NOL Group

CFO, Lim How Teck, discusses the huge increase in profitability NOL is enjoying.

Singapore's NOL Group is a global transport and logistics operator, which has been riding high on the boom in global trade and high freight rates. The company has been restructuring itself over the past few years and is now focused on pumping out profits. In the first quarter of 2004 NOL announced to the market a Q1 profit figure of $163 million, a 705% increase over the same period last year.

Congratulations on your 705% increase in profits from Q1 2003 to Q1 2004. To what do you attribute this spectacular growth in performance?

Lim: Thank you. We're pleased with the improved performance, but we're not resting on our laurels. Our liner business, APL, is continuing to return excellent results, and APL Logistics, too, is showing improvement.

The strong performance for the first quarter, which is traditionally slower than other quarters, reflects a number of initiatives taken by the liner team. They worked hard to secure cargo to keep our ships utilisation at a high level, and to maximise the use of our assets by careful management of our networks.

We have also continued to lower our costs, reducing costs in our liner operations by $17 million in the first quarter, and we are on track to achieve our target of reducing costs by US$100 million for the whole year.

How have you managed to keep costs down despite a hike in chartering rates and oil prices?

Fuel costs typically account for 4% to 8% of the group's total operating costs. We generally hedge around half our requirement and we recover around half the balance of the exposure from customers. So at worst, a maximum of around 2% of our costs are impacted by fuel increases. If current oil prices continue at the same rate as today, it will add around $10 million to our costs for the balance of the year. So, the oil price impact is manageable.

With regard to charter rates - these have certainly increased, but only a small number of vessels in our fleet are impacted. We estimate higher charter rates will add around $22 million to our costs for the full year.

Despite these increases, we have taken a disciplined approach to managing costs right across our business, focusing on the vessel network, operations and corporate G&A (General and Administrative) costs. Last year, for instance, these three areas yielded savings of $42 million, $84 million and $36 million respectively in 2003.

How do you hedge against rising oil prices?

We generally hedge around half our requirements.

Can you hedge against the risk of falling liner rates?

No, not in the technical sense of hedging. However, much of the work we've done over the past two years has been focused on making fundamental changes to our business model to help us ride through the cycles and adapt more quickly to changes in the external business environment.

This includes improving the core decision-making processes, cutting costs out of the business, and maintaining a disciplined focus on yield. As we continue to grow the top-line, we must continue to focus on the bottom-line so we can sustain profitability through the business cycles.

What are your financing plans for the rest of the year?

We're continuing to manage our finances proactively. We've paid down a considerable amount of debt to strengthen the balance sheet.

You've reduced your net debt down to $1.28 billion for a net gearing level of 40%. Do you intend to further reduce this level of debt or is this level manageable?

For now, funds are targeted at strengthening the balance sheet and allowing us to reduce debt and improve gearing.

We are also exploring ways to enhance shareholder value. For example, at our EGM this year, we obtained a mandate from shareholders to allow the company to more quickly institute a share buyback if we feel this is the best way of enhancing shareholder value.

Will you be undertaking any balance sheet restructuring exercises in this time of low interest rates (such as terming out your debt profile or retiring some expensive debt?)

Since the sale of AET (American Eagle Tankers) mid last year, our remaining debt has been almost 100% fixed, after taking into account hedges. Effectively, we are fully hedged and will not benefit or suffer from fluctuations in interest rates.

You have been selling assets such as AET over the last few years. Will this disposal programme continue?

We have largely completed our divestment programme. Our business focus is now clearly on container transportation and global logistics.

How exposed are you to a slow down in China?

The sourcing shift driving China's export growth does not look to be changing any time soon. It's important to remember that the demand is from Europe and North America - it's export-driven - so a slowdown in some sectors of China's economy may not impact significantly on the growth in containerised trade.

In fact, from a financial perspective, we see some benefits in a cooling off of the infrastructure growth in China. It will certainly reduce some of the pressures on costs, such as steel prices, that flow through to ship and equipment costs.