Neptune Orient Lines, parent of ocean carrier APL, is “totally focused” on returning the liner business to profitability, NOL CEO Ng Yat Chung said during a call with securities analysts.
Neptune Orient Line had a profit of $890 million after reaping a gain of $887 million on the sale of its APL Logistics business in May to Japan’s Kintetsu World Express. Last year NOL had a net loss of $54 million in the second quarter.
The company did not confirm or deny reports that its remaining container liner business, APL, might be sold to another company or what the plans of its largest shareholder, the Singapore government’s investment company, Temasek Holdings, are.
“The company has a duty to consider all options to maximize shareholder value,” said Ng Yat Chung, NOL group president and chief executive, during a call with securities analysts. “Hypothetically, if I receive a good price for the company, of course we will always consider selling the same way we had a fair price for APL Logistics and decided it was in the best interest of shareholder value to be able to do the transaction.
“But what I can say now is that the company is totally focused on returning the liner business into profitability. And our focus on managing cost and improving yield, has led to continual improvement in liner performance despite deteriorating market conditions. Our balance sheet is also healthier now with the sale of APL Logistics.
“We are now positioned where it makes sense to further invest in the liner business in order to improve the liner’s competitive position,” added Chung.
The company received $1.238 billion in proceeds from the sale of APL Logistics to Kintetsu. The proceeds were used to reduce debt, which fell to $2.7 billion as of June 26. NOL’s net debt-to-equity ratio is now 1.03 compared with 2.25 at the end of 2014.
NOL, which reports results in U.S. dollars, said it had core earnings before interest and taxes (EBIT) of $29 million on revenues of $1.55 billion in the second quarter of this year compared with a negative core EBIT of $15 million on revenues of $2.05 billion in the same 2014 period.
NOL also said its APL Liner operation went into the black in the second quarter. APL Liner had core EBIT of $20 million in the second quarter compared with negative core EBIT of $28 million in the same 2014 period.
Chung said the liner operations were able to achieve a profit through cost control that has resulted in $100 million in cost savings in the second quarter of 2015, despite what he called “quite appalling” conditions in the container shipping industry.
Savings were achieved through a reduction in charter expenses and network rationalization.
He also said while APL is carrying less cargo — 582,000 FEU in the second quarter of 2015, 12 percent less than the 662,000 FEU it carried in the second quarter of 2014 — that the company is making a “better cargo selection.”
Still the company has not been able to avoid the slip in rates the liner industry is experiencing. Average revenue per FEU was $1,933 per FEU in the second quarter of 2015, 17 percent below the average of $2,320 per FEU it achieved in the second quarter of 2014.
Chung said freight rates fell across all of its major trade lanes — Asia-Europe, Asia-U.S. West Coast, and intraAsia — and have reached their lowest point in many years.
APL Liner revenues were $1.325 billion in the second quarter of 2015, 22 percent less than the $1.704 billion recorded in the second quarter of 2014.
Chung noted, however, that there is still room for NOL/APL to reduce costs. The company has been increasing the average size of the ships in its fleet while also reducing overall capacity, and that trend is expected to continue this year.
At the end of June APL had 572,000 TEUs of capacity on ships with average capacity of 6,100 TEUs. The company projects overall capacity will be cut to about 542,000 TEUs and the average size of its vessels to increase to 6,200 TEUs.
The company still has nine expensive chartered ships that it can choose to return or re-charter at a lower cost, according to Chung.
“Bottom line there is still some additional headroom for further cost improvement,” he said.
Asked about the outlook for the upcoming peak season during a phone call with securities analysts, Ken Glenn, president of APL Liner, said the company has “reasonable volume expectations” for August and September in the transpacific, where cargo has been growing at 4 percent to 5 percent over last year.
The outlook for peak season was “more muted” in the Asia-Europe trade, where Glenn said volumes have been running about 4 percent behind those in 2014.
About 65-70 percent of APL’s business is conducted under annual contracts with beneficial cargo owners (BCOs) in the transpacific compared to about 20 percent in the Asia-Europe trade.
Glenn said the company was satisfied with the contracts it signed with BCOs, saying that rates in the transpacific were in line with the company’s expectations and that it had received rate increases.
“It is a fact that since that time spot market rates have shown some deterioration,” he said, “but at this point there has not been any impact on BCO contract rates” in the transpacific. The story has been different where there has been enormous rate pressure and the drop in spot rates has affected rates that were negotiated earlier in the year.
Asked if APL was any closer to deciding whether to investing 18,000-20,000-TEU ships, Chung said, “I think we are. We are actively considering investment to improve the competitive position of APL. But we do not have specific information to share at this point in time.”
He noted that in addition to ordering new ships, APL also has the option of chartering ships in order to increase capacity.
With the windfall from the sale of APL Logistics, might NOL resume paying a dividend? Chung said the company will think about a payment to shareholders once the liner business is “on a sustained profitability path.”
“It is not sound practice to issue dividends on one-time gains,” he added.
Sale of APL Logistics boosts NOL profits
