Executives
Roger MacFarlane - Chief Executive Officer
Lawrence R. Samuels - Executive Vice President
Jeff Misakian - Vice President, Investor Relations
Analysts
John Barnes - BB&T Capital Markets
Tom Wadewitz - J.P. Morgan
Todd Fowler - Keybanc Capital Markets
Nate Brockman
Alex Brand - Stephens, Inc
Jon Langenfeld - Robert W. Baird
Art Hatfield - Morgan, Keegan
UTi Worldwide, Inc. (UTIW) F4Q07Earnings Call March 27, 2008 11:00 AM ET
Operator
Good morning. My name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to the UTi Worldwide Fiscal Fourth Quarter and Full Year Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)
Thank you. Mr. Misakian, you may begin your conference.
Jeff Misakian
Thank you, Celeste, and good morning, everyone. Welcome to UTi Worldwide Fiscal 2008 Fourth Quarter and Year End Results Conference Call. Joining us on the call today are Roger MacFarland, Chief Executive Officer; and Lawrence Samuels, Chief Financial Officer. Tiger Wessels, Vice Chairman is also on the phone and available to answer questions during the Q&A session.
Before we begin the presentation, I would like point out that certain statements made in today’s call are not historical fact. They may be deemed therefore to be forward-looking statements on 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 those filings for more information regarding the risks and certainties 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 Roger MacFarlane. Roger.
Roger I. MacFarland
Thank you, Jeff. Good morning everyone. This morning we announced our results for the fiscal 2008 fourth quarter and full year. Our gross and net revenues continue to reflect above-market growth across all regions of the company for both the fourth quarter and the full year. Gross revenues in fiscal 2008 topped $4 billion for the first time in the company’s history.
We are encouraged by the company’s top line growth, which we believe continues to validate our strategy of providing clients with world class services and integrated solutions. As you know, however, we experienced significant yield pressure in air freight in the quarter, and our expenses grew faster than revenues all year. We discussed this with you last month when we announced several cost-reduction measures and aligned our organization to streamline operations and increase accountability. Excluding restructuring costs, our adjusted operating margin declined to 8.9% and 10.7% in the fourth quarter and year respectively.
As we told you on our last call, we are moving aggressively to improve our yields and our margins. Lawrence will review the details of our fourth quarter results in a moment. I would first like to give you an update on our restructuring efforts. Our cost reduction measures are progressing well and on target. We have terminated, given formal notice to, or advised almost all of the 1,400 people affected by the headcount reductions.
We are on target to exit the large contract logistics operation in the Americas that we mentioned previously by the end of July 2008. We have closed our retail distribution in South Africa. We are on target to exit the trucking division of Integrated Logistics by the end of the first quarter. As planned, we have cancelled various long-term initiatives and scaled back our charter operations.
We continue to expect that these measures will achieve annualized cost reductions of $105 to $110 million annually, partially offset by the annualized revenue reductions of $70 to $75 million. Once fully implemented, these measures are anticipated to increase annualized operating income by $30 to $40 million, with most of the benefits expected to be realized in the second-half of fiscal 2009.
We told you about the loss of our Wal-Mart contract in their Baytown facility, which was transitioned during February. This reduces revenue by approximately $45 million and costs about $40 million annually. Second, we have made further progress in realigning our management team. Under our new structure, John Hextall and Bill Gates have global responsibility for freight forwarding and contract logistics and distribution respectively.
Their critical priorities for the whole of the year will be to focus on improving yields and margins, fixing underperforming operations and controlling expenses. John and Bill have made initial changes to other senior level positions within their organizations and are continuing this process. We will have more to share with you on this in the near future.
Now I’d like to hand it over to Lawrence for review of our financial performance in the fourth quarter. Lawrence.
Lawrence R. Samuels
Thank you, Roger. This morning, we reported adjusted fiscal fourth quarter 2008 earnings of $0.24 per diluted share, excluding restructuring charges. For the year, we reported adjusted earnings of $1.05 per diluted share, also excluding restructuring charges. Although this is ahead of our guidance, we need to clarify that the $1.05 includes a positive impact of about $0.02.5 related to the prior period revisions and the FAS 108. I will address this in more detail in a moment.
This compares to earnings of $1.04 per diluted share in the last fiscal year. Keep in mind, however, that the previous fiscal year included a positive impact of $0.12 per share, relating to the accounting treatment of earnout payments on our acquisition of SLi. Gross and net revenues in our fiscal 2008 fourth quarter increased 24% and 22% respectively over the same period last year. Excluding contributions from acquisitions, gross and net revenues increased by 19% and 12% respectively, well ahead of market growth.
As Roger mentioned, this performance was driven by growth across all of our service lines and regions, which I will address in a moment. Operating expenses in the fiscal 2008 fourth quarter increased 26% over the same quarter last year. Excluding restructure charges of $8.4 million, operating expenses increased 23%. The increase in operating expenses reflects the cost required to support our revenue growth, as well as the impact from recent acquisitions.
Staff costs, the largest component of operating expenses, were 54% of net revenue in the fiscal 2008 fourth quarter, down slightly from the 55% recorded in the year-ago quarter. Staff costs are incurred to support our gross revenue growth and are less relevant to our net revenues. The ratio to gross revenue was 18.4%, down from the 19.1% in our fiscal 2007 fourth quarter. Other operating costs were 53.6% of net revenues in the fourth quarter, up from 31.7% recorded last year. The increase primarily reflects acquisitions and the growth in our business. Also included are costs associated with the Department of Justice Investigation and related cost action litigation of $1.6 million.
Restructuring and impairment charges in the fiscal 2008 fourth quarter totaled $8.4 million. We anticipate incurring additional restructure charges of approximately $6 to $8 million in the first quarter of fiscal 2009. Our operating margin totaled 6.8% in the fiscal 2008 fourth quarter. Excluding restructuring charges, the adjusted operating margin was 8.9% compared to the 9.6% reported in the same quarter last year.
For the year, our adjusted operating margin was 10.7%, excluding restructuring charges. Roger walked through the details of our plan to increase margins. W expect to see operating margin improvements from these efforts of 200 basis points on an annualized basis, primarily in the second-half of fiscal 2009.
As you saw in this mornings earnings release, we have provided supplemental detail on our two core businesses of freight forwarding and contract logistics and distribution, similar to how we reported this information in previous years. This information provides revenue and cost detail down to the operating income line for each of these business lines. We are investigating changes to our segment reporting in the future, but we will break out freight forwarding and contract logistics as you see this morning and continue to provide some form of geographic information.
Freight forwarding, which includes customs brokerage, gross and net revenues increased 24% and 19% respectively over the prior year fourth quarter, reflecting strong organic growth, as well as contributions from our recent Israeli acquisition. Overall, yield in this business declined to 22.9% in the fiscal 2008 fourth quarter compared to 23.9% a year ago. The operating margin in freight forwarding in the fiscal 2008 fourth quarter was 16.1% compared to 16.6% in the same period last year. This is almost entirely due to the decline in yields, particularly in China and it points to the importance of our yield initiatives.
Air freight forwarding gross and net revenues were up 30% and 19% respectively over the prior year fourth quarter, reflecting continued strong volumes. Air freight tonnage increased 24% in the fourth quarter compared to a year ago. Air freight yield in the fiscal 2008 fourth quarter declined to 22.1% compared to 24.1% in the same period last year, partly due to the record level of fuel surcharges and tighter capacity.
Ocean freight forwarding gross and net revenues increased 20% and 26% respectively over the fourth quarter last year, again reflecting continued strong volumes and improving yield. Ocean freight TEUs increased 23% in the fourth quarter compared to a year ago. The ocean freight yield increased to 16.2% in the fourth quarter compared to 15.4% in the same period last year. The increase reflects a favorable shift in trade [inaudible] mix and improving capacity. Contract logistics and distribution gross and net revenues increased 26% and 24% respectively over the prior year fourth quarter primarily due to organic growth.
We continue to see growth from new business, as well as the expansion of business with existing clients. It is encouraging to see that apart from restructuring charges, the operating margins in contract logistics and distribution held up well despite the negative impact in the quarter from costs associated with businesses that we are exiting. As we exit these operations, we expect operating margins in contract logistics to improve.
Turning to our segments, we are pleased at all regions reported gross and net revenue growth. Because our restructuring costs had an impact in all regions, a discussion of operating margins for each segment is complicated, but the restructuring costs in each region are disclosed in our press release tables. EMEA delivered net revenue growth of 43%, most of which was organic, with a portion attributable to the strengthening of the euro and the finalization of the acquisitions in Israel in the latter part of last year.
The Americas freight forwarding operation grew net revenues in the quarter by 14%. This is not as strong as we expected, which points to the impact of a slowing U.S. economy on import activity. The weak import activity was somewhat offset by the continued growth in exports. The Americas contract logistics operations increased net revenues by 17% in the fourth quarter primarily due to organic growth.
Net revenues in Asia Pacific increased 18% in the quarter. Net revenues in Greater China grew 18% in the quarter, on gross revenue increases of 28%. As mentioned previously, Greater China’s yields continue to be affected by a number of factors. Other income increased to $2 million in the fiscal 2008 fourth quarter primarily due to exchange profits as the dollar continued to weaken against other currencies. Our effective tax rate in the quarter was 28%. This rate would have been 50% without the adjustments related to the restructure and impairment costs and the benefit of the pickup in income.
For the year, our effective tax rate was 27% within our previously communicated range of 275 to 29%. We expect that our effective tax rate will be in a similar range in fiscal 2009.
Our balance sheet remains strong. We’ve generated $107 million in cash from operations in fiscal 2008 compared to $128 million in fiscal 2007. Free cash flow in fiscal 2008 was $71 million compared to $105 million in fiscal 2007. These declines are primarily due to the additional working capital requirements relating to major [inaudible]. We continue to expect free cash flows to approximate net income by the end of fiscal 2009.
As you may have seen in our press release this morning, we have restated our financial statements for fiscal 2007 and the interim periods therein. The error giving rise to the restatement results primarily from an incorrect application of fares five as it relates to tax matters. These errors are not material to previously reported net income in each of the fiscal years 2007, 2006, or 2005, when assessed under the rollover method for analyzing such errors as required by SAB 108; however, when the errors are aggregated under the IN [inaudible] method, they were deemed material for fiscal 2007.
As a result of this determination, we have concluded that we need to restate our previously issued financial statements for fiscal 2007 and the interim periods contained therein and that such financial statements should not be relied upon. All fiscal 2007 results and figures discussed on this call include the adjustments required by the restatement as reflected in the Form 8-k filed earlier today. We would refer you to this Form 8-k for more information about the restatement and the impact thereof.
At the time of our core loss [inaudible], we had anticipated that we would be able to correct some of these issues in our current quarter and, consequently, the negative impact was included in our guidance given at that time. Now that we have recorded these adjustments in prior periods, we have a pickup in the current quarter equivalent to $0.2.5.
Finally, we noted this morning that we expect that the filing of our annual report on Form 10-k will be delayed, as additional time will be required to complete the audit of our financial statements included in the report. We expect that the annual report including audited financial statements that reflect the adjustments I just described will be filed within 15 calendar days following the prescribed due date of the annual report.
With that, I will turn the call back to Roger for closing remarks. Roger.
Roger I. MacFarlane
Thank you, Lawrence. While we are in encouraged that our business model continues to drive revenue growth ahead of the market, we are not satisfied with the decline in yields or the increase in expenses we experienced last year. Fiscal 2009 will be different from top to bottom. We continue to grow revenues but with a greater focus on profitable growth. We have tightened processes to ensure proper pricing and implementation in freight forwarding and profitable agreements in contract logistics. In short, our execution will be much tighter.
Our cost reduction measures will reduce costs significantly, which we expect to improve profitability and increase our operating margins beginning in the second-half of fiscal 2009. We have realigned our management team to provide greater accountability and faster decision-making. Obviously, there will be a number of moving pieces this year.
In addition, we’re facing what could be a prolonged downturn in the U.S. economy, which could spread to other regions. This weakness has impacted the business of many of our plans and has dampened our near-term visibility. As such, we feel just prudent to discontinue to provide earnings guidance in line with our historical practice. We can tell you that we are continuing to expect growth in revenues. We anticipate that freight forwarding will lead with double-digit growth in fiscal 2009, as we expect to benefit from strong global trade trends and to gain market share.
We’re encouraged to see early indications of strong volume growth in the months of February and March. On the other hand, we’re still getting feedback from our clients that the economy is weakening. A protracted economic downturn and the spread of this contagious to other regions could slow our freight forwarding growth considerably. Of course, we will continue to manage our costs proactively in this environment.
We still expect contract logistics and distributions to grow but at a slower rate as we exit underperforming businesses and contracts, and we see to backfold the loss revenues related to the Baytown Operation that we performed for Wal-Mart. Yields are expected to improve from fiscal 2008 levels, particularly as we make progress on our yield initiatives. Our goal is for airfreight yields to expand by 100 basis points and ocean freight yields to expand by 50 basis points in fiscal 2009, over the current fourth quarter run rate.
This assumes that as that capacity improves, that fuel prices stay the same and that we don’t see a material deterioration in economic conditions. We have shared with you our expectations for cost reductions and operating margin improvement. Keep in mind that most of the benefit from the actions we’re taking will be seen in the latter half of the year. So for the first two quarters of fiscal 2009, you will not see as large a benefit until we complete the implementation of our plan.
We fully realize that this is a challenging time for UTi and our shareholders, but we are confident that the actions taken and the organizational changes made have laid a strong foundation for fiscal 2009 and beyond. With that, now I’d like to open the call to questions. Celeste, can we have the first question please?
Question-and-Answer Session
Operator
Your first question comes from the line of John Barnes - BB&T Capital Markets.
John Barnes - BB&T Capital Markets
First of all, just on the net revenue margin improvement expansion opportunities with air and ocean in fiscal 2009, what gives you confidence? I mean this year we saw some weakness in volumes. We saw what was supposed to be excess capacity and nobody really realized that greater degree of net revenue margin expansion. What gives you confidence that you could realize that in 2009?
Roger MacFarlane
John, that is a great question. It’s both the situation in the marketplace as well as our own internal focus. John and his team are very focused on improving yields lane by lane. We had previously disclosed that we brought on a procurement specialist professional to join John’s team, and we are working very hard at dissecting and focusing our efforts in improving density on lane segments and yields on critical markets. So we have a huge focus internally on producing outcomes.
The second thing is the environmental situation, and we’re anticipating that as the market softens that there are opportunities for improvement in our buying costs; and we’re certainly pursuing those aggressively. We expect, of course, that customers are also looking for ways to save costs given their economic environment so we see pressure from that point of view, as well as trying to make sure that we’re obtaining the right buying costs. But on the whole, expect both of those factors to deliver yield improvement this coming year.
John Barnes - BB&T Capital Markets
And is it backend loaded, similar to your operating margin improvement or do you think it’s more of a four-quarter event?
Roger MacFarlane
Well, I think you’ve already seen some of the impact in the ocean freight side, although some of it is mixed, as Lawrence mentioned, mixed changes for various lanes; but we… I would expect to see a steady progression during the course of the year with probably the best benefit coming in the fourth quarter next year because we did have situations in this year’s fourth quarter as you’ve seen where air freight yields, in particular, were weak.
John Barnes - BB&T Capital Markets
Okay and then looking at your fiscal first quarter, can you talk a little bit to kind of what trends you’ve seen thus far? My concern is you had some pretty significant weather events in China that slowed some things down, earlier Chinese New Year; is first quarter really going to be a good proxy for what we should expect the rest of the year or because of those events, are you kind of looking through first quarter and saying, “We know things are going to be a little spotty in the first quarter and, really, we’re going to make the bulk of our money in the back three quarters of the year
Roger I. MacFarlane
Well, your last statement’s correct in a sense that making most of our money because the cost reduction plan will have its full impact by the second half; but in terms of business growth, we are encouraged, as I mentioned, that February and March continue when we look at freight forwarding, continue to hold up quite well; the growth, that is, is holding up quite well. I don’t know what it will look like in April obviously, but we remain sanguine though because the economic growth report that just came out this morning is probably going to add to greater concern; and we are very happy that we’re going this far into the year with volumes as robust, or the growth in volumes as robust as they are.
Yes, we recognize that February had Chinese New Year but that we always have in either our fourth quarter or our first quarter to deal with.
John Barnes - BB&T Capital Markets
Okay, very good. Then last question, can you just talk to the pricing front. With your customers, I know they’re looking forward to taking advantage of the cost savings as well if there’s an excess capacity situation and the like. When you talked about in your closing comments just a greater focus on pricing in the freight forwarding and the contract logistics space, can you just talk a little bit to what exactly you’re attempting to do there, how receptive the customers are being in this environment to looking at that.
I guess where I’m really coming from, Roger, is how much of your business is tied up in longer-term contracts that are going to be more difficult to realize, any change in pricing, that’s going to have to bleed in over a couple of quarters or a couple years; and how much of it can you do in the next 30-to-60 days?
Roger I. MacFarlane
I take it, John, you’re talking about freight forwarding, right?
John Barnes - BB&T Capital Markets
Yes, yes.
Roger I. MacFarlane
What I think one of the things in the current environment is even if pricing where the client stays the same, if we can aggressively move, if we have a longer term contract and pricing is fixed in this environment by moving your buying cost down, it should widen your yields on that client. There are clients that we had initial pricing, as we’ve mentioned before, that affected our fourth quarter as we took them on in a big season. We are working very hard to, and we believe successfully, to develop strategies for meeting our clients’ needs at a lower cost. So we think that those contracts will become more profitable as we move forward.
John Barnes - BB&T Capital Markets
All right, very good. Roger, thanks for your time, nice quarter.
Roger I. MacFarlane
Thank you.
Operator
Your next question comes from the line of Tom Wadewitz - J.P. Morgan.
Tom Wadewitz - J.P. Morgan
Yes, good morning. I wanted to… A question for, I guess a more micro question for Lawrence first on the $0.2.5 a share impact he talked about in fourth quarter. Can you give us a sense of where that shows up on the income statement, which expense line items or if there’s anything in revenue?
Lawrence R. Samuels
Tom, there’s a small, very small piece in revenue that the majority comes on the cost line and the tax line.
Tom Wadewitz - J.P. Morgan
Is it one particular operating expense line or is it across a couple?
Lawrence R. Samuels
No, it’s across a few. It’s a combination or an aggregation of individual actions across a few line items.
Tom Wadewitz - J.P. Morgan
Okay and you offset a comment on the tax rate. I’m not sure if I understood it right. You said, I guess, the tax rate ex the restructuring charge would have been what?
Lawrence R. Samuels
Tom, it’s obviously complicated by the two impacts that excluding the restructuring charge would have been about 27% and excluding the uptake with the pickup we had in the fourth quarter as well together would have been 30%.
Tom Wadewitz - J.P. Morgan
Okay, all right. What do you think operating margins could look like in first-half of the year? I know you commented quite clearly that it was second half [inaudible] out of the real cost site, activities start to benefit but do you have any thoughts on operating margins in first half, whether their going to flattish or is there still going to be a little bit of year-over-year pressure?
Lawrence R. Samuels
Tom, I think we would expect to see continued pressure and obviously we are targeting the 200 basis point improvement annually, but we do expect to see that coming through from, towards the end of the second quarter onwards as not only the cost reduction plans kick in but obviously move into a more robust season and volumes pick up as we get into the end of second, into the third quarters.
Tom Wadewitz - J.P. Morgan
Okay, all right. On the revenue growth side, your revenue was really very strong in fourth quarter and both in a net and gross basis, and it seems like you would have already seen some of the slowing from the economy come in, in your fourth quarter, but the revenues are still strong. So what is it that gives you the concern that things are going to slow from here? Can you give some more comments on that because it seems like you’ve been pretty successful in putting up good revenue growth despite some slowing that we probably would’ve seen in the broader economy?
Roger I. MacFarlane
Tom, I’ll answer that part of the question. I think what we have sustained a strong revenue growth for quite awhile, and I’m very encouraged by the strength of our sales efforts, not only in freight forwarding but also in contractor, just in opening up new opportunities, brand new client opportunities, as well as expansion of our relationships with existing clients where we’re getting most of our revenue growth. So I think gaining market share has been something which we believe we’ve been doing for quite awhile and in this current environment, in a tighter economic environment, that is an imperative as we go forward, that is one of the areas where we believe we have got considerable momentum.
Tom Wadewitz - J.P. Morgan
So do you think there’s a chance then that the fourth quarter revenue growth rates might continue for a few more quarters?
Roger I. MacFarlane
Well, what I was indicating in my prepared remarks is that we’re seeing in freight forwarding February and March continued strong year-over-year growth in the volumes for air and ocean freight. That would indicate that, we don’t know whether we will up end with rates as high as the fourth quarter but certainly indicate a more sustained growth in the beginning of the year. But at the same time, we realize that as we exit a lot of the contracts and the operations, that we’re going to have a loss of revenue. So just by that mathematical fact alone, you’re going to witness a reduction in our revenue growth as we go forward.
Tom Wadewitz - J.P. Morgan
Right, okay, and last question I’ve got for you. I’ll pass along to someone else. On the logistics… I appreciate the breakout you’re giving us again between operating and come on forwarding and contract logistics. The logistics margin looks like it’s about 7½% if you take out the restructuring. Is that… Do you think the goal is to kind of stay at that level or given your actions you’re taking, do you think there’s potential to move that back up towards higher single digits or 10%? Maybe just an update on your thoughts on potential for logistics margin.
Roger I. MacFarlane
Well, I think, Tom, we’ve communicated that we’ve already taken action that is going to result in those margins going up because we’re existing loss made in contracts as well as operations that are not anywhere close to those levels of margins. So that what’s going to happen, again mathematically, as those are no longer in the average, that’s going to have an effect of revealing that the balance of the business is operating at a higher margin that the average you’ve just given. So that I think is going to be encouraging.
Then in addition to that, of course, we are working on margin improvement on all of our contract logistics and distribution anyway, all the existing business, so we certainly expect and we have obviously targets at levels higher than you witnessed in the fourth quarter.
Tom Wadewitz - J.P. Morgan
Okay, great, thank you for the time.
Operator
Your next question comes from the line of Todd Fowler - Keybanc Capital Markets.
Todd Fowler - Keybanc Capital Markets
Hi. Good morning, Roger. Just a couple of things, on the press release you talk about the growth rates, the organic growth rates and the gross revenue, the net revenue side, gross being 19%, net being 12%. Does that include a currency number as well or current impact?
Roger I. MacFarlane
Lawrence will answer that question.
Lawrence R. Samuels
Todd, yes, it’s… What we’ve done is we’ve excluded the impact of acquisitions from the growth rate, so that those growth rates are currency and organic growth.
Todd Fowler - Keybanc Capital Markets
Lawrence, you have how much currency-wise for both of those?
Lawrence R. Samuels
Todd, no, we don’t meet the [inaudible] obviously. We are operating a global environment and obviously currency’s continued to move. It becomes extremely complex to try and continually break that out. So we’ve taken the view that being in a global economy, currencies is just part of our day-to-day lives. So we’re not, and don’t separate it out.
Todd Fowler - Keybanc Capital Markets
Okay, that’s fair. My guess is that would’ve been, currency would’ve been a benefit though or it would’ve helped those growth rates during the quarter though?
Lawrence R. Samuels
That is fair, yes. Obviously as the dollar continues to weaken, the benefit will come through from a currency impact.
Roger I. MacFarlane
Todd, can I add that, of course, that’s true of all our competition.
Todd Fowler - Keybanc Capital Markets
I’m sorry, what was that?
Roger I. MacFarlane
That’s true of all of our competition.
Todd Fowler - Keybanc Capital Markets
Fair enough. We’ll note that for everybody.
Lawrence R. Samuels
Todd, I just also add that the same impact is on cost because most of our costs are in local currencies as well.
Todd Fowler - Keybanc Capital Markets
Right, okay. Roger, maybe following up a little bit on the previous question, can you talk a little bit about on the forwarding side, looking at the pipeline and I guess thinking about the growth rates and thinking about the revenue that you’re obviously going to be exiting; and I’m thinking about most of the lost revenue or the contracts you’re going to be out of will not be the forwarding side of the business. Can you talk a little bit about what you’re seeing in the marketplace as far as opportunity and how you’re approaching the market to continue to grow and just from a forwarding side, I guess, more than anything.
Roger I. MacFarlane
Todd, yes, I think China remains our primary growth engine. In fact we’ve designated it as a strategic engine for long-term growth. We are putting a tremendous amount of effort into growing business to and from China, to and from all markets, not just China to U.S.A. market but also to and from Europe and other markets as well. So that we feel will be the greatest locomotive for our revenue growth. So it won’t necessarily all show up in the China segment that we’ve been reporting because revenue for business into China is recorded in the other regions.
Todd Fowler - Keybanc Capital Markets
And so if I understand that correctly, you’re also seeing some benefit from exporting activity from the U.S. that would be, yeah?
Roger I. MacFarlane
Correct.
Todd Fowler - Keybanc Capital Markets
Okay. Then a couple of questions: first on the restructuring side, I think that when we spoke back in early February, you indicated the restructuring expense was going to be about $9 million here in the quarter. It looks like it was a little bit lighter than what you originally guided, and I think you talked about seeing $15 to $20 million in FY09. Is that still the right magnitude to think about on the restructuring side?
Lawrence R. Samuels
Todd, this is Lawrence. Yes, we… The number for the fourth quarter was slightly lower than our initial expectation and as we obviously continue to refine the plans, we’re going to be market. So we expect that it’ll be about six to eight for the first quarter.
Roger I. MacFarlane
Yeah, I think we need to clarify that. In fact, we gave guidance of $9 million, and we reported $8.4, which is pretty close.
Todd Fowler - Keybanc Capital Markets
Oh, that’s right. So the 6.2 is after-tax and so, that’s right, okay. Fair enough, okay. Then kind of on the same lines, and I’m just going through my notes here, I gather the net revenue that you originally laid out that you were going to exit was about 75 to 80, and I might’ve misunderstood this but I thought in the prepared remarks today, you said it was about $70 to $75 million. I guess if I’m correct in those numbers, was there a change and as you look at some of the contracts that you wouldn’t be exiting or maybe my notes just aren’t correct.
Lawrence R. Samuels
You’re absolutely right. We did adjust the number so that the revenue and the cost reduction produced the operating number. We noticed that the math didn’t work as well, so we directed what we previously reported on the revenue side.
Todd Fowler - Keybanc Capital Markets
Okay, so it’s nothing different? I mean it’s not that we looked at some contracts and decided that we were going to keep them [inaudible].
Roger I. MacFarlane
There’s no substantive difference.
Todd Fowler - Keybanc Capital Markets
Okay, and then, Roger, any comments that you can make on the Department of Justice Investigation and where they stand and what you’re anticipating going forward, I guess?
Roger I. MacFarlane
No, there’s no change to the situation which we’ve previously discussed. It’s something which we can’t control, so there’s nothing has changed from what we previously reported.
Todd Fowler - Keybanc Capital Markets
And that’s just a binary event basically where you’re providing them information; and at some point, they’ll come back to you?
Lawrence R. Samuels
That’s correct and, of course, we’re also gathering our own information based on understanding what they’ve asked for. So it’s an ongoing thing and we will expect to see ongoing expenses unfortunately.
Todd Fowler - Keybanc Capital Markets
Okay, fair enough. Thanks a lot for your time.
Operator
Your next question comes from the line of Nate Brockman.
Nate Brockman
Good morning, gentlemen. I just had a couple more clarifying questions. We’ve been talking about the market share gains here in freight forwarding and the better selling effort, probably some selling execution there. I was wondering whether that, you feel that maybe some of your customers are beginning to be even more receptive to the UTi value proposition of a, and multi-modal solution and, as he had talked about in the last quarter how some of the contract logistics business is actually, or having that business is driving increased freight forwarding; maybe if you could just talk to that a little bit.
Roger I. MacFarlane
Well you must be a fly on the wall of some of our sales pitches. But that’s absolutely right. I think we’ve mentioned in the past that we have seen growth in our freight forwarding business as a result of being capable of offering a more comprehensive solution to our clients and being able to understand the impact of a more comprehensive solution on their real costs, which are really inventory carrying costs. That often doesn’t get addressed by just offering a narrow range of services so we definitely have seen that. In fact, I personally have just come back from attending a client situation; hopefully, it will be successful where that…
In fact the client was really looking at freight forwarding as freight forwarding contract but felt that they couldn’t move on with us to other things afterwards. So I think that is very much part of our value proposition, and we believe that it is one of the drivers of our freight forwarding growth.
Nate Brockman
It also seems that, I mean, that’s been a UTi framework for a long time, but it seems that all of a sudden with the level of you being ahead of the market in terms of net revenue growth, that all of a sudden it seems that people are even more receptive to that. Do you think that that’s part of the U.S. economic pressures and rising fuel cost where they’re looking to outsource and looking for a UTi solution even more in the last six months than they had over the last couple years?
Roger I. MacFarlane
Well, I think that the rise of professional procurement is a big factor in our industry overall, and one of the factors in procurement is to have fewer partners with a deeper strategic relationship; and clearly if you look at the whole supply chain and decide that you want fewer suppliers in the whole supply chain, you pick partners that have capability across the supply chain. That is what we believe is fueling the opportunity for us to work with a number of critically strategic partners.
Nate Brockman
Great and one last question: we’ve kind of talked about kind of walking away from some lower margin contract logistics business, and we’ve also probably won some new relationships lately. Can you kind of talk about, in this slower U.S. kind of economic environment, kind of what you’re feeling on the underlying contract logistics business in terms of volumes and customers’ willingness to sign up new contracts even though it might cost some money upfront, that they might save some money longer term; and kind of just talk about what the economic impact is there.
Roger I. MacFarlane
I think in today’s environment when you’re under pressure in your business, and I’m speaking now about our clients, everybody is looking for innovative ways to be more competitive and either having faster speed to market or ways in managing inventory to streamline the balance sheet and things like that, that allow them to survive the current economic weakness or to find ways to improve their operating cost structure in a tight economic environment.
So the fact that clients are looking for different ways to do this has resulted in us winning a number of contract logistics opportunities for vendor vantage, inventory, and things of that nature, which I believe in different circumstances wouldn’t have been quite as easy to do. So we are seeing continued interest in working with us and I think our reputation of capability is spreading. I think that the acquisition we made recently of SPAN has been a huge injection of engineering expertise and has fueled a lot of opportunities, which I think we will see the benefit of in our contract logistics business in the future.
So we are very excited by the reception that we’re getting in the marketplace and I hope that as a result of that, we will continue to see growth in the right profitable contract in contract logistics as well as the things we’ve been talking about in freight forwarding.
Operator
Your next question comes from the line of Alex Brand - Stephens, Inc.
Alex Brand - Stephens, Inc
I was hoping that with respect to the operating expenses in the first half, I hear what you guys are saying about its back-half; and that’s certainly the way that we’ve looked at it, but it’s also hard to tell from what you’re saying sort of the rate that your expenses are coming out. So as we look at: how do we think about modeling the first half of the year, any further color you could give as to whether [inaudible] from Q4 should start to come down even a little or does it keep tracking up through the first half some and then it starts to drop off? Any color there at all would be very helpful.
Roger I. MacFarlane
Well, I think if you’re thinking about modeling, I think it would be good to model the first half conservatively.
Alex Brand - Stephens, Inc
Not all the color I was looking for but…
Roger I. MacFarlane
Well, what more color would you like?
Alex Brand - Stephens, Inc
Well, I just again, the rate of change there, it’s very hard to gauge because you haven’t said… You said you notified 1,400 people but I don’t think you said when or if any of those people had actually been removed from your cost structure yet.
Roger I. MacFarlane
Well to give you, I’d like to give you a specific example: we mentioned the one contract in North America that we’re exiting by July. All the stock involved in that and that is a big chunk of the number. I think we’re looking at probably 305 or 40% of the total that we gave you is related just to that one contract. Those people have all been notified. They’re all aware of what’s happening. Both the client and ourselves have gone through everything with them, so they know they’re going to be off of UTi books when the contract comes to an end, but that’s still in our cost structure until that happens.
We’re still working with the client as to whether it will be a clip end or whether it will be a phase down. These things I depend on the client’s circumstances so that’s why we are not going to see, in that particular instance, we’re not going to see how we are not modeling any benefits until the second half on that particular contract. Of course there are other ones where people have already left UTi, and so we do expect to have some benefit in the first quarter already but that is not the majority.
Alex Brand - Stephens, Inc
So at this point, you’re not prepared to say: we closed the South Africa retail distribution and that was 100 people or something like that?
Roger I. MacFarlane
Well, you’re right. That is true but slightly more than 100 people but, yes, that has been closed.
Alex Brand - Stephens, Inc
I think you said, you or Lawrence said, airfreight tonnage was up 24% in Q4. How much of that was organic?
Roger I. MacFarlane
Well, there was some business from Israel that I would say is not organic in a sense of… But we have been working with the Israeli partners before we close the deal. So probably on reflection, I’d say nearly all of that’s organic.
Alex Brand - Stephens, Inc
Great. Roger, could you just comment, we’re hearing, I guess not surprisingly, that given the environment that there’s a record level of bid activity in the market, which I would think for the bigger players would be an opportunity. Can you just talk about what’s going on out there and how you might be able to benefit?
Roger I. MacFarlane
That’s correct. I would say that there’s, I don’t know about record level but certainly we are experiencing a lot of pressure on our bid process as a result of the opportunities that are coming our way. One also has to recognize a lot of our existing clients are going out to bid. I’m happy to say that we have had a few of our major clients go out to bid, and we have basically retained those clients; but it does present an opportunity for us, and we have… That is one of the ways in which we’ve been gaining growth in our freight forwarding is to participate in new opportunities that are coming along.
I think it’s true though that with the amount that are going on, we are taking a very selective approach to make sure that we’re targeting customers that fit this strategic profile that are looking for a long-term relationship; and of course where we can have a profitable relationships from the get-go.
Alex Brand - Stephens, Inc
That sounds great. I think you guys used to be… I remember when came public, you used to talk about being very focused on select bids, so I’m glad to hear that that focus is back again. I’ll leave it at that, Roger, thanks a lot.
Roger I. MacFarlane
Thank you, Alex.
Operator
Your next question comes from the line of Jon Langenfeld - Robert W. Baird.
Jon Langenfeld - Robert W. Baird
Good morning, Roger. Can you just clarify the $0.2.5 benefit you talked about? That’s relative to your expectations and guidance, correct? I mean basically what I’m getting to, the $0.24 adjusted number for fiscal 4Q, that’s a good number. You’ve taken out this $0.2.5 but really that was a prior year expense. Am I thinking about that correctly?
Lawrence R. Samuels
John, it’s Lawrence. I’ll try and answer that. In essence, we expected to incur the cost-related to that to some of those keynote items in the fourth quarter when we gave our guidance; and because we now have booked those back into prior years, we’ve got that pickup in the fourth quarter of $0.2.5.
Jon Langenfeld - Robert W. Baird
Okay, so the $0.24 number is a clean number, I mean, relative to kind of a baseline for your fourth quarter?
Lawrence R. Samuels
Well, I think it would be reasonable to, for modeling, to take out the $0.2.5.
Jon Langenfeld - Robert W. Baird
Take it out, meaning add $0.2.5 back in and so you’re down to $0.21.5?
Lawrence R. Samuels
Let’s say for modeling purposes, John, yes.
Jon Langenfeld - Robert W. Baird
Okay and then the other question, I mean, I see what you guys are saying on the airfreight yields. We’ve seen it across the forwarding group but you grew your net revenues in forwarding, 19% - 20%, very, very strong growth, why is that not fast enough to get margin expansion in the freight forwarding division.
Roger I. MacFarlane
I think part of it, John, is a mix issue because what happens is when a lot of growth that we are working on is, for example, out of longer, whole lanes like China to the U.S.A. or China to Europe where the yield percentage is lower, although the whole dollars might be greater per shipment, but the yield percentage is lower. So you do get the impact of mix in the number, and so that’s why it isn’t just a mathematical… The growth rate, okay, we’re getting more density, shouldn’t we be getting a yield expansion? However…
Jon Langenfeld - Robert W. Baird
I guess, Roger, I was talking less on the yield side and more on the operating margin relative to debt revenue.
Roger I. MacFarlane
Yeah, I think it is related to the yield because one of the things is that our cost structure tends to be related to the volume of what we have to do and the volume of work is more tied to the gross revenue number. You see that in the tonnage numbers that I gave you in my prepared remarks are closer to the gross revenue growth rate. The growth rate in tonnage is, and in TUs is closer to gross revenue than it is to net revenue.
If you were to look at our, if we have the same yields this year in the fourth quarter than last year, if you did the map on that, you will see we probably would’ve had margin expansion in the operation. So that’s why we’re putting a lot of attention on getting yield improvement in the coming year, why I gave you the indications that we have got goals for improving net revenue. Even though we’ve been seeing net revenue in air freight decline, our goals are to improve net revenue in the coming year.
Jon Langenfeld - Robert W. Baird
Okay and then, thanks for the color on that. Then lastly, do you feel like, I’m assuming the answer to this is yes but I’d like to hear you confirm on it. I mean do you feel like given the initiative you have in place, given some of the restatements you’ve made over the last couple years, I mean how much a level of confidence that this noise is behind us? And I understand you can’t control the external environment, but the things you can control, do you feel like you have your arms around the situation; and we’re not going to be sitting here 6 or 12 months from now talking about similar type one-off items?
Roger I. MacFarlane
John, the only thing I can see is that when you go through the press we’ve just been through now, which was triggered by our tax, the new [inaudible] 48 tax accounting rules, when you’ve been through the press you’ve just been through now, you can be sure that everybody involved, the company and our auditors and everybody involved, is as cautious as possible to make sure that everything that we know about is correctly accounted for.
Jon Langenfeld - Robert W. Baird
And does the same hold true on the operating expenses and the charges and restructuring? You feel like you have your arms around the issues?
Roger I. MacFarlane
Well, we’ve given an indication that we will be expensing restructuring, further restructuring charges in the first quarter. We’ve quantified the number for that because we were… Some of the operations, the number is not exact yet until we actually make the exit, depending on how we make the exit, so… But we’re very comfortable with the range that we’ve given, that that will be the range within which we will report for the first quarter on restructuring charges; and we are not expecting any restructuring charges after that. It’s basically all in the first quarter.
Jon Langenfeld - Robert W. Baird
Excellent, thanks for the time.
Operator
Once again, ladies and gentlemen, if you would like to ask a question, it’s star/one on your telephone keypad. Your next question comes from the line of Art. Hatfield.
Art Hatfield - Morgan, Keegan
Good morning, Roger. You’ve been going a long time, so I’ll try and be brief. When you talk about in the second half of the year being able to get, Lawrence alluded to 200 basis point improvement in the operating margin, how dependent is that goal upon having improvements or stability in revenue growth through that timeframe?
Roger I. MacFarlane
Well, we, I think it’s true that we gave an indication of that target and our ability to achieve that target when we were discussing last month with all of you the cost reduction plans and since then, we have witnessed continued strong volume growth in February and March, probably about what we were thinking was going to be true. So I think it gives us greater confidence that we can achieve those kinds of margin improvements in the second-half of the year.
Art Hatfield - Morgan, Keegan
I guess to kind of dig a little bit deeper, how at risk or what can you hold onto with regards to margin improvements, say, if volume growth got cut in half from current levels?
Roger I. MacFarlane
Well, we of course proactively manage our operating costs and that is the beauty of the model whether it’s in freight forwarding or in contract logistics because in contract logistics, volume in a client’s facility goes down, we obviously flex the cost structure accordingly. So I think that from that standpoint, that is the beauty of the model, but we have taken action. I think one of the reasons why we took the action not only to exit things that were not working well or were not performing, we also took advance action anticipating a softer economic environment. That was one of the drivers for taking the action that we’ve taken.
So we’re anticipating a slower rate of growth during the course of the year, so it was on that basis that we had indicated that given the things that we were exiting, those would product margin improvement on their own; and coupled with the other things that we were doing, we thought that we achieve the numbers we gave. So obviously, if there’s a severe downturn, then we are going to need to take, as we witness that, we’re going to need to take even further action to address it.
Art Hatfield - Morgan, Keegan
But you’re at a greater level of flexibility now as you’ve taken the steps that you’ve taken over the last couple months.
Roger I. MacFarlane
Yes, I believe so.
Art Hatfield - Morgan, Keegan
Okay, that’s very helpful. Thank you, Roger.
Roger I. MacFarlane
Thanks very much. Thank you everyone, as there are no more questions. I would like to thank all of you for participating in our call this morning, and on behalf of all of us here at UTi to thank you for your continued interest in UTIW and your ongoing support. Thank you, Celeste.
Operator
This concludes today conference call. You may now disconnect.
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