Group CEO's Report
We now have a strong foundation on which to serve our customers in the future, and to profitably grow our business. Our net profits more than doubled as a result of strong performances from our core operations.
2004 Performance
APL Logistics continued the turnaround that began in 2003 by focusing on cost reduction through productivity improvements, and expanding its international services.
Our liner business, APL, was one of the top performing shipping companies in the world, more than doubling its 2003 Core EBIT (Earnings Before Interest, Tax and Exceptional Items). This was due in part to rate recovery actions that enabled us to achieve an 8% improvement in revenue per FEU (Forty-foot Equivalent Unit), which averaged US$2,713 over 2004.
Significantly, productivity gains contributed about $208 million or about 40%, to our improvement in performance over 2003.
APL also raised the already high level of vessel utilisation, from 96% in 2003 to 98% in 2004, and achieved cost savings of $96 million.
We continued to work on yield improvements, maintaining the discipline to take only cargo and business that made economic sense and which would benefit from our extensive service capabilities, and tuning our networks to deploy assets to where the market valued our services the most.
As a result of these efforts, margins have steadily and consistently improved over the past eight quarters and we achieved a Core EBIT margin for the Group of 14% in 2004, compared with around 9% in 2003. Measured another way, we returned 35% on gross debt and equity capital employed (weighted average), up from 19%
in 20031 .
1 2003 calculation restated using gross debt rather than net debt.
Our strong earnings have strengthened our balance sheet, and reduced our net gearing significantly to a low 5% at year end. This enabled us to increase our dividend payout while still retaining sufficient reserves to meet planned capital expenses in the coming year, and to remain ready to take advantage of new investment opportunities that may open up in the years ahead.
Strategic Direction
Our future growth will be driven by changes that are taking place in the global business landscape. Globalisation has increased the density and complexity of our customers' worldwide supply chains. We therefore believe that many of our customers will look to us for more comprehensive services and solutions to deal with their global transportation needs.
We have responded with a "One Company" strategy, where the NOL Group and its core operating units, APL and APL Logistics, will work together to deliver global transport and logistics solutions for our customers.
As One Company, we will grow our business along two dimensions; firstly, by increasing our capability to provide services to manage cargo movements from source to destination; and secondly, by deepening and strengthening our core container shipping business.
We already have many of the component capabilities to deliver source to destination services within APL and APL Logistics. We will grow by investing into adjacent capabilities, and by expanding our existing operations, especially in the large Chinese and Indian markets, but also in other emerging markets around the world.
It will take some time to build up our capabilities and to make our presence felt in new markets. For a start, our immediate goal is to integrate our liner and logistics operations on the ground.
APL and APL Logistics are separate companies but operationally we will realign our business units and work as one team to offer a seamless service based on the needs of customers.
To do this, we have appointed four of our most senior and experienced executives to be Group Regional Presidents to lead our combined businesses in the different parts of the world. Dave Appleton is our Regional President for Europe; Brian Lutt heads up Asia/Middle East; Koay Peng Yen oversees the Greater China; and John Bowe runs the Americas.
Additionally, we have created a new business division called Business Solutions. This group will develop and design service solutions to meet the needs of our customers by drawing on the capabilities of all our business lines. Jim McAdam was appointed Group Senior Vice President for Business Solutions to head this unit.
We believe that the key benefits our business solutions will bring to our customers are speed, flexibility and control over their cargo as it moves through the transport chain.
But to achieve these benefits we will need timely and accurate data, and effective decision-making tools. It is therefore essential for us to continue to invest in and upgrade our information technology (IT) systems.
In 2004 we embarked on a major programme to revamp our IT systems. In the first phase of the project in 2005, we will focus on systems and applications rationalisation. Redesign and major enhancements of the applications will be undertaken in subsequent phases. By 2007, we will have significantly enhanced systems to support the delivery of global cargo transport solutions for our customers.
NOL People
Our success in 2004 is testament to the talent, hard work and commitment of our people. Their expertise, skills and ideas will be the single most important factor in the future success of the Company.
We revised our remuneration policies to further align individual performance and contribution with their total compensation. At more senior levels of management, a larger percentage of total compensation will be variable and subject to the performance of the Group and business units.
In the year ahead, we will focus on enhancing our evaluation and deployment processes so that we can better develop our people according to their abilities and aspirations and better deploy them in jobs that make good use of their talents.
In line with our commitment to education, ties with various educational institutions were strengthened with scholarships and awards, and our successful Management Trainee Programme was revitalised and expanded.
Corporate Responsibility
As a leading international company, NOL recognises that it is part of a wider community of stakeholders that includes investors, employees, customers, business associates and local communities, and that appropriate attention to the fulfilment of its corporate responsibilities can enhance the quality of these relationships.
A key initiative during the year was the launch of the NOL Beyond Boundaries Trust Fund, which aims to help youth and disadvantaged people worldwide overcome barriers to their achievement.
The Trust reflects the spirit of the Company and is a natural extension of our ongoing involvement in the communities in which we operate and our corporate social responsibility programmes.
The first project to benefit from the Trust was Sailability Singapore - a sailing programme that gives people with disabilities the opportunity to participate in the sport. Trust funding supported a team of disabled sailors to represent Singapore at the Athens Paralympic Games in September. NOL volunteers have supported the Sailabilty programme since its inception in 2001.
The Trust Committee will be looking at other sponsorship projects during 2005.
Acknowledgements
2004 was an excellent year for NOL. We are pleased that our performance has been recognised externally with NOL winning Lloyd's List's prestigious Shipping Company of the Year in February 2005 and various awards from our customers.
Many of our customer awards recognise not just the quality of our shipping services, but also our ability to deliver origin to destination services. We are encouraged by these awards, and thank our customers and business partners for their generous acknowledgement. We will strive even harder in the year ahead to meet and surpass their expectations.
We owe the success that we achieved in 2004 to many people - our customers and business partners, regulators and government administrators, union leaders and their members and the many community groups that we have worked with - and I thank all of them for their support.
I would also like to thank the men and women of the NOL Group without whom we would not have had such good results, nor won such accolades from our customers. I salute their sterling efforts, not just over the past year, but, for many of them, over many decades of dedicated service.
In particular, I would like to thank our Group CFO, Lim How Teck, as he retires in June 2005 after 25 years of invaluable service to the Group. How Teck's contributions are many, as he has played a key role in the growth of NOL from a small regional shipping company to a leading global container transportation corporation.
I am personally grateful to How Teck for his guidance and advice over the past two years as he helped me settle into a new industry and my role in the Group. I thank him for his many contributions, and for his long and productive service to NOL. And on behalf of the NOL family, I wish him well in all his future endeavours.
Outlook
The year ahead is promising. We expect demand growth to remain strong across our lines of business. For the liner operations, concerns that a cyclical correction may occur during the year have been lessened by forecasts of continuing strong demand and the impact of port and rail congestion at many cargo destination locations, especially in the US and Europe. For logistics, we will grow our existing business, especially in Asia, while at the same time expanding our capabilities. We therefore expect to report good earnings for 2005.
More importantly, NOL has set itself on a new growth path. We will strive to expand our capabilities to better serve the changing needs of our customers, and to explore new market opportunities - particularly in emerging markets around the world. We will do this as One Company, so that our customers will have full and seamless access to all the capabilities and services within our Group. And in so doing, we seek to transform NOL from being primarily a global shipping company to being a global cargo transport and logistics company that is better able to deliver value to our customers and shareholders.
David Lim
Group President and CEO
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