$700 Million Turnaround

$700 Million Turnaround

Copyright 2004, Traffic World, Inc.

Container shipping is an up-and-down business and Neptune Orient Lines Ltd. has been riding a wave that has lifted the entire industry. After a dramatic turnaround in profit last year, the Singapore-based parent of APL plans to trim costs and pursue higher-yielding cargo.

David Lim, the group''s president and chief executive, also says NOL is being readied to make "significant investments" to expand its traditional markets, move into new ones and perhaps even make acquisitions.

"We will grow by all means possible - organically, as well as through careful and judicious acquisitions," Lim said. "I think an acquisition is something we will consider if it adds value to the company. That means it must provide us with a good strategic fit." The company''s last major acquisition was its purchase of third-party logistics provider GATX Logistics, now integrated into APL Logistics.

NOL posted a net profit of $429 million last year, reversing a $330 million net loss in 2002, as group revenue rose 19 percent to $5.5 billion. The results were boosted by a $134 million profit from the sale last July of American Eagle Tankers. NOL''s turnaround was credited to aggressive cost-cutting and debt reduction, tight yield management and rising freight rates on all its major routes.

Lim said NOL expects to do even better in 2004. He cited plans for $100 million in additional cost cuts and continued "firm and rising" freight rates. "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," he said.

APL accounts for 75 percent of the company''s revenue. APL Logistics increased its share to 18 percent last year. The balance came from NOL''s chartering division, primarily its tanker unit.

Lim said APL Logistics is expected "to continue to show improvement and to contribute to the group''s earnings." He said NOL will seek opportunities for expansion, "especially in the developing markets within Asia. We also will focus on how we can more effectively service the common customers between liner and logistics to generate more revenue and earnings."

Earnings before interest and taxes at APL Ltd. reached $406 million in 2003, compared with core earnings before interest and taxes of negative $72 million for 2002. This was due in part to improvements in rates in nearly all trades, particularly the transpacific, Asia-Europe, intra-Asia and transatlantic. Weighted average revenue per 40-foot equivalent unit was $2,512. Container volume rose only 1 percent to 1.5 million FEUs but revenue jumped 21 percent to $4.18 billion.

"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," said Ron Widdows, APL Ltd.''s CEO. "This gave us a significantly better yield than we would have achieved through rate increases alone."

Widdows said he expects 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 expanding capacity through larger vessels and partnerships with other carriers.

APL has made a concerted effort to increase its per-container yields. "They did a good job of managing their yield by dropping low-rated cargo and keeping the high-yield cargo," said Mark McVicar, shipping analyst with Dresdner Kleinwort Wasserstein in London. He said APL is moving empty containers back to Asia from Europe and the United States so they can be quickly reloaded with higher-value Asian imports instead of waiting for low-yield backhaul cargo.

"We would rather ship boxes empty back to (Chinese) ports for outbound shipments rather than lose them for two weeks while they are waiting for them to be filled with low-value goods for export to China," said Koay Peng Yen, president of APL Greater China in Shanghai.

But eventually, Koay said, rates on shipments to China must rise. "All the carriers are losing money on inbound shipments (to China)," Koay said. "As a service provider, we have reduced costs but there is little more we can do to cut costs and reposition containers. Rates will have to come up. There will be an inevitable adjustment in the supply-demand dynamic on the inbound leg to increase rates."

He said one aim in 2003 was to reduce debt. The company raised more than $300 million in new equity capital last November.

Lim How Tech, NOL chief financial officer, said the group''s debt would be reduced further with the February sale of the group''s product tanker business, which was expected to produce a book profit of about $8 million. He said the sale also was important strategically.