ZIM Integrated Shipping Services Ltd.

Ladies and gentlemen, thank you for standing by. I'm Natalie, your chorus call operator. Welcome and thank you for joining the Zim Integrated Shipping Services LTD Q1 2022 Earnings Conference Call. Throughout today's recorded presentation, all participants will be in listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I will now like to turn the conference over to Lana Holtzman, Head of Investor Relations. Please go ahead. Thank you, Natalie, and welcome to ZIM's first quarter 2022 Financial Results Conference Call. Joining me on the call today are Eli Glickman, ZIM's President and CEO, and Xavier Ducille, 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 for 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 material. We are kindly referred to consider the risk factors and cautionary language described in the documents the company filed with the Securities and Exchange Commission, including our 2021 annual report filed on Form 20F 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 the CEO, Eli Glickman. Eli?

Thank you, Yana, and welcome everyone to today's call. Following an extraordinary 2021 closing, we carried out our strong momentum into 2022. I am proud to present another quarter of record results and exemplary execution. I believe that we are very well positioned today as an innovative provider of seaborn transportation to capitalize on market tailwinds and continue delivering superior profitability. Before I dive into our quarterly highlights, I would like to address the situation in Ukraine. The continued violence segments us deeply. In order to support the people of Ukraine, we have donated to SD and operate a field hospital to care for those affected by the war. We also continue to support our Ukrainian employees, customers and partners in any way we can. As I have stated previously, our duty to help preserve human life exceeds all other considerations. Now, turning to Zinc U1 and hear today's accomplishments. As highlighted in this slide, slide number three, we maintain our strong trajectory into 2022, delivering another outstanding quarter of financial results due to the proactive strategies we have implemented to capitalize on both the highly attractive market and regime differentiated strategy. In Q1, we generated record revenues of $3.7 billion, record adjusted EBITDA of $2.5 billion, and record net profit of $1.7 billion. Shareholders' equity was $4.3 billion at the end of the quarter. Consisting with our focus on profitability, We achieved exceptional margins as well, 68% for adjusted EBITDA and 60% for adjusted EBIT. We continue to outperform the library industry average as we have done for several quarters. Our results. also stand out operationally as we grew our carriage volume by 5% in Q1 compared to Q1 last year. This is an impressive achievement, particularly given the global volume decreased by almost 2%. Slide number four, you can see that our strong performance today Combined with the 2022 long-term contract trades that we have secured boost our confidence with respect to our 2022 guidance. The average rate of our long-term contracts which took effect starting about two weeks ago in May which left a rate increase in excess of 100%. In other words, more than double as compared to 2021. This long-term contract rate illustrates customer expectations for both the stem demand for capacity as well as the continuation of a very strong great environment As such, we are raising our full E22 guidance and now expect to generate adjusted EBITDA between $7.8 to $8.2 billion and adjusted EBIT between $6.3 to $6.7 billion in 2022. It is also noteworthy that our exceptional performance allows us to continue to return substantial capital to shareholders. There are policies to distribute a dividend to shareholders on a quarterly basis at the rate of 20% of net income. Our law declares a Q1 dividend of $2.85 per share. Slide number five. We remain focused on executing across our strategic pillars, including operational excellence. The core component has been strengthening our commercial proposition and improving our core structure by securing fuel-efficient fuel-bill capacity. Following our first long-term charter agreement for 1015,000 TULNG dual-fuel vessels, intended to serve our Asia-European East Coast service, our focus shifted to high university veterans. Since the beginning of 2022, we announced three charter agreements for a total of 17 new veterans with total TU capacity of approximately 96,000. We added three 7,000 TU LNG dual-Q container vessels to the 15 vessels already secured in 2021, as well as five 5,300 TU vessels and six 5,500 TU vessels. This is modern and efficient commerce, particularly well suited to serve on our extended network of expedited services, as well as other regional services. This versatility will allow us to maintain our flexibility and strengthen our market position and commercial process. In total, we secured 46 new business vessels, starting in Q4 2022 and throughout 2023 and 2024. Our fleet chartering strategy will enable us, based on prevailing market conditions in the future, to decide whether this new vessel will represent an extension of our fleet or replacement. It is also important to highlight that these 46 new vessels, 28 are ALG powered. Consistent with our sustainability core values, we continue to position them at the forefront of the carbon intensity reduction among global liners and support our customers to meet their own ESG objectives. We anticipate becoming the first container shipping company to deploy LNG vessels on the Asia to US East Coast trade. When we take delivery of these green LNG tube vessels, which will represent approximately a third of our operating capacity, they will be more carbon and cost efficient than they are today, improving our competitive position. i would also remind you that the role to decarbonization in our industry is an opportunity for zine given our mostly chartering capacity we can easily replace our operating capacity to more environmentally friendly so much moreover By opting to charter these energy vessels other than on them, we are also maintaining flexibility to transition to newer technology if and when to become commercially verbal. Slide number six. You can see that our ability to adjust our fleet size to market conditions and identify market opportunities are directly operational and commercial agility, and other strategic pillars. Zil now has an established track record of making nimble adjustments to meet changing market conditions, optimizing versus declining, supporting high utilization of assets, and exploiting specific trade advantages to drive outstanding results and superior profitability. Since the beginning of the year, we have increased our operative capacity by approximately 11%, and internally operate 137 vessels. It is important to remember that we have added significant operative capacity in recent weeks, in anticipation of the changes to our collaboration with the third partner. Viewing instructional success is based on our ability to act decisively and adjust quickly. We continue to identify new market opportunities, advancing our global new strategy to meet customer demand. Last fall, in 2022, we had launched 10 new lines, including six that are an extension of our network and four replacement lines to better meet our customer needs. Notably, in keeping itself focused on promoting alternative modes of transport for e-commerce customers, we recently launched our Baltimore Express Line, ZXB, a third of its kind, a single e-commerce service from China and Southeast Asia to the U.S. East Coast, operated exclusively by Zoom. As part of our vision strategy, we identified this opportunity to add another leading block in our Zoom e-commerce express lines, and launch the Baltimore service at a time when customers are seeking a competitive alternative to air freight. Importantly, ZXB offers customers a wide range of advantages, including expedite rail, air, and road connections to human destinations. Finally, as we discussed on our previous EARN call, we will extend our operational collaboration with the TN lines on the Azure to U.S. East Coast and U.S. West Coast trades, while we move to give independent services in the Azure to NET and TNW trades. The collaboration is now operating on the basis of a slot exchange and vessel sharing, making Zim an equal partner in these joint services, and we continue to meet growing demand and competitively serve our customers, particularly on key trans-Pacific roads. I will now turn the call over to Xavier, our CFO, for his remarks on our financial results in market development. Please. Thank you, Andy, and again, welcome, everyone. We delivered another quarter of outstanding financial performance as a result of both historically high takeaways as well as our differentiated and proactive approach. The slide 7 here illustrates our strong results and significant improvement across key operational and financial indicators versus the prior year respective quarter. Our record results were once again driven by continued positive market conditions which kept trade rates significantly higher than prior year. We have continued to prioritize vectoring cargo and undertaking reshaping to capitalize on e-commerce demand, which enabled us to improve cargo mix. Specifically, our average freight rate to TU of $3,848 in the first quarter was 100% higher compared to the first quarter of 2021. Those were 6% higher than our average freight rate in the preceding quarter. Our free cash flow in the first quarter totalled $1.5 billion compared to $645 million in the comparable quarter of 2021, an increase of 130%. Turning to our balance sheet, total debt increased by $984 million since prior year end, mainly driven by the increased number of better fixtures, longer charter durations, as well as higher daily charter rates. Over the same period, our cash position grew substantially by approximately $1.3 billion. As a result of the second consecutive quarter, Zinc's net debt has been driven down to a level at which the company closed the period in an effective positive net cash position. Our FITMAL accounts try to maintain optionality to match capacity with demand-demand impact. We believe that Zinc has retained the ability to adapt our FIT style to changing demand fundamentals. The average remaining duration of our current chartered capacity today is 28.6 months, slightly up from the 26.1 months in March 2022. And bridging our current operating capacity to the scheduled delivery of our newly vessels. Also, only 11 of our chartered vessels are now scheduled for renewal between now and the end of 2022. and 28 will be renewed in 2023, and 34 potentially also will be renewed in 2024. Next on Friday, you can see that we are delivering consistent improvement in earnings. At the same time, our net leverage has trended downward from 2.4 in June 2020 to 0. Importantly, we continue to be positioned in the third tier of our industry, which we are. deflecting the strength of our value shift. Moving on to the next slide, slide 9, our proactive strategy continues to generate record results. Revenue for the first quarter was $3.7 billion compared to $1.7 billion in Q1 2021, driven primarily by improved freight rates, and to a lesser extent, also an increase in carry volume. Most importantly, we grew profitably with Q1 net profit of $1.7 billion, representing a 191% year-over-year increase. Just as EBITDA was $2.5 billion for the quarter, compared to $821 million in the first quarter of last year, that is an improvement of over 200%. Consistent with our focus on the delivery industry leading margin, adjusted EBITDA and EBIT margins were 68% and 60% respectively, as compared to 47% and 39% in the first quarter of last year. Those margins were comparable to margins delivered in the prior quarter. I would like to note that as anticipated, VIN is currently carrying 23% corporate income tax rate in ISA, in q1 2022 when it began to be impacted and as such during the first quarter we paid back events in a total amount of 246 million dollars moving on to slide 10 we continue to outpace the industry in terms of growth in carry volume without compromising our profitability We carried 859,000 TEUs in the first quarter, compared to 818,000 TEUs during the same period last year. So we grew our product volume by 5%, while the general market contracted by almost 2%. Volume growth in Q1 in non-transpacific trade did compensate for the decline in trans-pacific volume, which was negatively impacted by conjecture. Sequentially, our Q1 2022 categories were flat compared to Q4 2021. While again here, the overall market shrunk by over 6%. Regarding our cash flow, in Q1 2022, we had a total cash position of $5.1 billion, which includes cash and cash equivalents and investments in bank deposits and other investment instruments. I will remind you that in April, we paid a dividend totaling approximately $2 billion. During the first quarter, our adjusted EBITDA of $2.5 billion converted into a $1.7 billion cash flow cooperation. Other cash flow items in the first quarter included $177 billion of net capital and $249 billion of debt terms. In the first quarter of 2022, PLATEC mainly related to the second-hand vessels we purchased into four of last year that we got delivered in the first quarter of this year. Moving to our guidance, we are raising our two-year guidance and now do expect to generate adjusted EBITDA between $7.8 and $8.2 billion and adjusted EBIT between $6.3 and $6.7 billion. The main reason for improved outcome for 2022 is better than initially anticipated contract rate. Volume growth is expected this year to be approximately 5%. Other assumptions we provided in March do remain largely unchanged. Turning to market and industry strength and our COVID review moving forward. The combination of poor congestion and strong demand, especially in the United States, are the underlying factors shaping the strong market we are currently experiencing. Poor congestion and supply chain disruptions have been a persistent strain on container shipping operations for over a year now. This reality is not expected to be resolved in the near future, and may even fail in 2023. Jury estimates that long tubes of shift wading outside port and slower shift turnarounds resulted in effective container shift capacity being 17% below its potential in 2021. The forecast for 2022 has also increased from 13% in March to 15% today. And the project hoped congestion to absorb 7% of effective capacity in 2022. Fletchport's ocean timing indicator demonstrates the depth of port congestion. As you can see, the end-to-end transport time from the exporter's location to the port of destination on China to US routes, which stood at 45 days pre-pandemic, more than doubled and is currently estimated to be around 23 days. This longer supply chain creates demand for more vessels and containers to absorb the significantly longer voyages. It is important to remember that congestion cannot be viewed as port-specific. Rather, a more global holistic view should be taken. As we saw in recent weeks, as the queue outside the port of LA and London shortened, congestion in East Coast ports started to be less. These measures show no signs that the supply chain crisis has passed. The next one shows that demand in the United States is expected to remain modest in the near future. Continued disruptions of global supply chains are expected to support high demand for container shipping as shippers are looking to guarantee space to maintain required inventory. Despite growing inventories in the United States, strong demand results in inventory to sales ratio remaining at the level which is far below pre-COVID or normal levels. You can also see here on the right that global volume in March 2022 is higher by 6% when compared to 2019, the last normal year experienced by our industry. Moving on to the next slide, the overall supply-demand balance remains positive for 2022, despite projections for 2022 being adjusted downward due primarily to the impact of the Libyan war in Ukraine and China's zero-tolerance COVID policy. The supply-demand balance reverted in 2023, when more significant nuclear deliveries, including these, were empowered, I expected. The order growth has also consistently grown over the past several months. Yet, our view on market fundamentals for the near and mid-term remains overall positive. We believe that the increased order growth is, at least partially, a response to the anticipated pressure to decarbonize shipping and renew aging fleet. With major retailers facing more aggressive reduction in carbon emissions than on basis, The motivation to scrap older, less efficient vessels will grow, reducing the growth in effective capacity. Supply chain discussions will also partially offset the effect of UBD's delivery in 2025. Next, in the more short term, we show that the decline in freight rates since January 2022 is indeed consistent with typical seasonality impacting the first and second quarters in our industry. The graph on the left shows a similar seasonality trend for the 2022 SPSI comprehensive index when compared to previous year prior to and following Chinese New Year. We believe that the Shanghai lockdown contributed to the slow stock rate recovery this year compared to prior years. Yet, when manufacturing in China returns to normal and demand decreases in peak season, the added volume labels additional pressure on already strained supply chains and congested ports in the United States and elsewhere. The graph on the right compares the development of threat rates from 2019 to 2022 today. And again, demonstrates the price decline in Q1 are consistent with typical seasonality. The downward trend in 2022 extended longer than earlier years, again, most likely due to the Shanghai lockdown. But we are starting to see rate stabilization in Q2 as would be expected. With respect to our overall expectations of threat rates, we would contend that certain factors, including the sustained historically higher than average threat rates, now entering their third year on the road, structural changes in container shipping, vertical growth strategy being pursued by various liners, and a higher cost incurred by all players, will keep threat rates from declining to pre-COVID levels when rates finally normalize. With that, I will turn the call back to Eli for the concluding remarks. Thank you, Xavier. We continue to deliver on our commitment to outstanding execution and profitable growth while positioning ZIM for long-term success. As Xavier just outlined, strong underlying market fundamentals support our optimism for the future as we leverage our global niche strategy to meet growing customer demand. Importantly, we have secured fuel-efficient new-build capacity that will strengthen our market position and commercial prospects moving forward while maintaining our flexibility in our operational capacity. We are pleased with our incredible progress today as a public company and excited to carry our momentum forward, continuing to advance Zyn's position as innovative digital leader of seaborne transportation and logistics services to maximize value for all stakeholders. We will now open the call to questions. Thank you very much.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to answer questions may press star followed by one on the touched on telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. And the first question is from the group. Please go ahead.