ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q3 2023 Earnings Call Transcript

ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q3 2023 Earnings Call Transcript November 15, 2023

ZIM Integrated Shipping Services Ltd. misses on earnings expectations. Reported EPS is $-18.9 EPS, expectations were $-1.56.

Operator: Hello. My name is Krista, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the ZIM Integrated Shipping Services Third Quarter 2023 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. [Operator Instructions] Thank you. I would now like to turn the conference over to Elana Holzman, Head of Investor Relations. Elana, you may begin your conference.

Elana Holzman: Thank you, operator, and welcome to ZIM’s third quarter 2023 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 of 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 that company filed with the Securities and Exchange Commission, including our 2022 Annual Report filed on Form 20-F in March 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: Thank you, Elana, and welcome, everyone, to today’s call. Before we turn to our call today, I would like to address the ongoing war situation in Israel. During these trying times, our thoughts are with the children, parents, husband and wives and grandparents who lost their lives, their loved ones and their homes in the horrific and tragic events of October the 7th. We stand in support of families and communities who were affected by this terrorist attack, and we pray for the safe and immediate return of our people held hostage by Hamas in Gaza. Our priority is assisting our employees in Israel and ensuring their well-being while continuing to meet the needs of our customers, delivering the highest level customer care and maintaining strict operational standards to drive our business forward.

Despite war-related challenges, ZIM operation and services everywhere, including to and from Israel, are continuing without interruptions. As a global company, our employees over 4,500 around the world serve more than 34,000 customers worldwide, shipping to over 200 ports in 19 countries, with only about 10% of our volumes imported or exported from Israel. Turning to our financial results, I will discuss ZIM’s third quarter and our path forward. ZIM strategic transformation launched back in 2017, which involved every aspect of our company and the way we do business, delivered 2.5 years of historic financial results from mid-2020 through 2022, including net income of nearly $10 billion. This period of exceptional profitability has today led to a significant cash balance, which at quarter-end stood at over $3 billion.

While market weakness has extended longer than we had originally anticipated, it is important to note that our strong liquidity will allow ZIM to weather this downturn. We believe ZIM is well positioned to emerge stronger than ever with a fleet that provide us a competitive advantage in core trades. Specifically, we leverage our successful IPO and capitalize on the extended period of historic profitability to best prepare ZIM for the years to come. First, we executed our fleet renewal program and secured through a series of charter agreements, a total of 46 new built container ships, of which 28 are LNG powered. In 2025, ZIM’s fleet profile will be dramatically different. Our fleet will be much younger, more fuel and cost efficient. Our average vessel size will be bigger and better suited to the trade in which we operate.

We expect approximately one-third of our operated capacity in 2025 to be LNG powered, making ZIM one of the lowest carbon intensity operators in the industry. As such, we will be well-positioned to support our customer in reducing their carbon footprint. But even already today, ZIM is the only carrier to operate LNG vessels from Asia to the U.S. East Coast. By the end of 2024, we will have two different services operating with only LNG vessels as we plan to deploy our 7,000 TEU LNG vessels on our Baltimore service, in addition to the 15,000 TEU LNG vessels deployed on ZCP service, our premier Asia to U.S. East Coast service. Second, to complement our fleet renewal program, we purchased almost $1 billion worth of containers with a particular focus on investing in our reefer propositions.

Today, we own and operate the youngest reefer fleet in the industry, which serve us well as we compete for this high-value cargo. Third, we entered into a strategic supply agreement with Shell to secure LNG supply at competitive pricing. And last, we invested in customer-facing and back-end digital tools and applications to propel profitability and improve customer experience. We view it as a core strength to leverage technology to promote operational and commercial excellence. We continue to invest in technology and are currently in the process of planning an extensive project to install on our entire dry van container fleet, the cutting-edge tracking devices, developed by Hoopo System, which is also one of our portfolio companies. ZIM will be one of the first carriers in the container shipping industry to have its entire fleet equipped with tracking device.

This will enable us to better manage our fleet, but also offer customer value-added services such as [geofence] (ph) alerts and open and close door notifications. As we consider ZIM’s strategic direction back in 2021, we anticipated that the subsequent years 2023 and 2024 were going to be a transition period. The goal was to shift ZIM’s reliance on older, less fuel efficient and less environmentally-friendly capacity to a cost and fuel-efficient LNG powered newbuild fleet. We understood that steps were needed to make ZIM a more resilient company, and this new fleet will effectively position us to both address the carbonization agenda of the shipping industry and drive long-term profitable growth. During this two-year transition period, ZIM’s cost base will gradually improve as we continue to make — to take delivery of the cost-effective newbuild tonnage and redeliver the expensive COVID-era charter.

Our cost per TEU is declining and we expect further improvement moving forward. The remaining 33 of the 46 newbuilds we secured are added to our fleet this year and throughout 2024. I would highlight that the six 15,000 TEU LNG vessels we have already deployed on our strategic Asia to U.S. East Coast, ZCP service, are meeting and even exceeding our cost-saving expectations. During this transition period, our entire organization is focused on returning ZIM to long-term sustainable profitability. We expect the initiative we began to undertake two years ago will deliver that result in 2025 and beyond. At the same time, as we navigate near-term market challenges, we have taken steps to rationalize our existing capacity whenever possible to minimize cash burn.

In 2023, we have already redelivered 20 charter vessels and expect to redeliver another five vessels back to owner by year-end. We also have another 34 vessels up for renewal in 2024. This will allow us to better align our fleet with current demand levels. We also continue to review our services and reallocate resources to adapt our network. We are attentive to our customers’ revolving needs and focus on taking advantage of new commercial opportunities with growth and profitability potential. For example, we recently decided to reinstate our ZEX service, targeting the e-commerce market from South China to LA. Today, we are hearing from customers that they are again looking for an expedite ocean service that offers slightly longer transit time compared to the air freight, but at a fraction of the cost.

We also expanded our presence in Latin America this year. In early 2023, we opened our Colibri service, connecting the West Coast of South America to U.S. East Coast. Since its launch, we have consistently grown our carried volume and we are now one of the top five carriers on this trade. More recently, we announced the launch of two additional lines in Latin America. While market conditions remain challenging in this region as elsewhere, we believe North-South trades have significant growth potential as U.S. importers seeks to diversify their supply chain. During this third quarter, we also announced a new collaboration with MSC, the industry largest carrier that is already delivering cost saving. These agreements include vessel sharing, slot purchases and swap arrangements across services connecting the Indian subcontinent with the East Mediterranean, the East Mediterranean with Northern Europe, and services connecting East Asia with Oceania.

This latest collaboration is consistent with our approach to levering partnerships that improve efficiencies and enhance our network, particularly during this period of continued headwinds in our market. Furthermore, we believe that our new cost and fuel-efficient newbuild fleet will better position us to reach similar operational arrangements in the future. In parallel, we are constantly pursuing operative steps in a wide range of cost control optimization and cost avoidance initiatives in order to achieve improvements in our cost structure. These cost control initiatives include, among others, a strict HR hiring program to ensure our workforce is aligned with industry dynamics, lower variable costs such as terminal-related, cargo handling, and port storage cost, bunker cost, leveraging our agreement with Shell to use more LNG versus low sulfur fuel, and of course, actively seeking opportunities to redeliver charter capacity early.

We expect these initiatives to continue generating measurable and sustainable savings. Moving forward, we will continue to seek opportunities to capitalize on our strengths and capabilities in order to create long-term value for our customers and investors alike. Although market condition for the near future are uncertain, our ample cash enable us to maintain a long-term view. Turning to our third quarter results, our result this third quarter and performance reflect the persistent weaknesses of the current trading environment with soft demand and continued freight rate deterioration. The rate increases we saw in August in Transpacific were short-lived. In Q3 2023, we generated adjusted EBITDA of $211 million, and adjusted EBIT loss of $213 million.

Cash flow from operation was $338 million. As already mentioned, we maintained strong total liquidity with a cash position of approximately $3.1 billion at the quarter-end. Based on our nine months result and expectation of no material improvement in freight rate during this reminder of the year, we have lowered our full-year ’23 forecast. We now expect to generate adjusted EBITDA of $900 million to $1.1 billion and adjusted EBIT loss of $600 million to $400 million. Given this negative outlook in the near term, we recorded a non-cash impairment of $2.1 billion this quarter. Despite the losses incurred in ’23, ZIM is resilient company. Our strong cash balance will help us withstand this prolonged downturn. And as I already indicated, we believe the ’25 will mark a turning point for ZIM and return to profitability.

On this note, I will turn the call over to Xavier, our CFO, for a more detailed discussion of our financial results, the impairment and our revised guidance, as well as additional comments on the market environment. Xavier, please.

Xavier Destriau: Thank you, Eli, and again, welcome, everyone. On the Slide 5, we present key financial and operational results. As Eli mentioned, our third quarter financial performance reflected the ongoing weakness of the current market. Our third quarter average freight rate per TEU was $1,139. That is a 66% decline year-over-year. And during the first nine months of the year, our average freight rate of $1,235 was similarly 66% lower than the comparable period last year. Our carried volume of 867,000 TEUs is 3% higher versus last year’s third quarter. This compared to market growth of approximately 5%. And looking sequentially, our carried volume also increased slightly. Revenues for the third quarter were again adversely impacted by the continued decline in freight rates.

Q3 revenues were $1.3 billion. Our revenues for the first nine months of 2023 of $4 billion were 62% lower than in the first nine months of last year. Free cash flow in the third quarter totaled $328 million compared to $1.6 billion in the third quarter of 2022. Turning now to the balance sheet. Total debt increased by $401 million since prior year-end, mainly due to the net effect of the incoming vessels with longer-term charter durations. As previously mentioned, we also recorded a non-cash impairment of $2.1 billion this quarter, mainly driven by our negative outlook for container shipping in the near term, namely the deterioration in freight rates observed in recent weeks, with little expectations for meaningful recovery into 2024. In addition, we also needed to consider the increase in interest rates, which in turn increased our average cost of capital.

As a result, the expected discounted cash flow the company may generate going forward are lower than previously projected, resulting in the recognition of this impairment charge. This non-cash impairment has been allocated to our container shipping-related assets, primarily container vessels, but also equipment, boxes and other related assets. You can find additional information on the impairment test in the Note 7 of our Q3 2023 interim financial statements. And I would note that this non-cash impairment is excluded from our adjusted EBIT and also from our adjusted EBITDA results. Our net loss of $2.3 billion this quarter includes the impairment charge for $2.1 billion. Regarding our fleet, we currently operate 145 vessels, 129 container ships and 16 car carriers.

Excluding the newbuild capacity, the average remaining duration of our current chartered tonnage continues to trend down and is now 22.7 months compared to 24.6 months in mid-August. Of the 46 newbuild vessels ZIM committed to, 13 have been delivered to date, including six LNG-powered 15,000 TEU vessels and also the first 7,000 TEU LNG ship. Year-to-date, we redelivered 20 chartered vessels and we have another five vessels whose charter periods end before the end of the year. And in addition, 34 vessels have charter periods concluding next year in 2024. So, in total, these 39 vessels which we could redeliver to the owners or renew at lower rates compared to 33 newbuilds that we expect to be delivered to us during the same period. Again I would like to reiterate here the delivery of these modern, cost-efficient vessels will replace smaller, less cost-effective tonnage, therefore contributing to lowering our carried unit cost base.

On Slide 7, we present ZIM’s Q3 and nine months 2023 financial results compared to Q3 and the first nine months of last year. The decline in revenue based on the lower freight rate environment impacted all of our metrics. Adjusted EBITDA in the quarter was $211 million and the adjusted EBIT loss was $213 million. Adjusted EBITDA and EBIT margins for the third quarter were 17% and minus 17%, respectively, as compared to 60% and 48% in the third quarter of last year. For the first nine months of 2023, adjusted EBITDA margin was 22% and adjusted EBIT margin was minus 9%. This is compared to 63% and 54% in the comparable period in 2022. This quarter net loss was $2.3 billion and, as already mentioned, includes the impairment charge of $2.1 billion.

Moving on to Slide 8. As I mentioned, we saw a slight uptick in our carried volume compared to the third quarter of last year. The increase was driven by growth in Transpacific and Latin America. We also saw a small increase in carried volume versus the prior quarter, with the growth again driven primarily by Transpacific and Latin America trades. Turning now to the next couple of slides, I’ll review our cash flow bridge for the quarter and nine months period. We ended the third quarter with a total liquidity position of $3.1 billion, which includes cash, cash equivalents and also investments in bank deposits and other investment instruments. During the third quarter of 2023, our adjusted EBITDA of $211 million coupled with a positive effect from change in our working capital converted into $338 million of cash flow generated from operating activities.

For the nine-months period, adjusted EBITDA of $859 million converted into $858 million of cash flow generated from operating activities. Other cash flow items for the nine-months period included dividend payment of $769 million and $1.5 billion of debt service, mostly related to our lease liability repayments. Moving now to our revised guidance. In light of a continued deterioration in freight rates across all our trades, we are revising our guidance and now do expect to generate in 2023 adjusted EBITDA of $900 million to $1.1 billion, and adjusted EBIT loss of $600 million to $400 million. This revised forecast is based on our assumption that freight rates will not recover from current levels with overall volume for the year to be slightly lower compared to prior year.

Our assumptions also include inflation in bunker prices for the remainder of 2023. I would highlight that our adjusted EBIT forecast is positively impacted by the impairment that we recorded in the quarter as our depreciation expenses going forward are going to be lower. Moving to our market section. I believe it is clear that our current view of the market for the remainder of 2023 and into 2024 is one of continued headwinds, oversupply meeting weak demand with limited impact from capacity management actions taken by the carriers. Alphaliner’s supply/demand outlook for 2023 and 2024, which you can see on the left, remains unchanged, pointing to clear oversupply in the market. At the same time, freight rates remain depressed as you can see on the right.

Here we show the SCFI for the U.S. East Coast, a key trade for us which accounted for approximately 40% of our volume in the nine-months period. We also excluded here 2021 and 2022 rates from the graph to provide better granularity as to where rates are compared to other years pre-COVID since 2016. You can see the decline in rates from August, when we saw a short-lived improvement in freight rates following broader blanking, and that rates today are lower as compared to 2019 when cost today are clearly significantly higher versus that same year 2019. On the demand side, while retailers are working through high levels of inventories and we have seen some market growth in the third quarter, inventory levels are not declining, and there are no clear data points that a restocking cycle will begin anytime soon.

As such, it does not seem that recovery in our industry will result from near-term growth in demand. At the same time, while the carriers have employed some management capacity, these have not been sufficient to sustain higher rates. Slow steaming remains the only continued meaningful action taken by carriers. Blanking has also been employed but for limited periods of time with limited lasting impact on rates. Scrapping, on the other hand, has remained negligible with approximately only 107,000 TEU worth of capacity scrapped from January to September, compared to deliveries totaling 1.6 million TEUs during the same period. Alphaliner’s scrapping projection for 2024 and 2025 are for 450,000 TEU each — in each of the next two coming years, compared to expected delivery of almost 5 million TEUs of capacity in 2024 and 2025 combined.

Finally, idling has also remained limited with inactive capacity in September standing at 1% in terms of volume, or 2% by vessel count. While idled tonnage has increased over the course of 2023, it is currently lower when compared to a 2023 peak of 3.3% that was achieved in February. And just as a reference point, idle capacity in mid-2020 when COVID hit and demand failed also dramatically, was over the 10% mark. On that note, we will now open the call to your questions. Thank you.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Omar Nokta from Jefferies. Please go ahead.

Omar Nokta: Hi, thank you. Good afternoon, Eli and Xavier and Elana. Thanks for the update. Got some good detail here. Just wanted to ask, perhaps I had a couple of questions, but you’ve got the $3 billion of cash on the balance sheet. You’ve got the liquidity there. Just regarding the $2 billion write-down, obviously, it’s non-cash. And Xavier, you just mentioned how on an ongoing basis depreciation is going to come down. But just in general, how should we think about what this now means for actual running costs on a cash basis?

Xavier Destriau: Look, on that — as far as the cost is concerned, on a cash basis, like you said, rightly, the impairment has no effect. So, in terms of lease liability, repayment profile that is being unaffected by the impairment that we are booking now in the third quarter. What will be affected is indeed our depreciation and amortization. So, our P&L and our EBIT will go up as a result of us incurring less depreciation on a quarterly basis. And to quantify that, in the quarter in Q4, and this is also what we reflected in our guidance, now, if you look the difference between EBIT and EBITDA, the impact for the quarter is going to be in excess of $150 million.

Omar Nokta: Okay, thank you. And then, I guess, just in general, as I think about or we look on the balance sheets and we see kind of a bit of a mismatch between the book value of the ships and then the remaining lease liability, I guess, how should we think about that in the long term or medium term? Perhaps you mentioned the five ships rolling off charter here before year-end and another 34 next year. That’s 39. I guess — can we think perhaps, that — is ZIM maybe telegraphing an approach to shipowners for an amendment or early termination of the charters for beyond just these 39 ships, but the additional perhaps maybe 70, 80 that are — that remain on charter beyond next year? Is that what this means, this write down?

Xavier Destriau: Look, I think we need to disconnect a little bit what we did for the purpose of the impairment test that we needed to run at the end of the quarter from a — at the end of the day, the overall impact vis-a-vis our commitment with the vessel owner. We are committed to honoring our charter commitment vis-a-vis the owner, and we are, and we are not hiding from that, looking at potentially redelivering early some of the vessels for which we have potentially not an employment going forward. So that is still happening and is to be looked at in a decorrelation from the impairment that we booked today. What I would say, is critical to us, is, as I think Eli mentioned, we are clearly today in a transition phase. When it comes to the profiling of the fleet that we will end up operating once we have taken delivery of all this new cost-efficient tonnage, fuel-efficient tonnage that we’ve ordered back in 2020, 2021, these vessels are going to come and are going to replace the existing charter.

So, the message, if there was one, is that it is very likely from ZIM perspective that we will redeliver all the vessels as they come up for renewal in terms of their charter period to make room for the brand new ships more efficient that we’ve ordered between now and the end of next year. So, yes, we have five vessels up for redelivery between now and the end of the year. We have another 34 vessels that we cover for redelivery between 1st of January ’24 to the end of December 2024. And it is very likely that the vast majority of this capacity would be redelivered.

Omar Nokta: Got it. Thanks, Xavier. And then maybe just one final one, just kind of on the revised guidance. It makes sense. Clearly, I wouldn’t necessarily say there’s a surprise there, but just in general, as we think about the fourth quarter relative to the third quarter, it looks like the updated range is for 4Q to be similar to 3Q. I guess, just in general, I guess from, say, an EBITDA perspective, if we just think about on the margin as we look here into the next quarter, marginally, do you think 4Q is going to be better than 3Q or kind of your — on the margin, is it going to be worse? Anything you’re willing to share on that front?

Xavier Destriau: Look really our outlook for the remainder of the year, and also I think as we try to convey today is going into 2024, is that maybe very little will change in the sense that the freight rates today are at very low level and very challenging for the industry. We don’t see many catalysts for that to change in the immediate future. There is clearly the looming threat of overcapacity that is still ahead of us. We’ve seen that very little retirement of old tonnage. Scrapping is very limited. Even idling is very limited. So, the excess supply seems to be here to stay for a while, therefore reducing the optimism for the rates to meaningfully recover. So that’s the perception that we have up until things hopefully will turn out better after maybe 2024 has elapsed.