Zim Integrated Shipping Services (ZIM) Q3 2022

Ladies and gentlemen, thank you for standing by. I'm Irene, your call operator. Welcome and thank you for joining this ZIM Integrated Shipping Services Q3 2022 earnings conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Ilana Holtzman, Head of Investor Relations. Please go ahead.

Thank you, Irene, and welcome to ZIM's third quarter 2022 financial results conference call. Joining me on the call today are Eli Glickman, President and CEO, and Xavier Destribois, CFO. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements regarding expectations, predictions, projections, or future events or results. We believe that our expectations and assumptions are reasonable. We wish to caution you that such statements reflect only the company's current expectations and that actual events or results may differ. We kindly refer you to consider the risk factors and cautionary language described in the documents the company filed with the Securities and Exchange Commission, including our 2021 annual report filed on Form 20-F on March 9, 2022. We undertake no obligation to update these forward-looking statements at this time. I would like to turn the call over to ZIM CEO, Eli Glickman.

Thank you, Eli, and again, welcome everyone. On slide six, we present key financial and operational highlights. Our third quarter results reflect continued strong execution and the benefit of our differentiated approach, combined with high equipment utilization. Specifically, our average freight rate per TEU of $3,353 in the third quarter was 4% higher compared to the third quarter of 2021. During the first nine months of the year, our average freight rate was 43% higher than in the 2021 nine-month period. Our carried volume in the third quarter declined 5% compared to the same period of last year. Lower volume during the third quarter resulted primarily from continued congestion as well as more normalized levels of consumer demand. Over the nine-month period, our carried volume was down 3% compared to an approximately 2.5% decline in the market in the first nine months of 2022. We now anticipate our carried volume will be slightly down in 2022 on a full-year basis as compared to 2021, and that is due to softer demand and continued congestion. Our free cash flow in the third quarter totaled $1.6 billion compared to $1.7 billion in the third quarter of 2021. Our cash conversion rate remains strong at 84% as compared to last year's third quarter cash conversion rate of 83%. Turning now to our balance sheet, total debt increased by $1.4 billion since year-end. As in recent quarters, this was mainly driven by the increased number of vessel fixtures, long-term charter duration, as well as higher daily charter rates. In the first nine months of 2022, our cash, bank deposits, and investments increased by $600 million. Updating on our fleet, the number of vessels we currently operate hasn't changed from our last report and currently stands at 149 vessels, of which 10 are car carriers. The average remaining duration of our current charter capacity is 27.4 months, down from 28.6 months in August 2022, when bridging our current operating capacity to the scheduled delivery of our chartered newbuild vessels throughout 2023 and 2024. In 2023, 25 vessels are up for renewal, with 37 up for renewal in 2024. It means we have a total of 62 upcoming vessels for renewal compared to the expected delivery of 46 chartered newbuild vessels during this time period. Moving on to slide seven, you can see that we delivered very strong results over the last two-plus years, and our net leverage ratio as a result has trended downwards at the same time and is at zero as of September 30th. Turning to our performance, our differentiated and proactive approach has continued to yield profitable results. Revenue for the third quarter was $3.2 billion, up 3% as compared to Q3 2021. While net income was $1.2 billion compared to $1.5 billion in the comparable period, adjusted EBITDA was $1.9 billion for the quarter compared to $2.1 billion last year, reflecting more normalized carried volumes and average freight rates. While market dynamics have shifted, ZIM continues to generate strong EBITDA margins. Nine-month margins were 63% for EBITDA and 54% for EBIT. This compares to 58% and 51%, respectively, in the same period last year. I would like also to note that our lower margins in the third quarter were driven by higher voyage costs resulting from a higher vessel cost due to the transition to our own operating capacity following the termination of the slot purchase agreement we had with the 2M as of August 1st, coupled with higher operational charter rates. Turning to slide nine, we carried 842,000 TEUs in the third quarter compared to 884,000 TEUs during the same period last year. As you can see illustrated in the slide, lower volume on the trans-Pacific caused by softening demand and continuous effects of congestion in East Coast ports was partially offset by growth in Intra-Asia, Latin America, and cross-trade. Intra-Asia in particular is a key focus for us, and we do believe increasing presence in this growing trade will provide us with significant resilience as market conditions normalize. Let's present our cash flow bridge. We ended Q3 2022 with a total cash position of $4.4 billion, which includes cash and cash equivalents and also investments in bank deposits and other investment instruments. During the first nine months of the year, our adjusted EBITDA of $6.6 billion converted into $5 billion cash flow from operations. Other cash flow items included $293 million of net CapEx, $1.1 billion of debt service, mostly lease liabilities, and dividend distribution of $2.9 billion. Moving to our guidance, as already mentioned, with the pace of normalization accelerating, we have revised our full-year 2022 forecast. We now expect to generate in 2022 adjusted EBITDA between $7.4 to $7.7 billion and adjusted EBIT between $6 to $6.3 billion. That is approximately 5% lower from an EBITDA perspective than our previous guidance based on the midpoint of the range. Our underlying assumptions for the revised 2022 guidance reflect the steeper decline in spot freight rates and softer demand as discussed, in addition to adjusted contract rates. Again, we now expect our carried volume to be slightly lower than 2021. On the cost side, we assume a slightly more favorable charter rate environment, though the impact is marginal given the limited number of charter renewals. With that said, it is worth highlighting that these figures still do reflect fully elevated charter costs. Turning to our view on the market environment, the supply-demand balance forecast shown here reflects lower demand growth assumptions for 2022 and 2023 in light of the worsening macroeconomic environment. With the order book to fleet ratio currently at approximately 27%, of which 2.3 million TEUs are scheduled for delivery in 2023 and another 4.7 million TEUs scheduled for delivery in the following years, supply growth is expected to be considerably greater versus demand growth than previously projected. The combination of weaker demand and higher supply will create a challenging business environment for container shipping. Yet I will discuss why various market dynamics may impact the effective supply and create a more stable business environment in the coming quarters. Next, with the sharp decline in freight rates, the mirror image is the cooling off of the charter market. The charter market is also indeed returning to more normalized conditions. As you can see here, charter rates have significantly dropped, and although supply is still tight, options to secure charters for shorter-term duration are gradually coming back. The idle fleet has also slightly increased. As we have indicated in the past, our view is that effective supply growth may be smaller than is implied by the current order book due to the various factors that are being detailed here on slide 14. In 2023, port congestion, limited terminal capacity, and lack of lessors will continue to partially offset the expected supply growth, as well as possible slow steaming resulting from IMO 2023 regulations, which are expected to go into effect in January next year. IMO 2023 and the decarbonization agenda may also motivate liners to retire older vessels, resulting in scrapping and offsetting some of the new capacity. Delays may also result in lower supply growth. Alphaliner is currently suggesting that only approximately 60% of the deliveries will be on time in 2023 and 55% in 2024, as both carriers and shipyards may want to postpone delivery, as the former are facing weaker demand and the latter are facing higher costs. Liners adapting deployed capacity to demand, signs of which we have seen in recent weeks, may also support industry efficiency. On this note, we will open the call for questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please press star before making your selections. Anyone who has a question might press star followed by one at this time. One moment for the first question, please. Our first question is from Omar Nokta of Jefferies. Please go ahead.

Hi, thank you. Hi, Eli and Xavier and Ilana, and good afternoon. I just wanted to ask about liquidity and your cash position today. We've obviously got a pretty sizable amount with $4.4 billion at the end of the quarter, which is over $35 a share, and it's sort of in line with the amount of... but just in general, I wanted to ask how do you view your current cash position? Is that a comfortable amount that you're carrying now with all the uncertainty out there in terms of the outlook of the container market? And are there any levers to pull or you're thinking of pulling in order to maybe raise even more cash? Just if you could comment just about your cash position.

Okay, thanks, Eli, for that color. And yeah, maybe just on that final point you're making about returning capital. So how do you think about that dividend policy going forward? I know the board ultimately is going to make the decision, but how do you think about the use of cash at the moment given the softness in the market? And is that a true-up to that 50% payout next quarter for the full year of '22? Does that make sense? Or do you think sticking with 30% is more in line with your thinking?

Okay, no, that's fair. And maybe just one final one. You know, just regarding the cost structure at the moment, are there any levers to pull, you think, in terms of lowering our run-rate costs on some of the ships you have in-house today, not necessarily the newbuilds, but the vessels on the water, the 149 that have roughly 27 months left of duration? Is there an opportunity to maybe think about approaching the ship owners and lowering their rate in exchange for added duration? Is that something that you're thinking of? Is that a realistic measure that you guys think is worth undertaking?

Okay, very good. Thanks for the color. I'll turn it over.

Our next question is from Tim Long of Barclays. Please go ahead.

Yeah, good afternoon. Thank you for taking my questions. I had, to start, first, just on the implied Q4 EBITDA guide of around $1 billion. Obviously, the exit rate from Q3 has been quite strong, but clearly since mid-September, we've seen the spot rate decline quite considerably. How should we think about, you know, the first half of Q4 versus the second half of Q4, just to understand, you know, the exit rate as we go into the next year? Then secondly, on sort of your comments about sort of unit cost ability to change, when we look at 2023 and the current trajectory of spot rates, how can you protect profitability? What action are you able to take other than to basically reduce the capacity based on those, you know, the delta you have between the upcoming vessels and the ones that are expiring?

Follow up on the first question in terms of the kind of split between the evolution. And if we look at how rates have accelerated, would it be fair to say they'd be diced towards the first half of Q4, roughly two-thirds, one-third, if I just look at the kind of trajectory of rates?

Yeah, exactly. Whether you expect most of the profitability in Q4 to come from October and November and less in December.

Okay, understood. Thank you.

Our next question is from Sathish Sivakumar of Citigroup. Please go ahead.

Thanks again for the presentation. I got two questions here. So firstly, in your guidance, right, you did say that one of the reasons for the revision in guidance is lower contract rates. Yeah, if I understand right, your contract rate exposure is mainly from trans-Pacific, which normally resets in April, right? So why are we actually seeing lower contract rates versus, say, Q3 now? This is your previous expectation. Any color on that? And also directionally, like how much it's actually come down versus your previous expectation? And the second one is on the supply flexibility. On supply, you made it clear that, okay, you got about 60 vessels that are on charter that's due for renewal. This is 40 vessels you are taking in, but that's more like, say, in two years' time where you get a better supply management there. But into next year, given the uncertainties and if potentially for the downturn in demand, what are the tools that you have in terms of supply management as you go into H1 next year? Thank you.

Okay, yeah, thank you. Thanks, Xavier, and thanks, Eli. And hello, Ilana.

Yeah, thanks very much.

Our next question is from Mark Bland of JPMorgan. Please go ahead.

Thank you. The first one is on, in terms of capacity across the market, so far back to Q2 2020, to do with blank sailings and things, we've seen much of that yet? And if not, is that surprising? And the second question is, if we look at where spot rates are, are there any lanes or regions for you today where you kind of currently operate that are sort of below the break-even for them? Thank you.

I'm sorry, thank you very much.

This concludes our Q&A session. I hand it back to Eli Glickman, President and CEO, for closing comments.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.