Andersen: Cash flow, lower costs position Maersk

Andersen: Cash flow, lower costs position Maersk    A.P. Moller – Maersk Group Chairman Nils Andersen fired an ominous warning to the company's container shipping competitors Wednesday when he said Maersk Line is well-placed for whatever competitive environment it confronts.
   Andersen, speaking as the Maersk Group announced net profits of $4.2 billion through the first nine months of 2010 (compared to a $706 million loss in the same period in 2009), said the company's cost reduction efforts have yielded dramatic results that give it a competitive advantage even if container shipping rates and volume dry up in 2011. But Andersen said he is optimistic for container shipping next year.
   Maersk Line secured operating profit of nearly $2.5 billion through the third quarter, compared to a loss of nearly $1.5 billion in the same period last year.
   'The swing (for the group) is primarily coming from Maersk Line, where the result improved by $4 billion, which is remarkable,' Andersen said. 'Cost savings account for more than half of this improvement. Not only is demand better and rates higher, but we are better prepared for the market.'
   Through three quarters, Maersk Line's revenue was $19.5 billion, an increase of 34 percent, while volume rose 7 percent to 10.8 million TEUs. The average rate per FEU grew from $2,299 last year to $3,075 this year.

Andersen

   Andersen said the container line's average operating profits per FEU in the period was $451 compared to $85 in 2008, showcasing the line's ability to strip out costs in the last two years. Unit costs have fallen 2 percent this year (8 percent year-on-year without the effect of increased bunker costs in 2010). Meanwhile, bunker consumption for Maersk Line fell 7 percent in the period.
   'This makes us less sensitive to the fluctuations in the market,' Andersen said. 'Rates are still below 2008 levels, but we feel we're very well prepared for whatever may come.'
   He added Maersk is seeing encouraging profitability discipline throughout the industry.
   'In terms of managing capacity, the industry was good in laying up ships (during the crisis) and I also feel there's a general sense that competitors are interested in pushing up rates to profitable levels,' he said. 'Things are becoming professional in a very competitive landscape. We all learned a lot in 2009 and I hope this will stay with us for a long time. Price wars are lethal to most players. I don't feel the industry has an appetite for a price fight, so I don't expect competitors to be aggressive on rates.'
   Maersk said volumes on its head-haul routes between Asia and Europe increased 2 percent compared to the first three quarters of 2009, while volumes on the back haul routes declined 4 percent. Volume between Asia and Europe was at the same level as in the same period of 2009, while volume on the transpacific increased 7 percent. Transatlantic volume increased 3 percent.
   When asked about whether Maersk might face increased costs in 2011, Andersen said he didn't see it as a major concern.
   'We don't see a lot of cost pressure if you look at the total picture,' he said, adding that the company is continuing to offshore some of its activity to India, and that the threat of higher bunker costs will also be there.
   Asked specifically about the potential effect of higher charter rates, Andersen said 'the contracts we made during the extreme low price scenarios in 2009 were generally longer than our competitors — for five years. We're not concerned about cost pressures.'
   Despite the wildly successful first nine months of 2010, Andersen conceded Maersk hasn't seen volume growth along the likes of some its competitors.
   'We didn't see much of a decline in volumes in 2009, but we gave back some of that share this year, partly because we've been leading rate increases, but also because we haven't had capacity available at all times,' Andersen said. 'We've had equipment shortages in the first half and into third quarter. I'm quite convinced once our capacity situation is improved, we'll be able to regain some share. But I cannot exclude that we will be under pressure market share-wise at the beginning of 2011.'
   The positive results have led Maersk to raise its full-year group profit expectations for the fourth time.
   The performance of the company's terminal operating division, APM Terminals, was positive but pegged back slightly by Maersk's decision to roll inland transport services under the APMT banner.
   'Inland services were included in APMT to put that business at arm's length for Maersk Line,' Andersen said. 'That drove down margin for APMT. We don't have a lot of patience on (improving the profitability of) container inland services, but we're confident we will improve our performance next year. The idea of combining inland and port services is right and we're seeing the synergy in that. The inland business is smaller than the ports business. We see opportunities for profit improvements but it won't be in one year and it won't be in the hundreds of millions of dollars, but we think it will be noticeable.'
   APMT saw revenue stay even at $3.1 billion through the first three quarters of 2010, while operating profit increased 98 percent to $784 million, though much of that was through the sale of assets. Volume handled at APMT locations increased marginally, by 3 percent, to 23.5 million TEUs.
   Andersen admitted APMT has lost market share but that 'it's a question of the pattern of growth. We were less exposed to China (than its competitors, so the company missed out on that growth this year). APMT is looking more to growing markets, and we're seeing increases in non-Maersk Line activity — it's up to 44 percent of business, which we think is good progress.'
   Andersen also said Maersk's group-wide cost improvements were better than anticipated, with the company shaving as much as $1 billion when it had forecast cutting $500 million. He said the focus on 2011 will be on improving customer service to an even higher degree.
   'We've kept a high level of dialogue with customers, and worked hard to improve our service propositions and backup systems,' he said. 'We reached an all-time high in customer satisfaction, and distanced ourselves from the rest of the industry in reliability of our network. Having done as much as we've done on the costs, the focus will be more on the customer proposition.'
   Maersk is anticipating global container volumes to grow 6 percent in 2011, but said it was too early to forecast its own volume or revenue growth for next year. The line will start taking delivery of new vessels earmarked for South America and Africa services in the second quarter of 2011.
   Through three quarters, the line had increased its container fleet by 9 percent, and said it had four vessels laid up at the end of September, compared to nine at the end of the first half of 2010.
   Andersen said Maersk is in a good position to take advantage of distressed assets, with its huge profits and free cash flow of $4.2 billion (which has helped lower the group's net interest-bearing debt to $13.7 billion).
   'We have low investment commitments going forward and that financial flexibility gives us the chance to take advantage of opportunities,' Andersen said. 'And the presence we have in emerging markets should yield us good growth opportunities.' ' Eric Johnson