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UTi Worldwide, Inc. (NASDAQ:UTIW)

F2Q09 Earnings Call

September 4, 2008 11:00 am ET

Executives

Jeff Misakian

Roger I. MacFarlane - Chief Executive Officer, Director

Lawrence R. Samuels - Chief Financial Officer, Executive Vice President - Finance

Analysts

Analyst for Thomas Wadewitz - J.P. Morgan

Alexander Brand - Stephens, Inc.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Ed Wolfe - Wolfe Research

Nathan Brochmann - William Blair & Company, LLC

David Campbell - Thompson, Davis & Co.

Todd Fowler - Keybanc Capital Markets

Operator

Welcome everyone to the UTi Worldwide Q2 2009 earnings conference call. (Operator Instructions) Jeff Misakian, you may begin your conference.

Jeff Misakian

Welcome to UTi Worldwide’s fiscal 2009 second 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 to point out that certain statements 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 detail in the company’s filings with the Securities and Exchange Commission. Please refer to these filings for more information regarding the risks and uncertainties that the company faces. UTi undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law.

Now I would like to turn the call over to Roger MacFarlane.

Roger I. MacFarlane

Results for our fiscal 2009 second quarter reflect solid revenue growth, yield expansion excluding fuel, and some initial benefits from our cost reduction plan. We saw revenue growth in both business segments in the second quarter which points to our consistent ability to expand existing client relationships and win new business.

Volumes in our freight-forwarding business decelerated towards the end of the second quarter along with the rest of the industry amid a slowing in international trade. We predicted a market slowdown earlier in the year though the rate of decline has been greater than we had expected.

The volume deceleration however was offset by a meaningful expansion in our yields excluding fuel surcharges. This was partly due to market forces as capacity slackened and base rates declined. But nearly half of our yield improvement in the second quarter came through our procurement initiatives which was encouraging given the market dynamics. Reported yields in air and ocean freight were relatively flat year-over-year due to the continued impact of fuel on our yield percentages.

In our contract logistics and distribution segment we continued to win new business which led to revenue growth in the high single-digit range despite the absence in the quarter of approximately $21 million in revenue from actions taken in our cost reduction plan and the loss of revenue from the Wal-Mart Baton facility.

We also made some incremental progress in fixing the underperforming operations we told you about last quarter. We continue to improve the processes in these operations and believe that they will become profitable by the end of the fiscal year. We are pleased with the progress made to date. Along with the improvements wrought by our cost reduction plan helped us improve our margins in contract logistics over the previous quarter.

All of the actions required under our cost reduction plan have been completed. The contract logistics agreement relating to the previously mentioned client contract in the Americas expired in July which reduced our headcount by a further 700 employees.

We also completed the disposal of our art packing business in Europe which generated a gain in the quarter. This was one of the non-core activities we told you about earlier in the year when we announced our cost reduction plan. It is part of an ongoing process of streamlining our operations and focusing on our core business of providing integrated solutions and services in freight-forwarding and contract logistics and distribution in our existing market verticals.

Overall our operating margin for the company in the second quarter was 10.5% compared to 11.8% last year. Our cost reduction plan helped us improve our margin sequentially and we saw these improvements throughout the second quarter as we kept operating expenses flat each month while net revenues continued to rise. We continue to expect to see the majority of the anticipated improvements under the plan in the second half of fiscal 2009.

Now I’ll hand the call over to Lawrence who will provide you with more details in his review of our financial performance in the second quarter.

Lawrence R. Samuels

This morning we reported fiscal 2009 second quarter income from continuing operations of $0.28 per diluted share, the same as in the second quarter last year. We’ve also recorded a gain in the second quarter of $0.05 per diluted share from the sale of our art packing business in Europe which is reported in discontinued operations. We view the sale in the context of our overall focus on our core operations and the gain counts as the previously recorded restructuring costs.

Revenues in our fiscal 2009 second quarter increased 20% while net revenues increased 14% over the same period last year. This includes an impact from acquisitions of approximately 4% but this was offset nearly to the same degree by the loss of revenue associated with our cost reduction plan.

Operating expenses excluding freight consolidation costs in the fiscal 2009 second quarter increased 16% over the same quarter last year. Staff costs, the largest component of operating expenses, were 53.5% of net revenues in the fiscal 2009 second quarter, slightly above the 53.4% recorded in the year ago quarter. Other operating costs were 32.6% of net revenues in the second quarter, up from the 31.5% recorded last year. The increases are primarily due to growth in our business and acquisitions. Other operating costs were also impacted by $5.8 million in incremental fuel costs in our surface distribution operations compared to last year’s second quarter of which $1.1 million was not recoverable, all of which was in Africa.

Costs associated with the Department of Justice investigation and related investigations and litigation totaled $700,000 in the second quarter. Recall that we accelerated some of our internal documentation review in the first quarter of this year prior to the filing of our fiscal 2008 Form 10K. Going forward we continue to expect a level of activity to be in the $1 million to $1.5 million range per quarter unless circumstances change.

Our operating margin was 10.5% in the fiscal 2009 second quarter versus 11.8% in the same quarter last year. While lower than last year, the margin performance marks improvement over the first quarter which reflects our efforts to contain overhead costs as well as some benefit from the cost reduction plan and the incremental improvement in underperforming operations.

We have been able to hold operating costs flat at about $125 million per month for the last four months in spite of net revenue growth of 6% from the first to the second quarter, and in the month of July our net revenue growth exceeded operating expense growth. While we recognize that one month does not make a trend, we are encouraged by this result.

Freight forwarding segment revenues increased 26% while net revenues increased 24% over the prior year’s second quarter reflecting organic growth as well as contributions from our recent Israeli acquisition.

Air freight forwarding revenues were up 26% over the prior year’s second quarter while net revenues were up 25%. Air freight tonnage increased 4% in the second quarter compared to a year ago. While this growth rate is still ahead of the overall market, it represents a deceleration compared to the first quarter of this fiscal year and fiscal 2008 as a whole. This is consistent with the overall market.

Ocean freight forwarding revenues increased 26% over the second quarter last year while net revenues were up 27%. Ocean freight TEUs increased 13% in the second quarter compared to a year ago which also represents a deceleration from the level seen earlier in the year and in the prior fiscal year. The deceleration in our ocean volumes is consistent with the overall market decline; however our growth rate was still well ahead of the market.

Reported yields continued to be impacted by the sharp rise in fuel costs in the fiscal 2009 second quarter compared to the same period last year. Air freight yield in the second quarter was 21.5%, slightly less than the 21.7% in the same period last year. Fuel surcharges added approximately $104.5 million to revenues in the second quarter, nearly double the level of fuel surcharges of $55.2 million a year ago. Excluding the surcharge impact, air freight yield in the quarter would have increased 230 basis points to 27.9% from an adjusted yield in last year’s second quarter of 25.6%.

Bunker fuel also had a significant impact on reported ocean yields yet the reported yields still increased slightly to 16.2% in the second quarter compared to 16.1% in the same period last year. Bumper fuel costs were approximately $73.4 million in the second quarter, again almost double the $38 million in costs a year ago. Excluding the impact of fuel, ocean yields would have expanded by 200 basis points to 20.8% in the second quarter compared to an adjusted yield of 18.8% in the same period last year.

As a reminder, we have posted a schedule to our website that details the fuel surcharge impact on both air and ocean yields in each quarter for the last year. This should give you a sense of the changes in yield and the impact of rapidly rising fuel costs.

As you know, our target for fiscal 2009 is to increase air freight and ocean freight yields by approximately 100 basis points and 50 basis points respectively off the fourth quarter base of 21.1% and 19.5% which are adjusted to exclude the impact of fuel surcharges. While yields excluding fuel in the second quarter were clearly ahead of these targets, keep in mind that we are heading into the traditionally stronger shipping season which has historically been characterized by higher seasonal volumes and lower yields. Nevertheless we continue to be optimistic about our ability to achieve our yield targets for the full year particularly given the improvement we’ve been able to achieve through our procurement imitative to date.

The operating margin in freight forwarding in the fiscal 2009 second quarter declined to 20% versus 22% in the same period last year mainly as a result of an increase in our bad debt provisions given the current economic conditions.

Contract logistics and distribution segment revenues increased 9% over the prior year’s second quarter while net revenues increased 6%. The increases were primarily due to organic growth partially offset by the loss of revenues from the businesses disposed of as part of our restructuring efforts and the loss of revenues under our former Baton contract with Wal-Mart. This represents approximately $21 million in less revenue in the aggregate for the quarter. The operating margin for contract logistics and distribution was 5.3% in the fiscal 2009 second quarter and improvement over the previous quarter but below the 7% reported a year ago.

We did make some progress in turning around the underperforming operations discussed last quarter, improving several key performance metrics. We absorbed approximately $3 million in losses from these operations during the quarter which is an improvement over the previous quarter. This is in line with our expectations of seeing incremental improvement during the course of the year with operations returning to profitability by the end of the year.

Overall our other contract logistics operations are performing well and we expect to improve the operating margin in this segment through the benefits achieved in our cost reduction plan fixing the underperforming operations and a continued focus on margin improvement.

Our effective tax rate in the quarter was 25% which was below our expected range for the year. This was primarily due to a reversal of a portion of a FIN 48 accrual made earlier which equates to about $0.01 per diluted share. The effective tax rate would have been within our estimated range of 27% to 29% without this item.

Our balance sheet remains strong. We generated $13.7 million in cash from operations in the first six months of fiscal 2009 compared to $23.7 million in the same period last year. We continue to expect free cash flow for the full fiscal year to approximate net income for fiscal 2009.

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

Roger I. MacFarlane

We are pleased that we continue to win new clients and expand existing relationships. We are encouraged to see progress as a result of our restructuring initiatives which we expect will lead to even better performance in the second half of the year. Clearly international trade has slowed and this has had an impact on our freight forwarding volumes in the second quarter. But we also continue to gain market share and our yields have expanded nicely after excluding fuel. While slowing trade creates a headwind for our freight forwarding business, we prepared ourselves for this environment when we initiated our restructuring efforts earlier this year. John Hextall and his team are coming together and managing this business very well. We are confident in our ability to manage the things we can control as we have done successfully in the past. And we believe we can weather the current global economic climate and still grow our freight forwarding business at a double-digit pace in fiscal 2009 though we believe the growth rate in the second half of the year will be slower than the first.

Contract logistics is growing and we expect this business’ performance to continue to improve. Bill Gates and his team have done a great job in getting their arms around the issues globally and we have made encouraging progress in fixing underperforming operations. They are carefully scrutinizing new business opportunities to ensure that our growth in contract logistics is profitable. While we are being more selective in these opportunities, we continue to believe we can grow contract logistics in the mid- to high single-digit range after giving effect to our restructuring plan.

Our people remain focused on the four outcomes for this year: To deepen existing client relationships and gain market share, to drive higher levels of operating excellence, to deliver on our business plan and financial results, and to protect and nurture our core values.

With that we will now open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Analyst for Thomas Wadewitz - J.P. Morgan.

Analyst for Thomas Wadewitz - J.P. Morgan

I think you said that air freight tonnage was up 4% in the quarter and ocean TEUs were up 13%. Can you tell us where August came out?

Roger I. MacFarlane

We don’t give that kind of forward-looking information during the current quarter. What we can say is that if you look at the trend from the first quarter to the second, there was a deceleration in the rate which was evident and progressive during the course of the quarter.

Analyst for Thomas Wadewitz - J.P. Morgan

Would that have progressed further in August, without giving a specific number?

Robert I. MacFarlane

All I can say is that July was the weakest month of the quarter in terms of volume.

Analyst for Thomas Wadewitz - J.P. Morgan

On the yield side, can you talk about throughout the quarter how that progressed? I think you said you were up 230 basis points in air yield ex fuel. Can you talk about sequentially what you saw throughout the quarter? Was there a significant tightening at the end of the quarter?

Roger I. MacFarlane

Lawrence will answer that.

Lawrence R. Samuels

Obviously as volumes do decelerate that does help with the yield expansion, so as Roger mentioned, July was the weakest volume so that is a month we did see yields begin to improve.

Analyst for Thomas Wadewitz - J.P. Morgan

In terms of the two contracts that you referenced last quarter, I think you said there were $3 million in total losses in the current quarter. Can you talk about what the run rate was exiting the quarter? And I think you said that you expected that those contracts could be profitable by the end of the year. What level of profitability would you expect them to achieve?

Roger I. MacFarlane

I think the right way to think about this is that as things are being fixed and as they improve sequentially month by month we see improvements and that was evident during the quarter. I think we’re really saying we intend to get these into a situation where they’re not hemorrhaging by the end of the year. I think that that’s a realistic expectation.

Operator

Our next question comes from Alexander Brand - Stephens, Inc.

Alexander Brand - Stephens, Inc.

Roger, can you just talk about where the slowing has been the worst or if it’s everywhere? Can you just talk about what you’ve been seeing out in the market?

Roger I. MacFarlane

The most noticeable decline was Asia to Europe but we also saw Asia to USA volumes slowing and I think that was particularly evident in ocean freight.

Alexander Brand - Stephens, Inc.

But those are not your biggest lanes in terms of ocean freight, right?

Roger I. MacFarlane

Asia to the USA is our biggest lane.

Alexander Brand - Stephens, Inc.

Right. And on air freight as well, Asia to the US?

Roger I. MacFarlane

Yes.

Alexander Brand - Stephens, Inc.

And what are you seeing in terms of Europe and Africa trade?

Roger I. MacFarlane

I think the most robust trade is really trade to Latin America but that is not the biggest lane that we have. Africa trade is also softer and the US export trade of course has been growing as well at quite a pace.

Alexander Brand - Stephens, Inc.

In terms of the comments that were made with operating expenses flat for the last four months, I guess it’s hard for us to see that in the reported numbers since sequentially your expenses were still up. Is it just that February and March expenses were at that high of a run rate and so we don’t see it in the numbers?

Roger I. MacFarlane

Lawrence will respond to that.

Lawrence R. Samuels

Clearly you obviously don’t see the monthly run rate but the actual costs for Q1 excluding restructuring was slightly lower than this quarter, but from April onward which was the last month of the first quarter through the three months of this quarter, they were flat. So they were slightly up on the February and March numbers but flat from there going forward.

Alexander Brand - Stephens, Inc.

In July net revenue grew faster than operating expenses. Is there a target that you would share with us as to where you want to get that disparity? How much faster do you think is realistic to grow net revenue over OpEx?

Lawrence R. Samuels

I think the right way to think about it is we’ve indicated what we think our cost reduction plan and our efforts can produce by the end of the year, and I think that’s really the best guidance we’ve given as to how we can see our operating margin improving.

Alexander Brand - Stephens, Inc.

I understand that. I guess where I was trying to get to with that was systemically after you finished this sort of one-off plan, I’m sure that you hope that net revenue continues to grow faster than OpEx and I didn’t know if internally there was a thought about how that should be achieved and what that growth rate should be?

Lawrence R. Samuels

Yes, we do have targets that we look at internally and it is based on the different aspects of our business. But we haven’t communicated any of that publicly.

Operator

Our next question comes from Jon Langenfeld - Robert W. Baird & Co., Inc.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Can you talk a little bit about the geographic breakdown? It looks like on the profit side Europe was extremely strong, Africa was very weak. I know you mentioned the fuel component of Africa, but can you talk about those two geographies?

Lawrence R. Samuels

In terms of Africa, we did mention the fuel impact. We also mentioned that we had increased our bad debt provisions of the economic conditions and a lot of that was also in Africa. So that probably accounts for most of the Africa situation. Europe continues to grow revenues at significant rates and I think we are seeing the improvements coming through there with some of the cost reduction plans that they’ve taken as well.

Jon Langenfeld - Robert W. Baird & Co., Inc.

What was the bad debt provision in the quarter and what would that have compared to a year ago?

Lawrence R. Samuels

It’s up around $2 million over the same quarter a year ago.

Jon Langenfeld - Robert W. Baird & Co., Inc.

In aggregate?

Lawrence R. Samuels

In aggregate.

Jon Langenfeld - Robert W. Baird & Co., Inc.

But most of it was South Africa?

Lawrence R. Samuels

Most of it was the Africa region.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Roger, are you still comfortable on the 200 basis point operating margin improvement in the second half and maybe just put some boundaries around how we should measure that, making sure we’re all on the same page with that target?

Roger I. MacFarlane

I think that’s still what we’re shooting for and I think if we look at our performance last year, we see that we began to get a deceleration in our performance in the fourth quarter. And it’s when we were building the plan based on our fourth quarter performance of the plan we communicated in February that we felt we could achieve the 200 basis points using that as a base line. We are going to see significant evidence of that already in the third quarter. So we are still targeting to achieve the 200 basis point margin improvement in the second half of the year, but I think the right way to think about it is that we’ll get the complete evidence of that in the fourth quarter.

Jon Langenfeld - Robert W. Baird & Co., Inc.

And mitigating factors against that? Fuel, doesn’t sound like that’s a big issues outside of South Africa. The contracts that you had some issues within Europe, it sounds like those are coming around. So the mitigating factors that would prevent you from hitting that would be primarily external environment?

Roger I. MacFarlane

Primarily external. Yes. I think so, although we’ve seen the headwind we mentioned in regard to global trade. And of course we did recognize when we went into this that we were going to be in a global slowdown which we are anticipating will be shallow but long and we had baked that in. I think we were surprised at how strong our business was in the first quarter and the deceleration from there into the second quarter was perhaps sharper than we thought it might be. But this is the kind of environment which we had anticipated, where we are now.

Jon Langenfeld - Robert W. Baird & Co., Inc.

What’s your disposition on acquisitions at this point Roger?

Roger I. MacFarlane

We aren’t making any.

Jon Langenfeld - Robert W. Baird & Co., Inc.

As you look out over the next 12 to 18 months, is that going to be a similar position?

Roger I. MacFarlane

We communicated that we had extended our moratorium on making acquisitions for the full fiscal year, but as you can see from the focus on improving our internal operations that is very much where our energies are directed. We have streamlined a number of initiatives that we’re undertaking. As you saw we disposed of our art packing business. So we are very focused on the core elements of our business of integrated solutions and the services in freight forwarding on the one hand and contract logistics and distribution on the other.

Operator

Our next question comes from Ed Wolfe - Wolfe Research.

Ed Wolfe - Wolfe Research

Just a couple of follow ups. First on Jon’s question. The acquisitions on the cash flow, there’s $30 million. That’s earnouts then, and what’s that for?

Lawrence R. Samuels

That’s predominantly Spain which we spoke about in the first quarter and that was paid at the beginning of the second quarter. That was $27 million.

Ed Wolfe - Wolfe Research

Are there other earnout payments?

Lawrence R. Samuels

There are obviously a few small ones but nothing of anything approaching the significance of Span.

Ed Wolfe - Wolfe Research

So if I look at the next two quarters, less than $5 million in earnouts combined?

Lawrence R. Samuels

That’s probably reasonable, yes.

Ed Wolfe - Wolfe Research

In the language, I wanted to be a little more specific Roger. You said you were targeted 200 basis improvement in the second half and the complete picture there should be evidence more in the fourth quarter. Does that mean for the two quarters you’ll average 200 with the fourth quarter being more than 200 or we’ll see 200 in the fourth quarter and a little less than that in the third?

Roger I. MacFarlane

Yes, the second alternative that you presented is the way we are thinking about it.

Ed Wolfe - Wolfe Research

So exiting the year on a run rate of 200 basis points that we’ll kind of feel in the fourth quarter?

Roger I. MacFarlane

Correct.

Ed Wolfe - Wolfe Research

In terms of EBIT you had talked about $32 million of operating income improvement on an ongoing annual basis. If we’re there in the fourth quarter, that 200 basis points, we’re talking a quarter of that $32 million? Is that a way to think about that? $8 million a quarter kind of improvement?

Roger I. MacFarlane

Yes, that fits with the idea of using the fourth quarter base line. That was the base on which we started our cost reduction efforts and it’s also the base line on which we’re basing our yield improvement efforts. So really when we were looking at the current position the company was in at that time, we were looking at our fourth quarter and we based our efforts to improve performance on that which we regarded as a pretty weak performance for us.

Ed Wolfe - Wolfe Research

Can you talk about in this quarter, the second quarter, that logistics contract that you finally got out of in July and reduced the headcount as a result? What was the revenue that that contract contributed in the quarter and if there was any operating income or loss, what was that in the quarter?

Roger I. MacFarlane

We didn’t disclose that but we did disclose was that the run rate for that contract was $35 million of cost and $29 million of revenue. So that was a run rate of about $500,000 a month of loss and we did a very good job of mitigating the effects of that. So one would normally expect those losses to accelerate towards the end and I think our management team did a very good job and we’ve maintained a very good relationship with the client. So we managed to mitigate that and as a general view I would say the losses were pretty even, maybe a little less than that as we exited the contract.

Ed Wolfe - Wolfe Research

It looks like things are going the way you want them. It certainly sounds that way from what you’re saying. Let’s take the negative side of that. If things don’t pan out in third and fourth quarter and we don’t see by fourth quarter that $8 million-ish 200 basis point of improvement, what at that point is management’s intention? At that point do you take other strategic action?

Roger I. MacFarlane

That’s a good question. Perhaps I can answer it by saying that the majority of our cost reduction plan was in headcount reduction and the fact that we took a charge in the fourth quarter and again in the first quarter and particularly the charge in the first quarter was primarily severance. It indicates that we have taken the action to deliver the headcount reduction and in fact we can confirm the number, I think Lawrence you have the number of people that have exited the payroll. It’s close to 1,300. So I think that as far as we’re concerned the cost reduction plan, there’s hard evidence that we have reduced overall operating of overhead structure for the company.

Ed Wolfe - Wolfe Research

The 1,300 people, that’s a net of new hires and everything else? And what’s the base that that’s off of?

Roger I. MacFarlane

That number is the consequence of the identified actions we took in the cost reduction plan. Of course separate to that what is happening is we are winning new business, we open up new contracts particularly in contract logistics we’ve got some new contracts where we’re hiring a couple hundred people for this contract, so what happens is that those contracts we’re being very careful as we go into them to make sure that they are positive contributors. I think the right way to think about it is the cost reduction plan is the actions that we took related to contracts that we wanted to exit or scaling back our overhead or operations in anticipation of a slower environment.

Ed Wolfe - Wolfe Research

What’s the total number of heads?

Roger I. MacFarlane

It’s close to 1,300.

Ed Wolfe - Wolfe Research

How many total people? Is that 7% of the workforce?

Roger I. MacFarlane

We’ll give you the workforce number in a moment. This number by the way also excludes the reduction of the number of people as a result of the Wal-Mart Baton facility since that wasn’t a part of our cost reduction plan specifically.

Ed Wolfe - Wolfe Research

And how many was that at Wal-Mart?

Roger I. MacFarlane

About 900.

Ed Wolfe - Wolfe Research

I can get that full number from you offline.

Operator

Our next question comes from Nathan Brochmann - William Blair & Company, LLC.

Nathan Brochmann - William Blair & Company, LLC

Just to follow up on the contract logistics a little bit. What’s the biggest difference today in terms of what kind of controls that you have applied to scrutinizing that business and new contracts versus maybe what you were accepting a year ago?

Roger I. MacFarlane

We have established what we call a complete client engagement process that has been communicated and is in place within the company. And specifically in regard to that client engagement process and in regard to the take on of new business, we have a much more rigorous process of the review in pricing of a new contract, and looking specifically at contract logistics now, and we also have a contract review process in which Lance D’Amico and our global legal and risk management team are engaged in and Lawrence and the finance team are engaged in. So it’s a more careful and with what we would call gates through which the process needs to go, stop gates. If we don’t get this or that, then we negotiate with the client. If that doesn’t work out, then we withdraw from the process. We have adopted this. We are engaged in a number of situations at the moment through that process. So we are very comfortable that we have changed the way our client engagement process in the past worked and it is much tauter and more rigorous today than it ever has been.

Nathan Brochmann - William Blair & Company, LLC

Does that mean that you’ll be accepting more value added type business in terms of where you’re providing more value in order to get those higher margins or get the pricing you need versus again say maybe some more of the standard type business that you would have taken on a year ago?

Roger I. MacFarlane

That’s an interesting question. I think the answer to that is we do both. In fact quite a lot of standard business that we take on around the company if it is priced correctly and can be operated within the framework of what we’re doing. We like that business too. We also like the business where we are specifically coming up with a solution that adds a lot of value for which we get even better compensation. We are attacking the business from both directions.

Nathan Brochmann - William Blair & Company, LLC

In the current environment, what have you been seeing in terms of your customers or new customers’ desires to move forward with a contract type of solution where they might have to invest a few dollars to save a few dollars versus withholding some of those product checks in the slower economic growth?

Roger I. MacFarlane

Interestingly what we’re finding in today’s more difficult economic environment, we’re finding supply chain professionals, CFOs, manufacturing executives, our clients more interested in looking at new ways to deal with their own business and their own processes, so they really value ideas that we can help them with and I think in a lot of cases there’s a greater sense of urgency to implement things that are going to improve their business in a hurry given the fact that they are facing the same challenges in their businesses as we are facing in ours.

Nathan Brochmann - William Blair & Company, LLC

We haven’t talked about this a lot with a lot of the other issues going on, but maybe just a quick update on the internal IT project?

Roger I. MacFarlane

There’s really been no change to that that we are ready to communicate but we are moving forward. We’ve got our whole organization involved and all of our leadership involved. Because as we begin to move forward of course this becomes something that the company as a whole is going to be affected by and therefore we need to provide leadership from our business executives as well as the IT people. So that’s really where we’re progressing but we’ve got nothing really new to communicate to you at this point.

Operator

Our next question comes from David Campbell - Thompson, Davis & Co.

David Campbell - Thompson, Davis & Co.

I don’t have all my records in front of me. The fourth fiscal quarter last year had non-recurring charges and costs in there. That 2% growth you talked about in profit margin, that’s related to what a year ago?

Roger I. MacFarlane

Yes, the fourth quarter did have restructuring charges in it and obviously we’re excluding those restructuring charges in our thinking when we’re looking at performance day to day and operating performance.

David Campbell - Thompson, Davis & Co.

You don’t recall what they were? I don’t have that number with me?

Roger I. MacFarlane

I think it was $8.9 million at the operating line.

David Campbell - Thompson, Davis & Co.

Do you see any impact from plant shutdowns in China in late July and August in your sea freight and maybe air freight but I guess mostly sea freight business?

Roger I. MacFarlane

There has been some talk in the market that business may continue to pick up out of China as a result of the Para Olympics now being over but as this took place in August, there was no impact in the second quarter. Although a number of plants were shut down in Beijing, we did not really see any material impact in either accelerated or decelerated volumes in the second quarter and we really don’t anticipate anything of any material nature in the third quarter either.

David Campbell - Thompson, Davis & Co.

In the logistics revenue business that expired in July, what was the revenue from that business that won’t be there in the next quarter, in the third quarter?

Roger I. MacFarlane

There was a pretty even run rate on that business and we communicated at the time that the costs were at $35 million and the revenue was at $29 million.

Operator

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

Todd Fowler - Keybanc Capital Markets

With the contract logistics business, it sounds like you picked up some new business here during the quarter. Can you talk a little bit about the nature of that business? What verticals it’s exposed to? And also is that business related to existing forwarding customers or are these completely new customers outside of your existing base?

Roger I. MacFarlane

Some of the business that we have gained during the quarter was very tightly integrated into the rest of what we do and were essentially value added extensions of what we’re currently doing. Other business was not as well integrated but we already had the client relationship and we extended it particularly in contract logistics and other business was completely fresh relationships with clients we hadn’t worked with before. It was really across the board.

Todd Fowler - Keybanc Capital Markets

How would you break that out as far as new clients versus existing clients and some of the stuff that was intertwined? If you put it in a bucket, is it a third, a third, a third or is it weighted more towards new business?

Roger I. MacFarlane

I would say it’d be weighted more towards the second one that I mentioned which is where we have an existing relationship that has now expanded the relationship. Where the solution’s not particularly at this point integrated but rather that the relationship is common and to the size of the business. So if we’re talking about contract logistics, that’s where I’d say the majority of the growth rate is.

Todd Fowler - Keybanc Capital Markets

Going back to some of the slowness that you saw on the international trade trends as the quarter progressed, Roger is your sense that customers were delaying or pushing out orders towards later in the peak season or is this a change in business plans with people actually scaling back some of their initial plans or is it just the market overall is a little bit softer maybe than what you had anticipated, and I know that your outlook going into the year was a little bit soft to begin with?

Roger I. MacFarlane

I think it depends on the market vertical, but if we take anything to do with retail, our customers in the retail sector are pretty sanguine about their circumstances and I think that’s where the majority of the decline is. I think the Asia to US trade lane particularly in ocean freight that’s where the greatest deceleration has occurred and that is directly related to the consumer purchases in the US economy I would say. But in other sectors, particularly in technology, it has not been as weak. So it does depend on the market vertical.

Todd Fowler - Keybanc Capital Markets

Does this change your plans at all for planning capacity for the peak season? I’m not sure if you had any plans for air charters or anything along those lines but as you sit here and look at the environment right now, do you have to go back to the drawing board a little bit as you think about capacity for the upcoming couple months?

Roger I. MacFarlane

Yes, we are looking at this on a day-to-day basis. I think we’re anticipating that we will not have the level of active peak season that we have had in the past. In the air freight side there’s been a huge withdrawal of capacity and this is of course caused, also pricing, to hold up pricing on those markets. But we’re in a dynamic that is not following necessarily a familiar pattern so we’re really on the lookout for understanding what is happening in the market in order to take the right action.

Todd Fowler - Keybanc Capital Markets

It looks like, and if I’ve got the numbers right, the corporate expenses or the corporate line was basically running about $7 million to $8 million on a quarterly basis. Does that change at all going forward based on the headcount reductions or any of the things that have been put into place in the first half of the year? Is that a pretty good run rate to use for the back half?

Lawrence R. Samuels

That is a good basis for the back half. I think obviously the one caveat that we mentioned was any change in the [DAJ] situation but from where we are now we expect it to be at a similar run rate.

Operator

Our next question comes from Jon Langenfeld - Robert W. Baird & Co., Inc.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Free cash flow Lawrence, it looks light particularly given the balance and maybe some of the benefit you had from the charge or the gain on the sale. So can you just walk me through where you’re at on the free cash flow?

Lawrence R. Samuels

It is compared to last year lighter than it was but I think the important thing obviously it’s predominantly driven by our receivables and those are obviously up with the additional revenue and duties and taxes. I think the important thing to note is that our DSO remains consistent with where it has been for the last couple of quarters so we’re not seeing a dramatic extension by our customers from that point of view. Some of it is obviously based on timing that certainly a lot of our businesses particularly South Africa collections are done right at the end of the month and so timing any collections received from the first of August obviously fall outside of the cash flow. So we obviously continue to monitor that but not seeing anything that’s alarming to us and still expect our free cash flow for the year to be equal to our net income.

Jon Langenfeld - Robert W. Baird & Co., Inc.

I’m assuming most of that’s in the fourth quarter?

Lawrence R. Samuels

Yes. We get a big pickup in the fourth quarter.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Can you comment on the market transport, how that’s doing? I know it’s buried in the numbers here but it looks on a net revenue basis like it’s struggling quite a bit. Can you give us an update on that?

Lawrence R. Samuels

It is buried in the numbers and some of it is more complicated because the two operations that we closed earlier in the year, the distribution operation in South Africa and the trucking operation at the integrated logistics fall under the distribution heading as well, so that includes the lost revenue from those two operations. But it is obviously continuing to be difficult. We are seeing improvements in the operating margins but revenue growth is going to be tough for probably the balance of this year.

Jon Langenfeld - Robert W. Baird & Co., Inc.

But the margin’s improving. Why?

Lawrence R. Samuels

Certainly the market operations have been very well controlled operationally and of course obviously kept well under control. We have continued to hold the margins and improve them even with the deceleration. Remember most of that is truck brokerage?

Jon Langenfeld - Robert W. Baird & Co., Inc.

With regard to the fuel comment, why did fuel hurt you in this quarter and not in previous quarters or was it just not highlighted in previous quarters? And then how should we think about that moving forward? Is that something where you have added risk or have you addressed the issue?

Lawrence R. Samuels

It obviously has affected us in previous quarter and this is really on the surface transportation where the fuel costs are included in operating expenses as opposed to transport costs. I think what has happened in the second quarter is the spikes and the increases were a lot more frequent than they were earlier. And as I mentioned in Africa we didn’t recover some which was because we weren’t able to pass it on quickly enough. But as pricing has come down more recently, obviously that should reduce over time but it’s clearly something that we are focused on and putting in processes to make sure that we do recover as prices do change.

Jon Langenfeld - Robert W. Baird & Co., Inc.

Is there anything specific in South Africa you can do to minimize the lag?

Lawrence R. Samuels

We certainly are looking at that. We have one of the underperforming operations we had mentioned was there and that’s the distribution one. We did change the management there earlier this year and we are certainly seeing improvements in that operation.

Operator

There are no further questions at this time.

Roger I. MacFarlane

As there are no further questions, I’d 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 your ongoing support.

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Source: UTi Worldwide, Inc. F2Q09 (Qtr End 07/31/08) Earnings Call Transcript

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