In 2006, we dealt with tougher business conditions to achieve a sound financial result. Challenges, such as substantial fuel price increases and tight pricing, were managed in a disciplined manner.

Heading into 2006, the NOL Group had been monitoring the build-up of new tonnage and cost pressures. Accordingly, NOL had decided to take a measured approach to the year: to keep a tight rein on costs, pursue only modest growth in container shipping capacity and maintain the strength of the balance sheet. This approach served the company and our shareholders well. We also maintained our focus on delivering excellent customer service.

SOLID PERFORMANCE
We held our revenues for the year steady at US$7.3 billion, despite a 7% decline in average revenues per forty foot equivalent unit (FEU) in the liner business. This reflected the fact we increased our liner volumes by 8% to 2.1 million FEU. Overall, liner revenues were in line with the previous year at US$6 billion, while logistics revenues increased by 2% to US$1.3 billion.

At the Group level, Core EBIT (Earnings before Interest, Tax and Non-Recurring Items) for 2006 was US$401 million, down 55% on 2005, reflecting the impact of the lower liner freight rates as well as significantly higher fuel-related costs. Core EBIT for our liner business, which trades under the APL brand, was down 59% to US$344 million. Our other major business, APL Logistics, recorded Core EBIT of US$54 million, 5% lower than the previous year.

NOL Group’s Net Profit Before Non-Recurring Items of US$344 million was down 57% on the preceding year.

A positive adjustment of US$144 million was made to the accounts as a consequence of the Group’s election to enter its US-flagged vessels into the US tonnage tax regime, resulting in a write-back of deferred tax liabilities. Partially offsetting this, a negative adjustment of US$125 million was taken for the write-down of goodwill and deferred tax assets associated with the acquisition of warehousing and logistics businesses in 2001. Altogether, NOL benefited from a net US$20 million uplift from non-recurring items, resulting in an overall Net Profit of US$364 million for the year.

It is a credit to the NOL management team that, through a difficult year, we have again been among the very best performers in our industry sector. On the liner side, we executed well our proven formula of keeping our network tight, achieving high asset utilisation and maximising yields. On the logistics side, we realigned our business, with growth achieved in our Asia origin activities.

To view the summary of achievements for our liner business, click here.

To view the summary of achievements for our logistics business, click here.

When measured against the objectives set at the commencement of the year, and when market place and cost factors are taken into account, our financial outcomes for 2006 represent a solid performance.

DEALING WITH CHALLENGES
Each year brings new challenges, and our people continually display their resilience and ingenuity in rising to meet them.

Early 2006 saw considerable downward pressure exerted on pricing in the liner shipping sector. In early 2006, rates fell significantly in Asia-Europe trades and this impacted negatively on sentiment elsewhere. In the face of these forces, we maintained our focus on optimising yields.

Negative sentiment was compounded by perceptions of an imminent global oversupply of vessels. As the year progressed, it became apparent that supply and demand were in better balance than had initially been perceived.

By the end of 2006, the continuing strength of demand, based on double-digit rates of growth in containerised world trade, was clear. The trends of increasing globalisation of companies’ supply chains and ongoing outsourcing of production to lower-cost locations, especially to Asia, show no sign of softening.

Higher fuel prices, resulting in higher bunker costs and land transport fuel surcharges, added US$237 million to costs in 2006, and have added US$512 million over the past four years.

In response, we made progress with a range of actions to mitigate costs amounting to more than US$100 million. In 2007, our focus on cost management will become even sharper as we strive towards the goal of industry cost leadership.

MANAGING RISKS
Our Group takes a disciplined approach to risk management, with a comprehensive framework in place for assessing risk and establishing appropriate mitigation measures. Our processes are reviewed quarterly by the Enterprise Risk Management Committee of the Board, established in 2005.

The NOL Group’s revenue is denominated primarily in US Dollars, the measurement and reporting currency of the company. At the end of 2006, the Group had an estimated annual net exposure to other major currencies, in which local operating costs are incurred, of about US$1 billion. These exposures continue to be hedged in 2007.

The Group continues to recover part of its fuel exposures from customers through Bunker Adjustment Factor provisions. NOL Group continues to maintain a policy of hedging bunker exposures to match expected volume and contract durations. Details are set out in Note 34 to the financial statements in the company’s Full Financial Report.

FLEXIBLE CAPITAL STRUCTURE
Over the past four years, our business has consistently demonstrated its capacity to generate strong cashflows. We did this again in 2006 – net cash of US$560 million was generated from operating activities. The cashflow was derived from a broad range of geographies and diverse revenue streams – from terminal and warehousing activities and rail, trucking, equipment and consolidation services as well as shipping operations.

At the end of 2002, NOL’s net debt was US$2.5 billion. Three subsequent years of successful trading, coupled with a disciplined approach to debt reduction, enabled the Group to move to a net cash position by the end of 2005.

Even after paying out US$0.82 billion as part of its capital reduction and cash distribution exercise in February 2006, the Group was again in a net cash position as at 29 December 2006, with cash and cash equivalents of US$694 million.

NOL has in place committed credit facilities, with maturities ranging from 2008 to 2013, to ensure there is sufficient liquidity to meet operational and investment needs and the flexibility to respond quickly to market opportunities. Notes 10 and 24 to the financial statements in the company’s Full Financial Report provide further details.

TOWARDS PROFITABLE GROWTH
In 2006 we strengthened our foundations ahead of the next phase of our growth. Our core liner shipping business strengthened the premium positioning it enjoys in key markets, built upon its customer relationships and planned its network expansion. Seven vessels are scheduled for delivery into the APL fleet during 2007, providing for about a 10% growth in capacity. We currently have commitments for 28 new vessels to be delivered over the 2007 to 2009 period.

We consolidated our strong intermodal capabilities, broadened our range of value added logistics offerings and added a number of innovative new services – including OceanGuaranteed^SM, our time-guaranteed service for less than container load shipments, and the pioneering IndiaLinx™ rail service.

NOL continues to build its market-leading footprint in Asia. As a Group, we have very deep knowledge of the markets in this geography, which will continue to be the fastest-growing region of the world for the foreseeable future.

We commenced a program to expand and re-invest in our strategic network of nine container terminals, which is already the twelfth largest in the world. Capital works were initiated to expand capacity at our facilities in California, US and Ho Chi Minh City, Vietnam.

Together, these attributes give us a tremendous platform for a way forward based on growth and innovation. Our renewed commitment to innovation will be reflected in new services and new ways of doing business, building on the unique and distinctive characteristics of our company. We are redoubling our focus on the delivery of service excellenc to our customers, consistent with our reputation as a premium service provider.

The time is now right to accelerate the pace of our growth, further strengthen our position in container shipping markets and capitalise on the clear potential which exists for our Group to become an even more significant player in the global transportation and logistics industry.

During the year, we demonstrated that we can outperform the competition in difficult market conditions, as well as in an up-cycle. That we have managed difficult issues and continued to perform well shows the quality of our people. I thank them all.

Dr Thomas Held
Executive Director, Group President and CEO