Q4 2013 Earnings Call Transcript
Transcript Call Date 03/28/2013

Operator: Welcome to the UTi 2013 Fourth Quarter Conference Call on the 28th of March, 2013. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions.

I will now hand the conference over to Jeff Misakian. Please go ahead, sir.

Jeff Misakian - Global VP, IR: Thank you, Danny and good morning, everyone. Welcome to UTi Worldwide's fiscal 2013 fourth quarter results conference call. Joining us on the call today are Eric Kirchner, Chief Executive Officer; and Rick Rodick, Chief Financial Officer. Ed Feitzinger, Executive Vice President, Global Operations is also here and available to answer questions during the Q&A session.

Before we begin the presentation, I would like to point out that certain statements made in today's call are not historical facts. They may be deemed, therefore, to be forward-looking statements under the Private Litigation Reform Act of 1995. Many important factors may cause the Company's actual results to differ materially from those discussed in any forward-looking statements. These risks and uncertainties are described in further detail in the Company's filings with the Securities and Exchange Commission.

Please refer to these filings for more information regarding the risks and uncertainties that the Company faces. UTi undertakes no obligation to publicly update or revise any forward-looking statements, except as a result of new information, future events or otherwise, except as required by law.

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

Eric Kirchner - CEO: Thank you, Jeff, and good morning everyone. Our fourth quarter results reflect ongoing weakness in the air freight market, reduced activity in contract logistics and very challenging pricing environment while we maintained our focus on expense control, we could not adjust cost quickly enough to respond to the soft market condition and pricing declines. In addition, there were several material unusual items that were recorded in the fourth quarter that Rick will explain shortly. As a result, we reported a loss this morning for the first time since the fourth quarter of fiscal 2009. Clearly, these results are not satisfactory and we are taking a number of steps to address them, which I'll talk about in a minute.

In freight forwarding, air freight tonnage was down slightly in the fourth quarter compared to the same quarter last year. We've not seen any signs of sustainable improvement in the airfreight market. Ocean freight volumes were a bit better in the fourth quarter when compared to last year, particularly in the month of January as a result of the timing of Chinese New Year.

Net revenue per unit of cargo deteriorated in the fourth quarter. On our last earnings call, we told you about the challenges facing the industry with carriers maintaining rates by removing capacity, while competitive pressures were driving down sell rates. In the fourth quarter, buyer rates in certain markets eased slightly. The sell rates declined further due to even tougher pricing conditions. As a result of this pressure, net revenue per kilo in airfreight declined 15% and net revenue per TEU in ocean freight fell 13% in the fourth quarter compared to the same period last year.

Contract logistics and distribution revenue was also down in the fourth quarter. Contract logistics revenues dropped due to lower volumes on some existing clients, the timing of project related business and a loss of the North American contract that was previously reported. Our Distribution revenues increased as expected ought to improvement in our North American and African businesses. We continue to win new business in both segments during the fourth quarter, but not at a pace that was sufficient to offset the decline in activity from existing account. In spite of the soft markets in Freight Forwarding, we're encouraged by our new business wins so far this calendar year. The first promising sign we've seen in several quarters.

In Contract Logistics and Distribution, we continue to register strong growth in our Asia-Pacific and Africa regions, while our North American Contract Logistics funnel is the healthiest that's been in some time. While we're focused on boarding new wins in Freight Forwarding as quickly as possible, it will take some time to see those results in our numbers.

We've made a number of changes to the sales function to improve growth in fiscal 2014. This has been a primary focus of mine since the management changes we announced last September. We recently appointed a new Head of Sales for our Asia-Pacific region and we're in the process of appointing a new Head of Sales for the Americas region. We made investments in personnel, training, and other sales initiatives. We've increased our focus on capturing the client phasing benefits of our investment in people, processes, and system.

Expenses increased in the fiscal 2013 fourth quarter compared to the same period last year, while net revenue declined. This was primarily due to investments in Contract Logistics to improve efficiency and prepare for newly won business, some duplicative costs in our shared service center as we ramp up our system rollout and a local sales initiatives in North America.

We expect the duplicative shared service center cost pressures to ease later this year as the Freight Forwarding and finance systems are implemented more broadly and various local costs shifted to shared service center environment. As we told you on our last earnings call we took steps to improve operating expenses to stabilize productivity in a weak market. Those actions were completed in January and February and the cost savings are in place. We will continue to evaluate our cost structure if the environment deteriorates further.

Our transformation efforts continue to gain traction and our system rollout is picking up speed. We have launched our new freight forwarding operating system in six countries and our new financial system in 15 countries. I will share more with you on our plans this year after Rick's remarks.

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

Richard Rodick - CFO, EVP, Finance: Thank you, Eric. On a GAAP basis the net loss attributable to common shareholders in fiscal 2013 fourth quarter was $1.38 per diluted share. As Eric mentioned there were several adjustments to GAAP results in both periods, which I'll discuss in a moment. Excluding these items our adjusted net loss of $0.13 per diluted share in the fourth quarter compared to adjusted net income of $0.15 per diluted share recorded in the same period last year.

Currency changes had a smaller negative impact on our fourth quarter results than in previous quarters. The U.S. dollar was stronger against most currencies including the South African rand, but our reported revenues and expenses in the fourth quarter were negatively impacted by less 2 percentage points. Revenues and net revenues decreased 4.7% and 8.7%, respectively in the fourth quarter compared to the same period last year. The decrease in revenues reflects reduced pricing and the impact of currency. On an organic basis, revenues decreased 3.2% while net revenues fell 6.9% compared to the same period last year.

Fourth quarter adjustments to GAAP results included impairment of goodwill and intangible assets plus severance cost for total of $100 million.

During the fourth quarter, we performed an analysis on the value of our goodwill and other intangible assets as of January 31, 2013 and based on our current business conditions, we determined an impairment of these assets that occurred. Accordingly, we recorded a non-cash charge for this impairment of $95 million. We also incurred severance cost of $5 million during the quarter primarily related to transformation activities.

Also during the quarter, we increased our valuation allowance on deferred tax assets by $34 million pursuant to the accounting rules related to income taxes. The allowance was recorded in the provision for income taxes, but it does not impact our ability to utilize these operating loss carry forwards once these operations become profitable.

In the fiscal 2012 fourth quarter, adjustments to GAAP results were comprised of intangible asset impairment charges and other costs for a total of $10 million. This included intangible asset impairment charge of $5 million, severance and exit cost of $2 million and an accrual of $3 million relating to a legal claim that was settled in fiscal 2013. We also reduced our valuation allowance on deferred tax assets by $6 million.

We have provided reconciliations of GAAP to non-GAAP results in the tables in today's press release and posted more details on our website. The rest of my remarks will refer to our results and adjusted to exclude these items.

Adjusted operating expenses in the fourth quarter were 1.2% higher than the same period last year. On organic basis, adjusted operating expenses were 3% higher than the same period last year, primarily due to project work, one-time cost associated with three separate warehouse moves in Contract Logistics, some additional Oracle cost in corporate and short term duplication of some finance cost in our shared service centers. As we complete the transformation, the duplicative cost will be removed from the field operations.

The adjusted operating loss was $8 million in the fourth quarter compared to an adjusted operating profit of $32 million in the same period last year. The decrease was primarily due to the weak airfreight environment and reduced pricing in Freight Forwarding, as well as lower revenues and higher expenses in Contract Logistics and Distribution. In addition, we were negatively impacted by approximately $12 million in unusual items during the quarter it included $2 million in additional interest expense related to our debt refinancing, which I'll discuss in a few minutes.

Revenues from the Freight Forwarding segment were down 5.5%, primarily due to reduced pricing and impact of currency. Air freight tonnage fell 1.4% compared to last year's fourth quarter, but increased 0.7% on a sequential basis versus the third quarter of fiscal 2013.

Ocean freight TEUs were up 4.1% in the fourth quarter as compared with the prior year, but fell 6.2% from the previous quarter. Net revenues of Freight Forwarding decreased 12.8% in the fourth quarter, primarily due to lower net revenue per unit. Net revenue per kilo declined 15%, while net revenue per TEU fell 13% in the fourth quarter compared to the same period last year, primarily due to lower sell rates. This was partially offset by reduced carrier by rates.

Adjusted operating profit in Freight Forwarding fell 81% in the fourth quarter compared to the same period last year, reflecting the weak airfreight environment and lower net revenue per unit of cargo in both airfreight and ocean freight. Operating expenses were lower in the fourth quarter but not enough to offset the decline in the net revenue per unit. As a result, productivity ratios deteriorated in the fourth quarter.

Contract Logistics and Distribution revenues and net revenues decreased 2.9% and 5.1% in the fourth quarter, respectively over the same period a year ago primarily due to lower volumes in Contract Logistics and impact of currency. Adjusted operating profit in Contract Logistics and Distribution decreased 18% in the fourth quarter compared to the same period last year. The decline in profitability was primarily due to loss of high margin business in North America, pricing pressures, the timing of project work and costs associated with facilities moves. We had a small tax provision in the fourth quarter on a non-GAAP basis, primarily due to a mix of results and various taxing jurisdictions. We expect our effective tax rate for fiscal 2014 will be approximately 35%.

A significant positive development during the fourth quarter was the strengthening of our capital structure through the debt refinancing we announced in late January. We issued $200 million in senior unsecured guaranteed notes, a portion of which was used to prepay the previously outstanding 2009 senior notes. As mentioned earlier this led to $2 million in additional (make whole) interest expense in the quarter. 2013 notes also replaced $150 million in our previously outstanding 2011 senior unsecured notes. The refinancing eliminated scheduled principal payments of approximately $18 million that otherwise would've come due this year.

The deal also extends debt maturities and eliminates any principal payments for the next five years. More details on the debt refinancing can be found in our Form 8-K that we filed in January.

Cash flow stabilized in the fourth quarter when compared to the same period last year. Cash flow from operations was approximately $98 million, which was slightly higher than last year. Working capital improved significantly in the fourth quarter, increasing $100 million compared to the $67 million improvement in last year's fourth quarter, but the increase was largely offset by decline in profitability for the period.

Free cash flow was $71 million in the fourth quarter, which was 5.4% lower than the same period last year. The decline in free cash flow in the fourth quarter was primarily due to lower earnings. We expect to make further progress in the cash flow improvements this year. To that end, I'm pleased to announce that Tom Irwin join the Company in mid-March as our new treasurer. He has more than 30 years of treasurer experience and more than 8 years as a public company treasurer. Tom will be working closely with me to improve our cash position and cash utilization. I'm also pleased to announce that in February, we hired Steven Ryan as our new finance leader in the MENA region. Steven has more than 20 years of experience within industry. Tom and Steven will help me and the rest of the finance team to continue to improve our capital structure, strengthen our balance sheet and focus on cost controls.

As Eric mentioned, we continue to move forward aggressively with the rollout of our new systems. He will share our deployment schedule and cost savings goals for this year and the next year in a moment. Based on the current schedule, we expect to begin amortizing new system this summer. This is expected to result an increase in amortization of approximately $10 million this year. Using a seven year life, we expect depreciation to be approximately $20 million annually. This is in line with our previous guidance.

With that I'll turn the call back to Eric for his closing remarks. Eric?

Eric Kirchner - CEO: Thank you Rick. We accomplished a great deal in fiscal 2013 and it's not reflected in our financial results. We launched our Freight Forwarding system in six countries and deployed Oracle financials in 15 countries. We've made further improvements to our operating processes, launched new products in air, ocean, and customs brokerage and deployed our new human resources information system globally, among other activities.

The year ahead is very important with much work to be done. We've made positive changes to our organizational structure including those to sales that I mentioned earlier. Our efforts to improve growth will unfold throughout the year, particularly since we're not expecting any help from the market in fiscal 2014. But we believe we've already taken the steps necessary to get us back on track for growth that's ahead of the market and improve bottom line performance over the long term.

Our comprehensive business process transformation continues to move forward. We plan to launch our Freight Forwarding system in 35 additional countries this year, including eight to 10 countries before the next earnings call. We estimate that at least 70% of shipments will be on the new system by the end of fiscal 2014. This is about six months behind the pace that we originally targeted, but that's not surprising for a system this large and complex.

At our Investor Day in June 2011, we told you that we expect to achieve $75 million to $95 million in cost savings on a gross basis through the transformation in fiscal 2016. At that time we were less definitive about the years in between because we've not yet deployed our new systems. To this point in the process we believe we have enough information to provide you with more details on our expectations. Because we're confident in our progress we are turning our attention to maximizing the client phasing capabilities of the new system in ways that will help accelerate growth. We expect to generate cost savings of approximately $30 million to $35 million in fiscal 2014. This includes the expense reductions that we announced in December.

Cost savings in fiscal 2015 are estimated to be in the range of $45 million to $50 million positioning as to achieve our goal of $75 million to $95 million by fiscal 2016. Again all these savings are on a gross basis and do not factor in severance or amortization of the new system. We also told you at our June 2011 Investor Day that we are with targeting operating margins of 20% in Freight Forwarding and 10% in Contract Logistics and Distribution by no later than fiscal 2015. These targets assume that net revenue will be flat over the projected period. We did not assume that net revenue would decline or that the quality of the net revenue would diminish.

Since that time the macroeconomic and freight environment has pressured margins and impacted profitability to a much greater degree than could have been anticipated. While we remain focused on improving margins we now expect to reach our targeted run rate later than expected in fiscal 2015, primarily because of these pressures. This also assumes that there's no further deterioration in the environment.

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

Jeff Misakian - Global VP, IR: Thank you, Eric. We will now open up the call for your questions. As a reminder we ask that you limit your questions to one initially to allow as many as possible to have an opportunity to participate. Danny may we have the first question please?

Transcript Call Date 03/28/2013

Operator: Tom Wadewitz, JPMorgan.

Thomas Wadewitz - JPMorgan: I wanted to get a sense. I think you had mentioned $12 million maybe that you saw was I guess somewhat unusual I don't know contract logistic expense maybe some of forwarding, but somewhat unusual in the quarter. I'm not sure how you would look at – so I wanted to hear if you give more details on that and then how you would look at profitability in the next quarter? The loss in this quarter is pretty surprising. So, do you think it will be profitable in the first quarter or and kind of broad parameters to how we might think about that?

Richard Rodick - CFO, EVP, Finance: The $12 million, there are unusual items. They included the $2 million in interest. They included – we had a large bankruptcy that we had to write-off some bad debts. So, the things that would not be – we'd not classify them as non-GAAP and they are non-recurring and they – just a lot of them happened during the year. There was some things that we had to write-off with balance sheet, things that had come to fruition that made us have to write them off. So, they are approximately $12 million in things that don't occur on a regular basis, but they would not be included on our non-GAAP numbers.

Thomas Wadewitz - JPMorgan: That $12 million in the $0.13 loss and you think that in large part those wouldn't keep going?

Richard Rodick - CFO, EVP, Finance: These would not keep going exactly.

Eric Kirchner - CEO: With regard to the first quarter, it remains a very tough environment out there. We might talk to some volume changes later in the Q&A period, but we're doing everything we can do to maintain our cost base and reduce it as we talked about the fact we had the cost takeout that occurred in January and February, it's a tough environment out there right now. So we don't give guidance, but it's a challenging time for us and others in the industry and we're going to keep our head down and work away through it.

Thomas Wadewitz - JPMorgan: So, you can't really comment on whether you'd expect to be profitable or not in the first quarter?

Eric Kirchner - CEO: We don't give guidance.

Operator: William Greene, Morgan Stanley.

William Greene - Morgan Stanley: Eric, can you maybe comment a little bit about how the trends in the first quarter maybe are because I think there's a lot of uncertainty among all of us given the shift in the Chinese New Year, the loss of the leap day and what not. So maybe any volume commentary you might have given how uncertain the picture is. I assume you have some sense for February and March?

Eric Kirchner - CEO: We'll have Ed Feitzinger to talk to that question.

Edward Feitzinger - EVP, Global Contract Logistics and Distribution: So obviously, what we're trying to do is look at the January and February year-over-year because of the shift in Chinese New Year between the two years. There is also a little bit of a complexity as we're looking forward of Easter being in March versus April of last year, or the earlier Easter. The February tonnage was down about 4% year-over-year, TEUs were flat for the same month last year. Our attribution there is that we think there is some – the resumption of manufacturing post-Chinese New Year was a little bit slower than expected both for us and the market. When we look at January and February together to try to neutralize the impact of Chinese New Year. The sequential change is about negative 11% in air freight and negative 5% in ocean freight. That air freight is a little bit worse than the average of the last five years which is consistent with an overall weakness in mode while ocean is better. If you take a look at some specific industry data as an example, on (hack) shows a decrease in January and February of about 22% our historical numbers for January, February are about 18% if you look at that over the last five years, and our numbers we think are coming in about again that's just for the hacktool type information versus small segment of the business export out of that China environment.

Richard Rodick - CFO, EVP, Finance: That's not year-over-year though that's a comparison between investor drop from December to combined January, February.

William Greene - Morgan Stanley: Do you have any sort of read on March at all?

Eric Kirchner - CEO: March was I guess in line with our past several months. So I would say that within a range of 2% or 3% it could be or down over the previous March. So we got end of the month coming up the last couple of shipping days this week. Again with Easter pull forward we are not sure what kind of production we are going to have on Friday of this week, but it will be in a range of a couple of percent up or down of last March I think.

Operator: Ben Hartford, Robert W. Baird.

Ben Hartford - Robert W. Baird: I guess building off of that question, if we look out Eric and Ed to 2013 most of the I guess the air freight carrier seem to be budgeting for low single digit volume growth in the industry. I know that you guys have made some investments on the sale side and it sounds like that traction could build on the back half of the year and Eric you mentioned a possibility of resuming share gains. So, what are your early expectations for '13? Do you see a line of sight to stabilizing low-single digit volume growth and your ability to take share into that?

Eric Kirchner - CEO: We've been extremely encouraged Ben by some early new business wins that we've seen already this year and it will take a little bit of time to onboard that business, but we are trying not to factor in any help from the general market, especially for the first two quarters and maybe into the third. So, we are trying to take our destiny into our own hands on the business acquisition side. We've made some moves to help facilitate that, and again we would expect to see they will start to bear some fruit towards the middle to the back half of the year, but in terms of the general market, there is not a lot of exuberance out there from anyone. I hesitate to be too realistic about it because we get accused of being negative all the time, but it's generally what we are seeing out there, and again we want to make sure that that we're taking advantage of the opportunities and creating opportunities for ourselves and not that having an expectation that the market is going to lift all the ships, right.

Ben Hartford - Robert W. Baird: Then maybe Rick, if I could just clarify the cost savings guidance that you guys delineated. This $45 million to $50 million in benefits in fiscal '15, it sounds like we should interpret that as all incremental, the $45 million to $50 million in incremental savings in '15. That will probably be partially offset by the full run rate of the amortization of say, $10 million in fiscal '15. Is that interpretation correct? And then, I guess building on that and the changes that you have made within the finance organization, how should we think about uses of potential excess cash as we go through the balance of '14 and then to '15, with all things equal?

Richard Rodick - CFO, EVP, Finance: So, on cost savings of the $40 million to $50 million in FY '15 that's really on – that's the combined cost savings on top of the 30 million to 35 million we have we're projecting this year. Amortization this year will be $10 million on the system. Amortization FY '15 would be $20 million. So, it's kind of building. In Eric's script he talked about $30 million to $35 million – I think it was $45 million to $50 million and then in '16 we get to the full cost savings we talked about at Investor Day. But the one thing that would offset some of that too is Ben, as we're doing this ruling in core severance probably later this year, as we implement all these countries and they come on within 60 to 90 days the costs come out in those areas. So, we think severance could be similar to what we had this year and then they will be some in FY '15, also as we wrap up the transformation.

Ben Hartford - Robert W. Baird: So, just to be clear on this $45 million to $50 million you'll have $30 million to $35 million in savings in '14 and then this $45 million to $50 million is that incremental to that 30 to 35 or does that includes the 30 to 35?

Richard Rodick - CFO, EVP, Finance: That includes the $30 million to $35 million.

Ben Hartford - Robert W. Baird: Okay and then (indiscernible) Investor Day. That's still in play, but those savings would come on an incremental basis in fiscal '16.

Eric Kirchner - CEO: Yes.

Ben Hartford - Robert W. Baird: Okay.

Eric Kirchner - CEO: Offset by the $20 million in amortization in 2016.

Ben Hartford - Robert W. Baird: And then the follow on to my question was in terms of the attitude toward any excess cash that you generate from these savings in terms of what you would do with it?

Eric Kirchner - CEO: Right now, Ben, our uses of cash are investing in the business and that's what we've done the couple years. Last year was the transformation. Right now I think it's prudent that we're conserving cash. At this time we've got some debt to EBITDA covenant ratios that are based on gross debt, not net debt. We've got cushion at this time, but we're just at this time with the earnings where they are where I think it's prudent to be conserving cash and not leveraging up to do anything at this time, other than investing in the transformation and wrapping up the transformation.

Operator: Scott Group, Wolfe Trahan.

Scott Group - Wolfe Trahan: Can you just give us first a little bit more color on where the write-down in the quarter occurred and looks like there's another roughly $450 million of goodwill and intangible still on the balance sheet. How comfortable are you that there's no additional write-downs coming in? Did you do a fair value assessment of everything in the quarter?

Richard Rodick - CFO, EVP, Finance: This is Rick. Yes we did. I'm just trying to find my notes. We actually do it twice a year. We did it at yearend and, mid-year and then at yearend we do an analysis. So at January 31, we did an analysis based on the current market conditions. It occur we look at the entire goodwill balance and there were three countries where the earnings were less than what we needed them to be and we took goodwill right after the goodwill was impaired. We do not anticipate any additional coming anywhere in the near term, based on the analysis, we did the rest all have what we think is significant cushion.

Scott Group - Wolfe Trahan: Can you just maybe give us some thoughts on you've implemented system with I think you said six countries, what you are hearing from customers and service levels in those countries and if there is any benefit that you achieved yet. Then with that, do you think that's having any impact on the market share in most countries so as you roll out another 35 countries this year. Do you think that's a risk to your plan to start taking market share down.

Edward Feitzinger - EVP, Global Contract Logistics and Distribution: I'll try to unpack that question as it I think a bunch of different questions inside that. So maybe I'll just talk a little bit about how I view the system rollouts. We've been through this before. The first country that you'd put on is really test to whether your bits and bytes work. So the system work is you have the theory and then you are applying the theory in your country. Certainly and because this is a network where you have country interfacing with another. We have one country in the new system and then every other country in the world on the old system and then Netherlands is our first country to go live on that. So you are certainly not going to see a lot of benefits there other than cost or in market share and if anything you get a couple of bumps along the way as it goes in. as you get to the five or six country phase that would really what I would see you start to see more issues about the productivity of the system. You start to see the lights go on at least between the countries that are on the system now instead being on disparate system before. We've started to see that already. People get pretty excited about that. But it's a small percentage of our overall shipment as our team has discussed, and that's what you test the system to see whether its scale, that's what you see and how the exchange demand is working as people adopt their processes to the system in the different countries. And that's kind of what's behind us now at this point. So, as we roll out and we get a significant portion of our business that's where you're going to start to see some of the savings start to materialize, that's where we start to see some of the efficiencies and visibility for customers, better service for us and the benefit that we expect from the market side. So, there are benefit out there from a customer growth perspective certainly we think it's going to improve our service, perhaps to gets through critical mass of number of countries are, so that the customer are going to be able to see that and see the material difference. So, that the average transaction that will pop up between branch A and branch B that might come in next transaction in the system will be on the new system, instead of maybe A's on the new system and B is still on a local system. So I don't know if that helps that answer that question for you Scott?

Scott Group - Wolfe Trahan: Yeah, it does. If I can just follow-up was about how come 70% of the shipments are going to be on the new system by the end of this year. Why wouldn't we see 70% of the targeted savings by next year?

Richard Rodick - CFO, EVP, Finance: One of the ways that we've come to describe the initiative. So, the original business process change was labeled four as one, because we had four regions, four major blocks of systems and the idea was that we needed one. You can start thinking about where we are or where we will be rather than four as one being five as one, because you still have now the introduction of the new system and you will have other countries that remain on the old system and until a complete region retires a block that block of system, you don't start to see the benefit. So, the concern from appearance standpoint is that it starts to look like a hockey stick, but inside that's how it works until you get pass the critical mass where you have the preponderance of transactions moving between two countries on a new system, between countries that work on the new system you don't get the full benefit and that relates to retiring the old blocks of systems that these countries still operate on today.

Scott Group - Wolfe Trahan: Eric, that actually makes a lot of sense and is really helpful and it sounds like there maybe the timing of the delay but overall you still are just as confident and the ultimate savings from Israel. Is that right, is that fair?

Eric Kirchner - CEO: No, we are confident than the four, because we are at the point where we are getting ready to ramp, and we've really taken some steps forward since the last call. We just got done with a global roadshow. So, the senior management team, the executive board were non-vernacular went out and met with our people around the world and hit the top 300 leaders. And we've come to hear this phrase several times about transformation fatigue or things associated with UTi. So, I look back at an old quote from Vince Lombardi which was Fatigue makes cowards of us all.' And I didn't see any cowards out there when we went through this process. We've got people out there that were resilient, they've got a lot of resolve to make this thing happen, and they're actually waiting and ready to go to get this system stood up. So I'm more bullish on where we are than I've been in this process.

Operator: Kelly Dougherty, Macquarie.

Kelly Dougherty - Macquarie Capital: I just wanted to see if we could talk about how your Air and Ocean Freight businesses stack up from an operating margin perspective. So as I think about the goal to get to 20% forwarding margins, just wonder is that bogey is tougher these days given the shift to more lower margin CL&D business, more pressure on the forwarding side. So can you help us think about how mix impacts us and maybe some – if you have any interim targets you can offer us maybe for where operating margins can go in fiscal '14?

Richard Rodick - CFO, EVP, Finance: I'm not sure about talking to interim targets. There has been a shift generally from air to ocean because it's a lower cost mode and the margins on ocean are traditionally less than air. I'm not convinced that it's a forever thing and I'm also not convinced that aren't additional steps we can continue to take to mitigate market pressures. If you look at one of our key competitors, their annualized results were about a 30% margin and they're predominantly freight forwarding, so that gives us a very tangible target to reach for at which says from where we are today, 20% is a reasonable target as a forward number that we expect to get to. It has been pushed out somewhat because of the pressure on the transportation part of the margin. So, if you look at broad buckets of where our costs are, the net revenue number is impacted by the buy-sell dynamics between what we pay carriers and what we're able to charge our clients. Things that we can do to help mitigate the compression in that area are to take better advantage of the capacity that we purchased and we've got some good early signs that the gateway initiatives that we've been working on pretty diligently form the past couple of years are showing some benefit. So the more we can build on that with these new business wins, and the more we can take advantage of density on specific trade lines, the better we can drive that net revenue dynamic to help mitigate and offset basic market pressures. So, I don't know if you want to comment any more on other aspects of that, but…

Richard Rodick - CFO, EVP, Finance: I think another important aspect of that is if you – someone asked a question about the system and how that going to help us from a market share perspective. The systems going to help us get more smaller and mid-sized customers on board, which we think have a lot of value for us. So Eric talked earlier about the investment in the sales force. So we're not putting sales people in to go chase market share just to go (pledging) ourselves with our competitors and drop our margins. We're putting sales people in the right places where we haven't had necessarily investment in pursuing local customers, country-based customers, sub-regional customers again in our vernacular that we think will be fit well in the new system and it create volume in the system that's going to help us improve profitability and absorb our costs. So, it's all part of the strategy wrapped up in there. We're being very specific about what customers want to target going forward and again the system should allow us to improve the quality of the service that we can have for some of those small and midsized customers.

Kelly Dougherty - Macquarie Capital: Can I ask you as a quick follow-up to on mix on how you are seeing about the mix between the Contract Logistics and Distribution business versus the mix of the Forwarding business? You won't obviously have much higher margins than others so are you focusing more on growing the Forwarding side to help get to that combined 12% to 13% margin over time or how should we think about that?

Eric Kirchner - CEO: The growth in the Forwarding part of the business will help take advantage of the investments in this new system which is predominantly built around Freight Forwarding, although it will have follow-on effects to improve the R&D. So Forwarding is a network business and it does have scale advantages when you are able to grow and build density in these trade lanes. Contract Logistics and Ed is an expert in this area. I will let him lay in, but Contract Logistics is somewhat different in that growth for growth's sake is not a real objective and we want to grow and improve to our business to be growing but only in engagements where we can produce the types of margins that are attractive to us. Those are the types – those types of engagements are where we can provide value-added services for clients as opposed to just pure labor arbitrage and things like that.

Edward Feitzinger - EVP, Global Contract Logistics and Distribution: If you look at CL&D graph, I mean we are really focused on where we can get our rate curve on a improvement. So it's not only the margins, it's looking at the assets deployed for that and making sure that we are getting a healthy return on the net assets that are deployed.

Operator: Jack Atkins, Stephens.

Jack Atkins - Stephens: First off, if we could maybe just kind of go back to just the competitive landscape right now and maybe talk about how you guys are seeing more challenging competitive pressures manifest themselves in your business, whether it's on the air freight side or the ocean fright side and just sort of curious what you all are doing internally to combat that because we're hearing this from more and more folks that this is sort of the most challenging competitive market they have seen in quite some time?

Richard Rodick - CFO, EVP, Finance: I'm going to be optimistic here. I think that if you look back on '13 that there was – the competitive dynamic I think was in some cases irrational and I think people took positions. We were fairly conservative in protecting margin, you can see that in our results and I think some folks in the global competitive spectrum went after market share which in the floating industry in the last 10 years in the aero market when things are going everybody just wants to sort of grab share and you'll figure out how to make money later. We see that trend changing now. We see I think indication and there is obviously a little bit of a crystal ball here indications of return to a more rational competitive environment, less speculation. So, I'm cautiously optimistic I guess I would say that I think in the air freight market that as the market has matured and there is not a lot of growth in it, which I think is sort of natural course of events for a maturing market is the competitive behavior becomes probably more rational and that's my fist opinion on where we're – this '14 looks a little bit better from that perspective than '13 did.

Eric Kirchner - CEO: It was interesting as one day point a very large multi-national customer that we have some business for them put a bit out last year, we didn't win as larger portion of that business we would have prefer. They've come back not just to us, but to the base of transportation providers that they have engaged to rebid portion of that business because a competitor decided that they couldn't earn other pricing that they put in and what back and said that they had to have a pricing increase, and the customer basically said no. If you are not handling the price we are going to put the business back out into the market. So, that's an indicator, and I don't think that's a single data point, but it's not the only the place that's happening. So, look, we didn't see any virtue in going very low on price in the past year just to win business for adding volume sake. We are becoming more refined and how we price and being aggressive, but it's going to make sense for us. I think there are time to as Ed mentioned of the market, there is some of our competitors may have gone too far in that dynamic.

Jack Atkins - Stephens: And then just to last thing here. Just curious Rick or Ed, if you could maybe kind of give us the changes year-over-year for every kiosk and Asia freight kiosk one more time in the fourth quarter I missed that. And then Ed also you comment on combined January and February volume trends was than on a year-over-year basis, what was that sequentially that you talking about that?

Edward Feitzinger - EVP, Global Contract Logistics and Distribution: Rick, getting the number for you. The number I was talking about relative to had on our historical numbers where from December to January and February.

Jack Atkins - Stephens: Right, but the down 11% for air freight for January and February and down 5% for ocean freight that was from December or was that year-over-year?

Eric Kirchner - CEO: That was down from December.

Edward Feitzinger - EVP, Global Contract Logistics and Distribution: You had asked Jack about for the quarter air freight was down every quarter year-over-year 1%. Ocean was up 4% for the fourth quarter.

Eric Kirchner - CEO: Again part of the data point there is remember our quarter is not aligned with the competition so our quarter is November, December and January and there maybe a little bit of change when you look at us compared to the competition.

Operator: David Ross, Stifel.

David Ross - Stifel Nicolaus: My question is on the contract logistics segment, aside from North American customer loss, if you just look at the same-store sales weakness that caused some of the margin miss, was there any timing to that in the quarter was it weaker in December or was it weaker in kind of year-to-date in 2013 and then in any particularly industry groups is region is soft than more than others?

Edward Feitzinger - EVP, Global Contract Logistics and Distribution: To Eric's original point this is Ed again. We had there were some volume issues there we did have currency so most of the currency impact that existed in the company was relative to South Africa because our operations in CL&D are quite significant there. Iran was I think if you look back a year ago Iran was around high 7s I think it was 7 or 8 and now they are at about 9. There is a cyclical nature of the project work we talked about we did have the margin compression some new business startup and we had these three facilities. So, the pharma facility was planned in the Taiwan – we had a Taiwan facility we brought up. That was a large facility, that's our anchor for that whole region. And then the Hong Kong as well, we moved into new facility. Those were driven by needs to change to new locations. In Taiwan actually they took our – the government was redeveloping the entire park that we are in, so we have to move to a new park. So, those things they all contribute to the number you talked about. In terms of the volumes, we are not – I don't think we are seeing any particular customer industry that's up or down significantly. I think if you look at Europe, macroeconomic as you guys know particularly Southern Europe is quite weak, North America is little bit spotty, but nobody is I can't – we can't point to anybody and say this industry is doing great and this industry as I was indicating has had (indiscernible) unfortunately.

David Ross - Stifel Nicolaus: And then the sales changes that you talked about, Eric, are they sold in Freight Forwarding or is that going on in Contract Logistics as well?

Eric Kirchner - CEO: The sales leadership at the regional level is responsible for both Freight Forwarding and Contract Logistics, so there have been – the changes will affect both the segments. And then we've also bolstered our sales approach within Contract Logistics specifically in North America with some key additions. So, it impacts both.

Operator: Nate Brochmann, William Blair and Company.

Nate Brochmann - William Blair and Company: Wanted to go back to Tom's original first question on just the expenses and some of the one-time things. I know that you throughout the $12 million in terms of the mix of some bad debt and some write-offs and some interest and what not. But I wanted to see if we could get maybe a number for what some of the other upfront cost might have been during the quarter for some of the new business that you're bringing on in terms of what you have to establish ahead of that, as well as if we take out some of the unusual things in terms of the facility moves and what not. What kind of the run rate it might look like if we take out those issues out?

Richard Rodick - CFO, EVP, Finance: So, I think first you're talking about the $12 million and I think I mentioned we had some interest expense, some bad debt write-offs, some assets, some things on the balance sheet, some revenue items that went away.

Nate Brochmann - William Blair and Company: So on top of that is kind of what I'm saying in terms of some of these other things within the businesses that we're looking at what would the number be on top of that if we look at run rate?

Richard Rodick - CFO, EVP, Finance: For example the facility moves were about another $3.5 million in expense that Ed mentioned the three facility moves for the locations in CL&D, and then there was – so I think – to answer the question I think you're asking, we would have shown a slight loss in the quarter if not for these items, so in the $1 million to $2 million range on a pure straight operations basis.

Nate Brochmann - William Blair and Company: I understand if we get new business, you always maybe have some upfront cost et cetera, particularly in CL&D business, but if we excluded those issues, we definitely see a higher level of getting closer to profitability if we exclude that?

Eric Kirchner - CEO: No, that would be – yes, it would have been higher levels relative to what we reported but we have produced about $1 million to $2 million loss in that range.

Nate Brochmann - William Blair and Company: Then regarding some of the duplicative costs I know certainly that with the financial structure and kind of going back to a similar question, do we have to wait to the system is 100% implemented to get rid of those or as you bring down the countries individually online do we eliminate some of those duplicative things?

Eric Kirchner - CEO: Our expectation is that as we get further into the deployment process that those costs will start to come out incrementally in the deployment process. So, it's not I think (bang) it should start to come over time, when we pick up momentum with the deployments, because the work will shift from localized to the share service environment.

Nate Brochmann - William Blair and Company: Do we get any of that at all at the end of this fiscal year, would that mainly be next fiscal year that we'd start to see the incremental small impact from that?

Eric Kirchner - CEO: That was built into the $30 million to $35 million number that we talked about in gross costs savings for this current year.

Operator: Peter Nesvold, Jefferies & Company.

Peter Nesvold - Jefferies & Company: I think I understand why the restructuring benefits you are backend loaded. I mean you essentially have to create a global network from the ground up. You got to test the system, you got migrate the transactions over, and then eventually get labor productivity benefits from that. What's a little less clear to me right now is as those big numbers start coming through in the out years, the $75 million to $95 million, how much of those savings would you characterize as being volume dependent and how much of those savings would you say would be sort of execution dependent, i.e. your ability to actually roll out this system successfully and start to get those productivity savings outside of volumes?

Eric Kirchner - CEO: Virtually all of them are execution-dependent. So, as we say that in my remarks earlier, when we modeled and shared the information with everyone at Investor Day in June of 2011, it was built that – those assumptions were built on virtually no growth in revenue. So that portion of what this deployment represents is centered around improvements in efficiency, and it should not be dependent on volume. But the overall margin targets – so this is – you can almost separate the two issue, the overall margin target, that we talked about are impacted by changes to net revenue because of margin compression in the short-term and we talked about actions that we're going to take to mitigate that. But those cost numbers or the benefit numbers of the system building to the 75 to 90 range are based on improved efficiency of our operations.

Peter Nesvold - Jefferies & Company: Then as my follow-up question. You ruled out the Freight Forward system in six countries so far. You've mentioned that you're looking to deploy them in 35 additional countries this summer. What's the risk that we get are repeat of what happened in the first six rollouts? Obviously you got through it. It took a little longer, cost a little bit more money, but it was in six countries, you are going now to 35. How can you get us comfortable that we don't get a much bigger push out or much bigger run up in the cost?

Eric Kirchner - CEO: Most of the costs are already behind us in terms of the capital for building the systems. So from a cost perspective, regarding the deployment over the system itself, that should be relatively stable. The only area of that cost could have impact otherwise is if we don't start to achieve the productivity improvements that we expect as we implement the system. We took great care in the pilot phase and as Ed walked through the first country and the learnings from the first country pilot to then this current model where we have six countries and we're building on that, both in the performance in terms of speed and the functionality of the system. The system is now ready to scale, so the system itself will be able to handle the additional transactions as we add the volume into it and then we've developed the right processes around the transfer of information from the Freight Forwarding operating system into Oracle to help smooth out some process changes there. The Company quite frankly had a fairly complex intercompany billing process that we learned in this deployment in the Netherlands. We learned a lot about things that we could to do improve there and that also helps build toward the efficiency improvements over time because as that work shift to the shared service environment and actually gets done in the background where the country level people don't have to get involved in that. It's going to really help accelerate the productivity improvements going forward. So, we have got a very methodical plan to move through it. We are not going to put the business at risk. I think the fact that we roll out on a country-by-country basis gives us the right calibration in the event that we do need to look at different aspects of the system in terms of performance. But it's pretty much how these things go having gone two or three times.

Peter Nesvold - Jefferies & Company: I mean I guess I understand, if there is one fear in the back of my mind it's that you don't know what the system is going to do until you turn it on. But if I understand what you are saying correctly, it sounds like by deploying in the half dozen markets initially you figured out where the inefficiencies are in the system and the processes that you have developed to address those are repeatable to the other markets in that it's more or less just repeating the same process over and over again in the deployment, is that fair?

Eric Kirchner - CEO: I'd say so, yes. It is not like National Lampoon Christmas Vacation where Chevy Chase plugs the lights in and the whole place lights up at once. I mean it kind of comes on incrementally and builds over time and we are going to make sure that we are doing it in that way.

Operator: Kevin Sterling, BB&T Capital Markets.

Kevin Sterling - BB&T Capital Markets: Eric, maybe if I could ask a competitive dynamics question a little bit differently. You talk about the competitive dynamics in the industry being the toughest you have seen in many years and beside the sluggish market freight environment of the business, the mix shift you talked about from air to ocean. Are you seeing more competition coming in the marketplace particularly from the integrators? I note FedEx is talking a lot about really growing their FedEx Trade Networks.

Eric Kirchner - CEO: Not particularly. Obviously we are very mindful of FedEx and UPS and DHL from a competitive standpoint. I wouldn't say there's been any major shift in terms of who we run up against on an ongoing basis because they've been in the same market. So we haven't seen any – I wouldn't say there is evidence of a big change there. Danny?

Operator: We do not have any further questions. Please continue with any points, you wish to raise.

Eric Kirchner - CEO: Thanks, Danny. As there are no further questions, I would like to thank all of you for participating in our call this morning. On behalf of all us here at UTi, thank you for your continued interest and ongoing support. Have a great day.

Operator: This concludes today's presentation. Thank you your participation and you may now disconnect.