ZIM Integrated Shipping Services Ltd. Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome and thank you for joining the ZIM Q1 2021 Financial Results Conference Call. I would now like to turn the conference over to Elana Holzman, Head of Investor Relations. Please go ahead.

Thank you, Emma, and welcome to ZIM’s first quarter 2021 financial results conference call. Joining me on the call today are Eli Glickman, ZIM’s President and CEO, and Xavier Destriau, ZIM’s 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, including materially. You are kindly referred to consider the risk factors and cautionary language described in the documents the company filed with the Securities and Exchange Commission, including our 2020 Annual Report filed on Form 20-F on March 22, 2021. We undertake no obligation to update these forward-looking statements.

Thank you, Elana, and welcome to today’s call. It is truly a momentous time in ZIM’s 75-year history. I am excited to share with you our impressive year-to-date accomplishments as well as the important steps we have taken to unlock significant shareholder value. Following our successful IPO to become the first global container liner to list in the United States, we have continued our strong trajectory, which we outlined on Slide #4. First, our differentiated approach and proactive strategy we implemented to capitalize on the highly attractive market have once again produced record results. For the second consecutive quarter, we generated all-time record EBITDA and net profit, with net profit for Q1 2021 higher than for the full year of 2020. We are pleased to report that our consistent earnings growth positioned ZIM as one of the leading carriers in terms of profitability. We also delivered our highest operating cash flow ever of $777 million. Notably, our Q1 2021 EBIT and EBITDA results were well above the implied guidance range that we provided in March 2021. Importantly, we continue to deliver industry-leading margins and have once again outperformed the liner industry average. Our adjusted EBITDA margin was our highest ever, 47%, and adjusted EBIT margin was also our highest ever, 39%. We remain committed to our goal of consistently performing as one of the top three carriers in terms of EBIT margin. We also significantly strengthened our balance sheet, and today our shareholder equity is more than $1 billion. Based on our strong first quarter performance, the robust market environment, and the full completion of our freight contracts at higher rates, which we will discuss later, we are raising our 2021 guidance. Specifically, we now expect to generate 2021 EBITDA between $2.5 billion to $2.8 billion and EBIT between $1.85 billion to $2.15 billion. This is up from our March '21 expectation of EBITDA in the range of $1.4 billion to $1.6 billion and EBIT in the range of $850 million to $1.05 billion. Our record result in the first quarter enabled us to achieve another important milestone for our shareholders. Based on our strong cash flow in Q1, we will redeem the entire $340 million principal amount outstanding on our Series 1 and 2 notes, eliminating the restriction we faced on paying a dividend on account of 2020 profit. We are proud to achieve this important accomplishment sooner than expected and earlier than the stated maturity by two years, further strengthening our balance sheet and enhancing ZIM’s position to take advantage of favorable fundamentals for the benefit of shareholders.

Thank you, Eli, and again, welcome everyone to our quarterly update. I will now briefly discuss our KPI specific Q1 figures and our strong cash position. Additionally, I would like to first reiterate Eli’s comments on our success during the quarter, drawing on our differentiated model and proactive strategies to generate record results.

Thank you, Xavier. Turning to Slide 17, we continue our path forward, enjoying significant momentum. I am extremely proud of our strong execution and significant accomplishment in just a few months since going public. As we continue to move ahead, we will further position ZIM as an innovative digital leader of seaborne transportation and logistics services. We will advance our differentiated model and grow our strong foundation of standards and professionals, our culture of innovation and our value of sustainability to successfully operate in the 21st century. We will also maintain a laser focus on fueling ZIM’s goals, maximizing profitability into the future, and creating long-term value. We will now open the call to your questions.

The first question is from the line of Randy Giveans with Jefferies. Please go ahead.

How are you gentlemen? How is it going?

Very well. Thank you, Randy.

Very well, indeed. Yes. Congrats on the record and extraordinary quarter here. Can you talk about, first, the decision to declare the special dividend and how you decided on the $2 per share amount? And then also with the rising rates that we’ve been seeing, any reason why 2Q results would not exceed the results we’ve seen here in 1Q? And if improved, what are those additional plans for that free cash, more special dividends or more aggressive debt repayments?

Thank you, Randy. I will start with your first question. The special dividend, you may remember that during the IPO, we communicated our initial dividend policy, which was from 0% to 50%. We also mentioned that we were limited by the indenture and the documentation of the notes in our ability to distribute a dividend for distributable results or profits from 2021. With the very strong first quarter that we are delivering now and the further adjustment of the cash sweep clause as part of the indenture, we announced the full repayment of Tranche C and D far earlier than we initially anticipated. This basically freed us completely from any restrictions with respect to dividend payments. Combined with not only a strong first quarter but a revised guidance in terms of outlook for 2021, which we’ve increased significantly by 70% to 80% compared to the last time we addressed you, we feel comfortable that there is no reason for us not to start distributing in 2021 as opposed to waiting as we initially said in 2020. So today, the $2 per share, we believe represents a good remuneration to our shareholders. Addressing your second question, when it comes to the improved guidance, we are very pleased with the market conditions. We are very pleased with being able to increase our full year guidance for 2021. Nevertheless, from a dividend policy perspective, we are not changing our dividend policy today, which is still, I want to reemphasize, that we intend to pay between 30% to 50% of Q1 profit into 2022, and that should come in the early months of next year.

Got it. Okay. And then you mentioned the improved pricing on your contracts. I think you said around 50% improvement. Can you provide an update on how much of your business is on those 1-year contracts following the contracting period in April and May, trying to get a sense for percentage of volumes, maybe duration, if they are all for 12 months or maybe some longer? And then ideally, an average contracted TEU rate for the coming year. Clearly, the backlog has improved based on your increased and relatively tight EBITDA guidance range.

Yes, the percentage of long-term contracts applies primarily to the transpacific trades, not so much on the other trades. The transpacific trades account for approximately 45% of our overall volume and contribution. We like the idea of having 50% of our volume on long-term contracts and still benefiting from the spot market for the remaining 50%. So that has not changed in terms of volume allocation year-over-year. Overall, if you apply 50% to 45% of our overall volume from a full company perspective, we are still within 20% to 25% of our volume that is subject to long-term contracts. When it comes to the rates, indeed, we are very pleased with the outcome of the negotiations we have had with our customers. We mentioned the significant increase versus last year. However, I’m not going to disclose specific incremental amounts, as we are happy to keep that information confidential regarding the average revenue per TEU on our contract volume.

Okay. And then on the term long-term, are those entirely 12 months or do you have some 18 months, 24 months?

It is mainly 12 months. It is true that we have customers who were willing to discuss potentially agreeing to longer-term commitments at the expense of a reduced rate. It’s always the same strategy: a longer commitment or a cheaper rate. We were not so keen on pushing those discussions forward and are quite pleased to limit the commitment to 12 months as we are still optimistic for the years to come.

Perfect. And then I will just sneak in one more here quickly, Slide 5, pretty incredible chart here showing your net cash leverage ratios coming down. Based on our cash flow projections, we could see being net debt zero by some point in 2021. Is that a target? Do you have any kind of goal, leverage ratios or net cash, net debt amounts by year-end?

You're right. We are continuing the downward trend in this respect. We have an objective to be at net debt zero. The answer is no, for us. We want to deleverage our balance sheet, and we more than achieved our initial expectations and targets. So, there is no such objective to come down to zero in terms of leverage or net debt. We are happy where we are. This outcome is more a consequence of the very favorable market conditions rather than a constant strategy to keep pushing it down. Below 2, to be honest with you, I think we are more than happy.

Sure. Eli, thanks so much for that. I am glad to know you all are staying safe over there. I have been praying for peace in the region. So, you all take care.

Thank you very much.

The next question comes from the line of Omar Nokta with Clarksons Securities. Please go ahead.

Hi there. Good afternoon, Eli and Xavier. Yes, second being Randy’s thoughts, obviously, on the crisis there. But also wanted to wish you congratulations on another very strong quarter, and it sounds like we are going to be repeating the same message here in three months’ time. I wanted to ask about the guidance, and obviously, the $2.5 billion to $2.8 billion is a huge jump from where you were just a couple of months ago. And obviously, since then, we have seen a surge in freight rates. And I guess my question is, do you think that your EBITDA guidance for the year, just knowing what you know now, is still somewhat conservative considering you did $800 million of EBITDA already in the first quarter, which I guess indicates that you may potentially reach your guidance sometime within the third quarter? Any thoughts on that?

First of all, I would very much hope so. This is a very good scenario to be in, to be in a position to raise the full-year guidance. This comes on the back of a few favorable elements. First of all, we enjoyed a significant increase in volume when we compare ourselves to the rest of our peers, quarter-over-quarter. We expect to carry more than 30% incremental volume on the back of all the new lines that we have opened and continue to open. So that’s a very strong driver behind the improved guidance. The second element is the freight rates. If we look at the SCFI, it is going up. Initially, we thought it would start to gradually decline, but we are seeing the opposite trend, especially relevant in the trade lanes where we operate. This is another strong driver explaining why we significantly upgraded our guidance. Lastly, we just talked about the finalization of the long-term contracts. So, we know that for Q3 and Q4, we will benefit from the anticipation of slight softening in the spot market. The long-term contract is on the rise and will be up quarter-over-quarter in Q3 and Q4. Therefore, we truly believe that the guidance we are communicating now is well within reach of the company. We will deliver on this commitment and guidance to you. Whether there’s room for upside? We never know, and time will tell. In terms of forecasting horizon, we have clear visibility into Q2, a good visibility of Q3, while Q4 remains a little bit more uncertain. But again, we see very strong and resilient market conditions.

Thanks, Xavier. That’s really good context. And I guess maybe just wanted to double-check on some of the figures you were talking to Randy about when it came to the spot versus contract. Just so I have it right, about half of the Transpacific business is on contract. And then outside of Transpacific, it’s primarily spot-based. So, yes. If we look at ZIM overall, if the Transpacific is about 40% of the overall business, then effectively, 80% of your business over the next 12 months is still open to the prevailing spot market?

That’s correct. The carryout on Asia represents 20% of our volumes. You have another 20% to 30% of – we don’t say long-term contracts, but it’s not really spot. It’s quarterly pricing.

Got it. Okay. And then just one final question from me. You mentioned the $588 million that you have invested or are planning to invest this year in new equipment, primarily containers? You also recently contracted those 10 dual fuel new buildings. What are your thoughts on – do you feel comfortable with the existing fleet capacity? Do you see a need to go into the newbuilding market for more ships, or are you happy with how things are at this point?

From a container – from an equipment perspective, it was essential for us to continue to bring in new containers as we are growing quite significantly quarter-over-quarter. So we took the initiative to order equipment quite a while ago, and we started to invest in the third quarter of last year already, and we are continuing aggressively to bring in additional equipment. When it comes to vessels, we prefer to charter in capacity instead of buying older vessels and ships. We did secure a long-term charter for the large capacity vessels that we expect to take delivery from in 2023 to replace the 10,000 TEU vessels that we continue to grow on our Asia and U.S. East Coast routes. We are pleased that we concluded that agreement with Seaspan in February. We will continue to bring in vessels as needed to capture the new lines we are opening or to renew existing charters that come up for renewal. But we are not changing our strategy, which is to continue to rely on the charter market, and this could change based on the current market conditions.

Got it. Alright. Thanks. I appreciate that and congratulations again.

Thank you, Omar.

The next question comes from the line of Alexia Dodani with Barclays. Please go ahead.

Yes. Good afternoon. Thanks for taking my questions, and well done on navigating through such a volatile environment. I just have three questions, please. Firstly, just building on a bit of the previous questions, in terms of the size of the business now, I mean clearly, you have talked about 112 vessels. Do you think we will end the year at a higher number, and what do you feel is the right number to run the business with the kind of contracted volumes and the way the market is growing? Secondly, just kind of tie up on the CapEx for the full year. Am I correct in thinking that CapEx now will be $488 million for the full year instead of $300 million previously? And finally, when you think about the following period of extreme volatility because of traction and increased demand, what do you feel is the normalized earnings power of ZIM post-pandemic? Do you feel you can sustain this level of margins going forward because you have built your market share? Any color on that would be great. Finally, on the order book, obviously it’s still quite low, but it’s been moving recently. At what point do you start worrying about supply-demand balance further out? Thank you.

Thank you, Alexia. I will try to take your questions one by one. Starting with your first question about the number of vessels, we don’t have a specific number that we think is appropriate for us. On the contrary, we see vessels as a means to an end. We focus on the trade lanes where we think we can provide a competitive proposition and grow profitably. We have been engaging heavily since we have started e-commerce trade between Asia to the U.S., doubling and tripling the trade links and complementing similar trading between Asia and Australia. We are quite pleased with this growth. We also mentioned that we invest our profits, particularly in trades from Asia to the U.S., so that’s the driver for us. We are at 112 vessels today; we might finish the year at 130 or at 100. This will be driven by our analysis of the profitability of each of the trades where we operate. Second, regarding CapEx, you are correct. We are increasing our full-year cash CapEx by using the excess cash we are generating today to invest in new containers rather than contracting leases with providers. So, you should consider cash CapEx of roughly $500 million or even $550 million for the full year of 2021, largely allocated to containers. Regarding the volatility in our markets and the normalized earnings power of ZIM, I think it’s vital to note that we don’t know what the new normal will be. Our perspective is that the market has gained maturity in terms of capacity management, and that will resonate with your fourth question. The industry has demonstrated it can navigate certain changes in demand and market conditions. The expectations among industry experts are quite favorable for line operators like us. While today’s circumstances are exceptional, we expect 2021 will obviously be extremely good. In 2022, we believe the start will continue to be well aligned. The new normal for the industry remains uncertain, but what's significant for us is that, in terms of positioning ZIM vis-à-vis our peers and larger competitors, we are continuing to deliver superior EBIT margins quarter after quarter. Our transformation and new positioning are yielding results. Our agility is paying off. Lastly, regarding the order book, yes, it’s only slightly up. When we were discussing this back in October last year, the situation was too low to guarantee replacement CapEx or cater to the increased demand expected for the years to come. Now we are at 17%. If I were to commit to a threshold above which there will be a risk of overcapacity, I think below 20%, we are safe again, capturing replacement capacity and the expected growth in our market. So, 20% seems to be a reasonable number.

Thanks, Eli. And actually, if you don’t mind, I will ask a follow-up on just the future technologies. I mean there is a debate at the moment about whether LNG is the right transition fuel to get the industry decarbonized? I mean clearly, yourselves have voted with your feet towards LNG. What is your view? Do you feel that it’s a sustainable solution, and therefore, that’s where you have decided to target your future requirements? Any insights into what the industry is discussing at the moment would be helpful?

Sure. No, we don’t think that LNG will be the long-lasting technology that will fully decarbonize the industry. LNG resolves a few emission issues, but it doesn’t address CO2 emissions. It is more CO2-friendly than traditional fuel, but it is not the long-term solution. However, it is the best solution available today in terms of scalability and access. When we made the decision to enter into this long-term agreement with Seaspan, it was a clear choice. We wouldn’t want to purchase vessels since we believe LNG technology will likely be replaced with alternatives, like ammonia or hydrogen, that effectively address CO2 emissions. Therefore, we don’t want to own vessels to avoid any residual value risk. Nevertheless, we are willing to commit to a long-term charter and use the best available technology today, which is clearly LNG. There is currently no better viable technology than this. That’s our stance. We are not vessel owners, and we are happy to remain this way permanently. When negotiating with Seaspan, we aimed for them to make the most environmentally friendly choice to serve ZIM, allowing us to serve our customers in the most efficient manner from an environmental perspective.

Understood. Thank you very much.

This concludes our Q&A for today. I will hand back to Eli Glickman, CEO, for closing comments.

Thank you, operator. I would like to thank everyone again for joining us today’s call and for your interest in ZIM. We look forward to sharing an update on progress with you in the future. Thank you very much. Goodbye.

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