Fuel Costs Pressure NOL Earnings

Neptune Orient Lines (NOL) reported a net profit of $187m for the first half of 2006, down 52% from the same period of 2005. The company posted a second quarter net profit of $67 million, 66% lower than in 2005. NOL Chairman Mr Cheng Wai Keung, said: “After record financial performances in the past three years, we are now in a more challenging business environment, which is reflected in reduced earnings for the first half of 2006. “Business conditions for both our liner and logistics segments have become more difficult. Freight rates have softened, but our cost management efforts continue,nmitigating the cost pressures from high fuel prices.” 1H 2006 total Group revenues rose slightly year-on-year to $3.52b, while the Group’s Core Earnings Before Gross Interest Expense, Tax and Non-Recurring Items (EBIT) of $227m was down 47% from the corresponding period of 2005. Mr David Lim, NOL Group President and CEO, said: “While demand for our services remains strong across most trades, continued higher fuel costs and a softening of rates in some trades have impacted earnings – particularly when compared with the performances of 2003 to 2005. In the second quarter we continued to see growth in volumes but the revenues of both the liner and logistics businesses declined slightly in the quarter.

Liner

Average revenues per FEU for NOL’s liner business, APL, in 1H 2006 were $2,650, down 4% compared to the previous year. Container volumes were 5% higher than a year before at 1.01 million FEU, with headhaul capacity increasing by 8%.

1H 2006 Core EBIT for APL was $194 million, down 52% from the same period in 2005. Core EBIT in the second quarter was $71 million, 65% lower than in the comparable period in 2005. “Slightly lower utilizations are a result of our active yield management strategy,” said Ron Widdows, CEO of APL. “We continue to manage our business mix to ensure we carry cargo which provides the maximum yield.” Bunker costs combined with rate softening continued to be the major factors leading to compressed margins for the industry.

In the second quarter, total costs per FEU rose 3%, due mainly to the impact of fuel prices which were $60 million higher than in the corresponding prior year period. “Excluding the impact of fuel, costs per FEU in the second quarter were down 2% from the same period of 2005. This reflects our continuing efforts to control costs to offset the oil price challenge,” said Mr Widdows.

APL has increased new vessel commitments to 32 scheduled for delivery over the next four years. Only three of these ships will enter the fleet in 2006, which is consistent with APL’s approach of keeping its network tight as market conditions toughen. These ships range in size from 3,500 to 8,100 TEU, with 14 of these being in the 6,350-TEU class.

“This is our current vessel delivery schedule and we plan to make additional commitments in response to market conditions and the needs of our customers,” said Mr Widdows.

Fuel & Currency

The Group’s bunker costs for 1H 2006 increased by $132 million year-on-year due to business growth and considerably higher fuel prices. The Group continues to recover part of its fuel exposures from customers through Bunker Adjustment Factor (BAF) provisions. NOL Group continues to maintain a policy of hedging about 40% of 12-month forward bunker exposures to reduce the risk of sudden changes to bunker costs. The Group’s annual net exposure to other major currencies in which local operating costs are incurred - the Euro, Japanese Yen, Hong Kong Dollar, Singapore Dollar, Chinese Yuan, Korean Won, Canadian Dollar, British Pound, Australian Dollar, Indian Rupee and Taiwan Dollar - is estimated to be about $1b.

Outlook

NOL expects the more difficult operating environment in the liner industry to continue over the next 12 months. The freight rate outlook will largely depend on whether the strong demand seen in the first half continues and the extent to which it keeps pace with expected supply.

With high fuel prices in the forward market, NOL expects that fuel will continue to place significant pressure on bunker and land transportation costs.