ZIM Integrated Shipping Services Ltd.

Thank you for standing by and welcome to the Zim Integrated Shipping Services first quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. Thank you. I'd now like to turn the conference over to Alina Holtzman, Head of Investor Relations, you may begin.

Thank you, Operator, and welcome to Zim's first quarter 2024 Financial Results Conference Call. Joining me on the call today are Eli Glickman, Zim's President and CEO, and Xavier Destriot, Zim's CFO. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements regarding expectations, predictions, projections, or future events or results. We believe that our expectations and assumptions are reasonable. We wish to caution you that such statements reflect only the company's current expectations and that actual events or results may differ, including materially. you are kindly referred to consider the risk factors and cautionary language described in the documents the company filed with the Securities and Exchange Commission, including our 2023 annual report on Form 20F filed with the SEC in March 2024. We undertake no obligation to update these forward-looking statements. At this time, I would like to turn the call over to Zim's CEO, Eli Glickman. Eli?

Thank you, Ilana, and welcome everyone. Slide number three. Zim began 2024 with positive momentum. We leveraged market conditions and coupled with the strong execution of the Zim team globally, we delivered solid Q1 results. Based on current market conditions, Our outlook for the remainder of the year has improved, and as such, we now expect our full year 24 financial performance to be better than our 23 results. Our strategic plan to upscale our fleet and operate larger vessels to improve our cost structure is paying off, and we believe that in 2024, we will achieve our volume growth expectations outperforming the market. ZIM earnings in the first quarter reflect stronger spot rates, which resulted from disruption in the global logistics supply chain. Slide number four. We delivered revenue of $1.56 billion and net income of $92 million. Adjusted EBITDA was $427 million and adjusted EBIT was $167 million, reflecting adjusted EBITDA margin of 27% and adjusted EBIT margin of 11%. Our total cash position of $2.25 billion at quarter end remains strong, Our Q1 results reflect the dynamic nature of the container shipping industry. Today, tensions in the Red Sea have not eased and continue to disrupt global trade. We have seen freight rates significantly increase from November 23 lows as overcapacity in the market is being absorbed. As we look forward, we expect freight rates to remain higher for longer than originally anticipated. While we cannot predict when this disruption will end, there does not seem to be a solution in sight. Moreover, in recent weeks, we have seen spot rate increases spreading to additional trades which are not directly impacted by the Red Sea disruption and which previously did not experience rate increases. Certain indication of increased demand and constraint on equipment added to the supply pressure may be the cause of this recent trend. Going to slide number five. Given this stronger rate environment now impacting more trades, our outlook for the year is more positive. Therefore, we are raising our full year 24 guidance and now expect to generate adjusted EBITDA in the range of $1.15 billion $1.55 billion, and adjusted EBIT between $0 to $400 million. As per our dividend policy, which provides for a payout of 30% of quarterly net income, our board of directors has declared a dividend of $0.23 per share, or a total of $28 million on account of Q1 results. While the bear case scenario from a financial perspective has likely been avoided in 2024, we would like to remind you that our market is extremely volatile and that until recently, the disruptions which drove rates up were primarily supply-driven. It remains to be seen whether the improved demand we are currently witnessing is sustainable and whether it would support freight rates for the remainder of 2024. Overall market dynamics still point to supply growth significantly outpacing demand growth with significant deliveries this year and to a lesser extent next year as well. As such, our longer-term expectations for the market have not changed. It remains our view that once the Red Sea crisis is resolved, we will likely revert to the supply-demand scenario that had begun to play out in 2023. We maintain the view that the industry will face a more challenging second half of this year, irrespective of the duration of the Red Sea crisis as more new builds, particularly large capacity vessels, are delivered. This will likely adversely affect our results in the third and fourth quarters. We continue to assume that the second half of 2024 might be weaker than the first half. Xavier, our CFO, will discuss additional factors driving our 24 guidance in his prepared comments. Before I turn the call over to him, I would like to provide an operational and commercial update and highlight Zim's progress execution, executing strategic objectives thus far in 24. I'm going to slide number six. Our transformation is well underway and has begun to produce tangible results. We are very pleased with our progress and are confident that with respect to our fleet and cost structure, ZEE will emerge in a stronger position in 2025 and beyond, as our transformation continues to deliver incremental benefits. The primary pillar of ZEE transformation is our fleet renewal program executed to enable more efficient and competitive operations. We secure a total of 46 new-built container ships, of which 28 are LNG-powered. Today, 30 new-built vessels have already been delivered to us, including all 10,000-15,000 EU LNG vessels and 9 out of 18 8,000 TU LNG powered vessels, which we are deploying on the strategic Asia to the US East Coast trade. Our new fleet improves our cost structure and supports long-term profitable growth. Importantly, these new vessels are more modern, fuel-efficient, larger, and better suited to the trades in which we operate. This continues to reduce our cost per TU, and these cost-effective new-built vessels are replacing older, less efficient, and more expensive charter capacities. Moving forward, we expect to continue seeing gradual cost per TU improvement as we meet our volume growth targets. In addition to improving our cost structure and enabling long-term sustainable growth, our fleet renewal program addresses a central objective of our ESG roadmap, reduce the environmental impact of our operations and help fight climate change. The benefits of our new fleet from an environmental perspective are worth mentioning again. Next year, once we receive all our new builds and we deliver existing charter tonnage, over 50% of our operated capacity is expected to be new build. Approximately 40% of our operated capacity is expected to be LNG powered, making ZIM among the lowest carbon intensity cars in the world. Already today, 30% of our capacity is LNG powered and we operate the greenest fleet in terms of use of alternative fuels. Sustainability is a core value for ZIM and we are pleased to have recently published our six annual ESG reports. It outlines how ZIM addresses increasing demand from our various stakeholders for a more proactive ESG approach. In 23, ZIM achieved a 23% drop in carbon intensity of our operation compared to the prior year. This was driven in part by our new LNG vessels, which replaced other vessels and significantly cut our carbon emissions. We also decreased vessel speed and added vessels to routes to comply with emerging regulations. We are proud of the progress we made in 2023 and are well on our way to reaching our target of reducing carbon intensity by 30% by 2025 versus our 2021 baseline. We remain committed to reducing our GHG emissions to net zero by 2050, a more ambitious target than the one set by the IMO. We recognize that the implementation of ESG-focused strategies is an ongoing process and will continue to prioritize promoting responsible corporate practice to create long-term sustainable value for all our stakeholders. Operationally, We also remain focused on aligning our fleet size with demand levels and rationalizing our fleet to minimize cash burn. At the beginning of this year, we had a total of 32 vessels up for renewal in 2024. Thus far, we have re-delivered 11 vessels and anticipate the reminder will be re-delivered over the course of the year. Turning next to our network of services, the agile nature of our commercial strategy has continued to serve Zim well. During the first quarter, we continued to adapt our network to change in customer demand. In Q1, we grew our volume on Trans-Pacific, leveraging our larger capacity vessels and new lines open to LA and Vancouver. We maintain our unique commercial position on this strategic trade for ZIM as the only carrier to call the US East Coast with LNG-fueled vessels. In fact, we operate LNG vessels on two different services in this trade. As the only carrier able to offer shippers a pathway to significantly reduce carbon emissions on this trade, We believe that our differentiated offering enhances our competitive position and supports our volume growth target. We are also pleased with our growing volume in Latin America. We opened several new lines in 2023 in this trade and continue to expand our network in Q1. As we have discussed previously, Latin America has been a focal point for us where we see long-term growth and profitability potential. On this note, I will turn the call over to Xavier Arcefo for a more detailed discussion of our financial results our revised 24 guidance, as well as additional comments on the market environment. Xavier, please.

Thank you, Elie. And again, welcome, everyone. On the slide 7, we present key financial and operational highlights. And as Elie mentioned, our first quarter financial results reflect the improved freight rates that mostly ensued from the Red Sea disruptions. Team generated revenue of $1.6 billion in the first quarter of 2024, a 14% increase compared to the first quarter of last year. Our average freight rate per TU was $1,452, a year-over-year increase of 4%, and a 32% increase from the prior quarter. Total revenue from non-containerized cargo, which reflects mostly our car carrier services, totaled $111 million for the quarter, compared to $106 million in the first quarter of 2023. While we operated more vessels in the current quarter, revenues are only slightly up due to the longer voyages around the Cape of Good Hope in the current quarter. Our free cash flow in the first quarter totaled $303 million compared to $142 million in the first quarter of 2023. Turning to the balance sheet, total debt increased by $359 million since prior year-end, mainly due to the net effect of the incoming larger vessels with longer-term charter durations. Regarding our fleet, we currently operate 147 vessels, out of which 16 are car carriers, as compared to 150 vessels as of our Q4 earnings calls in mid-March. A slight decrease from March resulted from the delivery of six new builds and the scheduled re-delivery of nine vessels. We'd like to remind you that while we may continue to operate a similar number of vessels or even fewer vessels, our operating capacity has grown in 2023 and will continue to grow this year. We are replacing smaller vessels, less cost-effective tonnage with larger, more cost-efficient new-build tonnage, thereby contributing to lowered unit cost per TEU. Moreover, these vessels are also better suited to the trades in which they are being deployed, again, enhancing our strategic positioning. As of today's call, 30 of the 46 new-built vessels DIM has committed to have joined our fleet, including 10 15,000 TEU LNG vessels, 4 12,000 TEU vessels, 9 8,000 TEU LNG vessels, and 7 of the smaller wide-beam 5,500 and 5,300 TEU ships. Excluding the new build capacity, the average remaining duration of our chartered tonnage continues to trend down and is now 19.7 months compared to 20.4 months in mid-March. We have a total of 21 vessels up for charter renewal in the remainder of 2024, as compared to the expected delivery of 16 new builds during this period. In addition, we have another 37 vessels up for renewal in 2025. And as we previously highlighted, this gives us ample flexibility to ensure our fleet size matches the market opportunities. Turning now to additional Q1 financial metrics on slide 9, adjusted EBITDA in the first quarter was $427 million compared to $373 million in Q1 2023. reflecting an adjusted EBITDA margin of 27% in both periods. Adjusted EBIT was $167 million, or 11% margin, compared to an EBIT loss of $14 million in the same quarter of last year. Net income for the first quarter was $92 million, compared to a net loss of $58 million in Q1 2023. We do remain committed to returning capital to shareholders, and as such, our Board of Directors declared a dividend to shareholders of 23 cents per share, or a total of $28 million, which reflects a payout of 30% of Q1 net income as per our current dividend policy. Turning now to slide 10, we carried 846,000 TEUs in the first quarter compared to 769,000 TEUs during the same period last year. That is an increase of 10%, slightly ahead of market growth of 9%. As we discussed, we grew our volume on the Trans-Pacific in Q1, attributable to our larger capacity vessels and also new lines. Trans-Pacific volume grew 27% year-over-year, and we expect to see continued volume growth during the remainder of 2024 as we continue to upsize our capacity. Significant growth in Latin America volumes of 129% year-over-year was driven by our expanded presence in this trade. We see additional opportunities to participate in the growth of that trade. Next, we present our cash flow bridge. For the quarter, our adjusted EBITDA of $427 million converted into $326 million of cash flow generated from operating activities. Other cash flow significant items for the quarter is obviously $740 million of debt service, mostly related to our lease liability repayments. It is here important, however, to remember that the lease liability repayments in Q1 included $235 million, reflecting down payment for six LNG vessels that we received during the quarter, and also payment for the five vessels following an early notice for the exercise of purchase options we held on these vessels, as we already previously mentioned on our March call. Moving now to our 2024 guidance, as you heard from Elie, our outlook for the remainder of 2024 is stronger than previously assumed based on the evolving market. And as a result, our financial performance in 2024 is now expected to be better than our 2023 results. We are raising our full year guidance and now expect to generate adjusted EBITDA between $1.15 billion and $1.55 billion in 2024, and adjusted EBIT between $0 and $400 million. Our improved guidance is driven primarily by the strengths we're seeing in spot rates. This in turn contributed to higher freight rate assumptions incorporated into our current guidance as compared to the freight rate assumptions we incorporated into the guidance we provided back in March. Before touching on the volume and bunker cost assumptions, I'd like to briefly discuss the contract season and how it plays out. It plays into our outlook for the remainder of the year. So for the year ahead, our spot exposure in the Trans-Pacific trade will remain relatively high, as the new annual Trans-Pacific contract, which went into effect on May 1st, represents approximately 35% of our expected Trans-Pacific volume. We chose to revisit our commercial approach of roughly a 50-50% split between spot and contract volume, given our expectation that the average spot rate for Transpacific for the next 12 months will likely outperform the prevailing contract rates, which were only slightly better than last year's rates. We believe that our value proposition to customers operating LNG vessels on this trade will help us achieve our volume growth objectives while leveraging the strongest spot rate environment. Our volume assumptions for our 2024 guidance remain unchanged, and we expect our volume growth this year to outpace market growth as we continue to upsize our fleet and increase operating capacity. Market costs, on the other hand, are slightly higher as compared to the underlying assumptions for the guidance we provided in March. Moving to our market discussion with some data points on our commentary so far. Market evolution since November 2023 has demonstrated the volatile nature of our industry. The underlying supply-demand balance for 2024 has been and remains one of significant oversupply, as you can see in the graph on the left. Events external to our industry, namely the security concerns in the Red Sea, have caused most global carriers to re-divert their ships around the Cape of Good Hope. This has extended voyage durations to North Europe, the Mediterranean, and to a certain extent to the US East Coast, absorbing significant capacity, bringing the supply-demand balance to a certain equilibrium. Yet the strength in spot rates of recent weeks extends beyond these trades, which were directly impacted by the Red Sea diversions. As you can see, the improvement in spot rates in Asia to US East Coast, which we saw from December until mid-January, eased when the initial impact of the extended rotations was normalized. But as we mentioned earlier, we now see a second wave of spot rate hikes with the improvement in freight rates also speeding over to additional trades. We show here SCFI rates for regional trades including Africa, Latin America and Oceania. This recent more widespread strength in rates is attributable to indications of equipment constraints coupled with improved demand. CTS data for Q1 2024 shows a healthy start of the year. As already mentioned, global volume for Q1 2024 is up 9% compared to Q1 last year and tracking similar volume to Q1 in 2022 and Q1 2021. This suggests that the destocking cycle which started in the second half of 2022 may have ended. However, on the right, you can see the recent increase in the ocean timeliness indicator. The OTI measures the journey of a container from the time it is set to leave a factory to the time it is picked up from its destination port. This increase suggests some stress in the global supply chain. Therefore, it remains to be seen if the current uptick in demand is in fact the beginning of a restocking cycle that would translate into a more prolonged and sustainable improvement in demand and that could continue to support freight rates. Or whether this increase is simply shippers erring on the side of caution and and ordering peak season cargo early to ensure they have it available for the holiday season, signaling only a shift in the timing of peak season demand. On this note, we will open the call for questions. Thank you.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question today comes from the line of Omar Nocta from Jefferies. Your line is open.

Thank you. Hi, Elie and Xavier. Good afternoon. Just a three questions for me and maybe the first one just wanted to ask, you know Clearly the markets taken off and it seems much more Broad-stroked than what we saw earlier this year as you're just highlighting Xavier and on slide 14 We've got multiple geographies that are announcing higher rates And it's not just Asia Europe and a little bit of the Trans-Pacific like we saw at the beginning of the year how would you characterize what's really behind this and Is this a supply driven dynamic or demand? You mentioned just now that it's due to a shortage in equipment. I guess from your perspective and your lens, what has caused this equipment shortage to take place? And is it a sudden occurrence or is it something that's been gradually building up since the beginning of the year?

We see both. Supply side effect and demand side effect. As for the supply side, as a result of the Houthis crisis and Bab el-Mandeb, Suez Canal, vessels going through the Cape of Gouda, Africa, much longer, many more days, in order to keep our weekly services we need about 50% more vessels to keep the weekly service. As I said, this affects the supply side. In order to keep the service, because we spend more time on the way, we need more containers. Because of that, not in the industry, we feel there is a shortage in the containers we assume full capacity and we plan it in advance and we're ready to serve this high effect of the supply side. On top of that, there is the demand side. We see in the last few weeks, early than we expected, high demand side. mainly from the U.S. This time, compared to the beginning of the Houthis crisis, the high rates and the high demand is not coming from the U.S. or the services from Asia to the U.S. only, or the Asia to the Mediterranean, but we see it all over, Asia to West Asia. Coast Africa, Asia to India, Asia to Oceania. We see it in Asia to South America. We see it from Asia to the west coast of Central America, Mexico, and west coast of South America. And as I said, Asia to the U.S., both east coast and west coast. So this is a real question. In the past, let's say, speaking about the US market, we see a very interesting case. We see unemployment very low, historical level. We see high inflation. In the past, These two, high inflation and low unemployment, did not live together because low unemployment brings lower demand for employees, and we see the effect of low inflation. Here we see both low unemployment and high inflation. Probably there are more companies trying to attract employees really to pay them high salaries and the people, the consumer in the U.S. have more money to spend. We really don't know if this early demand coming, as I said, because of the early demand for the season, Thanksgiving and Christmas holidays, or this is because of low inventory. As you remember, after the COVID, the inventory level in the U.S. was on the high side and companies reduced inventory the orders because of that. As of today, as what we understand, the inventories in the U.S. in the low side. And because of that, we see high demand. The real question, if this demand is going to stay with us until after the holiday season, or this is a short season high demand because of what I described. Xavier, if you would like to add.

No, no, I guess that addresses your question, Omar. Unless it doesn't, let me know. But clearly, the vessel shortage triggered equipment shortage. And now, as Elie mentioned, we also see the uptick in demand in the U.S., which is providing further support at the end of the day to the rate environment.

Yeah, it makes sense. Thank you for the detail. And maybe as a kind of a second question follow-up perhaps to that dynamic is, you know, there's a shortage in vessel capacity. We've seen a big jump in appetite on the part of other ocean carriers to secure ships on charter. You know, Zim's been focused on returning ships back to their owners. You highlighted the 21 that remain for this year and 37 that roll off in 25. What's your...

plan you think with those has your thought changed at all about returning all of them um or do you look to retain some given the the change in market dynamics look i would say first unlike other shipping line as far as we are concerned we had already or we expected a significant increase in our operated tonnage throughout 2024 by just simply taking delivery of all the new builds that we ordered back in 21 22. reminding that our operating capacity is expected to increase more than a double digit compared to end of 2023. If we look at what our capacity will be by the end of 2024 and we compare it with what it was at the end of 2023, by just taking all the 46 ships that we ordered and we're delivering all the vessels that came up for renewal, we would de facto increase our operating tonnage meaningfully and significantly. I think by and large, as we speak today, our long-term view or mid-term view has not changed. So we are redelivering the vessels that come up for renewal in order to make room. for the, you know, still 16 ships that we are awaiting between now and the end of the year. On a case-by-case basis, we will reassess and we always, you know, reassess at every single occasion whether we might want to keep or renew for a short period some of the ships. But right now, the objective and the strategy, I think, remain unchanged.

Got it. Thank you. And final one for me, and you discussed this a bit in the cash bridge in your slides, the $235 million of upfront payments that you made during a quarter, if I recall, there's maybe $340 million in total for those C-SPAN leases due this year. Is that roughly the math? And how much should we expect will be spent in, say, next quarter or over the next three quarters?

Yes, you have the numbers more or less right with one maybe clarification I should give. So for the full 2024, so from 1st of January up until 31st of December, yes, the expectation is or is going to be an overall total payment of $339 million for the delivery of all those new buildings. We, in the first quarter, so looking at the cash flow statement in Q1, we incurred $106 million of down payment as we took delivery of two 15,000 TU ships and four 8,000 TU ships. So that's four times 20 plus two times 13. That's the 106. And then $130 million we paid as well as we exercised the right to acquire the you know, the option that we had on the five large capacity vessel, three 10,000 TU and two 8,500 that we acquired in Q1. So the 235 is not, this quarter is the combination of both 106 down payment and $129 million of exercising the option on the five vessels. Okay, I got it. So the remaining 233

I would assume just evenly split for the rest of the year.

Give or take, yes.

Okay, very good. Thank you very much for the time. I'll turn it over.

Thank you. Our next question comes from a line of Muneeba Kayani from Bank of America. Your line is open.

Thank you for taking my questions. So firstly, I just wanted to understand your EBITDA guidance and the phasing of it. As we've heard from some of the other liners that 2Q EBITDA could be better than the first quarter. So firstly, is that your expectation given what you've seen so far in the second quarter? And then if that's the case, I guess that would imply you're assuming fairly low profitability in the third quarter and fourth quarter. So can you please help us understand how you thought about the phasing this year?

Yes, I will begin, Xavier will follow. First, we are very positive, and as we said, we are in positive momentum. As we said, 24 results are going to be better than 23 results, as we see the forecast of today. As for your question for quarter, we don't, we try to keep, not to go to quarterly results, but we're speaking about guidance for the year, not for the quarters. You can understand, and I give you the credit to understand and to take the conclusion that we believe that, and we said it in the past, that the first half is going to be stronger than the second half. And this is because we are trying to be cautious as we don't know yet when the Houthis crisis is going to be ended. And in order to be conservative, and we don't know to expect in advance what will be with the Houthis and the supply side effect, we're trying to be conservative for the second half. As a result, what we can see today, as I said before, the first half is going to be strong, and 24 results are going to be stronger than 23.

I would just indeed add that it is, I'm sure everybody understands, very difficult to forecast and predict what's going to happen and how the situation will unfold in the coming quarters, as there are a lot of event that at the end of the day drive the current uptick in the market that are potentially also the results of a geopolitical event that nobody has a clear control over. So clearly what we can say at this stage is that, as Elie just said, the beginning of the year is much better than what we initially anticipated. But if we look at the fundamental dynamics of our industry, if we leave aside for a second the disruptions that we just talked about just now but if we look at the fundamentals supply demand dynamic of our industry we are still in a situation whereby the threat of over capacity is still around there around us i mean there is a lot of a new build tonnage that is expected to be delivered towards the second half of the year and vessel size that are precisely designed to get into the East-West trade that are today the very strong performer in terms of earnings generation. So that supply risk is there. And there is, I think, a good and positive science today when it comes to the demand, whether the demand will be good enough to absorb that extra capacity is where we need to you know, be, I think, a little bit more cautious. Hence why today we still feel that it is a likely scenario that the second half of 2024 might be weaker than the first.

Thank you. I totally understand that. And given what you've seen so far in 2Q and the spot rates we've seen, and just looking at your working capital and the trade receivables, Is it fair to assume that 2Q could be higher than 1Q?

You could.

Thank you. And just then, if I may ask another question on following up from the previous questions around lease payments. So thank you for the explanation there. Just in terms of overall lease payments for 2024 and 2025, Can you remind us what could be the cash outflows for that and just other capex this year and next year, please?

In terms of lease payment, we are and we always said indeed that 2024 is going to be a challenging year for us, mostly because we continue to pay the charter that we secured during the COVID era days that were more expensive than the one that could be secured today to some extent. And so for that purpose, 2024, just like 2023 was, by the way, is quite heavy on that front. But as we are re-delivering those more expensive ships and bringing in the ones that we've ordered, the new build that we've ordered for which we have a clear view, there is no debate, no question, no variable here. we have a fixed agreed upon rates that we're going to be paying for the foreseeable future, which again was priced as per the new build, the ship in the shipyards, new build price at the time we ordered the ship. So completely decorrelated from what was the charter market prevailing during those days. So we are going to go back to a far more reasonable charter payment if we bring that down to per operated TEU. So that's for the charter payment. When it comes to CAPEX, in terms of vessel CAPEX, we should not have today, we don't anticipate any of those in 2024, unless you consider the down payment that we are making at delivery of the ship today. as CapEx related. Just to be clear, in our cash flow statement, it is not. It is a prepayment of rentals. So it goes in the lease liability repayment line. But so as I think we previously said that we still have $230 million of cash payment in 2024 that we relate to the delivery of those new ships. And what may change a little bit is us having to maybe continue to invest a bit more on equipment. We just talked about the equipment shortages that resulted from the current market dynamics, and we want to anticipate and make sure that we are not taken short on our equipment requirement in order to meet our customers' expectations. So we might invest a little bit on that front and bring in new boxes, mostly dry 40-foot high cubes, which are the hot commodity right now when we talk about equipment.

And if I may ask a third question on dividends, please. How did you think about the quarterly dividend for 1Q? I understand the payout ratio, but I think if I remember correctly, it was subject to board review and kind of what has made the board comfortable with paying the dividend, given your comments around kind of the threat of oversupply in the industry. Thank you.

Look, I mean, I think on this front, you're right. I mean, we have a dividend policy which we intend to adhere to unless there are good reasons for us to deviate from that dividend policy. And the board looking at this question felt confident that by adhering to the dividend policy, we were not putting the company at risk in terms of outlook what do we see uh going going and looking ahead going forward uh from a corporate law perspective in israel we have to meet and satisfy uh several uh several uh criteria and tests that we did satisfy and as a result the board felt comfortable in in agreeing to this dividend distribution keep our policy yeah to adhere by the policy

Thank you.

Your next question comes from the line of Cecily Kumar from Citigroup. Your line is open.

Thanks for the presentation. I got three questions here. So first in the box shortages, slash equipment shortages, if you could just color, like which lanes are you seeing this? Is it mainly on the back hall or on the front hall? And then like Asia to Europe, any color on that or not south would be helpful. And then last year in Q3, you took an impairment on your... lease liabilities based on the rates would be depressed for longer. Given the recent rebound in rates, how does that impairment provision work? Could you see that being unwind or is it like done for now? You're not going to go and revisit that. And then the contract rates, like in your Q1 report, Have you had any contract rates coming in, or is it all like 35% contracted, you're just starting off only in May? And how should we think about the exit rate on your freight rates versus March versus what you're seeing in April and May? That would be helpful. Thank you.

Okay, on your first question when it comes to equipment constraints or shortages, we clearly see the pressure rising in Asia for us to be able to get the equipment positioned on time to bring the cargo to the US. So for us, it's really Asia to the US trade which is which is intention. And by the way, I mean, when we say Asia to the US, because it's our most significant trade, but from all the place of origin Asia to destination elsewhere, for as long as, for example, Ningbo is a place where we have a shortage of equipment and we need to make sure that we reposition equipment as timely as possible. And as I mentioned earlier on, potentially also envisage acquiring and increasing our fleet of equipment, which by the way, it doesn't come also as a surprise. And this is why I think Eddie mentioned that we got prepared for that, but need maybe to add a little bit more due to the increase in our operating tonnage. The more we operate capacity from a vessel perspective, the more de facto we need also additional equipment. So here we see still some pressure, but mostly this is a shortage of equipment availability in Asia, China more specifically, that we need to monitor very closely. The second question, I think, on the impairment. The impairment is on the asset side, not on the lease liability side. But the rationale for the impairment, again, what is it? It is us looking at our long-term forecast. And we say long-term here, it's not one quarter or even one year. We're looking at four to five years ahead. and try to come with a fair assessment as to what could be the cash generation of the company. Then we use the discounting rate, which is our weighted average cost of capital, and then come to a number, which is the future discounted cash flow that we think we might be generating. And then we compare that to the book value of our assets. And that's when we did that exercise last year in Q3. This is where we saw the decorrelation between those two numbers and allocated and accounted for this large impairment amount. So now every quarter we ask ourselves the same question and need to consider whether there are impairment indicators in both directions, by the way, a worsening of our forecast or an improvement that is material and meaningful that could or should lead us to revisiting that impairment analysis. Up until today, we felt that the recent change in the market, which are still, you know, from a timing perspective, we cannot safely say that this is the new normal. We are still, I think, in a very volatile environment. So the long-term view for us is still today pretty much unchanged when we look ahead into future years. But again, if we are to see or to think at some point in time that we had to revisit those assumptions, we would, and it could lead to a reassessment of the impairment. Again, both potential directions either add to it or write back some of it. And last, your question, I think, relating to the contract rates. Clearly, for us, when we refer to the 35% rate or percentage that we secured for the next contract season, so we talk here about as from the 1st of May 2024 up until the 30th of April 2025, we anticipate or expect that contracts out of our volume objective on the Trans-Pacific, 35%, give or take, of that volume objective will come from contract cargo, and de facto, 65%, the difference will come from sport. And that is, I think, very much, as we tried to explain, driven by the fact that, yes, we see the spot market today. The contract rates that we managed to agree with our customers were not meaningfully different from what they were during the past season. So for the first quarter, in the way of 2024, slightly higher. but not meaningfully higher. And we felt that on average, if we look at what we think will happen in our market environment for the next 12 months, on average, we think that we will earn a better income per TEU on the spot market than we will on the contract cargo.

Okay, got it. Thanks, Avi. Just maybe one more, if I could. In terms of the cost, obviously you do have higher proportion of LNG now with the additional voyage length. Does it put you in a disadvantage versus, say, the liners who operate on traditional bunkers?

I would say quite the opposite. Today, we feel the benefit of switching and gradually transitioning more and more towards LNG bunkering, which is both from a consumption perspective and from a cost-per-tonne perspective, cheaper for us to run the vessels on LNG than it is to run those ships or similar ships on traditional diesel engines. diesel fuel. So as you know, I mean, all of our LNG vessels are dual fuel. We could decide to run them on the LSFO if we wanted to. First, we don't want because they are meant to achieve a ESG objective, a decarbonisation objective and trajectory. But even beyond that one reason, from a pure cost of operation perspective, it is cheaper for us to run those chips on LNG than it would be to run them on LSFO.

Your next question, Colleen, of Marco Lemaitre from Barclays. The line is open.

Hi, good morning. Thanks for taking my question. My first question is on leverage. So as you state, you have 2.8 times net EBITDA as of Q1. Just wondering what's your sort of level of, what's your level of comfortability around leverage and if there are covenants going forward that we should think of. My second question is on cost. So clearly you do have some charters that have come up for renewal this year. And my question is, to what extent chartering costs are now taking into effect the RIC disruption? So are chartering costs becoming more expensive than what they were a couple of months ago, for example, and by how much? And my third question, just to follow up to the previous question, but on the, let's say, CAPEX side, So in your view, how more expensive are these LNG vessels compared to, let's say, standard fuel power vessels? Thank you.

Okay, so maybe starting with the last one. You know, those vessels that we ordered, we ordered them via a third party in the middle. So it's a long-term charter commitment. Although those vessels were ordered for us, with a back-to-back charter. So if we take about the LNG-fueled vessels, all of them, the 15,000 TEU were secured with C-SPAN as a vessel owner. And then on the back-to-back charter with us, the 8,000 TEU ships, 15 of them were also secured with C-SPAN and the three remaining with another vessel owner. So at the time, what we did was we knew what was the the shipyard price for those new buildings. And if you were to ask me, let's take the example of the 15,000 TU ships back in 2021, the average value of those ships was maybe around $140 million apiece. Today, it would be closer to $200 million. And what we got was a charter rate. So the C-SPAN is acting as a financial lessor ultimately to us. And so the charter rates that we secured for those ships is to be looked at a finance lease provided by a financial obligor, in this instance, CISPAT. So we feel that we got a very good, from a timing perspective, that we went out to secure those efficient tonnage at the exact right time, where the shipyard price was still not at the level of what we see today. So that's why we are saying with absolute confidence that our cost per TEU is going to improve as a simple result of us replacing all the tonnage that we charted via vessel owners and that we return to make room for this new build, which is far more cost-friendly to us. Which leads to your second question. Today, the company is not exposed to the charter market whatsoever. We are not discussing renewing a charter contract because, quite the contrary, like I said, we make room for the new buildings that are coming our way, for which we negotiated already three years ago what would be the rates that we would be paying. What we do is that we deliver all the vessels that we secured before and that come up for renewal at the end of the charter period. We don't renew, we give back, we re-deliver to the vessel owner. So this is why clearly we can say safely that as far as our cost structure is concerned, there is no exposure to the current charter market environment. And then to your first question in terms of leverage and covenant. First, there is no financial covenant or EBITDA-related covenant in any of our financing facilities. We only have one financial covenant in a small facility, a container facility, which is a minimum cash of $250 million. So we don't have any leverage or coverage or gearing type of facility.

type of covenant obligation vis-a-vis any of our financial financial counterparts okay thank you and if i could add one more uh just wondering as you have just said that you expect uh let's say spot rates uh to be you know throughout the year a bit stronger compared to the contract rate on the trans pack on average uh just wondering um whether that you know, the higher percentage of spot rate on the trans-Pacific versus contract is already in the guidance. And therefore, you are, you know, you have been cautious in the second half just because you are anticipating the possibility of a steep correction in spot rates. Thank you.

Look, I will let you be the judge of whether we are conservative or not, but yes, the short answer to your question, when we provided our guidance, we took into consideration where we ended up from a contract discussion perspective, and the outcome that we discussed of us willing to take a larger exposure to the spot market, which is us taking a risk, but we think it's the right risk for us to take as opposed to lock in at a low rate a significant amount of cargo so we take the more difficult avenue on that front but we have to be also mindful of the fact that the spot rate that we see today might not prevail for the whole of the year and it is indeed factored in our guidance that we anticipate a likely scenario that the sports rate will trend downwards, then the slope of the trend is to be determined and we will monitor the situation obviously quarter after quarter.

Thank you.

And this concludes our question and answer session. I will now turn the call back over to Eli Glitman for closing remarks.

We are pleased with our progress thus far in 2024, both advancing zinc transformation through fleet renewal and capitalizing on stronger than anticipated market conditions to deliver a profit in the first quarter. Our cost structure continues to improve in tandem with the delivery of our highly competitive fuel-efficient new-built tonnage that will include 28 LNG-powered vessels once our fleet renewal program is complete. As we transform our fleet profile and maintain a robust network backed by exceptional customer service, we are on track to drive long-term sustainable growth. In light of improved market conditions, we've increased our fully 24 guidance. While house remains and market conditions are constantly evolving, we are confident in the exceptional team we have in place and our strategic position as an agile container shipping player with Sir Ivan Flick. We look forward to continuing to capitalize on positive near-term market dynamics and further implement our differentiated strategy to best serve our customers and generate human value for shareholders. Thank you very much to all of you.

This concludes the conference call. Thank you for your participation. You may now disconnect.

customers and generate human value for