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UTi Worldwide Inc. (NASDAQ:UTIW)

F1Q09 Earnings Call

June 5, 2008 11:00 am ET

Executives

Jeff Misakian – Vice President Investor Relations

Roger MacFarlane – Chief Executive Officer

Lawrence Samuels – Chief Financial Officer

Analysts

Jon Langenfeld - Robert W. Baird

Tom Wadewitz - J.P. Morgan

[Ed Wolf – Wolf Research]

Alex Brand – Stephens

David Campbell – Thompson, Davis & Co.

John Mims – BB&T Capital

Todd Fowler - Keybanc Capital Markets

Operator

Good morning. At this time I would like to welcome everyone to the UTi Worldwide first quarter fiscal year 2009 earnings results conference call. (Operator instructions) I will now turn the call over to Mr. Jeff Misakian, Vice President Investor Relations. Please go ahead sir.

Jeff Misakian

Thank you and good morning, everyone. Welcome to UTi Worldwide’s fiscal 2009 first quarter results conference call. Joining us on the call today are Roger MacFarlane, Chief Executive Officer and Lawrence Samuels, Chief Financial Officer.

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

These risks and uncertainties are described in further details in the company’s filings with the Securities and Exchange Commission. Please refer to those 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 Roger MacFarlane. Roger.

Roger MacFarlane

Thank you Jeff and good morning everyone. This morning we announced results for our fiscal 2009 first quarter. We are very pleased that we continue to report revenue growth well ahead of the market, taking advantage of strong secular trends and our ability to gain market share from the competition.

This is particularly gratifying given the impact of the weak US economy and the reduced revenue resulting from our restructuring activities. The revenue gains we experienced reflect continued organic growth with strong volumes in our Freight Forwarding operations and new business wins in our Contract Logistics and Distribution operations.

Fuel costs had a major impact on our yield percentages this quarter which was not a surprise given the sharp increase in fuel recently. The increase in fuel surcharges this quarter on the line or portion of Freight Forwarding alone represents approximately six points of the 26% increase in revenues compared to the same period last year.

Without this impact, the revenue increase would have been much closer to the increase in net revenue resulting in a more consistent yield percentage compared to the first quarter last year. And for freight forwarding operations alone, the yield would actually have improved slightly.

Excluding restructuring charges, our overall operating margin of 7.6% as in line with our expectations for the first quarter. Freight Forwarding’s adjusted margin of 17.2% held up well in the light of the challenging economic environment. Contract Logistics and Distribution margins were negatively impacted by three issues in the quarter.

As expected, firstly our restructuring activities, and secondly the loss of our Baytown agreement with Wal-Mart hurt margins. Finally, margins were also affected by the underperformance of two international operations that are part of our improvement efforts. These businesses are integral to our overall operations and our client relationships.

And we have the best talented resources working on these efforts. Apart from these issues, the operating margin for Contract Logistics would have been down only slightly compared to a year ago.

As we start to see the full benefits of our cost reduction plan, we expect Contract Logistics margins to improve. Lawrence will provide more details in a moment. We initiated all of these actions required under our [inaudible] plan by the end of the first quarter.

We closed our retail distribution business in South Africa and our trucking division of integrated logistics and reduced headcount by nearly 600 employees. The remainder of the headcount reductions will come as the execution of the plan is completed. All that remains is for the transition agreement related to the previously mentioned Contract Logistics operations in the Americas to expire in July and the completion of some non-core business disposals.

We now expect that the total annualized cost reductions under the plan will be approximately $102 million, partially offset by associated annualized revenue reductions of $68 million. This is expected to result in an increase in annualized operating income of approximately $34 million, again with most of the benefits expected to be realized in the second half of fiscal 2009.

Last quarter we told you we were making changes to our senior level positions in each of our business segments. These changes have now been completed. In short we have tasked leaders in each segment with commercial and operational roles to strengthen our operational processes, our client engagement and implementation processes, the management of global client relationships, our quality initiatives and our procurement process.

Changes have been made to other functional areas of the company as well to strengthen our leadership team and the execution of our plan. Nearly all of this has been accomplished with internal resources and an eye to keeping our overall costs in line with our metric targets.

We have no in place the team that we need to help us achieve our short term and five term strategic client [as one] goals. Now I’ll hand the call over to Lawrence for a review of our financial performance in the first quarter. Lawrence.

Lawrence Samuels

Thank you Roger. This morning we reported adjusted fiscal 2009 first quarter earnings of $0.18 per diluted share, excluding restructuring charges. This is on track with our expectations for the first quarter of the year and compares with $0.18 per diluted share in the fiscal quarter last year.

Revenues in our fiscal 2009 first quarter increased 26% while net revenues increased 17% over the same period last year. Excluding acquisitions, net revenues increased by 13%, well ahead of market growth. Growth was achieved across nearly all of our service lines which I will address in a moment.

We revised the reporting of revenues and added freight consolidation costs in our income statement to better align this information with how our GAAP has evolved. Revenues are reported by service line as before, but we now present related freight consolidation costs by service line as well.

Net revenues are provided in the supplemental information in our press release. Operating expenses excluding freight consolidation costs in the fiscal 2009 first quarter increased 21% over the same quarter last year. Excluding restructure charges of $6 million, these operating expenses increased 19%.

Restructuring costs in the first quarter primarily consisted of costs to exit business of about $3.5 million and severance costs of about $1.5 million. We will not record further restructuring charges under the existing cost reduction plan in future quarters. Staff costs, the largest component of operating expenses were 55.6% of net revenues in the fiscal 2009 first quarter and slightly ahead of the 55% recorded in the year ago quarter.

Other operating costs were 33.3% of net revenues in the first quarter, up from the 32.3% reported last year. This increase is primarily due to costs associated with the DOJ investigation and related cross action litigation of $2.5 million, as well as acquisitions and the growth of our business.

We had increased expenses relating to the DOJ investigation this quarter as we accelerated our internal documentation review to complete this prior to the filing of our fiscal 2008 10-K in April. We expect the level of activity to return to prior levels going forward after allowing for the extra work performed in the first quarter unless circumstances change.

Fuel costs are also having an impact on our surface distribution operations. Unlike air and ocean carrier fuel surcharges, these fuel costs are included in other operating expenses. Our operating margin totaled 6.1% in the fiscal 2009 first quarter. Excluding restructuring charges, the adjusted operating margin was 7.6% compared to the 9.3% reported in the same quarter last year.

There were three primary items that impacted the operating margin in the first quarter, all of which were in our Contract Logistics and distribution business. I will address these items specifically when I review the segment results in a moment.

These items, however, were offset by stable performance in our Freight Forwarding segment, so that our overall operating margin came in about where we expected for the first quarter of fiscal 2009.

We continue to expect that our cost reduction plan will improve operating margins by approximately 200 basis points on an annualized basis beginning in the second half of this fiscal year. As a reminder, this improvement will be evident from the third and fourth quarters.

There is a lot to talk about in our segments this quarter. We changed our segment reporting based on the realignment of our management structure around our core business lines. Our reportable business segments of Freight Forwarding, Contract Logistics and Distribution and Corporate. We will continue to provide geographic data as well.

In conjunction with the segment change, we’ve made two changes to our previous reporting. Firstly, we moved certain client facing costs that were previously part of Corporate into our Freight Forwarding and Contract Logistics and Distribution segments. Secondly, we moved our domestic distribution network in South Africa from Air Freight Forwarding to Distribution to better reflect the evolution of this business from an air express to a road distribution operation over the past few years.

This naturally affects the historical air freight yield calculations. For comparative purposes, we have included in today’s press release revised figures for each quarter of last year which takes into account these changes and can thus be compared directly to the first quarter of fiscal 2009.

Freight Forwarding segment revenues increased 35% while net revenues increased 28% over the prior year first quarter, reflecting strong organic growth as well as contributions from our recent Israeli acquisition

The operating margin in Freight Forwarding in the fiscal 2009 first quarter excluding restructuring charges declined slightly to 17.2% versus 17.6% in the same period last year. Air Freight Forwarding revenues were up 41% over the prior year first quarter while net revenues were up 26%. These increases reflect continued strong volumes.

Air Freight tonnage increased 20% in the first quarter compared to a year ago. As Roger mentioned, yields in the first quarter were significantly impacted by the sharp rise in fuel cost. Air Freight yield in the fiscal 2009 first quarter declined to 19.6% compared to 22% in the same period last year.

This was primarily due to the record levels of fuel surcharges which added approximately $92 million to revenues in the first quarter compared to $42 million a year ago. Excluding the surcharge impact, Air Freight yield in the quarter would have declined by only 70 basis points to 24.7% when compared to last year’s adjusted first quarter.

This adjusted yield also represents an increase of a comparative fuel adjusted yield in the fourth quarter of 24.1%. As a reminder, our target this year is to increase Air Freight yields by 100 basis points from the fourth quarter rate of 24.1%. While there are seasonal factors at play, we are moving in the right direction.

Ocean Freight Forwarding revenues increased 26% over the first quarter last year while net revenues were up 21%, again due to strong volumes. Ocean Freight TEUs increased 24% in the first quarter compared to a year ago. The Ocean Freight yield declined to 15.3% in the first quarter compared to 15.9% in the same period last year, primarily due to the increase in bunker fuel costs.

These costs were approximately $55 million in the first quarter compared to $52 million a year ago. Excluding the impact of fuel, Ocean yields would have improved by 30 basis points to 18.8% in the quarter. The adjusted yield in the fourth quarter was 19.5% which is the baseline we are using to measure our goal of expanding ocean yields by 50 basis points this year.

Contract Logistics and Distribution segment revenues increased 9% over the prior year first quarter primarily due to organic growth and partially offset by the disposition of underperforming businesses through our restructuring and the loss of revenues under our former Baytown contract with Wal-Mart that ended after the first month of the first quarter.

We are encouraged to see growth from new business as well as expansion of business with existing clients. Excluding restructuring charges, the operating margin for contract logistics and distribution was 3.3% in the fiscal 2009 first quarter compared to 6.3% a year ago.

Both percentages include the allocated corporate costs I mentioned earlier. As I mentioned, there were three primary items in the fiscal 2009 first quarter that impacted Contract Logistics and Distribution’s operating margins. First, there was $1.1 million in costs associated with exiting operations in our restructuring which were not recorded as restructure charges.

Second, there are two underperforming operations, one in AMENA and the other in Africa which reported a combined operating loss of $4 million in the quarter. Included in this amount is $1 million for potential claims from a client due to prior performance issues.

Both these operations provide services to significant Freight Forwarding clients in addition to Contract Logistics and Distribution and steps have already been taken to fix these underperforming operations.

And finally, the loss of our Baytown agreement with Wal-Mart negatively impacted operating profit by $1.3 million for the first quarter when compared to last year’s first quarter. All our other operations are therefore performing well and we expect to improve the operating margin in Contract Logistics and Distribution through the benefits achieved in our cost reduction plan, fixing these two underperforming operations and continued focus on margin improvement.

Our effective tax rate in the quarter was 28% which is in line with the previously communicated 27-29% range in fiscal 2009, which estimates remains valid. Our balance sheet remains strong, we consumed $22 million in cash from operations in the first quarter of fiscal 2009 compared to consuming $36 million in the same period last year.

This is typical of our first quarter and we continue to expect free cash flow for the full fiscal year to approximate net income for fiscal 2009. Finally, we paid the final earn out payment of $27 million related to our acquisition of Span in May 2008 and this was the last major earn out payment.

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

Roger MacFarlane

Thank you Lawrence. We are pleased that in the current economic climate we continue to grow revenues at a better rate than the market. This speaks to the skill and dedication of our people and the breadth of our service offering. We continue to add new clients and expand existing relationships with a greater focus on profitable growth.

We have tightened processes to ensure improved pricing and implementation in freight forwarding and better risk management in Contract Logistics agreements. As we have discussed previously, we are seeing some slowing in our client’s businesses and this is starting to be felt in our growth rates in some markets, particularly in the US.

Obviously no one can predict the length and severity of any economic slowdown, but we continue to believe that we could be facing a prolonged downturn in the US economy. Nevertheless, given the growth in global trade and our ability to take share away from the competition, we continue to expect growth in revenues this year to be ahead of the market.

We still see Freight Forwarding growing at a double digit pace in fiscal 2009 while growth in contract logistics is likely to be in the mid to high single digit range after giving effect to our restructuring plan.

Of course a protracted and wider downturn could affect these growth rates considerably, but we are better organized now to manage costs accordingly. Our people are very focused on deepening existing client relationships and gaining market share, driving higher levels of operating excellence, delivering on our business plan and financial results and protecting and nurturing our core values.

The economic environment is presenting quite a challenge in fiscal 2009, but we believe we’re off to a good start. Our renewed focus on our core businesses, on profitable growth and on reducing costs have laid a foundation for a return to improving margins and profitability. With that we would now like to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from John Langenfeld – Robert W. Baird.

Jon Langenfeld - Robert W. Baird

Can you first talk about the two contracts that you mentioned that you’re having some challenges with. What do you think the profitability of those contracts were in fiscal 08?

Roger MacFarlane

Well both of them are relatively new. And so we didn’t have those businesses for the whole of 2008.

Jon Langenfeld - Robert W. Baird

Maybe you can drill into some more detail there. I mean the concern I have is these are two additional items that have popped up. It’s in the Contract Logistics area, the area that has the most issues in terms of cost. So can you go into a little bit more detail, no specific customers, but what the issues are and why so early into the contract you’re losing this amount of money?

Roger MacFarlane

I think we need to put this in context. When we looked at what we needed to do as we went through the issues of the fourth quarter, and we took steps to address our performance. We did a number of things, one is we decided that there are certain businesses we needed to exit because there were no longer core or they were contracts that were not going to be profitable in the long term. So we decided to exit those things.

We decided also that there were certain operations that are integral to our client relationships and we needed to fix them. These two fall into that category. And then thirdly, we decided to be much more focused on our two core businesses, the Freight Forwarding and Contract Logistics and so we organized around making sure we put the best talent that we had on each of those businesses and applied the right resources and organized around achieving the improvements that we thought were necessary.

So these two businesses were already part of the mix when we decided to take those actions. And what we’re witnessing in the first quarter is the fact that the challenge that we have with these, we have not yet fixed the performance to the level that we believe we’re going to. So there’s no reason why these operations cannot contribute positively in the future and so what we’re working on is dealing with the issues.

Most of them relate to challenges of implementation. And I think that that’s what we said when we initiated our plan is that we had challenges of implementation around the company and this is one of the issues that we’re now organized better to not repeat in the future.

Jon Langenfeld - Robert W. Baird

And based on your reaffirming your targets for your savings, I’m assuming that part of that is getting these back to breakeven and profitability by the second half?

Roger MacFarlane

Well when we outline our cost reduction plan and we quantified the range of expectations, that addressed only the actions that we were taking in respect of the operations that we were exiting and the reductions that we were making. It did not address improvements we would be making in other areas of the business. You could say they were harder to quantify because as you work to improve an operation you don’t quite know what are the right steps.

In some cases it might mean adding resources in the short term to make sure that their performance gets right so that you can get the processes streamlined and things like that. So these two operations, the benefits as we improve these two operations are not included in our cost reduction plan.

Jon Langenfeld - Robert W. Baird

And then of the $34 million that you’ve quantified now more specifically in terms of net annual operating income savings, you essentially have the one contract that you mentioned last year, you have the South African Road Division, the US Road Division, if you combined those three, how much of the $34 million in net savings annually do those three represent.

Roger MacFarlane

Yes I think in the past we did quantify those I think on the last call we actually gave a breakdown of what we thought the operating contribution on those three would be and I think we mentioned that the trucking operation in the US was essentially a breakeven operation but we were concerned in the current environment that that would not continue.

And in fact we’ve seen the impact as we’ve been closing it down that it made a negative contribution in the first quarter. In regard to the other two, on a combined basis, they were approximately one-third of the total.

Jon Langenfeld - Robert W. Baird

What I’m trying to drive to, the other two-thirds of the savings that you’re talking about, if you’re not including the improvements in the contract, the additional contracts that you outlined for us, what’s in that other two-thirds?

Roger MacFarlane

Well they are headcount reductions that we have taken. One of the driving factors if you’ll recall of our cost reduction plan is that as we looked out in the December, January timeframe and we got evidence from our clients of the economic or the behavior that they were anticipating from their clients, therefore the activity level that we were looking out at, we assumed that our business would be weaker going forward. The economic climate would be weaker.

So we took, given that we were taking these actions we decided that we needed to shape our organization in anticipation for a softer economic environment. So we took actions across the board. I think we mentioned there were regional costs, corporate costs, there were individual operations. There were a lot of areas that we focused on to look at how the organization should look going forward. So it’s in a lot of different areas right across the company.

Jon Langenfeld - Robert W. Baird

It sounds like to me two-thirds of the costs that we’re talking about out there are really related to more general cost reduction, no specific contract issues beyond the three that we’ve already talked about, is that a good way to look at it?

Roger MacFarlane

That’s correct.

Jon Langenfeld - Robert W. Baird

You talked about the potential for the slowing environment and seeing some signs of slowness in the US. Is that any different than what you were seeing three months ago?

Roger MacFarlane

I think if we scroll back three months ago I think we were probably seeing a slightly better environment than what we are now looking at. I think if we scroll back six months ago, I think we were of the view if you look at our comments two quarters back that we didn’t really feel from our clients that we were going to see a real slowdown.

And last quarter I think we communicated that we were worried that we were seeing a slowdown in activity. I think that in the US the slowdown is probably more than we anticipated but we haven’t yet seen the same level of impact in places like Europe which continues to be fairly strong and parts of Asia, of course China and India are continuing, their economies have continued to be strong.

So I think also, certainly my personal view is that the recovery will take a log longer as I talk to various people in the marketplace and clients as well. I think that the feeling is that we’re not really going to see a big pickup in even next year. So when we look at all of that, we’re very focused on identifying of the trade lanes that are growing, we’re focused on working with our clients to expand our relationships with them.

Or sales organization is very focused on providing our clients with more services as a way of cushioning the impact of perhaps less activity in a particular current relationship we have.

Operator

Your next question comes from Tom Wadewitz – J.P. Morgan.

Tom Wadewitz J.P. Morgan

Roger I wanted to see if you could give us some perspective on what you think is driving the new contract wins in Freight Forwarding and how much, is doing Contract Logistics work an integral part of those wins or is that really more isolated?

Roger MacFarlane

Obviously we’re working actively, you know we have invested in our client relationship and the sales organization extensively over the years. And we are very proud of our team and the way in which they work together on a global basis. So I think that collaborating globally on supporting our clients and identifying opportunities, all that investment is quietly beginning to pay dividends.

I think also that as we get better known in the marketplace and we become a more viable option for major clients, we are finding greater market recognition and client recognition. It makes it a little easier to make the way through the opportunities that present themselves.

And then when we get to that point, I think the way in which we do focus on trying to close our transactions, we’re very proud of that process and one of the things that we’re finding, particularly with major clients is that they are looking to having fewer vendors. I mean this is nothing new in procurement, but they do want or I should say fewer suppliers.

And therefore one of the things that really works for us and I think we’ve mentioned this in the case of Motorola and others, that what is the clincher in the end is that they know that we can support them in other areas, not just Freight Forwarding. And I think that that supports the value of our strategy and it’s what the central reason as we said in the past, why we believe we’re able to grow faster than the market.

Tom Wadewitz J.P. Morgan

So I guess if you looked at it you wouldn’t, it’s kind of hard to parse out and say well on a lot of these wins it’s because we’re pretty aggressive with pricing or on a lot of these wins it’s because we have, we’re offering Contract Logistics as well as Forwarding. Is it possible to kind of parse it out into some buckets like that or not?

Roger MacFarlane

As anybody that’s involved in sales will know that we of course attribute a win to the skill of the salesperson at the time. But you know basically the one, all I can speak to are from personal experience, things that I know, our senior team, myself and John and Gene and other people in our senior team that have been involved in those final closing the sales that the fact that we have the potential to support our clients.

The fact that we have resources to find solutions, the fact that we think in innovative ways about solutions for our clients and the fact that we’re small enough to pay attention to our clients and not as big as our competition, all of these are very attractive factors and who knows what goes into the final decision. Of course, one always has to be price competitive, you’re not going to with all those benefits be able to get a premium.

Tom Wadewitz J.P. Morgan

And then I guess a follow up question or two on the contracts that you mentioned that were I guess signed relatively recently but you’re losing some money on, what do you think you did, what is the issue specifically within those contracts that’s causing you to lose money and you know what gives you confidence or what do you do to fix them so they’re break even or hopefully actually making money on those two contracts?

Roger MacFarlane

I think both of those are examples of some of the things we talked about earlier where you know we were pursuing business and we were growing at a pretty fast rate. And we didn’t have the right level of focus on all of the issues, the take on issues.

In one client and each of these is different, is the whole take on process where you just have the laser like focus that we now have on that, and so therefore the implementation was not as well engineered and organized and we didn’t pay as close attention to all the pricing elements as we should have.

So that it was one of the lessons that we learned and of course we’re still threading the needle in getting through that. So I would say it’s, if we put it in the larger context, it’s a function of the growth rate that we were not putting the right level of resources. We do have these processes in the company, we do have the talent, we do have the understanding of how to implement but we didn’t direct these things as well as we should have in these particular cases.

Tom Wadewitz J.P. Morgan

So is it more a function of startup costs in Logistics Contracts and you get through some of the, maybe you didn’t anticipate the startup costs well and so you lose some money initially but you get beyond that and then you can make money? Is that the issue with these two contracts or is it more of a pricing issue where your ongoing activity wasn’t priced correctly o you really have to get them to pay a different price and if not then you could lose money on the contract for a more sustained basis?

Roger MacFarlane

I think it was both. I think primarily it’s the implementation design but it was also the pricing which we have rectified. But you know if you don’t implement effectively, then if you haven’t got the pricing right either, it compounds the issue.

And of course what you need to do in order to get the situation right is to make absolutely sure you’re performing in accordance with the client’s KPIs and if you don’t implement correctly that means initially you’re putting more cost into getting that right before you actually get the cost worked out correctly. So in other words, to fix them costs more money than you had anticipated. And that’s what we witnessed in the first quarter.

Tom Wadewitz J.P. Morgan

You said you had rectified the pricing, you’ve already got the client to agree to pay different pricing or that’s still something that needs to be done?

Roger MacFarlane

Yes in one of the cases that’s absolutely right, we’ve already. I think there’s a little way to go on some of the elements but the bulk of the pricing has been sorted out now.

Operator

Your next question comes from [Ed Wolf – Wolf Research].

[Ed Wolf – Wolf Research]

Did I hear Lawrence say there will be no more restructuring charges for the rest of the year?

Lawrence Samuels

That’s correct, yes.

[Ed Wolf – Wolf Research]

When are we going to start to see this intentional loss, you talk about $68 million reduction in revenue, $102 million in cost. I was surprised that we didn’t see an obvious amount of revenue that was removed this quarter. When are we going to start to see those chunks of $102 in cost and $68 in revenue?

Lawrence Samuels

There was about $13 odd million in lost revenue this quarter. As I mentioned, the one operation closed at the beginning of the quarter, the other one was towards the end of the quarter, so you would obviously see a bigger impact in the second quarter. And then the contract we’re exiting is only scheduled for the end of July. So it’s really only from the third quarter that we will see the bulk of that coming through.

[Ed Wolf – Wolf Research]

So it’s three contracts that are going to be a total of $68 million?

Lawrence Samuels

That’s the majority of it, yes.

[Ed Wolf – Wolf Research]

And when was the Wal-Mart, was that in the beginning?

Lawrence Samuels

Just to clarify, the one is a contract, the other two are operations that weren’t individual contracts.

[Ed Wolf – Wolf Research]

But they’re all with Contract Logistics?

Lawrence Samuels

Correct, yes.

[Ed Wolf – Wolf Research]

And the Wal-Mart one was at the beginning or the end of the quarter?

Lawrence Samuels

That was at the end of the first month, so we lost two months of that.

[Ed Wolf – Wolf Research]

And you said there was a $1.2 million impact to operating income?

Lawrence Samuels

$1.3, yes.

[Ed Wolf – Wolf Research]

So the implication, is that $7.8 million a year, $45 million of revenue, you said it had a 17% operating margin?

Lawrence Samuels

The $1.3 was just the difference between this quarter and last quarter. I think the annual run rate was at about $5 million.

[Ed Wolf – Wolf Research]

So we should expect the impact at $5 million, it’s pretty even over the quarters, I mean do we look at $5 million divided by four and say it’s about $1.2 million?

Lawrence Samuels

That’s the best way to look at it, yes.

[Ed Wolf – Wolf Research]

I just want to hone in a little bit on some of the Contract Logistics. Roger, in your opening remarks you talked about three impacts to margins, the first was restructuring which I assume is what we’ve added back as the restructuring expenses, or taken out the expenses that you broke out in your presentation that you released. Is there anything beyond that?

Roger MacFarlane

Yes, what Lawrence mentioned was, of the decline in Contract Logistics profitability in the first quarter, $1.1 million related to the operation, the two operations that Lawrence has just gone through with you that we closed during the quarter and these were operating losses that could not be treated as part of the restructuring charge.

[Ed Wolf – Wolf Research]

Okay, so they’re not part in any way of the $3.654 you listed for Contracts for the restructuring under contracts?

Roger MacFarlane

No, they’re not. That’s why they’re in the operating number.

[Ed Wolf – Wolf Research]

Then the loss of Baytown, that was the $1.3 million in the quarter.

Roger MacFarlane

$1.3 was the reduction in contribution in the quarter as a result of not having Wal-Mart for two of the three months.

[Ed Wolf – Wolf Research]

And then the third one, you said something about two international operations, can you go through that one more time?

Lawrence Samuels

I think that’s really what Roger was discussing, the one in Europe and the one in Africa. And those are the ones that the previous two questions were dealing with.

[Ed Wolf – Wolf Research]

How do I think about that going forward, the timing of when Europe and Africa stop being a drag?

Roger MacFarlane

We’re working hard, I think if you’re looking at it from a modeling point of view, it would be reasonable to expect that we will not be hemorrhaging in those two operations by the end of the year.

[Ed Wolf – Wolf Research]

So when you add it all up, when do you expect contract logistics margins under the new reapportioned way you’re looking at things to be positive year over year again?

Roger MacFarlane

I think it will take until the fourth quarter because if you look at our Contract Logistics margins, they were pretty reasonable the first three quarters of last year and then they dipped down in the fourth quarter. So when you start doing, when we get to the fourth quarter I think the comparisons will be more favorable.

[Ed Wolf – Wolf Research]

The reapportionment where you’re taking part of the Corporate and a portion of those expenses to Contract Logistics and Forwarding, should we think of that in terms of net revenue as a good way to look at that?

Lawrence Samuels

Just to confirm, what was reallocated was more of the client facing issues, a lot of IT, costs, it wasn’t really just an allocation, it was moving the actual costs. The apportionment that was between the two segments, between Freight Forwarding and Contract Logistics and that was done on a gross revenue basis.

[Ed Wolf – Wolf Research]

So if I go forward and Forwarding is 40%, I should assume that it’s 40% of what I had assumed of that corporate expense back, so in other words, you’re apportioning by gross revenue of total Forwarding and total Contract Logistics.

Lawrence Samuels

Correct, yes.

Operator

Your next question comes from Alex Brand – Stephens.

Alex Brand – Stephens

If I can shift the cost discussion just a bit to sort of the ongoing operating costs, I guess I was a little surprised that you would have the kind of volume growth you had in Air and Ocean but the expense growth, I mean it’s a little hard for me to sort of see with all the moving parts and the costs, admittedly, but it seems like also in your segment data, your Forwarding margin isn’t sort of moving up, you’re not getting the leverage despite some pretty impressive growth there.

Am I missing something or is this just part of the moving parts that are all going on right now?

Roger MacFarlane

I think the way to think about that is if you look at the segment information that we’ve reported, you’ll find an allocation of restructuring charges in there as one of the cost items.

And when Lawrence was talking about the margins, he was removing that restructuring charge. The important thing to think about is the fact that there is a restructuring charge means that we have taken cost reduction actions which will benefit future quarters.

Alex Brand – Stephens

So it sounds like a whole bunch of stuff happened in Q1, so we saw virtually no benefit and then is it fair to say, I mean I hear you saying back half but it also sounds like, I mean a lot of stuff happened in Q1, we should start to see some of that benefitting Q2, shouldn’t we?

Roger MacFarlane

Yes. We should begin to see the benefit. I think that’s what we’ve said all along when we communicated our cost reduction plan back in February that we would see minimal impact in the first quarter, a little bit of impact in the second and nearly or a big piece in the third and all of it by the fourth. So that’s why we said in the second half of the year we’ll see whether we have delivered these changes through the performance or through the reporting of the numbers.

Alex Brand – Stephens

I think maybe, it sounds like it’s a little confusing as to whether or not anything that you’re talking about, for example these two contracts, it sounds almost like you discovered something new. But really what you’re saying is this is all the stuff that we assessed before and it’s just too soon to see it yet, but you’re generally on track with your plan and you’re pretty comfortable?

Roger MacFarlane

Yes I think that’s absolutely right. You know we’re not making new mess, if that’s what you mean. What’s happened is that we identified all the things that we were doing and we’re tackling them and these two operations were two that we decided were so integral to our client relationship and part of our solutions that and we felt we had the skill and the ability to do these properly.

That despite the fact that they were already not performing in the first quarter, which was the baseline we were working from, we decided that what we needed to do was to put resources at fixing them. And that’s what we’ve been doing.

Alex Brand – Stephens

On the resource front, can you talk about what the bid environment, the sort of bid activity level is and what you’re maybe doing differently in both CL and Forwarding to make sure that you sort of maximize the utility of your resources and don’t get spread thing, make bad decisions.

Roger MacFarlane

Well I think we have communicated that we’ve tightened up our contracting process. We’re also doing more evaluations as we are looking at opportunities, more evaluations as to how we’re pricing and how profitable the business is. We’re also putting greater focus and we’re organizing now around making sure that we understand what it will take to implement.

Because implementing poorly is very expensive, not only in terms of the relationship with the client but also in terms of the costs involved. And we know how to implement. We implement a lot of contracts extremely well. What we’re all focused on here is the ones where we’ve not done that well.

But we do do a lot extremely well and what we haven’t done is make that a global approach and that’s what we’re trying to do now with the way in which we’re organized. So I personally feel that we’ve got our hands around these things. That’s not to say we won’t screw things up occasionally or that we won’t make mistakes, but I think we have organized around delivering the value for our clients and for our shareholders.

Operator

Your next question comes from David Campbell – Thompson, [Davidson].

David Campbell – Thompson, Davis & Co.

Just curious in general about the comments you made again about the industry outlook. I mean there’s no evidence in April and May of any slowdown in international business activity from Air and Sea Freight Forwarding. Who cares about the US? I mean you don’t do a lot of business here, especially in Forwarding and what you do business in is exports which are very strong.

Who cares? I mean are the customers saying this, are they reading the Wall Street Journal? I mean we’ve heard this now for six months and you certainly can’t complain about your tonnage growth and I don’t hear any complaints from other forwarders about their tonnage growth. So what are you trying to say?

Roger MacFarlane

Well I think if you do track some of the, certainly we are tracking the growth rates of our competition and I think they’re not as strong this year as they were last year which would indicate there is some level of slowdown in activity.

You’re right that Europe is doing particularly well. But imports into the US is definitely slower. We’ve got a number of major clients that are keeping inventory in a much tighter rein and I would say that the US imports are, there’s less growth, slower gross in the US imports than there has been in the past. But you’re right, we are very bullish about the fact that even in an economic slowdown like this, the global trade continues to grow.

David Campbell – Thompson, Davis & Co.

Yes, I mean the US imports are slow but actually it’s helping Air Freight because Air Freight’s up and Sea Freight’s down. So it seems like the shippers and retailers, manufacturers are shipping at the very last minute to save costs and that helps Air Freight business in general. But you disagree with that?

Roger MacFarlane

That’s absolutely right, that’s one of the great things about Air Freight. You know in boom times everybody wants to be at the market quickly and Air Freight should be ahead of their competition and in tight times they shrink inventory and then have to Air Freight in order to meet their client’s demands. So you’re right about that.

Operator

Your last question comes from John Mims – BB&T Capital.

John Mims – BB&T Capital

I’m standing in for John Barnes. If you could quickly just guide me through a couple things. When you’re looking at the international freight trends, are you seeing any pure pricing improvement in certain lanes? I know a lot of the top line growth this quarter was due to fuel, but as far as the pure pricing, can you add some color to that?

Roger MacFarlane

In a tighter economic time of course everybody is looking at how to save money. So this is an environment where our clients are also looking for ways to save money and ways in which to perhaps ship more by ocean and less by air. Although we haven’t seen as much evidence of that as we hear from our clients [maybe haveting].

So I think it’s probably not realistic to think of getting even with the capacity situation as it is, to think of getting price increases exclusive of fuel because clients are paying more for their transportation because of fuel and so it’s costing more in the costs of goods sold. And so you know that’s an issue.

We are of course seeing the reduction in capacity as a result of the high cost of fuel. A lot of 747 200’s which are no longer viable to fly as freighters at the current rates, we have seen quite a few of them parked and that’s a reduction in capacity. So that obviously influences the market as well.

John Mims – BB&T Capital

And looking at the DOJ probe, you said that the $2.5 million this quarter was on the high end but what can we look at going forward?

Roger MacFarlane

Well I think we said it would return to prior levels. I think it’s very hard to know but I think probably for modeling purposes, one could perhaps work on $1.25 million.

John Mims – BB&T Capital

And I guess you don’t know if there’s any end in sight for that or are you all forecasting.

Roger MacFarlane

Well it’s entirely out of our hands.

John Mims – BB&T Capital

Any earnings guidance for the next quarter?

Roger MacFarlane

No.

Operator

Your next question comes from Todd Fowler - Keybanc Capital Markets.

Todd Fowler - Keybanc Capital Markets

I missed a couple of prepared comments and if you gave this information I apologize, but did you say what the headcount was for the company during the quarter?

Roger MacFarlane

No we didn’t, we said that we have reduced headcount by 600 as a result of our cost reduction plan so far, but we didn’t give an overall headcount number.

Todd Fowler - Keybanc Capital Markets

So this [tonner] reduction on a percentage basis from the first quarter of last year, what [inaudible] percentage is the headcount down at this point?

Lawrence Samuels

It’s around about 3%. As we’ve explained a large part of that comes with this contract we exited at the end of July. So we’ll see a bigger change at that point in time.

Todd Fowler - Keybanc Capital Markets

How should I think about the staff cost line expense on the P&L? I mean the increase was a little bit larger than what I would have anticipated this quarter, being up 18%, is that run rate, the $215-$218 million, is that the rate that we’re going to see going forward for the rest of the year or does that trend down based on some of the reductions that we’ve made here recently?

Lawrence Samuels

Obviously as the top line is growing as well we need to add resources to that. But I think what is interesting, I know we don’t typically look at sequentially, but I think the number for this quarter was the same as the fourth quarter. So we certainly are seeing the line slowing down in terms of growth. But obviously as the revenues continue to grow, we will have to add resources for that. So I think we will see it growing, obviously the slower rate than the increase in revenues.

Todd Fowler - Keybanc Capital Markets

I’m assuming that’s probably the same way to think about the other operating expense line, excluding any DOJ costs?

Lawrence Samuels

Correct, yes.

Todd Fowler - Keybanc Capital Markets

On the two contracts that you spoke about, did you say which quarter those contracts were entered into?

Lawrence Samuels

No Todd, it was during the course of last year, last fiscal year.

Todd Fowler - Keybanc Capital Markets

Directionally, earlier in the first part of the year or the second half of the year?

Lawrence Samuels

Second half of the year.

Todd Fowler - Keybanc Capital Markets

With the margin expansion that you’re thinking about, the 200 basis points, do you need anything to change with those contracts, those two specific contracts to still achieve 200 basis points of operating margin expansion or is that predicated on some improvement in those two contracts or if they continue to underperform maybe a little bit longer than you anticipated, can you still achieve the margin guidance that you’ve laid out?

Roger MacFarlane

Yes we are certainly expecting them to improve. When we gave that margin guidance, we had all the information at that time that we have now in regard to the cost reduction plan and the underperforming operations. So that sort of encompassed everything we knew at that time.

Todd Fowler - Keybanc Capital Markets

So nothing has changed in those contracts better or worse since when you initially gave the thoughts on the cost reduction.

Roger MacFarlane

Yes.

Operator

There are no further questions.

Roger MacFarlane

Thank you. 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, thank you for your continued interest in UTi Worldwide and or your ongoing support.

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Source: UTi Worldwide Inc. F1Q09 (Qtr End 04/30/08) Earnings Call Transcript
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