NOL Reports First Half Profit of $11M

The tough economic situation and business environment has not prevented Neptune Orient Line from first half profits, as the company announced $11 million profits (albeit down 78% from 1H 2000 profits) on revenues of $2.3 billion (up 6 percent from 1H 2000 revenues.) In summarizing his company's results, Mr. Flemming R. Jacobs, NOL Group President and CEO, said "We have achieved much. We came from a difficult past and we are on the right track to return to full health, but we are not there yet. We would have preferred a little more time to consolidate all we have achieved and are achieving before having to deal with a severe downturn in the economic environment like this one. We will continue our strategy, but it will take us a little longer to reach our goals." "2001 is proving a tough year -- and, while this result is disappointing, we have to remember where we started from and accept that sustained profitability is not achieved magically overnight," Jacobs said. The Group recorded serious losses in 1997-98 when the Asian crisis hit just as it had purchased the American liner business, APL. "Today the NOL Group is clearly focused on building its three core businesses: APL, the Liner business; APL Logistics (APLL); and the tanker business, American Eagle Tankers (AET). This is on target. As part of the growth plans, APL Logistics increased its contribution to Group revenues to 14% from 9% in the first half of 2001," Mr Jacobs said. Overall profit was also impacted by the US$1.7 billion in debt, which the Company still carries.

APL Liner

It has been particularly tough for the liner business, APL, Mr Jacobs said. "Many of our APL customers are hit by the downturn and therefore so are we. But if we are to continue to meet their container transportation needs, we need to keep our eye on the future while ensuring we are making the most of the efficiencies we have made over the past two years -- and continue to find more." Volumes in Europe were up 14% and rates up 1%, while in Asia/Middle East rates were up 3%. These gains were undermined particularly by a significant reduction in both rates and volumes in trades touching the Americas (rates down 4%, volumes down 5%). The overall result for the first half of 2001 was a drop in APL Liner revenues of 2% to $1.77 billion and a drop in Earnings Before Interest and Tax (EBIT) of 68% to $31 million. "We are building strength back into the Liner business after a difficult few years and achieving a better geographical balance for our transportation activities. The weakening supply/demand picture affected freight rates in all East/West trades and we gradually had to adjust freight rates. We are also adjusting capacity in light of the lower trade volumes. "With Liner, as across the whole Group, we have maintained an aggressive focus on cost management. This has supported our variable contribution margins as rates were falling," Mr. Jacobs said. "Fixed costs rose because of the introduction of the previously announced new services in Europe and Asia, in line with the Group's strategy to reduce APL's vulnerability to ups and downs, particularly in the trans-Pacific trade. "We achieved what we set out to achieve in Europe, gradually and responsibly expanding our business there," Mr Jacobs said. "We need to be less reliant on the trans-Pacific trade in the Liner business and we have worked hard to develop our market in Europe and extend our network in Asia. This is beginning to show," he said. "We are in the process of rejuvenating our fleet, and the vast majority of the newbuilds are chartered in, which provides flexibility without taxing the balance sheet. We are dealing with low growth by returning other chartered in vessels to their owners as new vessels that are more cost efficient come on line," Mr. Jacobs said, and added, "We are in this business for the long haul and we are adding capacity carefully. Trade growth will continue, albeit more slowly, and we need to make sure we have the ships and services that will be needed to cater for growth in a cost-efficient manner. Similarly, we continue investing in people and training and fine-tuning our operations. "We will continue to make adjustments to our services as we go forward to ensure that we are making the most efficient use of our fleet and meeting the needs of customers in the most flexible way," Mr. Jacobs said. "As I have said, the short term for the Liner business is not bright. Rates have declined in several main trades since late last year and although they are stabilizing, we will have the full impact over the rest of this year and probably into at least part of 2002," Mr. Jacobs commented. "With the continued uncertainty about global economic developments, we expect the full- year result for Liner to be substantially less than for 2000. "We will continue our aggressive cost management, including the development of information technology products that will improve efficiencies for our customers and increase productivity for us."

APL Logistics

Net revenues for APL Logistics (APLL) leaped 63% to $330 million, as a result of increased business activities and the successful acquisition and integration of US-based GATX Logistics (GATXL) earlier this year. However, there was negative EBIT of $9 million, down from positive $10 million for the same period last year, due to acquisition and one-time development costs. "Revenue really took off with the acquisition of GATXL," said Dick Metzler, CEO of APLL, "and was also boosted by 18% organic growth. However, the costs of acquiring GATXL in the first half of this year had an impact on core EBIT. "The company also made necessary and significant investment in two new business areas: See Change Technologies (SCT) and APL Direct Logistics, and it will take time to realize their potential," Mr. Metzler said. SCT is developing a new generation of IT tools that will give customers greater visibility of their inventory as it moves through the supply chain from the factory floor to customer door. APL Direct Logistics was formerly e-Logistics, and was part of GATX Logistics when APLL acquired it. "At that stage it was focusing on servicing dotcoms," Mr. Metzler said. "With the bursting of the dotcom bubble, we needed to refocus this part of the business. This has cost us some money. It is now working on e-fulfillment, which is the process by which goods ordered over the Internet are delivered directly to the customer's door and is very much a partnership approach with successful e-tailers." Mr. Metzler said, "With the aggressive goal of rivaling the liner business as a major breadwinner for the Group in three to five years, we will, from time to time, have growth spurts such as we have had in the first half of this year, as well as organic growth. This growth path may be unconventional but it is consistent with our strategy for achieving our goal." The outlook for 2002 is positive and the company has a strong future, Mr. Metzler said, but soft market conditions and weaker demand coupled with the cost of integration and investment will impact the Logistics business results overall for the full year 2001. But business is picking up, he said. "We are having success in building our business for the future; for example, contracts with just four of our customers, Dow Corning, The Toro Company, Colgate-Palmolive Company, and Procter & Gamble, amount to $163 million of revenue for us over the next five years, and this is just the beginning. "We are building our capabilities in terms of our geographic coverage and the depth, breadth and complexity of our network. In addition, with the development of SCT we will be providing exactly the visibility tools our customers are telling us they want.

Chartering

Chartering revenues increased 24% to $180 million in 1H01. EBIT rose 268% from $13 million to $48 million. "Our tanker business, American Eagle Tankers (AET), continues to be a bright spot, contributing well to both revenue and the bottom line," said Joseph Kwok, Chief Operating Officer and CEO and President of AET and the Chartering Division. A marked improvement in Aframax crude oil tanker rates of 40%, from $22,000 to more than $30,000 per day over the same period in 2000, contributed to the improved result. "We added a further two Aframax tankers through time charter in the first half of this year, taking our fleet to 24," Mr. Kwok said. "We are on track to have an entirely double-hulled fleet as planned by 2003." None of the current fleet are single-hulled. "We were disappointed that the financial market conditions didn't allow us to complete a separate listing proposed earlier this year. However, this does not affect our business and expansion plans," Mr. Kwok said. "We disposed of another dry bulk carrier during the first half of this year, leaving four modern Panamax bulk carriers," Mr. Kwok said. "Our intention is still to exit this business over time." "Although the tanker market has come off the peak it experienced during the first part of this year, we expect the sector to remain stable for the balance of the year," Mr. Kwok said. "With more cargo contracts, our tanker business is somewhat protected from market volatility in the near term." Overall, expectations for the Chartering Division for the full year are positive and better than the solid results of 2000.

NOL Group Outlook

"This year is not going to get any easier for the NOL Group," Mr. Jacobs said. "With the current operating environment, we expect overall results for the full year 2001 to be significantly lower than last year's record results. Key reasons are more difficult operating conditions for the Liner business and the expansion of the Logistics business. "In addition, while we have reduced the level of our debt over the past two years in the wake of the Asian crisis and the purchase of APL, it is still a drain. However, our cash flow is strong. "We will weather the storm, with an on-going focus on efficiencies across all businesses. We will prepare for the future in areas that will bring long-term benefits, including growing APL Logistics, investing in China, strengthening our business in Europe and further building on the successful crude oil transportation business. "We will continue to innovate, pursue new opportunities, primarily for APL Logistics, push boundaries and lead change. We will work with our customers to meet their needs in good times and not so good times as we have in the past and as we will in the future. This is what generates lasting business relationships and on-going opportunities, which in turn benefit customers and shareholders," Mr. Jacobs said.