ZIM Integrated Shipping Services Ltd. Q1 FY2022 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. Q1 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. I will now turn the conference over to Elana Holzman, Head of Investor Relations. Please go ahead.

Thank you, Natalie, and welcome to ZIM's first quarter 2022 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 2021 Annual Report filed on Form 20-F on March 9th, 2022. We undertake no obligation to update these forward-looking statements. At this time, I would like to turn the call over to the CEO, Eli Glickman. Eli?

Thank you, Elana and welcome everyone to today's call. Following an extraordinary 2021 closing, we carried our strong momentum into 2022. I am proud to present another quarter of record results and exemplary execution. I believe that we are very well-positioned today as an innovative provider of seaborne transportation to capitalize on market tailwinds and continue delivering superior profitability. Before I dive into our quarterly highlights, I would like to address the situation in Ukraine. The continued violence saddens us deeply. In an effort to support the people of Ukraine, we have donated to help build and operate a field hospital to care for those affected by the war. We also continue to support our Ukraine employees, customers, and partners in any way we can. As I have stated previously, our duty to help preserve human life exceeds all other considerations. Now, turning to ZIM Q1 and year-to-date accomplishments. As highlighted in this slide, slide number three, we maintain our strong trajectory into 2022, delivering another outstanding quarter of financial results due to the proactive strategies we've implemented to capitalize on both the highly attractive markets and the ZIM differentiated strategy. In Q1, we generated record revenues of $3.7 billion, record adjusted EBITDA of $2.5 billion, and record net profit of $1.7 billion. Shareholders equity was $4.3 billion at the end of the quarter. Consistent with our focus on profitability, we achieved exceptional margins as well, 68% for adjusted EBITDA and 60% for adjusted EBIT. We continue to outperform the liner industry average as we have done for several quarters. Our results also stand out operationally as we grew our current volume by 5% in Q1, compared to Q1 last year. This is an impressive achievement, particularly given the global volume decreased by almost 2%. Slide number 4, you can see that our strong performance to-date, combined with the 2022 long-term contract rates that we have secured, boost our confidence with respect to our 2022 guidance. The average rate of our long-term contract, which took effect starting about two weeks ago in May 1st, reflects a rate increase in excess of 100%, in other words, more than double as compared to 2021. These long-term contract rates illustrate customer expectation for both sustained demand for capacity as well as the continuation of a very strong rate environment. As such, we are raising our full-year 2022 guidance and now expect to generate adjusted EBITDA between $7.8 billion to $8.2 billion, and adjusted EBIT between $6.3 billion to $6.7 billion in 2022. It is also noteworthy that our exceptional performance allows us to continue to return substantial capital to shareholders with our policy to distribute a dividend to shareholders on a quarterly basis at the rate of 20% of net income. Our Board declared a Q1 dividend of $2.85 per share. Slide number 5. We remain focused on executing across our strategic pillars, including operational excellence. A core component has been strengthening our commercial proposition and improving our cost structure by securing fuel-efficient using capacity. Following our first long-term charter agreement for 10,000, 15,000 TEU LNG dual-fuel vessels, intended to serve our Asia to US East Coast service, our focus shifted to highly diverse vessels. Since the beginning of 2022, we announced three charter agreements for a total of 17 newbuild vessels with total TEU capacity of approximately 96,000. We added three 7,000 TEU LNG dual-fuel container vessels to the 15 vessels already secured in 2021 as well as eight 5,300 TEU vessels and six 5,500 TEU vessels. This is modern and efficient tonnage, particularly well suited to serve on our expanded network of expedite services as well as other regional services. This versatile fleet will allow us to maintain our flexibility and strengthen our market position and commercial prospects. In total, we secured 46 new build vessels, scheduled for delivery starting in Q4 2022 and throughout 2023 and 2024. Our fleet chartering strategy will enable us based on prevailing market conditions in the future to decide whether these new vessels will represent an expansion of our fleet or a replacement. It is also important to highlight that of these 46 new vessels, 28 are LNG powered, consistent with our sustainability core value; we continue to position ZIM at the forefront of carbon intensity reduction among global liners that will support our customers to meet their own ESG objectives. We anticipate becoming the first container shipping company to deploy LNG vessels from Asia to the US East Coast. When we take delivery of these green LNG fuel vessels, which will represent approximately one-third of our operating capacity, ZIM will be more carbon and cost-efficient than it is today, improving our competitive position. I would also remind you that the road to decarbonization in our industry is an opportunity for ZIM. Given our mostly chartering capacity, we can easily replace our operated capacity with more environmentally friendly tonnage. Moreover, by opting to charter these LNG vessels rather than on ZIM, we are also maintaining flexibility to transition to newer technology if and when they become commercially viable. Slide number 6. You can see that our ability to adjust our fleet sales to market conditions and identify market opportunities are a direct result of our operational and commercial agility and other strategic pillars. ZIM now has an established track record of making minimum adjustments to meet changing market conditions, optimizing vessel deployment, supporting high utilization of vessels, and exporting specific trade advantages to drive outstanding results and superior profitability. Since the beginning of the year, we've increased our operated capacity by approximately 11%, and we currently operate 137 vessels. It is important to remember that we have added significant operated capacity in recent weeks in anticipation of the changes to our collaboration with the third party. ZIM's exceptional success is based on our ability to act decisively and adjust quickly. We continue to identify new market opportunities, advancing our global new strategy to meet customer demand. So far in 2022, we have launched 10 new lines, including six that are an expansion of our network and four replacement lines to better meet our customers' needs, notably focusing on promoting alternative modes of transport for e-commerce customers. We recently launched our Baltimore eXpress line, ZXB, a first-of-its-kind, speedy e-commerce service from China and Southeast Asia to the US East Coast operated exclusively by ZIM. As part of our vision strategy, we identified this opportunity to add another building block in our ZIM Ecommerce Xpress Line and launch the Baltimore service at a time when customers are seeking a competitive alternative to airfreight. Importantly, ZXB offers customers a wide range of advantages, including expedited rail, air, and road connections to inland destinations. Finally, as we discussed on our previous earnings call, we've extended our operational cooperation with the 2M Alliance on the Asia to US East Coast and US Gulf Coast trades, while we move to ZIM independent services in the Asia to Med and PNW trades. The collaboration is now operating based on the slot exchange and vessel sharing, making ZIM an equal partner on these joint services. We continue to meet growing demand and competitively serve our customers, particularly on key transpacific routes. I will now turn the call over to Xavier, our CFO, for his remarks on our financial results and market development, please?

Thank you, Eli, and again, welcome, everyone. We delivered another quarter of outstanding financial performance as a result of both historically high freight rates as well as our differentiated and proactive approach. Slide 7 here demonstrates our strong results and significant improvement across key operational and financial indicators versus the prior year’s respective quarter. Our record results were once again driven by continued positive market conditions, which kept freight rates significantly higher than prior year. ZIM has continued to prioritize better-paying cargo and undertaken initiatives to capitalize on the e-commerce demand, which enabled us to improve the cargo mix. Specifically, our average freight rate per TEU of $3,848 in the first quarter was 100% higher compared to the first quarter of 2021, and also 6% higher than our average freight rate in the preceding quarter. Our free cash flow in the first quarter totaled $1.5 billion, compared to $645 million in the comparable quarter of 2021, an increase of 130%. Turning to our balance sheet. Total debt increased by $984 million since prior year-end, mainly driven by the increased number of vessel fixtures, longer charter duration, as well as higher daily charter rates. Over the same period, our cash position grew substantially by approximately $1.3 billion. As a result for the second consecutive quarter, ZIM’s net debt has been driven down to a level at which the company closed the period in an effective positive net cash position. Our fleet management strategy is to maintain optionality to match capacity with demand remains intact. We believe that things as we take the ability to adapt our fleet size to changes in demand fundamentals. The average remaining duration of our current chartered capacity today is 28.6 months, slightly up from the 26.1 months in March 2022, and bridging our current operating capacity to the scheduled delivery of our newbuild vessels. Also, only 11 of our chartered vessels are now scheduled for renewal between now and the end of 2022. And 28 will be renewed in 2023, and 34 potentially also reviewed in 2024. Next on slide 8, you can see that we are delivering consistent improvement in earnings while our net leverage has trended downward from 2.4% in Q1 2020 to zero. Importantly, we continue to be positioned in the third tier of our industry in this regard, reflecting the strength of our balance sheet. Moving on to the next slide, slide 9. Our proactive strategy continues to generate record results. Revenue for the first quarter was $3.7 billion compared to $1.7 billion in Q1 2021, driven primarily by improved freight rates, and to a lesser extent, also an increase in carrying volume. Most importantly, we grew profitably with Q1 net profit of $1.7 billion, representing a 191% year-over-year increase. Adjusted EBITDA was $2.5 billion for the quarter, compared to $821 million in the first quarter of last year, that is an improvement of over 20%. Consistent with our focus on delivering industry-leading margins, adjusted EBITDA and EBIT margins were 68% and 60%, respectively, as compared to 47% and 39% in the first quarter of last year. Those margins were comparable to margins we delivered in the prior quarter. I would like to note that, as anticipated, ZIM is currently incurring a 23% corporate income tax in this math. In Q1 2022, the company began the impact of the ZIM and as such, during the first quarter, we paid tax event in a total amount of $246 million. Moving on to slide 10, we continue to outpace the industry in terms of growth in carried volumes, without compromising our profitability. We carried 859,000 TEUs in the first quarter as compared to 818,000 TEUs during the same period last year. So we grew our current volume by 5%, while the general market contracted by almost 2%. Volume growth in Q1 in non-transpacific trade did compensate for the decline in transpacific volume, which was negatively impacted by congestion. Sequentially, our Q1 2022 carried volumes were flat, compared to Q4 2021, while again up, the overall market shrunk by over 6%. Regarding our cash flow, we ended Q1 2022 with a total cash position of $5.1 billion, which includes cash and cash equivalents and investments in bank deposits and other investment instruments. I would remind you that in April, we paid a dividend totaling approximately $2 billion. During the first quarter, our adjusted EBITDA of $2.5 billion converted into $1.7 billion cash flow from operations. Other cash flow items in the first quarter included $177 million of net CapEx and $249 million of debt service. The first quarter of 2022, CapEx mainly related to the secondhand vessels we purchased in Q4 of last year that we got delivered in the first quarter of this year. Moving to our guidance, we are raising our full-year guidance and now do expect to generate adjusted EBITDA between $7.8 billion and $8.2 billion and adjusted EBIT between $6.3 billion and $6.7 billion. The main reason for the improved outlook for 2022 is better than initially anticipated contract rates. Volume growth is expected this year to be approximately 5%, other assumptions we provided in March do remain largely unchanged. Turning to market and industry strength and our positive view going forward. The combination of port congestion and strong demand, especially in the United States, are the underlying factors shaping the strong market we are currently experiencing. Port congestion and supply chain disruptions have been a persistent strain on container shipping operations for over a year now. This reality is not expected to be resolved in the near future and even still into 2023. Jury estimates that long queues of ships waiting outside port and slower ship turnaround resulted in effective containership capacity being 17% below its potential in 2021. The forecast for 2022 has also increased from 12% in March to 15% today, and the port congestion to absorb 7% of operating fleet capacity in 2020. The Exports Ocean Timeliness Indicator demonstrates the depth of port congestion. As you can see, the end-to-end transport time from the exporter’s location to the port of destination on China to US routes, which stood at 45 days pre-pandemic, more than doubled and is currently estimated to be around 103 days. This longer supply chain creates demand for more backroom and containers to absorb the significantly longer queues. It is important to remember that congestion cannot be viewed as port-specific; rather, a more global holistic view should be taken. As we saw in recent weeks as the queue outside the port of LA and Long Beach shortened, congestion in East Coast ports started to wither. These measures show no signs that the supply chain crisis has passed. The next slide shows that demand in the United States is expected to remain robust in the near future. Continued disruptions of global supply chains are expected to support high demand for container shipping and shippers are looking to guarantee space to maintain required inventory. Despite growing inventories in the United States, strong demand results in inventory to sales ratio remaining at a level which is far below pre-COVID or normal levels. You can also see here on the right that global volume in March 2022 is higher by 6% when compared to 2019, the last normal year experienced by our industry. Moving on to the next slide. The overall supply-demand balance remained positive for 2022, despite projections for 2022 to be adjusted downwards, due primarily to the impact of the illegal war in Ukraine and China's zero-tolerance COVID policy. The supply-demand balance reverses in 2023 when more significant new build deliveries, including ZIM green hours, are expected. The order book has also consistently grown over the past several months, yet our view of market fundamentals for the near and mid-term remains overall positive. We believe that the increased order book is at least partially a response to the anticipated pressure to decarbonize shipping and renew the aging fleet. With major retailers setting more aggressive reduction in carbon emission than mandated, the motivation to scrap older, less efficient vessels will grow, reducing the growth in effective capacity. Supply chain disruptions will also partially offset the effect of new building deliveries in 2022. Next is the more short-term; we show that the decline in freight rates since January 2022, which is consistent with typical seasonality impacting the first and second quarters in our industry. The graph on the left shows a similar seasonality trend for the 2022 SCFI Comprehensive Index when compared to the previous year prior to and following the Chinese New Year. We believe that the Shanghai lockdown contributed to the slower spot rate recovery this year compared to the prior year. Yet, when manufacturing in China returns to normal and demand picks up in peak season, the added volume may put additional pressure on already strained supply chains and congested ports in the United States and elsewhere. The graph on the right compares the development of freight rates from 2018 to 2022 to date, and again, demonstrates the price decline in Q1 are consistent with typical seasonality. The downward trend in 2022 extended longer than prior years, again, most likely due to the Shanghai lockdown. But we are starting to see rate stabilization in Q2 as would be expected. With respect to our overall expectations for freight rates, we would contend that certain factors including the sustained historically higher-than-average freight rates, now entering the third year in a row, structural changes in container shipping, vertical growth strategy being pursued by various liners and higher costs incurred by all players will keep freight rates from declining to pre-COVID levels when rates finally normalize. With that, I will turn the call back to Eli for his concluding remarks.

Thank you, Xavier. We continue to deliver on our commitment to outstanding execution and profitable growth while positioning ZIM for long-term success. As Xavier just outlined, strong underlying market fundamentals support our optimism for the future as we leverage our global niche strategy to meet growing customer demand. Importantly, we have secured fuel-efficient newbuild capacity that will strengthen our market position and commercial prospects moving forward while maintaining ample flexibility in our operated capacity. We are pleased with our incredible progress today as a public company and excited to carry our momentum forward, continue to advance ZIM's position as an innovative digital leader in seaborne transportation and logistics services to maximize value for all stakeholders. 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. And the first question is from the line of Sathish Sivakumar from Citigroup. Please go ahead.

Hi. Thanks for the presentation. I have two questions. First, regarding the contract rates, it's clear that your rates have nearly doubled. Could you provide some insight on how they've changed in relation to the spot rates? Particularly, as negotiations for Asia to the US are just starting, do you anticipate more potential increases as we approach Q2? How should we consider the contract rate aspect alone? Secondly, looking at your guidance and your EBITDA for Q1, what does that indicate for the second half of the year? Do you expect a sharp normalization of rates? I noticed in one of your slides that disruptions could extend into 2023, so I’d like to understand how that impacts your expectations for spot rates in the latter half of the year. Lastly, what is your current visibility on demand in terms of bookings in your system? Do you have visibility for two to three months, and how does that compare to 2019? Those are my three questions. Thank you.

Yes, starting with the first question, the first and second are quite connected. The contract season for us on the transpacific runs from May 1 to April 30 of the following year. Over the past few weeks, we have finalized discussions with our customers on the transpacific trade to agree on the allocation and the risks for the next 12 months. We have found that the rates we agreed on are higher than what we initially expected during our discussions back in March. This is why we have increased our guidance, based on these higher contract rates that will take effect starting May 1. This will significantly impact the third and fourth quarters of 2022. Regarding the spot market, while there is a lot of uncertainty, we have made some assumptions in our guidance that we expect spot rates to begin normalizing in the second half of the year. We anticipate that the decline in the spot market will be somewhat balanced by the additional revenue from contract cargo compared to last year. We remain cautiously optimistic about the spot market beginning to stabilize in the latter half of this year. As for the demand forecast, we are currently facing challenges impacting the entire industry, particularly in Shanghai due to its lockdown, which has led to a drop in export volumes. We believe that production should start to resume and lockdown measures should ease by the end of June, allowing production in Shanghai to return to normal. So far, we have been able to offset the reduction in export cargo from Shanghai by reallocating some of our volume to South China and Southeast Asia. However, if the manufacturing sites remain closed, the situation could worsen, but we do not expect that to happen. In terms of booking forecasts, our filling factors indicate that our vessels are expected to remain full in the coming weeks and months.

You do have a visibility of the two months that ZIM stands today?

I'm sorry, say that again?

No, I just wanted to clarify. So, you got about two months of visibility in terms of demand booking?

Yes, that's correct. Additionally, regarding the contract, we have slightly more than that due to our negotiations regarding contract risk, which is increasingly important for our customers today in terms of volume.

Okay, got it. Can I ask you another quick follow-up actually? You've outperformed on volume growth versus the overall market, right? And what is actually driving that? Is it because of your exposure to Transpacific, or how should we think about, let's say, for the remaining part of the year?

If we look at the first quarter where we generated an increase of 5% versus the same quarter last year, we were affected by the congestion on the Transpacific. So, we carried a bit less cargo than we initially anticipated. But where we have been extremely active in growing our network is on the Intra-Asia trade. We've opened quite a few new lines within the Intra-Asia region, including between Southeast Asia to Australia, so the growth on Intra-Asia has been quite dynamic and allowed us to compensate for the slight reduction we've seen in volume due to the congestion in the US.

The next question is from the line of Muneeba Kayani from Bank of America. Please go ahead.

Thank you. I was wondering if you could talk about the union negotiations at the Port of LA, Long Beach. What are you hearing? And what is your expectation for that? And is that a risk for further disruption going into peak season? And then secondly, in terms of new deliveries for the market that are expected in 2023, could those be delayed because of the lockdowns in China and disruption on the supply chain? Thank you.

Yes. The first question with regards to the current discussions in the union discussions in Port of LA, it's very difficult for us to comment on what could be the outcome, what we can say is that as is always the case, we hope for the best and prepare for the worst. So it is a threat and a potential risk to the current existing supply chain disruption. We've seen some of our customers directing some of their cargo already in anticipation of what could be the outcome of the discussions, or if there was to be some action also in the Port of LA. So some of the cargo has been moved already from the US West Coast to the US East Coast, which also explains, to some extent, why there is an increase in the congestion of the US East Coast terminals. With respect to your second question, as we all know, 2022 is not going to be a year where we will see a significant new building being delivered. In 2023 and 2024, indeed are expected to be years where significant amounts of new tonnage are expected to be delivered. It is possible and time will tell, it is possible that the initial planning and we are sensing that some shipyards, especially in China may struggle to deliver the vessels as per the original schedule due to the zero-COVID policy that is being enforced in China, which may lead to potential delays in delivery. However, as far as ZIM vessels are concerned, because you know that we are expecting some vessels in 2023, the first one being expected to be delivered in February 2023, we seem to be on schedule.

Thank you. And can you comment on what sort of demand you're seeing right now from the US? And have you seen any change in recent weeks?

Today, the demand remains very strong. This is what we aim to highlight with the graph illustrating the inventory to sales ratio in the US, a key metric we monitor. The situation in Asia serves as one point of reference, while the crisis in Europe, particularly involving Russia and Ukraine, also impacts Asian offshore trade links. However, focusing on trans-Pacific trade, which is our area of exposure while not being involved in Asia to North Europe, we find that the demand in the US is still very resilient and strong. We have not seen any significant softening beyond what is seasonally expected. Customers are eager to maintain the space allocated to them for the upcoming weeks. Orders placed before the Shanghai lockdown are still valid, and we need to transport these from China and Southeast Asia to the US. It's possible that the pre-Thanksgiving and pre-Christmas shopping season, our peak period, might begin earlier than initially thought. If conditions are favorable and the Shanghai lockdown ends by June, we could see a surge in demand as soon as July.

The next question is from the line of Chris Robertson from Jefferies. Please go ahead.

Good morning and thank you for taking my questions.

Good morning.

My first question is on the current average time charter duration. Could you talk about the average time charter duration and on average, what percent of your operated fleet rolls off charter per quarter or per year?

We currently operate 137 vessels, most of which are on charter, except for the secondhand vessels we acquired late last year. All of them are chartered for a duration of more than a year, with an average remaining charter duration of 28 months. When we renew contracts, which we've been doing since late 2020 and throughout 2021 and into 2022, the average duration for renewed charters remains between three to five years, consistent over the last several quarters. Regarding the number of vessels whose charters will expire in the upcoming quarters, out of the 137 vessels we operate today, 11 will have their charters end by the end of the year. We aim to renew these charters, likely for a duration of three to five years. Therefore, we are not significantly exposed to the spot charter market for the rest of 2022. Looking ahead to 2023 and 2024, 28 charters will end in 2023, and another 34 in 2024. In total, this amounts to 62 vessels entering the end of their charter agreements, which we can compare to the 46 new builds that will be chartered to us during the same timeframe.

Okay. Yes. Thanks for that. And my second question is on the new Baltimore eXpress line, and you can speak generally on the other Express and also the eCommerce lines. How should we think about that in terms of earning a premium versus the market average rate?

Yes, those lines are focused on time-sensitive cargo. The goal is to minimize transit time and to ensure that once the vessel arrives at the terminal, we have the chassis ready and can organize inland transportation onto rail quickly. This is the complete service we offer to customers who book on those specific lines. They do command a premium. It is challenging to determine or provide an estimate of the percentage of premium we generate on those trade lines, but we typically achieve higher income or better margins per TEU compared to more traditional lines.

Okay. And my final question, it’s kind of following up on the first question asked around your EBITDA guidance. What percentage of the EBITDA guidance is kind of locked in based on your contract negotiations versus what is exposed to fluctuations in spot?

When we look at the cargo mix or the trade mix where every country operates, 45% of our volume is from trans-Pacific. The rest includes non-trans-Pacific, Intra-Asia, Atlantic, and Asia to South America. About 50% of our volume will be contracted on a long-term contract basis and 50% remains exposed to spot. So from a volume perspective, you can think that a bit more than 25% of our volume is contracted, and you can apply that first line of our criteria. The second one that obviously needs to be taken into consideration is that the trans-Pacific in terms of profitability may differ from the other lines in terms of volume – in terms of EBIT margin per TEU. So from a profitability perspective, it is north of the 25% I just talked about that is being locked in already for the future quarters.

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

Yes. good afternoon. Thanks for taking my question. I also had three. Just firstly, Xavier, on your comments that you're now operating 137 vessels. That is a significant increase from the 125 we talked about at the previous call, and yet carried volumes are in line this quarter with the prior quarter. Can you just talk a little bit about the utilization of these assets in the most recent period and how you expect that to move ahead, I guess, as the lines pick up? So that's one clarification on the capacity. And if you're able to give us a forward-looking capacity plan in terms of size of fleet, that would be very useful? And then just secondly on the customer mix or product mix on the volumes you carry. Is there a high-level number you can give us in terms of exposure to e-commerce or retail? I guess I'm trying to understand what else can balance if there is some weakness from retail demand? I mean, news from some of the largest US retailers is a little bit confusing in terms of the sales growth being driven by price rather than volume and clearly there are associated implications. So any color you can give there would be great. And then the final question is on labor cost inflation. Is there something to flag in terms of seafarer wages going up in line with inflation, or is it more nuanced? Thank you.

Thank you, Alexia. Regarding your first question about fleet utilization, we are currently operating 137 vessels compared to 125. This increase in the number of vessels is partly due to our expansion of the fleet to align with our partnership with the 2M. We have also replaced slots that we previously chartered from our partners with our own capacity. This explains why we are operating more vessels, although the volume of cargo carried does not reflect this directly, as we used to rely on our partners for additional space. In terms of utilization, we are seeing extremely strong performance, nearly reaching 100% on every voyage. However, congestion at ports has increased waiting times, which has lengthened the transit period for transporting cargo. This congestion has meant fewer voyages, impacting our overall transit times. Therefore, while utilization remains robust and we have adjusted our fleet in response to our partnership, the cargo volume must be understood in light of the delays caused by congestion. Looking ahead, we aim to maintain a strong foothold in our core markets and ensure sufficient capacity to strengthen our competitive position. The 46 new vessels we plan to bring into service in 2023 and 2024 will help us establish a more efficient fleet. We will continue to seek new opportunities in trade lanes where it makes sense to enter, and we are pleased to have the option to renew 62 vessels, allowing us to adapt our operations as necessary in the future. Regarding the e-commerce aspect of our operations, we have made significant strides in this area, beginning with services from Asia and Southeast Asia to Los Angeles. We have since expanded these services to Australia and New Zealand, and recently announced a new service from Asia to the US East Coast, responding to customer demand for such solutions. In 2021, about 25% of our transpacific trade was e-commerce, and around 20% of our Intra-Asia trade involved e-commerce as well. On the subject of labor costs, the current situation in Ukraine does impact us since many of our seafarers are Ukrainian. However, this has a limited effect on us because we are primarily chartering our vessel capacity. The costs associated with operating these vessels, including manning, management, and technical support, are typically covered under the charter rates we pay. Therefore, if there are any cost impacts, they would affect the tonnage owners more than us.

Thank you very much, Eli. And can I just ask one follow-up on the contract portfolio. Actually, you haven't really changed your mix of contracted volumes. I mean, is there an opportunity to increase that 50% on the transpac to a higher level that locks in some of these increases for longer, or are you more confident on the spot market?

We could have decided to increase the volume that we would contract on a long-term basis. It was not a lack of demand in this respect from our customers. Throughout the discussions, the first question we were addressing with our customers was the amount of space we could allocate to each and every one of them. So it was more a strategic decision from the company to stick to the 50% allocation between contract and spot as we also like to benefit from the spot market, especially during the peak season, where normally it is expected that the spot can outpace the contract rates. So that has been a recipe that has worked for ZIM over the past few years, and we didn't see any reason to change drastically on that front for this very specific contract season.

The next question is from the line of Sam Bland from JPMorgan. Please go ahead.

Hi. Thank you. Thanks for taking the question. I have also got three, please. First one is on the transpacific contracts. I think they've roughly doubled – the rate has doubled. Could you talk about where the contracted rates have been agreed versus the current spot rate on that particular lane, please? The second question is on the 46 vessels. I think on at least some of those, maybe all of them, there's an option for a sort of upfront payment. Could you just kind of confirm if that's on all 46? And if so, is it known how big that upfront payment could be in 2023 or 2024, or is there some flexibility around that? And the final question is, if we assume that you take all 46 and renew the charters on the existing ships, $137 million, where do you think roughly the lease liability would max out at, please? Thank you.

On the first question regarding the transpacific contract rate, we confirmed that we settled on rates that are more than double compared to what we agreed to last year. However, there is some variation in the rates we negotiated. Generally, when comparing to the current spot rates, the contracted rate is quite close to today's spot rates depending on when you look at it over the past few weeks. Regarding the 46 vessels, we agreed to make some upfront cash payments upon delivery. This decision was driven by our desire to utilize our cash effectively rather than satisfying the equity demands of tonnage owners, which would have led to higher daily charter rates over the duration of the agreement. We initially communicated that for the first series of vessels with Seaspan, the 10,000 and 15,000 TEU vessels, the cost would be $13 million per vessel, totaling $130 million for the 15 vessels. For the following order of 18 vessels at 7,700 TEU, we agreed on total payments of $20 million. Overall, the upfront cash commitment when we receive these new builds will exceed $500 million. As for your last question, it’s challenging to provide a precise answer since we don't know what the charter renewal rates will be if we were to renew the charter in 2023 and 2024 compared to releasing the vessels we currently operate for the incoming ones. It’s difficult to predict, but we would only proceed if it aligns with our business strategy, as we aim to grow profitably and engage in trades that will yield sustainable profits. We are excited about the opportunity to grow, but we do not feel obligated to expand aggressively.

This concludes our Q&A session and the ZIM Q1 earnings call. Thank you for joining, and have a pleasant day. Goodbye.