small, and I can't give you number going forward for those.

Elliott Waller - Jefferies & Company

What was your headcount at the end of the quarter?

Lawrence Samuels

The headcount was about 21,500.

Elliott Waller - Jefferies & Company

So it's slightly higher I believe at the yearend, 21,500 previous quarter. Is that correct?

Lawrence Samuels

That's correct, and most of that's related to additional resources required for these business wins on the CO&D side.

Elliott Waller - Jefferies & Company

And finally, if you could talk to the net revenue per unit trends you saw during the quarter. And based on your outlook for the rest of the year, how would you expect them to continue?

Lawrence Samuels

In terms of the trends for the quarter, we did see the trend upwards throughout the quarter on the air freight side, and similarly on the ocean freight side. So through May, June, July, there was continual improvement. And I think we spoke about the expectation going out for the rest of the year. It's difficult to quantify, and I don't think we'll give a projection on what the net revenues will do. Obviously, it will be based on the volumes and the demand side.

Operator

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

David Ross - Stifel Nicolaus

It looks like you grew your gross revenues in freight forwarding in all regions except for Asia-Pacific where there was a decline. But there was a yield squeeze in all regions except for Asia-Pacific. Could you talk a little bit about what's going on in the different markets, capacity issues and I guess other factors that may be causing that?

Eric Kirchner

I think that the numbers speak for themselves. So there has been weakness, and again, a lot of it depends on any individual company's client base. But the exports from Asia have fallen off with our clients, and the rest of the markets that we're in have remained fairly steady. So I don't have it right at my disposal to change in volumes versus the change in net revenue, because there is likely a different result when you look at it that way.

But the expectation is that Asia is going to remain fairly soft. We did have a couple of good wins on the trade lane between the U.S. and Brazil recently. So that's helpful in both directions. That's a little bit different. In fact, we entered the IATA table for forwarders, I think in with the fourth or fifth highest amount of export from Brazil in July. So that's been a positive. That would be movement within the Americas, but that's one anecdote. There are others.

Lawrence Samuels

Just a little more color on the Asia side. As we saw that the selling rates reduced over the period as demand dropped and capacity opened up a little. So most of that's really related to the impact of the carrier rates.

David Ross - Stifel Nicolaus

And then we also heard that I guess 3PL customer is terminating its contract early due to some unionization efforts. Is that true, and is that going to be a sizable hit to the third quarter numbers at all?

Eric Kirchner

We didn't terminate any agreement based on any unionization. So that's not accurate. But there is the potential, as we talked about, that we're going to see with the review based on these bottom 10 clients that we might turn over some business, but our expectation would be that we offset that with some other business. So it will be premature to talk about any individual change with clients at this point.

David Ross - Stifel Nicolaus

And then, lastly, Lawrence, on interest expense, given the new notes and credit facilities, should we expect it to trend lower in the back half of the year?

Lawrence Samuels

Yes, that will be a fair assumption.

David Ross - Stifel Nicolaus

Significantly lower, maybe $0.5 million a quarter?

Lawrence Samuels

Part of it is difficult to predict too much, because obviously a lot of the working capital depends on the volumes going into the third and fourth quarters. So that given that if we are at a steady state, then, yes, that will be a fair number.

Operator

We have a question from the line of Todd Fowler with KeyBanc Capital Markets.

Todd Fowler - KeyBanc Capital Markets

Eric, on the forwarding side, the commentary in the volumes, it sounds like the preliminary August data is a little bit roughly flat on a year-over-year basis. It sounds like you're expecting things to kind of level off or be steady here. Does that imply if we kind of maintain at this run rate that air freight and ocean volumes would be up on a year-over-year basis in the third quarter?

Lawrence Samuels

I think we would expect at a steady run rate given what we can see now that we would expect those improvements to be consistent with August. We wouldn't expect to see a significant change over the volumes from last year. So probably more or less flat for the third quarter based on what we can see currently.

Eric Kirchner

And what's so challenging to try to predict volumes is if you go back and plot things over the last two-and-a-half years, the level of consistency in terms of pegging volumes based on historic seasonality is not what it was, and it's very difficult to see what the new model might predict.

So my experience, having done this a while, was that you could fairly well index each month of the year with some level of predictability. And that went away I think as 2008 came into 2009, and it's not been nearly as predictable as it was. And again, with the significant drop off, everybody knows what happened with the volumes.

It's so hard to say based on especially with the economic environment and the geographic mix. I'd predict that we're going to remain challenged in the Southern European countries regardless because of the economies in those areas. The U.S. economy is just very unclear at this time in terms of consumer demand going into the holiday season.

So it's just darn hard to isolate on a given quarter and predict it based on even the visibility that we have so far with August. We would certainly like to believe we're going to trend along at similar volumes to last year. But again, then you have to dissect what last year looked like and how much fluctuation there was with any sort of peak activity based on consumer demand last year at this time. So it's going to tough.

Todd Fowler - KeyBanc Capital Markets

And I think that everybody on the call would certainly agree with that, and that's obviously what I'm trying to get a sense of, especially the year-over-year comparisons. I mean is there anything different in September and October on a comp basis that would throw off, maybe that you have got more difficult comps or something like that, how that would impact the volume growth that you saw during August or the volume change that you saw during August?

Eric Kirchner

I don't believe there is anything that's materially different.

Todd Fowler - KeyBanc Capital Markets

And then thinking about the comments on the air freight side, the potential for maybe a later peak on air freight if the consumer feels better, if retail activity does pick up or retail sales do pick up. Do you feel like you're positioned to benefit in that? I think if I go back to fiscal 2010, you saw nice volume growth in the fourth quarter there. Is your relationship still the same with the air charter providers there, cargo carriers that you would be able to benefit if there was a later peak on the air freight side?

Eric Kirchner

I think we are very well positioned in terms of capacity and our relationship with our carrier partners. So it would be a welcome to see a peak come along.

Todd Fowler - KeyBanc Capital Markets

Lawrence, maybe if you can talk on the cash flow side for the rest of the year, what you have remaining, if anything, on debt payments as well as on spending for systems upgrades?

Lawrence Samuels

We don't have anything in terms of debt payments. And typically we do see it terms of our cash flow that as we go into the third and fourth quarter that we see an improvement especially in the fourth quarter in our free cash flow. So we don't see those trends changing at all this year.

Todd Fowler - KeyBanc Capital Markets

And what about on the IT spend?

Lawrence Samuels

I think that will continue at the current rate. If you at the cash flow, the caption that relates to the purchase of software and other intangible assets which was near about $15 million for the six months, we expect that to continue at a similar rate for the balance of the year.

Operator

And we have the question from the line of David Campbell with Thompson Davis & Company.

David Campbell - Thompson Davis & Company

I wonder if you could estimate the gross air freight revenues in the second quarter, excluding foreign exchange benefit and fuel surcharges.

Lawrence Samuels

The actual numbers, the fuel surcharge in the quarter was about $40 million. And the currency impact was about $68 million, which was about 8.4% of the total.

David Campbell - Thompson Davis & Company

Currency?

Lawrence Samuels

The currency was the major movement in the freight forwarding gross revenue increase.

Operator

We also have a question from the line of Kevin Sterling with BB&T Capital Markets.

Kevin Sterling - BB&T Capital Markets

Eric, there has been a lot of talk about the ocean carriers trying to push across peak season surcharges. Are you seeing these surcharges stick?

Eric Kirchner

Not at this point. And again, I think if volumes tighten up or if some capacity comes out of the rotation, there might be the potential for that to be passed through. And I am not close enough to talk about an isolated trade lane. There may be some trade lanes where the potential for a peak season surcharge is stronger than others based on demand; but as a general statement, not at this point.

Kevin Sterling - BB&T Capital Markets

Is there any way to quantify how much Japan impacted you in the second quarter and do you see any impact in Q3?

Eric Kirchner

Our business in Japan itself has not been impacted to the greatest extent. I guess the answer is no. I mean it's hard to specifically quantify it. But as Ed mentioned, some of our business that's dependent on automotive was really impacted at least from a trade volume perspective, or from a distribution perspective was impacted by the parts shortage that ensued from manufacturing activities being curtailed in Japan. But I don't believe I can give you a specific number as to what impact it had.

Operator

And ladies and gentlemen, that concludes the question-and-answer session. Mr. Misakian, please continue.

Jeff Misakian

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

Operator

Ladies and gentlemen, that concludes our call for today. Thank you very much for your participation. You may now disconnect.

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