Earnings Call Transcript - ZIM Q2 2025

Elana Holzman, Head of Investor Relations

Thank you, operator, and welcome to ZIM's second quarter 2025 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 2024 Annual Report on Form 20-F filed with the SEC on March 12, 2025. 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?

Eliyahu Glickman, President and CEO

Thank you, Elana, and welcome, everyone. Thank you for joining us today. Despite severe market disruption and volatility, mainly due to American tariff announcements, we leveraged our transformed fleet and improved cost structure in Q2 to mitigate negative effects. We generated revenue of $1.6 billion and net income of $24 million. Q2 adjusted EBITDA was $472 million and adjusted EBIT was $149 million, with an adjusted EBITDA margin of 29% and an adjusted EBIT margin of 9%. We maintained total liquidity of $2.9 billion at June 30, having paid approximately $470 million in dividends in the second quarter. Per our dividend policy to distribute 30% of quarterly net income, our Board of Directors has declared a dividend of $0.06 per share or a total of $7 million based on Q2 results. Despite the considerable uncertainty given our performance to date, we are revising our full year guidance ranges. We are raising the lower end of our full year guidance such that we expect to generate adjusted EBITDA between $1.8 billion to $2.2 billion and adjusted EBIT between $550 million and $950 million. Xavier, our CFO, will provide additional context and our underlying assumptions for our 2025 guidance later on the call. While it has been an unpredictable 2025 so far with wide swings in freight rates, we are confident in our competitive position in the industry and believe ZIM is well positioned to navigate turbulent periods like the one we are in today. ZIM's strength lies in our modern competitive fleet and agile commercial strategy, and we will remain proactive responding to changes in demand across our global trade lanes. We have adapted our Transpacific network to account for the changes in the cargo flow following the various tariff announcements since April. We rearranged our Transpacific network to address the sharp decline in cargo from China to the U.S. and parallel, improvement in cargo flow from other Southeast Asian markets. And later, we reinstated capacity to China after the spike in demand following the tariff suspension announcement in May. As we have previously discussed, we aim to build a strong commercial presence in key markets in which we operate and diversify our geographic footprint to enhance our business resilience. Accordingly, ZIM has worked to expand and diversify its network to both mirror changes in trade flows to the U.S. as well as increase our exposure to trade from China to diverse end markets beyond the United States. Our expanded presence in Southeast Asia, especially in Vietnam and Thailand, is in line with the region's rise as a manufacturing hub for the U.S. and globally. ZIM's strong and growing position in this market will enable us to capitalize on the expected continued growth in these trades. During the second quarter, this presence in Southeast Asia served as an advantage, enabling us to partially mitigate the impact of reduced cargo flows from China. Nevertheless, the incremental volume from Southeast Asia was not sufficient to fully offset the shortfall, as reflected in our overall credit volume for the period. The surge in Transpacific demand we experienced in May was short-lived, and current demand on this trade continues to be relatively weak. Furthermore, due to ongoing uncertainty regarding tariffs between the U.S. and China, and based on our current visibility, we do not anticipate a strong peak season this year. As supply that was previously withdrawn from the Transpacific has been reinstated, we also anticipate continued pressure on freight rates during the second half of 2025. In light of these developments, we are pleased with our growing presence in Latin America, where we saw 10% volume growth year-over-year. ZIM tends to benefit from growing trade between Latin American countries and both the U.S. and China. In addition to growing geographic diversification, our operational excellence remains a core strength. We operate today a modern and cost-competitive fleet that is highly suited to the trades where we currently operate, and we continue to focus on ensuring access to the right capacity. Following a transition period from '23 to 2024, during which we had 46 new build vessels delivered to us, we entered '25 with a transformed fleet, significantly improving our cost structure and the efficiency of our operated capacity, thanks to larger, more modern vessels. Moving forward, our objective is to maintain and further enhance our competitive position while capitalizing on attractive opportunities that will ensure our fleet remains modern and cost-effective. In April, we announced a new long-term chartering agreement for 10, 11,500 TEU LNG dual-fuel vessels that will be delivered in 2027 and 2028. This resistive capacity is ideally suited for ZIM's various global trades, and it will also further strengthen our core LNG fleet, which is a critical commercial differentiator. In the future, we see significant value as operators of LNG tonnage and customers increasingly seek eco-friendly shipping solutions. We also view it as imperative that ZIM maintain some degree of flexibility at all times to act dynamically and reshuffle vessel capacity based on market demand. We recognize that the market realities of today may be different from the realities of tomorrow. We implement the same agility operationally in line with our operating capacity with the shifting dynamics of the trading environment. This year, we regained this important optionality with respect to our fleet size and have redelivered charter capacity. Overall, market fundamentals still point to supply growth outpacing demand moving forward. However, as we've seen, the rate environment can be volatile and unpredictable, driven by a range of factors impacting global trade and economic expectations. In the face of such uncertainty, our focus is controlling what we can to position ZIM for sustainable and profitable growth. We are confident that our commitment to excellence and our agility will serve us well, and we continue to take steps forward to further enhance ZIM's business resilience, both commercially and operationally. On this note, I will turn the call over to Xavier, our CFO, for a more detailed discussion of our financial results, 2025 guidance as well as additional comments on the market environment. Xavier, please?

Xavier Destriau, CFO

Thank you, Eli, and again, on my behalf, welcome to everyone. On Slide 7, we present our key financial and operational highlights. Second quarter revenues were $1.6 billion, down 15% compared to last year, reflecting lower freight rates and lower volume. Total revenues in the first half of 2025 of $3.6 billion were up $147 million, or 4% year-over-year. Our average freight rate per TEU in the second quarter was $1,479 compared to $1,674 per TEU in the second quarter of last year. Q2 carried volumes of 895,000 TEUs were 6% lower year-over-year due to the disruption in the market that Eli already referred to. Revenue from non-containerized cargo, which reflects mostly our car carrier services, totaled $111 million for the quarter compared to $128 million in the second quarter of 2024. Our free cash flow in the second quarter totaled $426 million compared to $712 million in the second quarter of 2024. Turning to our balance sheet, total debt decreased by $115 million since prior year-end. As previously noted, total debt is expected to trend down as repayment of lease liabilities exceeds lease additions and extensions until we start receiving newbuild charter capacity in the second half of 2026. Next, the following slide provides an overview of our fleet. While Eli has already addressed a few key elements of our fleet strategy, I'd like to expand on his comments and share additional data points that we believe are important to consider. ZIM currently operates 123 containerships with a total capacity of 767,000 TEUs. Two-thirds of this capacity comes from the 46 newbuild vessels received during 2023 and 2024, which have durations in terms of charter from 5 to 12 years, and also another 16 vessels that are owned by ZIM. To remind you, we opted to secure our newbuild capacity on long distance and long-term contracts rather than continue to rely on the short-term charter market. By doing so, we ensure access to vessel sizes better suited to the trades in which we operate, which are not available on the charter market, thereby improving our competitive position. The longer-term charter period also contributes to better predictability in our cost structure. Moreover, for 25 of the 28 LNG vessels, our core strategic capacity, we hold options to extend the charter period as well as purchase options, giving us full control over the destiny of these vessels, very much as if we were the vessel owners. We had a similar option to purchase the 10 11,500 TEU LNG vessels we recently committed to at the end of the charter period. The remaining one-third of 250,000 TEUs allows us to maintain important flexibility. At the end of 2026, there will be a total of 34 vessels up for charter renewal, with 12 vessels of 64,000 TEUs still up for renewal in 2025 and 22 vessels or 70,000 TEUs in 2026. This optionality to keep the capacity or redeliver to owners allows ZIM to adjust its capacity according to changing market conditions or shifts in our commercial strategy. With respect to our car carrier capacity, we currently operate 14 vessels, having recently delivered another car carrier. The car carrier industry has also been under some pressure, given supply growth and the introduction of new tariffs on Chinese electric vehicles by both the U.S. and the European Union. While ZIM expanded its car carrier capacity in the past few years up to 16 car carriers last year to benefit from favorable market trends, we do not have long-term commitments on our chartered capacity, and we are prepared to adjust our participation if market dynamics change. Next, now moving on to Slide 9. We present ZIM's second quarter and six months 2025 financial results compared to last year's Q2 and last year's first half. Adjusted EBITDA in this year's second quarter was $472 million, and adjusted EBIT was $149 million. Adjusted EBITDA and EBIT margins for the second quarter were 29% and 9%, respectively, compared to 40% and 25% in the second quarter of last year. For the first six months of 2025, adjusted EBITDA margin was 34% and adjusted EBIT margin was 17%. This is compared to 34% and 19% in 2024. Net income in the second quarter was $24 million compared to $373 million in the same quarter of last year. Next on Slide 10, you see we carried 895,000 TEUs in the second quarter compared to 952,000 TEUs during the same period last year. That is a 6% decline. This decline was mainly attributable to weak Transpacific demand, driven by tariff-related disruptions as volume from other Southeast Asian markets were insufficient to offset the reduction in cargo from China. In Latin America, on the other hand, we continued to see growth, 10% year-over-year in the second quarter. Next, we present our cash flow bridge. For the quarter, our adjusted EBITDA of $472 million converted into $441 million net cash generated from operating activities. Other cash flow items for the quarter included dividend payments of $471 million and $470 million of debt service, mostly related to our lease liability repayments. Moving now to our 2025 guidance. We have raised the lower end of our guidance range and now expect to generate adjusted EBITDA between $1.8 billion and $2.2 billion, and adjusted EBIT between $550 million and $950 million, with the second half still expected to lag the first half. We have narrowed ranges reflective of our performance year-to-date, but note the continued high degree of uncertainty related to global trade and the geopolitical environment. Our view on freight rates and operated capacity is unchanged as compared to our guidance assumption for March and May. We expect freight rates on a full year basis to be significantly lower in 2025 when compared to those of 2024, with average freight rates in the remainder of 2025 lower than the first half average. Also, our view remains that sailings through the Red Sea will not resume this year, continuing to absorb significant capacity. We assume that we will maintain similar operating capacity on average to the one of 2024 over the course of the year, as we renew some existing capacity or similar tonnage. Given our exposure to the Transpacific and weaker outlook for the remainder of 2025, we revisited our volume growth assumptions again and now assume flat volume year-over-year compared to 2024. Finally, as for our bunker cost, we expect slightly lower costs per ton in 2025 when compared to 2024. Now before opening the call to questions, a few more comments on the market dynamics. The supply-demand balance previously used as an indicator for market expectations appears to be a less effective predictor. On the supply side, the routing around the Cape of Good Hope continues to absorb substantial capacity, while congestion also remains a factor influencing effective supply. Despite notable increases in supply, 10% in 2024, and an additional 6% expected for the full year of 2025, scrapping has been minimal for several years. Idle capacity has stayed low, below 1% for the past 18 months, and the charter market has remained relatively strong. Demand, particularly on the Transpacific, on the other hand, has been greatly impacted both positively and negatively by uncertainty with respect to American tariffs. Beginning in late 2024, in response to anticipated higher U.S. tariffs, demand was strong entering into 2025. We've already discussed the effect of shifting target decisions throughout April and May on our Transpacific cargo flow. On a positive note, inventory levels, which are available up to June, remained relatively stable throughout 2025, suggesting that the strong demand we experienced from late '24 into early 2025 did not result in significant inventory build-up. Recently, new trade agreements have been announced between the U.S. and several significant trading partners, including the European Union, Japan, Korea, and Vietnam, resulting in higher overall tariffs on products entering the U.S. The long-term impact of these changes is not yet clear. Additionally, a trade agreement between the U.S. and China has not been reached, contributing to ongoing uncertainty that complicates planning for U.S. importers and for carriers to forecast demand, particularly beyond the third quarter. Recent tariff announcements and the introduction of unusually high tariffs as seen in recent announcements regarding India and Brazil for various reasons have also introduced further unpredictability. It is important to note that ZIM or any other carrier for that matter need not be active in a particular trade to be impacted by these tariff decisions as container shipping works as a global network. If tariffs undermine a particular trade in the long term, the resulting network adjustment can create overcapacity on other trades. And on that note, we will open the call to questions.

Operator, Operator

Your first question comes from Omar Nokta from Jefferies.

Omar Mostafa Nokta, Analyst

Eli and Xavier, a couple of questions from my side. And maybe just first on the volume discussion you were just highlighting. Obviously, you're expecting flat volumes for the year, which implies the second half is going to be down year-on-year. And I wanted to just check with you, is this expectation driven by your views on the market itself being down in the second half? Or is it driven by maybe a pullback on the part of ZIM, given some of your vessels are rolling off charter and you don't plan to renew them?

Xavier Destriau, CFO

Omar, it's a little bit of both. I think, first, when we compare year-over-year 2024 versus 2025 for the second half, we benefited last year from a very strong volume growth, if you remember. Quarter-over-quarter, we beat records in Q3 and also in Q4 from a tariff quantity perspective. This year, we will operate a similar type of overall effective capacity in terms of TEU that we deploy on the various trades where we operate. But it is to be said that the peak season in Q3 is somewhat expected to be not as strong as what we experienced last year. And so that is, I think, why we don't believe that we are going to renew beating our record in terms of carried quantity into the second half. We still believe that we are going to hopefully come back to higher volume sequentially. So Q2 has been a little bit of a weaker quarter from that perspective for the reasons we talked about and the reshuffling of our capacity as a result of the change in the U.S. tariff discussions between the U.S. and China that impacted us, give or take, 50,000 TEUs. So in Q3, we expect that if we are to operate in a stable environment, we will recover that volume; whether we're going to beat last year remains less likely.

Omar Mostafa Nokta, Analyst

Clearly, the market can be very volatile. You mentioned the current market dynamics in your commentary. What is your best estimate if you consider the business over the next 18 months? You have 34 ships that are up for renewal between now and the end of 2026. If there's no change in the market dynamics, what portion of those 34 do you think you would look to renew?

Xavier Destriau, CFO

That's an interesting question, an important one. What is very important to us is that what we label as our core capacity, which mostly relates to the large capacity vessels, going back to those 46 ships that we ordered and got delivered to us in '23 and '24. We know that this is the capacity that we need in the longer term and that we will continue to operate in the longer term. So that's with the capacity that we own, that's two-thirds of the capacity that we operate today. And yes, we have, give or take, 250,000 TEUs today. Of capacity, these 34 ships that you were referring to, that will come up in terms of charter period for possible renewal between now and the end of next year. And clearly, those ships will act as variables for us to navigate the market conditions. If the market is continuing to deteriorate more likely than not, we will let go more of the ships than we will recharter. If this is to be a different story, then we will recharter. But back to your question, I think if the market is trending down meaningfully into 2026, chances are that we will end up downsizing as opposed to renewing those vessels.

Omar Mostafa Nokta, Analyst

Okay. And one final one for me and I'll turn it over. Eli had mentioned the capacity on the Transpacific that's been reinstated and then you have it in combination with the muted peak season has kept rates depressed. Why would you say that the capacity influx that we did see, why has that not been rerouted? And when would you expect to see that start to kind of shift away from the market, given the market remains fairly soft on the Transpacific?

Xavier Destriau, CFO

That's an interesting question. Looking ahead to the third and fourth quarters, while we may not surpass our volume from last year in terms of carried quantities, we expect to see a strong volume in the second half. This expectation also extends to our outlook for the Transpacific. Additionally, it's worth noting that earlier this year, alliances were reshuffled, and as a result, our network and partners are in the initial stages of collaboration. This situation may lead to some limitations in managing capacity, although that could change.

Operator, Operator

Your next question comes from the line of Alexia Dogani from JPMorgan.

Alexia Dogani, Analyst

Yes. Two questions, please. Just firstly, when we look at the third quarter, is there any kind of timing effect of the exit rate from the high June spot rates that will benefit you? And do you have kind of a sense of that already? And then when you look at your deployed capacity, I understand the number of vessels has come down year-over-year, but these are larger vessels. So in fact, in the second quarter, you actually increased capacity quite substantially, and yet volumes were also down quite substantially. When we look at the second half, I'm estimating that you will still grow capacity year-over-year and based on your average deployed capacity last year. Should we expect the load factors to continue to erode therefore, or are you taking more near-term action now? And then just a follow-up on the previous question. I think you talked about 250,000 TEUs that could be up for renewal in the next 18 months. But on this slide, I only get 140,000. What am I missing, please?

Xavier Destriau, CFO

So first, on the question regarding the timing effect, I think you're correct. When we look at what has happened in this first half, the tariff effect of April, you may remember, on the 9th of April, the tariff was hiked to 145% for the import of cargo from China to the U.S. As a result of that, we saw pretty much overnight, the export or the bookings out of China take a nosedive. What we did was change the capacity and as a result, we lost the volume that we just talked about during the prior question. But then what happened is when in May, mid-May, the 90-day pause was introduced, we saw a very sharp rebound in demand, with all the importers in the U.S. trying to benefit from this window of opportunity to scale back their inventories. That also came with a nice increase in the spot rates to which ZIM is significantly exposed. When it comes to revenue recognition, you remember that according to the accounting rules, we recognize revenue based on the pro rata temporaries over the duration of the voyage. So the surge in the rates that we experienced towards the second half of the second quarter is only partially recorded in our second quarter. Some of those voyages and a bit of loadings will find their way into our financial statements for the third quarter. Hence, why maybe if you look at our Q2 performance and you put that in parallel with the guidance that we just recommunicated, there might be a calendarization of that peak effect that we saw in terms of the spot market happening in Q2 over a very short time frame. It went up and down quite fast. So yes, there is a bit of a time lag that will point into Q3 on that front. When it comes to the capacity that we will deploy in the second half of this year, I think when compared to last year, I wouldn't say that there is going to be a significant difference in terms of operated TEU. By December 2024, we had received almost all but one of the 46 ships that we had on order. If I remember well, we closed 2024 operating 782,000 TEUs of capacity. We operate today 760,000 TEUs. I think it's going to be pretty much like-for-like. Regarding your last question for clarification, when it comes to the TEUs, maybe I was unclear. We have 250,000 TEUs that are subject to a short-term charter, which we define as less than 5 years. The 140,000 is what relates to 2025 and 2026 expiration dates. The rest is beyond 2026, going back to your 250,000.

Alexia Dogani, Analyst

Can I just ask one more if I may? In terms of the cost structure of the whole industry, we've heard from Hapag-Lloyd and Maersk that unit costs are materially above pre-pandemic levels. Can you give us an indication of your breakeven unit cost level? And I guess if we think about the 2Q, did you incur any operating losses at the start of the quarter versus the end of the quarter?

Xavier Destriau, CFO

Look, I think when we are considering our cost structure, it is clear that costs went up in terms of moving a box today compared to what was the prevailing cost structure. If we look at pre-COVID, we were bunkering the ships on HFO, then since then, we transitioned to LSFO in itself. This is a cost increase. If we look at the newbuilding price, as I'm sure you've seen, they went up, and as a result, that is where the chartering rate went up. So the cost of securing tonnage has also gone up compared to a prior period. When we look at the variable component of things, the cargo handling charge has also gone up. If we look at the U.S., we are not strangers to the discussions and the agreement reached between the various terminals in the U.S. East Coast and first in the West Coast and then in the East Coast with the union. That triggered an increase in salaries that is reflected at the end of the day in an increase passed on to the carriers when it comes to paying for loading or discharging a box. All those elements of additional costs have found their way into our cost structure, which, yes, do contribute to increasing the overall cost that you carry. And then you add to that, something that is more linked to the congestion we are experiencing today compared to what was the situation prior to COVID. There are more and more ships on the water. Maybe the terminal capacity did not grow at the same pace. We need to put more ships in order to maintain weekly service. To give you an example, on our main Asia-to-U.S. East Coast, our ZCP line, we used to operate that line on a weekly basis with 10 ships pre-COVID, now we need 12 to maintain the weekly schedule. So yes, I would say that overall, the cost structure of the industry and of ZIM has gone up compared to pre-COVID levels.

Operator, Operator

Your next question comes from the line of Chloe Fu from Citi.

Tianyu Fu, Analyst

My first question is also on the cost. So you have mentioned that you have an improved cost structure in Q2 and you aim for sustainable growth in this highly uncertain market. Can you elaborate on what you have done in terms of cost in Q2? And what are some further cost improvement plans? And since you have also talked about what the product cost that is more difficult to decrease such as cargo handling. I'm just interested to know, which part of the cost can you improve?

Xavier Destriau, CFO

Thank you, Chloe. Maybe addressing your second question to start with from a rate dynamic perspective. Yes, I think there are clouds on the horizon with all the uncertainties we talked about. The fact that some of the shippers in the U.S. anticipated a little bit of the peak season means that we don't expect a strong peak season ahead of us, and maybe the bulk of it is already behind us. If there is no stronger demand from a seasonality perspective, then this is not a good indicator to support the freight rates. We'll see what happens on that front, but it is a risk we highlight, especially with respect to the latter part of the year Q4. In terms of cost structure, the initiatives we are entertaining on a quarter-over-quarter basis include a few key points. First, we continue to benefit from the scaling up of our average vessel size. The average vessel size has gone up by 50% compared to the average size we were operating back in 2022. As you know, by scaling up, we reduce our cost of moving a box, provided we can maximize utilization. The second element to emphasize is the transition we embarked on shifting away from LSFO and increasing our LNG conversion. Today, 40% of the capacity we operate runs on LNG. We also have secured good access to supply for the trades where we operate, and this transition from lower sulfur fuel oil to LNG also contributes to reducing our cost of operation. Third, I would highlight our partnership with MSC that we entered into in February, following the change in the 2M Alliance. That helps maintain costs down while offering a wide range of services to our customers. Lastly, we consider reducing the imbalance between our trades to maximize the weak leg in terms of loading and avoid the repositioning of empties, which is a hidden cost. We are also active in developing tools to improve our digital initiatives, assisting us to anticipate better, price better, and capture additional volume from the competition.

Operator, Operator

And that concludes our question-and-answer session. I will now turn the call back over to Mr. Glickman for some final closing remarks.

Eliyahu Glickman, President and CEO

Thank you. To conclude, while 2025 has so far been marked by significant volatility and wide swings in the freight rates, we remain confident in ZIM's ability to navigate this turbulent environment. Our model upscale fleet of cost-efficient vessels, as well as our agile commercial strategy, positions ZIM well to continue to respond quickly to changes in the market and demand and across our global trade lanes. As we have demonstrated time and again, we will remain proactive, realigning our network, redeploying capacity, and capitalizing on our growth opportunities as market conditions evolve. We believe our disciplined, nimble approach combined with a commitment to operational efficiency and a strong balance sheet will enable ZIM to manage through the current period of uncertainty and emerge even stronger over the long run. Based on our performance to date, we've increased the midpoint of our 2025 guidance ranges and intend to draw on our transformed fleet and improved cost structure to continue to create value for our shareholders, even in the face of challenging market dynamics. Thank you again for joining us today. We look forward to sharing our continued progress with you all. Thank you.

Operator, Operator

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