Atlantic trade holds back CP Ships’ 3Q results
Higher volumes and average freight rates in the third quarter were not sufficient to significantly boost CP Ships' third quarter earnings, as the Canadian-registered company reported a net income of $31 million for the third quarter, compared to restated earnings of $27 million in the same quarter of 2003.
In the latest quarter CP Ships suffered a further fall in its results on the transatlantic — its main trade — and incurred heavy cost increases.
Group operating income at CP Ships increased marginally to $41 million in the third quarter from $38 million a year ago. As a percentage of revenue, though, the company’s operating margin declined to 4.2 percent from 4.7 percent.
Operating income on transatlantic services fell 62 percent to $5 million, from $13 million in the third quarter of 2003. By contrast, operating income on Latin American services rose to $12 million from $4 million, and Asian services made an operating income of $11 million up from $8 million. Operating income from Australasian and other services remained unchanged at $7 million and $6 million respectively.
Ray Miles, chairman of CP Ships, said overall results in the third quarter were “a little down on what we expected.”
CP Ships carried 578,000 TEUs in the latest quarter, a year-on-year increase of 4 percent.
Revenue per TEU, including for inland operations, soared 13 percent to $1,669 from $1,471. However, the company’s cost per TEU also increased 13 percent in third quarter 2004, partly due to the adverse impact of the weaker U.S. dollar. While CP Ships’ total revenue rose 18 percent to $966 million in the third quarter, its total expenses climbed 19 percent to $925 million.
“Profits in the transatlantic were lower than expected, even though volume was up, as costs continued to increase and freight rates were flat,” said Frank Halliwell, chief executive officer of CP Ships. “In Asia, where we broadened our service coverage, volume growth was strong and freight rates up sharply, outweighing higher operating costs.”
The transatlantic, where CP Ships is the biggest carrier group, accounted for 46 percent of the company’s revenue in the third quarter of this year, down from 49 percent in the same quarter of 2003.
Transatlantic volume was up 7 percent “with growth mainly in the lower margin export trade from North America to Europe,” the carrier said. Average freight rates were flat compared to both the third quarter last year and second quarter of 2004, while unit operating costs were significantly higher.
In September, CP Ships announced plans to adjust its North Europe/Montreal ship capacity by replacing three owned 2,400-TEU ships by smaller vessels of 1,600-TEU capacities. The larger ships will be deployed elsewhere in its network, replacing costly chartered ships. CP Ships said this move, to be implemented by April, will reduce its overall capacity in the transatlantic market by about 7 percent. It is part of “a broader review of our transatlantic services to tighten supply, reduce costs where possible and improve freight rates,” the company said.
The carrier is attempting to improve the profitability of its transatlantic business. It expects to benefit from freight rate increases implemented in October and from additional rate hikes scheduled for next April and October.
Like other carriers, CP Ships reported improved results from its Asian services. Volume from Asian services rose 15 percent year-on-year to about 131,000 TEUs, with revenues up 30 percent to $224 million. CP Ships said higher volumes came from continuing strong market conditions, the expansion of its services and the easing of congestion in the Vancouver gateway. Average freight rates on Asian services were 8 percent higher. CP Ships now provides five transpacific services.
CP Ships reported continuing improvement in Latin American trade lane conditions and average freight rates that were up 26 percent.
But CP Ships cited cost pressures in different areas. The impact of renewing the charters of 24 containerships at higher rates is an additional annual cost of about $38 million, it said. Congestion at marine terminals and shortages of rail and truck capacity across North America and Europe continue to affect the company’s operational performance and increase costs.
For the first nine months of 2004, CP Ships raised its operating income to $78 million from a restated $66 million for the same period of 2003. It increased its net income to $37 million compared to a restated $25 million for 2003.
CP Ships expects higher profits in the fourth quarter, with strong volume and increased freight rates.
“Therefore, despite the weaker than anticipated third quarter, especially in the transatlantic, and continuing cost pressures, we expect net income for full year 2004 to be similar to last year’s $82 million, as originally reported before any restatement,” the company said.
CP Ships consider the outlook for 2005 to be positive. “Subject to current industry and market conditions continuing, we expect earnings to substantially exceed the result for 2004,” it said. “This outlook is based upon modest volume growth and freight rate increases in most trade lanes but continuing cost pressures.”
Commenting on the accounting errors disclosed in August, CP Ships said it has appointed an independent special committee to investigate reasons for the restatement and management’s actions following the restatement of its results and certain stock trades made by officers of the company in recent months.
To address the problem, the company has hired additional finance people both at senior and junior levels. The company said in a statement it is “confident that issues relating to restatement are being resolved.”
CP Ships said its chairman (Miles), CEO (Halliwell) and chief financial officer (Ian Webber) will each have repaid, by the end of this year, “a large portion of their 2003 cash bonuses previously received, to reflect the reduced bonus due on the restated profits.”
Six class action lawsuits in the United States and two in Canada have been filed against CP Ships concerning the restatement of its results. These proceedings are at a preliminary stage, and to date no class has been certified and no consolidated claim has been filed, the company said.
On the New York Stock Exchange Monday, CP Ships' stock rose 0.5 percent to $13.34.
