UTi Worlwide, Inc. F3Q08 (Qtr End 10/31/07) Earnings Call Transcript

UTi Worlwide, Inc. (UTIW)

F3Q08 Earnings Call

December 6, 2007, 11:00 AM ET

Executives

Jeffrey D. Misakian - VP, IR

Lawrence R. Samuels - EVP and CFO

John S. Hextall - EVP and COO

Roger I. MacFarlane - CEO

M.J. "Tiger" Wessels - Vice Chairman of UTi and Chairman of UTi Worldwide

Analysts

Thomas Wadewitz - J.P. Morgan

Alex Brand - Stephens, Inc.

Edward M. Wolfe - Bear Stearns

Arthur W. Hatfield - Morgan Keegan

Todd Fowler - KeyBanc Capital Market

David Campbell - Thompson Davis & Co.

Jon Langenfeld - Robert W. Baird

Jason Seidl - Credit Suisse

John R. Mims - BB&T Capital Markets

Presentation

Operator

Good afternoon. My name is Janice and I will be your conference operator today. At this time, I would like to welcome everyone to the UTi Worldwide Fiscal 2008 Third Quarter Financial Results 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.

Mr. Misakian, you may begin your conference.

Jeffrey D. Misakian - Vice President, Investor Relations

Thank you, Janice and good morning everyone. Welcome to UTi Worldwide's fiscal 2008 third quarter results conference call. Joining us on the call today are Roger MacFarlane, Chief Executive Officer; John Hextall, Chief Operating Officer; and Lawrence Samuels, Chief Financial Officer. Tiger Wessels, Vice Chairman is also here and available to answer questions during the Q&A session.

Lawrence Samuels will begin today's presentation with an overview of the company's fiscal 2008 third quarter results and John Hextall will provide an update on operations. Roger MacFarlane will then comment on selected highlights, and provide closing remarks before we move into 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 historical facts. They maybe 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 described 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.

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

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Thank you, Jeff and Good morning everyone. This morning, we reported fiscal third quarter 2008 earnings of $0.35 per diluted share, an increase over the $0.31 per diluted share reported in the same period last year. Gross and net revenues in our fiscal 2008 third quarter increased 25% and 24% respectively over the same period last year. Excluding contributions from acquisitions, gross and net revenues increased by 21% and 16% respectively; well ahead of market growth and our key competitors. This robust performance was driven by growth across all of our service lines and regions and which I will address in a moment.

We continue to tighten expenses through our cost reduction measures. We fully realized the benefits of these measures in the third quarter, which delivered cost savings of just under $6 million before severance cost of approximately $1 million.

Operating expenses increased 5.8% over our fiscal 2008 second quarter on a net revenue increase of 6.6%. Although it is important to note that the fiscal third quarter expenses included $1 million in fees associated with the Department of Justice investigation and staff cost of $3.4 million associated with the contract logistics operation that I will discuss in a moment. The DoJ investigation costs are likely to continue and have a 1% to 2% per share impact in the fourth quarter. Staff costs, the largest component of operating expenses were 52.9% of net revenues in the third quarter, a decline of 54 basis points from our second quarter and more than 200 basis points from our first quarter.

Other operating costs were 31.5% of net revenues in the third quarter, the same ratio reported in the second quarter and a decline of 76 basis points from the first quarter.

As you can see, we continue to keep expenses in line even with the unusual items I mentioned in the press release. As a result of the revenue increase and expense tightening, our operating margin improved in the fiscal 2008 third quarter to 12.5% compared to the 11.8% reported in our second quarter, and 9.3% in our first quarter of fiscal 2008. We expect to see continued improvement in the operating margins although, as we have previously mentioned, it will be difficult to see the actual impact on the cost line as we incur cost to support our revenue growth.

Airfreight forwarding gross and net revenues were up 25% and 17% respectively over the prior year's third quarter. Airfreight yield in the fiscal 2008 third quarter declined to 21.7% compared to 23.2% in the same period last year with two-thirds of a decline attributable to the record level of fuel surcharges. Airfreight yields were also impacted by tighter capacity from resistance to peak season surcharges and the weakening U.S. dollar. In addition, Greater China's yields were further affected by year around pricing agreements for new large clients that were added at the beginning of the peak season. However, as pricing adjusts towards the non-peak period, we expect to benefit from this strategy.

Ocean freight forwarding gross and net revenues increased 23% and 15% respectively over the third quarter last year. Ocean freight yields declines to 15.3% in the third quarter compared to 16.3% in the same period last year. This decline is primarily due to the higher fuel surcharges coupled with tighter capacity and trade lane mix.

Contract logistics gross and net revenues increased 37% and 38% respectively over the prior year third quarter, due to organic growth and contributions from our acquisition of Span International. We continue to see growth from new business including newer Home Depot facilities as well as expansion of business with existing clients.

Contract logistics margins were negatively impacted in the third quarter by staff cost of $3.4 million incurred in connection with the new operation in the Americas. Revenue has not been recognized for this portion of these costs, as we are currently engaged in negotiations with the client to resolve a contract dispute related to this operation. If we cannot resolve this matter satisfactorily, it is likely to have a negative impact of approximately $0.01 per quarter, the remaining four years of the contract.

We were also disappointed to receive word from Wal-Mart recently that they had exercised their 60-day termination clause with respect to our outsourcing agreement for The Baytown, Texas facility, effective March the 1st, 2008. We believe, based on our discussions with Wal-Mart, that this decision was based on a strategy to in-source these services; it was not based on any service issues with us. We are working on a concession plan with Wal-Mart and will not incur any material costs associated with the termination of this agreement. The termination is expected to reduce annualized gross and net revenues by approximately $60 million and earnings per share by approximately $0.03 to $0.04 per annum, beginning March, the 1st, 2008.

As expected, the continued challenging trucking environment in United States has had an impact on distribution revenues, which accounts for about 60% of our distribution net revenues. Net revenue from our U.S. operations declined compared to the third quarter last year, somewhat offset by growth in other locations. We expect to see the challenging U.S. domestic trucking market continue for at least the rest of this fiscal and into next year.

Turning to our segments; we are pleased that nearly all regions reported strong growth and net revenue growth, the one exception being Greater China which I will talk about in a moment. EMENA delivered exceptionally strong net revenue growth of 36%, most of which was organic, with a portion attributable to the strengthening of the euro. Operating margin for EMENA declined to 14%, compared to 14.7% a year ago, primarily due to business mix.

The Americas Freight Forwarding operations grew net revenues in the quarter by 15%. Exports have continued to rise and have offset the impact of lower import yield, particularly from China. Operating margins in the Americas Freight Forwarding operations, improved to 19.4%, compared to 10.3% in the year ago third quarter.

The Americas Contract Logistics operations increased net revenues by 29% in the third quarter due to organic growth and contributions from Span International, which grandfathers in the fourth quarter. Operating margins however, declined in the quarter to 7.4% versus 10.7% in the same period last year, entirely due to the issue that I mentioned previously.

Net revenues in Asia Pacific increased 20% in the third quarter. The operating margin improved 32.7% in the quarter, compared to 31.2% for the quarter a year ago. All operations in this region continue to deliver improving performance.

Net revenues in Greater China grew less than 1% in the quarter on a gross revenue increase of 26%. As I mentioned previously, Greater China's yields were impacted by a number of factors. As a result, the operating margin in Greater China declined to 36% versus 47.2% in the year ago third quarter.

Net revenues in our Africa segment grew 12% in the quarter. The operating margin in Africa increased to 16.3%, compared to 14% in the same period last year, reflecting our revenue increase and expense controls. We are particularly pleased with the performance of our freight forwarding operations in this region.

Our effective tax rate in the quarter was 26%. This was lower than our guidance for the year, as the majority of other income in the quarter had no tax expense associated with it. We expect that our effective tax rate for the year will now be between 27% and 29%.

With that, I'll turn the call over to John. John?

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

Thank you, Lawrence. We are pleased with our annual overall quarterly performance, which was a record for the company in many respects, despite the issues that Lawrence has just covered. We have made a lot of progress this year, demonstrating our ability to execute in a number of areas. We still have room for improvement though and we continue to move in the right direction and are confident in our ability to deliver improved operating performance. This is demonstrated by the fact that without the contract logistics dispute and the DoJ expenses, our operating profit in the quarter would have been almost $54 million.

Gross revenue growth in the third quarter was very satisfying, although some of the growth related to fuel surcharges and currency. On the net revenue side, our growth... organic growth of 16% was one of the highest growth rates in the industry. This demonstrates our continued focus on the freight forwarding opportunities, some of which came as a result of our cross-selling successes and the integration of contract logistics and transportation operations. In fact, many recent successes have come about because of client needs for a complete integrated solution.

For example, Motorola, which we have mentioned previously, is a freight forwarding client, which we won from a major competitor. We were awarded the freight forwarding opportunity primarily because of our complete service capabilities, as Motorola plans to extend into other non-freight forwarding opportunities.

Another example is Dow Corning, where our integrated offering has allowed us not only to maintain that global freight forwarding business but to continue expanding our contract logistics and distributions service offerings for this client as well. These are just two examples of how our clients are benefiting from our complete supply chain offering.

This is important to ensuring the continued growth in our freight forwarding operations where the operating margins in the regions that primarily performed freight forwarding services, with 20% in the fiscal 2008 third quarter compared to 19% a year ago. Similarly for the Contract Logistics and Distribution services, we are benefiting from cross-selling successes as we realize revenue synergies from our client base. A couple of recent examples of these successes are JohnsonDiveresy and Case New Holland. As a result, we saw strong organic net revenue growth in the Contract Logistics and Distribution services in the third quarter.

The operating margins in the two regions that primarily performed contract logistics and distribution services were 8% in the third quarter but would have been 10%, excluding the contract dispute previously mentioned.

Next, let's talk about yields. Both air and ocean yields decreased during the third quarter due to a number of reasons. Obviously, peak season pricing and fuel surcharges were two significant factors. For example, the increase in fuel surcharges on airfreights in the third quarter represented 100 basis points of the 150 basis point overall decline from the prior year.

As many of you know, we spend more than $2 billion per year on transportation costs. We recently appointed a professional procurement executive to lead a more aggressive carrier procurement process. Given our rate of revenue growth and the integrated nature of the services and solutions for our global clients, we are also strengthening our client service process for acquisitions of business with an emphasis on pricing and implementation.

Let me turn now to our operating costs. We committed to reducing these costs and I'm pleased to report that our plans are being successfully executed within the time frame communicated. However, this is an ongoing process, and although it continues to grow our revenues in a faster rate than our costs. Since taking our miney role [ph] in April, we have eliminated more then 350 positions, continued in our progress of aligning cost to revenue growth at the operational level and turned around the majority of the underperforming operations and we continue to fix the remaining ones.

Finally, I want to bring you up to date on our acquisition in Israel, which closed late in the third quarter. This operation is performing on plan and our integration program is on track. We are now the second largest provider of freight forwarding and customs brokerage services in the growing Israeli market. This combined operation is expected to deliver $0.03 to $0.04 in earnings per share per annum next year.

With that, I will turn the call of to Roger. Roger?

Roger I. MacFarlane - Chief Executive Officer

Thank you, John. Our ability to consistently drive double-digit organic growth across all our regions and service lines demonstrates the success of our strategy and the strength of our service offering. Our focus on plant simplicity is generating increasing confidence in our comprehensive offering and we continue to secure more new business with strategic partners and relationships with new global clients.

Our CLIENTasONE strategy is working. Part of the reason freight forwarding is performing so well is because of our ability to offer more services. Clients that want an entire package of services often begin a relationship with us in freight forwarding and expand from there to other services. Our freight forwarding services are increasingly benefiting from contract logistics clients, who engage us for freight forwarding services.

We have also demonstrated steady progress this year on operating margin improvement. We fully realize the benefits of our cost reduction plan in the quarter and we have delivered tangible cost savings. Yet as John has mentioned, we are constantly targeting other areas to improve our efficiency. Operating margin improvement remains one of our five performance platforms essential to the success of CLIENTasONE.

I'm also pleased to update you on our previously announced new management structure. Operationally, we are on track with our transition to a single global enterprise, which is managed on an integrated basis. We have established clearly refined roles and responsibilities with accountability for operational and financial performance. While this may not be clearly visible externally, we are making substantial progress.

It is important to keep in mind that we are operating in uncertain economic times and we do not see these conditions changing in the near future. We continue to believe that we will achieve our earnings per share guidance of $1.09 to $1.15 per share. But current conditions suggest that we may end the year closer to the lower end of this range. This represents our best estimate based on a number of assumptions that we believe to be a reasonable. Please keep in mind that any of these assumptions could prove inaccurate. Many risks and uncertainties may cause actual results to differ materially from our guidance. We encourage you to review our SEC filings for more detailed information regarding the risk and uncertainties facing UTi. We also wish to remind you that this guidance is not an indication of the change in practice with regard to providing guidance in future periods.

With that, we would like to open the call for your questions. Janice?

Question And Answer

Operator

Thank you, sir. [Operator Instructions]. Your first question comes from the line of Tom Wadewitz with J.P. Morgan.

Thomas Wadewitz - J.P. Morgan

Yes, good morning.

Roger I. MacFarlane - Chief Executive Officer

Hello, Tom.

Thomas Wadewitz - J.P. Morgan

Wanted to see if you could give some perspective on the logistics, the contracts and I guess logistics in general. Do you have a significant portion of the mix of business that is similar to Wal-Mart where the customer could opt out or the pricing structure could... I guess the cost structure could seemingly change as this disputed contract has and what would be the risk that we would have I guess more developments like we've seen in the current quarter in other logistics contracts?

Roger I. MacFarlane - Chief Executive Officer

Tom, we have a number of customers where we have contractual commitments on contract logistics and of course most of them have termination clauses that do vary, but usually termination clauses are established early on to allow both parties to withdraw if they wish to. I think that the Wal-Mart situation is one that we have a few other customers that have contract similar where they could decide to in source but our experience has been that most customers are moving in the opposite direction and that is to look increasingly at outsourcing their activities. And I think we see that as something that is providing opportunities for growth for us. But there are no cost risks associated with the situations as you saw from Lawrence's comments on Wal-Mart.

Thomas Wadewitz - J.P. Morgan

Okay. And so have you included in your comment on the guidance that this other contract would continue to be a headwind or not? I think it's only $0.01 a quarter, but is that included in your fourth quarter guidance?

Roger I. MacFarlane - Chief Executive Officer

Yes, it is.

Thomas Wadewitz - J.P. Morgan

It is. Okay, thank you. I guess I'll get back in the queue for a second question.

Roger I. MacFarlane - Chief Executive Officer

Thank you, Tom.

Operator

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

Alex Brand - Stephens, Inc.

Good morning. I guess, I want to ask contract logistic question to Roger, if I could.

Roger I. MacFarlane - Chief Executive Officer

Go ahead Alex.

Alex Brand - Stephens, Inc.

It looks like if I take this contract and I add it back, its still looks like your contract logistics margins are going down and I guess I want to understand as part of this whole margin picture there is a whole bunch of moving parts and I guess some one-time items, but freight forwarding looks pretty good. Can you speak to may be absent the $3.4 million, what is the rest of the business look like and why would the margins be going down?

Roger I. MacFarlane - Chief Executive Officer

Alex, I'll ask John to respond to that question.

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

Okay. Good morning Alex. I think on the contract logistics side and with the exception of the client we've alluded to, we see the contract logistics revenues and yields trending in the current environment quite bullishly, I think on both fronts. We're continuing to secure new contract, as I mentioned in my scripts that we are seeing a lot of that supporting the freight forwarding side, in other words people want may the consolidation center, had it moving the freight. So we see those two things being together.

If going back on to your numbers, if we exclude the cost that we are not able to recover, we would have had an operating margin for contract logistics of around 10%, which I think is quite exceptional in this industry. We are looking to expand the yields in this area; typically there most contract logistics operations are at standalone sites. We have very few which are integrated around the world. We have... I can only name one client that we have which has falling sites.

Alex Brand - Stephens, Inc.

All right. So in other words; John, you are saying 10% is a good number and it would be unrealistic to think that's going to go up much in the future? That's where I'm off.

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

Yes, I think we've alluded before to specialized solutions where we can do more value-added services and they typically would generate higher yields, but our overall mix of business have some in the single-digits and some in the late teens and that's giving us this average around 10.

Alex Brand - Stephens, Inc.

Okay. I guess is there only one question, Roger?

Roger I. MacFarlane - Chief Executive Officer

Yes, we did say that Alex.

Alex Brand - Stephens, Inc.

Okay, I will get back in.

Roger I. MacFarlane - Chief Executive Officer

Thanks.

Alex Brand - Stephens, Inc.

Thank you.

Operator

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

Edward M. Wolfe - Bear Stearns

Hey, good morning Roger.

Roger I. MacFarlane - Chief Executive Officer

Hello Ed.

Edward M. Wolfe - Bear Stearns

I have more of a strategic question. I listen you guys on the call and I hear everybody congratulating themselves that the strategy is working, yet I see your stock down two points on my screen. So investors aren't appreciating it and I noticed that, as strong as your revenue has been certainly better than anybody expected, your total expenses excluding transportations, your operating expenses as a percentage of net revenue has been growing every quarter, faster than your net revenue and you have been very focused on trying to work on the expenses, yet this quarter, its gone worse, the disparity in the margin has gone worse. And I was hoping that you are going to say on this call that some of these things were going to go away. But you kind of saying, the contract logistics stuff that you get caught in, these contracts don't go away so quickly. So is it time to rethink the strategy may be? That's the question.

Roger I. MacFarlane - Chief Executive Officer

Ed, that's a very good question and I think the issues that we have on the contract logistics are, in a number of cases related to execution. What we are finding and certainly my personal experience of talking to critical customers is that what appeals to them is our capacity to have skills and capabilities that will allow them to look at managing the total supply chain, particularly the inventory levels. And we have a number of cases where customers are examining how they can reconfigure how the supply chain works. And we have to have the capability to do vendor managed inventory and things like that.

These are all in the contract logistics side of our business, and a lot of customers are giving us therefore the entry point into freight forwarding, because they understand that we have capability in other aspects of supply chain. So if you're looking at a long-term partnership relationship, you need to establish that relationship with somebody who has the capability to help you manage the supply chain more comprehensively. That's the experience that we're coming across, which is why we believe that our strategy is justified. And that is also why we believe we're growing at a faster rate in freight forwarding than we would otherwise have done without contract logistics.

Edward M. Wolfe - Bear Stearns

I'm not questioning that the logistics is helping the forwarding grow.

Roger I. MacFarlane - Chief Executive Officer

Okay.

Edward M. Wolfe - Bear Stearns

The question I'm trying to get at is, realizing that you can grow, but it seems hard to also keep your margins or grow your margins. And that investors are rewarding you when you're growing and growing your margins, but they've not been rewarding you. They've been punishing you, since you stop growing your margins. Does that change the way you go about this? Is there a way to do this business in a different way where you grow forwarding faster than logistics, slowdown the logistics expansion and start to grow margins again? How do you think about that?

Roger I. MacFarlane - Chief Executive Officer

That is absolutely right. And I think you're right on. We are very much engaged in working out, how to continue to grow margins comprehensively of the company. That is the very big focus and I think the point has been made. I think you were making the point that we haven't experienced a slowdown in the expense growth at a higher rate than net revenue, despite the cost reduction... the successful implementation of our cost reduction plan. And as John said, we are continuing to focus on those areas that are not performing and the individual execution of some of the contracts that we've had. I think we are learning a lot as we go along. And I think we are confident that we are going to get our hands around these execution issues.

Edward M. Wolfe - Bear Stearns

Again I'm going to ask, because I think this is one question I keep asking. From a strategic standpoint, are some of those things done better as a private company than a public company? And is that something that maybe should be entertained?

Roger I. MacFarlane - Chief Executive Officer

We don't believe so Ed.

Edward M. Wolfe - Bear Stearns

Okay. Thank you, I appreciate it.

Roger I. MacFarlane - Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Art Hatfield with Morgan Keegan.

Arthur W. Hatfield - Morgan Keegan

Thank you. Good morning Roger. Just one quick question on the accounting in the quarter, the $2.5 million benefit from the Israeli acquisition, could you talk about that and then how we should think about that particular line item going forward?

Roger I. MacFarlane - Chief Executive Officer

Okay. Art thanks for that question, I'll ask Lawrence to respond.

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Good morning, Art. Just that is a one-time gain that was realized following the final merger and signing of all the documents in October... after we completed the acquisition and the various valuations that resulted in that gain. But it is a one-time and we don't anticipate that line item being at that level going forward.

Arthur W. Hatfield - Morgan Keegan

Okay, one quick follow-up if I could. You made some valuation assessments, is there chance going forward that you could see adjustments to that gain?

Roger I. MacFarlane - Chief Executive Officer

No.

Arthur W. Hatfield - Morgan Keegan

Okay. Thank you.

Roger I. MacFarlane - Chief Executive Officer

Thanks Art.

Operator

Your next question comes from the line of Todd Fowler with KeyBanc Capital Market.

Todd Fowler - KeyBanc Capital Market

Good morning everybody.

Roger I. MacFarlane - Chief Executive Officer

Hello Todd.

Todd Fowler - KeyBanc Capital Market

Roger, I guess, what I am curious about is, looking at where you're going to come in for the year, thinking about the Wal-Mart contract, thinking about the Israeli acquisition and then thinking about the current environment, looking out to next year, how does all that line up for the longer term, the five year or EPS growth of 20%? I mean there is only thing right now that you see that will prohibit you from next year having 20% earnings per share growth, I mean... I guess as I think about the strong freight forwarding revenues and the expense issues, can you still get there, given some of the other things you laid out here today?

Roger I. MacFarlane - Chief Executive Officer

Todd, we are very focused on the objective of our CLIENTasONE, journey from a performance standpoint. And we've publicly communicated the 20% EPS growth. I think what we will find we are facing a very uncertain economic times. And we have recognized that on the one hand. On the other hand, I think as John outlined, we are continuing to work on the operations that are not performing at the right level. And yet, we are also focused very much on continuing to grow our revenue line. So with all of those things taken together, we are not communicating any change to our overall CLIENTasONE target. Recognizing of course that that is not meant to be guidance nor is it meant to be a forecast; it is our business target for the CLIENTasONE journey and that's what we have communicated.

Todd Fowler - KeyBanc Capital Market

Thank you, and yes I do understand that Roger as far as your guidance versus longer term plan. I guess for my follow up, you made some comments about seeing some improvement in export volumes domestically. Can you give a little more color on specifically what the nature of those movements are, I mean exactly what you're seeing there?

Roger I. MacFarlane - Chief Executive Officer

Todd, I'll ask lost John to respond on that one.

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

Good morning, Todd.

Todd Fowler - KeyBanc Capital Market

Good morning, John.

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

I think we mentioned early on that we had a slight slow down in our U.S. inbound yields due to the business from China with much stronger capacity demands on that blame and the fuel surcharges, but I think with the weaker U.S. currency, we have certainly seen an uplift in our exports from USA in both airfreight and sea freight from the forwarding division. And we've seen those movements to Europe expanding and also within the Americas to Latin America as well. We particularly expanded on some of our existing clients, I mean automotive and in other sectors where we see some regular business north and south.

Todd Fowler - KeyBanc Capital Market

Okay, good. Thanks for the color. I'll get back in the queue.

Operator

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

David Campbell - Thompson Davis & Co.

Yes. Someone, I guess, it was Lawrence mentioned that the Israeli acquisition would add $0.03 to $0.04 in earnings per share in fiscal 2009. Does that... that we've already gotten some benefit from it in the third quarter from the non-operating line. Is that $0.03 to $0.04 in addition to the benefit in the third quarter?

Roger I. MacFarlane - Chief Executive Officer

Hello David. I'll ask Lawrence to explain the difference between those two points.

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Yes. David, certainly the $0.03 to $0.04 is, as a result of operations in fiscal '09. The benefit in this third quarter as I mentioned was a once-off related to the actual acquisition and not related to operating.

David Campbell - Thompson Davis & Co.

Okay. And just one other one and that is, you're not recording revenues on the disputed contract. But you're saying if it's not resolved, it will still cost you $0.01 per quarter. Will there be revenues then in that... from that contract?

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

There will be revenues for the contract, but not associated with those costs that we're incurring. So these are additional costs over and above.

David Campbell - Thompson Davis & Co.

Okay. Thank you.

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Thank you.

Roger I. MacFarlane - Chief Executive Officer

Okay David.

Operator

Your next question comes from the line of Jon Langenfeld with Robert W. Baird.

Jon Langenfeld - Robert W. Baird

Good morning.

Roger I. MacFarlane - Chief Executive Officer

Hi Jon.

Jon Langenfeld - Robert W. Baird

Roger, you keep talking about the economy and your questions on the economy; and favoring the lower end of your full year guidance and maybe not even 20% growth next year and kind of looking back at a tough economy yet. I'm looking at your top line trends; I'm looking how you're growing. The growth looks to be there, in fact it looks stronger today than it was a couple of quarters ago. So, is your reticence and your concern more to do with your internal execution and the cost side of the equation than it is the external environment because, on paper that's what it looks like?

Roger I. MacFarlane - Chief Executive Officer

John that's a great question and certainly, we are happy with the way in which customers are responding to what we have to offer, and the way in which we're expanding our relationships with our existing clients, where most of our growth is coming from. So that gives us a lot of confidence that we are able to weather the economic issues that are facing us. But the uncertainty that's created one... always makes one cautious as we look forward.

So that really is the nature of why we're communicating the economic conditions as a factor. But we are very focused on the execution. And we are very pleased with the cost... management... the results of our cost management plan. We know there is more to do and there is more we can do. And we are already working on a lot of issues that we think will bear fruit next year. So I wasn't trying to change our 20% EPS target in my earlier response. If it sounded like that, that wasn't intended. But I did say that it is a management target, it's not a forecast.

Jon Langenfeld - Robert W. Baird

And so why on the expense side... I mean you talk about being pleased with the progress and maybe we're just not able to see it yet. But I think most investors would look at this business on a year-over-year basis, given the seasonality and probably won't give any credence to the sequential numbers that you highlighted them. So, I guess when you look at on year-over-year basis, what's it going to take to get the expense growth to be less than the net revenue growth. Or are we there and we just haven't seen it reported in the financials yet?

Roger I. MacFarlane - Chief Executive Officer

Well, I think probably both things are true. Things take time to reveal themselves. And so I do think that we will see the greater effect of what we've been working on. We will see that in the year to come. But maybe John, you could add some color to Jon's question.

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

Jon, I think when we met at the Investor Day earlier in June, we talked about the cost program we've put in place to immediately focus on underperforming operations and so on. And that we've executed. The cost management is an ongoing process as I said, we can do more. I think when we look at those under performing operations, which were largely the ones that we are losing money, we've turned those around and there is still a couple of it that have got some issues. But the other one is, I think on some of the areas where we had business with very low margins, we are looking how we can reengineer that and some of those low margin businesses do have a lot of cost with them and particularly in the people side. So we are looking at how we can change our efficiencies.

Organizationally, what we are doing is using our larger operations as centers of excellence to go out on a global scale to help improve performance. So where we've had some areas that are been underperforming in a region, we've transported people from let's say, United States to Europe and also to China and Hong Kong to look at those operations and see what we can do to improve them. And we are seeing good traction in those areas.

But I just wanted to comment, if we look at the revenue growth organically, its 16.3 excluding acquisitions and exceptional items we had in our third quarter, our cost growth is actually 15.9. So as far as we are concerned, we are making progress. It doesn't always look like that when you see the overall headline figures. But I can assure you we are on top of that.

Jon Langenfeld - Robert W. Baird

Good, Thank you.

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

Yes.

Operator

Your next question is from the line of Jason Seidl with Credit Suisse.

Jason Seidl - Credit Suisse

Good morning gentlemen. If we look at your organic growth and excluding the impact from currencies, is it the same or was that quarter without currency impacts?

Roger I. MacFarlane - Chief Executive Officer

Jason, Lawrence will respond to that.

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Yes. Jason, it was just excluding acquisitions.

Jason Seidl - Credit Suisse

So how much did currency impact you in the quarter for your organic growth?

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Jason, it was about 5%.

Jason Seidl - Credit Suisse

5% was currency, okay, all right. And my quick follow-up here about the DoJ cost, can you breakdown where those costs are coming from and what's the company's official stance in terms of where you stand with any potential fines?

Roger I. MacFarlane - Chief Executive Officer

Lawrence, do you want to answer that?

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Well, in the terms of the cost, obviously those are the additional work we are doing internally in providing the additional information or obviously we have a legal team working in conjunction with the DOJ and sifting through the information. And in terms of anything else, we clearly can't comment on any thing out that we haven't publicly announced already.

Roger I. MacFarlane - Chief Executive Officer

Jason, if I can add, when the DOJ investigate these situations and I think you saw that most of our competition was similarly penaled [ph] by the DOJ. They do ask for huge amount of information and takes a huge amount of effort and cost on our side to respond to the request which is why the number is so big.

Jason Seidl - Credit Suisse

And in terms of your estimates for the costs going forward, how long this is going to continue? Do the DOJ sort of just give you a timeframe how long you think this investigation is going to run?

Roger I. MacFarlane - Chief Executive Officer

No unfortunately they don't, and unfortunately we have no idea of how long this will take. I think if you look at the outcome on the airline side, that's I think we are on for about 12 to 18 months or maybe as close as two years. So we have no idea.

Jason Seidl - Credit Suisse

Okay, fair enough. Thank you for the time.

Roger I. MacFarlane - Chief Executive Officer

Thanks Jason.

Operator

Your next question is a follow up question from the line of Ed Wolfe with Bear Stearns.

Edward M. Wolfe - Bear Stearns

Hey, just a follow up on the DOJ investigation. At this point, are you a target of the investigation?

Roger I. MacFarlane - Chief Executive Officer

Ed, no we are not.

Edward M. Wolfe - Bear Stearns

Okay. Because... and your best guess right now is about $1 million a quarter of expenses for legal and for responding to the subpoena.

Roger I. MacFarlane - Chief Executive Officer

Yes, we are obviously trying to narrow; we are working with the DOJ to narrow the scope of this subpoena, so that's an ongoing effort from our side. Of course, if we could do that, that would reduce our cost.

Edward M. Wolfe - Bear Stearns

It just is like everyone's got in the same request but no one else is talking about $1 million a quarter. So do you think there is anything different about the request you got from the other guys or you just being right there and responding?

Roger I. MacFarlane - Chief Executive Officer

Well probably the big problem is of all the people that have got these requests; we are probably the smallest in scale. So may be the number is bigger relative to lot of them, so this is why we comment on this compared to the other guys. We have no idea what they are spending on this.

Edward M. Wolfe - Bear Stearns

That's fair, all right. Thank you, I appreciate it.

Roger I. MacFarlane - Chief Executive Officer

Thanks.

Operator

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

John R. Mims - BB&T Capital Markets

Hey, good morning, guys. This is John Mims; I'm standing in for John Barnes. Lot of questions has been answered already, but one thing following up on the Israeli acquisition as you look at different geographical segments. Do you have additional acquisitions on the horizon or you actively looking or is that so far your growth strategy now?

Roger I. MacFarlane - Chief Executive Officer

John a good question. We had publicly communicated before that we had a moratorium on acquisitions with two exceptions; one is the Israeli acquisition which we have now completed and secondly, our potential acquisitions in our specialized solution area. So, that is still the position. Obviously, acquisitions play an important role in the growth of our business, so we will continue to look at them starting next year. But we will obviously evaluate acquisitions against alternative uses of capital and we will pursue only the best deal that we believe to be in the best interest of our shareholders.

John R. Mims - BB&T Capital Markets

Okay great, thank you. And one other thing that just kind of jumped out of me. On the balance sheet, your accounts payables seemed to jump way out of its historical average. Is there anything to that, is there... there some color you could add to that or is that just the one-time shot for the third quarter?

Roger I. MacFarlane - Chief Executive Officer

John, I will ask Lawrence to respond.

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Yes John. As you know, the third quarter is our heaviest priced season and if you look at the receivable, you will see a similar increase and is just really the seasonality related to the freight forwarding and the disbursements we make on for duties and taxes, so certainly nothing untoward in that.

John R. Mims - BB&T Capital Markets

Right, okay, thanks a lot.

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Okay.

Operator

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

Thomas Wadewitz - J.P. Morgan

Yes. I just got a follow-up question here. I know you have been asked a lot about the operating margins and I just wonder if you could give some perspective when you look to fiscal '09. Do you think it's realistic to see total margin improvement and if so, what you think are some of the key drivers that might allow operating margin improvement in fiscal '09?

Roger I. MacFarlane - Chief Executive Officer

Tom, that's a great question. We are really not... can forecast for next year. But what I can say is what I said in my prepared remarks earlier that one of the five platforms for performance in CLIENTasONE is operating margin improvement. So the organization is very focused on that. And we... I think John has outlined a number of the areas that we are looking at to see whether we can improve our operating... or to see how we can improve operating margin and in terms of Centers of Excellency we talked about. And the historical approach that we've taken to freight forwarding and as we grow our freight forwarding business we feel that we can gain margin improvement there as well.

I think John also outlined that we have had join our team a seasoned procurement executive that is helping us focus on the biggest cost we have, which is the $2 billion in freight spend. So, all of these areas of focus we believe will produce results in the future in terms of operating margin improvement.

Thomas Wadewitz - J.P. Morgan

Is there more... I guess in terms of some of the control of headcount, or the elimination, I guess 350 positions eliminated. Are there more activities like that you would consider for the next year, for fiscal '09? Or is that... was that kind of a one-time event for fiscal '08?

Roger I. MacFarlane - Chief Executive Officer

John will respond to that, Tom.

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

Tom thanks for that question. That was the first step of our cost management program, which we introduced in quarter two. But there are additional costs that we're looking to remove. As I mentioned in my thing, we outlined these five steps earlier in the year. We changed that management structure; we've started to align our revenues with our costs. We've looked at those underperforming operations and typically what happens is we stopped some ones that were bleeding. Some other ones maybe go from bad to worst and we have to go deeper into those things.

But I think the most important thing is we've got the visibility of what's happening from a local P&L standpoint. And we have the right management plans in place to address those things. So, we will close operations where they deem not to be efficient. And we've done some those in the last two months as well. We are definitely going to be having another round of measures on cost management going forward. We have the complete team in next week, as we look at our budgets for next year. And headcount obviously, remains the single biggest cost item that we have. And obviously efficiencies in operating process will determine what levels of headcount, when you're going forward. But that is going to be our key focus in 2008, FY '09.

Thomas Wadewitz - J.P. Morgan

Okay, great. Thank you.

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

Thank you.

Operator

[Operator Instructions]. Your next question comes from the line of David Campbell with Thompson Davis.

David Campbell - Thompson Davis & Co.

Lawrence, you said the organic growth would be and I quote, 11.3% in the last quarter without currency translation gains?

Roger I. MacFarlane - Chief Executive Officer

David, Lawrence will answer.

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Yes David, that is correct.

David Campbell - Thompson Davis & Co.

Okay. And so obviously, the cost growth would have been less too?

Lawrence R. Samuels - Executive Vice President and Chief Financial Officer

Yes.

David Campbell - Thompson Davis & Co.

In the Specialized Solution Group, you've had good revenue growth sequentially from quarter-to-quarter, but not any increase in profitability. Are there a lot of upfront costs associated with these revenues and will we see significant profit growth going forward in Specialized Solutions?

Roger I. MacFarlane - Chief Executive Officer

David, Tiger will respond to that.

M.J. "Tiger" Wessels - Vice Chairman of UTi and Chairman of UTi Worldwide

David, the Specialize Solutions is primarily an investment into opportunities of a future. As John and Roger said earlier on, some times you'll find the revenue is going into other operations such as freight forwarding and it's early in operations where we specifically ring sent them into the solutions area that I wish has the revenue there. We do believe one might say why are we persisting with investments in the future and we do firmly believe, for instance in the pharmaceutical side that the direct distribution model is some thing which is already here. We have evidence globally that the pharma industry, which is under pressure as we saw from the Wall Street Journal this morning, to generate efficiencies is looking towards a supply chain models like this to improve their profitability. And we've been in the area long time and we believe its worth holding in until the industry actually recognizes it on the global basis.

David Campbell - Thompson Davis & Co.

Okay. And finally Wal-Mart Roger, $60 million net revenue cost from annually termination of the contract, so that will come out beginning March of next year, is that correct?

Roger I. MacFarlane - Chief Executive Officer

Yes it will be March 1. And I think we are still negotiating the actual process of termination. So I don't know whether there will be any tail revenue at this point, but I think you can model that there will be no revenue from March 1.

David Campbell - Thompson Davis & Co.

Okay. And then you'd have to have some reduction in overhead and staff to compensate for that loss of revenues; is that correct?

Roger I. MacFarlane - Chief Executive Officer

Yes, you can assume exactly the same if the revenue reduces, all the cost will go away simultaneously and that is part of the process which Wal-Mart and we are very confident in having a transition plan that does not involve any transition cost being picked up by UTi.

David Campbell - Thompson Davis & Co.

Right. Of course you'll lose the revenue, the profitability from the $60 million annual business. Is that, that's also part of the problem, right?

Roger I. MacFarlane - Chief Executive Officer

Yes, in fact Lawrence's prepared remarks; he mentioned $0.03 to $0.04 a year annualized number starting March 1.

David Campbell - Thompson Davis & Co.

Okay, thank you.

Roger I. MacFarlane - Chief Executive Officer

Thanks David.

Operator

And there are no further questions at this time sir.

Roger I. MacFarlane - Chief Executive Officer

Thank you, Janice. As there are no further questions, I want to thank all of you for participating in our call this morning and on behalf of all of us here 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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