ZIM Integrated Shipping Services Ltd. Q2 FY2024 Earnings Call

Thank you for standing by and welcome to the ZIM Integrated Shipping Services Second Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I'd now like to turn the call over to Elana Holzman. You may begin.

Thank you, operator, and welcome to ZIM's Second Quarter 2024 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 2023 Annual Report and Form 20-F filed with the SEC in March 2024. We undertake no obligation to update these forward-looking statements. At this time, I would like to turn the call over to ZIM’s CEO, Eli Glickman. Eli?

Thank you, Elana, and welcome everyone. ZIM's positive momentum continues in the second quarter and we are pleased to report strong Q2 results today, highlighted by double-digit volume growth to a record high carried volume and increased guidance for the full year. ZIM generated net income of $373 million and revenue of $1.9 billion for the second quarter. Adjusted EBITDA was $766 million and adjusted EBIT was $488 million, reflecting an adjusted EBITDA margin of 40% and adjusted EBIT margin of 25%. We maintain total liquidity of $2.3 billion at quarter end. I am particularly proud of the record we set this quarter in terms of our carried volume, which totaled 952,000 TEU. We achieved double-digit growth as planned, significantly outpacing global container market growth. This achievement is a direct outcome of our strategic decision to upscale our capacity, but also due to the exceptional execution of our employees globally. Given our performance today and continued market strengths, we have raised our 2024 guidance ranges. We anticipate full-year adjusted EBITDA between $2.6 billion to $3 billion and adjusted EBIT between $1.45 billion to $1.85 billion. Xavier, our CFO, will discuss additional factors driving our 2024 guidance in his prepared comments. We remain committed to returning capital to shareholders; as such, per our dividend policy, which calls for a payout representing 30% of quarterly net income, our board of directors has declared a dividend of $0.93 per share or a total of $112 million on account of Q2 results. As we look toward the remainder of the year, our outlook for the second half has improved, reflected in our new guidance. We now expect a stronger back half of 2024 as compared to the first half. To date, the Red Sea crisis has not improved. Ongoing supply constraints, including port congestion and equipment shortages, coupled with strong demand, have continued to put upward pressure on spot rates, which were anticipated during the third quarter. However, taking a longer-term view, market dynamics still point to supply growth significantly outpacing demand, setting up for a reversion following recent peak rates. While the container shipping industry has always been volatile, our objective at ZIM was to build a resilient business with a transformed fleet. Importantly, we have maintained flexibility to adjust the size of our fleet depending on how market conditions evolve moving forward. The primary pillar of ZIM's transformation is our fleet renewal program and we continue to make tangible progress as new vessels are delivered. Thus far, 38 of our 46 new-build container ships have been added to ZIM's fleet, including all 10; 15,000 TEU LNG powered vessels and 12 out of 18; 8,000 TEU LNG powered vessels. Our cost per carried TEU continues to decline as this cost-effective and fuel-efficient new-build vessels replace older, less efficient, and more expensive charter capacity. We have also seen financial benefits from our utilization of LNG since it has proven to be more cost-effective than LSFO. ZIM is proud to have been an early adopter and advocate for LNG as a key solution to drive the transition to lower carbon fuels. This decision has enabled us to be the first and only liner to operate two separate services on the Asia to US East Coast trade with LNG-fueled vessels. Our upscale fleet has delivered commercial benefits as we carried a record of 952,000 TEU this quarter, an increase of 11.7% compared to Q2 last year and 13% compared to the first quarter. Specifically, in our main trade, Transpacific, we grew our carried volume in Q2 by 29% compared to Q2 last year and by 22% compared to the first quarter. As such, we launched a second premium service from China to the US West Coast to meet strong demand on this trade. Also contributing to our Q2 results and improved guidance is the decision we made earlier this year to revisit our commercial approach of an approximately 50/50 fleet between spot and contract volume. Instead, our spot exposure in the Transpacific trade is approximately 65%, enabling ZIM to benefit more significantly from the upward pressure we have seen on spot rates. I would also like to highlight our growing volume in the Latin America trade, as we have taken steps to launch new lines and extend our market share in this region. We grew our volume in Latin America this quarter by 90% compared to Q2 last year and 8% versus Q1 '24. As we have discussed previously, Latin America has been a focal point for us where we see long-term growth and profitability potential, and we are pleased with the progress we are making in increasing our market share. Before I turn the call over to Xavier, I would like to briefly touch on our tech investments. We believe there continues to be value in investing in companies developing disruptive technologies complementary to our core shipping business, as a potential growth engine. We recently added two very interesting companies to our portfolio. The first is CarbonBlue, our first investment in a climate-related technology. We participated in the seed-funding round alongside other financial and strategic investors. CarbonBlue develops groundbreaking water-based carbon dioxide removal technology that is unique in its ability to utilize any type of water in its environmentally friendly process. The second investment is in an e-commerce startup developing innovative robotic grasping technology. E-commerce's solution combines advanced robotics and artificial intelligence to transform how logistics centers and warehouses handle packaging processes. We are proud to have these companies address critical market needs and fulfill their potential as active strategic investors. On this note, I will turn the call over to Xavier, our CFO, for a more detailed discussion of our financial results, our updated 2024 guidance, as well as additional comments on the market environment. Xavier?

Thank you, Eli, and again, we welcome everyone. Our second quarter financial results are indicative of continued market strength based on elevated freight rates and strong demand. Our second quarter average freight rate per TEU was $1,674, a 40% year-over-year increase and a 15% increase from the prior quarter. During the first six months of the year, our average freight rate per TEU of $1,569 was 22% higher than in the first half of 2023. At the same time, we continue to see the positive impact on carried volumes. As Eli just mentioned, our Q2 carried quantities of 952,000 TEUs were a record and 11% higher year-over-year. ZIM’s growth compares favorably to market growth of 6%. Revenues from non-containerized cargo, which reflects mostly our car carrier services, totaled $128 million for the quarter compared to $136 million in the second quarter of 2023. Total revenues in the first half of 2024, of $3.5 billion, were up $811 million or 30% year-over-year. Our free cash flow in the second quarter totaled $712 million compared to $321 million in the second quarter of 2023. And turning now to the balance sheet. Total debt increased by $585 million since prior year-end, mainly due to the net effect of the incoming of larger vessels with longer-term charter durations attached. Currently, we operate 148 vessels, including 132 container ships with total capacity of approximately 755,000 TEUs, as well as 16 car carriers. This compares to the overall fleet of 147 vessels as of our prior earnings calls in May. The change from three months ago resulted from the delivery of eight new builds and the redelivery of seven vessels. Excluding the new-build capacity, the average remaining duration of our chartered tonnage continues to trend down and is now 18 months compared to 19.7 months in late May. As previously highlighted, this gives us ample flexibility to ensure our fleet size matches the market opportunities. Next, moving on to ZIM's second quarter and six months 2024, financial results compared to last year's Q2 and first half. Adjusted EBITDA in this year's second quarter was $766 million and adjusted EBIT was $488 million. Adjusted EBITDA and EBIT margins for the second quarter were 40% and 25% respectively as compared to 21% and negative 11% in the second quarter of last year. For the first six months of 2024, adjusted EBITDA margin was 34% and adjusted EBIT margin was 19%. This is compared to 24% and a negative 6% in 2023. Net income in the second quarter was $373 million compared to a net loss of $230 million in the same quarter of last year. Turning now to our carried volumes broken out by trade zone. As you can see, we saw significant growth on the Transpacific and Latin America trades in the second quarter attributable to our larger capacity vessels and new lines. Transpacific and Latin America volume grew 29% and 90% respectively year-over-year. We expect to see continued volume growth during the remainder of 2024, as we continue to upsize our capacity and remain on track to achieve our double-digit volume growth target this year. Our adjusted EBITDA of $766 million converted into $777 million of cash flow generated from operating activities. Other cash flow significant items for the quarter include $598 million of debt service, mostly related to our lease liability repayment. In Q2, we paid $73 million as a down payment on the delivery of our LNG vessels. Moving now to our 2024 guidance. As you already heard from Eli, our outlook for the remainder of 2024 is now significantly stronger than previously assumed, with the second half of 2024 expected to be better than the first. As such, we are raising our full year 2024 guidance and expect to generate adjusted EBITDA between $2.6 billion and $3 billion, and adjusted EBIT between $1.45 billion and $1.85 billion. Our improved guidance is driven almost entirely by the strengths we are seeing in spot rates, which we expect will continue at least through the third quarter. This contributed to higher freight rate assumptions in our current guidance compared to those we provided back in May. Our volume assumptions for our 2024 guidance remain unchanged, and we continue to expect to achieve double-digit volume growth in 2024 versus 2023. Our fleet renewal program continues to give us good visibility into our cost structure this year. As previously indicated, we did not need to turn to the charter market to secure additional tonnage and therefore our 2024 results are not impacted by the elevated rates currently observed in the charter market. Moving to some data points, which we believe underscore our expectations for the remainder of 2024. The underlying supply-demand balance for the near-to-midterm has been and remains one of significant oversupply. Yet, security concerns over a safe transit through the Red Sea and Strait of Bab el-Mandeb have dramatically changed this reality into a certain equilibrium as extended voyage durations around the Cape of Good Hope have absorbed significant nominal capacity. From May onwards, congestion mostly in Asian and West Med ports, along with equipment constraints, put additional pressure on the global supply chain. You can see the continued upward trend in the Ocean Timeliness Indicator, or OTI. These longer journeys on the main deep-sea trades point to added pressure on the supply side. The spot rate development reflects positive momentum. While the SCFI has declined since its mid-July peak, these declines are not unexpected as new vessel deliveries continue, particularly of large capacity vessels alleviating the pressure on supply. Overall, we believe that demand continues to remain strong. Thank you. And with that, we’ll open the call to your questions.

Thank you. We will now begin the question-and-answer session. Your first question comes from the line of Omar Nokta from Jefferies. Your line is open.

Thank you. Hi, Eli and Xavier. Good afternoon. Congratulations on a very strong quarter and significant guidance revision for the year. It's great to see double-digit growth in the volumes, and it's also encouraging to witness that in the freight rate, which often doesn't align. I have a couple of questions, but I want to focus on volumes first. You've frequently mentioned your goal of double-digit growth for the full year. The second quarter figure of 952,000 TEUs represents a substantial increase compared to previous quarters. I understand you've received some larger ships, which has contributed to this. As we look ahead, do you see this volume level as a new standard for ZIM? Additionally, can you provide any insights on the third quarter and how these volumes have performed so far?

Yes, Omar, it is a good question. The short answer is we basically hope so. Clearly, as we have been upgrading and upsizing our capacity, we keep on increasing our operative tonnage. Today, we operate around 750,000 TEUs. By the end of the year, when we will have received the remaining eight ships and returned 15 smaller vessels, we will end up operating an equivalent capacity close to 800,000 TEUs. To benefit from the lower cost per TEU carried, we need to make sure that, at the same time, we increase the volume that we carry. So we set a new record this quarter with 952,000 TEUs. We expect to continue to grow quarter after quarter and reach 1 million TEU per quarter in the not-so-distant future.

Okay, thank you. Interesting. And I guess, maybe big picture, obviously, on free cash flow: 2024 has turned out to be much stronger than you initially expected, and free cash flow has turned positive quite meaningfully. How do you think about the uses of this excess cash flow that you are now bringing in, whether it is strategically or with respect to the balance sheet? Any thoughts you can give on the uses of that additional free cash?

Look, I think the first comment I want to make is that we are very pleased with how the quarter turned out and the outlook for the remainder of the year. Continuing to strengthen the balance sheet of the company is critical. The stronger the balance sheet and capital structure are, the more opportunities we have in terms of capital allocation. In terms of prioritization, we will continue to allocate capital to our assets, vessels, and containers. We’ll continue to rejuvenate the fleet of containers that we operate. From a vessel perspective, we did a significant completion of our transformation that was initiated back in 2021, 2022, so there may be less rush on that front. Additionally, we want to continue to return capital to shareholders, as we've done since the IPO. I think we have consistently adhered to our dividend policy in terms of dividend paid to our shareholders, and we intend to continue to do so as well in the foreseeable future.

Thank you. I have one more question as a follow-up regarding the dividend. You've declared a 30% payout for this quarter, which is your second one this year. It seems likely that another one will be announced in the third quarter. How is the Board considering the possibility of reaching the full 50% payout by year-end? I understand this is at the Board's discretion, but do you think it's as straightforward as maintaining the current market above long-term averages to achieve the 50%, or is the preference to retain excess cash due to uncertainties with the order book and demand growth? How are you approaching the situation regarding the potential adjustment to that 50%? Is the company leaning towards preserving cash or distributing it if the market remains stable? Any insights you can share would be appreciated.

Look, I think it’s a little bit early for us to give a clear answer to that question. The Board and the company will closely look when the time comes. This will be in March next year. What will we think the following years will look like? Where will we be as an industry in terms of potentially going back to a more normal way of operating? The Red Sea disruption today blurs the perception of what the new normal may look like. So I think this question will be very much on the agenda at the time, and the answer will depend on what we have delivered on a full-year basis in 2024, as well as how we project ourselves in the coming years depending on where market dynamics end up being.

Yeah, understood. That makes a lot of sense, and I appreciate you giving that framework. That's it for me. Thanks, guys.

Your next question comes from the line of Sathish Sivakumar from Citi. Your line is open.

Thanks, Xavier. Thanks, Eli. I got three questions here, maybe just to start off with on the tax rate. If you look at in quarter two you had a plus $2 million, how should we think about going forward into quarter three and quarter four, maybe for the full year in terms of the tax charges on the P&L? The second one is around the vessels that are coming up for renewal. So you got about 51 vessels that are coming up for renewal, including 2024 and 2025. Given where the rates are today, would you still be interested in like giving those vessels back, or would you look to renew them? The third one, you had a slide in the cash flow bridge where you pointed out about $380 million down payments for 10 LNG vessels and also payment for five vessels. How should we think about for the remaining eight vessels? And do you expect to take another debt service charge in the coming quarters, or will it mostly be in '25? Yeah. Thank you.

Thank you, Sathish. I'll try to take your questions one after the other. So, the first one with respect to tax rates for the full year 2024; we don't expect to incur significant tax charges in 2024, as we will still be able to benefit from tax losses that we generated in 2023 and can carry forward against profits expected in 2024. You should not expect significant tax charges in our yearly P&L. With respect to the vessels, in 2024, we intend to continue to execute our strategy laid out in previous quarters, which is redelivering vessels that come up for renewal. Those are smaller vessels with somewhat expensive capacity that were secured during the COVID era. We continue to need to make room for the new ships yet to be delivered. By doing this, we will increase our operating capacity from 750,000 TEU today to 800,000 TEU by the end of the year. For 2025, we do not have any new build delivery expected, but we have 36 ships up for renewal. We will need to determine whether to recharter some or all of this capacity to continue operating around 800,000 TEUs, depending on market conditions. This provides us flexibility to downsize if the market turns negative or expand if needed. Those 36 ships represent approximately 130,000-140,000 TEUs. With respect to your last question on the down payment for the eight ships yet to be delivered, we expect six 8,000 TEU ships and two smaller 5,000 TEU vessels. We only have a down payment commitment for the 8,000 TEU ships.

Thank you. You mentioned that rate levels would influence your decision to renew them. To clarify, is it primarily about the freight rates instead of the charter rates? Or do you still...?

I guess, Sathish, it is a combination. The two are somewhat linked. If we’re in a situation where the charter environment continues to be elevated, that typically reflects a shortage of capacity. This may sustain elevated freight rates. If we were to be in this environment, we might want to take some charter to capture good market conditions. However, we will be mindful and aim to limit our commitment in terms of charter duration to a short-term charter.

Your next question comes from Neils Thompson from Securities. Your line is open.

Hi, thanks for taking my question. Just to clarify, you mentioned that freight rates will be higher in Q3 and then they will trend downwards in Q4, and that's what's baked into your guidance. Can you tell us what you expect in terms of container demand? Do you expect a normalization of the year-on-year growth that we've seen so far towards the end of the year, or is that based on continued growth in the container throughput throughout the year?

Look, I think we believe that 2024 overall in terms of growth in demand will be better than what we initially planned when we entered 2024. But we did have a little bit of an early peak season in the second quarter, so some volume that would have been expected later this year may have come early. We think the second half should be okay from the overall demand perspective. We're monitoring inventory levels in the US, and if those were to pick up meaningfully, it would suggest that the underlying demand is not as strong. However, at this time, those inventories are still not at concerning levels. Therefore, whether demand continues strong will impact rates. Today, we don't have any clear alarm signals indicating that demand will collapse in the second half.

And this concludes our question-and-answer session. I will now turn the call back over to Eli Glickman, ZIM President and CEO, for closing remarks.

Thank you. We are very pleased to report strong Q2 financial and operational results today. This performance illustrates ZIM's continued success in advancing our fleet transformation, our commercial agility, and outstanding execution while capitalizing on a rate environment that has remained stronger for longer than anticipated. We are confident the steps we have taken to enhance our operational and commercial resilience will continue to drive long term sustainable growth. As we look towards the remainder of 2024, we have increased our full-year guidance and now believe that the back half of 2024 will be stronger than the first half. In the second quarter, we achieved record carried volume, as a direct result of ZIM's strategic decision to upscale and modernize our fleet, and we expect to see incremental benefits as new, larger, cost-effective vessels join the fleet. We are committed to further implementing our differentiated strategy, best serving our loyal customers, and maximizing value for all our stakeholders. Thank you again for joining us today. We look forward to sharing our continued progress.

This concludes today's conference call. Thank you for your participation. You may now disconnect.