ZIM Integrated Shipping Services Ltd.

Good afternoon, ladies and gentlemen. Thank you for standing by. I am Francie, your course call operator. Welcome and thank you for joining the ZIM Integrated Shipping Service Q2 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. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Press the star key followed by zero for operator assistance. It's my pleasure, and I would now like to turn the conference over to Ms. Elana Holzman, head of investor relations. Please go ahead, ma'am.

Thank you, Francie, and welcome to Zim's second quarter 2022 financial results conference call. Joining me on the call today are Eli Glickman, Zim's president and CEO, and Saviedis Leo, 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 material. You are kindly referred to consider the risk factors in 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 Gluckman. Eli?

Thank you, Ilana, and welcome everyone to today's course. I am very proud of our execution and continuous strong financial performance during the second quarter and first half of 2022, as you can see in slide number three. Over the past several quarters, Zim established itself as a leader in terms of EBITDA and EBIT margin in container shipping. Our first half results are record results for Zim and we are pleased to continue delivering strong EBITDA and EBIT margins. Based on our solid performance in the first half, we are reaffirming our full year guidance for 2022 and are on track to deliver another year of record earnings and profitability. We are also announcing today the increase in our quarterly dividend payout from 20% to 30% of quarterly net income. This quarterly increase is based on our confidence in our ability to deliver long-term and consistent profitability while enabling our shareholders to benefit sooner from these strong results on a quarterly basis. As you can see in slide number three, In the first half of 2022, revenue grew by 73% compared to the same period in 2021. Adjusted EBITDA grew 115% and net income grew 106% as we further capitalized on elevated freight rates and resilient demand. We remain committed to profitable growth In the first half of 2022, adjusted EBITDA margin improved from 52% to 65%, and adjusted EBIT margin improved from 45% to 56%. Our balance sheet continues to be very strong with total equity of $5.25 billion at the end of the quarter after the distribution of $2.4 billion in dividends during the first half of 2022. In slide number four, you can see that return capital to shareholders has been and remains a top priority for us. Given our confidence in our long-term profitability and goal to reward long-term shareholders, we are increasing our quarterly dividend payout from 20% of quarterly net income to 30% of quarterly net income, with the total dividend payout of 30 to 50% annual net income. As such, starting this quarter, we intend to distribute approximately 30% of quarterly net income for each of the first three quarters of the year, with possible step up to 50% of annual net income with the release of Q4 and full e-results subject to board approval. Accordingly, our board declared a Q2 dividend of $4.75 per share, or a total of approximately $571 million. The Q2 dividend includes a 10% one-time catch-up from Q1 net income. In slide number four, you can see that the past several weeks have demonstrated the dynamic nature of our industry and the importance of staying focused on our core strategy and key strengths. Innovation, agility, and excellence were the foundation of Zim's successful turnaround, and they will continue to guide our commercial and operational strategy to further position Zim as a top performer in our industry. We have established a track record of successfully identified attractive growth opportunities and adjusting our fleet size based on changing market conditions. This is a direct result of our operational and commercial agility, which has enabled Zing to optimize vessel deployment, support high utilization level of vessels, and exploit specific trade advantages, driving our strong results and strong profitability. We expect this approach to continue to be beneficial as the market expected to normalize from peak levels. Our global needs strategy dictates that we operate in trade lanes where we have competitive advantage and can command meaningful market share. In Q2, we expanded our operated fleet capacity. We now operate 149 vessels to meet customer demand. We open new lines and adjust our service to address changes in the business environment so our vessels continue to sail full. I remind you that we have expanded our fleet over the past few quarters, partly in anticipation of the change in our collaboration agreement with the 2M. We transitioned to a full-slot swap agreement on the Asia to U.S. East Coast and Gulf Coast and terminated the slot purchase agreement we had on the PMW and Asia met rates. As a result of these changes, which went into effect in April 2022, we increased our operating capacity in order to best serve our customers. I would also like to highlight our car carrier business as an example of Z-mobility to identify profitable commercial opportunities. Since the beginning of the year, we grew the number of car carriers we operate to 10 as we take important steps to further capture growth in car cargo being exported out of Asia. On the operational side, we remain committed to a strategy of relying primarily on charter capacity while maintaining a high level of flexibility. This flexibility allows us to adapt our fleet size to changing market environment. Yet, we adopted our chartering strategy to reduce our exposure to the sport charter market due to shortage in capacity and rising daily rates. Instead, we opt to charter new built vessels for our co-operated capacity to improve our cost structure in the mid and long term. As you know, during 2023 and 2024, we expect the delivery of 46 new-build vessels, of which 28 are LNG-powered vessels. This new-build capacity strengthens our commercial proposition and improves our cost structure by securing fuel-efficient new-build capacity. The LNG vessels also serve our own ESG goals. We estimate that approximately a third of our capacity could be LNG powered when we take delivery of these LNG vessels, and we will be the first line to operate an LNG fleet on the Asia to the US East Coast trade. We are excited. The dream will be more carbon and cost efficient than it is today. while improving our competitive position and supporting our customer in meeting their own ESG objectives. We are pleased to continue to position Zyn at the forefront of carbon intensity reduction among global liners. In slide six, we can see that as part of our strategy, we continue to leverage the Israeli high-tech startup ecosystem to identify attractive new innovative companies as growth engines. Our focus is on digital initiatives and technologies relevant to our core shipping activities and the broader logistics sector. Our objective is to identify this opportunity at an early stage, which requires modest investment to establish our position and serve as strategic partners, implementing the technologies internally and assist these companies in their growth. We have been very active. on this form and have recently completed four investments. We did two follow-on investments in WaveBL and Sodio, and a third-time investment in Data Science Group and Hooper Systems. Highlighting our most recent investment in Hooper, they are a provider of cutting-edge tracking solutions for unpowered assets. The solution is extremely doable, cost-efficient, and power-efficient. creating a tracking device that can last up to 10 years without changing the power source. Our investment in Hoopoe will be used in part to develop a solution suitable for the containers. For all these companies, Ariane will believe they hold significant potential in the future. Before turning the call over to Xavier, our CFO, I would like to briefly address the current market environment and outlook moving forward. As I mentioned, the shipping industry is dynamic. Over the past several weeks, we've seen a decline in freight rates, particularly in the Trans-Pacific, despite persistent port congestion and overall positive demand trends driven by macroeconomic and geopolitical uncertainty. We therefore recognize that rates may have peaked. However, We know that current rate rates, which are of historic high, remain elevated and therefore very profitable. While we anticipate some declining rates for the remainder of the year, we expect the normalization to be gradual and support ZIM reaffirmed 2022 guidance, which, as I mentioned, will enable us to post another year of record earnings. Furthermore, We expect the new 2023 in regulation and the agenda to decarbonize shipping to partially offset growth in supply and support freighters in the mid to long term. I will now turn the call over to Xavier for his remarks on our financial results and additional comments on the market, please.

Thank you, Elie. And again, I welcome everyone. On slide 7, we present key financial and operational highlights. Our strong second quarter record first half 2022 financial performance reflects the historically high trade rates, which were significantly higher this quarter compared to the prior year period. Resilience demand as well and the value of our differentiated approach. Specifically, our average freightway to TEU of $3,596 in the second quarter was 54% higher compared to the second quarter of 2021. During the first six months of the year, our average freightway was 73% higher than in the first half of 2021. Our commercial strategy and our competitive positioning enabled us to identify better paying cargo and earn more to TEU than our peers. Our carriage quantities in Q2 were down 7% compared to the same period last year. Lower volume this quarter resulted primarily from continued congestion exacerbated by more congestion in the U.S. East Coast ports, which we call on our trans-Pacific trade. Over the six-month period, our carriage volume was down 1%, compared to the 2% decline in market volume in the first half of 2022. When we look at the full year, we still expect to grow our volume by 2% to 3% based on a higher operating capacity and assume easing import congestion going forward. Our free cash flow in the second quarter totaled $1.6 billion, compared to $861 million in the comparable second quarter of 2021, an increase of 93%. Turning now to our balance sheet, total debt increased by $1.2 billion since prior year end. The increase in debt is driven mainly by the increased number of vessel fixtures long-term charter duration, as well as higher daily charter rates. The first half of 2022, our cash position remained essentially flat, even after having paid approximately $2.4 million in dividends. Maintaining flexibility in our fleet management strategy so we can match our capacity with customer demand remained a core focus for us. The average remaining duration of our current chartered capacity is 27.7 months, slightly down from the 28.6 months in May 2022, and bridging our current operating capacity to the scheduled delivery of our chartered new-built vessels. Also, only nine of our chartered vessels are scheduled for renewal between now and the end of 2022. When we look into 2023 and 2024, 28 and 34 vessels are up for renewal respectively. In other words, we have a total of 62 vessels up for renewal compared to the expected delivery of 46 chartered new build vessels during this time period. Next, moving on to slide eight, you can see that our earnings have continued to grow. Our net leverage has trended downwards and is at 0.1 times as of June 30th this year. Moving on to the next slide, slide nine, our differentiated and proactive approach continues to generate strong results. Revenue for the second quarter was $3.4 billion, 44%, compared to $2.4 billion in Q2 2021. Most importantly, we grew profitably with Q2, net profit of 1.3 billion, representing a 50% year-over-year increase. Adjusted EBITDA was 2.1 billion for the quarter, an improvement of 57%. Consistent with our focus on profitable growth, margins were 61% for adjusted EBITDA and 51% for adjusted EBIT. That is to be compared to 56% and 49% respectively in Q2 last year. Our six months 2022 adjusted EBITDA margin was 65% and adjusted EBITDA margin was 56%. These profit margins are among the highest in the liner industry and do reflect our performance during the first half of 2022. Margin contraction in Q2 versus Q1 was driven by higher slot costs resulting from the transition of the slot purchase agreement we had with the 2M, which was terminated on April 1st, to our own operating capacity, and also to higher LSFO bunkering rates, as well as lower average freight rates in Q2 versus Q1. Moving on to slide 10, we carried out 156,000 TEUs in the second quarter, compared to 921,000 TEUs during the same period last year. Lower volume of the Trans-Pacific coast by the surf and congestion on the east coast was partially offset by growth in intra-Asia volume, another trait we see as a key focus. The growth in intra-Asia was given primarily by the new e-commerce services we opened from China to Australia and New Zealand in the second half of 2021. Moving to slide 11, regarding our cash flow in Q2 2022, with a total cash position of $3.9 billion, which includes cash and cash equivalent, and also investments in bank deposits and other investment instruments. During the first half of 2022, our adjusted EBITDA of $4.6 billion converted into $3.4 billion cash flow from operations. Other cash flow items in the period included $248 million of net capex and $627 million of debt service. I will also remind you that during the second quarter, we distributed dividends totaling approximately $2.4 billion. Moving to our guidance, we are reaffirming our full-year guidance and are on track to deliver another year of record earnings. We expect to generate adjusted EBITDA between $7.8 and $8.2 billion, and adjusted EBIT between $6.3 and $6.7 billion. Our assumptions with respect to our guidance remain largely unchanged, except for lowering our expectations on volume growth from 5% to now 2% to 3% for the full year. Our guidance also includes the assumption that spot rates have peaked and that the gradual normalization in rates will continue through the second half of the year. In other words, on average spot rates in Q3 are expected to be lower compared to the average of Q2 and the same for Q4 versus Q3. Turning to our view on the business environment, slide 13. The combination of very strong demand-side supply and port congestion were the main underlying drivers of freight rates reaching unprecedented levels in 2021 and early in 2022. We addressed these three drivers. First, port congestion and supply chain bottlenecks remain a significant challenge, especially in the United States. As vessels avoided the heavily congested West Coast ports and diverted targets of East Coast and Gulf Coast ports, the queue outside those at the port grew. While there have been some corrections in port operations, evidenced by the improvement of measures such as Flexport Ocean Timelapse Indicator, at 90 days for trans-Pacific, it is still double the 45-day pre-COVID level. There is today still little expectation that port congestion will materially improve in the near future, despite these corrections at the port. Drury continues to estimate that 7% of effective capacity will be sized down in 2023 due to port congestion. Also, given that port congestion is to a certain degree the outcome of landside bottlenecks, in other words, the efficiency in moving containers in and out of the port, Some level of post congestion may become a lasting fixture in our industry. This would result in the reduction of the effective capacity on the water. In the United States and elsewhere, there are signs that certain headwinds such as increased inflation and higher energy prices have resulted in softening of demand. Yet overall demand trends globally and possibly in the United States remain healthy. 2022 volumes are higher than pre-pandemic, higher 2019 levels. In fact, for the first six months of 2022, volume was up 5.4% when compared to the same period in 2019. Going forward, the current inventory-to-sales ratio also supports this year. While it is up from low of opportunity 1.1 and 1.2 retail inventory to sales ratio, it's still below historical pre-COVID levels of around 1.5. In light of persistent congestion and length of bottlenecks, we believe that retailers cannot and will not maintain lower inventory to sales ratio as compared to pre-COVID. Moving to slide 15, starting in 2023, the outlook for the supply-demand balance will also change when additional supply is expected to be delivered and supply growth is anticipated to outpace growth in demand after a long period of side supply. Yet we believe that both short- and long-term net effective supply growth may be smaller than is implied by the current order book. In 2023, port congestion will partially offset the expected 9% in supply growth, as well as possible slow steaming resulting from ILO 2023 regulations that are expected to go into effect in January 2023. The growth in supply may also bring about scrapping, which was essentially zero in the past couple of years. Longer term, we have indicated that the increase in all the bookings, at least partially, a response to the anticipated pressure to decarbonize shipping and reduce aging fleet. As such, the motivation to scrap older, less efficient vessels may grow, resulting in lower growth in actual capacity that is currently implied by the order book. To summarize, these factors support our positive outlook on our business environment. And I also note that the recent consolidation in the industry and the operational alliances, they also further support improved efficiencies in our industry. And with that, I will turn the call back to Elie for his concluding remarks.

Thank you, Xavier. Thank you. I'm incredibly proud of our team and Zim's ability to execute at the highest level and deliver on our commitment to profitable growth reflected in our second quarter and first half of 2022 performance. We generated our best ever first half year results and are set to deliver another record year based on the guidance which we reaffirmed today. We believe this core strategy and key strengths will continue to serve us well as freight rates are expected to continue to gradually normalize from peak levels. We have taken proactive steps to improve the commercial proposition and competitive position, both commercially and operationally. We anticipate the changing nature of the charter market and adapted our fleet strategy to secure our core fleet and reduce our dependence on the spot charter market. We enter into multiple mid and long-term chartering agreements to secure cost and fuel efficient new build capacity. To remind you, our first chartering agreement for 10,000-15,000 TU vessels, which will be the largest vessel in our fleet, was signed over 18 months ago. Going forward, we remain highly confident that our global needs strategy and cost structure, several commercial prospects, and investment in innovation and disruptive technologies positions in to be a top performer in our industry and deliver long-term shareholder value.

Francie, we'll take questions now. Thank you.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from Satish Sirvakumar from Citigroup. Please go ahead.

Thank you again. I've got three questions here. So firstly, on the dividend payout ratio, the change in from 20% to 30%, what has actually triggered this quarterly dividend payout ratio change, given that going into H2 and then to next year, there's uncertainty around demand and also the rate as the rate starts to normalize. So could you actually explain the thought process why the rate increase in the ratio? And then secondly, on the vessel utilization, on the ships, can you give a context like where the vessel utilizations are today versus what it used to be at the start of the year? especially out of Asia, into Trans-Pacific. And then the third one is around the spot premium surcharges. Obviously, last year, there was a significant increase in volumes that were on spot premium surcharges. Do you actually add any spot premium volumes in Q2, and how does it actually in terms of that part of the premium market. Those are my three questions. Thank you.

Thank you, Satish. If I may, I will address your questions. The first one with respect to the dividend quarterly payout increase from 20 to 30. You may remember that we, from the outset, said that we intended to return significant capital to shareholders. And we have on already a couple of occasions tweaked or changed or updated our dividend policy. We started between 0 to 50% dividend payout once a year. Then we acknowledged that this was a bit too vague and we wanted to clarify also for our investors our view on our market and our ability to continue to distribute dividends. So we switched from a yearly to a quarterly and we took the conservative view initially to only distribute 20% even though on a quarterly basis, even though we recommitted our intention to distribute between 30 to 50% of our full year net earnings. So that meant at the end of the day that we would always end up or very likely always end up with a significant higher dividend payment once a year when we release our full-year financials, if it is just only because we would catch up from 20% to 30%. As we feel confident in our ability to continue to generate quarter after quarter ongoing profit, then we felt there is no real reason to hold back for the first three quarters and to catch up to get to at least a 30% once a year. Hence why we've made that change today. Second, looking at taking your second question in terms of vessel utilization. Up until today, most of our vessels, if not all our vessels, when we are focusing on the trans-Pacific trade lane are failing full. We did mention that, but despite the fact that this does not necessarily, was not necessarily translated in terms of volume with the overall volume in terms of CEUs that we initially expected due to congestion. But this is a congestion effect that the schedule is taking longer than anticipated, not a utilization effect. So our vessels have been saving full up until today and for the remainder of the year we are also assuming that the utilization will continue to be extremely strong and this is why we think that we'll be able to catch up on our volume assumptions on a full year basis because utilization will remain strong and we will also assume some sort of easing in the current congestion of the bottlenecks at the terminal at the receiving end. And third, you were asking I think about our ability to add surcharges to our income, which has been a significant feature towards the end of 2021 and also to some extent during the first quarter of 2022. So this has faded clearly over the quarter, and we are not assuming that we will generate significant additional surcharge going forward. We take the view, when we talked about our guidance for 2022, on average, that the rate normalization will continue, albeit at a pace which is gradual, which has always been, by the way, our assumptions when it comes to the normalization agenda.

I've got a couple of follow-ups, if I may. On the dividend, basically, why not share buyback? That actually gives you flexibility, right? as we go into a potential downturn. I will consider share buyback in the future. And then the second one, actually, on the volume normalization for the full year. So if you look at your H1, this year versus last year, you basically see an increase of proportion of volumes towards intra-Asia. So do you expect that trend to continue, and that's what would see a volume recovery come through

So maybe starting with the second question that you raised, yes, on the intra-Asia trade, we continue to be very active. We talked about lines that we recently opened between Southeast Asia, also to Australia and New Zealand. So we see a lot of growth, opportunity growth on the intra-Asia trade lines, and we are well positioned to capture the volume growth in this region. Going to your first question, why not share buyback and why dividend? We have, up until today, promoted the returning significant dividend to our shareholders, and it's good that we have. If we look at our 12 months into being a traded company, we've returned $21.5 per share to our shareholders, $2.6 billion in terms of dividends. terms of dividend we uh when we guide for 2022 the numbers that we are guiding suggest that there will still be more dividend to come in the in the future so up until today we have uh promoted returning capital to shareholder via dividend and we continued again by updating our dividend policy in terms of interim payout that we just talked about that we made to the shareholders on day one, and we are delivering on that front. That doesn't mean that share buyback is completely out of the table. Up until today, we haven't entertained such initiative, but the board, the management will continue to always evaluate quarter after quarter what is the best avenue, the best way for us to continue to maximize shareholder value, and share buyback is really one way to return capital to shareholders on top of dividend.

Thank you, Xavier. That's quite helpful.

The next question is from Omar Nocta from Jefferies. Please go ahead.

Hi. Good afternoon. Hi, Ely and Xavier. Thanks for the update. Obviously, a very nice and, you know, solid quarter and good to see the guidance reaffirmed, especially, you know, given spot freight rates have been coming off here the past several weeks. You know, having said that, some of your peers had actually been raising guidance this past or, you know, the past couple of weeks, this running season, which I think kind of set up expectations that we could see the same from Zim. Is there anything that you could highlight that maybe separates you from the others in this respect? Is it higher relative spot exposure on the Trans-Pacific, or is it maybe a function of being too conservative?

I would like to begin. First, this question to manage expectations. We began the year with very high expectations from 2022, and we share it with our analysts and investors. Looking on our EBITDA margin, EBITDA margin, the first six months, Zim is considered, let's say, one of the leaders compared to those companies who publish the results. For sure, those on the Western side of the world. Not by 1% or 2%. So in Q1, although it was a very short time after the first guidance for the year, we increased our expectation for the year. And we set targets that 2022 will be a better year Speaking of EBITDA and EBIT, bottom line compared to 21, it was the best year ever for ZIL. We believe that our responsibility is to be conservative as we see gradual normalization of the rates, mainly in the past Pacific, and the freight rates. So we would like to reaffirm our guidance for the, in the same, this is a real target for them to deliver best results. Compared to the companies that you spoke about, they've decided to begin there with low expectations, mainly for the second half of the year. And they improved their guidance from the beginning low guidance. Xavier, thank you.

I think we need to look at things, Omar, in absolute terms. When you look at things in absolute terms, relative to our size, we are a smaller company than some of the larger European players. Those are the ones you are referring to. Our capacity is less than 500,000 EUs to be compared to the other ones. And if you were to do a comparison in terms of EBIT, For TEU that is being operated, you may come to a very different conclusion with respect to the relative performance of a liner versus another one.

Thank you. That's helpful, and I appreciate those comments. And I guess maybe just about volumes. You've mentioned, I think, Ili, that you've taken the fleet up to 149 vessels. Volumes have been flattish here the past three or four quarters. How should we think about volumes going forward? You were thinking 5% growth before, now it's maybe 2% to 3%. So far in the third quarter, are you seeing higher volumes that give you maybe some confidence that we are going to see a bounce here in volumes, or is it still more of an expectation as we proceed to the rest of the year?

We clearly expect to deliver on increased volume of tariff quantities into Q3. For many reasons, again, it's not that the vessels have been not sailing full over the past quarter. It's been more that there's been those issues in terms of congestion. We think we'll need to go hand in hand. If we assume that the freightways will continue to normalize, it has to go with and they also from a land side perspective aspects of things that congestion should should start to ease significantly because if that doesn't happen then with the scenario or the underlying assumption that freight rate will normalize might be might be challenged so if we are taking the conservative view or the reasonable view on the freight rate level then we also need to assume that we will be less penalized in terms of carried quantities by the congestion. So that's one. Second is also when we look at the capacity that we are operating, we are also taking delivery of more vessels in the third and fourth quarter. We are going to be taking delivery of a large capacity vessel as well that are going to be entering into Asia-US East Coast ahead of our big transition next year, which is around the corner. where we will start getting the first 15,000 TEU LNG vessels that will be delivered to us in February. So that's really a combination of us operating more capacity, if you will. Second, assuming that the congestion will ease and will improve, therefore allowing us to move more and more cargo and therefore increase carry quantities.

T. Got it Thank you and just final one on the new buildings, the 46 that are coming on starting next year that are going to be vastly you know much more fuel efficient, you know, in terms of your existing footprint, you know how do you see that these new buildings joining the fleet. T. would theoretically you have 149 is it simply. 46 come out of the existing chartering fleet and you bring in these new 46? So your overall fleet size stays the same? Or do you expect to add some of these a bit more permanently? And I guess that's sort of that's like the one question. The other one I have is on that, have you done sort of an analysis or are you willing to give maybe what these new buildings will look like on a uh ship by ship basis so if we were to replace ships on a one-to-one basis uh in terms of teu costs are you able to give how much they would reduce your unit cost by i know that was a bit of a jumbled question but simply i have what does your cost go down by if you were to assume all 46 new buildings come in and replace 46 existing ships um that are currently in the fleet okay thank you the answer is not that simple because uh starting with the beginning of your question

we are not planning on replacing ship for ship. So we have indeed those 46 new buildings that are coming our way for which we are committed to, and we are eagerly awaiting this capacity. And if we look at the vessels out of the 140 container vessels that we operate today, we have 62 vessels that will come up for renewal over the same period. And we will decide whether we want to let go of some or all of that capacity, depending on our reading of the market and whether we see options for us to grow or enter into new trade links. So the determination will be made as we go. And as we are today, I'm sure you would assume that we are preparing for 2023. We are in the budget season as far as GIM goes, so we are already looking into What is the fleet plan? What are the trade links that we intend to continue to grow in, exit, enter? So this is very much in the process as we currently speak. So it's not going to be one for one. To give you an example, the first series of 15,000 TEU vessels, so the 10,000-15,000 TEU vessels will clearly be deployed on our Asia-US East Coast trade, the ZCP line, all of them, and they will replace vessels that are currently of a capacity of between 9,000 to 10,000 TEUs. What will we do with this capacity of 9,000 to 10,000 TEUs? We might cascade some of that capacity into other trades, be it on the PNW, for example, or on a second string on the Asia to the Gulf or to the US East Coast. We are looking into that. This is also a discussion that may take place with our partners. As you know, we jointly operate with Maersk and MSC on our Trans-Pacific trade base. So there is a lot of potential scenario that may unfold, which will lead to a different conclusion when it comes to our fleet plan going forward. What we wanted to make sure of is that we have the option to grow, not the obligation to grow. And that's very important in terms of fleet planning, the fact that as we committed to those policies and new buildings, that we have the ability to deliver a significant portion of our current capacity going forward.

Thanks, Xavier. Yeah, that's very helpful. That optionality is key. I'll leave it there. Thanks so much.

Thank you, Omar.

The next question is from Sam Bland from JPMall. Please go ahead.

Thanks for taking the question. I have two, please. The first one is, could you talk about, I think, the change in the 2M relationship started at the beginning of April. Could you talk about to what extent that increased your unit cost quarter on quarter, please? And the second question is, I think you talked about in the opening remarks that maybe in the last few weeks, spot rates have been coming down quite sharply. I can't view, if anything, congestion seems to be possibly getting worse on a global basis. And I don't think demand is falling that quickly. I guess I'm interested in why you think spot rates are coming down so sharply, given those two factors. Thank you.

Thank you, Sam. The first question with regard to the change in the relationship or the cooperation, the partnership with the 2M, you're correct that we entered into this new network on the changes were effective as of the 1st of April. this year. So in the first quarter, we were a net slot buyer from our partners. We were jointly operating capacity, but at the end of the day, we were also, in addition, buying slots from our partners, Merced and MFC, on the Trans-Pacific trade lane and on the Asia Main. And from the 1st of April This year, we shifted completely to a full swap agreement, meaning that we are no longer buying any slots from MERS and MSC, and that we are purely exchanging capacity on the vessels that we jointly operate on the trade where we continue to operate, which are mainly the Asia-U.S. East Coast and the Asia-U.S. Gulf Coast. So as a result, what happened, we, and you see that we anticipated that change in the collaboration in terms of the structure of the collaboration. So we had to bring in additional capacity in order to continue to be able to operate a similar tonnage at the end of the day. So that's what has explained to some extent the increase in vessels that we are operating today versus what we were operating a few quarters back. And so we saw those vessels from the chartering market at rates that obviously were the prevailing rates that the tonnage providers were commending and that were quite different from the slot rates that we were purchasing from our partners. So in terms of impact, it's not that easy to quantify, but it's in the region, I would say, of $100 million. Second, on your question with respect to the rate dynamic, and why is it that we are assuming that the normalization of the rates of the spot market might continue to slide as we've already experienced already throughout the second quarter? How is that possible if indeed the congestion continues to be there or to worsen? You're right, there is a lot of uncertainty ahead of us, and it might end up being a different scenario. What we are just here saying is that we think it needs to go hand in hand if we assume continued normalization in the freightways, then at some point congestion should be, otherwise we would be in a situation which would be quite awkward. where there would be no real reason to justify the rate adjustment. So that's why we are making that assumption. If we were to be wrong in the assumptions with respect to the easing in the congestion, it is very possible, as the demand is still as strong, it's not as strong as it used to be, let's be clear. There are signs of weakening in demand as well, and that maybe weighed significantly in the explanation of why the rates are starting to normalize. But the demand is still there. Compared to pre-pandemic level, we are still very resilient. Remembering that last year was extremely strong. So when we compare year over year, yes, there might be signs of weakness, but it's still a strong market. So that's an assumption we are making. We're thinking it's a reasonable one. There might be other scenarios at the end of the day. We'll see which is which. Understood. Thank you very much.

The next question is from Alexia Dogani from Barclays. Please go ahead.

Thank you for taking my questions. I also had three. Just firstly on kind of recessionary scenario, can you just kind of explain to us what kind of flexibility you have to adjust the network should you need to? I guess kind of the reference of the number of vessels expiring would be helpful then secondly am I correct in picking up that Eli in his comments mentioned that you are reducing your spot exposure and you're entering in more contract agreements if that's right can you give us a rough indication of how spot versus contract is evolving and then Finally, in terms of the alliances and the pros and cons of joining an alliance, is that a possibility? What do you think? Thank you.

Thank you, Alexia. With respect to your first question, what are the tools or what could we do in case of a prolonged recession beyond, I guess your question is even beyond the 2022, in 2023, maybe 2024. The flexibility for us is key and critical, and we have 28 vessels that we cover for renewal in 2023. So if we were to end up in a situation where the global economy is entering into a prolonged recession, and as a consequence, if demand on the trade where we operate was to significantly drop, then we would obviously not renew those charter. We also have in 2024, another 34 vessels that we cover for renewal. What is very important, because then you might say, but yes, but you have the 46 vessels that are coming in over the same period, What is very important, I think, for us to emphasize is that those vessels, yes, they are green, they are brand new, but as a result, they meet our ESG strategy and commercial positioning, that's one. But also very importantly, when it comes to operating and the cost of operating those vessels, the chartering cost that we will be paying for each of those brand new vessels, they are going to be far more competitive than the last vessels that we fixed in the spot charter market. but as you know, has been very hot for the past few quarters and has had some effect on our cost structure. So what it means, it means that as we enter into 2023 and every month when we take delivery of one of these brand new vessels, our cost of operation per TU, our stock cost, will go down compared to the current cost of operation of the company. uh the second question you asked whether we were uh changing the mix between the contract and spot um no we are we are still where we were last last quarter you know that of the trades where we operate mainly the trans-pacific trade lake is the trade that is subject to a long-term contract discussions with the customers these headquarters or dcos we finalize those discussions towards the end of April for the new rates to kick in as of the 1st of May. We have concluded the secure 50% of our volume on our Trans-Pacific trade lane with the contract customers. We are still remaining exposed to spots. at 50%. What Elie was referring to is today, the current situation is, by and large, spots and contracts are paying the same amounts, so it doesn't make much of a difference for us to load a container that is on contract or a container that is sourced from the spot market. That is the truth of today. And the last question that you raised with regards to alliances, For them, the partnership that we entered into in 2018 with Maersk and MSC has been extremely beneficial to us, but not only to us, by the way. I think it has been extremely beneficial also to our partners, which is very important in a partnership. It has to be a win-win combination for it to last. And all parties have enjoyed significant improvements in the network, significant cost savings opportunities. and that's why this collaboration has lasted up until today it is for us we continue to always keep on evaluating our options in terms of partnering with with with an alliance or with a liner because on top of our partnership with the two web on the trans-pacific trade we also have a partnership agreement or bsa agreement vessel sharing agreement with merce and mse by the way separately from those trade lanes where we operate with the 2M, and we operate with the 2S. Same goes of the intra-Asia region, where we partner with a lot of also smaller shipping lines. So this dynamic of sharing space at the end of the day and sharing operating capacity is a feature, I think, of our industry, which has brought a lot of benefits And at the end of the day, I think a lot of benefit to the end customer as well as allowed for the shipping industry to deliver improved input service at a lower cost.

Ladies and gentlemen, this concludes our Q&A session and today's conference call. You may disconnect the telephone. Thank you for joining and have a pleasant day. Goodbye.