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Q1 2023 Earnings Conference Call
spk06: Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the ZIM Integrated Chipping Services Q1 2023 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 1 on your touchtone telephone. Please press the star key followed by 0 for operator assistance. And I would now like to turn the conference over to Alana Holtzman, head of Investor Relations. Please go ahead.
spk07: Thank you, Natalie. And welcome to ZIM's first quarter 2023 financial results conference call. Joining me on the call today are Ellie Glickman, ZIM's president and CEO, and Xavier Desliot, 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 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 filed with the Securities and Exchange Commission, including our 2022 annual report filed on Form 20F. 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, Ellie Glickman. Ellie?
spk01: Thank you, Alana, and welcome everyone to today's call. Coming off a record 22 in terms of EB-DIME EB results, the operating environment in the first quarter of 2023 reflected the continuation of the downward pressure on freight rates that began in the summer of 2022. Largely consistent with our expectations in the first quarter, we delivered adjusted EB-DA of $373 million and adjusted EB loss of $14 million. Cash flow from operation was $174 million. Our total cash position of $4.2 billion at quarter end remains exceptionally strong. In March and April 2023, after several months of persistent declines, we have seen some price gains. Yet prices continue to slide since then, and we anticipate rate pressure to continue in the near future before we see more durable rate improvement in the second half of 2023. This continued price pressure is expected to similarly impact our Q2 results. Nevertheless, we continue to expect positive EB in 2023. Despite the challenging macro and industry dynamic, which our CFO Xavier will address later in our prepared comments, we are reaffirming our fully 2023 guidance, which we provided in March. Going to slide number four. It is important to highlight that ZIM understood during the highly lucrative market period of the last two years that a more normalized operation environment was on the horizon. By being proactive in adapting our vessel charting strategy and improving our core structure, we are better positioned to operate in this environment as we seek to create sustainable value over the long term. Additionally, our robust balance sheet and ample liquidity enables ZIM to operate from a position of strength and maintain a long term view during this downturn. We remain cautious in our cash allocation decisions and focus on supporting future profitable growth. In total, we secure few charter agreements, 46 new builds, including 28 state of the art LNG dual fuel vessels. This cost competitive and fuel efficient new build capacity supports our commercial strategy and advances sustainability objectives. To remind you, our agreements include 10, 15,000 TU LNG fuel vessels, which are ideally suited for the Asia to the US East Coast service. And 36 smaller, more versatile, 7,000 and 5,000 TU vessels. 18 of these 36 vessels are also LNG powered. This new overall larger vessel will allow us to optimize our fleet composition. So while we expect the number of vessels we operate to remain stable, our operated capacity will grow. Under this plan growth in operated capacity, our fleet will be better suited for trade and services. Regarding our cost structure, we expect ZIM cost per TU to decline as we replace smaller vessels with larger ones. Notably, we have already seen initial cost benefits in 2023 and expect further improvement moving forward. Six of our 46 new build vessels have already been delivered. A second 15,000 TU LNG dual fuel vessels was delivered in April and the third is expected in the next couple of weeks. We expect the delivery of four additional 15,000 TU vessels this year and the remaining three are expected in the first few months of 2024. Being the first liner to operate LNG vessels on the Asia to the US East Coast trade is a significant commercial differentiation. And we are incredibly proud to be at the forefront of carbon intensity reduction among global liners. Not only is ZIM committed to a decarbonization strategy, but we are also enabling customers to reduce their carbon footprint. Supporting our customers in their ESG journey is a high priority for us. For ZIM, our ESG vision is to consider and support the society and environment in which we operate. And to this end, we recently published our fifth annual ESG report providing a comprehensive overview of our activities, accomplishments, as well as future goals and commitments. In this report, we published for the first time ZIM FullScope 1, 2 and 3 greenhouse gas emissions and announced our commitment to reducing ZIM GAG emissions to net zero by 2050. This target is above and beyond the IMO goal. In the coming months, we will announce our roadmap to achieving this ambitious target. Our fleet renewal program is a key element in our ESG strategy. Today, our use of LNG provides a clear benefit from an environmental standpoint, but also from financial one, given the price of LNG relative to LSFO. Following our long-term supply agreement announced last year, ZIM and Shell successfully completed the first LNG bunkering of ZIM's SAMI offer in Kingston, Jamaica. This will be their routine bunkering port for our 15,000 TU vessels. We look forward to continuing our partner with Shell to ensure our fuel sourcing is well planned and of the highest quality as our LNG-powered fleet grows in the coming months. Agility and excellence guide our commercial strategy as we continue to adapt our network to change in customer demand and identify attractive commercial opportunities. Our car carrier's activity is such an example. The extension of our services in on-track and we now operate 14 car carriers to go to 16 vessels in the next few weeks as planned. Tight supply and strong demand in these services continue to drive profitable growth in the first quarter. Similarly, we have been investing in our reefers to target better paying cargo. Over the last year, we've expanded our reefers capabilities and today we believe that our reefers fleet is the youngest in the industry. Also, we could now potentially deploy nearly 25% of our overall vessel capacity for the transport of temperature-controlled cargo. This is the highest percentage of all the top 10 carriers. Reefers can play a key factor in the success of certain trades such as our new service from South America, West Coast, to the U.S., East Coast. We announced earlier this year and that became operational in April 2023. Moving to contracts, our commercial approach to secure contracts for 50% of trans-Pacific volume remains the same. We are close to meeting this target, though as expected, rates this year are significantly lower than last year's contract rates. I would highlight that our contract volume this year represents a substantial increase compared to last year as our operated capacity has grown significantly. We are pleased in our ability to secure this larger volume and believe that it is a testament to the good relationships we have with our customers. We also continue to seek investment opportunities in innovative technologies in our core shipping and broader supply chain ecosystem. Our strategy is to invest in early-stage companies and as such the capital requirements are modest and the potential is significant. Moreover, we are actively involved with our portfolio companies to assist them in their growth trajectory. We recently led a new investment in SpinFrame, an Israeli-based startup, after completing successful few Cs with the company. SpinFrame developed an innovative vehicle inspection platform that creates digital twins for vehicles throughout the supply chain to detect and report any defects in these cars from the assembly line to the end customer. We also recently participated and learned with other existing investors in a CSB funding round in Wave Electronic Bill of Leading, one of our earlier portfolio companies. We were pleased to see a new venture capital focused on investing in supply chain and logistics leading this round. On that note, I will turn the call over to Xavier, our CFO, for his remarks on our financial results and additional comments on the market. Please.
spk02: Thank you, Elie, and again, welcome everyone. On slide five, we present key financial and operational highlights. As Elie mentioned, our first quarter financial results reflected continued downward pressure on freight rates. In Q1, our average freight rate per TU was $1,390, a 64% decline year over year. Revenues for the first quarter were $1.4 billion compared to $3.7 billion last year, driven primarily by a dramatic decrease in freight rates, as well as lower carried volume. Our free cash flow in the first quarter totaled $142 million compared to $1.5 billion in the first quarter of 2022. Turning to our balance sheet, total debt increased by $307 million in Q1, mainly due to the incoming vessels characterized by longer term charter duration. Regarding our fleet, we currently operate 152 vessels, 138 container ships, and 14 car carriers. Excluding the new build capacity, the average remaining duration of our current charter capacity is 25.5 months, essentially the same as prior quarter. We note that our current fleet includes six new build vessels, that is four 12,000 TU ships and two 15,000 TU LNG vessels. We have 17 vessels up for charter renewal during the remainder of the year, with 37 up for renewal in 2024. In other words, we have a total of 54 vessels that are up for renewal compared to the expected delivery of 40 chartered new build vessels during this same time period. As I mentioned, in the short term, we expect the number of vessels we operate to remain fairly stable. Yet we will grow our operating capacity with the delivery of cost efficient new build capacity and re-delivery of smaller, less cost effective tonnage. In the next slide, we present Q1 2023 results compared to Q1 2022 and also sequentially. The underlying dynamics for both comparisons are similar and are primarily the outcome of the decline in revenues. Specifically, Q1 results are driven by our disproportionate exposure to the transpacific trade and the absence of 2022 contract revenue tailwind. Revenues for the quarter were $1.4 billion, while adjusted EBITDA in the quarter was $373 million and adjusted EBIT loss was $14 million. Adjusted EBITDA and EBIT margins were 27% and minus 1% respectively, as compared to 68% and 60% in the first quarter of last year. Turning to slide 7, we carried 769,000 TUs in the quarter. That is a 10% decline compared to the same period last year and a 7% decline sequentially, as compared to the overall market decline of 7% and 4% respectively. Compared to Q1 last year, lower volume on transpacific, intra-Asia and Atlantic was partially offset by a higher volume in the cross-trade trade. Q1 volumes were adversely impacted by further blanking as well as changes we have implemented in our network and the process of repositioning those vessels. Next, we present our cash flow bridge. We ended the first quarter with a total liquidity position of $4.2 billion, which includes cash and cash equivalents and investments in bank deposits and other investment instruments. I would remind you that following the first quarter's end, we distributed to our shareholders a dividend of $6.4 per share or a total of approximately $770 million. For the quarter, our adjusted EBITDA of $373 million converted into $174 million of cash flow generated from operating activities. This quarter was negatively impacted by the last tax payments on account of 2022 taxable income in the amount of approximately $290 million. Other cash flow items include $482 million of debt service, mostly related to lease liabilities, and $32 million of net capital expenditure. We have a commitment of approximately $150 million and $340 million in 2023 and 2024 as down payment for new-build vessels chartered primarily from C-SPAN. To date, we already paid $26 million for the first 15,000 TU vessels delivered. Moving to our guidance, while our full year view has deteriorated somewhat, we still expect to generate positive EBITDA in 2023 and deliver results within the guidance range provided in March. Specifically, we continue to forecast 2023 EBITDA of $1.8 billion to $2.2 billion and EBITDA of $100 to $500 million. Our underlying assumptions of improved freight rates and growth in volume driven by the end of the de-stocking cycle remain the same, with improved results in the second half of 2023 as compared to the first half. Given the net loss we recorded this quarter, for our dividend policy to distribute 30 to 50% of our annual net income in quarterly instalments, we are not distributing a dividend this quarter. Now, briefly discussing market dynamics, the supply demand balance for 2023 and 2024 points to clear risk of oversupply. Yet, as we have previously indicated, there are possible mitigating factors that may impact net effective supply growth. Slow steaming has had a meaningful impact so far this year and has cut effective supply by up to 6%. Scrapping in the first three months of 2023 has increased compared to the last two years, but in absolute terms is still negligible. It remains to be seen if more vessels are sent to the scrap yard as IMO 2023 regulations become more stringent and all the vessels become less cost efficient to operate. Lastly, slippage, as we have also experienced it, is happening but with limited expected impact. On the demand side, you can see that globally the demand pattern for 2023 is tracking similar pre-COVID patterns of 2019 and 2020, with a positive development towards the end of Q1. The dotted line for 2023 shows the expected volume for the remainder of the year, reflecting a .4% -over-year growth and assuming equal distribution of that expected growth over the remainder of the year. Given the weak start for 2023 to date, volume is expected to improve in the second half of 2023. On this note, we will open the call for questions. Thank you.
spk06: Our first question is from Omar Nocta from Jefferies. Please go ahead.
spk08: Thank you. Hi guys. Hi Ili and Xavier. Good afternoon. Thanks for the update. I just wanted to maybe first off just ask about the state of the market and say that the ZIM response thus far, you clearly talked about it in your opening comments. We've seen softer rates and whatnot, but just generally, can you maybe just give us some color on how you have shifted capacity around certain lines that you've exited or certain areas you've entered into? And just generally speaking, how have you shifted the overall operating strategy of the company, whether it's long-term or tactical, to sort of move through this difficult environment today?
spk02: Thank you. Thank you, Omar. Indeed, you're right that we always try to look to make sure we deploy our capacity where it makes more sense for us in order to generate profit. And this quarter has been quite significantly impacted by a switch of allocated tonnage between various trade lanes. To name a few, we exited or we suspended our operations between Asia to the US west coast, the south west coast. The service that we had between South China and NLA is a service that we suspended due to the significant rate erosion that we experienced on those trade. And we did reposition that capacity and upsize our service between Asia to Australia. That's one example. We also closed a line that was not performing well on Asia to Australia, New Zealand with smaller vessels. And we redeployed that capacity and opened a new line between the west coast of South America towards the east coast of North America. So this is a new service that we've entered into where we believe that the opportunity for growth and for profit are better. So we have shifted some of our capacity, closed line, open new line, and we will continue to do so, trying to maximize the vessel allocation for the capacity that we operate.
spk08: Thank you. That's helpful. Thanks, Xavier. And maybe just kind of on overall, maybe time charter activity, because early in the comments, I think Ili had mentioned that as you take delivery of your very fuel efficient and low cost new buildings, you return some of the vessels in your fleet today. I just wanted to ask you maybe big picture wise, what we've seen in the chartering market over the past couple of months has been a real kind of resurgence, perhaps, where vessels becoming available, irrespective potentially of their age, have been deployed on one to two year time charters to the point where just on the outside looking in, they look very profitable for the ship owner. And yet for the liner in a loss making environment, it seems a bit cost prohibitive. Can you help maybe just reconcile what's going on? Why are liners still continuing to take vessels that are available today, continuing to put them on one to two year charters, given the type of environment we're seeing?
spk02: Well, this is indeed what I think you are suggesting or referring to here, Omar, is maybe the desynchronization between what we are seeing on the revenue line in terms of freight rates and the chartering market, which is still quite active. And there is not that much capacity available there or idle to say the word. As far as we are concerned, we took decisive actions already a couple of years ago, and now we have a significant order book ahead of us in terms of new build, more efficient tonnage. So this is the priority for us to make room for that tonnage that is coming in, that is allowing us to upsize our services to be more cost effective in each of the trades where we end up operating. And as far as Dean goes, we are by and large, we're delivering most of the capacity that is coming up for renewal in terms of our chartering contracts. So we said we have 17 vessels that come up for renewal before now and the end of the year with another 37 vessels next year. Today it is very likely that if the market remains what it is, we will deliver most of that capacity again to make sure that we make room for the most efficient tonnage that is expected to come our way in the coming months. Just
spk01: to emphasize, you understand very well the question and we see the market not behave as expected. On one side, the laws are expected to come out the freight rate and the huge reduction in freight rate. Not from this side, but we see that the banker price in general, the fuel reduced dramatically to the $1,200 per ton that we used to have in the past. And I understand that you expect that the charter market rate would behave the same and you expect to see lower rates on the chartering market. And on the other hand, on the contrary, we see that the rates on the charter market are still high. So this is a question. We are not playing this market and we cannot answer this question as for the chartering, but we follow and we don't have the right answer for that.
spk08: Now that that's helpful and clearly you've stated you have the 17 ships this year, the 37 next year. It sounds like you'll be returning those. And maybe just finally for me, and I'll turn it over just on the guidance clearly very, very, I would say strong guidance relative to expectations. You know, it's very second half way to just wanted to ask about the second quarter and how that's developing. It sounds like you and your earlier comments that some of the pressures in one queue are still present in the second quarter. Is there a way if you're willing to maybe qualify how does to queue look thus far? Is it going to be similar to one queue slightly better, slightly worse, any color you're willing to give on the second quarter?
spk01: We don't. As you know, we're talking about guidance for the year and we are not giving specific. We cannot be specific on quarter, but you can understand from our guidance from two months ago that we are still referring. We didn't change them. We said that the first half is going to be challenging. And now we are the first quarter or the first half of the first half. And you can understand that in general, the first the second quarter is not going to be the best. As we said, they're still going with our guidance. So the first half is going to be challenging. We believe that the second half is going to be better than the first half. And this is what can we share and you can understand and take your conclusion from this guidance.
spk08: Got it. That's good enough. Thank you. I'll turn it over.
spk06: The next question is on the line of Satish Sivakumar from Citigroup. Please go ahead.
spk03: Yeah, thank you for the presentation. I got three questions here. So first, actually, if I look at the contract rate season, obviously most of them should have been done by now. If you could share any color on how the contract season has gone so far, how much of your volumes have been signed, given you actually taken out one service out of the city. And the second question, if I look at your volume trends and actually the intra Asia seen a big step down. I understand there is some Chinese new year related seasonality. If I look at go for Q4 to Q1, but even with respect to last year, Q1 versus this year Q1, it has gone from 269,000 to 219. What is driving that actually? Because we have seen some rebound in China has opened up and most of Asia is back. So any color on what is the weakness driving that volume, especially in intra Asia? And the third one, actually on the cost, if I look at your ex bunker, you actually did a really good job from bringing it down to 868 versus 997 last year, it is excluding bunker. How much more room do you have to bring this further down given that slow steaming, as you pointed out, slow steaming is, as majority is already operationalized. And if I look at within lines, both costs has actually gone up versus last year. The only cause that has come down is car grandling. So any color on how much more room that you have to like say ex bunker cost, in the coming quarters, that would be helpful. Those are my three questions. Thank you. Thank you,
spk02: Satish. So starting with the your first question with respect to the contract rate negotiation. Those are still ongoing as we speak. When we compared this season versus the last, the negotiation are taking longer and we have some of our customers are still holding on the committing and agreeing to a rate. Our objective from a company perspective remains very similar to the one we had in prior years, which is to lock 50% of our expected volume with contract cargo and they remain exposed to the spot for the reminder of the 50%. And as Ali also mentioned, since we are adding capacity by up sizing our vessel fleet on those trade lanes, de facto, we are chasing and looking for more volume. This 50% represents more volume that we are willing to lock for the coming 12 months. So we are on track with our expectation, still finalizing contracts here and there. And obviously, from a rate perspective, the average rates that we are securing today are much lower than the ones that we secured last year and by and large are trending towards the current spot levels. With respect to your second question, Satish, on the drop in volume on our what we label our intra Asia business units. It is, you know, it intra Asia for us is pretty wide. It also covers not only the trading within the Southeast Asia region, but also Asia to Australia and Asia to West and East Africa. And this is mainly where we've seen a significant drop in volume on our Asia to Australia lines. We have closed the service and this is the vessel that we've used and repositioned to open our new line on from Latin America from the South West Coast of South America to the US East Coast. So we closed one of our service in the quarter, therefore impacting our overall volume on intra Asia. And the same goes on Asia to Africa, which has been a market under quite some pressure in the in the first quarter. We've had the significant blank sailing. So if you look overall in the volume drop, where did we experience most of the drop? It's been on the Trans-Pacific, mainly Pacific Northwest, not so much the US East Coast or the Gulf, but Pacific Northwest and on intra Asia, mainly the Australia trade. And the Asia to Africa. And then to your last question when it comes to what are the questions are, what are the additional room for cost extraction that we may have a head of us. Ex-banker. I think what we expect to see is the, you know, the incoming effect of us getting delivery of our new building capacity. This is very important to us. And the cost of operating of 15,000 to you ships on the Asia to the US East Coast is is clearly far much lower than the current costs with the 10,000 to you ship that we currently operate. We also because of all the cascading that is going to ensue the upsizing of the trades with today we deploy 6000 to you ships and tomorrow we will deploy those 10,000 to you ships that will be freed up from our ZCP traded and so on and so forth. We result in pretty much all of our trade to a reduction in our cost of securing capacity. So that's that. And I think on the variable cost we will also and we continue to see an improvement on that front, which is largely driven by the improvement in the, you know, in the port and the terminal operations with less congestion, we incur less storage cost, we incur reduced variable cost on that front, which is also contributing to reducing our cost of operating. And lastly, there is another element, which is the commercial strategy and where we are seeking to increase our volume of exports of cargo from the US back to Asia. So on the weak leg of the trade, improving the volume here contributes to reducing our cost of repositioning empty the equipment. So that is also the balancing cost, which is also a potential source of additional savings going forward as we continue to develop our commercial strategy.
spk03: Thanks, I got a couple of follow up if I may actually. So Asia to US you close the service and what will be the like run rate going forward? You should be thinking in Asia would probably follow Q1 trends, adjusted for seasonality of course, but would you see some more impact of that service to come through? And then second one, if I could actually ask on the new build that you just put into service, what are the utilization of those vessels right now?
spk02: I'm sorry, I didn't quite get the second question Satish, could you repeat the second one?
spk03: You know, the new build 15,000 TU vessels that you deployed on the trans-Pacific trade lane, just trying to get a sense what does the utilization of those ships are?
spk02: Right, so maybe I'll start with this one. On the US East Coast, and this is where indeed those vessels are being deployed, we are benefiting from very strong utilization. So the volume is there. And when I was referring again to the drop in volume on the trans-Pacific, I did mention that it was more driven by volume reduction on the West Coast than on the US East Coast. So today the utilization, we are very happy with the utilization on the Asia US East Coast. We're not happy with the rates, but from a volume perspective, we are quite fine. That is not to mention the recent disruption, obviously, that I'm sure you are aware of with respect to the limitation on the Panama Canal, where we need to be quite inventive in ensuring that we are carrying a light cargo and so that the vessels can go through the canal due to the current draft limitation. But by and large, today, we on those trades, the volumes are there, but the rates are still yet to improve. Which also I think linked to your first question. We've seen on some of, on quite a few of our trade lanes today as we are delivering loss making results for the first quarter. Obviously, it means that in most of the trade lanes where we currently operate, we generate revenue that do not allow for us to absorb the, for us to absorb the cost. So we think that in most of the current East West trade lanes today, the rates, at least the spot rates, and this is what we are talking about here. The spot rates is not sustainable in the longer term. And as we operate in terms of vessels, very efficient vessels, we are not behind in terms of cost structure. So we think that most of the industry might end up being lost making in some of those trade lanes, which should, when the demand starts to come back and that this is what we based our assumptions for the remainder of the year. But at some point, the de-stocking effect that we've experienced over the past few quarters will come to an end, which should allow for the demand to slightly come back. And that should be a good trigger for the rates to also follow through.
spk03: Okay, correct. Thanks, Xavier.
spk06: The next question is from a line of Sam Blen from JP Morgan. Please go ahead.
spk00: Thanks. Thanks for the second question. I've got, I think, three, please. The first one is on contracts. I think previously, towards the end of last year, maybe in the beginning of this year, you sort of had re-based your sort of contract rates down to spot. Does that mean that there isn't a sort of quarter on quarter profit headwind in Q2 from the new Trans-Pacific contracts being lower again, i.e. your rates have already come down to market levels? The second question is, where you have contracts on the Trans-Pacific, are any of those being signed at what you think are loss-making EBIT levels? Or if that was the choice, would you just put more volume on to spot for the time being? And the third question is car carriers. You mentioned, I think, you had about 14 of those. I just looked at the rate for car carriers. It looks like it's been very strong in recent months. Could you just talk generally about, you know, those car carriers, very profitable for ZIM at the moment? How much of a contributor are they to profitability? Thank you.
spk02: Thank you, Sam. So on your first question, you are right in saying that or re-emphasizing that we do not today benefit from any tailwind from rates that we may have secured last year on the Trans-Pacific. So we are largely already today fully exposed to the spot market. So we do not or we should not expect additional headwind in the quarters to come as we no longer have or really no longer had any tailwind to support our revenue in the first quarter of 2023. Next to the next question, where are we or do we end up or would we do we consider securing and locking rates at the loss making level? This is not the intention of the company. So we are not doing that. And this is also maybe what explains why we are not yet at this time of the year, fully finalized when it comes to agreeing with our customers, the volume commitment and the rate commitment for the for the next 12 months. Precisely because some of our customers have been pushing for rates reduction or our expectations is below the minimum level where we are willing to go. And that explains why it takes a little bit longer. So I think by and large, the answer to your second question is that we do not intend to lock ourselves on revenue that would mean loss making, loss making cargo for us. And third, your question with respect to our car carrier activity. It is very true that we've grown this activity like never before, moving from being a single vessel operator not so long ago to 14 vessels and soon to 16 car carrier that we will end up operating. This is a nice, you know, profitable business for us to continue to grow and to continue to explore additional growth opportunities. We do not, as you know, we do not display specific information in terms of earnings generation on this specific activity. But you can see when you check our other revenue line in our P&L, this is basically capturing two sources of income. The one that we generate out of our car carrier activity and the one that we generate out of detention and demurrage. Detention and demurrage is going down significantly compared to last year. Pretty much we are halving the revenue that we expect to generate in 2023 versus the one we generated a year ago on that front. And this is compensated to a significant extent by the growth in earnings that we do generate on revenue that we do generate from our growing car carrier business.
spk00: Yeah, understood. Thank you very much.
spk06: The next question is from the line of Muneeb Akhiyani from Bank of America. Please go ahead.
spk04: Thanks for taking my questions. I just wanted to revisit kind of what are you seeing in terms of demand right now in the market? Has that kind of any signs of stabilization yet or is that just a two-h expectation? If you could give some more color on that. Secondly, if you could just talk about your charter costs this year and next year based on the new build vessels coming in and the older charters going out. How should we think about that from a modeling perspective? Thirdly, on ILWU, any color on what the situation there? It's been almost a year and no agreement. And how does that kind of factor into your planning at this point? Thank you.
spk02: Thank you, Muneeb. Maybe I'll start with the last one. As we mentioned earlier on, we exited the trade between Asia to LA. So we are no longer impacted or will no longer be impacted for as long as we are not resuming activity on this trade lane with the current situation in the terminal. What we can say is that when looking at the market environment on those trades, the uncertainties may be contributing to some of our shippers, some of the shippers are still pushing cargo to the East Coast as opposed to coming back to LA. And that may be the positive effect that is impacting us on the trades where we continue to operate on the obviously on the US East Coast and the Gulf. With respect to your second question, the charter cost or cost of a sourcing capacity year over year or quarter over quarter. We clearly, I think, have reached a peak in terms of what is the cost for the company each quarter in sourcing our vessels as we moved from being highly dependent on the chartering market and the somewhat shorter charter market, even though that developed to a more midterm charter market in 21-22. When we had to secure chartering contracts for at elevated rates compared to pre-COVID levels, but those contracts are coming and will continue to come to an end and are being replaced by the long term chartering agreements based on new building price that we secured early in 2021 and into the early days of 2022. So all those 40 new ships that are coming our way are coming at rates which have nothing to do with the rates that prevailed on the chartering market back in 2021 and 2022. So as we let go the historical tonnage to make room and replace it with the new tonnage that we are taking on, we see and we expect to see the revenue per TU, sorry, the cost per TU go down as a result. And not only because we see a chartering rates at lower level, but also because as a result of all this fleet deployment plan, we are upsizing in most of our trades, therefore increasing the operated capacity and providing that we are able to capture that additional volume, we will reduce our cost of operation per TU. And Muniba, I'm very sorry, if you can please repeat your first question which now I cannot remember.
spk04: Yes, sure. Just a bit more color on the current demand environment that you're seeing because some of the industry press has suggested it remains quite weak at this point.
spk02: Yes. So clearly, I mean, you know, the first quarter has been also especially on the Trans-Pacific trade impacted by there is always the seasonality effect around the Chinese New Year, which was quite early in 2023 compared to prior years. So the demand has been obviously also to some extent impacted by that. The demand is still weak. We are not suggesting here that the demand has rebounded very, very significantly as of now. So the first quarter was impacted by that. The second quarter or the beginning of the second quarter was very much a continuation of the market environment that prevailed over the first quarter, the end of the first quarter. So there's been a little bit of an uptick and we've seen the rates did increase on those trade lanes, especially in April as the GRI was somewhat successful. So the rates have bottomed at some point. We now obviously expect or wait to see whether the trend is changing. And as we did mention earlier on, if the stocking effect is coming to an end, we shall assume that the second half of the year will see an increase in the demand and therefore that will come in support to the trade rates. I still have early days to say, but that's our most likely scenario and the one assumption that we promote today.
spk06: Thank you. The next question is from the line of Alexia Dugani from Barclays. Please go ahead.
spk05: Yeah, hello. Thank you for taking my questions. I also had three. Just firstly on your guidance and the Q1 performance, was it always your expectation that Q1 would see EBIT loss? Secondly, in terms of the expectation for basically the improvement in demand and rates in the second half, the chart you showed the one and a half percent demand growth from here on, will that be enough to close the oversupply spread in your view? And I guess what gives you confidence that one and a half is the right number? And then my final question is on net debt. Obviously, net debt in the period was something around 380 million, but you paid since then the 700 million plus of the dividend. So should we expect the underlying net debt of just over a billion to remain kind of broadly flat throughout the quarters or should we expect it to increase towards year end? Thank you.
spk02: Thank you. Thank you, Alexia. So with respect to our first quarter results, we said that they are broadly in line with our original expectation. We did anticipate a difficult beginning of the year and Q1 and also we said that we said Q2 largely driven by the fact that we do not get the tailwind from the contract rates that pushed us to be fully at the end of the day exposed to the spot market. So no surprise from our end with respect to our first quarter results on that front. With respect to your second question, the 1.5 percent or 1.4 percent expected year over year growth assumptions is not ours. So what we are trying to do is we are relying here on the latest alpha-line data, which are suggesting that the growth in demand for the year of 2023 when compared to the year of 2022 could be in the region of 1.4 percent. This is what we've tried to illustrate in the graph. Since the first quarter was behind, it would mean that if those assumptions were to prove correct, that the volume should come back up a little bit in the second half of the year. So this is the base for our assumptions here, the data that we get from alpha-line. And to your third point, on the net debt, you are correct in your assessment that after having distributed or paid the dividend to our shareholders in April, our cash went down by obviously the same amount, $760 million. And as a result, the net debt would go up by a similar number. Now, going forward, what is to be expected on that front, we will continue to take delivery of the new-build vessels that we've ordered back in the past two years. And as those are for longer-term charter agreement, remembering that the C-SPAN deal, for example, is a minimum charter period of 12 years. So the lease liability that we will take on balance sheet for each of the vessels as they come and be delivered to us is more than the one that we would be taking if the charter period was longer, was shorter. So we continue to, and we should continue to expect that our lease liability or our financial indebtedness at the end of the day on our balance sheet will continue to grow as we take delivery of that capacity. And then the cash will be a function, obviously, of our EBITDA and EBIT generation going forward.
spk05: That's helpful. And can I just ask a follow-up on that, Javier? In terms of net debt to EBITDA, what kind of level are you comfortable with, kind of mindful of the lease liabilities coming online?
spk02: That's an interesting question, and I'm not sure there is a cool answer to that, because we always need to look at us in the context as well of our overall competitive environment. And so we need to also look at that carefully. Back in the days, this industry is obviously very capital intensive. And back in the days, the leverage of this industry was to be or expected to be above two, maybe between two and three was the leverage ratio that would be considered normal in our industry. I think we will go back to those levels at some point. The question is at which phase. I'm not sure. But clearly, going back to a net debt situation from a capital structure perspective and therefore walking away from a zero leverage balance sheet is to be expected clearly.
spk06: So this concludes our Q&A session. I head back to Mr. Glickman for closing comments.
spk01: Thank you. We have spoken at length about the current challenges driving rate pressure in the near to medium term. But it's also important to highlight that ZIM is well positioned to weather this period of uncertainty. We took significant steps during the highly lucrative rate environment of 2021 and 2022 to adapt our vessel sourcing strategy to improve our cost structure with the addition of fuel efficient modern tonnage that also enable us to optimize our fleet composition. Moving forward, we expect to continue to advance ZIM's position as innovative digital leader of seaborn transportation to maximize long term shareholder value. Our customer relationships drive everything we do at ZIM. And we strive to maintain the highest service quality while preserving our personal touch. In addition, we continuously work to enhance front end and back end digital tools to improve customer experience and support profitability, invest in disruptive technologies within our ecosystem, while remain committed to advancing our ESG and sustainability values. These are ZIM priorities. And I'm excited to lead our companies through our next phase as a leading global liner. Thank you all.