$ZIM ZIM Integrated Shipping Services Ltd Q2 2023 Earnings Conference Call

Thank you, Alana, and welcome everyone to today's call. During the second quarter and here today, mid-term container shipping market conditions continue to be challenging. Our performance in the second quarter of 2023 reflected this reality. In Q2, we generated adjusted EBITDA of $275 million and an adjusted EBIT loss of $147 million. Cash flow from operations was $347 million. Our total cash position of $3.2 billion at quarter end remained strong. Going to slide four, ZIM is currently in a transition period. In early 2021, we embarked on a fleet renewal program to improve our cost structure and support long-term profitable goals. During this period, we secured through a series of charter agreements a highly competitive fleet and one that is optimally suited for our commercial strategy. This fleet is made up of 46 newbuild vessels, including 28 LNG-powered container ships. Of the 46 newbuilds, eight are already part of our fleet today: four 12,000 TEU vessels and four LNG-powered 15,000 TEU vessels. We expect the delivery of three additional 15,000 TEU LNG vessels this year, and the remaining three are expected in the first few months of 2024. The commercial and environmental benefits of this cost-competitive capacity are significant. The 15,000 TEU LNG-fueled vessels were designed and built to serve on the Asia to U.S. East Coast trade. This is a strategic service for ZIM and one in which our market share exceeds 10%. When we operate our ZCP service with all 10 newbuild 15,000 TEU vessels, we expect to benefit from a very competitive cost per TEU on this trade. Moreover, ZIM is the first liner to operate LNG-powered vessels on the Asia to U.S. East Coast route, which we are confident will increasingly become a significant commercial differentiator. With ESG, it is imperative that we provide customers with a service offering that enables them to reduce their carbon footprint. At the same time, adding state-of-the-art LNG-fueled vessels furthers ZIM's sustainability goals and supports our commitment to reduce greenhouse gas emissions to net zero by 2050. Our fleet renewal program also included 32 smaller, more versatile newbuild vessels, out of which 18 are LNG-powered 7,000 TEU vessels. These smaller vessels support our global niche commercial strategy and enable us to maintain flexibility to target better-performing trades. The first three 7,000 TEU vessels are expected this year, and the remaining in 2024. Once we receive all 28 LNG vessels, we expect approximately 70% of our operated capacity will be LNG-fueled, which will position us among the lowest carbon intensity operators. In 2021, we also leveraged our strong cash generation to invest almost $1 billion in renewing our container fleet, particularly our reefer equipment. Today, we operate the youngest reefer fleet in the industry, which is a competitive advantage with this higher-value cargo. We were also early to identify the active dynamics of car carriers caused by tight supply. We successfully grew our operated capacity from two car carriers in early 2021 serving the local Israeli market to operating 16 car carriers today with global coverage and benefiting from strong demand. In the near term, during this downturn period, as we await the delivery of the remainder of our cost-effective newbuild capacity, improving our cost structure remains an underlying priority for ZIM. We continuously review our network and services and take action to rationalize our existing capacity to minimize our cash burn. To date in 2023, we redelivered seven container vessels to adapt our fleet to current demand levels and maximize utilization. Xavier will provide additional information about our fleet in his prepared comments. During this challenging market, we continue to look for opportunities to establish resilience in our business and focus on optimizing profitability. We remain committed to our core trade lanes, specifically Asia to U.S. East Coast and Intra-Americas, and expect our network will continue to evolve as customer demand changes and new commercial opportunities arise. For example, in Q1, we suspended our express service from China to Los Angeles as a result of the West Coast collapse, and launched in Q2 Colibri, a new service from South America West Coast to U.S. East Coast. In this service, we leverage our strong reefer offering, and carrying volumes have been consistently growing. Moving to slide five, while we remain cautious in our capital allocation decisions, we believe there continues to be value in investing in growth engines which complement our core shipping activities. In June, we expanded our partnership with Forto, one of our portfolio companies. Forto is an innovative fintech platform designed to modernize cross-border trade financing. As a reminder, Forto uses AI tools to streamline the credit application process and can offer small and medium-sized importers and exporters faster and cheaper access to working capital financing needs than traditional financial institutions. Now offers this unique financing solution to customers directly as well as via our digital freight forwarder, Ship4wd. When it comes to this investment, the capital requirements are relatively modest, yet the potential is significant. Moving to slide six, in conclusion of my prepared comments, I would like to address our revised guidance for 2023 and current freight rates. As previously announced, we now expect to generate in 2023 adjusted EBITDA of $1.2 billion to $1.6 billion and adjusted EBIT loss of $500 million to $100 million. This revised focus is driven by our expectation that peak season will be soft, bringing down our expectation for volume growth to low single digit, and no material improvement in freight rates in the second half of 2023 that would normally be consistent with seasonality. The improvement we have recently seen in spot freight rates is clearly a welcome development. However, I would like to caution that the significant improvement is related to ZIM's focus on trans-Pacific rates, whereas other trades we operate in haven't seen a similar improvement. Moreover, this improvement, even if sustained, does not have an immediate impact on our financials and does not change our full-year guidance. Marginally, we may benefit from improved spot freight rates as long-term contracts this year account for only about 30% of total trans-Pacific volume. I would also like to reiterate that ZIM's strong balance sheet and ample cash will serve us well during a prolonged downturn and allow us to operate from a position of strength and maintain a long-term view. On that note, I will turn the call over to Xavier, our CFO, for his remarks on our financial results and additional comments on the market, please.

Look, hi Omar, thank you for the question. Clearly, the increase that we see in the spot rate on the trans-Pacific is a welcome development after having been through a period where the rate went down consistently week after week and reached a level below the 2019 average. So it is very, very good to see that the rates are going up. Yet at this stage, we want to remain cautious that we don't really know whether this will stick, and as a result, we are remaining quite cautious for the year for the forecast. That being said, what is clear to us today is that the spot market now is more beneficial to the liners than the average rates that were contracted during the contract season. And as far as we are concerned, we have in terms of cargo mix a greater exposure to spot than we have to contract: 70% spot exposure compared to maybe 30% contract. So for as long as the spot rate today continues to be more elevated compared to the average of the contract, yes, this is going to benefit the company.

Look, as far as we see it today, you may remember that when we were discussing during the contract season with our customers, we had some sort of a floor that we were not willing to go below in terms of agreeing to rates. And this is also why we ended up with a 30-70 type of mix. So today, in retrospect, we feel that we made the right decision at the time. But again, I would remain extremely cautious because we have only seen today only a few weeks of improvement in the trade. We know that this trade has been struggling for a long period, so hopefully it will stick, but time will tell.

Look, the increase that we've experienced on the trans-Pacific, as you mentioned, is driven by a couple of things. Clearly, the newbuilds, so the fifth and the large capacity vessels that we take delivery of, those ones are being deployed on Asia to the U.S. East Coast trade, and they come and replace the 9,000-10,000 TEU ships that are being cascaded to a line which is also serving the U.S. East Coast. That's the service to Baltimore, which we have, or we are in the process of exercising as we currently speak, moving from a bi-weekly service to a weekly service. So our operated capacity deployed on the trans-Pacific is increasing and will continue to increase up until we get the final delivery of the 10th 15,000 TEU ship that we have ordered with Seaspan. So yes, we think that the volume increase that we've experienced in the second quarter, at least from a capacity operated perspective, providing that the volume will continue to be there, should allow us to maintain this type of volume, if not more.

Thank you.

Yes, thank you for the question. To your first point, we clearly already asked from the fourth quarter of 2022, so already I think as we mentioned last quarter or first quarter of 2023, we were not able to keep the contract cargo that was secured at a very high and elevated rate back in March-April of 2022. So for us, when we look in Q3 or early Q3, and even relate to Q1, there's been no tailwind from a potential higher revenue generated by contract cargo that was already long gone for us. We were already in Q1 operating predominantly on the spot market with very little, again, tailwind from a contract. That is also very much the case in Q2, where we've been booking very much on spot. What is happening in Q2 is that now we are shifting to the new contract season in a way, which starts the first of May. And so the second part of Q2 and now going into Q3, this is where we now say that we are loading pretty much on the 70-30% mix between spot and contract. So the 30% contract were the volume and the rates that we discussed and agreed upon with our customers earlier on this year around March-April time frame. And you're right in saying that 30-70 is lower than what the company used to secure or lock in terms of contractual commitment, because we were more towards 50-50 in the past, at least last year and the year before. The reason why we ended up this time around at 30-70 is because we were not willing to agree to rates that were below a certain threshold that we did have set for ourselves. So that's the reason. And today, now that for some time the spot market was contributing less than the contract, this seems to be turning now as we speak. We'll see, and the future weeks and months will tell us whether we made the right decision at the time.

That is correct.

Thank you. Yes, when we look at the guidance range, we need to be very careful in the sense that there is still a lot of uncertainty ahead, and this is why it is difficult to be precise in our assessments for the quarters to come. What are our main underlying assumptions? First of all, from a volume perspective, we revisited a little bit downwards our volume expectations compared to a prior assessment, and now we anticipate that on a full-year basis, we will be slightly up, low single-digit numbers in terms of carried quantities when compared to last year. So we have a volume assumption that if there was to be more demand and a stronger peak season than what we initially anticipate, could drive the volume assumptions in one direction or the other. Today, we look at the peak season and the way it is shaping out, and we think that if there is going to be one, it's going to be a very soft peak season to say the least. So volume is one driver. The second driver, obviously, and the most meaningful one, is clearly the freight rates environment. We've talked about the recent improvement that we have experienced and that we are continuing to experience, at least as of today, on the trans-Pacific trade lane. That is obviously a welcome, but how long that improvement will stick is also an unknown. Whether it's going to go beyond October or not is an unknown. So this is also a significant potential driver when you look at the full-year outlook for the company. And when we talk about the trans-Pacific that is improving, we should not lose sight of the fact that on some other trades that have so far been more resilient than the trans-Pacific, there is intensified pressure. To name one, the Atlantic trade lane that has been extremely resilient until recently is today under more severe pressure, and we see the rates going down as opposed to the rates going up. So there is also here a mixed consideration that may impact where we are going to land the year on a full 12-month basis. To your second question, in terms of the cost measures that the company is taking, they are obviously the ones that we already took a couple of years ago, and that will take time in order for them to find their way all the way through the bottom line. And this is really the reprofiling of the fleet that we operate and those newbuildings that we ordered in 2021 and 2022 that are coming gradually between now and the end of 2024. So that's going to take a few quarters for us to bring in those ships and for those ships to replace the more expensive tonnage that we are currently operating. Now, in a more short-term horizon, we are obviously looking at always trying to optimize our fleets and to allocate our capacity the best way we can. So we are looking at a few things, as we always have, by the way, which is looking at how we can potentially partner with some other shipping lines in order to optimize a fleet, a network, or a structuring of a line, so that both partners can be better off by joining forces as opposed to operating alone. And so we've been quite successful at doing that in the past, and we will continue to explore any opportunities of the sort. Second, we will look on a case-by-case basis if there are ways for us maybe to redeliver some of the charter that we have secured back in 2021-2022 a little bit ahead of schedule. We'll see if this is something that can be done. And lastly, but even maybe more importantly, we continue to look at trades that we believe may be underserved and there might be opportunity for us to enter, just like we've done not so long ago. We opened this Colibri service between the Latin America West Coast to the North America East Coast, which has been so far proven to be quite the right decision for us to do so. We will also look at entering into new trades as well.

Look, today when we sail, and because we need to keep in mind, there's been an intensification of blanking, and we have also blanked some voyages on those services, which we think have participated in allowing for the rates to go up. But when we sail, the utilization on the 15,000 TEU ships is extremely good. So this, I think, is the right strategy for us to promote blanking and to sail at optimum capacity when we do sail. And on the other service, which is the one that is being upsized as a result of the cascading of the 10,000 TEU ships that are now being deployed on this other service, we continue to also see the volume ramping up. So from a capacity deployment perspective, we think we have today, and we continue to hopefully have tomorrow, the right vessels for the right trade for when we have fully completed the upsizing and the cascading that we have engaged in recently.

Okay. So on your first question, you're right, the contract is, there is a bunker escalator that is embedded into the contract that we've signed with our customers, so that would go up or down with the fluctuation in bunker. And the spot does not, the spot is indeed an all-in rate, give or take, even though sometimes we for internal purposes divide the ocean trade from the bunker elements. So the recent changes that we've seen in bunker, yes, they may have had an effect on the spot market, but I would say to a limited extent. If you look at on average how much you are burning per TEU that you carry from Asia to the U.S., you're talking half a ton, give or take. And so when you have a 50% change, that's potentially $25 per TEU in terms of incremental cost that is obviously being, has to be deducted from the rate improvement at stable bunker assumptions. So your view is correct, whether this recent situation in bunker has or will have a significant impact on the rate increase, I think not so much. Maybe looking at the second question, you're right that there's been a lot of uncertainties going on, by the way, on the U.S. West Coast due to the discussions that were ongoing in the various terminals with the ILWU, and also on the East Coast with the current issues with the Panama Canal. And there's been sometimes some arbitrage between customers moving from one place to the other, or by the way, also including the U.S. Gulf Coast. But as far as we're concerned, as you know, today we are no longer operating any service between Asia to LA. We are now only focusing on the Asia-U.S. East Coast and U.S. Gulf, and we have a service where we load on PNW. So for us, really, the matters relate more to what's going on in Panama with the current draft restrictions, which act as a regulator in terms of capacity being deployed to the trades. But the requirement is that we are very up to speed and up to date and that we are prioritizing light cargo in order to be able to load the vessels the way we want, also potentially leveraging our network in South America by unloading some of the cargo before the canal, and for that cargo to find its way on the service that we recently opened between South America and the U.S. East Coast. So that's, I think, what is today driving the markets on the trans-Pacific as far as we are concerned. With respect to your third question, unit cost ex-bunker, yes, we've seen an improvement quarter-over-quarter. I think the long-term trend should be that we will continue to see an improvement, only because of again the change of the profile of the fleet that we will end up operating. And as we take on the newbuildings, more efficient and cheaper tonnage, cheaper TEU in terms of operated capacity, and those vessels come in and will end up replacing a more expensive charter, but that is something that will take some time and it's not going to be an overnight effect, but it's on the way. And every quarter that passes should allow us, if we look at the vessel cost, for that cost to go down. Another element of cost reduction that is quite visible is the fact that now with the ease in the congestions in the various terminals, we do incur far less storage, for example. We also have less land transportation-related cost, also because of lesser volume booked door-to-door from the PNW service. So we also see here a less cost per TEU that we carry. And finally, as well, in terms of balancing cost, you know, balancing cost is being defined for us as the cost of repositioning empty when we have an imbalanced trade. And we are moving a full from Asia to the U.S. and we don't have as many full to export out of the U.S. back to Asia. We had a line that was heavily imbalanced, almost 100% imbalance, and that was the ZEX line, the express service that we closed in Q1 between Asia to the U.S. West Coast. And as a result, we have less balancing cost as we operate in the overall network of lines and a more balanced network overall.

The first one, yes. So in terms of capacity, we have increased the overall capacity that we are operating today, as we have taken on board in the quarter, I mean today, up to date, we have now four of the 15,000 TEU ships that were delivered over the first six months of 2023, and we also received the four 12,000 TEU newbuildings that were also delivered. So that's eight for us, eight large capacity ships that were delivered, and we have returned some smaller tonnage to tonnage providers over the course of the quarter. So today, I think if I'm not wrong, we operate a combined capacity of roughly a shy of 600,000 TEUs altogether, a little bit less than that. And as we progress throughout the year, we will have the delivery of another three 15,000 TEU ships between now and the end of the year, and we will also start taking delivery of our 7,000 LNG-powered vessels. Three of them will be delivered between now and the end of the year. So adding six newbuild tonnage to our operated capacity, so that will contribute as well to increase our overall operated tonnage between now and year-end.

Because as far as we are concerned, the majority of the contracts that we have signed and secured and agreed upon with our customers are fixed. So either side, obviously, the bunker adjustment factor that we referred to earlier on during this call, for us, the vast majority is an agreed-upon ocean freight and with no index type of linkage. That doesn't mean that we would not be considering this going forward, but if we look at the present time, when I'm talking about the 30% of the capacity, of the volume that we are carrying, the contracts are mainly fixed, fixed rate.

Yes, we have done that. So slow steaming is something that has been the strategy of the company for already quite some time. And as a result, we indeed in some of the trades have added vessels in order to maintain a weekly schedule. So that has happened at least on more than two occasions where we have added a vessel to a given service, so without at the end of the day increasing our offering on the trade, but absorbing some of the capacity and allowing for slow steaming, which is also for us a way to make sure that we meet the IMO 2023 regulation as well when it comes to calculating the carbon intensity index.

Thank you. While we are clearly in the midst of a challenging period for our industry, ZIM has continued to take proactive steps in response to these market realities. Beginning early 2021, ZIM began securing through a series of charter agreements a highly competitive fleet that is optimally suited for our commercial strategy, and continue to take delivery of these newbuild vessels this year and next year will improve our cost structure and build further commercial resilience. We are in transition time. We remain committed to minimize cost in the near term, continuously review our network and services to rationalize our existing capacity. Additionally, our liquidity and solid balance sheet, including a total cash position of $3.2 billion at quarter end, will enable us to operate from a position of strength and maintain a long-term view. As we look to the future, we believe ZIM is well positioned to further implement our differentiated strategies to best serve our customers and generate sustainable value for shareholders. Thank you to all of you.