UTI Worldwide F2Q08 (Qtr End 7/31/07) Earnings Call Transcript

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UTI Worldwide, Inc. (UTIW)

F2Q08 Earnings Call

September 6, 2007, 11:00 AM ET

Executives

Laurie Berman - IR

Lawrence R. Samuels - EVP andCFO

Roger I. MacFarlane - CEO, Director

John S. Hextall - EVP, COO

M. J. "Tiger" Wessels - Vice Chairman

Analysts

Alexander Brand - Stephens Inc.

Edward Wolfe - Bear Stearns

John Barnes - BB&T Capital Market

Todd Fowler - Keybanc Capital Markets

Thomas Wadewitz - J. P. Morgan

David Campbell - Thompson, Davis, & Co.

Presentation

Operator

Good morning. My name is Janice and I'll be your conference operator today. At this time, I would like to welcome everyone to the UTi Worldwide Fiscal 2008 Second Quarter Financial Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions].

Thank you. Ms. Berman, you may begin your conference.

Laurie Berman - Investor Relations

Thank you Janice and good morning everyone. Welcome to UTi Worldwide investor conference call for the fiscal 2008 second quarter ended July 31, 2007. Before we begin, please recognize that certain statements in the conference call are not historical facts. They may be deemed therefore the forward-looking statements under the Private Securities Litigation Reform Act of 1995. Any important factors may cause the Company's actual results to differ materially from those discussed in any such forward-looking statements. These risks and uncertainties are described in further detail in the Company's filings with the Securities and Exchange Commission. You are directed to these filings for more detailed information regarding the risks and uncertainties that the Company faces. UTi undertakes no obligations to publicly update or revised any forward-looking statement whether as a result of new information, future events or otherwise.

As usual we have allotted one hour for today's call. Chief Financial Officer, Lawrence Samuels will begin today's presentation with an overview of the Company's results for the fiscal 2008 second quarter. Chief Executive Officer, Roger MacFarlane will then comment on selected highlights and provide closing remarks before we go into the question-and-answer session. Vice Chairman, Tiger Wessels, who is calling in from Africa and Chief Operating Officer John Hextall are also with us on the call and will participate in the Q&A session.

Now, I would like to turn the call over to Lawrence Samuels. Lawrence?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Thank you Laurie and good morning to everyone. Thank you for joining us today. As reported in our fiscal 2008 second quarter earnings release this morning, gross revenues and net revenues increased 17% and 20% in the quarter respectively, over the corresponding quarter a year ago. Excluding contributions from acquisitions gross and net revenues both increased by about 14% over the prior year second quarter.

On the cost side, as expected, our operating margin improvement plans had some impact in the second quarter with operating costs increasing by 6.2% over fiscal 2008 first quarter against net revenue increase of 9.2%. We do recognize that some of this improvement is due to seasonality as well. We expect to see a larger impact from these trends in the quarters going forward, though it will be difficult to see the actual impact in the cost lines, as we continue to incur costs to support our revenue growth. The costs for this quarterincreased some severance costs relating to headcount reductions already taken, as well as cost relating to certain potential acquisitions, which were terminated during the quarter.

Our airfreight forwarding gross and net revenues were up 14% and 15% respectively over the prior year second quarter. Our airfreight yield for the second quarter of fiscal 2008 was 24.2%, up 37 basis points over the prior year quarter. Our ocean freight forwarding business continued to grow with gross and net revenues for the fiscal 2008 second quarter advancing 13% and 18% respectively, over the same prior year period. Our ocean freight yield also improved year-over-year up by 64 basis points. Our contract logistics gross and net revenues increased 40% and 36% respectively, over the prior year quarter. These increases were driven mainly by organic growth as well as due to our November acquisition of Span International. The organic growth was due to both new dedicated customers and expanding business with existing customers.

As all of you now, we are facing a challenging trucking environments in United States, which accounts for approximately 60% of our distribution net revenues. Although, we saw a revenue growth in other locations, the USA operations net revenues declined when compared to last year's second quarter. We are particularly pleased however with the management of operating cost in those areas, which despite the reduction in revenues, the operating margin improved over the same period last year driven by our truck brokerage operations. There are no indications that we will see an improvement in the U. S. domestic trucking market in the second half of fiscal 2008.

Other revenues include amongst others, both freight forwarding operations primarily in the EMENA regions, inventory management and other specialized supply chain operations. Net revenues grew 44%, compared to the fiscal 2007 second quarter primarily as a result of the acquisitions made after last year's second quarter. And net revenues would have grown 19% without the contributions from these acquisitions.

Now, before reviewing our segments, I would like to remind everyone again of the restated annual and interim financial statements filed in December 2006 for the year ended January 31, 2006 and the quarters ended April 30, 2006 and July 31, 2006, and the positive impact that had on the second quarter of fiscal 2007. As such, our year-over-year comparisons of the second quarter operating income and operating margins maybe somewhat difficult. This is especially true for our EMENA region in which almost all of these adjustments were reported. I am pleased to report that all of our segments delivered net revenue gains year-over-year. In our EMENA regions, we continued to achieve strong revenue growth with over 31% increase in net revenues, approximately 8% of which resulted from currency movement. The operating margin for this region was 13.9%.

The Americas freight forwarding operations continues to show good growth with net revenues increasing 13%. Exports from this region have increased, offsetting the impact of the softening of imports from China in particular. Operating margins for the Americas freight forwarding region increased by 210 basis points to 14.7%, over the second quarter of fiscal 2007, through a combination of improved productivity and cost management. Net revenues for our Americas contract logistics and distribution segment grew 26% over the prior year second quarter.

As previously mentioned, these increases were attributable to organic growth as well as the contribution from Span for the quarter. Operating margins increased to 9.1% from 8.7% for last year's second quarter, both after the amortization of goodwill. Gross revenues in our Asia Pacific region increased 12% and net revenues increased 22% over the prior year second quarter respectively.

Operating expenses grew at a slower rate, resulting in a 500 basis points improvement in operating margins, compared to last year's second quarter. We are focused on continuing to grow revenue in this area, but at the same time managing the cost to generate continued margin improvements going forward.

In our Greater China segment, which also includes Hong Kong and Taiwan, gross revenues grew 17% and net revenues grew 9%, compared to last year's second quarter. This was below our internal expectations and historical growth rates for this region of the world. We continued to focus on revenue growth in this region and have recently been awarded two major airfreight accounts. The operating margin for this region was lower than prior year's second quarter, mainly as a result of the slower net revenue growth.

We combined the two Asia regions while managing yields due to the buying patterns for this region. And the yield for the second quarter fiscal 2008 was 16.9%, slightly ahead of last year's second quarter of 16.8%. The growth rates in our Africa segment continued to be impacted by the depreciation of the South African rand, compared to the dollar. The 40 net revenues increased 8%, but on the constant currency basis this would have been close to 12%.

Operating costs grew at a faster rate in net revenue resulting in the margin decline of 180 basis points, compared to fiscal 2007 second quarter, primarily as a result of the challenges in our domestic distribution business. The Global Specialized Solutions segment currently consists primarily of our specialized pharmaceutical solutions of IHD in contract logistics [ph], the development for cost associated with other vertical as well as the replication of the direct distribution and free wholesaler pharmaceutical model.

Gross revenues for the segment were up 32% over the same period last year, and net revenues were up 7.4%. The operating profit in this segment was down on last year's second quarter. There were a few unusual items here that had an unfavorable impact, including a nationwide strike that affected the Pharmaceutical industry in South Africa, few days just before the end of July. This was resolved quickly, but did impact IHD's revenue for the quarter. We expect a partial pick up of this lost revenue in the current quarter.

The segment also carried some headcount termination cost as well as the acquisition cost... acquisition-related cost I referred to earlier, together totaling $0.5 million. The operating margin in the segment of 12.4% despite these issues made a positive contribution to the Company's overall margin. Corporate cost remained at a similar level to the first quarter of the year and we would not expect this level of cost to change significantly for the remainder of the year. For the company as a whole, stock cost continue to be the largest operating cost.

As a percentage of net revenue, stock cost were 53.4% for the quarter, slightly ahead of last year's second quarter of 52.8%, before accounting for the SLi earn-out. Other operating costs, as a percentage of net revenue, reduced from the first quarter about 80 basis points and were 50 basis points higher than the second quarter of fiscal 2007. We continue to focus on controlling cost, in line with our increase in revenues and remain focus on delivering improving operating margins. Our tax rate of 28% for the second quarter is in line with our expected rate for fiscal 2008, it is the range of 28% to 30%.

Net income for the quarter was $27.7 million or $0.28 per diluted share. This compares to $0.35 for the second quarter of fiscal 2007, which includes $0.11 per share benefit from the SLi accounting treatment.

With that, I would now like to turn the call over to Roger.

Roger I. MacFarlane - Chief Executive Officer, Director

Thank you Lawrence. At the beginning of the year, we projected 2008 earnings per diluted share in the range of $1.14 to $1.22 based on a number of assumptions that we believe to be realistic at the time. Certain of these assumptions, most notably those related to the anticipated operating environment for the second half of the year were likely too optimistic. This is evidenced by the slow down we have seen in gross rates, in freight volumes from China to North America and the continued weakness in the U. S. domestic trucking market.

In light of these current market conditions as recognized by the industry analysts, we are revising our previously stated fiscal 2008 full year earnings per share guidance to the range of $1.09 to $1.15 per diluted share. This represents an EPS growth rate of between 14% and 20% using our internal base line of $0.96 per diluted share for fiscal 2007. To achieve this level of performance in the current operating environment demonstrates the strength and flexibility of our business model. This revised EPS guidance represents our best estimate, based on a number of assumptions that we believe, to be reasonable. Please remember however, that any of our assumptions could prove to be inaccurate. Many uncertainties may also cause our actual results to differ materially from our guidance numbers.

We encourage all of you to review our SEC filing for more detailed information regarding the risks and uncertainties facing UTi. We also wish to reiterate that this guidance is not an indication of a change in practice, in regard to providing guidance in future year. That said we are satisfied with our financial performance in the second quarter with continued growth in gross and net revenues. We will continue to focus on improving our operating margin, and this remains the top priority for the management team. As you know, improving operating margins through revenue growth and cost control is the one of the five performance platform essential to the success of our CLIENTasONE strategy.

UTi's entire team is fully committed to this strategy. Building on the success of NextLeap, our CLIENTasONE strategy is designed to deliver service excellence to our clients and to position UTi as the market leader in world class supply chain services and integrated solution. We believe this approach will deliver greater value to our clients and thereby greater long-term value for our shareholders.

The success we are having in securing new clients and developing existing ones, demonstrates that we are on the right path. We continue to secure new relationships with strategic clients, with more recent examples being Motorola, The Gap and Intel. We are pleased that Motorola and The Gap will initially deliver airfreight export revenue out of Asia to the Americas, as the first step in a long-term relationship.

UTi has a clear strategy of excellent performance with well defined targets. We are organized, sponsored and accountable, as our revenue continues to grow. Our focus on client's interest will help us establish and maintain long-term relationship that, we expect to fuel continued double digit revenue growth. UTi's non-asset based model enables us to navigate through different economic cycles. Such as the one we are currently in.

In summary, let me assure you that we are focusing on three areas to deliver shareholder value. Number one, our focus on continuing to grow gross and net revenues; number two, managing our costs to deliver improving operating margins; and three, delivering our stated CLIENTasONE objective of EPS growth 20% compounded EPS growth over the five-year journey.

With that let's open the call for questions. Janice if you would explain the technical elements of the Q&A session please.

Question And Answer

Operator

: [Operator Instructions]. Your first question comes from the line of Jon Langenfeld with Baird.

Unidentified Analyst

Hi, this is Ben, I'm standing in for Jon. Good morning.

Roger I. MacFarlane - Chief Executive Officer, Director

Good morning Ben.

Unidentified Analyst

I wanted to address, the good execution in the quarter. I wanted to address your confidence on realizing the cost savings, in the second half of the year and beyond. What other tangible elements that give you that confidence that you are making progress on the cost side, despite little evidence this quarter?

Roger I. MacFarlane - Chief Executive Officer, Director

Okay, John will handle that one for you Ben.

Unidentified Analyst

Thank you.

John S. Hextall - Executive Vice President, Chief Operating Officer

Good morning. I think as previously advised, while we have reductions and expenses in the targeted areas. We also have increases in other areas to support the growing business. So, we clearly have added costs in the second quarter and will do so going forward to support new business coming on. However, when we had our Investor Day back in June, we outlined a five-point plan and we remain entirely on that plan. We did take out a number of costs during the second quarter and we committed on I think in terms of severance and we still have further cost coming out in quarter three and we believe that as we said earlier on, we see the quarter three and quarter four will deliver the benefits and get our cost amounted on that revenue growth.

Unidentified Analyst

Okay, great thanks. Then specifically in this quarter, I think, I thought half a million, one time like charge this quarter associated with headcount reductions and other costs is that the bulk rate or are there other costs embedded in this quarter's results?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Ben, it's Lawrence, I'll response to that. Just to confirm that figure related specifically to the Global Specialized Solutions segment. In addition, to that there were other severance costs in all of the other regions, and probably entire to the severance costs for the group were around about $1 million and the acquisition costs were a couple a $100,000.

Unidentified Analyst

Okay. Great thanks. How back-end loaded does your new guidance range assume have to be, do we expect margin expansion continue... beginning in the third quarter or is it more of a fourth quarter and beyond event?

Roger I. MacFarlane - Chief Executive Officer, Director

Well I think if you look at the guidance it was compared to our performance last year, we implied expanding margins as we go forward in the quarters coming ahead.

Unidentified Analyst

Okay great. That's all I have for now. I'll jump back in the queue. Thanks.

Operator

Your next question comes from the line of Alex Brand with Stephens.

Alexander Brand - Stephens Inc.

Thanks. Good morning guys.

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Good morning.

Roger I. MacFarlane - Chief Executive Officer, Director

Hi Alex.

Alexander Brand - Stephens Inc.

Roger, I guess I just want to understand a couple of things here. I hear some big customer wins and that sort of helps me understand why you are confident and for good organic growth despite your comments about the macro working against you. But I am a little confused if Motorola, Gap, Intel those don't sell like high margin accounts to me. So, how does that fit into the broader strategy of improving your profitability while I understand you... it sounds like you have some reason to believe that the revenue growth is ramping?

Roger I. MacFarlane - Chief Executive Officer, Director

That's a great question Alex and it's absolutely true that major customers... securing major customers in the beginning and airfreight doesn't necessarily produce very high margins on that business. What we are looking at, however, is as we have been focused very much on increasing our presence in the high-tech vertical, these are various strategic customers in that regard. And at the same time, of course, in freight forwarding when you have customers that make a good base load on certain lane overtime you get real value released for your other customers as well as those customers. So, this is a long-term way of ensuring that our margins increased over the long-term.

Alexander Brand - Stephens Inc.

So it's kind of a scale up opportunity similar to the ocean strategy over a couple of years ago?

Roger I. MacFarlane - Chief Executive Officer, Director

Yes. We are not trying to sacrifice margin, don't get me wrong. What we are trying to do is to make sure that we use these opportunities to build on the back of a long-term margin expansion and yield improvement opportunities, particularly out of Asia.

Alexander Brand - Stephens Inc.

Okay. Along the lines of this same sort of topic, as I look at your Greater China results, you had a pretty meaningful drop in operating margin, despite top line growth. So, I guess I am not understanding, it seems like the model shouldn't have negative operating leverage to it unless you were staffing up ahead of anticipated business which would clearly not be ideal. Can you just address that's in fact what happened and if that's something that you are comfortable with as a sort of longer term strategy for growing the business?

Roger I. MacFarlane - Chief Executive Officer, Director

Well we are never comfortable with things that don't continuously improve. So we don't want to leave you with that impression, but why don't John onto the specifics?

John S. Hextall - Executive Vice President, Chief Operating Officer

I think if I can just say on the China situation we are largely dependent on Greater China and North American in our mix. We don't have such a large business to Europe and not as the one that's racing maybe margin expansion. The North American sector is the one that's really being more depressed and it seems to switch away from air duration freight. And I think, we still need to remember that we broke out our China business from our Asia Pacific region, that will not actually put those two regions together. I think we will see our growth overall is actually very comparable with the competitors in the marketplace. So, I think we had a depth certainly in the yield. We have obviously still continued to expand our office platform in China, but we believe that the Chinese market has different seasons. They have a slow, the shoulder and the peak in airfreight and we are moving into the peak, but we don't see it as being as robust as in previous years.

Alexander Brand - Stephens Inc.

Okay. Fair enough. And my final question perhaps this is best addressed by Lawrence, but if I look at EMENA and EMENA had the burden of the SLi accounting changes, but it clearly is a drag on the profitability of the Company right now, on the cost or look like there is still a problem. Is there any way you can sort of talk about, if you strip that out it's maybe kind of where we thought it would be or we are still feel behind and we are not happy with that region? Where is the progress there? Is that more of a drag I guess than you really thought it would be by now?

John S. Hextall - Executive Vice President, Chief Operating Officer

Alex I am probably better to answer that question. It's John again.

Alexander Brand - Stephens Inc.

Okay.

John S. Hextall - Executive Vice President, Chief Operating Officer

I was the EMENA person one time of day as well. And I think when we met in the June meeting we had our Investor Day, we did say some of the action plans we are taking and one of them really was focused on reducing loss making activities which EMENA tended to have the majority of them. What I am happy to say is even from the second quarter, we have managed to half the number of those loss making operations. So, I think EMENA is already showing some large signs of improvement and that will continue again to quarter three and quarter four. I think the encouraging thing in EMENA is that we still got a very good revenue growth there. So the cost management really is entirely in our hands and we have a detailed plan to ensure we get there.

Alexander Brand - Stephens Inc.

Okay great. Thanks for the help John.

Roger I. MacFarlane - Chief Executive Officer, Director

Can I just add to that in that of course, in EMENA as a result of what John just said, EMENA was carrying some severance cost during that quarter as well.

Alexander Brand - Stephens Inc.

Okay. Thanks guys.

Operator

Your next question comes from the line of Ed Wolfe with Bear Stearns.

Edward Wolfe - Bear Stearns

Hey thanks. Good morning guys.

Roger I. MacFarlane - Chief Executive Officer, Director

Hello Ed.

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Good morning Ed.

Edward Wolfe - Bear Stearns

Hey just a follow-up. You talked about there is a $1 million or so of severance across the different areas in the quarter. Does any of that continue in the fiscal third quarter?

John S. Hextall - Executive Vice President, Chief Operating Officer

Yes sir. That will continue in the third quarter. And the gain is back to our plan that we've got and we see this continuing in quarter three and benefits arising in quarter four.

Edward Wolfe - Bear Stearns

Is it greater or less or similar to the impact in third quarter?

John S. Hextall - Executive Vice President, Chief Operating Officer

Sorry. You mean the quantum?

Edward Wolfe - Bear Stearns

The dollar impact similar in third quarter or second or does it increased or decreased?

John S. Hextall - Executive Vice President, Chief Operating Officer

Cost of severance is going to be slightly less.

Edward Wolfe - Bear Stearns

Okay. And then in fourth quarter the negative becomes the positive because of the impact?

John S. Hextall - Executive Vice President, Chief Operating Officer

Well our intention was to get the operating ratio right and to get the net revenue growing at a faster rate than the cost.

Edward Wolfe - Bear Stearns

Okay. Is there any way to quantify directionally what... if second or third quarter are minus 1 million and minus say 750, what does fourth quarter look like?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Our response that is, in terms of the severance we probably have... would have accomplished most of the plans by the end of the third quarter but clearly we'll get the benefit of the stock cost having been taken out in the fourth quarter. We'll get full benefit in the fourth quarter. Obviously we'll get done; we'll obviously get some benefit in the third quarter of the terminations taken in the second quarter. So, it will start flowing through, but I would expect the severance in the third quarter to somewhat offset the benefit.

Edward Wolfe - Bear Stearns

What's the expected full benefit once you arrive at that on a quarterly basis?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Ed we haven't quantified that, but it will be certainly greater going forward than the actual severance costs.

Edward Wolfe - Bear Stearns

I'm sorry will be or won't be?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

It will be.

Edward Wolfe - Bear Stearns

Will be.

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Yes.

Edward Wolfe - Bear Stearns

Okay. And then also you had mentioned that there were some acquisitions that were terminated. What were those?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

We can't disclose those, but we did indicate earlier with the moratorium [ph] acquisition that we will continue to focus in the Global Specialized Solutions arena.

Edward Wolfe - Bear Stearns

Okay, but that wasn't the Israeli acquisitions in other words?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

No, those are very much on track and we do expect those to close within the next few weeks.

Edward Wolfe - Bear Stearns

Okay.

Roger I. MacFarlane - Chief Executive Officer, Director

I would just like to add to that and say, we did say that we were re-examining all of our initiatives everywhere that was one of the points with the plan that John mentioned and as a process of doing all of that, of course it resulted in something that we were pursuing, but we decided, we would no longer pursue... would pursue. And the cost associated with that which may have been capitalized that didn't actually spend.

Edward Wolfe - Bear Stearns

Okay. How do we think about airfreight gross yields being relatively flat given your comments that demand has slowed down and knowing there is so much large white body air capacity out there? How should we think about air yields going forward assuming the economy doesn't pick up?

John S. Hextall - Executive Vice President, Chief Operating Officer

I think again, we have to look at our business mix. But I think as far as the yields are concerned we still see that being rather flat for the rest of the year.

Edward Wolfe - Bear Stearns

That's the airfreight?

John S. Hextall - Executive Vice President, Chief Operating Officer

Well we've got the peak season market to happen in Asia and I think in the Europe, North America there is obviously multiple capacity out there still, as we go into the winter period.

Edward Wolfe - Bear Stearns

But I would think when you added that mix, you would see at least a 30 basis point improvement you saw this quarter now?

John S. Hextall - Executive Vice President, Chief Operating Officer

I would not specify the actual improvement level at this point.

Roger I. MacFarlane - Chief Executive Officer, Director

Ed, we think when you look at our level of our yield on airfreight, we think they are pretty well up there at the level where we... we are really proud of delivering them. One factor of course will be as the third quarter comes, we get a greater incidence or greater proportion of our business coming out of Asia where yields are lower. So, you do get a mixed impact on air yields as the season goes through.

Edward Wolfe - Bear Stearns

Honestly, I am just thinking about it year-over-year. So -- just third quarter over fiscal third quarter. And ocean I have been surprised, that you are getting as much expansion as you are... what you are doing right now, are these trends likely to continue?

Roger I. MacFarlane - Chief Executive Officer, Director

Well at the basis low.

Edward Wolfe - Bear Stearns

Okay.

John S. Hextall - Executive Vice President, Chief Operating Officer

So, yes is the answer.

Edward Wolfe - Bear Stearns

Based on the minority interest payout this quarter, which was disappointing, it appears IHD continues to struggle, it bakes the question why are you spending so much time and effort replicating IHD as it continues to struggle?

Roger I. MacFarlane - Chief Executive Officer, Director

Tiger do you want to handle that one?

M. J. "Tiger" Wessels - Vice Chairman

Lawrence, can answer the first part. And I will answer the second.

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Clearly, I mean the minority interest is related to all the South African operations and as you saw Africa as well. They mark there results were a little disappointing, because there is a local distribution operation, it's not just IHD but it certainly the issue that we spoke about at IHD had contributed to the lower minority interest. Tiger?

M. J. "Tiger" Wessels - Vice Chairman

Yes, clearly the replication is taking more patience than I would have thought in the first place. But I still believe that we need to continue on this path. We had one or two disappointment in the last quarter. But the model is still there and one just got enough space that's the model as accepted by the manufactures indeed the one they want. And until we hear otherwise which we doubt, we are going to proceed with it.

Edward Wolfe - Bear Stearns

When you say there is a disappointment Tiger. Do you mean the disappointment in terms of that incurred cost or just in terms of the potential opportunity that didn't buy?

M. J. "Tiger" Wessels - Vice Chairman

Well it's the opportunity that didn't work, we believed it would happen and the final stages we called it off.

Edward Wolfe - Bear Stearns

At current can you talk a little bit about profitability of IHD, I know when you bought it several years ago, it was such a highly profitable, high return on capital business, it feels like that margin has deteriorated a bit, is it still a margin and a return that's above the overall company margin and return.

M. J. "Tiger" Wessels - Vice Chairman

The answer to that is yes. In fact, I am happy with IHD particularity when you think about the fact, that it suffered loss of revenue for a couple of days due to strike which Lawrence referred to. There is nothing else that makes me unhappy, we are aware of the start-up which we were battling with a year ago, and that's where we are moving in the right direction. And so I am comfortable with the way, with the price have set.

Edward Wolfe - Bear Stearns

Okay and then last question, I think Lawrence you alluded that corporate overhead of 10.5 million would remain kind of at this level going forward. And it's the level that was at first quarter. But it's hard to believe that year-over-year it's up 40% when you are focused on cost and your revenues growing half of that, is there something in this corporate overhead that's changed?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Yes, it's partly due to the new management structure where we have realigned. For example John's new role as COO comes into the corporate overhead and his direct team as well. As we mentioned in the first quarter, we have added corporate [ph] which is such as Lance D'Amico and Ron Glickman. So, there have been a few heads added. But in general it's more reallocation from other regions.

Edward Wolfe - Bear Stearns

Okay, that's what I was looking for. But 10.5 is the good number for the rest of the year, give or take in the quarter?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Yes we believe the same.

Edward Wolfe - Bear Stearns

Okay, thanks a lot guys.

Operator

Your next question comes from the line of John Barnes with BB&T Capital Markets.

John Barnes - BB&T Capital Market

Hey good morning guys.

Roger I. MacFarlane - Chief Executive Officer, Director

Hello John.

John Barnes - BB&T Capital Market

Just a couple of quick, clean up questions. The interest cost in the quarter was a good bit less than what I was looking for. Can you just give us some explanation of why and Lawrence do you have some guidance in terms of what we should expect on interest for the balance of the year?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

John I think it's... as we saw that the cash flow generation, the cash from operations increased quite significantly over the first quarter, cash from operations for the second quarter itself was about 60 million. And so, we all going into the season needs strongest... stronger pace. As we have seen with our cash flows seasonally we do tend to pick up certainly in the fourth quarter. But we are certainly focused on the free cash flow and we have plans in place to continue focus on DSO and the receivable collections. But I think the current number is probably a reasonable going forward. Probably get into the fourth quarter, we may see that turndown slightly as we do pick up that free cash flow.

John Barnes - BB&T Capital Market

All right, that's fine. It was just... like I said it was sharply down. I wouldn't expecting debt reduction of that magnitude quite yet, but nice job on that. Going... looking at the yields again, I am sorry if I missed part of this, I had to jump off the call for a minute. But just as you look at yields for the balance, net revenue margins for the balance of the year. Can you talk a little bit Expeditors I think talked about approaching equilibrium on both ocean and air? Can you talk a little bit about your expectations for the balance of the year and in terms of both and especially given your comments about Asia starting to be... Asia to North America starting to be a little sluggish? Are you seeing the movement of capacity to other lanes, thus keeping pricing firm and it's going to result in difficulty in seeing material, further net revenue margin improvement or do you expect if that sluggishness persist, that you will be able to capture some of that net revenue margin for yourself?

John S. Hextall - Executive Vice President, Chief Operating Officer

I'd say it's a good question John and it was similar to what was asked earlier on, I think what we said on the airfreight is we think and we are going to see maybe, it remaining rather flat for the rest of the year, despite the fact that in Asia. We have the peak season as well as have the some uplift in pricing. But a number of clients also have earlier on pricing as well. So, this is baked into our forecast. I think on the ocean freight side, we have seen the shifting capacity moving to the Europe lane and obviously the prices they are hardened and obviously some of the clients have taken price increases. But our mix actually is totally different compared to the ones of the property closes in the U. S. markets and we have a lot more business in Europe and Africa. So, we still see our ocean fright improving because we are coming of a lower base. But on airfreight I think we see it being more flat for the rest of the year.

John Barnes - BB&T Capital Market

Okay. Very good, and then lastly just as you prepare for peak and again with your comments concerning I guess the little bit of sluggishness you are seeing, can you give us an idea... have you gone out in a material way with charter aircraft versus a year ago or did you line up on that this year with the expectation that the volumes might be a little bit sluggish?

John S. Hextall - Executive Vice President, Chief Operating Officer

We still have a charted program and gradually we like to dip on it [ph] as you term it this year compared to last year because those... A; there was less charter equipment around in this market as well, but we definitely lightened up and as we said before a lot of that charter capacity isn't exclusive to UTi business. We have correlating traffic as well. So, we still have a program and we maintain those services for our top clients but it is a lighter low than what we had a year ago.

John Barnes - BB&T Capital Market

Very good. All right, thanks for your time guys. I appreciate it.

John S. Hextall - Executive Vice President, Chief Operating Officer

Thank you.

Roger I. MacFarlane - Chief Executive Officer, Director

Thanks John.

Operator

Your next question comes from the line of Todd Fowler with Keybanc Capital Markets.

Todd Fowler - Keybanc Capital Markets

Good morning everybody.

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Good morning.

Roger I. MacFarlane - Chief Executive Officer, Director

Hello Todd.

Todd Fowler - Keybanc Capital Markets

I just wanted to follow-up on the 2 airfreight accounts out of Greater China as Lawrence mentioned. Number one, what's the annual magnitude of those accounts on a net revenue basis and then are those accounts going to hit here in the third quarter or more in the fourth quarter which in here in this peak season?

Roger I. MacFarlane - Chief Executive Officer, Director

Well, I think if we take a client like Motorola certainly it will be one of our top ten once it's fully implemented. We don't normally give out the specific revenue details in regard to those kind of customers. But we wouldn't have mentioned the three of them if we didn't think that they would have an important impact on our revenues overtime. So, we... all of these customers get implemented overtime, so we would expect in this case, let's say, Motorola we would expect the implementation to be completed in the next six months.

Todd Fowler - Keybanc Capital Markets

Okay. So there will be some ramp with all three of these accounts over the next couple of quarters than in fully implemented next year really?

Roger I. MacFarlane - Chief Executive Officer, Director

That's a good way of thinking a lot of time.

Todd Fowler - Keybanc Capital Markets

Okay, great. And then Roger if you could maybe talk a little bit about the distribution business specifically here in the U. S. domestically, it sounds like your outlook for the peak season is somewhat muted. I guess a couple of things if you could go through, if I remember correctly market had some exposure to the flatbed market, is that part of the drag on those results there and then secondly if you could talk about any other benefits that you are seeing from any cross on is going between free affording customers using domestic ground services?

Roger I. MacFarlane - Chief Executive Officer, Director

That's a great question. John will respond to you.

John S. Hextall - Executive Vice President, Chief Operating Officer

I think in terms of truck brokerage, we mentioned on the earlier discussions from Lawrence with 60% of the truck brokerage that we report in total and over 92% of market's operations in non-asset base. It is the fastest growing area and we expect it to continue to increase as a percentage of that total that we reported. We also expect to gain further market share and we look forward to seeing this operation grow in USA. It has actually started to work and integrate with our freight forwarding operations in the USA. We mentioned that a couple of months ago, and that continues to gain momentum. So there is an internal strategy there. And in terms of the cross setting with the clients, I think when we reorganized our management teams, market transport in the USA became part of the Americas Contract Logistics and distribution which meant all of our acquired companies now are under one management roof and that in itself means the team is working much more closely together. And that's going to give us greater synergies going forward.

Todd Fowler - Keybanc Capital Markets

Okay. And then just a follow up then on the flatbed exposure, if I remember correctly market did have some?

Roger I. MacFarlane - Chief Executive Officer, Director

Yes that's absolutely correct. That's our famines division and we don't want to sound recall, but we benefited in the past from quite a lot of hurricane activity. It appears that we might have a more robust hurricane season this year, which will help that business, but in fact it is doing very well despite the decline in revenues that Lawrence indicated and we are seeing overall that whole group improved margins year-on-year in the quarter even despite the challenges of revenue pressures and market condition. So we are very proud of that, that's team's performance.

Todd Fowler - Keybanc Capital Markets

Okay. That's helpful and just lastly Roger and Lawrence touched on this. It sounds like or here in the quarter it was good, operating cash generation with the more trend on acquisitions and the stock at these levels. Have you at all thought about going into the market and doing the share repurchase as you are going to piling up some cash, and certainly with the evaluation of the shares right now?

Roger I. MacFarlane - Chief Executive Officer, Director

Todd we have continuously looked at the whole question of the share buyback. It's one of the things that we believe that in the short-term we would need based on the requirements of working capital and based on the fact that we intend to re-enter the business of acquisitions in the course of next year and beyond as that we wouldn't probably need to borrow in order to do a share buyback and we are not sure at the moment if that's in the shareholders' best interest. So we continue to have this issue visible. We continue to look at it but right at the moment feeling as that we should conserve our cash for growing opportunities that we see in the future.

Todd Fowler - Keybanc Capital Markets

Okay. Fair enough. That's what I figured just thought I would ask. Thanks a lot guys.

Roger I. MacFarlane - Chief Executive Officer, Director

Thanks Todd.

Operator

Your next question comes from the line of Tom Wadewitz with J. P. Morgan.

Thomas Wadewitz - J. P. Morgan

Yes. Good morning Lawrence, good morning Roger.

Roger I. MacFarlane - Chief Executive Officer, Director

Good morning Thomas.

Thomas Wadewitz - J. P. Morgan

Let's see, so a question on your guidance here. It sounds like you are seeing some weakness, you mentioned the truck side and also is the U. S. weakness a bit, but at the same time you have some new business coming on and the current quarter was pretty solid the earnings report. Are the numbers as a new guidance range a bit conservative is it anticipating some weakness you haven't yet seen or how should we view the new guidance range?

Roger I. MacFarlane - Chief Executive Officer, Director

That's a great question Tom. And last time when we gave guidance back in February last year or earlier this year sorry. When we were looking at the market we hadn't anticipated the softness in both the trucking market nor in the China to USA particularly airfreight business. And so, we believe at the time of our guidance was neither optimistic nor conservative, but rather realistically pitched and that's really... we really now readdress that. I think as I mentioned in my remarks with time factor is now looks if that guidance might be viewed as optimistic in the light of what's happening. So we are now looking at, we are closer of course to the end of year. We are looking, we have done a lot of homework about the market and our own internal performance and we believe that we are pitching our guidance on the basis that what we think we can deliver.

Thomas Wadewitz - J. P. Morgan

Okay. So if I take that comment and I look to next year ended, the Street seems to imply about 20% growth next year and obviously that's where you kind have five-year guidance is to achieve that type of growth. Is it reasonable to think that you will do that if the weakness you are seeing in second half in the trucking market and is U. S. continues or would it be appropriate to think that if some of this weakness you are now taking about continues next year that perhaps the 20% is bit too optimistic?

Roger I. MacFarlane - Chief Executive Officer, Director

Well one way to look at that Tom is to analyze what we will be delivering in terms of EPS growth, in the next two quarters, compared to last year. And to think about that as to what we can do in the years to come. And as I mentioned, if we hit the range of our guidance we have given indicates a growth rate of between 14% and 20%, and as we have already have the first quarter and the second quarter I think if you look and analyze what that implies for the next two quarters, I think that's a good way of thinking about what we can deliver in the years to come.

Thomas Wadewitz - J. P. Morgan

Okay. So it sounds like since the growth is kind of back half loaded and perhaps maybe that's not too aggressive to think you could have that kind of growth next year the 20% type of number. Is that what you are going to see in the second half perhaps?

Roger I. MacFarlane - Chief Executive Officer, Director

Well certainly as you know that our objective that's our CLIENTasONE objective and we all are committed to as a management and the whole of UTi is committed to delivering on our CLIENTasONE objective. So, we are driving our performance in that direction.

Thomas Wadewitz - J. P. Morgan

Okay fair enough. And then I just had one more question for you, you had mentioned this is going back I guess two quarters, I think in the fourth quarter of fiscal '07 you had a number of multi-client warehouses, I believe two per at one [ph] I think in China and one in Hong Kong that you had acquired opportunistically some space for multi-clients warehouse activity, has that space been filled out now, are you realizing the margin benefit of filling that upwards, that's still a couple of quarters out and as you get more business and there you will see some benefit to margins from utilization?

John S. Hextall - Executive Vice President, Chief Operating Officer

Yes Thomas, John speaking, I think the warehouse that we... as you say speculated with earlier on, we have fill them up, it is necessary the highest quality of business, that we would like, but nonetheless I think, we are now covering our cost side that could be in those areas, and as we continue to develop in Asia in particular in China and Hong Kong. We will see the quality of that business improve and therefore the yields improve.

Thomas Wadewitz - J. P. Morgan

Okay great. Thank you for the time.

John S. Hextall - Executive Vice President, Chief Operating Officer

Thank you.

Operator

Your next question comes from the line of David Campbell with Thompson Davis.

David Campbell - Thompson, Davis, & Co.

Good morning. Roger, I am so surprised to hear the company say that, you don't have as much business in the Asia Pacific to Europe lane where obviously the market has been very strong and where most... a lot of the global revenue growth is coming from today, I mean you have a strong base in Europe and why is it that you have apparently such a limited exposure or market participation in that airfreight business.

Roger I. MacFarlane - Chief Executive Officer, Director

Well David the primary reason is that when we established our business from Asia to the USA, one of the locomotives for that was the acquisition of Continental going back six years or so... six or seven years and that company was exclusively focused on China and Hong Kong and parts of Asia to the United States. So we have ended up with a disproportionately larger position within UTi, disproportionately large not necessarily compared to our competition. But as our base and of course when you have a strong base like that, you tend to play to your strength and deliver more value for customers. So, that's not to say that we haven't been growing Asia to Europe businesses and we have some very attractive customers on that lane as well, but that's the historical reason for the disproportion. But we have recruited now Thomas Blank, you met him, I believe at Investor Day and his background of course is from Panitino [ph] he is a European and he is based in Singapore and that is one of the steps, just one of the steps we have taken to strengthen our focus in this other opportunity market.

David Campbell - Thompson, Davis, & Co.

So the problem is that the revenue base in Asia Pacific, Europe is relatively small compared to your total business?

Roger I. MacFarlane - Chief Executive Officer, Director

That's correct, yes.

David Campbell - Thompson, Davis, & Co.

Let's say it represents a tremendous opportunity going forward.

Roger I. MacFarlane - Chief Executive Officer, Director

Absolutely.

David Campbell - Thompson, Davis, & Co.

And the... second and last question is in general the revenue growth of the company is not the problem as I see it. The gross or net revenue gross, is this constant... consistent growth in salaries and other costs. It's not quite clear to me, how you expect that to improve in the next two quarters or going beyond in the next fiscal year.

Roger I. MacFarlane - Chief Executive Officer, Director

Well David I agree with your point which you made, John will respond to the actions we've already taken.

John S. Hextall - Executive Vice President, Chief Operating Officer

Hi David.

David Campbell - Thompson, Davis, & Co.

Hi John.

John S. Hextall - Executive Vice President, Chief Operating Officer

Good morning. I think one of the things that we have actually done is adjust those three aspects of cost management. I'd mentioned earlier on in the meeting we had in June, that we are looking at the loss making activities to eliminate those, we are half way there. Secondly, we looked at the companies that we are growing at a much faster rate, operating cost growth and net revenue growth. We've got action plans on those, part of that was also been address by some of the severance which continues in quarter three. And the third thing was of course just to make sure that people were sticking to budgets. And so, I think we don't want to do is to prejudice our revenue growth and of course in that area we have taken costs on. So whether it be new freight forwarding business or new contract logistics business, we have had costs to support those new businesses. So, you won't be able to see it as clearly in the numbers, when you look at just stock cost growth. But what I am saying is, we got to look at the bigger picture of the overall next two quarters and our operating ratios, that's the focus.

David Campbell - Thompson, Davis, & Co.

Okay well that's great. I certainly appreciate the Company's success and revenues that's in the long run, that's the key. Thank you.

Roger I. MacFarlane - Chief Executive Officer, Director

Thanks.

Operator

And your final question comes from the line of Ed Wolfe with Bear Stearns.

Edward Wolfe - Bear Stearns

Hey guys, just a last question. Lawrence what's the timing, now that you are generating the cash, you got this big cash balance and you're not making acquisitions in the near-term. When do you pay down some of the debt, what's the timing on that?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Ed the notes... the commencement is at the beginning of the third year. So, we... I need... so year-over-year interest. So, we still got two years to go. Just also to confirm, I did mention that Israel we expect to close in the near future. So, there will be cash for that, we also do have some earn-outs on the go and if you remember Span International was the largest, which has a potential to earn-out of about $28 million, which are on track to meet, which will come at the beginning of the first... of next year. So, there is still are some earn-outs on the cards, which obviously we need the cash flow as well.

Edward Wolfe - Bear Stearns

Okay, so you are not going to pay down even the short-term debt there's no revolver to pay down, there is nothing?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Well we do manage that. But again because each individual operation has working capital requirements, we got to manage the movement of cash in and out of individual countries. So, we do manage that on a regular basis and we do keep that as low as possible.

Edward Wolfe - Bear Stearns

What are your earning on... what's your interest on the cash piece of this?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

Ed again, it does vary by jurisdiction where the cash is located. Obviously, we do through cash management and cash pooling, maximize that and second advantage of us... of our international structure as well.

Edward Wolfe - Bear Stearns

And what's the average?

Lawrence R. Samuels - Executive Vice President andChief Financial Officer

I think I will stay away from that, it's certainly as higher than you will get in the U. S.

Edward Wolfe - Bear Stearns

Okay, thank you.

Operator

I do apologize sir, you do have one more question. There's a follow up question from the line of Jon Langenfeld with Baird.

Unidentified Analyst

Hi, I just had a couple of follow ups on the contract logistics side of the business. Could you comment on the pace of the conversion of business, within the pipeline there, has it been consistent, have you seen some pressure with the economic slowdown?

John S. Hextall - Executive Vice President, Chief Operating Officer

Hi, it's John speaking. I think we are actually doing very well in our implementation. We've got a number of new clients we're implementing right now and particularly in the United States with our integrated logistics division and also with Span and we are also looking at the cross-selling opportunities as well, with those new clients as we can convert that business ultimately to other services such as aero nation [ph] and brokerage. So, no we are quite happy with the development from the contract logistics side.

Unidentified Analyst

Okay, great and then with the existing contracts that you have, and their volumes, have you noticed any sort of tapering off or is that been consistent as well?

John S. Hextall - Executive Vice President, Chief Operating Officer

I think if you look specific things like Wal-Mart volumes are lower than when the contract started. But of course they settle down since then, I think obviously there has been a somewhat of an impact from the Asia slowdown. But, not so material.

Unidentified Analyst

Okay great. Thank you.

Operator

At this time, I would like to turn the conference back over to management for any closing remarks.

Roger I. MacFarlane - Chief Executive Officer, Director

Thank you Janice. I think as there are no more questions, I would like to thank all of you for participating in our call this morning. And on behalf of all of us at UTi, thank you for your continued interest in UTi Worldwide and your ongoing support.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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