Question

The following article 'CMA CGM Sails to Profitability in 2017' (World Maritime News, posted on March 16, 2018) reports CMA CGM's financial performance in 2017. Based on the information provided in the article, knowledge learned in this unit, and other relevant information (e.g. annual reports and market information), complete the following tasks. 1. Summarise CMA CGM's financial performance in recent five years 5 Marks] 2. Explain the key factors affecting CMA CGM's profitability in 2017 [12 Marks] 3. Identify and discuss potential challenges faced by CMA CGM andprovide recommendations to enhance its financial performance in future [8 Marks]

Answer 1

1. On the CMA CGM Corporae website data is avaialble for fiscal year 2014 to fiscal year 2017 only. As per company's website, CMA CGM generated consolidated revvenue of $16.7 billion in 2014, which fell to $15.7 billion in 2015. Then it again rose to $16.0 billion in 2016 and $21.1 billion in 2017. In the terms of Core EBIT margin, the Company observed flat 5.8% core EBIT margin in 2014 and 2015. It sharply fell to 0.2% in 2016. Though in year 2016, due to sharp rise in revenue, Core EBIT Margin also sharply rose to 7.5%. On the net income from the company generated net loss of $452 billion in 2016. Though in 2017, the company has generated Net Income of $701 million.

2. CMA CCGM has shown better results in 2017 in comparision to 2016 and the company attained profitability. Following are the reasons behind that:

a). Rise in Volumes carried: The company launched many strategic projects in 2017 due to which, the company was able to ship higher volumes in 2016. Such as the company launched Ocean Aliance Service in April, 2017 which covers 40 shipping services on the East-West trades. Additionally, CMA CGM and APL brands have shown strong performance in Transpacific MArket The Company's volumes carried in TEU millions increased by 21.1% to18.95  in 2017 from 15.64 in 2016.

b).Full year APL's integration to Group: APL group which was integrated in June, 2016 to Group carriedmore than 5 million TEUs in 2017 and contributed $340 mllion to operating income.

c) New supplementary and innovative services: 2017 financials were positively impacted by the company supplementary services to shipping services such as inland and logistic offerings.

d).Acquisition of Local Players: CMA CGM acquired South Pacific Island operator SOFRANA in October, 2017 and Brazi domestic comntainer shping market player MErcusol in December, 2017. These acquisitions helped to expand company's operations globally.

e). Rise in freight rates: The other factor which positively impacted the company's financial performance is rise in freight rate. On an average, in 2017, the company generate year on year 9% more revenue per TEU than 2016. The rise in freight rates helped the company in offsetting +42% rise in fuel price in 2017 over 2016 due to which control of unit costs increased by 1.6% only.

3. CMA CGM can face folowing potential challenges:

a) Fluctuation in Freight Rates: The frieght rates were on higher side in 2017, which has helped the company to generate more revenue. Though freight rates keep on changing and lower frieght rates could adversely affect company's profit margin. Therefore, to keep profit margin in check CMA CGM can use hedging strategy. The Company should sign forward contract with its customers at fixed freight rates. Although it may flat company's profit if freight rates move in upward direction, but it will help company to stay safe from losses if freight rates moves in downward direction.

b) Rise in fuel prices: Despite of rising freight rates, the company's control of unit increased by 1.6%. Further rise in fuel rates may further increase company's loss. To overcome rising fuel price issue, CMA CGM should use hedging strategy here as well. Forward contracts at fixed fuel rates with fuel dealers which help company to maintain its price.

c) Diversification: Also CMA CGM's operations are highly diversed as it operates around the world. Though major chunk of company's operations is in USA (27% of total 2017 volume) and Asia/Mediterranian & ISC (17% of total 2017 volume). The Company could further strengthen these regions as wells others by acquiring more local players which help the company in cutting competition down.

Source: The answer is based on the given excerpt of article as well as the Company's corporate website's investor page. https://www.cmacgm-group.com/en/investors

Thanks