News / 'We took our eye off the ball, making too many changes at once', says UTi chief

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The perils of how a large-scale corporate transformation can undermine a company were graphically illustrated yesterday when US forwarder and contract logistics provider UTi Worldwide released fourth-quarter results that showed sliding revenues and mounting losses.

The company reported an adjusted EBITDA loss of $47m, compared with a slim profit of $2m last year, on revenues of $965m ($1.072bn the year before), amid continuing problems with the implementation of its One View IT system.

New chief executive Ed Feitzinger said that cause of its problems was that “we made too many changes at once – many of these were textbook correct decisions, but the sheer magnitude of all these changes happening at once” was the firm’s undoing.

“Over 90% of what we have deployed in One View is very good – I believe in the fundamentals of the system – but the problems with the remaining 10% really hit our margins,” Mr Feitzinger said.

He admitted that the restructuring plan had made UTi take its eye off the ball.

“We were ‘under the hood’ for a lot of last year and it was a really bad time to be ‘under the hood’. The first half of the year was tough competitively and the second half was when the market sprang back – we lost our client focus, as anyone would that undertakes an ERP transformation, and we needed to get out back on the street,” he said.

During the past few months, the company’s streamlined executive management team – notably trimmed since Mr Feitzinger assumed the chief executive role from Eric Kirchner, who resigned in December – has developed a new strategy that has put the reduction of working capital as a key strategic goal and a return to a granular focus on the profit margin on each piece of business.

“We had changed our view of transportation costs in the belief that it would save us costs,” he explained – in fact, it transpired to have increased these costs severely.

In one example, demurrage costs, which had previously been managed on a per shipment level, were redirected to central control, “but without local control in place, responsibility disappeared and this, magnified by the problems on the US west coast ports, led to demurrage costing us $5-6m in fiscal year 2015”.

He said that a 1% improvement in the yield of ocean freight business was worth $10m to the firm’s bottom line, but that could only be achieved if it concentrated on the individual margin of each shipment.

A comparison of its working capital position with its peers is instructive: in the fourth quarter of 2014, UTi’s working capital stood at just under 10% of its gross revenues; at Expeditors it was marginally under 5%; at Panalpina it was just over 2%; and at Kuehne + Nagel it was -1%.

Ultimately, this will mean that UTi will look to end contracts with customers, whatever their size, that do not represent a certain return on capital invested (ROIC).

“We found that some of our larger clients over the last couple of years have become more commoditised in the freight contracts, and yet we still embraced them because of the gross revenues and the volumes they had, instead of looking at margins and ROIC. We are now putting the tools in place that will allow us to make more intelligent decisions about tradelanes.

“We do need the large clients, particularly in air freight, but we want to match that up much more strategically with where we need the volumes – it’s now a more specialist approach, where previously we couldn’t really see the margin per client,” he said.

Chief financial officer Rick Rodick said the new working capital plan would see UTi’s balance sheet improve to the tune of $175-200m through a range of improvements to its accounts payable and accounts receivable.

The company said it hoped to hit an EBITDA of $125-150m in fiscal year 2016, through a mix of the reorganisation plans and cost savings, a $5-8m increase in contract logistics profits and a $23m-45m increase in its freight forwarding profits.

But it will also need to handle higher volumes, and recent months have seen UTi recruit scores of sales people as it seeks to reverse the previous quarter’s trend that saw ocean freight volumes decline 5% and air freight volumes by 7% in markets which have been more robust than for several years.