ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q4 2022 Earnings Call Transcript

ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q4 2022 Earnings Call Transcript March 13, 2023

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: 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, including 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: Thank you, Lana, and welcome to everyone to today’s call. Slide number 3. 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 reflect changing market dynamics throughout the year. Q1 2022 was our best quarter ever with respect to all financial and operational parameters. And 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.

Slide 4, we haven’t been idle for the past two years. As we benefit 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 important was our decision to adapt our vessel chartering strategy. We secured cost competitive and fuel efficient newbuild capacity in a sense of chartering agreements to support our commercial strategy. These agreements include vessel ranging from our flagship 15,000 TEU LNG fuel vessels impairment to 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 large one, 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 market and weaker demand environment and maintain our objective of maintaining positive EBIT. Our chartering strategy also underscore our ESG target. 28 of our 46 newbuild vessels, we secured our LNG power, making us an industry leader in term of low carbon intensity. The 15,000 TEU vessels are ideally suited to serve on our core Asia to U.S. East Coast service and we are the first liner to operate LNG vessels on this train. This is a significant commercial differentiation which enable 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 relationship 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, 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 condition evolve, we adapt our services, open new lines, modified rotation and suspend loss making services. Recent example of these changes include, a new premium line from South America West Coast to U.S. East Coast, in which we redeploy vessels previously deploy in Intra-Asia services, a new service covering major ports in Southeast Asia and Australia. Rotation change to our express Asia, Baltimore, ZXB service and suspension of ZEX, our Azure to LA Express service. These changes are proof of our agile approach, aim at providing streamline 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 position ZIM to serve local importance and exporters and more effectively 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 extending Cambodia and LA international trade. We also identified a commercial opportunity in the car carrier market in which strong demand and tight supply are resulted in positive market dynamics. We currently operate 11 car cares, which 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 broader ecosystem.

Most recently, we participated in equity and debt financing around for the company 40Seas 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 importance and exporters faster and cheaper access to working capital financing needs then traditional financial institution. Moreover, 40Seas’s represents a unique financing solution that we will very soon offer to our customer as well, primarily via our digital freight forwarder Ship4wd. The valuable synergies between Ship4wd and 40Seas and we are pleased to be able to offer our SME customers and new and innovative digital financing solution designed to assist them to grow their business.

The positive development, which may benefit wave bill of lading, one of our early investment is a recent decision by the Digital Container Shipping Association, the DCSA, that was established in 2018 by most of the largest shipping companies with their objective of 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% electronics bill of lading within five years and 100% by the year 2030. As you may recall, ZIM first introduced electronic bill of lading to its customer, so the wave bill BL 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 as we leverage our expertise and network to support these companies. We believe our portfolio of companies all significant potential in the future. Our goal is to build financial resilience in our business, stay focused on our strategy and leverage our core strengths and in choosing this best position for a more volatile and uncertain market. We intend to employ our significant cash resources cautiously to support our future profitable goals. The actions that I have outlined and at advanced ZIM primary objective to use our strengths to grow profitably and maximize value to our shareholders. Going to Slide number 5. Despite the current rate environment, and challenging macro and industry dynamics, we are confident in our strategy and expect positive EBIT in 2023.

As such, 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 assumption of our guidance and current markets 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 fell on account of 2022 results to $2.04 billion or 44% of total €˜22 net income. Returning substantial capital to shareholders remain 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 and our financial results and additional comments on the market.

Xavier, please.

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Xavier Destriau: 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 and that is to be compared to $10.7 billion in 2021, 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 the majority of the year. In Q4, our average freight rate per TEU was $2,122, a 42 % decline year-over-year and 37% decline from the prior quarter.

Our free cash flow in 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 prior year end. As in recent quarters, this was mainly driven by the increased number of vessel fixtures, longer-term charter duration as well as higher daily chartering rates. Regarding our fleet, we currently operate today 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 that we have a total of 58 vessels for renewal compared to the expected delivery of 41 chartered new build 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. And as a result our net leverage ratio has trended downwards at the same time and currently stands at zero as of December 31st, 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 are driven primarily by lower revenue. Turning to slide nine, we carried 823,000 TEUs in the fourth quarter compared to 858,000 TEUs during the same period last year, a decline of 4% compared to the market decline of 8.5%. And for the full year, we carried 3.4 million TEU, that is a 3% decline compared to 2021, slightly better than the market decline of 4% in that quarter — sorry, in the full year period. Lower volume on transpacific driven by congestion and lower demand will partially offset by higher volume in other trade lanes.

Next, we present our cash flow bridge and we ended 2022 with a total liquidity position of $4.6 billion. Important here 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 a 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 bottom and expect some improvement in 2023. Further, we also expect our volumes to grow in 2023 as compared to last year, as we receive our newbuild capacity and enable to better optimize outfit. As for banker cost, we expect lower rates this year versus last year. Overall, while we don’t give quality guidance, we do expect improved results in the second half of 2023, as compared to the first half. So we are entering 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 do 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 ’23 and ’24, respectively, as down payment for newbuild vessels charted 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 we continue to explore inorganic growth to the potential acquisition or regional liners in key market, such as Southeast Asia or Latin America. The backdrop against we are providing guidance today is extremely challenging. The supply demand imbalance points to oversupply in ’23 and ’24. Demand is soft, and as a result, congestion in U.S. ports and elsewhere has been one. Despite lower volumes in recent months, inventory to sales ratio were still below pre-pandemic level has not come down and various large U.S. retailers express caution with respect to their 2023 sales.

These factors among others are causing freight rates to continue sliding, though at a slower pace as compared to the fall of 2022. Yet, 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 with respect to some of our charter newbuild vessels on potential delays. Scrapping also remains low, but the combination of practically no scrapping in the past two years and increase compliance requirements with IMO 2023 regulation 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.

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Q&A Session

Operator: The first question was coming from Nokta Omar from Jefferies. Please go ahead, and ask your question.

Omar Nokta: 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 about the, 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 reds their highest ever at 442 million. What’s behind the upwards move there and what can we kind of expect as we move here in the next several quarters?

Eli Glickman: 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 with back in November But to your question, with respect to the contribution of a non-containerized income, we did benefit still in the fourth quarter from two strong factors. First, Detention & Demurrage, especially relevant on the transpacific trade lanes in the U.S. were still quite high. We still experienced congestion in Q4. Although now, this has pretty much did unwind itself. And second, when it comes to our car carrier activity, we have been growing and we continue to grow our presence in this market. And it has contributed to also a significant impact on our revenue and also on our bottom-line. And we expect the car carrier activity to continue to contribute positively to our earnings next year and in the years to come.

Omar Nokta: Got it. Thanks, Xavier. And then maybe just kind of big picture. Clearly from the press release, the presentation and your comments here. You at ZIM, you feel very confident despite the soft market we’re seeing today, which will have positive EBIT and maybe perhaps positive earnings, I guess, overall for ’23. I guess as we kind of think about the market as it is today, how would you characterize things as they are? You mentioned that you expect rates to be at bottom here in the near-term and the recovery coming, what’s going on in the market from say — from your perspective, from say 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: No. That’s a good question. There is clearly a lot of uncertainties ahead. And as you said that, we are confident. I would say that, we are confident in the actions that we took in 2021 and in 2022 to make sure that we are well prepared to enter into this new normal post pandemic. And so our cost structure is going down and this is the one lever where we can have an action upon that we have been very active in ensuring that we drive the cost down. So that we have done. And now when it comes to the demand, clearly, we have seen the demand softening throughout the second half of last year. We have seen a destocking type of strategy by the main retailers in the U.S. that was very aggressively performed in the fourth quarter, and into the first quarter of this year of 2023.

With that, you have seen that, the capacity has been adjusted with more and more blank savings. But as we were implementing more blank savings, the demand was still softening even more. So we believe that at some point, this de-stocking effect will end and the retailers will have to come back and replenish their inventories. Hence why, we are reasonably optimistic when it comes to the statement that we are making. We think that, the market is close to reaching a bottom before the demand starts to come back. And as a result, we expect that we will have a positive effect on the overall freight rates.

Omar Nokta: Thank you. Thanks for that color. And maybe just one final one just about the contracting that’s hopefully are potentially underway now. How are things developing here for the 2023 contracting season? Clearly there has 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: Yes. Clearly, the market today when we look at where the spot currently is on the €“ main from specific trade lanes kind of pushes the shippers to ask for a significant rate reduction compared to last year. And we very well understand that. So, the one thing I would say is that 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 perspective and from a rate perspective. Well first, what we are hearing today from our customer base is that they are very pleased with ZIM. And we hear a lot of positive feedback and comments on the fact — on the very fact that we are the first liner to deploy in LNG service on the Asia to the U.S. East Coast.

And that resonates very strongly to vis-a-vis our customer base. So now we do hope that it’ll translate into the final discussions on the rates to levels where we would both shippers and ourselves be happy. We clearly have set ourselves a limit in terms of where we are not willing to go in terms of flow. For now, the discussions are ongoing. It’s still too early to say what will be the final outcome of all those decisions. But clearly, we feel that from a commercial positioning perspective, the name and the brand of ZIM resonates pretty high in the eyes of our customers in the U.S.

Omar Nokta: Got it. Thanks. And sorry, just want one tiny follow up to that is, are you able to give a ratio or percentage of how much of your €˜23 business, you’ve got under contract so far?

Eli Glickman: We are still looking into 50/50 and the ratio that we’ve been doing by over the past few years or 50% contract cargo and 50% spot is still pretty much where we would like to end. But again, we will see where we end, when we finalize each of the discussion with each of our customers. And if the rates are not satisfactory to ourselves, we might revisit that percentage allocation and agree to expose ourselves motor spot market. We think that the second half is going to be indeed better than the first.

Omar Nokta: Okay. And just for clarity, the 50/50 is just on the Trend Pacific’s?

Eli Glickman : Correct. This is really the trade where we have a significant amount of our volume that is being contracted. We still on the other trade lanes and mainly on the Asia med, we also have a contract discussion with customers, but those are more quarterly as opposed to yearly. And in terms of quantum, I would say, it’s 25% of the trade compared to the 50% of the transpacific.

Omar Nokta: Great. Thank you. I’ll turn it over.

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