Signify Health - Q3 2021

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. I'm Natalie, your current call operator. Welcome, and thank you for joining the ZIM Integrated Shipping Services Ltd. Q3 2021 Earnings Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Press the star key followed by zero for operator assistance. I would now like to turn the conference over to Elana Holzman, Head of Investor Relations. Please go ahead.

Elana Holzman (Head of Investor Relations)

Thank you, Natalie, and welcome to ZIM's Third Quarter 2021 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 2020 annual report filed on Form 20-F on March 22nd, 2021. We undertake no obligation to update these forward-looking statements.

At this time, I would like to turn the call over to Eli Glickman. Eli.

Eli Glickman (President and CEO)

Thank you, Elana, and welcome to today's call. I'm very excited to present our record results and discuss notable third quarter 2021 updates outlined on slide number four. Our continued outstanding performance is a testament to the execution of our team, including the proactive strategies we have implemented to capitalize on both the highly attractive market and ZIM differentiated approach. Of note, ZIM's revenue of $3.1 billion, Adjusted EBITDA of $2.1. Excuse me. Adjusted EBITDA of $2.1 billion, a net profit of $1.5 billion. This is for the third quarter of 2021. These are the highest in our history. We also generated our highest ever operating cash flow of $2 billion in the third quarter and further strengthen our balance sheet, growing shareholders' equity to more than $3.1 billion.

Importantly, we continue to deliver industry-leading margin, outperforming the wider industry average. Our Q3 2021 Adjusted EBITDA margin was 66% and Adjusted EBIT margin was 59%. Based on our exceptional financial performance today and our favorable market outlook, we are once again raising our full year guidance. Specifically, we now expect to generate in 2021 Adjusted EBITDA between $6.2 million-$6.4 billion and Adjusted EBIT between $5.4 million-$5.6 billion. Based on the midpoint of today's guidance versus the guidance provided in August, our new forecast represents a 26% increase in our EBITDA guidance and a 31% increase in our EBIT guidance. Returning capital to shareholders also remains a priority for us and is a central component of our capital allocation strategy.

As such, we announced earlier today a change in our dividend policy that will allow us to return capital to shareholders more frequently. Effective immediately, we'll distribute a dividend on a quarterly rather than annual basis. The interim dividends will be at a rate of approximately 20% on the quarter's net income, with the total annual amount to be distributed to shareholders remaining between 30%-50% of our annual net income. According to the new policy, we declare a dividend for Q3 2021 of $2.5 per share. The dividend will be paid in December 2021. On slide number five, you can see that over the last 11 quarters, our earnings have consistently increased, and we deliver consecutive record quarters. At the same time, our net leverage has trended downward, reaching 0x this quarter.

Repeat, 0x this quarter as compared to 5.3x in Q1 2019. We are proud to be positioned in the top tier of our industry in this regard. Turning to the next slide number six. We continue to execute at the highest level across our four strategic pillars while remaining committed to profitable growth. Our exceptional operational agility continues to be a core differentiator for ZIM. Currently, we continue to operate a fleet of 113 vessels. For ZIM, vessels are a means to achieve profitable growth and our primary strategy of chartering in the vast majority of our fleet, and this is unchanged. Notwithstanding, we recently took advantage of attractive vessel acquisition opportunities to purchase eight secondhand vessels to secure much needed operating capacity and meet strong market demand, while remaining committed to delivering industry superior profitability.

Going forward, we may selectively acquire secondhand tonnage when the appropriate opportunity arises, while executing our proven chartering approach. Complementing our efforts to secure capacity to serve our customers and benefit shareholders, our commercial agility has also been instrumental in driving our record results. Relying on the charter market as our primary approach to securing capacity allows us to ensure that we source the fleet we need to capitalize on attractive fundamentals and new opportunities. While navigating through these challenging circumstances in the charter market over the past several months, we have successfully maintained a high level of fleet flexibility to further advance our global niche strategy and best serve our customers. Despite longer-term charters becoming more common, the average remaining duration of our chartered capacity today is now 24.8 months, compared to 15.3 months as of December 31st, 2020.

Charters representing approximately 23% of our total operating capacity are scheduled for renewal in 2022. This gives us the ability to manage our fleet and adapt to changing demand fundamentals in the more immediate term. Turning to operational excellence, we believe that ZIM is well-positioned for future success. In September, we exercised the option to long-term charter five additional 7,000 TEU eco-friendly LNG dual fuel container vessels from Seaspan under the transaction that we announced in July. After exercising option, ZIM has secured a total of 15 7,000 TEU vessels, adding to the 10 15,000 TEU vessels dual fuel we contracted earlier in February. The 15,000 TEU vessels are ideally suited to serve on the Asia to U.S. East Coast trade. While the 7,000 TEU vessels are versatile vessels and can be used in multiple trades.

When we take delivery of these vessels, ZIM will deploy the cleanest technology currently available. This will help us address increasing regulation on carbon emission and meet customer demand to have their cargo transported on more eco-friendly vessels. At that time, over 40% of our operating capacity will be LNG fueled, positioning us at the forefront of reducing the carbon intensity of our fleet operations among global lineups. Notably, by opting to charter these LNG vessels rather than own them, we are also maintaining flexibility to transition to newer technologies as they become commercially viable. We have also leveraged our improved cash position to make long-term investment in equipment, mostly new build containers. With our container fleet topping 1 million TEUs.

Given our higher than expected growth this year, coupled with current congested market and limited availability of containers, investing in our container fleet has supported our ability to respond to customer needs now and will continue to do so in the future. Now more than ever, responsiveness has high impact on our customer overall service experience. As such, we further enhance our human response capabilities to enable us to provide best-in-class customer experience via all channels, including phone, emails, and chat. While we continue to advance our customer-powered digital tools. Finally, we continue to use digital strategies to power new services. In October 2021, we launched Ship4wd, a digital freight forwarding platform targeting the SME market. We recognize the global need to simplify shipping services through the use of mobile device, especially among small and medium-sized businesses, and introduced Ship4wd in response.

Ship4wd's innovative approach enables anyone to be a self-shipper with a simple and smooth digital solution, making the transfer of goods worldwide just a few clicks away. Ship4wd is consistent with our strategy of developing growth engines, which complements our core business and aligns with our innovative spirit. We are excited about the market opportunity for Ship4wd and expect it can become a meaningful player in the multi-billion-dollar freight forwarding industry. I will now turn the call over to our CFO, Xavier, for his comments on our financial results and market developments. Please.

Xavier Destriau (CFO)

Thank you, Eli. Again, welcome everyone to our quarterly update. During the third quarter, our execution remained strong, and we generated outstanding operational and financial results based on our differentiated approach and proactive strategies. We now briefly discuss our KPIs, specific Q3 and year-to-date figures, and also our robust cash position. Slide eight highlights several KPIs demonstrating our extraordinary financial performance, including record earnings and further enhanced cash position. Our annual contract with Transpacific customers, which reflect an average rate of slightly above 60% higher than last year, as well as strong momentum in the spot rate, continue to drive our results. ZIM capitalized on industry tailwind that pushed freight rates higher. Moreover, our prioritization of a better paying cargo mix and initiatives to capitalize on the e-commerce boom were a key differentiator that allowed us to earn even higher rates.

Specifically, our average freight rate per TEU rose by 174% in the third quarter of 2021 to $3,226, compared to $1,176 in the comparable quarter in 2020. All 38% higher than the average freight rate of $2,341 in the second quarter of this year. For the first nine months of the year, our average freight rate per TEU was $2,510, more than double compared to last year's first nine months. Turning to our balance sheet, we have significantly increased our cash position with our leverage ratio now at 0x.

As of September 30th, total net debt decreased by $1.2 billion compared to year-end 2020, resulting primarily from, first, an increase of $1.37 billion related to lease liability, offset by a decrease in other financial indebtedness following the early redemption of the Series 1 and 2 Notes in June. Secondly, an increase in cash position of $2.17 billion. The increase of $1.37 billion related to lease liability is almost entirely attributable to additional charter-related commitments that we incurred in 2021. Our free cash flow in the third quarter totaled $1.72 billion compared to $237 million in the comparable quarter of 2020. That is an increase of over 600%.

Once again, we leveraged our strength to profitably grow our business, as is evidenced by our success in substantially increasing quarterly revenue, EBIT, EBITDA, and net profit, both sequentially and year-over-year. Total revenues in the third quarter were at $3.1 billion compared to $1.01 billion in the third quarter of 2020. An increase of more than 200%, three times more. Most importantly, and consistent with our primary objective to grow profitably, third quarter net profit was a record $1.46 billion, compared to $144 million in the third quarter of last year, growing by more than 900%, ten times. Adjusted EBITDA in the third quarter also significantly increased to $2.08 billion, compared to $262 million in Q3 2020.

Adjusted EBIT increased to $1.86 billion in the third quarter, compared to $189 million in the comparable quarter of last year. ZIM's Q3 2021 Adjusted EBITDA and Adjusted EBIT margin of 66% and 59% respectively, improved sequentially and continue to position ZIM among the leading performers of the industry. Our Q3 2021 results include increased tax expenses totaling $358 million for the quarter. As I previously indicated, considering our current and expected full year 2021 performance, we will be utilizing our entire carryforward losses for the tax year of 2021. Next, we review our significant improvements across all financial metrics during the first nine months of 2021.

Revenue for the nine months period was $7.26 billion compared to $2.63 billion last year, driven by the improved freight rates as well as an increase in carried volume, thanks to new lines that we launched, especially in the second half of last year. Again, consistent with our focus on profitable growth, net income for the first nine months of the year was at $2.94 billion, compared to $158 million for the first nine months of 2020. Adjusted EBITDA was at $4.24 billion for the first nine months, compared to $504 million for the first nine months of last year, representing a growth of 740%.

Our nine months Adjusted EBITDA and EBIT margins also improved to 58% and 51% respectively this year versus 9% and 11% last year. To slide 10. Our increased carried volume year-over-year is a direct result of proactive efforts to launch new expedited and other services with a focus on expanding our presence or entering new trade in order to drive profitable growth. Our enhanced position in the Pacific trade and in intra-Asia, which came in response to identified growth demand there, continues to serve us well. While global volume growth in the third quarter was approximately 1.6% year-over-year for the industry, ZIM carried volume increased by 16% from 762,000 TEUs in Q3 last year to 884,000 TEUs in the current quarter.

Our Q3 carried volumes were relatively flat sequentially, and this was due to supply chain bottlenecks and consistent with conditions experienced across the industry. To help alleviate some of these pressures, as well as in response to our higher than expected volume growth in 2021, we have contracted to purchase $898 million of equipment this year, adding approximately 307,000 TEUs to our own container fleet. This is about $135 million more than what we previously indicated last quarter. Containers at a cost of $689 million have already been delivered to us during the first nine months of this year. Regarding our cash flow, we ended Q3 2021 with a total cash position of $2.76 billion.

The total cash position includes cash and cash equivalents and investments in bank deposits and marketable securities. During the third quarter, our Adjusted EBITDA stood at $2.1 billion, converting into a $2 billion cash flow from operations. Other cash items included $288 million of net capital expenditure, $274 million of debt service, and $237 million of dividends that we distributed in September. Now we review market fundamentals that we see in the liner sector and our positive view also going forward. We continue to view fundamentals as favorable in both the near and the longer term, considering the need for replacement tonnage and current forecast for demand growth. First, in the immediate term, supply chain challenges are persistent and there are no near-term signs of import weakness.

The queue at the port of L.A. Long Beach has recently reached as high as 80 vessels, with the port continuing to struggle with the sheer volume of boxes arriving. Key U.S. inland logistics bottlenecks remain with truck driver shortages, chassis shortages, and limited inland warehouse space. We expect these market conditions to continue at least over the next six months, supporting elevated freight rates. Second, looking towards 2023 and beyond, we continue to view the threats of overcapacity as low due to two unrelated factors. One, forthcoming environmental regulation that will likely go into effect in 2023 will promote slow steaming, necessitating additional capacity to carry the same volume. By some estimates, for every 1 knot in average speed reduction across the fleet, this would result in an effective supply reduction of 4%-5%.

Two, congestion or subpar land infrastructure, particularly relevant in the U.S., will continue to adversely impact port efficiency. While pandemic-related supply chain disruptions have exacerbated challenges as demand continues to grow, operational constraints in the U.S. are likely to persist. As such, these two factors are expected to partially offset 2023 net fleet growth reflected in the increased order books. Now turning to the next slide. Although the upward trend we have seen in freight rates over the past several months has softened, possibly in conjunction with China's Golden Week, freight rates do continue to be well above the past decade average, driven by high demand, which is met by supply chain bottlenecks, equipment shortages, and port congestion.

Circumstances, again, we do not expect to change in the near future. On the cost side, charter hire rates correlate with freight rates, and despite the continued shortages of ships, we see a positive trend of charter hire rates beginning to plateau. Next, looking at the demand expectations in the U.S., pressure on the supply chain into the U.S. is not expected to decrease in the near term. The robust demand for container shipping is being supported by the largest restocking cycle in the U.S. ever. Data continues to suggest that pressure on retail inventory is partially spilling over to wholesalers as well. Inventory replenishment for wholesalers continues to fail to keep pace with sales, leading to inventory to sales ratio being well below average. We expect retailers and wholesalers to target higher inventory to sales ratio, which in turn is projected to sustain strong demand for container shipping.

As for bunker prices, as economies bounce back from COVID induced slumps, the demand for oil is driving prices up, which we accounted for in our updated guidance. Turning to our full year outlook, as previously mentioned by Eli, based on our exceptional financial performance to date and our favorable market outlook, we now project to deliver in 2021 Adjusted EBITDA within a range from $6.2 billion-$6.4 billion and adjusted EBIT within a range from $5.4 billion-$5.6 billion. The underlying assumptions driving this improved outlook include expected higher average freight rates and slightly lower bunker expenses, partially offset by higher charter expenses and slightly lowered carried volume as compared to our expectations and assumptions when we provided our guidance back in August.

We nevertheless still expect our volume in 2021 on a full year basis to be approximately 25% higher when compared to 2020. Turning to our new dividend policy, we are confidently transitioning to a quarterly dividend rather than a single annual payout, while keeping our underlying policy of distributing between 30%-50% of our annual net income to shareholders. The payout for each of the first three quarters of the year will be approximately 20% of the net income generated in that quarter, and each fourth quarter, once a year, ZIM will pay a dividend so that the cumulative distribution amount will total between 30%-50% of the annual net income.

We are pleased to implement this effective immediately and accordingly declare an interim cash dividend of approximately $296 million or $2.5 per ordinary share, reflecting approximately 20% of our third quarter net income. This dividend will be paid in December. Now I'm turning back to Eli for his concluding remarks.

Eli Glickman (President and CEO)

Thank you, Xavier. ZIM continues to be well-positioned for the future as an innovative digital leader of civil transportation and logistics services. Once again, we deliver record quarterly earnings and profitability reflective of our differentiated global niche strategy and outstanding execution, leveraging strong underlying market fundamentals. We are excited by the progress we have made advancing this proven approach in the recent quarters, increasing our capacity to support customers and benefit shareholders while successfully maintaining a high level of fleet flexibility. Our innovative spirit continues to be on display as evidenced by multiple initiatives advanced throughout 2021. Most recently, as I said, we launched Ship4wd, our digital freight forwarding platform, which we expect to become a significant player in the freight forwarding industry. We remain focused on developing growth engines, complementing to our core business to provide added value.

Lastly, we are proud of our capital allocation track record in the short period of time as a public company. In addition to prudently allocating capital for future growth, including paying down debt in previous quarters, strategically securing our future core energy fleet and investing in equipment and innovation. ZIM is poised to return a significant amount of cash to our shareholders. We'll now open the call to questions. Thank you very much.

Operator (participant)

Ladies and gentlemen, at this time we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Randy Giveans from Jefferies. Please go ahead.

Randy Giveans (SVP of Equity Research)

Howdy, Eli and Xavier. How's it going?

Xavier Destriau (CFO)

Morning, Randy.

Randy Giveans (SVP of Equity Research)

Good morning. Yeah, congrats obviously on the epic quarter, improved dividend policy. I have a couple questions. I've been pretty bullish on ZIM, but I'll try to keep it brief. I guess first on the EBITDA guidance front. You have one quarter remaining. 4Q should be at least in line or possibly better than 3Q based on that EBITDA guidance. With that, looking at the volumes, they seem to have ticked down from 2Q into 3Q. What is this trend looking like for 4Q? Do you have much volume left to sell this quarter?

Xavier Destriau (CFO)

Yes. When it comes to the volume, we've seen a little bit, as you rightly pointed out, a reduction quarter-over-quarter between Q3 and Q2, which is very much linked to the current, you know, bottlenecks that we're experiencing in the terminals, especially relevant on the U.S. West Coast, but also to some extent in some other locations also on the East Coast. The situation today is as it is. We expect or we hope that all the actions that are being taken by all the stakeholders in this industry will assist in easing as opposed to further deteriorating the current situation.

When it comes to our volume expectations for the fourth quarter, we do not anticipate that those would further reduce compared to what we'd experienced this quarter around.

Randy Giveans (SVP of Equity Research)

Perfect. Following up on that, you know, we've seen some headlines around spot rates falling. Maybe one of the reasons is customers switching from booking spot to longer term contracts. With that, have you signed some new long-term, maybe at least 12-month contracts with your customers starting in the fourth quarter? Or are you kind of waiting until early 2022 for those contract agreements?

Xavier Destriau (CFO)

You know, for us, the contract season, which is relevant for the Transpacific volume, is a little bit later than what is the contract season for the Asia to North Europe, which is based on the calendar year. When it comes to the Transpacific, the contract runs from the first of May to the thirtieth of April. We really are today at the very early stage or very early days of initial discussions with customer to agree on the volume and on the rate that will prevail for and that's from the first of May next year. It's too early to say for us. No, we don't see the rates and the spot. That's for the contract cargo.

A little bit too early for us to give a view as to where we will land, although the market conditions today hint towards a significant increase in the average contracted rates that will prevail next year. On the spot today, yes, you're right, there are some fluctuations on the week after week. Let's not forget that we are still in an industry subject to seasonality. We are just right after the end of what we traditionally call the peak season, and there was also the Golden Week effect in China. That's it. It's moving a little bit up and down.

Our assumptions for the fourth quarter, and obviously we have good visibility on that, is that on average, we don't expect our average revenue per TEU to decrease.

Randy Giveans (SVP of Equity Research)

Yeah, that makes sense. Then lastly, in terms of capital allocation, you know, you clearly have billions to spend. You've been active on securing some long-term charters with new buildings. You've been buying those second-hand container ships with more prompt delivery. You have zero net debt. I guess, how will you further kinda balance this in terms of acquisitions, maybe some M&A activity, equipment spending on the boxes, or maybe most effectively, repurchasing shares directly from some of the legacy shareholders?

Xavier Destriau (CFO)

You know, for us, capital allocation is obviously very, very important. First and foremost, we are making sure that we dedicate cash resources to further invest in the business and to make sure, as you rightly pointed out, that we secure the tonnage that we need in order to continue to deliver those very good results that we managed to deliver quarter-after-quarter. That meant that we acquired some second-hand tonnage, as you've seen.

That also meant that we need to set aside some cash in order to put some up front payments for our LNG vessels with the Seaspan that also allowed us to invest significantly this year on containers and bringing in the badly needed containers also to tackle the current bottlenecks that we are experiencing today. That's one. The second is obviously also, as we always mention, returning capital to shareholders is high on the agenda of the company and of its board. We are very pleased with what we've achieved so far.

If we just go back down and remember that over the past nine-10 months since we've been a listed company, we started by raising close to $230 million back in January. Already nine months down the line in September, we returned that same amount to our shareholders when we have distributed the exceptional, you know, dividend. We are now announcing another one in December. Within less than a year, we would have returned to shareholders twice as much as what we raised back in January. We are looking at all the ways relevant for us to return value to shareholders.

We are also very pleased to, you know, to transition from annual to quarterly, which I think is also will allow to better visibility from our shareholder base. Shareholder buyback is something that is also on the agenda that the company might consider if this is something that becomes relevant. For us, again, we are looking at creating long-term shareholder value, and we believe that today the strategy and the decisions that we are making achieve just that.

Randy Giveans (SVP of Equity Research)

Perfect. No, that all makes sense. I could go on and on, but I'll hop. Thanks again for the time. Keep up the great work.

Xavier Destriau (CFO)

Thank you. Thank you.

Operator (participant)

The next question is from the line of Omar Nokta from Clarksons Securities. Please go ahead.

Omar Nokta (Head of US Securities)

Thank you. Hey, guys. Good afternoon. Yeah, also congratulations on another strong quarter and exceeding a lot of people's expectations, including mine, of course. We wanted to touch on Randy's question about the freight contracts. I know it's a bit early, as you highlighted, Xavier, you know, with the May contracting period still a bit away, but did want to ask because we did see some reports and some discussions for the Asia-Europe legs that we were seeing freight contracts being entered into that were as long as 36 months in duration. Just wanted to ask, did you see that type of interest? I know it's a small piece of your business, but did you see that type of interest?

Also, are there any indications that we could be seeing something like that on the Transpacific? I know it's early, but any color you can give on that?

Xavier Destriau (CFO)

Yeah, you're right. When we look and look at what's going on on trades where we are not an active player, but it's still important for us to know what is happening there because it may give us indication as to what our customers may want to discuss with us on the trades where it is relevant. True that on Asia, North Europe, we've heard and read the same thing as what you're mentioning right now, Omar. As far as we are concerned now, we have some customers that throw the idea to whether you know, longer term, more than 12 months, is something that the company would entertain. We haven't made a final decision here as of yet.

First of all, for us, the primary question that we want to give an answer to internally is, what is the allocation in terms of contract cargo versus spot that we want to secure for the next season? When we focus on the percentage of contract cargo, whether those are going to be 12 months as it used to be the norm, or in some cases more than that, will be subject to the discussions that we will have with each and every customers. A little bit too early for us to comment on this at this stage.

Omar Nokta (Head of US Securities)

Got it. Appreciate at least some of that insight. You also highlighted in your comments earlier just on some of the activity going on in the West Coast in the U.S. where you know everyone's getting involved trying to sort out the excess containers, and there has been you know the threat of fees on idle boxes at the ports of Los Angeles and Long Beach. It looks like that threat at least has worked because the containers apparently have come down in volume, and they've pushed out when they're gonna implement those fees. Generally speaking about that given you have a big footprint in the Transpacific, do you see that as a concern, having to pay those fees potentially?

How do you think about being able to pass those costs on to the customer?

Xavier Destriau (CFO)

First, maybe I start by saying that nobody has any interest in incurring costs, and then passing the cost to customers. All the stakeholders in this industry, you know, need to work together and are working together to try to ensure that the equipment is, you know, going out and coming back as efficiently as possible. That is the spirit of the detention and demurrage charge is to incentivize the return of the equipment back into the network. We, the terminals, the shipping lines, the customers all need to work together to try to indeed alleviate the current issues that are highly visible indeed in the port of L.A.

For us, what we are doing is trying to make sure that, first of all, we communicate with our customers on a daily basis, letting them know that their customers, when we talk about full, that needs to be picked up by the customers, that they are available for them to pick up, that they are in places where they are accessible, because there's also this question about not inaccessible and accessible equipment. We've made sure that we position the containers full to places where customers could come and pick up the cargo. Indeed, it is bearing fruit.

As far as we are concerned, looking at the ZIM equipment that or is sitting in the port of L.A., we've seen a drastic reduction of give or take 50% of the overall containers within the past two, three weeks. That have been now put back into the overall network. That's what is overly important for us again, is to all work together to try to make sure that the customers get their cargo, that we get our customer back, that the port can work and continue to work efficiently.

Operator (participant)

The next question is from the line of Sathish Sivakumar from Citigroup. Please go ahead.

Sathish Sivakumar (Equity Research Analyst)

Yeah, thank you. Thanks for the presentation. I've got three questions here. Firstly, on the share of contract versus spot. Just to clarify, is it still around 20% of your volumes are contract? Just related to that, what is your exposure to the spot premium market actually in terms of volumes? Secondly, on CapEx guidance. If you look at nine-month CapEx, it's about $755 million, and the seven vessels that were purchased in October, is it about $320 million. Is it fair to think that you've kind of done for full year, it might be around $1 billion-$1.1 billion of CapEx for this year?

Xavier Destriau (CFO)

Yeah. Yes. Sorry, go ahead.

Sathish Sivakumar (Equity Research Analyst)

Sorry. Maybe I can ask afterwards. Let's take these two, and then I can, yeah, ask the third one later.

Xavier Destriau (CFO)

All right. Is the answer to your second one, which is the CapEx? Yes, you're right. When we look at combining the investment in the secondhand vessels and the equipment, the boxes, we will be a little bit in excess of $1 billion overall for the year 2021. To the first question in terms of what is today still the mix between contract and spot. Yes, we are on the Transpacific, give or take at 50%/50%. 50% spot, 50% contract. For next year, it is very possible that we will continue with the same type of a split.

Sathish Sivakumar (Equity Research Analyst)

What is your split on the spot premium market?

Xavier Destriau (CFO)

You know, the premium is something that is fluctuating week after week, as it is very much a function of whether a customer wants to jump the queue in a way, and have the cargo loaded in the next voyage as opposed to waiting for additional weeks. It is marginal to be honest with you as far as we are concerned. If we look at the breakdown of premium versus well, non-premium or normal, if you will, if you want to call it that way. To give an indication of percentage, I think it's less than 10% of premium cargo.

Sathish Sivakumar (Equity Research Analyst)

Okay. Got it. Thank you. This is my third question, actually. Cash conversion, if you look at it, is actually down from 90% to 83%. Is it mainly driven by longer duration of charters? How should one think about the normalized cash conversion?

Xavier Destriau (CFO)

No, this is very much. You know, I think what we provide here in terms of a cash conversion is free cash flow conversion. There is the effect of the CapEx that we just talked about, which has been quite significant in 2021 when compared to prior years. In the years ahead of us, if we were to revert back to a more fully, you know, chartered type of strategy, as opposed to also acquiring in the secondhand market.

Also considering that from an equipment perspective, we made a significant investment in 2021 that we do not intend to replicate to the same magnitude, same levels in the years to come, the cash conversion rate will normally increase.

Sathish Sivakumar (Equity Research Analyst)

Okay, got it. Will it go back to 90%, or you should still expect it to normalize somewhere between 85% and 90%?

Xavier Destriau (CFO)

I would say, yeah, between 85%-90% would be a reasonable assumption.

Sathish Sivakumar (Equity Research Analyst)

Okay, got it. Yeah. Thank you. Thanks again for your time.

Xavier Destriau (CFO)

Thank you, Sathish.

Operator (participant)

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

Alexia Dogani (Director of Equity Research for European Transport)

Hi. Good afternoon, gentlemen. I had also three questions, please. Just firstly, following up on Eli's comment at the start. Am I correct in thinking that 23% of your total capacity is on charters less than 12 months? And is that the number that we compare at the time of the IPO being around 70%? And I just want to check, is that 23% enough therefore for you to maintain your agile approach to capacity? That's my first question. My second question is on just CapEx and lease CapEx. Very helpful, Xavier, the comment on 2021 cash CapEx. Can you just give a similar comment on lease CapEx and CapEx for 2022, 2023 if possible, between cash and lease?

Finally, on the supply chain disruption point, I mean, clearly, based on your comments on sort of midterm supply-demand balance, you don't expect operational reliability to recover from the current sort of trough levels. I mean, what do you think are the implications if therefore, the supply chains remain more costly and more lengthy for longer? That's it for me. Thanks.

Xavier Destriau (CFO)

Right. Thanks, Alexia. The first question, which is a clarification question, I guess, on comments that we made, 23% relates to the tonnage that is up for renewal indeed in 2022. Give or take in terms of vessels, we are talking 25%, I think, 25 vessels that will come up for renewal in 2022. To your point, we are navigating. We're trying to solve a difficult equation here, because let's remind ourselves that first of all, we are growing. Unlike the industry that is growing at 5%, that we expect to grow in 2021 at 25%. With that growth comes also additional needs when it comes to capacity tonnage vessels.

We need to find first that vessels. Then we need to find the arbitrage in terms of locking ourselves for duration that we are happy to entertain. That it needs to be linked to our perception of the mid-term, long-term view that we have on the you know the access to tonnage. We are of the view that and for the reason I've explained the environmental related issues for one that there will be continuous pressure on tonnage. It's okay for us as we are growing to shift towards a little bit of a longer average duration.

25 months now versus 15 months as of end of last year. The average duration of our charter is indeed increasing. But that's okay. It is also important when we look and compare these 25 months on average. If you add 25 months to where we are today, we end up in 2023, 2024, right on when we are going to get delivery of our LNG vessel, the Seaspan vessel.

We will be able to make also the arbitrage as to whether we are continuing to grow, and then we renew and extend the chartered tonnage because we need it, or we don't, and the energy vessels that we take delivery from come in as replacement capacity, and we would just return to the tonnage providers, those vessels. We feel good about the fact that you know we are making the right arbitrage and come to a situation whereby we answer to the fact that we need to secure tonnage for the longer term.

We need to keep the flexibility, especially relevant again, when we are going to get delivery of that significant amount of newbuilding in 2023, 2024, and that we continue on the growth path when it comes to the network where we operate. On your second question, with regard to CapEx, you know, for me to give you an indication in terms of what will be the charter assumptions for the years to come, this will be also a function of what the market and the drivers of the market are like.

Surely when it comes to forecasting, we're taking a conservative assumption and we link our revenue for TEU assumptions with the chartering market and for as long as we see a positive trend on the revenue side, we will make sure that we do also account for the fact that there would be then no reason for the chartering market to soften. That's something that we look hand in hand in our forecast. From a cash CapEx perspective, as I mentioned earlier on, very much containers were the drivers for this year. We've now bought in more than 300,000 TEUs.

Our total container capacity is exceeding 1 million TEU, depending on what the situation looks like. Towards normalization of our industry, which will happen one day. The question is when, but it will eventually happen. We think that we will have enough containers to carry the cargo that we tend to carry, and we will redeliver and scale out the older equipment, keeping the brand new boxes with us. The last question on the supply chain disruption, it's very difficult, you know, to say. What we can just, you know, acknowledge is that there are still the same drivers that are very much there.

Very strong demand on the one hand, especially true in the U.S. There is no sign of softening of those demand driver. From a productivity aspect of things, from a landside operations aspect of things, from a lack of truckers, difficulties to you know to move the cargo inland, that is still very much of an issue, and it needs the time before it actually gets resolved.

Alexia Dogani (Director of Equity Research for European Transport)

Thank you very much.

Operator (participant)

Mr. Omar Nokta from Clarksons Securities back after disconnecting. Please ask your question.

Omar Nokta (Head of US Securities)

Hi. Thank you. Yeah, sorry about that. Xavier, I just had one follow-up and apologies if you already addressed it, but wanted to ask about M&A. I believe last quarter you had highlighted looking at potential deals at some of the smaller scale Asian liners, and just wanted to get an update on that. Also just in general, with regards to M&A, if you felt, you know, continued horizontal activity was ideal or if you were looking at also doing vertical integration as well. Thank you.

Xavier Destriau (CFO)

Yes, Omar. What we said last quarter remains very true, as of today. We will continue to explore opportunistically, you know, options for us to acquire smaller shipping lines. That's what we are looking at. Still in the same regional trade, where we see potential for growth, very much on intra-Asia, and also to some extent on the Latin America or South America region. There's nothing changed here. We are looking for opportunities in this respect, and we continue to do so.

Omar Nokta (Head of US Securities)

Okay. Anything on going into the vertical aspect of the industry?

Xavier Destriau (CFO)

Sorry. Yes. No, we are focusing on being a you know pure play shipping player. We develop adjacent activities, but more on the digital front. We announce and launched not so long ago, Ship4wd, the you know this digital platform. That's how we potentially you know diversify a little bit away from pure core shipping activity. When it comes to M&A potential deals, we are concentrating our research on shipping players.

Omar Nokta (Head of US Securities)

Got it. Very clear. Thank you, Xavier.

Operator (participant)

This concludes our Q&A session, and I hand back to Eli Glickman, President and CEO.

Eli Glickman (President and CEO)

Thank you very much to all of you. See you next quarter.

Operator (participant)

Ladies and gentlemen, the conference is now concluded. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.