ZIM Integrated Shipping Services Ltd. (ZIM) Earnings Call Transcript & Summary

Good morning, everyone. This is Muneeba Kayani from Bank of America Research. Thank you for joining us for the virtual day of our transport conference. I'm delighted today to be hosting ZIM's CFO, Xavier Destriau. In terms of format for the session today, if you have any questions, please do feel free to put them in the Q&A section on your screen. So with that, I hand over to Xavier for some opening remarks.

Thank you very much. Thank you, Muneeba, for having us today. So maybe I just want to open this call by introducing ZIM for the audience. We are operating in the container liner industry and solely in the container liner industry. We are moving 3.5 million TEU 20-foot equivalent unit every year, which position us, give or take, #10 in the ranking of the players in our industry. We also differentiate ourselves compared to maybe the bigger players, talking the League, the Maersk, the MSC or Hapag. We are not completely global. We are neither completely regional. We are what we call global niche, meaning that we select the trades where we want to operate, and we want to make sure that we command a very significant market share on where we decide to compete. So we are not everywhere, but where we are, we do matter. And for example, today, the major trade lanes where we focus our attention are the Transpacific between Asia to both the U.S. East Coast and the U.S. West Coast. And also, we are growing strongly on the intra-Asia trade. For example, we are not -- completely withdrew from Asia to North Europe, which is a trade that we certainly were not competitive enough. Now when it comes to also the strategy of the company because also we do not operate on every single trade lane. We want to make sure that we source the right capacity to always employ the right vessel as opposed to way to own the bulk of our capacity that we would always need to try to find an employment for the vessels. We want to source the vessel that we need as opposed to having to find an employment for the vessels that we would otherwise own. So we are more geared towards chartering tonnage as opposed to holding capacity for that very reason. Now we're obviously very mindful that the times have changed. And today, everybody is fighting for tonnage. So we have taken that opportunity as well to change a little bit our chartering strategy and also taking the opportunity to transition quicker hopefully than our competitors to greener tonnage. And that's why we have announced since now -- February, we have announced a series of contracts and long-term charter agreement with tonnage providers for brand new capacity, LNG fueled, which will allow us to have a very competitive fleet for the years to come. And more importantly, maybe even a greener fleet, which will allow us to accelerate our transition towards the greener shipping. This is, for us, a very important ambition and our customers demand it. And we feel that since we don't have the legacy of an old fleet and old tonnage, we are very well positioned to put ourselves on the top of the game here. We are also -- just one final comment. We are also, in terms of capital allocation, we've done a lot of things in terms of digitalizing our industry, but providing tools for the company to be better in terms of engaging with customers and targeting better cargo mix, start getting better paying cargo which allowed us to close Q1 today in terms of average revenue per TEU yesterday, should I say. In terms of revenue per TEU, a very, very high, we exceeded $3,800 per TEU. So meaning that we are capable to generating a significant income on each of the box that we carry. And that is also thanks to all our digital investments. And we also want to play a part, a wider role to the digitization of the whole of the industry. And that is us having put to market the very first eBL or electronic bill of lading, paperless based on the blockchain technology, and we are very pleased to see that not only we use it, but our competitors also start to adopt the technology. So we will continue to be active on that front. And with that, Muneeba, we hand it back over to you.

Great. Thank you, for that introduction. So maybe I can start with a question on the market. We've seen spot rates are falling since January daily. What do you think has been driving this? Is this just all seasonality, are we near a bottom now?

Yes. The spot rates have been softening up. I'm not sure I would use the word fully because they are extremely elevated still if we compare year-over-year. We are -- and we compare Q1 versus Q1 last year, we are nowhere near the levels of last year for us. We doubled our revenue per TEU on average in Q1 versus last year. So there has been a softening and we think indeed that it has a lot to do with the seasonality of our activity. We -- this is a slack season at the end of the day for us now up until we engage into by a position, the peak season, which should kick in around July, Shanghai lockdown, allowing it. That's -- so for us, we don't see the current trend as a collapse or even the beginning of normalization to be frank. We were expecting a softening of the rates due to the seasonality of our industry.

And then if you talk about the demand, what are you seeing in terms of demand in The U.S.? Any signs of slowdown? We recently had earnings report from some of the U.S. retailers where they've highlighted some concerns. So what are you seeing?

We -- on the U.S. trade lanes, we see a very strong demand. We don't see any softening of demand. Our vessels are selling full and have been selling full despite the lower volume due to the seasonality. We are getting ready to be absolutely honest. We are getting ourselves ready for what we think might come, which is a surge in the demand in the weeks to come towards like I was saying -- towards the end of June. Today, the inventory to sales ratio, which is a metric that we track, and we monitor very closely that metric, which is a very good indicator for us to try to anticipate any potential fluctuations in the demand from our U.S. customers. And this metric is still at a very low level. So I don't think we should be making a direct correlation between what the earnings of some of our major customers and our activity, from a volume perspective, cargo is there. Cargo is waiting. There's been a lot of unmet orders also that could not be served due to the lockdown situation in Shanghai. It is very possible that there will be a catch-up in a very few weeks from now. And as far as we are concerned, we are clearly getting ourselves ready for that.

Great. So that goes into my next question, really, what are you seeing in China right now? Is the lockdown really easing? And over the last couple of weeks during the lockdown, what impact did you see in terms of export volumes out of China, what was the impact on your bookings? And how do you see that changing?

The lockdown situation in Shanghai has been lasting for in excess of 6 weeks now. I think we are turning into the 6 weeks. And so as a result, the port remained open, but the fact that there's been those -- this lockdown in the city did not allow for the manufacturing to produce at their normal productivity levels. So the cargo, which managed to get its way to the port where what was left in inventory in those manufacturing sites. So the volume out of Shanghai fell quite drastically, close to 40%, 50% of less volume in -- over the period. Did that translate into us sailing half empty? No. And this is because we do not operate only one service. We operate a series of services out of China and Southeast Asia to the U.S. And if I take the example of the U.S. East Coast, where we -- Asia to the U.S. East Coast, we operate 6 services in the coordination and conjunction partnership with the 2M alliance, as you know, Maersk and MSC. And what did we do? We -- on the services that go from China to the U.S. East Coast, we increased the allocation of South China, Yantian. And so we loaded more cargo from Yantian on the vessels that went to the U.S. East Coast up north to Shanghai and then all the way to Panama Canal and then on the East Coast. And on the service that went through Suez on -- to the East Coast, then the shortfall of volume that had been reallocated from Yantian have been compensated by volume provided by Vietnam and Thailand. So our vessels have been sailing full despite the fact that in Shanghai, we lifted less volume. If that situation of lockdown was to continue for prolonged period, it would start to affect our overall volume. But with the -- I think we are also expecting to see soon the light at the end of the tunnel in this respect. And we understand that by the end of June, all being well, all going well, the production should come back to normal, which will be timely for right in time, right on time for the -- entering into the peak season. So that has been the situation. We compensated by reallocating cargo from other port of origin. And as a result, did not get any significant impact on our [indiscernible].

So now with, hopefully, the lockdown easing and reopening goes on track, are you expecting a surge in volumes out of Shanghai with the reopening? And then how should we be thinking about stock rates getting into peak season. Could spot rates move higher now?

It is a possible scenario like I was just suggesting there's been -- for as long as the demand in the U.S. remains extremely resilient. Then the U.S. consumers at the end of the day and the U.S. retailers, our customers are desperate for the cargo. So as soon as Shanghai comes back into a more normal operating mode, it is a very likely possibility that there will be, again a cargo rush. And if that was to happen, as we know, the market dynamics may suggest that the spot rates will go back up. As far as we are concerned, when it comes to our guidance and what we communicated yesterday, we are still taking a conservative view that the market might start to normalize towards the second half of the year and that the spot rates might cool off a little bit. But there are alternative scenario that could also be possible, time will tell. And we're going to be very cautious in trying to anticipate the future. But bearing in mind that it's been a situation we've been in, we've all been, I think, consistently wrong in trying to do a second guess when the situation would normalize and kept on going. And there's always been something that fueled the congestion issues. And for as long as they are those looming threats, it's difficult to formulate the view. What we can say is that we don't think when the situation will start to normalize that it will have a direct and significant effect on the freight rates, the normalization will be gradual. We don't expect to collapse or a sharp and sudden reduction. That is because we think the freight rates will follow the pace of the normalization of the cargo flow, which we know will take some time when if it starts to happen.

Talking about cargo flow, if you could shift to the U.S. side of things in terms of congestion. We've seen the number of vessels waiting outside the Port of LA and Long Beach come down. They were about 100 in January. Now they've been kind of hovering in the 30 to 40 range over the last couple of weeks. What's driving this? And do you expect this to continue? And then what are you seeing on the East Coast? You mentioned you've diverted your vessels to the East Coast. Has that resulted in congestion increasing there? So if you could give us a sense of what you're seeing in terms of congestion in the U.S. at this point.

You're right that the congestion out of LA has reduced at least on the face of things and the numbers, if we are counting the numbers of vessels that can be seen outside of LA. They have been on the trend downwards. Does that really mean that the issues or the congestion in the port are behind us? No, not necessarily. There's been some vessels that have been pushed to wait later outside or further away off the shore of LA. And those vessels may not be counted even though they participate to the overall congestion. That's one thing. The second thing is some of our customers and some of the liners, including ourselves, have also redirected some of the cargo to both the U.S. East Coast, but also to the U.S. Gulf. And that also potentially assisted though had an effect in the improvement that we've seen in the Port of LA. At the expense -- going back to your second point, at the expense of the ports that saw -- that had to cope with this surge of volume that used to be offloaded on the West Coast and so contributing to increasing the congestion on the East Coast. And today, the Port of New York is a port that is, for example, experiencing significant congestion issue. Add to that, I think the -- or maybe explaining also why some of the cargo has been redirected from West to East is also the threat of the current discussions that are taking place in the Port of LA in terms of the union discussions, not knowing what the outcome of those discussions might be as some of our customers took the steps to get ready and prepare as opposed to have to deal with the consequences and shifted some of the cargo from West to East.

You mentioned the union negotiations. So what are you hearing currently in terms of where the negotiation is at this point? And kind of how are you about the outcome over the next couple of days, weeks on this one. And then related to that, on the inland side in the U.S., what's your sense of -- what's the situation in terms of labor availability and all the issues we've been hearing about earlier?

In terms of the status of the discussion, it's very difficult for me to comment. I think it's -- first of all, it's very early to formulate a view. And we will clearly monitor the situation as it develops. But the looming threat of potential disruption is enough today to already have impact, even though maybe today, we don't know much as to what is the current situation of the discussions. But we will obviously monitor those discussions as they develop.

Maybe we can talk about the contract side of things. You've made your guidance based on the contract rates that were just negotiated on the Transpacific and contracts are about half of volumes for Transpacific. Where the rates are today now on contract? How does that compare to spot rates? And if spot rates fall below contract rates, how do you make sure that customers continue to comply with their contract obligations?

You're raising, I think, a very good point, and there is a correlation with the contract rates that we managed to secure the volume as well of that or the percentage of cargo that we are willing to allocate to contract and what we're willing to keep in terms of exposure to the spot market. Throughout the discussion that we've had and that were initiated already towards at the end of last year and were concluded for the vast majority of them over the past few weeks, the #1 priority for our customers was first to secure space. That was the #1 criteria of the discussion. The first question was how many slots can you allocate to us? And then the discussions on the rates followed. So the primary concern from our customers was really to secure space. And with that, we are quite comfortable in -- we've been selective in a way in terms of who did we decide to partner with and to lock in rates and space with some of our customers that we know well and we did not want to venture and provide space protection to customers that we're willing to commit to any price because of this potential risk, if there is a risk, that the spot market if it was to fall below the agreed upon contract rate that the customer would come to us and say, well, things have changed, and we need to be negotiated. So the quality of the customer mix that we contracted with is it was a very high importance to us, and we are quite comfortable that in any situation, the customers -- because they will want to make sure they value the long-term relationship with the company. We'll abide by their commitments. So this is, I think, not a threat or at least we've been ensuring that this would not be a threat to the quality of our earnings. That's why we could increase our guidance just as a result of the outcome of the discussions. In terms of the rates, where do they compare against the spot, you need to -- it depends on what do we define as spot because also on the Transpacific trades, there has been a situation where due to debottleneck, due to the congestion issues, we've been generating additional income on top of the normal ocean freight in terms of surcharges to prioritize the bookings between the various spot customers, and that has contributed as well to increasing the revenue [ equity ]. So it's very -- and that is changing week after week depending on the booking forecast and the committed bookings as well from our customers. We -- in terms, again, are modeling for the purpose of our guidance. We -- I'm sorry, I see that my camera is moving but it's better now. We haven't changed our assumption that it is a possible scenario that towards the second half of 2022 the congestion issue will start to normalize and then the spot market should cool off a little bit or slightly or gradually and maybe we will end up at a situation where the spot market contract rates might be fully mentioned alike.

So maybe we could shift to kind of next year and what's the outlook there? We haven't had much in terms of new deliveries in the market that's expected to step up next year with about possibly a 9% addition to the global fleet. Is there a risk that some of this gets delayed, especially from Chinese shipyards, given the lockdown? What are you hearing right now?

It is a possibility, and the lockdown has had effected to everyone, including the shipyards in their ability to get the material -- steel is being required to build the ships. So we are hearing as well that some shipyards might struggle to meet the delivery schedule. I don't think -- it might be a little bit too early to be able to quantify what impact will this have in terms of the delivery schedule. But the risk is there, indeed that some of the shipyards may struggle to meet their delivery schedule. As you know, we have ourselves ordered the Seaspan that goes on the first vessels that should be delivered to us in February next year. So as far as those vessels are concerned, we are on time. And so we should be taking delivery of those first vessels as per original schedule in 2023. But it is likely possible that the vessel delivery might be disturbed due to the lack of raw material, making its way to the shipyards.

And then generally, we've seen the order book kind of increased sitting at around 26% of the global fleet now. Do you think that liners will continue to order mode? Or do you think it settled at this level? It is kind of one question. And then secondly, just in terms of deliveries next year, how should we be thinking about scrapping, slow steaming due to IMO '22 offset -- offsetting the new supply?

To your first point, will liners continue to order? I think there is still a willingness to renew the fleet and the whole of the industry has -- can afford it today, let's face it. And there might be an incentive to continue to all the new capacity. But that doesn't necessarily mean that the effective fleet will grow by the same pace because there is a view. I mean we -- I'm of the view that also with the enforcement of the new regulation, the road towards carbon zero and we even said -- even the regulation itself, but the pressure we are getting from all of our customers to be more environmentally friendly as an industry will push the liners that we'll be able to afford it and pretty much everyone will be able to afford it to retire early capacity. So the old tonnage might actually find its way to the scrapping yards sooner -- in the coming years than they would have in prior circumstances. And that will, if the scrapping is increasing, will have the effect on the net capacity. The order book we know in terms of windows as well in terms of windows of deliveries, '23 is now full and '24 as well. So the new orders that are being placed today are more likely to result in deliveries '25, '26, which then we need to look at it from a year-to-year basis. So on the one hand, I think, there is some sort of an incentive to renew capacity. There is also a break to that because everybody also wants to make sure that they make the right choice in terms of technology, and we know that LNG is one. But maybe at some point, zero carbon technology will prevail be it ammonia, hydrogen, methane or whichever, I don't know which one will prevail. And that one will be zero carbon, and maybe some are also waiting a little bit to see if there would be some new technological developments that we would incentivize to place orders when there is this ultimate technology, which is really a carbon zero. So this is -- by the way, why we didn't order ourselves. We didn't want to take that technology risk. So we want to make sure that we will be able to shift as well towards the one technology that we prevail will be fully carbon neutral. So they are conflicting, I think, of interest here. But by and large, we do not feel or think that there is a risk of overcapacity even with those numbers in terms of order book -- order to fleet ratio due to the capacity discipline, due to the fact that we think there will be an incentive to retire fleet early [indiscernible].

Your guidance is beyond the normalization in spot rates in the second half of the year. So as we think about kind of the normal rate for the market, where do you think rates settle? Would they be above pre-COVID levels and why?

For me, there will be clearly above pre-COVID level, just because if they were to go back to pre-COVID level, the whole of the industry will lose money, and I'm not talking ZIM, I'm taking the whole of the industry because there are some costs that went up, not to mention the cost of fuel, for example, which went up quite significantly since 2019. Also the cost of operating vessels, the chartering costs went up. And everybody, all shipping lines are, to some extent, chartering capacity. And so the cost of operating has gone up for every shipping line. So if we were to come back to pre-COVID level, we would be not even making the same margin as an industry as the one that prevail pre-COVID. So that's one thing. But that's not the more important thing. I think the more important thing is that the industry did demonstrate its ability to better manage capacity and do land sailings, plan voyages or putting vessel on idle in order to ensure that the vessel that sail end up sailing profitably. And the hard days or the lessons from 2008 or '09 have been put to the test in the first half of 2020 when we were entering into the COVID-19 pandemic. And let's remember that the first 6 months of 2020, our industry started by losing 9% of its volume year-over-year. And that was the exact same percentage of what happened in 2009 after the 2008 financial crisis. But the difference between the 2 periods was, in 2020, the industry has started to jointly operate vessels at those -- through the major shipping alliances. And what happened, capacity was managed and as opposed to sailing vessels half empty, the vessels were put on idle, voyages were [ planned ] and the freight rates did not collapse in the first 6 months of 2020. So the industry has now, I think, gaining maturity, as in terms of consolidation as well has gone through some consolidation and is operating in a much more efficient manner. That's another element. And then the third element is that even our customers today have used to think that, that transport was meant to come for free or almost for free. And forgot maybe the value of the service that we provide. Now they know, and they haven't [indiscernible] especially towards the end of last year that if you would not anticipate, if you would just believe in [indiscernible] in time, if you think that shipping lines will not earn their cost of capital, maybe this is something of the past. And I for one truly believe that our industry went through a tipping point, and there is absolutely no reason to think that we would go back to the errors of the past as an industry.

You reported 5% volume growth in the first quarter, which is well ahead of the market. How are you able to do this given all the congestion issues? And then you're forecasting guidance for 5% for the rest of the year as well. So kind of what trade lanes are you focusing on?

We have grown our volume, you're right, when the market contracted by 2%. Overall, in the first quarter, we grew by 5% and that is very much thanks to our growth on the intra-Asia trade. And I want to say intra-Asia, I also include trades between China to Australia and New Zealand. We opened new lines during the first quarter. And those new lines drove the volume up and compensated for some of shortfall of volume on the Transpacific trades due to the congestion. Again, I'm not suggesting that the vessels were not sailing full. They were sailing full, but a chance in time increased due to the congestion issues and due to the waiting times outside of the port. As a result, the carried quantities or discharge volume in the U.S. got affected by that. But full year offset, even more than offset by the growth on the new lines that we've opened on the intra-Asia trade. So one of them, which is an addition to a series of trades that we currently operate are an expedited service again. And we'd liked -- we liked very much those services, and we started between Asia to the U.S., then we opened between Asia to Australia and now New Zealand. And we've also opened very recently new expedited services between Asia, Southeast -- China, Southeast Asia to the U.S. East Coast, Baltimore and New York. Sorry, go ahead.

One other question on your fleet then. So you have a largely chartered fleet. How are you thinking about charter costs going forward and for the market and for yourself?

We think that for as long as the rates are where they are for as long as there are those bottlenecks and congestion issues, there is no reason to think that the chartering market will cool off. So it's -- there are hardly no idle capacity today or the one that is idle it's technical idling because the vessels are maybe they're going dry docking or things like that. But -- so there is still all the capacity that is available today is sailing and is on the water. So there is no real sign for me to suggest that the chartering market will cool off. It will start to cool off only when and after the freight rates has started to come down. And for us, and you rightly pointed out, we are heavily geared towards the chartering market. But here, we're talking about the spot charter. And so this is why what we wanted to make sure and we've been working quite hard on that already since the end of 2020 to step away from the pure reliance on the spot charter market because otherwise, we will have completely lost control of our costs. So that's why we decided to go to the newbuilding market because then we could negotiate with the tonnage provider, a charter based on the newbuilding price as opposed -- the cost of newbuilding as opposed to based on the supply-demand dynamics for existing capacity. And so the contract that we've entered into and so the charter rates that we will be paying when we get delivery of those vessels has nothing to do with the current charter market. It is a financing based cost based on the newbuilding price of the vessels at the time you otherwise place. And also from a timing perspective, to be frank, we are very pleased to have made those decisions very early because if we were to order or try to do the same deal that the one we secured in February 2021, today, due to the increase in steel price, the newbuilding prices have gone up 30%, 40%. So we are very happy with the strategy that we've put in place to reduce the reliance on the spot market and enter into a long-term charter. And when we look at what is left for us in terms of exposure to the spot market, out of 137 vessels that we currently operate, we only have 11 of those that will come up for renewal between now and the end of the year. And it is likely that we will renew those charters. It's only 11 out of 137. So our cost structure is pretty much locked, and we've made sure that we have the flexibility to redeliver to let go capacity in '23 and in '24 as we will take delivery from those newbuildings that we've agreed to take on with Seaspan and others. So that's -- that has been the strategy of the company to walk away from the pure reliance on the spot market, but to ensure that we retain and keep the flexibility to size our capacity depending on what we see in the market going on in '23, '24. We will have the option to grow by taking the new deliveries on top of our existing capacity or to take it as a replacement and let go the charter that we come up for renewal. We have more than 62 vessels that will come for renewal in '23 and '24 combine.

I realize we've run out of time. So I'll wrap up here, Xavier. Thank you very much for joining us and sharing your insights. And thank you, everyone, in the audience. Please reach out to me if you have any other further questions.

Thank you for having me, Muneeba. Thank you very much.