UTi Worldwide Exec Insights: Costs and Reduced Volume, Fixed Rates vs. Demand

On Thursday, UTi Worldwide, Inc. (NASDAQ:UTIW) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.

Costs and Reduced Volume:

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

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

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

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

Alex Brand – SunTrust: Just to clarify before I’m cut-off; the ocean yields are under short-term pressure, but airfreight is not, is that right?

Eric W. Kirchner – CEO: That’s right, Alex. Mainly the Ocean rates that we’re seeing the increase in pricing and the GRIs coming through.

Fixed Rates vs. Demand:

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

Eric W. Kirchner – CEO: Lawrence?

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

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

Thomas Wadewitz – JPMorgan: What was your comment I think Alex also asked you on the airfreight yields that you are more optimistic that you’ll do well on airfreight or you’re seeing meaningful pressure on airfreight yield as well?

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