Yahoo Finance ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q4 2023 Earnings Call Transcript
ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q4 2023 Earnings Call Transcript March 13, 2024
ZIM Integrated Shipping Services Ltd. beats earnings expectations. Reported EPS is $-1.23, expectations were $-1.33. ZIM isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to the ZIM Integrated Shipping Services Q4 and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Elana Holzman; Head of Investor Relations. Please go ahead.
Elana Holzman: Thank you, operator, and welcome to Zim's fourth quarter and full year 2023 financial results conference call. Joining me on the call today are Eli Glickman, Zim's President and CEO; and Xavier Destriau, Zim's CFO. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements regarding expectations, predictions, projections, or future events or results. We believe that our expectations and assumptions are reasonable. We wish to caution you that such statements reflect only the company's current expectations and that actual events or results may differ, including materially. You are kindly referred to consider the risk factors and cautionary language described in the documents the company filed with the Securities and Exchange Commission, including our 2023 Annual Report filed today on Form 20-F.
We undertake no obligation to update these forward-looking statements. Before turning the call over to Eli, one housekeeping point. Since announcing the relevant charter agreements, we have referred to the 18 smaller LNG vessels as 7,000 TEU vessels for their original designing and prior to their construction. The nominal capacity of these vessels is approximately 8,000 TEUs. As such, going forward, we will refer to these vessels as 8,000 TEU vessels. At this time, I would like to turn the call over to Zim's CEO; Eli Glickman. Eli?
Eli Glickman: Welcome everyone to today's call. Reflecting on a challenging year, we at Zim have proven to be resilient and committed to excellence throughout our operation, as we deliver the highest level of customer care even in the face of the industry disruptions and other operational challenges. The war situation in Israel is ongoing and continues to affect our employees here. We mourn the loss of all innocent lives, and we continue to pray for the safe return of all Israelis who remain held hostage by Hamas in Gaza. Since the tragic events of October 7, our priority has been to ensure the safety and well-being of our employees and to minimize any service disruptions to our customers. I'm incredibly proud of the unwavering commitment that I've seen from our people throughout the organization during this challenging time and the collective spirit to continue to drive our business forward.
Before discussing the current state of the market and Zim's strategic transformation, I will briefly address our financial results. Consistent with our latest expectations, our full year adjusted EBITDA was $1.05 billion and '23 adjusted EBIT loss was $422 million. These results were in line with the outlook we provided in November '23 and reflected the ongoing market weakness. Importantly, we ended the year with substantial liquidity of approximately $2.7 billion. Turning to Slide 4. Turning to the market environment, we've seen dramatic changes in recent months, demonstrating the volatility and dynamic nature of our industry. The escalating tensions in the Red Sea have had broad implications for container liners. In late November '23, to ensure the safety of our seafarers, our customer's cargo and the vessels we operate, we made a decision to divert all Zim vessels to pass through the Red Sea around the Cape of Good Hope until further notice.
These Red Sea diversions, which others have also implemented have been a disruptive force across the industry, absorbing some of the overcapacity in the market and driving freight rates in certain trades higher. In January '24, [indiscernible] restrictions enforcing the Panama Canal, including on container vessels, added to the supply squeeze we are currently experiencing. While this disruption had minimal impact on our Q4 results, we expect first quarter and potentially second quarter earnings in '24 to reflect the improved spot rates. Yet, as we look toward the remainder of the year, it is world’s most noting (ph) that there is a fundamental difference between the current disruptions and the prevailing market conditions during the COVID-19 pandemic.
The COVID era market was characterized by a significant increase in consumer demand accompanied by unprecedented supply chain disruptions. Current market conditions on the other hand are primarily supply driven and the significant spot rate increases remain somewhat limited to trades more directly impacted by the disruptions. Once the Red Sea crisis is resolved, we will likely revert to the supply demand scenario that began to play out in '23, setting up a more challenging third and fourth quarter of '24 for the industry, including us. Given that market dynamics in the era will depend largely on the duration of the Red Sea disruption, we are taking a cautious approach in establishing our '24 guidance. As such, in '24 we expect to generate adjusted EBITDA of $850 million to $1.45 billion, an adjusted EBIT of negative $300 million to positive $300 million.
Xavier, our CFO, will discuss the underlying assumption for '24 guidance in his prepared comments. Going to Slide number 5. ZIM's strategic transformation is progressing as planned and is already yielding the favorable outcomes we projected. As we have communicated previously, '23 and '24 were always expected to be in transition period. We are pleased with the decisive steps we have taken to enhance Zim's future commercial and operational resilience. As a result of these actions, we expect Zim to emerge in a stronger position than ever in '25 and beyond as our strategic transformation continues to deliver gradual benefits. Most importantly, we have executed a fuel renewal program that will enable Zim to operate more efficiently and competitively.
Through a series of long-term charter agreements, we secured a total of 46 newbuild containerships of which 28 are LNG powered. 24 vessels have already been delivered to us and another 22 are expected to be delivered through the remainder of '24. The advantages of this fleet are worth highlighting again. The goal was to shift ZIM's reliance on older less fuel efficient and less green capacity to a cost and fuel efficient, largely LNG powered newbuild fleet. Our core fleet will be modern, larger, and better suited to the trades in which we operate. Our cost per TEU is declining as we continue to take delivery of the cost effective newbuild tonnage and redeliver expensive COVID era vessels. We expect further improvement moving forward. From an environmental perspective, we expect approximately one-third of our operated capacity will be LNG powered in '25, establishing ZIM as a clear industry leader in terms of carbon intensity reduction.
We are pleased to offer our customers a pathway to more eco-friendly shipping options and reduce carbon emissions. Today, ZIM is the only carrier to operate LNG vessels from Asia to the U.S. East Coast. We are deploying 15,000 TEU and 8,000 TEU LNG powered vessels on two different key services. We believe this further enhance our competitive position on this strategic trade for ZIM. As I already mentioned during the remainder of the year, we have 22 outstanding newbuild deliveries that once completed will further enhance our fleet and complete our fleet renewal program. Our decision to charter these LNG vessels was part of our long term strategic plan to enhance our market position, particularly in the Transpacific trade, partly in anticipation of the termination of the 2M alliance, which did in fact happen.
We wanted to ensure that ZIM operates a competitive fleet that would allow us to operate independently if needed and at the same time, would also make us an attractive potential partner to other liners. Our collaboration with the 2M will end at the end of January 25 as per the termination of the 2M Alliance. Yet, we are confident that our new cost and fuel efficient newbuild capacity better position us to reach new operational collaborations in the future and we continue to believe in mutually beneficial operational partnerships, which will continue to seek when possible. We are focused on ensuring our fleet in the best aligned with demand levels. To this end, we are committed to rationalizing our capacity whenever necessary to minimize cash burn.
In '23, we redelivered 32 vessels and we have a total of 32 charter vessels up for renewal in '24. Turning to our network. We are constantly reviewing our services to best address customers' evolving needs and take advantage of new commercial opportunities with growth and profitability potential. Our decision to reinstate our ZEX service in late '23 connecting South China to Los Angeles was very timely, and we are now benefiting from volume growth reaching the U.S. West Coast. We prove our agility once again when we launch a second ZIM operated West Coast bound service early in the first quarter of '24 in addition to our collaboration with MSC on this trade. This service connects Asia, Canada and the U.S. via the Vancouver Gateway and includes expanded rail connection across North America.
This service is also benefiting from recent market tailwinds. Latin America, where we see long-term growth and profitability potential has been a focal point for us throughout '23. We open a number of different services and we are pleased with our growing volume in this region. We also made adjustments to services calling East Mediterranean ports to address changes resulting from the Red Sea crisis and capture market share. We redeployed existing capacity to this service and did not charter additional capacity to maintain a weekly service on our Asia to East Med service. Delivering our signature Z-Factor customer care, which combines personal touch with advanced digital tools remained a high focus this year, especially against the operational challenges.
We are especially pleased to receive better than ever results from our '23 annual customer experience service. We see positive trends in the important parameters such as satisfaction with ZIM, customer loyalty and how customers view our service versus our competitors. Moving to Slide number 6. Our capital allocation strategy for '24 remains unchanged and equally cautioned. We intend to invest our resources to enhance our long-term value for the benefit of shareholders, namely our fleet, our equipment, as well as our gross engine, while at the same time, we continue to pursue cost savings and cost avoidance initiatives to preserve cash. So preserving cash remains a top priority, we believe there continue to be a value in investing in growth engines, namely selectively investing in early stage companies, developing disruptive technologies in our core shipping activities and broader logistic ecosystem, and assisting these companies to reach their potential as active strategic investors.
An excellent example in our recent announcement to install cutting edge tracking device on our dry van containers developed by Hoopo Systems, one of our portfolio companies. We are excited to see our investment in Hoopo's unique technological solution mature into what we believe is the most advanced tracking device for dry containers. At ZIM, the use of technology and digital tools combined with our agility are core strengths, which will promote our operational and commercial resilience and efficiency. The upcoming months still represent a transition period for our company, but we are excited about what the future holds. During this time, while market conditions remain uncertain, our strong cash position will enable us to maintain a long term view.
Our entire organization is focused on returning ZIM to long term sustainable profitability. On this note, I will turn the call over to our CFO, Xavier for a more detailed discussion of our financial results, our '24 guidance, as well as additional comments on the market environment, please.
Xavier Destriau: Thanks, Eli, and again, welcome everyone. On this slide, we present our key financial and operational highlights. And echoing Eli's earlier comments, 2023 marked a challenging year, but ZIM remains resilient. Due to the weak market, ZIM generated revenue of $5.2 billion in 2023, a 59% decrease compared to last year. During the year, our average freight rate per TEU was $1,203, 63% lower than in 2022, as we're again adversely impacted by the continued decline in freight rates. In Q4, our average freight rate per TEU was $1,102, that is a 48% decline year-over-year., and a 3% decline from the prior quarter. Total revenue from non-containerized cargo, which reflects mostly our car carrier services, totaled $534 million for the full year of 2023 and that is 73% increase compared to prior year.
This growth resulted from our expanded capacity in 2023, as well as underlying positive market dynamics. As also Eli previously indicated, the Red Sea disruptions had minimal impact on our Q4 results. Our free cash flow in the fourth quarter totaled $128 million compared to $1.05 billion in the fourth quarter of 2022. Turning to the balance sheet. Total debt increased by $666 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 150 vessels, out of which 16 are car carriers. This increase from November resulted from the delivery of 12 vessels and the scheduled redelivery of seven ships. Excluding the newbuild capacity, the average remaining duration of our current chartered tonnage continues to trend down and is now 20.4 months compared to 22.7 months in mid-November.
And as of today's call, 24 of the 46 newbuild vessels ZIM committed to have joined the fleet. Since our last update in November, we received three 15,000 TEU LNG vessels, five 8,000 TEU LNG vessels, two wide beam 5,500 TEU vessels and one wide beam 5,300 TEU vessels. February 2024, we also completed the purchase of five vessels for a consideration of $129 million, following an early notice for the exercise of purchase options we held from the 2014 restructuring. These vessels range in size from 8,400 TEU to 10,000 TEU. The decision to acquire these vessels does not mark a change in our vessels' sourcing strategy, but rather it is us taking advantage of beneficial term to acquire the ships. We have a total of 30 vessels up for charter renewal in the remainder of 2024 as compared to the expected delivery of 22 newbuilds during this period.
In addition, we have another 37 vessels up for renewal in 2025. This gives us ample flexibility to ensure our fleet size matches the market opportunities. Again, I would like to highlight that while we may continue to operate a similar number of vessels or even fewer vessels, our operated capacity has grown and will continue to grow in 2024. The newbuilds are replacing smaller vessels, less cost effective tonnage with larger more cost efficient tonnage, thereby contributing to lowered unit cost per vessel. These vessels are also better suited to the trades in which they are being deployed, again improving our competitiveness. Turning to our fourth quarter and full year financial performance, Q4 revenue was $1.2 billion compared to $2.2 billion in the fourth quarter of last year.
Adjusted EBITDA in the fourth quarter was $190 million compared to $973 million in Q4 2022. And for the full year, net loss was $2.69 billion compared to a net income of $4.63 billion in 2022. To remind you, our full year 2023 net loss includes a $2.1 billion impairment loss recorded in the third quarter. Adjusted EBITDA in 2023 was at $1.05 billion compared to $7.54 billion in 2022. You can see that adjusted EBITDA and EBIT margins were significantly lower this year versus last year. Turning to Slide 10. We carried 786,000 TEUs in the fourth quarter compared to 823,000 TEUs during the same period last year, that is a decrease of 5% compared to a market growth of 7%. For the full year, we carried $3.3 million TEUs, a 3% decline compared to 2022 and the overall market which was more or less flat.
Importantly, our Transpacific volume grew 9% in 2023 and we expect to see growth in 2024 as we upsize our capacity. Growth in Latin America was driven by our expanded presence in this trade. And conversely, Intra-Asia volume is down as we cut our capacity in this region, including services to Australia and New Zealand and also Africa due to weaker demand. Next, we present our cash flow bridge. For the full year, our adjusted EBITDA of $1.05 billion converted into $1.02 billion of cash flow generated from operating activities. Other cash flow items for 2023 included dividend payments of $769 million made in April 2023 and $2.09 billion of debt service, mostly related to our lease liability repayments. Moving now to our 2024 guidance. We expect to generate adjusted EBITDA between $850 million and $1.45 billion in 2024, and adjusted EBIT between negative $300 million and positive $300 million.
Overall, we assume average freight rates to be slightly higher than in 2024 as compared to 2023. We also expect first quarter and potentially second quarter to benefit from current higher spot rates in certain trades, while the second half is expected to be weaker than the first half of the year. We also expect our volume to grow in 2024 versus 2023 as we receive our newbuild capacity and are able to better optimize our fleet, coupled with potentially better demand than in 2022. As for our bunker costs, we expect a lower cost per ton in 2024 versus last year 2023, as we shift towards more LNG consumption. As Eli had mentioned, the crisis that has evolved in the Red Sea over the past three months, which caused most global carriers to divert their vessels away from the Suez Canal and around the Cape demonstrated the fast pace at which market conditions can change in our industry.
If in November 2023, we anticipated rates to remain flat through 2024 amid a supply demand imbalance, today, the SCFI is over 80% higher as the longer voyages around the Cape are estimated to have absorbed 6% to 7% of global capacity, creating a more balanced supply demand equilibrium. Yet, the long term impact of the Red Sea crisis remains unknown. First, it remains unclear under what circumstances trades through Suez would resume. And although, there doesn't appear to be a military or political resolution of the crisis in sight, that could change as quickly -- that could change, sorry, as quickly as the crisis itself has evolved, causing rates to drop quickly back to November, December 2023 levels. Moreover, even if the crisis persists, the long term impact on rates also remains to be seen.
Rates in January seem to have peaked in conjunction with a seasonal cargo rush prior to Chinese New Year and have since abated. In other words, strong demand could potentially keep the rates higher. But if demand is weak as shippers remain cautious on inventory levels throughout 2024, rates could continue to slide down. The underlying supply demand balance in 2024 points to clear oversupply with over 3 million TEUs, or approximately 10% of current global capacity expected to be delivered during the year. The Red Sea crisis has created a more balanced market. However, it should be noted that of the expected deliveries of 2024, 1.9 million TEUs, or 120 container ships, are 10,000 TEUs or larger in terms of size. These are large capacity vessels that could be deployed on East-West trades that have been impacted by the Red Sea crisis.
As such, newbuild deliveries could alleviate the supply pressure that currently exists on some vessel segments. The change in market conditions also impacted capacity management actions taken by carriers. The simultaneous restrictive passage through both the Suez and Panama Canal, though for different reasons has sidelined slow steaming, which was used in 2023 to absorb some capacity, as well as idling and blanking, which were used more modestly. Expectations for scrapping in 2024 also remain limited at only approximately 357,000 TEUs, less than 2% of current global capacity compared to the 10% scheduled deliveries. Although, current market conditions may have put a hold on the various capacity management actions available to carriers, longer term, we believe IMO 2023 and the decarbonization agenda may motivate liners and vessel owners to retire older vessels earlier than in the past, resulting in a step up in scrapping and helping the market to offset some of the newbuild capacity.
Short term, however, the current market condition we believe creates significant uncertainty for carriers in 2024 and warrants a cautious view of potential outcomes this year. And on this note, we will open the call for questions.
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