The past two years have together been the toughest years the industry — and the NOL Group — has ever faced.

The year 2002, in contrast with every year of our history, saw our revenue fall instead of growing, shrinking by around 2 per cent to US$4.6 billion from US$4.7 billion, and we recorded an overall loss of US$330 million.

As a result of the losses, the Board was not in a position to resume dividend payments in 2002.

APL Liner continued to contribute the largest proportion of the Group’s revenue at 74 per cent of the total, while APL Logistics’ share increased to 18 per cent and 7 per cent came from NOL Chartering activities, with the balance of 1 per cent from other activities.

At an operating level, Core Earnings from business operations Before Net Interest Expense, Tax, Depreciation, Amortisation and Exceptional Items (Core EBITDA), was positive at US$241 million, although down 29 per cent on the 2001 figure of US$339 million.

Losses in 2002 were compounded by exceptional items, which amounted to US$109 million, including costs associated with the disruption on the West Coast of the United States during contract negotiations between the Pacific Maritime Association and the International Longshore and Warehouse Union; losses from exiting non-core businesses; and provision for business restructuring and severance.

However, there were indications by the end of 2002 that 2003 may see an improvement. Discounting exceptional items, the Group’s second half loss was less than half that of the first half of 2002, at negative US$70 million, compared with negative US$151 million in the first half of the year.

Overall, in 2002, while the industry as a whole was unable to translate the solid growth in world trade into more sustainable container freight rates, we faced an even more difficult situation.

Our strategy to reduce our reliance on the Trans-Pacific trade in our liner business and focus on growing in Europe, while correct, was unfortunately timed. It meant we geared for growth in 2001 just as the recession hit. Because of our alliances and other factors, we were not able to adjust quickly enough to the changed circumstances. The impact of that carried over into 2002.

The slowdown compounded with depreciation and amortisation costs associated with rapid, acquisition-based expansion and other factors also impacted APL Logistics.

Tanker charter rates, too, were significantly lower, although American Eagle Tankers (AET) continued to make a profit in 2002.

Today at NOL, we are very much focused on getting back to basics — concentrating on what we do best and on paring down our costs, managing our yield closely and working hard to recover rates.

We are reducing general and administrative costs as well as operating costs. This has some impact on headcount — although, as in the past, this is not a general headcount reduction, but as a result of the search for greater efficiencies.

Our target is sustainable profitability and we anticipate a substantial improvement in performance in 2003.

We have three capable leaders in each of the CEOs of our business units who began the year by setting high goals for themselves and their teams and developing business plans to help them achieve those goals.

Early in 2003, signs were positive for an improved year across all three of our businesses.

Many of APL Liner’s customers understand that, after two years of record low rates, without a return to more historic levels, their choices and services are likely to reduce as the industry reduces its investment in the medium to longer term. Supporting our rate restoration efforts is the fact that the balance between supply and demand tipped to the demand side with the volume growth rate at high levels from the second quarter of 2002.

APL Logistics is seeing some movement as well and with its focus firmly on reducing costs, building on its core competencies of warehousing and consolidation, and underlining its global network and solution-based offerings, 2003 is looking more positive for this business.

A leap in tanker charter rates at the end of 2002, together with a significant contract with Venezuelan fuel supply company, Bitor, which requires AET to expand its fleet of Very Large Crude Carriers (VLCCs) from two to five, means this unit has a strong future.

Whether that future will be within the Group or outside of it was being considered at the time of printing this report. Following approaches from parties interested in purchasing AET, we announced in October that we were reviewing our investment in this business.

This process has been extremely thorough, looking not only at the value and growth potential of AET, but also the fit with our core capabilities in global container transportation and logistics.

The outcome of the review has not been announced, but the Board remains committed to pursuing the path that delivers the best return for our shareholders.

The Board also took some tough decisions at the end of 2002, agreeing it was time for a new leadership. Following the announcements at the beginning of 2003, we have been impressed with the way in which the organisation put the various changes behind it, and rose to meet the challenges, embracing both a renewed focus on accountability and the rewards and responsibilities that focus brings.

The most visible change has been the departure of Mr Flemming Jacobs as Group CEO. The Board appreciates Mr Jacob’s contributions during the previous difficult period faced by NOL and thanks him for his past services to the Group.

We said when we made the announcement that a new Group CEO would be appointed in due course. Because this is such a vital role, we will not rush the appointment. An international recruitment company has been engaged in a rigorous search to help us find the right person for the job, reporting to a search team which I head as Chairman, and which includes the non-executive directors of the Board’s Executive Committee and Board member and HR specialist Mr Connal Rankin. We hope to make an appointment in the not too far distant future.

We are looking to 2003 as the beginning of our return to profitability. We know that will not be easy, but we are determined to do what we need to do and work hard together to achieve our goals.

We remain committed to providing our customers with the quality, global transportation and logistics services they expect from us — and we expect from ourselves. In our drive for efficiency, we will be looking to maintain or enhance our high standard of service. This is something we will not compromise on.

As you know, Mr Lua Cheng Eng handed over the reins to me as Chairman in May 2002. I thank him for his wise counsel over the years, as an executive of the Group and as Chairman. His have been large shoes to fill.

It has been a challenging first year as Chairman and I thank my colleagues on the Board for their valuable support and contributions, particularly those with me on the Executive Committee of the Board.

Vice Chairman Dr Friedbert Malt, Mr Boon Swan Foo, and Mr Lim How Teck were asked to contribute above and beyond the normal time commitment to support the senior management team in the interim before the appointment of a new Group CEO.

Two Board members retired during 2002; Mr Marvin Girouard and Mr Stephen Lee. We thank them for their contribution over the two years they were on the Board. Both have provided sound advice and insights in their time with us.

Five new Board members took on the challenge of helping to steer NOL through these difficult times. We welcomed former Board member Mr Timothy Rhein back to the Board table; Mr Yasumasa Mizushima, Mr Lock Sai Hung and Mr Boon Swan Foo also joined the Board in mid-2002; and Mr Connal Rankin joined later in the year.

Mr Boon Swan Foo has conveyed to us his intention to step down as a Board member at the AGM. We have asked much of his time, his experience and his expertise over the past, challenging year and he has given all generously. But in doing so, he has had to put some other pressing commitments on hold. We understand the demands on his time and thank him sincerely for his contribution to NOL during the time he has been able to be with us.

I would also like to thank in particular the staff of the NOL Group for their continued commitment and dedication to doing their very best in what proved to be an extremely tough year.

There is no better team in the industry and with all of us working together I know that we will return to profitability and sustain that profitability in the future.

Cheng Wai Keung
Chairman

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