Earnings Call Transcript - ZIM Q4 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. I am Ecola, your chorus call operator. Welcome and thank you for joining the ZIM Integrated Shipping Services Q4 and Full Year 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 would now like to turn the conference over to Elana Holzman, Head of Investor Relations. Please go ahead.

Elana Holzman, Head of Investor Relations

Thank you, operator. And welcome to ZIM's fourth quarter and full year 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 materially. You are kindly referred to consider the risk factors and cautionary language described in the documents the company files with the Securities and Exchange Commission, including our 2022 annual report filed on Form 20-F today, March 13, 2023. 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?

Eli Glickman, President and CEO

Thank you, Elana, and welcome to everyone to today's call. 2022 was a record year for ZIM in terms of EBITDA and EBIT results. We delivered adjusted EBITDA of $7.5 billion and adjusted EBIT of $6.1 billion, 14% and 6% higher than 2021 respectively. For the year, adjusted EBITDA margin reached 60% and adjusted EBIT margin reached 49%. The development of our quarterly results in 2022 reflects changing market dynamics throughout the year. Q1 2022 was our best quarter ever with respect to all financial and operational parameters. Since then, our quarterly results have declined sequentially, with Q4 2022 results dramatically reflecting the negative impact of the declining freight rates. I'm incredibly proud to present these results today and of the ZIM team for their exceptional execution in delivering these record results and meeting our 2022 guidance, especially considering the evolving market conditions. We haven't been idle for the past two years. As we benefited from highly lucrative market conditions, we took important steps to best position ZIM to execute in a more normalized market environment, improve our cost structure to ensure that ZIM is optimizing its performance for the benefit of our shareholders and creating sustainable value over the long term. Most notably, our decision to adapt our vessel chartering strategy. We secured cost-competitive and fuel-efficient newbuild capacity in a series of chartering agreements to support our commercial strategy. These agreements include vessels ranging from our flagship 15,000 TEU LNG fuel vessels serving our Asia to U.S. East Coast service to smaller, more versatile 5,000 and 7,000 TEU vessels. Notably, as we replace smaller vessels with larger ones, our cost per TEU will decline, driving improvements to our cost structure throughout 2023 and beyond. This will allow ZIM to competitively operate in low freight rate markets and weaker demand environments and maintain our objective of achieving positive EBIT. Our chartering strategy also underscores our ESG target, with 28 of our 46 newbuild vessels secured as LNG-powered, making us an industry leader in terms of low carbon intensity. The 15,000 TEU vessels are ideally suited to serve our core Asia to U.S. East Coast service, and we are the first liner to operate LNG vessels on this route. This is a significant commercial differentiation that enables us to immediately reduce the carbon footprint of ZIM and our customers. Next, our global niche strategy and customer-centric approach remain the foundation of our commercial strategy. Our customer relationships drive everything we do at ZIM, and we continue to make progress enhancing our customer experience. We continuously work to enhance our digital offering and employ strict KPIs to ensure we maintain the highest service quality while preserving our personal touch. We focus on special cargo and high-value services. We continue to invest and improve our sales tools to support our profitability objectives. We also strengthen our local presence in important markets such as Australia, New Zealand, Thailand, and Vietnam. Our commercial presence today is more diversified as we focus on trades where we can establish a competitive position. We continuously review our services and strive to improve our network for the benefit of our customers. As market conditions evolve, we adapt our services, open new lines, modify rotations, and suspend loss-making services. Recent examples of these changes include a new premium line from South America West Coast to U.S. East Coast, in which we redeployed vessels previously deployed in Intra-Asia services, and a new service covering major ports in Southeast Asia and Australia. Additionally, we have made rotation changes to our express Asia, Baltimore, ZXB service and suspended ZEX, our Asia to LA Express service. These changes are proof of our agile approach aimed at providing streamlined services to our customers, as well as responding swiftly to changing market dynamics. We also recently established a joint venture with the largest domestic shipping company in Vietnam, High-End Shipping Services. We have discussed the potential we believe this market holds, and this joint venture uniquely positions ZIM to serve local importers and exporters and connect local services with our international network. This joint venture will allow us to better serve manufacturers shifting from China to Vietnam, as well as potentially target the expanding Cambodia and Lao international trade market. We have also identified a commercial opportunity in the car carrier market, where strong demand and tight supply have resulted in positive market dynamics. We currently operate 11 car carriers, with plans to expand to 16 vessels by mid-year. Turning to our gross engine complement to our co-shipping activities, we continue to explore opportunities in early stage companies introducing disruptive technologies in shipping and the broader ecosystem. Most recently, we participated in an equity and debt financing round for the company 40Seas, an innovative FinTech platform designed to modernize cross-border trade financing. By using AI tools, 40Seas streamlines the credit application process and can offer small and medium-sized importers and exporters faster and cheaper access to their working capital financing needs than traditional financial institutions. Moreover, 40Seas represents a unique financing solution that we will very soon offer to our customers, primarily via our digital freight forwarder Ship4wd. The valuable synergies between Ship4wd and 40Seas are beneficial, and we are pleased to be able to offer our SME customers a new and innovative digital financing solution designed to assist them in growing their businesses. A positive development, which may benefit Wave Bill of Lading, one of our early investments, is a recent decision by the Digital Container Shipping Association (DCSA), established in 2018 by most of the largest shipping companies, aimed at establishing IT standards for our industry. Together, the founding members represent over 70% of the global container shipping trade. DCSA members recently announced their commitment to reaching 15% electronic bills of lading within five years and 100% by 2030. As you may recall, ZIM first introduced electronic bills of lading to its customers with the Wave Bill solution back in 2017, and today, other major shipping companies are also offering the Wave solution to their customers. We are active investors in all our portfolio companies, leveraging our expertise and network to support these companies. We believe our portfolio contains significant potential for the future. Our goal is to build financial resilience in our business, stay focused on our strategy, and leverage our core strengths to best position ourselves for a more volatile and uncertain market. We plan to use our significant cash resources cautiously to support our future profitable goals. The actions that I have outlined advance ZIM's primary objective to utilize our strengths to grow profitably and maximize value for our shareholders. Despite the current rate environment and challenging macro and industry dynamics, we are confident in our strategy and expect positive EBIT in 2023. For the full year, we expect to generate adjusted EBITDA between $1.8 billion to $2.2 billion and adjusted EBIT between $100 million to $500 million. Our CFO, Xavier, will shortly discuss the underlying assumptions of our guidance and the current market environment in greater detail. Based on our strong full year results and confidence in our strategy, our Board declared a Q4 dividend of approximately $769 million or $6.4 per share. This brings our total dividend for 2022 results to $2.04 billion, or 44% of total net income for 2022. Returning substantial capital to shareholders remains a priority as we seek to create long-term value and enable shareholders to directly benefit from our results. On that note, I will turn the call over to Xavier, our CFO, for his remarks on our financial results and additional comments on the market. Xavier, please.

Xavier Destriau, CFO

Thank you, Eli. And again, welcome to everyone. On this slide, we present our key financial and operational highlights. As Eli already mentioned, 2022 was a year of exceptional financial performance for ZIM, even with the pace of normalization accelerating during the latter part of the year. Despite the deteriorating market, ZIM generated record revenue of $12.6 billion in 2022 compared to $10.7 billion in 2021, marking a 17% improvement. During the year, our average freight rate per TEU was $3,240, 16% higher than in 2021, as we benefited from the elevated freight rate environment for most of the year. In Q4, our average freight rate per TEU was $2,122, a 42% decline year-over-year and a 37% decline from the prior quarter. Our free cash flow in the fourth quarter totaled $1 billion compared to $1.7 billion in the fourth quarter of 2021. Turning to our balance sheet, total debt increased by $1 billion since the prior year-end. As in recent quarters, this was mainly driven by the increased number of vessel fixtures, longer-term charter duration, and higher daily chartering rates. Regarding our fleet, we currently operate 152 vessels, out of which 12 are car carriers. The average remaining duration of our current charter capacity is 27.3 months, essentially unchanged from November 2022. I would note that our current fleet includes five newbuild vessels, four of 12,000 TEU capacity and one of 15,000 TEU, which is the first of the series of the 15,000 TEU LNG vessels that we ordered in 2021. We have 22 vessels up for charter renewal during the remainder of the year, with 36 up for renewal in 2024. This means we have a total of 58 vessels for renewal compared to the expected delivery of 41 chartered newbuild vessels during the same time period. Moving on to the next slide, you can see that we delivered strong results over the last two plus years. As a result, our net leverage ratio has trended downwards and currently stands at zero as of December 31, 2022, as we end the year in a net cash position. Turning to our fourth quarter and full-year financial performance, fourth-quarter net income was $417 million compared to $1.7 billion in the fourth quarter of last year. Adjusted EBITDA in the fourth quarter was $973 million compared to $2.4 billion in Q4 2021. For the full year, net income was $4.63 billion compared to $4.65 billion in 2021, and adjusted EBITDA was $7.5 billion compared to $6.6 billion in 2021. Lower margin sequentially, the second half of 2022 versus the first half, as well as Q4 versus Q3, were driven primarily by lower revenue. In the fourth quarter, we carried 823,000 TEUs compared to 858,000 TEUs during the same period last year, a decline of 4% compared to the market decline of 8.5%. For the full year, we carried 3.4 million TEUs, a 3% decline compared to 2021, slightly better than the market decline of 4% during that period. Lower volume on transpacific trade was driven by congestion and lower demand, partially offset by higher volume in other trade lanes. Next, we present our cash flow bridge and ended 2022 with a total liquidity position of $4.6 billion. It's important to emphasize that this includes cash and cash equivalent investments in bank deposits and other investment instruments. For the full year, our adjusted EBITDA of $7.5 billion converted into $6.1 billion of cash flow generated from operating activities, and other cash flow items included $314 million of net capital expenditure, $1.7 billion of debt service, mostly lease liabilities, and dividend distribution of $3.3 billion. Moving to our guidance, as Eli already mentioned, we expect to generate positive EBIT in 2023. Specifically, we expect to generate in 2023 EBITDA of $1.8 billion to $2.2 billion, and an EBIT range between $100 million to $500 million. We believe freight rates are close to the bottom and expect some improvement in 2023. Further, we also expect our volumes to grow in 2023 compared to last year, as we receive our newbuild capacity and are able to better optimize our outfit. As for banking costs, we expect lower rates this year versus last year. Overall, while we don't give quarterly guidance, we do expect improved results in the second half of 2023 compared to the first half. We enter this unpredictable time with a strong balance sheet, a significant cash balance of $4.6 billion, and zero net leverage. As such, our Board of Directors declared a dividend to shareholders, which, including prior dividends paid on account of 2022 results, totaled 44% of 2022 net income. We remain committed to returning capital to shareholders under our current dividend policy of returning to shareholders 30% to 50% of our annual net income. Other capital allocation priorities remain intact. We have a commitment of approximately $155 million and $340 million in 2023 and 2024, respectively, as a down payment for newbuild vessels chartered primarily from Seaspan, of which we already paid $13 million for the first 15,000 TEU ship delivered to us last month. We will continue to renew our container fleet and explore inorganic growth through potential acquisitions or regional liners in key markets such as Southeast Asia or Latin America. The backdrop against which we are providing guidance today is extremely challenging. The supply-demand imbalance points to oversupply in 2023 and 2024. Demand is soft, and as a result, congestion in U.S. ports and elsewhere remains an issue. Despite lower volumes in recent months, the inventory-to-sales ratio is still below pre-pandemic levels and has not come down, and various large U.S. retailers express caution regarding their 2023 sales. These factors, among others, are causing freight rates to continue sliding, though at a slower pace compared to the fall of 2022. There may be factors on both the supply and demand side that could mitigate the supply-demand imbalance. Capacity may be impacted by slippage; in fact, we've received indications regarding some of our charter newbuild vessels facing potential delays. Scrapping also remains low, but the combination of practically no scrapping in the past two years and increased compliance requirements with IMO 2023 regulations may also decrease net supply. On the demand side, we believe that in 2023, we will see a return to a more normal demand pattern, with demand stronger in the second half of the year, especially given the current weak demand. And on this note, we will open the call for questions.

Operator, Operator

The first question is coming from Omar Nokta from Jefferies. Please go ahead and ask your question.

Omar Nokta, Analyst

Thank you. Good afternoon. Nice earnings report today, clearly. Definitely earnings coming in stronger than a lot of us had expected. And just wanted to ask maybe if you could expand just a little bit about the earnings surprise, perhaps the other revenue line item, I guess the non-container portion of the revenue, those reached their highest ever at 442 million. What's behind the upswing there and what can we kind of expect as we move here in the next several quarters?

Eli Glickman, President and CEO

Sure. Thank you, Omar, for the question. As far as we're concerned, the Q4 results did not surprise us, and we are pretty much in sync with the guidance that we provided the market back in November. To your question regarding the contribution of non-containerized income, we did benefit in the fourth quarter from two strong factors. First, detention and demurrage, especially relevant on the transpacific trade lanes in the U.S., were still quite high due to ongoing congestion in Q4. However, this situation has largely unwound itself now. Second, when it comes to our car carrier activity, we have been growing and continue to grow our presence in this market. This has also made a significant impact on our revenue and our bottom line. We expect the car carrier activity to contribute positively to our earnings next year and in the years to come.

Omar Nokta, Analyst

Got it. Thanks, Xavier. And then maybe just big picture. Clearly from the press release, the presentation, and your comments here, ZIM feels very confident despite the soft market we're seeing today, which will have positive EBIT and maybe perhaps positive earnings overall for '23. As we think about the market today, how would you characterize things? You mentioned that you expect rates to be at a bottom here in the near term and recovery coming. What's going on in the market from your perspective, from the demand angle? Are we seeing an actual substantial drop in demand, or is this more of an unwinding of retail inventory, and thus we may not really have a good picture of where demand is until that inventory unwinds completely?

Eli Glickman, President and CEO

No, that's a good question. There are clearly a lot of uncertainties ahead. As you noted, we are confident in the actions taken in 2021 and 2022 to prepare for this new normal post-pandemic. Our cost structure is going down, which is one lever where we can take action. We have been focused on actively driving costs down. Regarding demand, we have seen a softening of demand throughout the second half of last year. The main retailers in the U.S. engaged in a destocking strategy that was aggressively executed in the fourth quarter and into the first quarter of 2023. As a result, we noticed capacity adjustments with more blank savings. Despite these adjustments, demand softened even more. We believe that at some point, the destocking effect will end, and retailers will need to replenish their inventories, which leads us to be reasonably optimistic in stating that the market is close to reaching a bottom before demand starts to come back, positively impacting overall freight rates.

Omar Nokta, Analyst

Thank you. Thanks for that clarification. Lastly, just to mention regarding the contracting that's hopefully underway now. How are things developing here for the 2023 contracting season? Clearly, there's been a big disconnect between contract rates historically and where spot rates are. What's going on in that market and how are you preparing for that?

Eli Glickman, President and CEO

Yes. Clearly, the market today, when we look at where the spot currently is on the main specific trade lanes, pushes shippers to ask for significant rate reductions compared to last year. We understand this well. The company has engaged with most of our key customers with whom we would like to enter into a contract settlement, both from a quantity and rate perspective. What we are hearing today from our customer base is very positive feedback about ZIM. They are pleased with our operations, particularly the fact that we are the first liner to deploy LNG services on the Asia to U.S. East Coast route, which resonates very strongly with our customer base. We hope that this positive sentiment translates into our final discussions on rates to a level where both shippers and ourselves will be satisfied. We have clearly set limits regarding how low we are willing to go, and discussions are ongoing. It is still too early to determine the final outcomes of these discussions, but we feel that our commercial positioning and brand value resonate highly with our customers in the U.S.

Omar Nokta, Analyst

Got it. Thanks. And just to clarify, the 50/50 ratio you mentioned earlier is just on the transpacific?

Eli Glickman, President and CEO

Correct. This ratio is primarily for the trade where we have a significant portion of our volume being contracted. Additionally, in other trade lanes, particularly in the Asia-Mediterranean route, we also have contract discussions with customers, but those contracts are more of a quarterly nature compared to yearly contracts. In terms of volume, I'd say that around 25% of the trade is being contracted as opposed to the 50% in the transpacific.

Operator, Operator

The next question is coming from Sam Bland from JP Morgan. Please go ahead.

Sam Bland, Analyst

It's Sam Bland here. I have two questions, please. The first one is on the charters; you mentioned the sort of maturity profile. Is your current plan to let them run to maturity on the agreed time scale, or are there any options to either accelerate or delay how you are thinking about that? The second question is, you mentioned slippage of the order book in the presentation. We've heard that from elsewhere as well. Do you think it's possible that the slippage could be quite a material amount of the orders or deliveries planned for 2023 and 2024? Or are we talking about sort of small bits around the edges?

Eli Glickman, President and CEO

Yes. Good morning to you, Sam. In terms of charters, we need to differentiate here between the long-term charter for the newbuild vessels that we've ordered over the past two years. We intend to take delivery of every vessel. We're eagerly awaiting these vessels that clearly align with our vessel and commercial strategy, so there is no intention from the company to cancel or delay any of these contracts. When we look at existing tonnage that we charter, especially traditional charter markets, in 2021 and 2022, we entered into significant contracts with durations of three to five years, maintaining the average duration of our agreements. We have a few vessels up for renewal in 2023 and 2024, but it will really come back in 2025 and beyond. In regards to slippage, it’s tricky to assess how significant it will be, but we are very much in front of this matter because we are waiting for the delivery of 15,000 TEU ships. We've received indications of delays for some of the vessels originally meant for delivery in 2023 from that shipyard. We think some shipyards in Asia are facing manpower or resource issues, which may affect the overall industry as well.

Sam Bland, Analyst

Just to clarify, when you say redelivered, does that mean handed back to the charter?

Eli Glickman, President and CEO

Correct. They will be handed back to the vessel's owner.

Operator, Operator

The next question is coming from Sathish Sivakumar. Please go ahead.

Sathish Sivakumar, Analyst

Thank you for the presentation. I have three questions here. First, on the restocking. There seems to be some optimism that volumes are looking better, at least trending into the second half of the year? Are we seeing signs of recovery? If so, how does this differ from what you would normally expect seasonally around this time of year? My second question is regarding the 2M Alliance. With Maersk coming out of the alliance, what does it mean for ZIM? How much of your DSA is actually related to Maersk, and what is your exposure to Maersk versus MSC? Finally, regarding the dividend payment for FY '23, given that we might see a potential downturn and possibly loss-making quarters, do you expect to maintain your quarterly dividends?

Eli Glickman, President and CEO

Thank you, Sathish. Regarding your first question on potential restocking, it is early to determine when demand will fully rebound, but we are observing early indications suggesting that as inventories reach desired levels, demand will follow suit. This aligns with what we traditionally experience during the slack season at the beginning of 2023, where orders and demand are generally lower. Currently, we have a mix of destocking and the typical slack season affecting trade volumes. While we believe we are nearing a bottom regarding demand and freight rates, we await clearer signs moving forward. As for the 2M Alliance, its breakup is not unexpected; we have maintained strong relationships with both Maersk and MSC which have worked collaboratively in various trade lanes. We intend to continue our partnerships with both companies even after the alliance's dissolution. Regarding dividends, we have always prioritized returning capital to shareholders. As of now, there is no reason to change our dividend policy, which remains focused on providing consistent quarterly returns based on our results.

Sathish Sivakumar, Analyst

Thank you. Just to follow up on your comments about Maersk and MSC. Are you suggesting that you would still work with both, separately, after 2025?

Eli Glickman, President and CEO

What I mean to say is that we don’t see any reason why we wouldn’t work with either of them individually. We are a significant player in the market, particularly on the Asia to U.S. East Coast trade lane, and we have a competitive fleet with the new 15,000 TEU ships. Therefore, we want to leverage these partnerships moving forward.

Operator, Operator

The next question is coming from Alexia Dodani. Please go ahead.

Alexia Dodani, Analyst

Hi, thanks for taking my question. I have three as well, please. Firstly, on the outlook for 2023. Given Eli's comments regarding profitability improving in the second half, are we expecting EBIT losses in the first half? Furthermore, Xavier, your expectation of spot rates improving from here—how much of an improvement do you expect to meet your guidance range, if you can cover that? Secondly, following up on the vessels you mentioned, as the 58 vessels are coming up for renewal over the next two years versus the 41 that you've already chartered, could this lead to a double-digit decline in unit costs, and under which scenario would you consider reducing your fleet size? Lastly, in terms of CapEx, could you remind us of cash CapEx expectations for 2023 and 2024?

Xavier Destriau, CFO

Sure, thank you, Alexia. Regarding your question about the outlook for 2023, yes, we expect the second half to be an improvement compared to the first, but we do not provide a calendar view for specific periods. We are not necessarily implying EBIT losses in the early part of 2023. Regarding improvements in freight rates, our outlook is contingent upon the outcomes of our contract discussions with customers, particularly for the transpacific trade lane. The outcome of these discussions will significantly influence our overall results for the year. Regarding the 58 vessels up for renewal versus the 41 newbuilds expected for delivery, it’s important to note that we’re unlikely to hand over all those vessels. The replacement of older vessels will occur and will be driven by a cascading effect, meaning some of the older, smaller vessels will redeploy to meet regional needs. Investments in our digital solutions are also integral to our strategy. We’re committed to maintaining our technological edge. As for CapEx, we'll continue investing in our newbuild vessels, with commitments of $13 million for each of the 15,000 TEU vessels and $20 million for the 7,000 TEU vessels. This totals approximately $140 million for 2023 and about $350 million for 2024. We are also focused on upgrading our equipment where necessary.

Alexia Dodani, Analyst

Thanks, Xavier. For clarification on your first answer, contract rates historically tend to be struck at a discount to spot rates. Based on your earlier comments, it sounds like your view might differ. Could you explain why contract rates should not discount to spot rates or potentially be at a premium?

Xavier Destriau, CFO

Yes, I believe today's market is unique. We have transitioned from two years of extraordinary conditions, and the pendulum has swung in the opposite direction. Both shippers and liners are aware that a middle range exists where equilibrium can be achieved. If we don’t strike a balance, service disruption could extensively affect supply chains. Presently, we have several weeks to finalize discussions, and whether rates end near or above spot rates remains uncertain depending on the outcomes of contract negotiations, which vary by customer.

Operator, Operator

This concludes our Q&A session. I will hand it back to Eli Glickman, President and CEO, for closing comments.

Eli Glickman, President and CEO

Thank you. Despite challenging market conditions toward the end of the year, we continue to execute our global niche strategy and deliver outstanding execution and profitable growth in 2022. Truly, EBITDA and EBIT results were all-time records. As a result of our outstanding cash generation and strong balance sheet, we declared a Q4 dividend of approximately $769 million or $6.4 per share. While the new trend in the liner shipping industry may be uncertain with increased supply and weaker demand trends as Xavier discussed, we believe there are reasons for optimism as we look ahead. We took deliberate steps over the past two years to both diversify our commercial presence and improve our operation, enabling the company to continue to perform while adapting to a more normalized environment. We remain highly confident that we have the right strategy in place, with our competitive, efficient, and cost-effective newbuild capacity on the way. Our investments in digital innovation and disruptive technologies continue to position ZIM to best serve our customers and shareholders over the long term. Thank you all.

Operator, Operator

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