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Executives

Lawrence R. Samuels - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance and Member of the Management Board

Edward G. Feitzinger - Executive Vice President and President of Global Contract Logistics & Distribution

Eric W. Kirchner - Chief Executive Officer and Director

Jeffrey D. Misakian - Vice President of Investor Relations

Analysts

Scott H. Group - Wolfe Trahan & Co.

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

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

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

Glenn Primack

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

Elliott Waller - Jefferies & Company, Inc., Research Division

Sterling Adlakha

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

David P. Campbell - Thompson, Davis & Company

Matthew Brooklier - Piper Jaffray Companies, Research Division

UTi Worldwide (UTIW) Q3 2012 Earnings Call December 1, 2011 11:00 AM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the UTi Fiscal 2011 (sic) [2012] Third Quarter's Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, December 1, 2011. I'd now like to turn the conference over to Vice President, Investor Relations, Mr. Jeff Misakian. Please go ahead, sir.

Jeffrey D. Misakian

All right. Thank you, Elisa. And good morning, everyone. Welcome to UTi Worldwide's Fiscal 2012 Third Quarter Results Conference Call. Joining us on the call today are Eric Kirchner, Chief Executive Officer; and Lawrence Samuels, Chief Financial Officer. Ed Feitzinger, Executive Vice President, Contract Logistics and Distribution, is also here and available to answer questions during the Q&A session.

Before we begin the presentation, I would like to point out that certain statements made in today's call are not based -- 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 W. Kirchner

Thank you, Jeff. And good morning, everyone. Both business segments delivered revenue and operating profit growth in a decelerating business environment. Expansion in net revenue per unit of cargo drove most of the Freight Forwarding improvement. Contract Logistics and Distribution delivered double-digit increases in revenue and operating profit on the strength of new business and operational improvement.

Ocean freight TEUs turned ahead of the market for the first time in more than a year. Airfreight volumes in the third quarter declined against challenging comparisons a year ago, particularly in the month of October. As you're aware, the overall airfreight market has been contracting since April of this year. We tracked close to the market numbers through September; however, our volume declines worsened in October compared to one of our best months ever in October last year. Lawrence will talk about this in more detail in a few minutes.

Yields in net revenue per unit increased over the prior year, primarily due to process improvements that included better buying and success with our gateway initiatives. Declining carrier rates also contributed to the increases. These improvements helped to offset the volume weakness in airfreight and led to an increase in net revenue and an improvement in operating profit in our Freight Forwarding segment.

Overall, our Contract Logistics and Distribution segment turned in a solid third quarter. This segment continued to see volume gains from existing clients and new business wins, especially in our Africa and Asia Pacific regions. Our U.S. Distribution business was also strong again in the third quarter. We continued to work on improving the fundamentals in our Contract Logistics and Distribution business, which led to the better operating performance in the quarter.

While all of this is encouraging, the outlook for the fourth quarter is not as bright. Activity is clearly slowing for the industry and for us. Airfreight declines moderated in November, but tonnage will not reach levels that we would typically associate with the peak season. Recent retail sales results in the United States have been encouraging, but it's not yet clear that these results will carry through the entire holiday season. As a global company, we're also affected by economic conditions in other regions. In addition, the timing of Chinese New Year will significantly reduce activity levels out of China during the last 10 days of January. This will adversely impact our fourth quarter results due to the fact that our fiscal year ends January 31. The rate environment is still supportive of yield development in the near-term as capacity remains flat, which provides some cushion in our forwarding operations. But this won't last forever, particularly given the signs that carriers are reducing capacity.

In Contract Logistics and Distribution, several of our clients tell us they're forecasting volume declines in their operations in the fourth quarter, particularly in the retail, consumer, chemicals and automotive verticals in the Americas and EMENA regions. In addition, the impact from a weakening rand will impede dollar reported growth in the Africa region. At current exchange levels, this could reduce our fourth quarter dollar reported results by approximately $0.02 to $0.03. We expect that new business wins, especially in Africa and Asia Pacific, will help but will not fully offset the anticipated overall volume declines.

While we can't control fluctuations in currency or the global economy, we can continue to control costs, drive improvement in our global operating processes and further the development of our new operating and financial systems. All of these efforts are on track, and I will share more information on our activities in a few minutes.

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

Lawrence R. Samuels

Thank you, Eric. Net income attributable to common shareholders in the fiscal 2012 third quarter was $0.28 per diluted share compared to $0.26 per diluted share recorded in the same period last year. Revenue and net revenue increased 5.5% and 9.2% respectively in the fiscal 2012 third quarter compared to the same period last year. The increase in revenues reflects increased net revenue per unit of cargo; greater activity in the Contract Logistics and Distribution; and higher fuel surcharges, which we passed through to clients.

Currency had very little impact on the overall net revenue in the third quarter, but there were opposing movements in rates to the dollar, primarily in our EMENA and Africa regions, that negated each other. Our operating margin in the fiscal 2012 third quarter was 10.9%, compared to 10.8% margin in the third quarter last year. The improvement was primarily due to the increased activity and higher net revenue per unit, partially offset by increased expenses.

Revenues from the Freight Forwarding segment were up 2.2%, while net revenues increased 7.3% in the fiscal 2012 third quarter over the same period last year. Airfreight tonnage declined 7% compared with a robust quarter last year. Tonnage in the month of October declined in the low double-digits on a percentage basis against very high volumes in October last year.

In addition to the shrinking airfreight market, our volume decline was also impacted by 2 principal factors. First, there were declines from several large fashion clients out of Asia, particularly a large footwear company which had a major new product launch last year. Second, an automotive client moved significant volume on airfreight from Europe to the United States last year to overcome temporary parts shortages they had at the time. Apart from these factors, our airfreight tonnage decline in October was more consistent with the reductions reported by most key airports and airlines.

Ocean freight TEUs were up 5% in the third quarter, continuing the trend we saw late in the second quarter. Improvement was consistent throughout the third quarter. This is a positive early indication that we are pursuing the right strategy with our new product leaders.

Airfreight and ocean freight yields were up 100 basis points and 110 basis points respectively in the third quarter. Sharply higher fuel costs continued to weigh on yield percentages, even though we passed through these costs to clients with no margin. Net revenue per kilo in airfreight improved 13%, while ocean freight net revenue per TEU increased 5% in the third quarter compared to the same period last year. On a sequential basis, airfreight yields increased by 80 basis points, while ocean freight yields decreased by 40 basis points. Sequentially, net revenue per kilo was up 1% while net revenue per TEU was down 3%.

Operating profit in the Freight Forwarding segment increased 9.7% in the fiscal 2012 third quarter compared to the same period last year. The Freight Forwarding operating margin in the third quarter was 18.5% compared to 18.1% a year ago. The improvement reflects the increase in net revenues per unit, partially offset by lower airfreight volumes and higher expenses. Contract Logistics and Distribution revenues increased 13.5% and net revenues increased to 10.7% over the same period a year ago, primarily due to higher business levels, particularly in Asia and Africa.

Our Distribution business in the United States also continued to show improvement in the third quarter. We saw particular strength in the auto, high tech and consumer-and-retail verticals. This was somewhat offset by the impact of a weakening South African rand.

Operating expenses in Contract Logistics and Distribution were 10.2% higher in the fiscal 2012 third quarter compared to the same period last year, primarily due to cost associated with increased client activity and new business wins. Operating profit in Contract Logistics and Distribution increased 16% in the third quarter of fiscal 2012 compared to the same period last year. The operating margin in the Contract Logistics and Distribution segment was 10.1% in the third quarter compared to 9.6% recorded in the third quarter last year.

Corporate costs were $13.4 million in the quarter, higher than the $11.1 million in the same quarter last year, but consistent with the first half of this fiscal year. Severance costs of $1.7 million in the fiscal 2012 third quarter were primarily related to certain transformational initiatives, which include redefining business processes and developing the company's next-generation Freight Forwarding operating system and other software-related activities. As we have mentioned in the past, we expect to incur severance costs related to these activities through fiscal 2015. Severance costs of $1.7 million were also incurred in last year's fiscal third quarter, but these were primarily related to the rationalization of certain operations.

Cash flows from operations was $27.7 million in the fiscal 2012 third quarter, compared to $60.3 million in the same period last year. Free cash flow was $8.4 million, compared to this $42.8 million in the previous year. Both of these were lower than last year's third quarter, primarily due to the timing of payments to certain of our payables, particularly in South Africa, Germany and France. This was partially offset by our receivables increasing at a slower rate in this year's quarter compared to last year. Much of this relates to timing and does not imply a change in our model.

Our DSO is under 34 days and has improved each quarter this year. Our effective tax rate was 32% in the fiscal 2012 third quarter, and we expect that our effective rate for the full fiscal year will be in the region of 52%.

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

Eric W. Kirchner

Thank you, Lawrence. We made respectable progress in the quarter with no peak in ocean freight and shrinking airfreight volumes across the industry. The Freight Forwarding model continues to display flexibility as net revenue per unit expanded, helping to deliver overall growth in net revenue in a slowing environment. We remain focused on delivering above-market growth at acceptable margins while keeping a tight rein on expenses. Contract Logistics and Distribution has delivered consistent improvement for several quarters. We continue to pursue profitable new business opportunities and make improvements in low-margin operations.

As I said earlier, the economic situation and other factors will likely impact our performance in the fourth quarter. It's uncertain how these issues may weigh on the results next year and we're closely monitoring this as we develop our business plans for fiscal year 2013. We'll have more to say about this when we report our fourth quarter results in March of next year.

We continue to make good progress on the deployment of our Freight Forwarding operating system. We recently reviewed and approved many of the system's screens and are now in the testing phase of this system. The pilot in Northern Europe remains on schedule for a launch in our fourth quarter. Once the pilot is complete, we'll begin the rollout of the integrated operating and finance systems.

We continue to implement our common global operating processes and are making significant strides in all regions. Coordinating with our strong regional operations, we now have in place 3 key product leaders for air, ocean and customs brokerage. And we've added additional resources in Contract Logistics and Distribution to accelerate new business opportunities, particularly in Asia Pacific. These are but a few of the initiatives underway to transform the company into a global enterprise with common processes and policies that will significantly improve efficiency and productivity in our operations and deliver a high level of service to our clients.

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

Jeffrey D. Misakian

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Tom Wadewitz with JPMorgan.

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

I wanted to see if you could give a little further perspective on the tonnage numbers and the trend that you see. I don't know if you're willing to give some kind of by-month trend in November. Or if not, if you could just give a little bit more color on the change in trend in airfreight tons and TEUs through the quarter.

Lawrence R. Samuels

Thomas, Lawrence. As we said, that -- we did see that decelerate through, particularly into October. We did explain some of the reasons for the higher decline in the month of October. But as we said, we have seen those moderate back to more normal levels through November. Obviously, November only closed yesterday, so we're still reviewing the final numbers.

Eric W. Kirchner

If you look at a normal trend line, and we went back 5 years to look at what normally happens between October and November, typically you see a decline in November versus October. We had, this year, more of a decline in October, and then November came back to levels that were consistent with last November. So I think if you consider the 2 specific client situations that Lawrence described and then look at the market, there's conflicting data out in the market right now. So IATA's number was somewhere around 5% of a decline for the industry for October. But there's an interesting summation of various airport data that was -- that we found on Bloomberg. And Bloomberg shows in October: Hong Kong, down 10%; Taipei, down 10.2%; London, down 7.2%; Frankfurt, down 8.8%. So I think that 5 number again considers some strength to and from Latin America. But if you look at a lot of the East-West trade lanes, there was more impact from a number of these that we know where we have a higher business concentration. So the good news was again that the November volumes actually came back slightly. But again, with this lack of clarity around the retail season in the U.S. and then the challenges that we see in Europe, we're not expecting any evidence of any kind of peak season. Our October last year was very strong. November wasn't so strong last year either and actually was a decline from October, whereas this year, we saw October down, consistent with the market, with the addition of those 2 specific account issues, and then back up slightly in November.

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

So I think you said for the full quarter, airfreight tons were down 7%. So then presumably, October was worse than that, and then maybe November is more consistent with that full quarter down 7%. Is that a fair way to look at it?

Eric W. Kirchner

No. You're right on October -- on what you said about October. But in terms of November, November actually will be modest -- probably modestly down from our last November in terms of volume, but within 1 percentage point probably.

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

Okay. And then I guess, as a second question, on the ocean side, with respect to yields, I would have expected the yields to show some sequential improvement. They were down a little bit sequentially. What do you think is driving that? And do you have any comments kind of looking forward on how we might view ocean yields?

Eric W. Kirchner

Sure. We've made a concentrated effort to grow again in ocean and we've fallen behind the market. I don't believe that a lot of the yield issue is related to being too aggressive in terms of our pricing. One factor that is a little bit different with us is the large amount of trade traffic that we have to and from Africa, which traditionally that market is much more competitive in terms of yield. So rather than being able to take advantage of a lot of volume on the trans-Pacific lanes, we did grow slightly there, where we would have had some better margins. But Africa business is a bigger percentage for us, and it normally carries a lower margin for everybody.

Operator

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

Sterling Adlakha

This is Sterling in for Alex. The 10.4% adjusted Contract Logistics and Distribution margin seems really impressive. I know there's a lot of seasonality in that number, but your Analyst Day guidance is for 10% in fiscal '15. So does that timing seem conservative in light of this performance in what's been a pretty weak global economy?

Eric W. Kirchner

We were obviously very pleased with the quarter's results. But I don't think that we're situated yet where we anticipate moving in Contract Logistics and Distribution. But I'd like Ed Feitzinger to comment about that from his perspective.

Edward G. Feitzinger

Thanks, Eric. Sterling, our target is for the full fiscal year. The third quarter is traditionally our strongest quarter. I think we're likely to see challenges as we go into the fourth quarter with some of the slowing client volumes and a tough comparison versus last year. So our target is really to get to that on a run rate by the end of the fourth quarter of fiscal '14. I think it's good evidence of progress toward that, but I wouldn't view it as us saying that we think we have achieved our milestone 2 years early.

Sterling Adlakha

Okay, great. Second question. On net revenue, you talked a lot about why it was down. It was down sequentially, but so was SG&A, so were salaries. Can you just talk about holistically how you managed your salaries and SG&A expense down in that manner, given that we were going into "peak season"?

Eric W. Kirchner

We've been very mindful about cost. And specifically, we saw some signs, at least within our business earlier in the year, that led us to make sure that we didn't add cost in anticipation of revenue that might come on. So it's a lot easier to add revenue with new business, but we kept our eye on the cost and we're working on operating efficiencies. Another factor that I'll have Lawrence comment on is the impact of currency on the numbers.

Lawrence R. Samuels

Yes. In terms of the comparisons between sequentially Q2 and Q3, there was some currency impact as well, which led to a reduction or a lower reported both net revenue and operating costs. So while there was no impact, third quarter compared to last year, on a sequential basis, the currency did have an impact on the third quarter revenue and costs.

Operator

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

Matthew Brooklier - Piper Jaffray Companies, Research Division

I just wanted to focus on Europe. I think you mentioned a challenging environment or some softness there. Maybe you could provide a little bit more color in terms of what you're seeing currently in Europe within your respective Forwarding and Contract Logistics businesses.

Eric W. Kirchner

From the Forwarding perspective, as Lawrence mentioned, one of the big producers of airfreight tonnage in October specifically was this automotive client that needed to replenish inventory due to production issues. So we saw a falloff in some large onetime moves out of Europe. If you just look at the economies, we're overweighted in Spain, I would say, in terms of the size of our operations. So that's had a pretty big impact based on the economic conditions there, and the demand just isn't there. We're working to expand our presence in Germany, so it would have been a lot better situation, given the exports out of Germany, to have a bigger presence there. But we're not quite at scale in Germany. So we're more, I think, tied to some of the tougher economies right now based on how the company has evolved. I'll have Ed address the CL&D operations because he's very familiar with where we are there.

Edward G. Feitzinger

Sure. So we've had some success, really good success stories in Central and Eastern Europe, and that's been offset by economic weakness in Spain and the U.K. The results in the third quarter reflect consolidation of some of our U.K. facilities, and we're continuing to take measures to make sure that our operations in both Spain and the U.K. are rightsized for the markets there. But both of those markets from a CL perspective are fairly soft at this point.

Matthew Brooklier - Piper Jaffray Companies, Research Division

Okay. What I mean, all-in for the quarter, you guys put up a pretty good growth in margin number within the Contract Logistics business despite that weakness. I guess, the question is, are you in November seeing further decelerating trends within Europe within your Freight Forwarding and Contract Logistics businesses?

Eric W. Kirchner

Well, as I mentioned, the volumes -- at least this is airfreight [indiscernible] now. But the volumes in November came back to levels -- it will be near where we were in November of last year. So I don't have a specific breakdown, other than I do believe Europe was down versus last year and we had strength in other markets to help offset that. So I would say that there's not a lot of great news from a macro perspective, at least with our clients. And as that relates to Europe, Ed can talk about the CL business.

Edward G. Feitzinger

Yes. When we look at CL business and ask our customers for their forecasts of what their volumes are, they are certainly not optimistic looking out for the next 3 months. So we've tried to factor that in. But certainly there's not a lot of optimism in Europe at this point from an existing customer volume perspective.

Matthew Brooklier - Piper Jaffray Companies, Research Division

Okay. And the second question, you mentioned within the Contract Logistics business that certain customers and probably certain verticals have, I guess, a lower inventory carrying expectations going forward, which kind of seems a little bit counterintuitive, given we're at kind of all-time low inventory-to-sales ratios. Maybe just provide a little bit more color in terms of maybe the verticals those customers were in and what they're telling you.

Edward G. Feitzinger

So we've seen -- so if you look at the Americas just an example, so on the retail side, if you asked someone about a month ago prior to Black Friday what their forecasts were, they were not overly optimistic about where the Christmas season was going to land. And then on suppliers to industrial manufacturing, particularly in the chemical side, people were seeing sharp reductions in orders going forward. So those 2 sectors, I would say, were ones, at least if you looked at the Americas volumes, that we were concerned about going forward. And then certainly, going into Asia and Thailand and the impacts of the floods in the automotive industry, everyone is trying to sort that out in terms of understanding what that disaster is going to do to the automotive pipeline.

Eric W. Kirchner

There's some nuance as well because inventory levels don't necessarily equate to a lot of throughput, right? So there may -- inventory levels are a little bit different in considering its impact on our operations versus how much -- how the velocity of goods moving through those facilities, because it's when things come in and go out that in many cases, the way the contracts are structured, that we derive revenue. And they might have come in and they might be at reasonable levels of inventory, but if they don't go out, it's got different implications.

Operator

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

Scott H. Group - Wolfe Trahan & Co.

So, Eric, if I heard you, your commentary was that the ocean carriers are maybe starting to put some capacity out of the market. And we're hearing about rate restoration initiatives that could be coming in January. Do you think we start to feel that pressure in gross yields in the fourth quarter? Or is that more of a fiscal '13 event? I'm guessing with rates continuing to feel pressure, at least in the near-term, there's still an opportunity to see yields -- good yield expansion in the fourth quarter. Is that a fair way to think about it?

Eric W. Kirchner

Probably. I mean, there's not a lot of time left in the fourth quarter, especially the calendar fourth quarter. Obviously, as we mentioned, ours goes to the end of January. But I think it's a difficult situation for the entire industry if you're an asset operator. We saw -- and I'm sorry; I can't recall the name, but I saw that one carrier has decided to completely get out of the container business because of the lack of margins in it and concentrate more on the bulk carriage -- I don't know. I can't remember the carrier. But anyway, it's a Singapore-based carrier. And there is a potential that more vessels get laid up, but there's still new capacity coming in the market that was -- that has been on the books for quite some time. So I think the first half of next year still has some potential upside. But the other factor is that our clients are observant and we want to make sure that we pass along the savings to our clients as well, so that does have some impact on margin as the rates continue to be depressed.

Scott H. Group - Wolfe Trahan & Co.

How about on the airfreight side? Are you seeing similar things, where capacity is maybe getting pulled and rates may be nearing a bottom? Or do think that market still has more downside to go?

Eric W. Kirchner

I would not expect a big change there early in the year either. One thing that we have observed is a number of the carriers that are based in the Middle East are continuing to ramp up and add capacity, whereas some of our carrier partners in the rest of the world are keeping an eye on that, because as the carriers in the Middle East expand, they have the potential to take market share from more established carriers, and that causes a reluctance to reduce the capacity for fear of losing long-term market share. So it's a challenging dynamic right now. And again, we're trying to support our carrier partners to the greatest extent that we can, but there is some, I think, volume shift going on right now that relates to this excess capacity issue. And I don't predict that, that would abate anytime in the near-term.

Scott H. Group - Wolfe Trahan & Co.

Okay, that's helpful. And then, Lawrence, I know you that you mentioned a $1.7 million of severance. Could you talk about the transformation-related costs that are in addition to that? And how do we think about severance and transformation in fourth quarter and then looking out to fiscal '13?

Lawrence R. Samuels

Scott, it would be -- transformation costs that we've spoken about in the past are running at a similar rate to what we expressed in the previous quarters: about $1.5 million, $1.6 million a quarter. They will come in slightly lower than our original estimate of $8 million to $10 million for the fiscal year. We've managed to keep those down and make some changes to keep those low. In terms of severance, that will continue. There'll probably be less going through the fourth quarter. And as we start deploying the system and start rationalizing the operations, we will see that go again into the New Year and through fiscal 2015.

Scott H. Group - Wolfe Trahan & Co.

So severance is going to ramp down in fourth quarter then ramp back up in fiscal '13. Is that...

Lawrence R. Samuels

Yes, that's what we expect at this point.

Scott H. Group - Wolfe Trahan & Co.

Okay. And then just with that on the transformation side, at the Analyst Day, I think the guidance was at pretty similar amount of cost and benefit in fiscal '13 from transformation. Is that still what you guys are thinking? And how do we think about -- is the cost kind of equal-weighted but the benefit ramps up throughout the year? How should we think about fiscal '13, just the trajectory of costs and...

Lawrence R. Samuels

Yes, I think it's a good question. For the full fiscal year, we do expect the cost and the benefits to equate, but we will obviously see the cost ahead of the benefits, as the benefits really come once we've deployed the system. And so we will see costs ahead of the benefits, excluding any related severance.

Operator

And we have a question from the line of Ben Hartford with Robert W. Baird & Company.

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

Eric, as you think about fiscal '13 as it relates to your share versus the market, certainly your net revenue growth comparisons are very comparable to the leading forwarders this year. But now that you've got dedicated leaders in the verticals on the Freight Forwarding side and customs brokerage as well, into the system implementation next year, how do you think about your share versus the market and positioning the company to capture share on the margin over the course of the next 12 to 24 months? I mean, strategically, how do you think about managing that?

Eric W. Kirchner

Sure, Ben. I like where we are. I think we've done -- a lot of the work that we've talked about over the past couple of years is starting to show benefit. And these product leaders are serving a purpose that causes us to look at the business a little bit differently, and that is inclusive of a procurement strategy, which we've had, but it links the procurement strategy and the sales strategy and then the country-level operational strategies together differently, because we had such a regional bias in the past. So I expect our opportunities to accelerate into next year. And the mantra that we're talking internally is we should still be able to gain share even if the market isn't cooperative. Because again, if we go back to the fact that there's such a fragmentation in the business and the bottom 60% is with smaller to medium-sized competitors, we've got a compelling value proposition for a lot of clients. And it really relates to getting the word out and being more visible and aggressive in the market from a business acquisition perspective. So we've got plans to do that. And again, the linkage with these product leaders and the sales effort and then the operational approach is going to be very helpful coming into next year. Look, we're going to enter a significant period of change management for the company next year, but it doesn't particularly impact our sales or business acquisition approach or activities. So we've invested in tools this year like a sales force automation tool that helps link our salespeople more closely so that we can identify opportunities on a global basis and act on them more quickly. These product leaders are working to get standardization in how we go to market in each of the geographies, which is compelling to our global clients. And as I said, the tone of this call and the things we've been touching on is a little bit -- there's some gloom and doom in the discussion right now because again, this quarter doesn't appear to be real satisfying -- this fourth quarter. That doesn't mean that we can't take advantage of some great opportunities going into next year, and we're positioning ourselves to do that.

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

And then, Ed, on the Contract Logistics side, can you talk about the new business wins this year, really specifically the source of these new business wins? I know that you've added some talent to the organization. You've focused the sales efforts according to verticals. Are they share wins? Are they conversions from in-house functions? And then as you think about next year as well, addressing new business wins, what do you expect the source of those new business wins to be next year?

Edward G. Feitzinger

So if you look at -- across the business segments, so our Distribution business, we think we're taking share. The Distribution business in the Americas is really a good success story for us. If you asked us a year ago, that would not have been the case. We've done a nice job, I think, in the team of integrating the acquisitions that we had in that space in the past, getting them to sell together, to cooperate, to really focus on driving new sales volumes and working together to provide a comprehensive service for the customer. And I think we're just starting to show some of the results from that, and that's been real positive. In Southern Africa, we're the premier service provider, and we think we're taking share on service and quality. It's a difficult market to measure that. There really aren't statistics for that, but that's our opinion. And our CL business, which has been traditionally quite small in Africa, is just something where we've seen really phenomenal growth driven by the vertical focus, driven by our consultative sales focus, and that's been encouraging, as has Asia Pacific. So -- and that's also on the back again of our strategy of talking to our global clients about what they need and matching our sales focus with where we think we can truly add value for them. So certainly, we think that there's sustainability in that going forward. Even the economics are uncertain. Certainly we've talked about the rand impacts on the growth dampening, the underlying rand growth. But we're positive -- well, we feel like we're getting some good mileage out of the strategy here.

Operator

And we have a question from the line of David Ross with Stifel, Nicolaus.

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

You've commented, I guess, on the forwarding side of the business, saying that retail consumer and auto, I think, were showing weaker-than-expected volumes this quarter or were expected to have weaker volumes this quarter. And then you also talked about, with respect to Contract Logistics and Distribution, the same segments showing strength. I wanted to know kind of if that's correct and how you reconcile why the forwarding piece of these businesses are not doing as well as the kind of the Contract Logistics and Distribution side.

Edward G. Feitzinger

Yes, I think with -- just to be specific on the CL&D side, we're seeing strength in new business in Asia and Africa. So those are new contract wins, so someone will give us a 3-year deal or we'll pick up a distribution contract from a competitor. However, when we talk about the underlying existing business in EMENA and in Americas, which is the bulk of our net revenue, that's where we're seeing a slowdown in the existing customer volumes. So even if we get some of the new wins, those are offset against potential volume declines in existing businesses. You could think of like a same-store sales type of a situation, where you have a warehouse and the customer forecasts, "Look, my orders are going to be down 20% in the next quarter." That directly, as Eric mentioned before, in terms of the mechanism of most of our pricing contracts, shows up in lower net revenue for us.

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

And is the same-store sales improving in those regions for any segments?

Eric W. Kirchner

For the same-store sales improving?

Edward G. Feitzinger

In terms of the new sales, I think the new sales are...

Eric W. Kirchner

Same-store. So are we seeing growth in any verticals other than what we talked about of our existing clients, I think, is the question. Is that right?

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

That's correct.

Edward G. Feitzinger

In the Americas and EMENA? Not so much now.

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

Okay. And then I guess, you may not break it out, but if you can talk directionally about the margin differential between the Contract Logistics business and the Distribution business, and maybe what the return on capital difference is there.

Lawrence R. Samuels

No, we don't break it out. And obviously, it does depend on the regional splits and how the contracts are set up. So it's difficult to generalize on that because of the different requirements in different regions and the different capital requirements in each of those contracts.

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

And would it be fair to say that Contract Logistics as a whole has a little bit higher margin than Distribution as a whole and that the improvement in Distribution might have had kind of more of an impact on the overall margin this quarter?

Lawrence R. Samuels

I think that again depends region by region. So we will see some of that in different regions, that the Distribution in the Americas is probably at a slightly higher margin than the CL side. But we'll see that move the other way in some of the other regions. So as a generalization, it's difficult to draw that comparison. We'd have to look at region by region for that.

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

Okay. And then just last question on the Contract Logistics operations. As you're winning the new business, are there any segments -- I know you provide a lot of logistics service offerings, whether it's pick and pack or warehouse management or reverse logistics for customers. Are there any services you're focusing on or deemphasizing as you win new business?

Edward G. Feitzinger

Certainly, we're trying to get away from some of the historical contracts where we were providing labor only and get towards contracts where we're providing more value to the client in terms of systems or engineering or doing what we would describe as value-added services, which could be anything from light assembly to packaging operations, things like that.

Operator

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

Elliott Waller - Jefferies & Company, Inc., Research Division

This is Elliott Waller in for Peter. Quick question, if you could let us know what your headcount was for the quarter and how that changed sequentially.

Lawrence R. Samuels

Sure. The headcount was around about 20,500 -- sorry, 21,500, which is similar to what it was a quarter ago and up slightly from the first quarter.

Elliott Waller - Jefferies & Company, Inc., Research Division

Okay. And any -- given what you talked about in terms of demand trend volume continue to be like, any -- how should we think about that going forward?

Eric W. Kirchner

I think from -- it's challenging to take that number in aggregate and draw conclusions from it, because whenever we win a Contract Logistics opportunity, there is additional headcount associated with that. The Freight Forwarding number is in the low 8,000 range. And I wouldn't expect to see increases on the Freight Forwarding side. It's more of a good news story when you see that on the Contract Logistics side, because it means we've added another operation somewhere. So as we've talked about the transformation and the benefits of the system, we're going to improve our efficiency as that rolls out and cascades through the company. And variance in headcount in Freight Forwarding specifically is going to be driven by growth. Or in the alternative, if we're not growing as quickly and we have efficiency advantages, then we have to consider the headcount implications differently there. So it depends on the business segment and then it depends on the basic growth that we experience next year.

Elliott Waller - Jefferies & Company, Inc., Research Division

Got you. Okay, that makes sense. And then, is there any way to quantify the impact thus far of the flooding in Thailand, be it in different segments or company overall?

Eric W. Kirchner

A lot of -- there's a lot of randomness in terms of luck of the draw. And it appears that a lot of our clients, the clients that we have in that region, were not as significantly affected as some others. And again, it's random. We were just fortunate and our clients were fortunate there. But if you -- I think a proxy for it would be what happened in Japan. And you can draw some similar assumptions as to what might happen to various supply chains. And the disruption took a month or 2 to take hold, and then it has impacted production for several months thereafter. And I think Japan is now -- the impact of Japan on the supply chain has just now basically worked its way through the system, but it has a tail on it. So it's difficult to call, but I would expect that it could have some implications through the first half of the coming year.

Elliott Waller - Jefferies & Company, Inc., Research Division

Okay, that's fair. And then finally, with your comments you made in the press release about peak season, what you've talked about in terms of capacity hopefully coming out of the air and ocean segments, I mean, where do you see the inflection -- the hopefully positive inflection points coming, be it by mode or by region, if things were to get better? What would you expect to see first in terms of how that would play out?

Eric W. Kirchner

Well, normally, what would happen is if demand or economic conditions start to improve, airfreight would probably be a leading indicator -- at least that's been my experience -- followed then by, I think, a ramp-up of ocean freight as people synchronize their supply chains. But the tea leaves are awfully difficult to read for the first half of the year. I think, is the biggest challenge that we're focused on, to make sure that we're maintaining the right kind of relationships with our carriers and then view of our own costs. We don't want to predict some kind of hockey stick next year either, that there's going to be some significant uptick in volume at the end of the year. But we're going to be very conservative as we plan our expenditures in the first half of the year with an eye on adding capacity or resources where necessary in response to improved business conditions. So my experience has been that if we plan costs in anticipation of revenue that doesn't materialize, it's a lot more difficult to address than if we plan our cost base conservatively and then are prepared to react to the growth opportunities.

Jeffrey D. Misakian

[Operator Instructions]

Operator

And our next question comes of line of Nate Brochmann with William Blair & Company.

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

I wanted to talk, Eric, a little bit. As you just kind of alluded to, I mean, there's a lot of doom and gloom in terms of negativity a little bit on the outlook. But there are some bright things ahead. We talked about some of the potential new contracts. I was wondering if you could elaborate just a little bit on maybe a few specifics of what you're seeing there. And also, maybe if we started at the beginning of this year, where you talked about some of the cross-selling opportunities in the Freight Forwarding business that you were winning because of diverse solutions. And then finally, too, in terms of just some of the very near-term negative outlook, how you think about that a little bit in terms of whether your own personal belief supports a dynamic of sluggish-but-positive growth or whether you really feel, based on your client discussions, that not just for a quarter or 2, but that things are really getting worse.

Eric W. Kirchner

The volatility -- and I think that the -- I don't know. I'm not an economist or heavily into the market. But I think that the volatility in the market itself has driven concern in the general business environment. And you still have a lot of cash on the sidelines, and people have been unwilling to expand or invest because the prediction of demand for products is so uncertain. So we're looking to continue to expand with new -- some new wins. We've had good success in our automotive vertical. We've taken over some supply chain operations in India, which have been helpful for us. So again, having the global footprint that we do is a benefit, because we all are bombarded with U.S.-centric news every day. But to your point, Nate, elsewhere in the world, that we've got some good opportunities. So we've got a robust pipeline for our CL&D operations in both Africa and in APAC. We're working to overcome the economic weakness or the general malaise in the economies in Europe and in the Americas. But again, then you'd look at the Americas and break it down into subsets. We've had some really good success with some heavy equipment manufacturers to and from Brazil. And Brazil is a hot market and continues to provide us with growth opportunities there. So it is segmented by region and it is also by vertical. If you look at the automotive and the heavy equipment opportunities, they've been pretty good, at least in our experience. We're focused, too, to try to grow more in the high-tech area. Again, that's very demand-driven. And I think the cycle right now gives us some opportunities within high-tech, because there's an intense focus on cost there so that people can bring products to market and be more competitive within high-tech. So if you look also at our sales approach being driven by supply chain design, that's been helpful for us to gain entrée into various clients, because when we're able to go in and present them with a compelling value proposition that includes looking at their inventory carrying costs and the basic cost of capital that they're incurring, that leaves us with some good opportunities, that then we get the opportunity that we're able to subsequently execute. So I don't know if that answers the question, but I think...

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

No, that's helpful. And again, I'm not asking you to be an economist or make 2013 predictions at this point. But in terms of just kind of some of the negative commentary or pessimistic commentary on what you're hearing from some of your clients here going to the fiscal fourth quarter and in terms of just their overall concern, do those comments extend beyond the fourth quarter for you in terms of whether you do believe, in terms of where your business levels are, for a sluggish growth environment? Or do you think it's worse than that?

Eric W. Kirchner

It's unclear, unfortunately. I think that -- and again, if you look at different verticals, I just spent some time at one of our clients, a warehousing operation for one of our clients in the consumer electronics space. And there was some interesting feedback there which said that the cycle of everybody buying large screen TVs may have played itself out. And this particular client has a lease coming due on one of his key distribution facilities. And his belief is there's the potential he needs to plan for more small items because they also distribute cameras and other consumer products, and that demand for TVs is going to abate. So it depends on the specific product line and the specific vertical. But in that case, he said he was having a very challenging time assessing what his square footage needs were going to be for this warehouse today, because it might not need to house such large products in the future. So that's one -- again, one anecdote, but there may be some more structural issues in specific industries like that, rather than just short-term concerns about the first quarter or first half of next year.

Operator

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

David P. Campbell - Thompson, Davis & Company

Eric, I just wanted to dig in a little bit more on this airfreight tonnage. You were very specific about the problems in October and the moderate upturn in November. Looking at the third quarter, your 7% decrease in tonnage was substantially more than the industry's decrease in the same 3 months -- in the September quarter. Now you say November is relatively flat or down slightly. Do think that means that the industry had growth? Because you're down more than the industry in the third quarter, maybe the industry had growth in November. And if so, where would it be?

Eric W. Kirchner

David, I think we always get into a challenge because of this 1-month variance in the quarter. So if we go back and set our numbers -- level set our numbers on a September quarter end, we're a lot -- we're right in the middle of the pack. I mean, it may not be the prettiest pack in terms of airfreight volumes because it's been in decline since April, but -- and I can't predict what our competitors did in October. My guess is they will have experienced declines in October that are greater than what they saw in their third quarters. So -- and to your comments about November, it was encouraging to see volumes come back up. I don't know if that means October was just a blip, but November levels will have come back to levels that were similar to last year, maybe a couple of percentage points down. A lot of it relates to how heavily weighted an individual company is on specific trade lanes or verticals. There was a -- I don't know if you've seen the Seabury study that just came out, but it talked about fashion specifically. So fashion airfreight, at least in the sources that were attributed in this article, was down 30% year-over-year for the entire industry. So we experienced -- we went down with that trend, and then as Lawrence mentioned, we had one specific client that actually had driven even chartered lift last year because of the volume of a new footwear product launch, and that those kinds of launches of blockbuster breakout products weren't obvious to us in what would have been a peak season. So I don't know if I'm answering your question, but I do think that the industry probably picked up in November as well. And if you look at our numbers and our competitions' numbers for October, they may not be that far off versus the calendar quarter.

David P. Campbell - Thompson, Davis & Company

Yes, I understand. And the second question is, Lawrence, you mentioned the $0.02 to $0.03 hit in this fourth quarter from the rand translation. I assume that's correct, that 2% to 3% in earnings after tax, largely due to less revenue growth in the translation. Is that correct?

Lawrence R. Samuels

Yes, David. That's all to do with the translation of the local currency into dollars for reporting purposes. So in local currency, we're not expecting any decline.

Operator

And our next question comes from the line of Glenn Primack with PEAK6 Investments.

Glenn Primack

Most of my questions have been asked. I just have a quick one on the ClientasOne transformation. You're on a pretty good uptake. But if go back to the slides from the Analyst Day, if you can just have an idea of -- how much yellow is going to show up, do you think, as you enter fiscal '13 in that middle slide versus the green, where I think that was like level 2, where you're on par with your peer group?

Eric W. Kirchner

I don't have that slide in front of me, so what I would say -- now I've got it. I believe that we're progressing nicely through the evolution of where we've identified gaps to the market or gaps to our competitors and say where we want to be. So it's going to continue to improve throughout the year and throughout the following year. So we're going to target incremental improvement in our processes. And then as we roll the system out and more of our transactions go through the system, we'll see better results. It's not all system-driven. It's a comprehensive business transformation. One thing, we have 3 key areas of focus, and client is one. 1 Team, 1 Focus, 1 World. 1 World is primarily the system and the operating process transformation. 1 Focus is the sales and business acquisition piece. And then 1 Team is centered around our people. And I'm pleased to share that we added a senior human resources person reporting directly to me in the quarter. That is really helping accelerate our improvement in our people processes and driving our performance management system, developing more robust succession planning. So we've got a lot of the ground we're covering. And again, back to the fact that the macro environment may not be that cooperative, I'm very pleased with where we are in the transformation, that we're continuing to progress, and that we're putting this company on level footing to be ready to grow significantly as we move through next year and into the completion of the system deployment.

Operator

And our last question comes the line of Kevin Sterling with BB&T Capital Markets.

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

Lawrence, I just have one question here. I know the call has been long and I appreciate your time. Lawrence, you've talked about your DSOs, I think, falling to the 34 days. You've driven them down each quarter. Do you have a target in mind that you'd like to get to in 2013?

Lawrence R. Samuels

Kevin, we've always kept our DSO in the low 30-day range. So it will fluctuate slightly a day here or there, partly depending on timing. But certainly, our target is to maintain that low 30-day DSO level.

Operator

Gentlemen, please continue.

Jeffrey D. Misakian

All right. Thank you, Elisa. As there are no further questions, I'd like to thank you all for participating in our call this morning. On behalf of us all, 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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