Turnaround for NOL

By Peter Leach
The JOURNAL of COMMERCE ONLINE

Fueled by higher rates and steep cost cutting, Neptune Orient Lines Ltd. (schedules) today reported a significant turnaround in profits and revenues for the fourth quarter and full-year 2003.

For the fourth quarter, the Singapore-based company reported net profits of $134 million on group revenues of $1.547 billion, compared to a net loss of $146 million on revenues of $1.342 billion in the same period of 2002. Revenue for the quarter was up 15.3 percent from a year ago.

For all of fiscal 2003, NOL reported a net profit of $429 million, compared with a net loss of $330 million for the previous year. That includes $134 million from the sale of crude oil tanker business American Eagle Tankers in July. Without this and other exceptional items, the group still made a record profit of $335 million.

Revenue for the year increased by 19 percent to $5.5 billion from $4.6 billion, despite the sale of AET. This reflected the considerably improved performance of both shipping subsidiary APL and supply chain management unit APL Logistics.

APL, the second largest container carrier in the U.S. import-export trade lanes, continued to contribute the largest proportion of NOL's revenue at 75 percent of the total, while APL Logistics' share increased to 18 percent. The balance was contributed by chartering, whose principal business was AET.

NOL Group Chairman Cheng Wai Keung said in a media release that the recovery was not just based on rate improvements, but on efforts by management and staff "to hammer in changes that pared down costs, managed yield closely and optimized our assets.

"The Group will continue to explore avenues to take advantage of any growth opportunities in the future. Barring unforeseen circumstances, the board expects NOL to continue to perform better in 2004," Cheng said.

Group Chief Executive David Lim said, "We have had a remarkable year and this was not solely down to improved freight rates in our liner business. The work we put in to reduce costs, and manage yield and the mix of our business, contributed more than 60 per cent of our core EBIT improvement."

Lim said a key goal in 2003 was to reduce NOL's debt. "Our balance sheet is now very healthy," he said. "The sale of AET netted a sizeable gain, reflecting the value we had built up in that company over the years, and in November, we raised more than $300 million in new equity capital."

Group Chief Financial Officer, Lim How Teck said NOL would further reduce debt with the recently announced sale of the product tanker business, Neptune Associated Shipping, expected to realize a book profit of about $8 million. However, he said, the sale was also important strategically. "We intend to build on our core capabilities in global transportation and logistics, and the divestment was in line with our strategy to exit non-core business," he said. "Around 95 percent of non-core activities have now been divested."

Commenting on the outlook for this year, Lim said, "We expect to do better in 2004 even though we will not have the revenues and profits accruing from our AET operations." The group aims to achieve this by targeting further cost cuts of $100 million, which will "accrue directly to our bottom line," he said.

"Secondly, the liner industry outlook is favorable and we expect freight rates to remain firm and rising. We therefore expect APL to better its performance this year. We see first quarter performance reflecting the growth and profit momentum of 2003, and for this momentum to carry through for the rest of the year. And thirdly, we expect our logistics business to continue to show improvement and to contribute to the Group's earnings. This year, we will continue to look for new expansion opportunities, especially in the developing markets within Asia. We will also focus on how we can more effectively service the common customers between liner and logistics to generate more revenues and earnings," he said.

Earnings before interest and taxes at APL, the group's container shipping subsidiary, totaled $406 million in 2003, compared with a loss of $72 million in 2002. This was due in part to improvements in rates in nearly all trades particularly trans-Pacific, Asia-Europe, intra-Asia and trans-Atlantic. Overall, the average rate per FEU was $2,512, less than the highest-ever average on a weighted basis recorded in 2000.

However, NOL said the turnaround was down to more than rates alone. APL Chief Executive Ron Widdows said, "During 2003, we changed the way we worked, managing the mix of our business to make the most of our assets — shifting equipment where it was needed most, flexing the network to respond to demand. This gave us a significantly better yield than we would have achieved through rate increases alone."

Reflecting this, container volumes rose just 1 percent on 2002, reaching 1.5 million FEUs, while revenue increased 21 percent to $4.18 billion.

Widdows said he expected another good performance this year, with strong demand creating space shortages on major trade routes. "China is a key driver of volumes," he said, "but we are also seeing significant increases in other emerging markets in Asia such as India and the Middle East which are driving strong intra-Asia demand."

APL is continuing to expand its capacity through upsizing vessels and partnership arrangements with other carriers. This will continue through 2004.

APL Logistics said core EBIT for 2003 rose to $7 million on revenues of $975 million, compared with a loss of $27 million on revenue of $813 million in 2002.

APL Logistics Chief Executive Hans Hickler said the division "is successfully leveraging its origin and destination capabilities, including consolidation of goods, deconsolidation and warehouse management to put the pieces of the supply chain together in an integrated way for customers internationally."

In NOL's Chartering division, revenues fell 9 percent to $317 million in 2003, with core EBIT of $75 million, as a result of the sale of the tanker unit.

With the conclusion of the sale of the Neptune product tanker subsidiary, announced last week, NOL will effectively exit the chartering business.