ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q3 2022 Earnings Call Transcript

ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q3 2022 Earnings Call Transcript November 16, 2022

ZIM Integrated Shipping Services Ltd. beats earnings expectations. Reported EPS is $9.66, expectations were $9.54.

Operator: Ladies and gentlemen, thank you for standing by. I am Irene, your chorus call operator. Welcome and thank you for joining the ZIM Integrated Shipping Services Q3 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, Irene. And welcome to ZIM's third quarter 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 2021 annual report filed on Form 20-F on March 9, 2022.

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?

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Eli Glickman: Thank you, Elana, and welcome everyone to today's call. ZIM's third quarter and nine months' performance reflects continued solid execution and strengths in our financial results and profitability. These results consistent with our expectation for market normalization beginning in the second half of 2022 following an extended period of solid profit. However, over the past several weeks, we have seen a steeper decline in freight rates than we previously assumed. As consumer demand in the US and elsewhere has softened, the pace of normalization has accelerated. And based on this evolving marketing environment, we've revised our full year 2022 focus. For 2022, we now expect to generate adjusted EBITDA between $7.4 billion to $7.7 billion, compared to our previous guidance of $7.8 billion to $8.2 billion and adjusted EBIT between $6 billion to $6.3 billion compared to the previous projection of $6.3 billion to $6.7 billion.

I note that based on our current guidance, 2022 adjusted EBITDA and adjusted EBIT are expected to be once again all-time records. Current market conditions illustrate the volatile and fast-paced nature of our market. The outlook for the global economy is very uncertain as we see various macroeconomic and geopolitical risk, rising inflation and interest rates, energy crisis in Europe, the extended war in Ukraine just remain a few. External spending is down, and now when consumer spending on services have returned to normal, demand for durable goods may be held even healthy. All this challenging outlook for container shipping, particularly given the scheduled vessel deliveries planned for next year in 2021. Xavier, our CFO, will further discuss our guidance and the current market environment in greater detail later on the call and the potential impact of different factors, including IMO 2023 on our business.

In accordance with our dividend policy to pay 30% of quarterly net income, our board declared a Q3 dividend of approximately $354 million or $2.95 per share. We continue to return substantial capital to shareholders, which remains a priority as we seek to create long-term value and enable shareholders to directly benefit from our strong results. So far, on account of 2022 results and including this quarter, we have returned over $1.26 billion or $10.55 per share in dividends. During the first nine months of the year, as you can see in slide number four, revenue grew by 43% to $10.4 billion as compared to the same period in 2021, driven by elevated freight rates and differentiated strategy, our adjusted EBITDA increased 55% and net income increased 43% compared to the nine months period in 2021.

Most importantly, while market conditions remain dynamic, we continue to deliver strong EBITDA and EBIT margins, highlighting our focus on profitability. Nine months 2022 adjusted EBITDA margin improved from 58% to 63% and adjusted EBIT margin improved from 51% to 54%. Notably, our balance sheet also continues to be very strong with total shareholders' equity of $5.8 billion at the end of the quarter. In the third quarter of 2022, our revenues grew 3% year-over-year to $3.2 billion, and we generated adjusted EBITDA and net income of $1.9 billion and $1.2 billion, respectively. Adjusted EBITDA and EBIT margin for the quarter were 60% and 48%, respectively, though lower than in Q3 2021. Going to slide five. In light of the fundamental changes in market conditions, it is important to highlight key elements of ZIM strategy, our commercial and operational agility.

We believe this differentiate us, enhance our position to operate in a more normalized freight rate environment. Over the past two years, we've been proactive to best position ZIM for long-term success as we continue to focus on optimizing profitability for the benefit of our shareholders. On slide five, we list several initiatives that we have previously discussed. Example on the commercial side includes our network of e-commerce lines to Australia and New Zealand and the US East Coast. Our focus on the interest rate, which is a very dynamic threat in the world's largest trading volume terms and the expansion of our car carrier activity, which we intend to grow even further. We have demonstrated our ability to adapt to prevailing market conditions and capture commercial opportunities.

Today, our commercial presence is more diversified, allowing us to benefit from and balance between variant trade dynamics, yet, we remain committed to our global niche strategy and operating trades we find the most attractive and where we can establish a competitive position. We believe this agility will provide us with significant resilience in this new market environment. Operationally, we remain very focused on securing the most competitive and efficient fleet possible to support our commercial strategy. As a reminder, we entered into our first agreement for the long-term charter of 10,000, 15,000 TEU vessels in February 2021. These vessels are ideally suited to serve on our core Asia to US East Coast service. This charter agreement will have a positive impact on our cost structure next year, as we take delivery of the vessels throughout 2020.

We also expect to be the first liner to operate LNG vessels on this trend, offering ZIM an important commercial differentiating and enabling us to immediately reduce the carbon footprint of ZIM and its customers. Most recently, we entered into an important agreement with Shell to secure the supply of LNG and efficiently banker this vessel. From our digital investment, I would highlight the progress of Ship4wd, our digital freight forwarder, which we launched about a year ago. As a reminder, Ship4wd is pure digital solution on the front and back-end targeting SMEs from the US and Canada shipping from China and Vietnam. This capability offers them important efficiency compared to other industry players. While Ship4wd still has very modest revenue at this time, its technology has proven itself and the potential in this multi-billion market is clear.

On that note, I will turn the call over to our CFO, Xavier for his remarks on our financial results and additional comments on the market.

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Xavier Destriau: Thank you, Eli. And again, welcome, everyone. On slide six, we present key financial and operational highlights. Our third quarter results reflect continued strong execution and the benefits of our differentiated approach, combined with higher freight rates. Specifically, our average freight rate per TEU of $3,253 in the third quarter was 4% higher compared to the third quarter of 2021. During the first nine months of the year, our freight rate was 43% higher than in the 2021 nine months period. Our carried volume in the third quarter declined 5%, compared to the same period last year. Lower volumes during the third quarter resulted primarily from continued congestion as well as a more normalized level of consumer demand.

Over the nine months period, our carried volume was down 3%, compared to approximately 2.5% decline in the market in the first nine months of 2022. We now anticipate our carried volume will be slightly down in 2022 on a full-year basis as compared to 2021, and that is due to softer demand and continued congestion. Our free cash flow in the third quarter totaled $1.6 billion, compared to $1.7 billion in the third quarter of 2021. Our cash conversion rate in a strong at 84%, as compared to last year's Q3 cash conversion rate of 83%. Turning now to our balance sheet. Total debt increased by 1.4 million since prior year-end. As in recent quarters, this was mainly driven by the increased number of vessel fixtures, long-term charter duration, as well as higher daily charter rate.

The first nine months of 2022, our cash bank deposits and investments increased by $600 million. Updating on our fleet, the number of vessels recently operate hasn't changed from our last report and currently set at 149 vessels, of which 10 are top liners. The average remaining duration of our current charter capacity is 27.4 months, down from the 28.6 months in August 2022 and bridging our current operating capacity to the scheduled delivery of our chartered newbuild vessels throughout 2023 and 2024. In 2023, 25 vessels were out for renewal, with 37 up for renewal now in 2024. This means we have a total of 62 upcoming vessels up for renewal compared to the expected delivery of 46 chartered newbuild vessels during this time period. Moving on to Slide 7.

You can see that we delivered very strong results over the last two-plus years. And our net leverage ratio as a result has trended downwards at the same time and is at zero time as of September 30. On Slide 8, turning to our three and nine months financial performance, our differentiated and proactive approach has continued to yield profitable results. Revenue for the third quarter was $3.2 billion, up 3% as compared to Q3 2021. While net income was $1.2 billion, compared to $1.5 billion in the comparable quarter. Adjusted EBITDA was $1.9 billion for the quarter compared to $2.1 billion last year, reflecting more normalized carried volumes and average freight rate. While market dynamics have shifted, ZIM continues to generate strong EBITDA and EBIT margin.

Most margins were 63% for adjusted EBITDA and 54% for adjusted EBIT. This compares to 58% and 51%, respectively, in the same period last year. I would like also to note that our lower margins in the third quarter were driven by higher slot costs, resulting from higher vessel costs due to the transition to our own operating capacity following the termination of the slot purchase agreement we had with the 2M as of April 1. Coupled of is on top, higher LPSO bulk rates. Turning to Slide 9. We carried 842,000 TEUs in the third quarter compared to 884,000 TEUs during the same period last year. As you can see illustrated in the slide, lower volume on the transpacific caused by softening demand and continued effects from congestion in East Coast ports was partially offset by growth in Intra-Asia, Latin America and Cross-Suez.

Intra-Asia, in particular, is a key focus for us, and we do believe increasing presence to this growing trade will provide us with significant resilience as market conditions normalize. Next represents our cash flow bridge. We ended the Q3 2022 with a total cash position of $4.4 billion, which includes cash and cash equivalents and also investments in bank deposits and other investments instruments. During the first nine months of the year, our adjusted EBITDA of $6.6 billion converted into $5 billion cash flow from operations. Other cash flow items included $293 million of net CapEx, $1.1 billion of debt service mostly lease liabilities and dividend distribution of $2.9 billion. Moving to our guidance. As already mentioned, with the pace of normalization accelerating, we have revised our full year 2022 forecast.

We now expect to generate in 2022 adjusted EBITDA between $7.4 billion to $7.7 billion and adjusted EBIT between $6 million to $6.3 million. That is approximately 5% lower from an EBIT perspective than our previous guidance based on the midpoint of the range. Our underlying assumptions for our revised 2022 guidance reflects a steeper decline in spot freight rates and softer demand as discussed, in addition to adjusted contract rates. Again, we now expect our carried volume to be slightly lower than 2021. On the cost side, we assume a slightly more favorable charter rate environment, though the impact marginal given the limited number of charter renew. With that said, it is worth highlighting that this figure still do reflect full year record high positive.

Turning to our view on the market environment. The supply/demand balance forecast shown here reflects lower demand growth assumptions for 2022 and 2023 in light of the worsening macroeconomic environment. With the order book to fleet ratio current at approximately 27%, of which 2.3 million TEUs are scheduled for delivery in 2023 and another 4.7 million TEUs scheduled for delivery. The following years supply growth is expected to be considerably greater versus demand growth than previously projected. The combination of weaker demand, falling freight risk and risk of oversupply creates a challenging business environment for container shipping. Yes, I will discuss why various market dynamics may impact the effective supply and create a more stable business environment in the coming quarters.

Next with supply , mirror image of the decline in freight rate is the cooling off of the chartering market. The charter market is also indeed returning to more normalized conditions. As you can see here, charter rates have significantly dropped and although supply type options to secure charters for shorter term duration are gradually coming back. The idle fleet has also slightly increased. As we have indicated in the past, our view is that effective supply growth may be smaller than is implied by the tariff order book due to the various factors that are being detailed here on slide 14. In 2023, port congestion, limited terminal capacity and lacking lesser infrastructure will continue to partially offset the expected supply growth as well as possible slow steaming resulting from IMO 2023 regulation, which are expected going to effect in January next year.

IMO 2023 and the decarbonization agenda made also liners to retire older vessels, resulting in greater scrapping and offsetting top of the newbuild capacity. Slippage may also result in lower supply growth. ZIM currently suggesting that only approximately 60% of the deliveries will be on time in 2023 and 65% in 2024, as both carriers and shipyard may want to postpone delivery as the former are facing weaker demand and the latter are facing higher costs. Liner adaptive deployed capacity to demand, signs of which we have seen in recent weeks, they also support industry efficiency. On this note, we will open the call for questions.

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