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Executives

Jeff Misakian - Global Vice President, Investor Relations

Eric Kirchner - Chief Executive Officer

Lawrence Samuels - Chief Financial Officer

Ed Feitzinger - Executive Vice President, Contract Logistics and Distribution

Analysts

Alex Brand - SunTrust Robinson Humphrey

Tom Wadewitz - JPMorgan

William Greene - Morgan Stanley

Ben Hartford - Robert W. Baird

Scott Group - Wolfe Trahan & Co.

Jack Atkins - Stephens

Todd Fowler - KeyBanc Capital Markets

Elliott Waller - Jefferies & Company

David Ross - Stifel Nicolaus

David Campbell - Thompson Davis

Kevin Sterling - BB&T Capital Markets

Keith Schoonmaker - Morningstar Research

UTi Worldwide Inc. (UTIW) F1Q13 Earnings Call June 7, 2012 11:00 AM ET

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the UTi Fiscal 2013 First Quarter Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, June 7, 2012.

I'd now like to turn the conference over to Jeff Misakian. Please go ahead.

Jeff Misakian

Thank you, Ian, and good morning everyone. Welcome to UTi Worldwide's fiscal 2013 first quarter results conference call. Joining us on the call today are Eric Kirchner, Chief Executive Officer; and Lawrence Samuels, Chief Financial Officer. Ed Feitzinger, Executive Vice President, Contract Logistics and Distribution, is also here and available to answer questions during the Q&A session.

Before we begin the presentation, I would like to point out that certain statements made in today's call are not historical facts. They may be deemed therefore to be forward-looking statements under the Private Litigation Reform Act of 1995. Many important factors may cause the company's actual results to differ materially from those discussed in any forward-looking statements.

These risks and uncertainties are described in further detail in the company's filings with the Securities and Exchange Commission. Please refer to these filings for more information regarding the risks and uncertainties that the company faces. UTi undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

Now I would like to turn the call over to Eric Kirchner. Eric?

Eric Kirchner

Thank you, Jeff. Good morning, everyone. Results in our fiscal 2013 first quarter were negatively impacted by the weak airfreight environment which has shown little sign of improvement on key trade lines. We mentioned this on our last call when you told you the volumes were likely to remain soft for the first half of the year, and many of our competitors have reported similar results to date. Additionally, our results were impacted negatively by the weaker South African rand.

Higher net revenue per unit relative to the same period last year partially offset these negative factors. We also experienced ongoing improvements in our contract logistics and distribution business which continued to deliver revenue and operating profit growth in the first quarter. Taken together, our overall results were slightly ahead of last year. In our freight forwarding segment, the percentage of air freight volume contraction was in the mid-teens in the first quarter. Part of this was due to a tough comparison with some of our highest volumes of the year shipped in the first quarter of fiscal 2012. But clearly the environment also paid a key role of many companies fewer heavy weight goods through the air.

It’s important to note that shipments were down only 6% in the first quarter, much less then the tonnage decline, as client moved fewer kilos per shipment. This has a negative impact on productivity in freight forwarding in the short term as most operating expenses are tied to shipments rather than tonnage. This was an issue for the entire industry. We remain focused on keeping costs under control and improving our productivity.

Our ocean freight continued to show modest growth in the quarter and inline with the market. Our efforts to improve our ocean product are showing result as client currently favor this mode of transit. Net revenue per unit has begun to erode recently as carriers, particularly in ocean freight, have been driving up rates in a big to restore their profitability. This may pressures yields in the short-term but we believe that we can manage this environment successfully.

In contract logistics and distribution, net revenues increased slightly in the first quarter. Organic growth came from new business wins in Africa and Asia and continued strength in our U.S. distribution business. Underlying volume improvements were most notable in the United States, while new wins were across the broader set of clients. We continue to make progress improving margin of businesses and client contracts which helped increased operating profit and margins.

I will now ask Lawrence to walk through the financial results. Lawrence?

Lawrence Samuels

Thank you, Eric. Net income attributable to common share holders in the fiscal 2013 first quarter was $0.12 per diluted share. Excluding severance costs, adjusted net income was $0.14 per diluted share in the fiscal 2013 first quarter. This compares to $0.12 per diluted share recorded in the same period last year, which was adjusted to remove severance and other transformational related costs, as well as costs related to the closure of certain underutilized facilities.

The weaker South African rand continued to have a material negative impact on our reported revenues in the first quarter of fiscal 2013, and generated a similar reduction in our expenses when translated into our U.S. dollar reporting currency. This weakening began late in the third quarter of last year and it’s likely to be affecting our competitive results for at least two more quarters.

Revenues and net revenues decreased 4.2% and 1.2% respectively in the fiscal 2013 first quarter compared to the same period last year. The decrease in revenues reflects the impact of a currency and the weaker airfreight environment, partially offset by greater activity in contract logistics and distribution and an increase in ocean volumes. Net revenues declined to a lesser extent, primarily because of the expansion in net revenue per unit of cargo relative to last year. On an organic basis, however, revenues were down only 0.6% while net revenues grew 3.4% compared to the same period last year.

As noted earlier, there were a few unusual items impacting results in both periods. In the first quarter of fiscal 2013, we incurred severance costs of $1.7 million which were primarily related to our ongoing transformational initiatives. Last year, unusual items totaled $4.8 million, and were comprised of severance costs of $2 million in freight forwarding related to our transformation, and $2.8 million in severance and facility exit costs relating to the closure of underutilized contract logistics facilities in Europe.

We have provided reconciliations of GAAP to non-GAAP results in the tables in today’s press release and posted more details on our website. The rest of my remarks will refer to our results as adjusted to exclude these costs. Adjusted operating expenses in the fiscal 2013 first quarter were 1.7% lower than the same period last year. The weaker rand had a large impact, reducing reported expenses in the fiscal 2013 first quarter. On an organic basis, adjusted operating expenses would have been 2.7% higher than the same period last year, which was less than the organic growth in net revenues.

Our adjusted operating margin in the fiscal 2013 first quarter was 6.2% compared to 5.8% in the first quarter last year. Revenues from the freight forwarding segment were down 8.2%. The revenue decline was impacted by the 13% drop in airfreight revenues, primarily due to a 14% decrease in tonnage shipped in the first quarter. Ocean freight TEUs were up 3% in the quarter, a modest improvement. We’ve seen little change in these trends in May, despite the easier comparisons.

Airfreight tonnage was down approximately 13% while ocean freight TEUs were up modestly in May compared to the same month last year. Net revenues in freight forwarding decreased 4.4% in the fiscal 2013 first quarter as the tonnage decline was partially offset by an expansion in net revenue per unit of cargo. Net revenue per kilo improved 4%, while net revenue per TEU increased 3% in the first quarter compared to the same period last year.

Currency had an impact on these figures as well. Adjusting for the currency impact, net revenue per kilo was up 7% and net revenue per TEU increased 6% in the first quarter compared to the first quarter last year. As Eric mentioned, carrier rates have risen significantly in the first quarter and this has had an impact on the sequential development of net revenue. Compared to last year’s fourth quarter, net revenue per kilo declined 9% and net revenue per TEU was down 8%. We are actively working to manage these rate increases with both carrier partners and clients.

Adjusted operating profit in freight forwarding decreased 13% in the fiscal 2013 first quarter compared to the same period last year. The freight forwarding adjusted operating margin in the first quarter was 10.2% compared to 11.2% a year ago. As mentioned, the decline in profit and margin was primarily due to the lower airfreight volumes, which were partially offset by higher ocean volumes and greater net revenue per unit relative to last year.

Contract logistics and distribution revenues and net revenues increased 4.8% and 1.5% respectively over the same period a year ago. As Eric mentioned earlier, volumes were higher than last year primarily due to new business wins in our Africa and Asia Pacific regions. Offsetting this was the impact of currency, which reduced net revenues in our contract logistics and distribution business by $13 million, as well as a reduction in yield in our distribution business.

Adjusted operating profit in contract logistics and distribution increased 30% in the first quarter of fiscal 2013 compared to the same period last year. The adjusted operating margin in contract logistics and distribution was 9.4% in the first quarter compared to 7.3% reported in the first quarter last year. The increases in profitability and margin primarily reflect greater productivity, as well as ongoing improvements in operations including those in Europe. Our effective tax rate was 31% in the first quarter of fiscal 2013. We continue to expect that our effective tax rate for the full fiscal year will be in the region of 32%.

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

Eric Kirchner

Thank you, Lawrence. Our transformation activities are on track. We are live and in-production with our integrated system in the Netherlands, and we are on target to initiate a broader rollout in the second quarter. While sequencing may change, we currently plan to launch next in several Northern European countries. We remain on target to have approximately half of our transactions on the system by the end of this fiscal year.

The external environment is uncertain and difficult to predict. The year is shaping up to be weak with airfreight lagging and we see little to suggest that will change. Clients continue to ship, but in smaller quantities in airfreight and with greater preference for ocean freight. Meanwhile, ocean carrier rates have risen materially this year. It remains to be seen how long these rate increases can be sustained, but the near-term environment is likely to put a bit of pressure on net revenue per unit of cargo.

We plan to manage this environment through our targeted growth strategies, pricing initiatives and productivity measures like better buying and increased use of gateways while tightly controlling costs. Contract logistics and distribution has produced more consistent results delivering modest growth and good return.

We’re focused on driving new business to offset revenue reductions from the client turnover that we highlighted last quarter. Our results will depend on a number of factors, not the least of which is the performance of regional economies especially those in Europe. While the environment may be volatile and visibility low, we’ve navigated these circumstances in the past. This requires profitable growth, productivity improvement and cost control, and we plan to remain extremely focused in these key areas.

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

Jeff Misakian

Thank you, Eric. We will now open up the call for your questions. As a reminder we ask that you limit your questions to one initially to allow as many as possible to have an opportunity to participate. Ian, may we have the first question please.

Question-and-Answer Session

Operator

Sure. Our first question comes from the line of Alex Brand with SunTrust. Please go ahead.

Alex Brand - SunTrust Robinson Humphrey

Good morning, guys. Which question, Jeff? I guess, I would just want to go with the last statement Eric that you just made about the macro picture. I think before you had said that with the easing comps in airfreight, you guys felt like the back half would be better. And so I just want to make sure that I’m clear that you’re saying that you’ve sort of changed that view now? And I also want to make sure that I’m clear on what the trends are in May? April was bad and May stayed bad in both air and ocean. Can you just go back over all that stuff again?

Eric Kirchner

Sure. I would say that our initial read on this year, and obviously we don’t give guidance, but initial read on this year was with the expectation that the second half would improve over the first half and it’s really difficult to make that assertion at the moment because there is nothing on the horizon to say that’s going to happen. So what we’re planning is aggressive focus on our costs and I think if you look at the results for the first quarter in response to the lagging volumes, we’ve operated effectively in keeping our cost in line with the reduced volumes. Again, it’s difficult in this environment when the shipment count is not declining at the same rate as the tonnage, to keep that dynamic in balance. But I think it’s more prudent at this point to not bank on some big windfall on the second half of the year and if you look at our numbers and compare them to either one of our key competitors commented on their volumes in April and we had virtually the same percentage decline in tonnage, it’s a macro scenario. So, Lawrence, can you go back through the May declines?

Lawrence Samuels

Sure. So, May was down about 13% on the same period last year in airfreight, and between 2% and 3% on ocean. So very similar trends to what we saw through April but less worse is the best way to describe that.

Eric Kirchner

So the ocean numbers are fairly in line with the market and better than last year. We’ve got a lot more focus on ocean for two reasons, we’ve built out a product structure for the company that didn’t exist before and we’re driving specific initiatives within UTi that have greater focus on ocean. And customers at this stage are looking to ocean much more than air because it depends on cost. It’s another dynamic that if you look at the cost of capital today, it’s driven more goods to Ocean because when interest rates are high and you’ve got a warehouse on the water for 30 days, it’s got a different implication than when they are virtually nil and people can afford to wait because demand isn’t very high. So specific commodities are obviously more targeted for airfreight but more commodities because of that cost differential in the low cost of capital have transitioned to ocean. So, anyway, back to the airfreight demand, there has to be demand in the market for goods to put them in the air or there has to be more volume in key segments like pharmaceuticals and hi-tech which normally is moved by air. And I think it’s more prudent not to expect that and then to react to if it happens.

Alex Brand - SunTrust Robinson Humphrey

Then just to clarify before I’m cut-off, the ocean yields are under short-term pressure but airfreight is not, is that right?

Lawrence Samuels

That’s right, Alex. Mainly the ocean rates that we’re seeing the increase in pricing and the GRIs coming through.

Operator

Thank you. Our next question comes from the line of Tom Wadewitz from JPMorgan. Please go ahead.

Tom Wadewitz - JPMorgan

Yeah. Good morning. I wondered if you could elaborate a bit further on the yields outlook. And also I guess, specific on the ocean side, so you’re seeing these rates fixed so far. When you look at second quarter, would you expect your ocean yields to be down year-over-year, the reported yields, or is there not so much pressure that they would actually be off. You did see some decent improvement in first quarter year-over-year

Lawrence Samuels

Tom, clearly there is pressure and the carriers are pushing the rates. There is even been talk at the moment of peak season surcharges being discussed at this point. So, there certainly is pressure from the carriers to push through these rates and that really will depend on the demand that we see going forward as to whether those will stick. Clearly, we are working with our customers very closely to work with them and obviously to pass those through, if and when they do stick from the ocean carriers.

Eric Kirchner

So you’ve got basic math equation, right, that says that if cost per TEU goes up and we pass it through directly then the yield comes down just because of the math. And the fundamental question is how the balance works between new capacity shipped and then the slow steaming etcetera. Things that the carriers are trying to do to improve their profitability versus things that we’re working on internally and how that balance comes out in terms of ultimate yield calculation. We’ve initiated a different approach or I guess another way to put it is we’ve come to a similar approach for our ocean providers as we had previously for our air providers, where we’re starting to consolidate more volumes with fewer carriers in exchange for a better relationship based on volume. So there are gives and takes in the overall yield calculation and I wouldn’t say that it’s a foregone conclusion that it is going to go down or be worse than last year in subsequent quarters because there are a lot of moving parts and I don’t think we can predict that at this moment.

Tom Wadewitz - JPMorgan

And what was your comment I think, Alex also asked, on the airfreight yields that you are more optimistic that you’ll do well on airfreight or you’re seeing meaningful pressure on airfreight yield as well?

Eric Kirchner

So the challenge within, in this market is a lot of clients are under profit pressure themselves and business gets put out to bid and we have retained business in some cases at lower pricing than we had initially. We’re still aggressively pursuing new business and that the dynamic is slightly different in the way that the carriers are able to price, because you can't quite slow an airplane down or you can’t do and park as many aircraft as ships get laid up. So there is just a different dynamic there at the moment because we have already enhanced gateway utilization and we’re consolidating the volume as I described earlier, I think it’s got the chance to be more stable than probably the ocean does.

Operator

Thank you. Our next question comes from the line of Bill Greene from Morgan Stanley. Please go ahead.

William Greene - Morgan Stanley

Good morning. Eric, I think your comments on the sort of developed market trends. So tech, pharmaceutical and this sort of stuff, I think we all sort of look at the uncertainty out of Europe and say that kind of makes a lot of sense, but there’s also a sense that some of the fastest growing lanes are not these markets to the develop markets so they might be China, Vietnam, or trend to Brazil or something. I’m wondering if you can talk about number one, is that actually what you’re seeing, do those markets look like they are the fastest growing. How are you positioned there and if we do have growth there what does that mean for margins? Is it a lower margin business or does it not really matter kind of what the volumes look like in terms of scale, but rather so long as you’re there you can right size the business and get similar margins no matter where growth is?

Eric Kirchner

You know one of the focuses for our company is to serve our clients and many of them have exposure or have set up operations in some of the markets that you mentioned that aren’t necessarily the long matured key established trade lanes. So we have seen growth in the non-major trade lanes or non-major markets. In terms of the margin opportunity there, it depends on surges in volume or it depends on basic volume because the capacity options aren’t the same, right. So, out of Vietnam you’re going to have different capacity options than you have out of China. So I think it’s important that we again establish the right relationships with our carrier partners so that if one of these particular markets seized up, we’re well positioned in terms of having capacity available to serve our clients. Certainly it plays into our strong suite when you consider South Africa. So we’ve got a bigger presence in South Africa than virtually any of our competitors and that’s helpful because in terms of capacity and relationships, the more that market remains solid the better it is for us. So I don’t know if that’s right answer to the question but I think the margin opportunities in the, if you want to call them less traditional or emerging markets, are certainly there at the same degree or perhaps better than some of the more mature markets.

William Greene - Morgan Stanley

And when we hear about things like product launches, is that only a developed market trend and can that move it or can that affect these smaller markets as well? Like I don’t know how important product launches are that we keep hearing about?

Eric Kirchner

The only obvious thing that affected any business I think in the last two years, is the two different iPad launches and that’s not -- I think it depends on if you carry that specific product, but they are again driven by consumer demand. We’ve seen things over the years that have major impact. A couple of years ago, we’ve had big surges in fashion or in footwear from specific markets that aren’t key mature markets. So it’s hard to know what might become hot or what consumer demand might drive production in one of these markets that would cause that kind of a surge.

Operator

Thank you. Our next question comes from the line of Ben Hartford from R. W. Baird. Please go ahead.

Ben Hartford - Robert W. Baird

Good morning, guys. Eric, I’m wondering if you could provide a little bit of perspective on the system rollout in the Netherlands. How the trend is relative to expectations and then if you could build upon the way that you’re thinking about the sequencing in light of incremental weakness in Europe? And then I have a follow on question on that.

Eric Kirchner

Okay. Sure, Ben. We have taken great care to go through very rigorous testing to make sure that as we deploy this system, the output and the results from this system was consistent with what we expected to gain from it. And while I would have liked to see the Netherlands up and running a year ago and I think everybody would like to be further down the curve with the transformation, it’s on schedule and it’s operating very effectively today. So there are certainly learnings that you go through that our team in the Netherlands has been exemplary in terms of working with the global team for IT and finance, and global operating processes and we’ve had a lot of opportunities now to bed down this rollout process that will really help subsequent countries. So, I’m excited about where we are. The organization’s invigorated by where we are with the deployment in the Netherlands and it’s a good place for us to be.

With regard to subsequent rollouts, we’re moving live production through the system today. Any gaps within the system are being addressed. So we’re going to make sure that before we go to the next set of countries, anything that comes up is fixed and bedded down. And I think the schedule is fairly consistent with what we’ve talked about in Investor Day and subsequent discussions. So we expect to have the 50% in volumes due to systems by the end of this fiscal year. And it’s exciting for us to reach this milestone that we’ve got the system in production and we’re going to make sure that again as we go into the next round of countries, we build on the learnings that we had in the Netherlands.

Ben Hartford - Robert W. Baird

Good. And then you had the comments about on an aggressive focus on cost certainly in light of persistently weak forwarding trends. I’m wondering if it’s in conjunction with or because of the system rollout or if this is -- if you’re accelerating some of the cost savings because of the weakness in the environment or if there are savings independent of the system implementation that you’re able to extract and mitigate some of the near-term weakness from a top line perspective?

Eric Kirchner

We’ve talked about the overall approach at UTi as a comprehensive business transformation. So, it’s got three key elements. And we talk in terms of one team initiatives which are our people and HR initiatives, one focus, which are within the business acquisition and our sales efforts and marketing, and then the one world, which is the system deployment and operating process changes. My direct reports are going to be in next week and we’re going to talk through initiatives that have been sequenced through the remainder of the year and take a view on which we can afford to execute and which we might tend to postpone or differ based on the outlook. What won’t be included in the discussion will be the system rollout and the operating process changes and some key things within our HR team, because we need them to be successful and we need them to get to the ultimate savings that we’ve talked about in the Investor Day for the deployment of this combination of systems and processes and people initiatives.

So, it’s very inconvenient that there is no macro help on the horizon, but it’s a situation that we’ve addressed effectively in terms of controlling our operating expenses and we are going to take a very close look at what you might bucket as administrative expenses or the dreaded word overhead, and see where we need to go with those so that we can calibrate for the remainder of this fiscal year and into next year.

Operator

Thank you. Our next question comes from the line of Scott Group from Wolfe Trahan & Co. Please go ahead.

Scott Group - Wolfe Trahan & Co.

Good morning, guys, how are you doing? So I was hoping to just get a little bit more color on some of the airfreight trends. Lawrence, any chance you have what March was when you gave -- sorry -- what April was and we have the math -- and if you have the year ago numbers as well. Just trying to get a sense if things are getting worse if you normalize for the comp. And then if there’s any color in terms of specific trade lanes, Asia to U.S. and Asia to Europe specifically. And then just along those lines, Eric, this trend that you’re seeing of tonnage worse than shipments, what’s your sense on why this is accelerating now and what do you think it’s going to take for that trend to start working in the other direction?

Lawrence Samuels

Scott, as we said, our April numbers one of our competitors reported a decline and our April decline was relatively similar to that. In May we spoke about a 13% decline, which was less then the decline we saw in April. So we are seeing a small improvement there as we also mentioned the comps that do start getting easier as last year’s first quarter was particularly strong quarter. I think in terms of the trend of shipments being smaller in terms of tonnage, it’s just reflective of the consumer demand that is out there, the demand is slowing and clients are therefore just shipping less volume per shipment. In terms of the outlook I think Eric has given a clear indication of what our view is of that certainly for the next couple of months.

Eric Kirchner

Yeah, I think to build on what Lawrence said if demand is low there is not the need to accelerate movement by air. So maybe the best way to look at it is the economy at best is in a holding pattern right now, and I don’t see any catalysts in the near term to change the dynamic of shipment size, because I think as Lawrence mentioned, it’s demand driven. And if a company is selling 100,000 widgets today and they continue at that pace until it spikes up to 150,000, I don’t know what’s going to change the average shipment size of the general airfreight environment.

Scott Group - Wolfe Trahan & Co.

That’s helpful. Do you have any color just in terms of specific trade lanes?

Lawrence Samuels

We’re seeing and I think the industry information is showing that there are certain lanes particularly the Middle East, where the volumes are up. Unfortunately, we’re not particularly strong in that market but that seems to be probably the fastest growing market at the moment.

Eric Kirchner

But in terms of weakness obviously inbound to Europe is not very favorable especially from Asia. As we mentioned some upsides for the company with our presence in Africa, we have seen a big decline in air volumes with transition over to ocean particularly from automotive clients just based again on demand and the fact that the cost is so much lower to ship by sea, and they’re willing to wait.

Operator

Thank you. Our next question comes from the line of Jack Atkins from Stephens. Please go ahead.

Jack Atkins - Stephens

Thank you for taking my questions guys, good morning. So I was wondering if you could help me reconcile a couple of different items here. So, first just to go back to the net revenue per unit issue for a moment. I guess, I’m a little surprised to see the expansion in the first quarter on a year-over-year basis both in airfreight and ocean freight, but particularly in ocean freight given that most of the rate increases from the carriers that we saw were confined to that first quarter period for you guys. So, could you maybe talk about why you expect a net revenue compression on a go forward basis and why you didn’t see it in the first quarter in particular?

Eric Kirchner

I don’t -- well, obviously the change in margin is often impacted by volatility in the underlying buy rates. So, if the trends remains -- so let’s assume that the ocean carriers are persistent with these increased rates. At a point, as Lawrence mentioned in his remarks we’re working with both our clients and our carrier partners in conjunction with one another to try to get the best deal for our clients, while at the same time understanding that the asset operators have an objective to get back to some better level of profitability. So, at a point we’re trying to bridge that dynamic and market forces will dictate what’s an acceptable price to our clients, and sometimes we have to compress the margins to make sure that we’re competitive out there. So that’s more, I guess a better description of how that dynamic works. So if the underlying buy rates stay where they are, it’s likely that those have to be passed through to the clients more quickly and we’re trying to work that dynamic as effectively as we can.

Jack Atkins - Stephens

Okay. Great. And then as a follow up on that, help me understand sort of the weakness on the airfreight side. It seems like you guys are tracking inline with the industry on ocean freight, but when you look at airfreight it seems like it’s fairly significant underperformance versus the industry data that’s publically available, both for you guys and your close competitor that you’ve referenced. So can you maybe help us understand what’s going on in airfreight to make the forwarders underperform relative to the broader industry? Is it a function of losing market share, is it a function of maybe some project related revenue last year that makes this year more difficult on a comparable basis, just any color there would be helpful.

Eric Kirchner

Sure, we look at a lot of different data to try to come to the right conclusion about where we situate against the market. And for a long time, there seems to be a better correlation from specific industry data-points like IATA and others and our performance. But it’s interesting if you look at the trends recently. There’s a departure and you can look at our times reported and you can look at our key competitors and there’s becoming a gap between these blended industry group averages and the key forwarding competitors. So, I’m not sure what’s driving that at this point. We are trying to get more rich information as to make an assessment, but I don’t believe that it’s likely that all the forwarders are losing share, therefore the gap between forwarder reported volumes and indexes like IATA. So, that being said, we’re mindful of the changes in our volumes. We’re taking steps to control our costs in response to that, and we expect that it’s going to level out at what point the general macro conditions start to level out.

Operator

Thank you. Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please go ahead.

Todd Fowler - KeyBanc Capital Markets

Great. Thanks, good morning. Eric, on the cost side, I just want to make sure I understand some of the trends that are going on. If I look at the reconciliation that you have in your press release, it looks like on a constant currency basis and excluding the severance, net revenues were up 3% in the quarter, and operating expenses were up 3% in the quarter. Is that related to the seasonality and the weakness in the first quarter? Do you expect to get more leverage on the costs line as you move throughout the year? Or is it something that you need to see on the systems side to really get better leverage on the costs relative to what you saw in the first quarter? And then just to follow-on to that, can you talk about what’s happening with the corporate expenses?

Eric Kirchner

Sure. In terms of the costs, and I don’t think we called it out in a big way either in the script or in the press release, but we have been on a long-term and probably for almost every quarter for the last two years, trend, where our net revenue grew faster than our costs or our costs declined more than our net revenue did. And I think we were still basically in line or close to that trend for this most recent quarter. If you look at what happened to the industry a couple of years ago, there is a big component of costs that are variable and there is another component of costs that are longer term in nature that take time to move. So I would say that in the first part of this year we have reacted very quickly to make sure that the frontline operating expenses have been addressed and are in line with these volume changes. As I mentioned, we are going to look at some other cost components to make sure that that we’re adjusting both in light of our net revenue as well.

Those -- our rubber band stretches so far, right, so I don’t know at what point, especially with the operating expenses, that we can -- you know, if volumes continue to decline at 15% year-over-year, it puts things in a different light because ultimately you have got a different kind of challenge. I don’t have any prediction on how long that’s going to happen. We are just going to keep our eye on the fundamentals as closely as we can. In regards to the system scenario, we have got to get past a tipping point so to speak, where volumes have been transitioned to the system now start to travel between two locations. So that, as an example when Hong Kong is on the system and London is on the system, than the information and processing between those two locations starts to bring leverage. So that’s further out in the future. If you go back to Investor Day, we didn’t predict much benefit at all this year and then we’ll start to see the benefit as we progress through the next fiscal year and then see the full run rate benefit at the end of our fiscal year ‘14. But Lawrence might be able to address your question regarding the corporate cost.

Lawrence Samuels

Sure. Todd, as we mentioned on the last call that we expected the corporate costs to be in the range of $14 million to $15 million per quarter for the year. So we are right in the middle of that range. And it’s really partly related -- the increase is related to the more centralizing of some of the functions. So there is some movement of headcount from regional resources into what we are calling the corporate bracket. But there isn’t really an overall companywide increase in those costs.

Todd Fowler - KeyBanc Capital Markets

Okay. That makes sense. And just to be clear on that then Lawrence, that means, or is what you are saying there that there are some costs coming out of, maybe like the freight forwarding segment now that are just surfacing in the corporate line?

Lawrence Samuels

There is the small of element of that, yes.

Operator

Thank you. Our next question comes from the line of Peter Nesvold from Jefferies & Co. please go ahead.

Elliott Waller - Jefferies & Company

Hi, good morning. It’s Elliott Waller in for Peter. A couple of quick questions. If I recall from last quarter’s call, you had mentioned that, particularly on the airfreight side, that you had seen some aggressive behavior in the marketplace and that pertained to rates. And I was just curious if you were seeing that, if that has accelerated given the trends in terms of volumes?

Eric Kirchner

I would say it’s consistent. I don’t know that it has gotten any more aggressive but it’s a tough environment out there and competitors want to hold on to business that we would like to get and business that we have they would like to take. So you can understand that dynamic. I would say, I haven’t heard as many examples recently of things that were out of scope or out of control. So in other words we have seen a couple of examples, I’d say, in the last quarter where we have scratched our heads as to how a specific competitor had priced a competitive deal. It’s interesting that that same competitor has retrenched their sales force and are doing some things that are different than they were doing before. But I don’t know if there is any correlation there. So anyway, I think that it’s about like it was and it’s not gotten worse.

Elliott Waller - Jefferies & Company

Go it. That makes sense. And then along the same lines, from your customer standpoint, have you seen any change in trade up or down in services from air to ocean versus last quarter?

Eric Kirchner

Yes. I think that’s an ongoing trend and we are working with those clients to make sure we can take care of their needs whether it be air or ocean. But I think that’s more of a macro trend and our customers have been in line with that in several instances.

Elliott Waller - Jefferies & Company

Got it. And then finally part C of question one, thank you for allowing me, any impacts we should expect in the ocean air from the European Championships that start this weekend or the Olympics?

Eric Kirchner

We have -- I’m not sure how much on the, just the pure transportation side. We do represent several major apparel and footwear, and sportswear clients in our CL&D operations and that we would expect some small bump in that but I don’t know necessarily on the transportation side if we’ll see a whole lot of that.

Operator

Thank you. Our next question comes from the line of David Ross from Stifel Nicolaus. Please go ahead.

David Ross - Stifel Nicolaus

Good morning, gentlemen. Maybe a question for Ed on the contract logistics side of things. I wanted to know if there was, I guess, one, any unusual gain sharing type income in the quarter that may have made margins a little bit higher than normal. And then also if you could just give some more color on why the net revenues declined significantly year-over-year in North America and kind of the strength in Africa was just South Africa or was there more growth in Africa than that?

Ed Feitzinger

Let me make sure I got this. So the first question, the answer is no. There’s no exceptional one time profitability from gain share. So what you see is what you get. In the North American business, we’ve talked for some time that we’re focused on improving our operations, moving towards profitable customers. We have talked in the past about transitioning from customers that may have given us revenue, but we weren’t seeing much profitability from them in our quest to get to our client as one goal from an EBIT perspective. So I think that’s part of what you’re seeing in North America. Our funnel is looking reasonably good going forward and so you’re seeing sort of a, I guess a restructuring of the type of the clients that we’re interested in pursuing on a long-term there for maybe low margin big box to places where we can add more value in the long-term. Africa, our business is primarily in Southern Africa. That’s where you see our strength. That may change over time, but at this point from a materiality perspective, the bulk of our revenue is in the Southern African countries.

David Ross - Stifel Nicolaus

And then in North America, is there also a change in what customers are asking you to do for them on the contract logistics side?

Ed Feitzinger

No. I don’t think there is really a material change in the industry going on at all. I think the industry continues to evolve to look towards people who can provide value for them. I think what we’re doing is repositioning our service offering to have little bit more intellectual property in there, more IT focus, more solutions in conjunction with our forwarding businesses etcetera.

David Ross - Stifel Nicolaus

And then is there going to be any increased focus on tying in with forwarding you are saying --

Ed Feitzinger

Yeah, that part of our strategy is to continue to link our businesses together. With forwarding we’ve seen success in that in various parts of the world particularly between our distribution businesses and our forwarding, there is a very naturally link there. And we continue to work that with our sales organizations and also as part of our overall corporate strategy.

Operator

Thank you. Our next question comes from the line of Nate Brochmann from William Blair & Company. Please go ahead.

Nate Brochmann - William Blair & Company

Good morning, gentlemen. I wanted to just kind of follow-up on that last question talking about the contract logistics business a little bit. In terms of, as you’re kind of refocused maybe on a different client base, can you talk a little bit about what that client base is and what you’re seeing in terms of adoption rates, and kind of just general movements and trends in terms of what clients are looking for and what you’re able to offer them?

Ed Feitzinger

Sure, I think if you’re looking backwards at least from an acquisition perspective, and we’ve talked at Investor Day about how our contract logistics businesses was a collection of acquisitions. They had different historical focuses from their origins and we’ve been working in the past couple of years to get a segment, customer segmentation that’s more consistent across the whole company. So, again that has moved us away from some of the, what I would call big box, labor only plays towards the more value added solutions perspective, is consistent with some of our business. And then if you look at the success of our business in places like Asia and Africa which we’ve talked about, there what we’re seeing is that our customers are looking for, and even big, very large customers are looking for an effective global provider in emerging markets and we’re able to provide that service for them consistently in places like India or other places in Asia and Africa. So, we’re going to, I think we’re continuing to focus on those areas and then in the established markets of Europe and North America our focus is on a slightly smaller deal, where there is more linkages across multiple services and intellectual property component.

Nate Brochmann - William Blair & Company

Okay. That’s helpful. And then just kind of one follow-up on that. And maybe, Eric, we talk a lot about obviously the transformation on the cost side and we talk about a lot of the economic pressures obviously that make you adjust what you’re doing there. Could you talk about maybe a couple of key highlights or maybe some other things that you’re doing internally though, whether it’s new geographies or new services or really focusing on different things in terms of what you might be doing internally to go out and win new business on the periphery away from some of those other issues?

Eric Kirchner

Sure, Nate. We have a couple of specific business acquisition initiatives that have been in place for quite some time. But one, and we’ve labeled it internally, it’s mature market solutions in emerging markets. So that’s how we talk about it internally. But as Ed mentioned, especially as we have clients that potentially change their footprint globally or where our client has previously split operations between UTi and a competitor as an example in different regions of the world, we’ve put a focus on extending what we’ve done positively for those specific clients and replicating it in these markets. So Ed mentioned India, which is a good example there, and we are looking again to markets like Brazil and others. If you look at the BRIC region, a lot of opportunities out there for us and we found that generally we are on a more equal competitive footing against our competitors in those markets. Then, as an example of more established and mature markets where there already is millions of square feet of warehousing on the contract logistics side as an example.

So that’s one thing, the mature solutions for emerging markets. And then another thing that we’re working on is an initiative called, everybody sells. It’s not a very elegantly named thing but what we found was there is obvious internal focus when you are working on this comprehensive business process transformation as we are here. And we just wanted to make sure that the people that are the closest to our clients across the company, and this includes both salespeople and operating management, are back out in front of as many clients as possible because we are doing great things out there for clients, and if we are not accelerating relationships with new clients and building on relationships with existing clients, we are not going to grow as quickly. So those are a couple of examples. I don’t know if that helps, Nate.

Operator

Thank you. Our next question comes from the line of David Campbell from Thompson Davis and Company. Please go ahead.

David Campbell - Thompson Davis

Good morning. Just want to check to see what you have seen on a sequential monthly basis from April to May in airfreight tonnage. Your competitors in airlines, some airlines are reporting significant growth from April to May in tonnage this year unlike last year when there was no growth, sequentially, from April to May. What have you seen in your airfreight tonnage? And same part of that question is, is it possible you are losing share because you are trying to keep gross margins higher than a year ago?

Lawrence Samuels

David, just in response to the trend from April to May, we did, in our prepared remarks say that we saw the air volumes decline by 13% this May to last May which is an improvement on what we obviously saw in April. And I think as Eric mentioned to one of the questions earlier that some of the industry information is not always consistent with what the forwarders are seeing. And so we are all working through that to understand what’s driving that. So we believe some of that, for example on IATA, a lot of freight is moving on non-IATA airlines or charters etcetera. So there is that aspect that we need to take into account when we look at the market versus in the industry stats.

Eric Kirchner

We did -- but David we did see increased tonnage in May versus April. So on that sequential basis we did see some growth around 4% on airfreight.

David Campbell - Thompson Davis

4%?

Eric Kirchner

Yes.

David Campbell - Thompson Davis

Well, that’s encouraging, that’s better than last year. And also that would indicate that particularly in the Asia Pacific region the turn has started to turn. Hopefully it will continue. Okay. Thank you, very much.

Operator

Thank you. Our next question comes from the line of Kevin Sterling from BB&T Capital Markets. Please go ahead.

Kevin Sterling - BB&T Capital Markets

Thank you, good morning, gentlemen. Lawrence, you talked about the negative impact from demand. Could you give us kind of what that total dollar amount was if you have it, or the negative impact, could you quantify that if possible?

Lawrence Samuels

Kevin, our estimate is that that was about $1.7 million at the operating level, at the operating profit level.

Kevin Sterling - BB&T Capital Markets

Got you. Okay. Thank you. And then second question here, this will be my last question, and Eric not to beat a dead horse about airfreight, but one of your competitors has had a decline in project related business on the airfreight side leading to a decline in airfreight tonnage. Is that your view as well? Did you see a decline in project related business or maybe it’s something different for you guys?

Eric Kirchner

I don’t think we could generalize it that way. So I saw that commentary as well and I would think that it might be more specific to that competitor’s client base or customer base. So I guess you could say that if we had the absence of project business in the first quarter of last year then we wouldn’t have that as a data point in terms of decline this year. Ours I think was just more general across the client base.

Operator

Thank you. Our next question comes from the line of Keith Schoonmaker from Morningstar. Please go ahead.

Keith Schoonmaker - Morningstar Research

Thanks. Eric, you mentioned client preference for air over ocean in the period and cited automotive in particular. Wondered if you would speak more and what’s made this possible lately when previously airfreight was required, for example the better JIT planning or a mix shift in goods that can move by ocean or simply just weak demand? And in addition to what’s enabling these shifts, what you believe would drive clients back to shift back to here at some point?

Eric Kirchner

Okay. Thanks, Keith. So to clarify, the shift from air to ocean, I think our experience has been that it’s demand driven. The differential between air and ocean is reasonably comparable I think to what it was last year although with ocean prices coming up a little bit it maybe even less. But that aside it’s still in the neighborhood of 10 times less expensive to go by ocean versus air. The things that -- this may sound like a crude analogy, but for many clients ocean freight is like the undertaker. I mean -- I’m sorry, airfreight is like the undertaker because no one wants to use it, but ultimately they are going to have to. For other clients, it’s more programmed based on commodity or value of the commodity. So, anything that can be moved by ocean and trends as you mentioned with better advanced planning or different production scheduling, people favor that approach rather than spending additional dollars on the transportation elements.

There are some, either commodities or reasons in terms of how capital plays into the equation that people would favor air over ocean. But again, when the cost of money is as well as it is, that’s changed the dynamic as well. So a couple of things that would drive more volume back into the air would be higher. interest rate, which I don’t see on the horizon or a huge spike in demand for a specific commodity or product which I think we all have the same crystal ball to look at with regard to the economy globally, and we don’t see a lot on the horizon at the moment that would predict that there would be a move from ocean back to air.

Keith Schoonmaker - Morningstar Research

You think it’s somewhat of a secular shift with those clients?

Eric Kirchner

As long as the economy stays as it is, it will stay I think this way. But because of volatility in either demand or -- so, another example is, if there is a quality issue in a manufacturing environment. So we’ve had instances where an automotive client, for example, might fall behind in production because of a specific component like a transmission that would require heavier airfreight than they would normally experience. Once that quality issue is resolved then they go back to ocean freight for that. So, it’s maybe premature to say that it’s a long term industry trend. We’re keeping our eye on some other trends and it’s interesting because we’re beginning work on our strategy in terms of go to market. And one thing we’re keeping an eye on is that the possibility of near-shoring where more production is coming back to a regional base versus the extended supply chains that have more volatility in them, but it’s a little bit early to make that judgment yet.

Operator

Thank you. And that’s all the time we have for questions today.

Jeff Misakian

All right. Thank you, Ian. As we’ve reached the end of our call, I just would like to thank all of you for participating again in the call this morning, and on behalf of all of us here UTi thanks for your continued interest and your ongoing support. Have a great day.

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