Thursday, June 9, 2016

NOL HAD ISSUES

From American Shipper on NOL.  LTD question-- How much of problem was caused by Temasek?




CEO: NOL lacked the scale, agility to compete

Recently purchased APL parent Neptune Orient Lines couldn’t cut costs fast enough to compete in an increasingly commoditized market, chief executive Ng Yat Chung said in a surprisingly candid interview with Singapore’s Straits Times.

   Neptune Orient Lines (NOL), the recently purchased parent of ocean carrier APL, lacked the scale and agility needed to compete in today’s shipping market, chief executive Ng Yat Chung said in a surprisingly candid interview with Singapore’s Straits Times.
   Ng said the company couldn’t cut costs fast enough to weather the storm of rampant overcapacity and the corresponding decline in ocean freight rates.
   Once a highly-profitable line known for premium service and innovation, NOL has struggled to turn a profit recently, posting losses in five out of the last 10 years, $1.5 billion since 2011 alone. Singapore-owned investment firm Temasek Holdings, NOL’s majority owner, agreed in December 2015 to sell the company to French ocean carrier CMA CGM for $1.30 per share. CMA CGM announced late last month it was proceeding with the estimated $2.4 billion acquisition following approval from regulatory authorities in China and the European Union.
   “In this environment of extreme overcapacity and severe freight rate erosion, competition is based on cost,” said Ng. “We have made good progress in that aspect, and every year we've managed to reduce our losses. Unfortunately, we haven't been able to cut costs fast enough to offset the collapse in freight rates.”
   “Compared with our competitors, we also didn't have the scale, which has become more important in this industry,” he added. “The largest part of the cost for a carrier like us comes from the terminal costs, trucking costs, fuel costs - all these, you get a significant advantage in getting a better rate when you have big volumes. So when freight rates are very low, every dollar of the cost advantage matters. Otherwise, you're hamstrung.”
   NOL in 2015 reported a profit of $707 million compared with a loss of $260 million in 2014. Excluding one-time proceeds from the sale of APL Logistics to Kintetsu World Express, however, the company would have had a loss of $181 million last year. Revenues stood at $6.02 billion in 2015, a 30 percent drop from the $8.62 billion recorded in 2014.
   For the first quarter of 2016, the company posted a net losses of $105 million, much higher than the $11 million loss it reported in the first quarter of 2015, when losses were offset by gains from the APL Logistics divestiture. Revenues fell 43 percent year-over-year to $1.14 billion for the quarter, as volumes and average revenue per FEU at APL dipped 6 percent and 23 percent, respectively.
   By comparison, APL’s first quarter costs declined only 16 percent ($60 million) compared with the same 2015 period.
   Ng, a former army general who transitioned to CEO of NOL in October 2011 from his role as senior managing director of Temasek Holdings, said the prior success of NOL’s premium service offerings always came at a “significantly higher” those that of competing lines.
   “This was always the way for NOL, even before the 2008 financial crash, and it did well,” he said. “But the world has changed. The market growth has slowed down, there is severe overcapacity, so we had to recognize that the business model needed change. We didn't have the right cost position in an industry that was becoming more and more commoditized.”
   The company was too slow in recognizing this reality and “reluctant” to make the changes Ng says were necessary to survive.
   “It wasn't easy because the business model has worked for us so far,” he said. “There were arguments that when the cycle turns, things will be okay. Unfortunately, this time round, the down-cycle is probably as deep and as long as anyone can remember.”
   Deciding to sell the business to CMA CGM wasn’t easy either, said Ng, but it was the right decision for NOL and its shareholders.
   “At least one thing I can take comfort in is that by doing this deal, we are ahead of the curve rather than reacting to consolidation in the market. We'd rather be ahead of the curve and look for the best partner than to react and try to scramble for a good deal,” he said.
   “In this deep down-cycle, the companies that do well are those with scale. For NOL to be able to continue on our own, it requires a lot more investment either to acquire another firm or to buy more ships.
   “Making those fresh investments means calling for an injection of shareholder funds, which in this environment, the return on incremental investment is not certain. NOL holds a 2.5 per cent market share, the big guys have an 8 to 10 per cent share, so you can imagine how big we need to be in order to stay competitive.”
   Ng will step down from his role following completion of the deal, and CMA CGM has said he will be replaced by Nicolas Sartini, currently group senior vice-president at CMA CGM. Ng is expected stay on as executive director and a special advisor to the chairman to help with the integration process.
   On a personal level, Ng said “it would be strange not to feel a little bit of regret,” about the sale, which will almost certainly result in job cuts at NOL.
   “But at the end of the day, we're doing this for the business and our shareholders. All in, this sale is as close to ideal as it gets,” he said, noting CMA CGM’s commitment to growing Singapore’s position as a global port hub.
   CMA CGM plans to establish its regional headquarters in Singapore, and just yesterday a report from industry news outlet Lloydslist said the company has agreed to form a joint venture company with port terminal operator PSA Singapore to lease four container terminals at the principality port. PSA Singapore will own a 51 percent majority stake in the new joint venture, and CMA CGM 49 percent, according to the report.
   Ng told the Straits Times he’s still “bullish” on Singapore’s prospects and that the city’s role as an ocean shipping hub has “outgrown NOL for some time.”
   “(NOL) might have been useful in the early days,” he said. “But Singapore has become such a success now. Nearly all major carriers from around the world have a substantial presence here.”
   “People ask if NOL helps to bring volume to Singapore - but we don't decide where to bring volume, our customers do that. They choose to use Singapore as a major trans-shipment hub, and that is only because Singapore is competitive.”
   Ng noted that Singapore benefits from high quality infrastructure and a transparent legal and regulatory environment, both of which will be crucial to its continued success.
   “Of course, the high cost of doing business here is an issue, but I think if we can continue to improve our productivity, we will be able to offset some of that,” added Ng.