ZIM Integrated Shipping Services Ltd. Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. I'm Natalie, your Chorus Call Operator. Welcome, and thank you for joining the ZIM Integrated Shipping Services Ltd. Q3 2021 Earnings 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. I would now like to turn the conference over to Elana Holzman, Head of Investor Relations. Please go ahead.

Thank you, Natalie. And welcome to ZIM's Third Quarter 2021 Financial Results Conference Call. Joining me on the call today are Eli Glickman, 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 the 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 20F on March 22nd, 2021. We undertake no obligation to update these forward-looking statements. At this time, I would like to turn the call over to Eli Glickman. Eli?

Thank you, Elana, and welcome to today's call. I'm very excited to present our record results and discuss multiple third quarter 2021 updates outlined on Slide Number 4. Our continued outstanding performance is a testament to the execution of our team, including the proactive strategies we have implemented to capitalize on both the highly attractive markets and ZIM's differentiated approach. Of note, ZIM's revenue of $3.1 billion, adjusted EBITDA of $2.1 billion, and net profit of $1.5 billion for the third quarter of 2021. These are the highest in our history. We also generated our highest operating cash flow of $2 billion in the third quarter and further strengthened our balance sheet, growing shareholders' equity to more than $3.1 billion. Importantly, we continue to deliver industry-leading margins, outperforming the liner industry average. Our Q3 2021 adjusted EBITDA margin was 66% and adjusted EBIT margin was 59%. Based on our exceptional financial performance today and our favorable market outlook, we are once again raising our full-year guidance. Specifically, we now expect to generate in 2021 an adjusted EBITDA between $6.2 billion to $6.4 billion and adjusted EBIT between $5.4 to $5.6 billion. Based on the midpoint of today's guidance versus the guidance provided in August, our new focus represents a 26% increase in our EBITDA guidance and a 31% increase in our EBIT guidance. Returning capital to shareholders also remains a priority for us and is a central component of our capital allocation strategy. As such, we announced earlier today a change in our dividend policy that will allow us to return capital to shareholders more frequently. Effective immediately, we will distribute the dividend on a quarterly rather than annual basis. The interim dividend will be approximately 20% of the quarter's net income, with the total annual amount to be distributed to shareholders remaining between 30% to 50% of our annual net income. According to the new policy, we declare a dividend for Q3 2021 of $2.5 per share, to be paid in December 2021. On Slide Number 5, you can see that over the last 11 quarters, our earnings have consistently increased, delivering consecutive record quarters. At the same time, our net leverage has strengthened downwards, reaching 0 this quarter, compared to 5.3 in Q1 2019. We are proud to be positioned in the top tier of the industry in this regard. Turning to the next slide, Slide Number 6, we continue to execute at the highest level across our four strategic pillars, while remaining committed to profit and growth. Our exceptional operational agility continues to be a core differentiator for ZIM. Currently, we operate a fleet of 113 vessels. For ZIM, vessels are a means to achieve profitable growth, and our primary strategy of chartering in the vast majority of our fleet remains unchanged. Nonetheless, we have recently taken advantage of attractive vessel acquisition opportunities to purchase eight second-hand vessels to secure much-needed operating capacity and meet strong market demand, while remaining committed to delivering industry superior profitability. Going forward, we may selectively acquire second-hand tonnage when the purchase opportunity arises while executing our chartering-in approach. Complementing our efforts to secure capacity to serve our customers and benefit shareholders, our commercial agility has also been instrumental in driving our record results. Relying on the charter market as our primary approach to securing capacity allows us to ensure that we have the fleet we need to capitalize on attractive fundamentals and new opportunities. While navigating through challenging circumstances in the charter markets over the past several months, we have successfully maintained a high level of fleet flexibility to further advance our global niche strategy and best serve our customers. Despite longer-term charters becoming more common, the average remaining duration of our charters is now 24.8 months, compared to 15.3 months as of December 31st, 2020. Also, charters representing approximately 23% of our total operating capacity are scheduled for renewal in 2022. This gives us the ability to manage our fleet and adapt to changing demand fundamentals in the more immediate term. Regarding operational excellence, we believe that ZIM is well-positioned for future success. In September, we exercised the option to long-term charter five additional 7,000 TEU LNG dual-fuel container vessels from Seaspan, under a transaction that we announced in July. After exercising the option, ZIM will have a total of 15 of these vessels, in addition to the 10 15,000 TEU vessels we acquired earlier in February. The 15,000 TEU vessels are ideally suited for the Asia to U.S. East Coast trades, while the 7,000 TEU vessels are versatile and can be used in multiple trades. When we take delivery of these vessels, ZIM will deploy the cleanest technology currently available. This will help us address increasing regulations on carbon emissions and meet customer demands for more eco-friendly transport. At that time, over 40% of our operating capacity will be LNG fueled, positioning us at the forefront of reducing the carbon intensity of our fleet operations among global liners. Notably, by choosing to charter these LNG vessels rather than own them, we are also maintaining the flexibility to transition to newer technologies as they become commercially viable. We have also leveraged our improved cash position to make long-term investments in equipment, predominantly new build containers, with our container fleet totaling 1 million TEUs. Given our higher-than-expected growth this year, combined with current congested markets and limited availability of containers, investing in our container fleet has supported our ability to respond to customer needs, now and in the future. Now, more than ever, responsiveness has a high impact on our customers' overall service experience. As such, we are enhancing our human response capabilities to enable us to provide best-in-class customer experience via all channels, including phone, forms, email, and chat. While we continue to advance our powered digital customer tools, we have also utilized digital strategies to launch new services. In October 2021, we launched Ship4wd, a digital freight forwarding platform targeting the SME market. ZIM recognized the global need to simplify shipping services through mobile devices, especially among small and medium-sized businesses, and introduced Ship4wd in response. This innovative approach enables anyone to be a self-shipper, providing a simple and digital solution that makes the transfer of goods worldwide just a few clicks away. Ship4wd is consistent with our strategy of developing growth engines that complement our core business and align with our innovative spirit. We are excited about the market opportunity for Ship4wd and expect it can become a meaningful player in the multibillion-dollar freight forwarding industry. Now I will turn the call over to our CFO, Xavier, for his comments on our financial results and market developments.

Thank you, Eli. And again, welcome everyone to our quarterly update. During the third quarter, our execution remained strong, and we regenerated outstanding operational and financial results, owing to our differentiated approach and proactive strategies. I know we've discussed our KPIs, specific Q3, and year-to-date figures and our robust cash position, but I'd like to highlight several KPIs demonstrating our extraordinary financial performance, including record earnings and further enhanced cash position. A one-year contract with strong statistics reflects an average rate that is slightly above 50% higher than last year, as well as strong momentum in the spot rates, which continue to drive our results. ZIM capitalized on industry tailwinds that pushed freight rates higher. Moreover, our prioritization of a better paying cargo mix and initiatives to capitalize on the e-commerce boom were key differentiators that allowed us to earn even higher rates. Specifically, our average freight rate per TEU load increased by 174% in the third quarter of 2021 to $3,226, compared to $1,176 in the comparable quarter in 2020. This is also 38% higher than the average freight rate of $2,341 in the second quarter of this year. For the first nine months of the year, our average freight rate per TEU was $2,510, more than double compared to last year’s first nine months. Turning to our balance sheet, we have significantly increased our cash position, with our leverage ratio now at 0. As of September 30th, total net debt decreased by $1.2 billion compared to year-end 2020, resulting primarily from: first, an increase of $1.37 billion related to lease liabilities, offset by a decrease in other financial indebtedness following the early redemption of the Series 1 and Series 2 notes in June. Secondly, an increase in our cash position of $2.17 billion. The increase of $1.37 billion related to lease liabilities is almost entirely attributable to additional charters we incurred commitments in 2021. Our free cash flow in the third quarter totaled $1.72 billion, compared to $237 million in the comparable quarter of 2020. This represents an increase of over 600%. Once again, we leveraged our strengths to profitably grow our business, evidenced by our success in substantially increasing quarterly revenue, EBIT, EBITDA, and net profit, both sequentially and year-over-year. Total revenues in the third quarter were up to $3.1 billion, compared to $1.01 billion in the third quarter of 2020, an increase of more than 200%, three times more. Most importantly, and consistent with our primary objective to grow profitably, third quarter net profit was a record $1.46 billion, compared to $144 million in the third quarter of last year, growing by more than 900%. Adjusted EBITDA in the third quarter also significantly increased to $2.08 billion, compared to $262 million in Q3 2020. Adjusted EBIT increased to $1.86 billion in the third quarter, compared to $189 million in the comparable quarter last year. This Q3 2021 adjusted EBITDA and adjusted EBIT margin of 66% and 59%, respectively, improved sequentially and continue to position ZIM among the leading performers in the industry. Our Q3 2021 results include increased tax expenses totaling $358 million for the quarter. Considering our current and expected full-year 2021 performance, we will be utilizing our entire carry forward losses for the tax year of 2021. Next, I'll review our significant improvements across all financial metrics during the first nine months of 2021. Revenue for the nine-month period was $7.46 billion, compared to $2.63 billion last year, driven by improved freight rates and an increase in current volume sent to new lines that we launched, especially in the second half of last year. Again, consistent with our focus on profitable growth, net income for the first nine months of the year was $2.94 billion, compared to $158 million for the first nine months of 2020. Adjusted EBITDA was at $4.24 billion for the first nine months, compared to $504 million for the first nine months of last year, representing a growth of 740%. Our nine-month adjusted EBITDA and EBIT margin also improved to 58% and 61% respectively this year versus 19% and 11% last year. Turning to slide 10, our increased carried volume year-over-year is a direct result of proactive efforts to launch new expedited services and a focus on expanding our presence or entering new trades in order to drive profitable growth. Our enhanced position in the Pacific trade and in Intra-Asia, identified growth demand, continues to serve us well. While global volume growth in the third quarter was approximately 1.6% year-over-year for the industry, ZIM carried volume increased by 16% from 752,000 TEUs in Q3 last year to 884,000 TEUs in the current quarter. Our Q3 categories were relatively flat sequentially, due to supply chain bottlenecks consistent with conditions experienced across the industry. To alleviate some of these pressures, as well as in response to our higher-than-expected volume growth in 2021, we have contracted to purchase $898 million worth of equipment this year, adding approximately 307,000 TEUs to our old container fleet. This is about $135 million more than what we indicated last quarter. Containers at a cost of $689 million have already been delivered to us during the first nine months of this year. Regarding our cash flow, we ended Q3 2021 with a total cash position of $2.76 billion. Our total cash position includes cash and cash equivalents and investments in bank deposits and marketable securities. During the third quarter, our adjusted EBITDA stood at $2.1 billion, converting into a $2 billion cash flow from operations. Other cash items included $288 million of net capital expenditure, $274 million of debt service, and $237 million of dividends that we distributed in September. Now I will review market fundamentals that we see in the line expected, and our positive view also going forward. We continue to view fundamentals as favorable in both the near and longer term, considering the need for replacement tonnage and current forecasts for demand and growth. In the immediate term, supply chain challenges are persistent, and there is no near-term sign of import weakness. The queue at the Port of Long Beach has recently reached as high as 80 vessels. The ongoing situation continues to struggle with key U.S. inland logistics bottlenecks, including truck driver shortages, shacking shortages, and limited warehouse space. We expect these market conditions to continue at least over the next six months, supporting elevated freight rates. Secondly, looking towards 2023 and beyond, we continue to view the threat of overcapacity as low due to two unrelated factors. First, forthcoming environmental regulations that will likely go into effect in 2023 will promote slow steaming, necessitating additional capacity to carry the same volume. By some estimates, for every 1 knot in average speed reduction of the global fleet, these would result in an effective supply reduction of 4% to 5%. Secondly, congestion of land infrastructure, particularly relevant in the U.S., will continue to adversely impact efficiencies. Pandemic-related supply chain disruptions have exacerbated challenges as demand continues to grow, and operational constraints in the U.S. are likely to persist. These two factors are expected to partially offset 2023 net fleet growth reflected in the increased order book. Now turning to the next slide, although the upward trend we have seen in freight rates over the past several months has softened, possibly in conjunction with China's actions, freight rates continue to be well above the past indicative average, driven by high demand met by supply chain bottlenecks, equipment shortages, and port congestion. These circumstances, again, we do not expect to change in the near future. On the cost side, charter hire rates correlate with trip rates, and despite the continued shortages of ships, we see a positive trend of charter hire rates beginning to plateau. Next, looking at demand expectations in the U.S., pressure on the supply chain into the U.S. is not expected to decrease in the near term. The robust demand for container shipping is supported by the largest destocking cycle in the U.S. ever, continuing to suggest that pressure on retail inventory is partially spilling over to wholesalers as well. Inventory replenishment for wholesalers continues to fail to keep pace with sales, leading to inventory-to-sales ratios being well below average. We expect retailers and wholesalers to target higher inventory-to-sales ratios, which in turn is projected to sustain strong demand for ongoing shipping. As for brokerages, as the economy bounces back from the COVID-induced slump, the demand for oil is driving prices up, which we accounted for in our updated guidance. Turning to our full-year outlook, based on our exceptional financial performance today and our favorable market outlook, we now project to deliver in 2021 adjusted EBITDA within a range from $6.2 to $6.4 billion and adjusted EBIT within a range from $5.4 to $5.6 billion. The underlying assumptions driving this improved outlook include expected higher average freight rates and slightly lower long-term expenses, partially offset by higher charter expenses and slightly lower carried volume compared to our previous expectations and assumptions when we provided our guidance back in August. Nevertheless, we still expect our volumes in 2021 on a full-year basis to be approximately 25% higher than those in 2020. Turning to our new dividend policy, we are confidently transitioning to a quarterly dividend rather than a single annual payout, while keeping our underlying policy of distributing between 30% to 50% of our annual net income to shareholders. The payout for each of the first three quarters of the year will be approximately 20% of the net income generated in the quarter, and each fourth quarter once a year, we will pay a dividend so that the cumulative distribution amount will total between 30% to 50% of the annual net income. We are pleased to implement this effective immediately and accordingly declare an interim cash dividend of approximately $296 million or $2.5 per ordinary share, reflecting approximately 20% of our Q3 net income, and this dividend will be paid in December. Now, back to Eli for his concluding remarks.

Thank you, Xavier. ZIM continues to be well-positioned for the future as an innovative digital leader in transportation and logistics services. Once again, we deliver record quarterly earnings and profitability reflective of our differentiated global strategy and outstanding execution, leveraging strong underlying market fundamentals. We are excited by the progress we've made in advancing this proven approach. In recent quarters, we have increased our capacity to support customers and benefit shareholders while successfully maintaining a high level of fleet flexibility. Our innovative spirit continues to be on display as evidenced by multiple initiatives advanced throughout 2021. Most recently, we launched Ship4wd, our digital freight forwarding platform, which we expect to become a significant player in the freight forwarding industry. We remain focused on developing growth engines that complement our core business to provide added value. Lastly, we are proud of our capital allocation track record in the short period of time as a public company. In addition, we will strategically allocate capital for future growth, including paying down debt in previous quarters, strategically securing our future energy-efficient fleet, and investing in equipment and innovation. ZIM is poised to return a significant amount of cash to our shareholders. We will now open the call to questions. Thank you very much.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. One moment for the first question, please. And the first question is from the line of Randall Giveans from Jefferies. Please go ahead.

How's it going?

Good morning, Randy.

Good morning. Congrats, obviously on the epic quarter and improved dividend policy. I have a couple of questions. I've been pretty bullish on ZIM, but I'll try to keep it brief. I guess, first, on the EBITDA guidance front, you have one quarter remaining. The fourth quarter should be at least in line or possibly better than third quarter based on that EBITDA guidance. So, looking at the volumes, they seem to have ticked down from the second quarter into the third quarter. What is this trend looking like for the fourth quarter? Do you have much volume left to sell this quarter?

Yes. When it comes to the volume, we've seen a slight reduction quarter-over-quarter between Q3 and Q2, which is very much linked to the current bottlenecks that we're experiencing in the terminals, especially relevant on the U.S. West Coast, but also to some extent in other locations on the East Coast. As it stands, we expect and hope that all the actions being taken by stakeholders in the industry will assist in easing, as opposed to further deteriorating the current situation. Regarding our volume expectation for the fourth quarter, we do not anticipate that those would further reduce compared to what we experienced this quarter.

Perfect. And following up on that, we've seen some headlines around spot rates falling. Maybe one of the reasons is customers switching from booking spot to longer-term contracts. So, have you signed some new long-term contracts, maybe at least 12-month contracts with your customers starting in the fourth quarter, or are you kind of waiting until early 2022 for those contract agreements?

For us, the contract season relevant for the trans-Pacific volume is a little bit later than the contract season for the Asia to North Europe. This is based on the current year. The trans-Pacific contracts run from the 1st of May to the 30th of April. We are at the early stages of initial discussions with our customers to agree on the volume and rate. It's too early to say, we don’t see the rates reflecting the contract outlook. There are fluctuations week after week; it’s a seasonal industry. We are at the end of what we typically call the peak season, coupled with the Golden Week effect in China. That said, our assumptions for the fourth quarter, and obviously with visibility on that, is that we don't expect our average revenue per TEU to decrease.

Yeah, that makes sense. And lastly, in terms of capital allocation, you clearly have billions to spend. You've been active in securing some long-term charters with new buildings. You've been buying second-hand container ships with more prompt delivery at 0 net debt. How will you further balance this in terms of acquisitions, maybe some M&A activity, equipment spending on boxes, or possibly repurchasing shares directly from some of the legacy shareholders?

Capital allocation is obviously very important. First and foremost, we are ensuring that we dedicate cash resources to further grow the business and that we feel the tonnage needed to continue to deliver those solid results. This means acquiring secondhand tonnage; we also set aside cash for the payment of our energy vessels from Seaspan, which allows us to invest significantly this year in containers to tackle the bottlenecks we're experiencing. Secondly, as we've always mentioned, returning capital to shareholders is high on the company's agenda. If we look back to what we've achieved in the first nine to ten months since becoming a public company, we started by raising close to $220 million to $250 million back in January, and already nine months down the line in September, we returned that same amount to our shareholders through exceptional dividends. We're looking at all ways to return value to shareholders, including considering share buybacks if it becomes relevant. Again, we are focused on creating long-term shareholder value, and we believe our strategy and decisions achieve just that.

Perfect, that all makes sense. I can go on and on, but I'll hop. Thanks again for the time. Keep up the great work.

Thank you.

Hi, guys. Good afternoon. Also, congratulations on another strong quarter and exceeding many expectations, including mine. I want to touch on Randy's question about the freight contracts. I know it's early as you highlighted with the May contract period still a bit away, but did want to ask because we saw reports in some discussions where Asia-Europe legs are seeing freight contracts being entered into for as long as 36 months in duration. Did you see that type of interest? I know it's a small piece of your business, but did you see that type of interest? And are there any indications that we could see something similar on the trans-Pacific? I know it's early, but any color you can give on that?

You're right. We're monitoring what is happening in those trade routes where we are not active right now, but it seems important for us to be aware because it may indicate what our customers might want to discuss with us on trades where we are active. Regarding Asia-Europe, we are hearing similar reports to what you mentioned. Some customers have floated the idea of whether longer-term contracts beyond 12 months are something we would entertain. However, we haven't made a final decision just yet. The primary question for us is about the allocation of contract versus spot cargo that we want to secure for the next season.

We focus on the percentage of contracted cargo, whether it will evolve to 12 months as it used to be the norm, or potentially longer, will depend on the discussions we have with our customers. However, it's a bit too early to comment on this at this stage.

Got it. I appreciate at least some of that insight. Previously, you highlighted supply chain disruptions on the U.S. West Coast, where everyone is trying to manage excess containers, and there has been the threat of fees on idled boxes at the Ports of Los Angeles and Long Beach. It looks like that threat has worked, resulting in a reduction of containers and implementation of those fees. Given your large footprint in the trans-Pacific, do you see that as a concern regarding incurring those fees, and can you pass those costs on to your customers?

Firstly, no one has any interest in accruing costs and passing them on to customers. All stakeholders in our industry need to work together to ensure that equipment returns efficiently. Detention and demurrage charges incentivize the return of equipment back into the network. We ensure regular communication with our customers, letting them know that the equipment is available for them to pick up. And we've seen a reduction of about 50% in the number of containers at the Port of L.A. in the past 2-3 weeks as they’ve been put back into the overall network. What's crucial for us is collaborating to ensure that our customers receive their cargo while getting our equipment back.

Yes. Thank you for the presentation. I have three questions. Firstly, on the share of contract versus spot. Just to clarify, is it still around 20% of your volumes that are contracted? And related to that, what is your exposure to the spot premium market in terms of volumes?

Regarding the capital expenditure guidance, you're correct. When we look at combining the investment in the second-hand vessels and the equipment, overall for the year 2021, we will be slightly above $1 billion. In terms of our contracted cargo, yes, for the trans-Pacific, we're at approximately 50-50 contracts.

What is your split on the spot premium market?

The premium fluctuates week after week and is mostly a function of whether a customer wants to jump the queue to have their cargo loaded instead of waiting longer. It's marginal regarding our business; in terms of percentage, it's around 10% of our premium cargo.

Thanks. For my third question, regarding cash conversion, it's down from 90% to 83%. Is it mainly driven by longer durations of charters or offshore, and what's the normalized cash conversion?

The cash conversion rate is affected by CAPEX, which has been significant in 2021 compared to prior years. If we revert to a more fully chartered strategy instead of acquiring second-hand vessels, and considering our substantial investment this year, the cash conversion rate will typically increase.

I believe the cash conversion rate will normalize somewhere between 85% to 90% in the coming years.

Got it. Yeah. Thank you. Thanks again for your time.

Thank you, Sathish.

Hi. Good afternoon, gentlemen. I have three questions, please. Firstly, following up on Eli's comment at the start, am I correct in thinking that 23% of your total capacity is on charters less than 12 months? Is that the number to compare with the term appeal of being around 70%? I just want to check, is that 23% enough for you to maintain your agile approach to capacity? That's my first question. My second question is on CAPEX and lease CAPEX. Can you just provide an update on 2021 cash CAPEX, and also CAPEX for '22 and '23 if possible, distinguishing between cash and lease? Finally, on the supply chain disruption point, clearly, based on your comments on major supply-demand balance, you don't expect operational reliability to recover from the current low levels. What do you think are the implications if the supply chains remain more costly and lengthy for longer?

The 23% relates to the tonnage that is due for renewal in 2022, roughly the number corresponds to 25 vessels. We are navigating a difficult equation because we expect to grow by 25% while the industry grows at 5%. We need to find the balance between securing long-term tonnage and retaining fleet flexibility, especially as we receive new vessels in 2023 and 2024. Regarding CAPEX, our clear indication for this year is that overall, we expect to be in excess of $1 billion, combining investments in second-hand and new containers. As for cash CAPEX between years, it will depend on market drivers, but we plan to keep our investments conservative.

Hi, thank you. I just had one follow-up regarding M&A. I believe last quarter you highlighted looking at potential deals involving smaller scale Asian liners. I wanted to get an update on that and to confirm if you see continued horizontal activity as ideal or if you're also exploring vertical integration.

What we said last quarter remains true. We will continue to explore options to acquire smaller shipping lines within regional trades where we see growth potential, particularly in intra-Asia and to some extent in South America. This focus hasn't changed, and we are looking for opportunities.

Anything on the vertical integration aspect of the industry?

Yes. We are focusing on being a pure-play shipping operator. We have developed activities on the digital front, such as the Ship4wd platform we launched. This gives us a slight diversification away from pure core shipping activities, but we remain focused on enhancing our core shipping operations.

Got it. Very clear. Thank you, Xavier.

Thank you very much to all of you. See you next quarter.

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