ZIM Integrated Shipping Services - Q1 2024

Transcript

Operator (participant)

Quarter 2 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. Thank you. I'd now like to turn the conference over to Elana Holzman, Head of Investor Relations. You may begin.

Elana Holzman (Head of Investor Relations)

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

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

Eli Glickman (CEO)

Thank you, Elana, and welcome everyone. Slide number two. ZIM began 2024 with positive momentum. We leverage market conditions, and coupled with the strong execution of the ZIM team globally, we delivered solid Q1 results. Based on current market conditions, our outlook for the remainder of the year has improved, and as such, we now expect our full-year 2024 financial performance to be better than our 2023 results. Our strategic plan to upscale our fleet and operate larger vessels to improve our cost structure is paying off, and we believe that in 2024, we will achieve our volume growth expectations, outperforming the market. ZIM earnings in the first quarter reflect stronger spot rates, which resulted from disruption in the global logistics supply chain. Slide number four. We delivered revenue of $1.56 billion and net income of $92 million.

Adjusted EBITDA was $427 million, and adjusted EBIT was $167 million. Reflecting Adjusted EBITDA margin of 27% and adjusted EBIT margin of 11%. Our total cash position of $2.25 billion at quarter end remains strong. Our Q1 results reflect the dynamic nature of the container shipping industry. Today, tensions in the Red Sea have not eased and continue to disrupt global trade. We've seen freight rates significantly increase from November 2023 lows as overcapacity in the market is being absorbed. As we look forward, we expect freight rates to remain higher for longer than originally anticipated. While we cannot predict when this disruption will end, there does not seem to be a solution in sight.

Moreover, in recent weeks, we've seen spot rate increases spreading to additional trades which are not directly impacted by the Red Sea disruption, and which previously did not experience rate increases. Certain indication of increased demand and constraint on equipment, added to the supply pressure, may be the cause of this recent trend. Going to slide number five. Given this stronger rate environment now impacting more trades, our outlook for the year is more positive. Therefore, we are raising our full-year 2024 guidance and now expect to generate Adjusted EBITDA in the range of $1.15 billion-$1.55 billion and adjusted EBIT between $0-$400 million.

As per our dividend policy, which provides for a payout of 30% of quarterly net income, our Board of Directors has declared a dividend of $0.23 per share, or a total of $28 million on account of Q1 results. While the bear case scenario from a financial perspective has likely been avoided in 2024, we would like to remind you that our market is extremely volatile and that until recently, the disruptions which drove rates up were primarily supply driven. It remains to be seen whether the improved demand we are currently witnessing is sustainable, and whether it would support freight rates for the remainder of 2024. Overall market dynamics still point to supply growth significantly outpacing demand growth, with significant deliveries this year, and to a lesser extent, next year as well. As such, our longer-term expectation for the market has not changed.

It remains our view that once the Red Sea crisis is resolved, we will likely revert to the supply-demand scenario that had begun to play out in 2023. We maintain the view that the industry will face a more challenging second half of this year, irrespective of the duration of the Red Sea crisis, as more newbuilds, particularly large capacity vessels, are delivered. This will likely adversely affect our results in the third and fourth quarters. We continue to assume that the second half of 2024 might be weaker than the first half. Xavier, our CFO, will discuss additional factors driving our 2024 guidance in his prepared comments. Before I turn the call over to him, I would like to provide an operational and commercial update and highlight ZIM progress execution, executing strategic objective thus far in 2024. Going to slide number six.

Our transformation is well underway and has begun to produce tangible results. We are very pleased with our progress and are confident that with respect to our fleet and cost structure, ZIM will emerge in a stronger position in 2025 and beyond, as our transformation continues to deliver incremental benefits. The primary pillar of ZIM transformation is our fleet renewal program, executed to enable more efficient and competitive operations. We secure a total of 46 newbuild container ship, of which 28 are LNG-powered. Today, 30 newbuild vessels have already been delivered to us, including all 10, 15,000 TEU LNG vessels and nine out of eighteen, 8,000 TEU LNG-powered vessel, which we are deploying on the strategic Asia to the U.S. East Coast trade. Our new fleet improve our cost structure and support long-term profitable growth.

Importantly, these new vessels are more modern, fuel efficient, larger, and better suited to the trades in which we operate. This continues to reduce our cost per TEU, as these cost-effective newbuild vessels are replacing older, less efficient, and more expensive charter capacity. Moving forward, we expect to continue seeing gradual cost per TEU improvement as we meet our volume growth targets. In addition to improving our cost structure and enabling long-term sustainable growth, our fleet renewal program addresses a central objective of our ESG roadmap: reduce the environmental impact of our operations and help fight climate change. The benefit of our new fleet from an environmental perspective are worth mentioning again. Next year, once we receive all our newbuilds and redeliver existing charter tonnage, over 50% of our operated capacity is expected to be newbuild.

Approximately 40% of our operated capacity is expected to be LNG-powered, making ZIM among the lowest carbon intensity carriers in the world. Already today, 30% of our capacity is LNG-powered, and we operate the greenest fleet in terms of use of alternative fuels. Sustainability is a core value for ZIM, and we are pleased to have recently published our sixth annual ESG reports. It outlines how ZIM has addressed increasing demand from our various stakeholders for a more proactive ESG approach. In 2023, ZIM achieved a 23% drop in carbon intensity of our operation compared to the prior year. This was driven in part by our new LNG vessels, which replaced older vessels and significantly cut our carbon emissions. We also decreased vessel speed and added vessel to routes to comply with emerging regulation.

We are proud of the progress we made in 2023 and are well on our way to reaching our target of reducing carbon intensity by 30% by 2025 versus our, versus our 2021 baseline. We remain committed to reducing our GHG emissions to Net Zero by 2050, a more ambitious target than the one set by the IMO. We recognize that the implementation of ESG-focused strategies is an ongoing process, and we'll continue to prioritize promoting responsible corporate practice to create long-term, sustainable value for all our stakeholders. Operationally, we also remain focused on aligning our fleet size with demand levels and rationalizing our fleet to minimize cash burn. At the beginning of this year, we had a total of 32 vessels up for renewal in 2024.

Thus far, we have redelivered 11 vessels and anticipate the remainder will be redelivered over the course of the year. Turning next to our network of services, the agile nature of our commercial strategy has continued to serve ZIM well. During the first quarter, we continued to adapt our network to change in customer demand. In Q1, we grew our volume on Transpacific, leveraging our larger capacity vessels and new lines open to L.A. and Vancouver. We maintain our unique commercial position on this strategic trade for ZIM as the only carrier to call the U.S. East Coast with LNG-fueled vessels. In fact, we operate LNG vessels on two different services in this trade. As the only carrier able to offer shippers a pathway to significantly reduce carbon emissions on this trade, we believe that our differentiated offering enhances our competitive position and supports our volume growth target.

We are also pleased with our growing volume in Latin America. We opened several new lines in 2023 in this trade and continued to expand our network in Q1. As we have discussed previously, Latin America has been a focal point for us, where we see long-term growth and profitability potential. On this note, I will turn the call over to Xavier, our CFO, for a more detailed discussion of our financial results, our revised 2024 guidance, as well as additional comments on the market environment. Xavier, please.

Xavier Destriau (CFO)

Thank you, Eli, and again, welcome, everyone. On slide seven, we present key financial and operational highlights, and as Eli mentioned, our first quarter financial results reflect the improved freight rates that mostly ensued from the Red Sea disruptions. ZIM generated revenue of $1.6 billion in the first quarter of 2024, a 14% increase compared to the first quarter of last year. Our average freight rate per TEU was $1,452, a year-over-year increase of 4% and a 32% increase from the prior quarter. Total revenue from non-containerized cargo, which reflects mostly our car carrier services, totaled $111 million for the quarter, compared to $106 million in the first quarter of 2023.

While we operated more vessels in the current quarter, revenues are only slightly up due to the longer voyages around the Cape of Good Hope in the current quarter. Our free cash flow in the first quarter totaled $303 million, compared to $142 million in the first quarter of 2023. Turning to the balance sheet, total debt increased by $359 million since prior year-end, mainly due to the net effect of the incoming larger vessels with longer-term charter durations. Regarding our fleet, we currently operate 147 vessels, out of which 16 are car carriers, as compared to 150 vessels as of our Q4 earnings calls in mid-March. The slight decrease from March resulted from the delivery of six newbuilds and the scheduled redelivery of nine vessels.

We'd like to remind you that while we may continue to operate a similar number of vessels or even fewer vessels, our operative capacity has grown in 2023 and will continue to grow this year. We are replacing smaller vessels, less cost-effective tonnage, with larger, more cost-efficient newbuild tonnage, thereby contributing to lowered unit cost per TEU. Moreover, these vessels are also better suited to the trades in which they are being deployed, again, enhancing our strategic positioning. As of today's call, 30 of the 46 newbuild vessels ZIM has committed to have joined our fleet, including ten 15,000 TEU LNG vessels, four 12,000 TEU vessels, nine 8,000 TEU LNG vessels, and seven of the smaller wide-beam 5,500 and 5,300 TEU ships.

Excluding the newbuild capacity, the average remaining duration of our chartered tonnage continues to trend down and is now 19.7 months, compared to 20.4 months in mid-March. We have a total of 21 vessels up for charter renewal in the remainder of 2024, as compared to the expected delivery of 16 newbuilds during this period. In addition, we have another 37 vessels up for renewal in 2025.... As we previously highlighted, this gives us ample flexibility to ensure our fleet size matches the market opportunities. Turning now to additional Q1 financial metrics on slide nine. Adjusted EBITDA in the first quarter was $427 million, compared to $373 million in Q1 2023, reflecting an Adjusted EBITDA margin of 27% in both periods.

Adjusted EBIT was $167 million or 11% margin, compared to an EBIT loss of $14 million in the same quarter of last year. Net income for the first quarter was $92 million, compared to a net loss of $58 million in Q1 2023. We do remain committed to returning capital to shareholders, and as such, our Board of Directors declared a dividend to shareholders of $0.23 per share or a total of $28 million, which reflects a payout of 30% of Q1 net income as per our current dividend policy. Turning now to slide 10. We carried 846,000 TEUs in the first quarter, compared to 769,000 TEUs during the same period last year. That is an increase of 10%, slightly ahead of market growth of 9%.

As already discussed, we grew our volume on the Transpacific in Q1, attributable to our larger capacity vessels and also new lines. Transpacific volume grew 27% year-over-year, and we expect to see continued volume growth during the remainder of 2024 as we continue to upsize our capacity. Significant growth in Latin America, volumes of 129% year-over-year, was driven by our expanded presence in this trade. We see additional opportunities to participate in the growth of that trade. Next, we present our cash flow bridge. For the quarter, our Adjusted EBITDA of $427 million converted into $326 million of cash flow generated from operating activities. Other cash flow significant items for the quarter is obviously $740 million of debt service, mostly related to our lease liability repayments.

It is here important, however, to remember that the lease liability repayments in Q1 included $235 million, reflecting down payment for six LNG vessels that we received during the quarter, and also payment for the five vessels following an early notice for the exercise of purchase options we held on these vessels, as we already previously mentioned on our March call. Moving now to our 2024 guidance. As you heard from Eli, our outlook for the remainder of 2024 is stronger than previously assumed, based on the evolving market, and as a result, our financial performance in 2024 is now expected to be better than our 2023 results.

We are raising our full-year guidance and now expect to generate Adjusted EBITDA between $1.15 billion and $1.55 billion in 2024, and Adjusted EBIT between $0 and $400 million. Our improved guidance is driven primarily by the strengths we are seeing in spot rates. This, in turn, contributed to higher freight rate assumptions incorporated into our current guidance as compared to the freight rate assumptions we incorporated into the guidance we provided back in March. Before touching on the volume and the bunker cost assumptions, I'd like to briefly discuss the contract season and how it plays out, it plays into our outlook for the remainder of the year.

For the year ahead, our spot exposure in the Transpacific trade will remain relatively high as the new annual Transpacific contract, which went into effect on May 1, represents approximately 35% of our expected Transpacific volume. We chose to revisit our commercial approach of roughly a 50/50% split between spot and contract volume, given our expectation that the average spot rate for Transpacific for the next 12 months will likely outperform the prevailing contract rates, which were only slightly better than last year's rates. We believe that our value proposition to customers operating LNG vessels on this trade will help us achieve our volume growth objectives while leveraging the stronger spot rate environment.

Our volume assumptions for our 2024 guidance remain unchanged, and we expect our volume growth this year to outpace market growth as we continue to upsize our fleet and increase operated capacity. Bunker costs, on the other hand, are slightly higher as compared to the underlying assumptions for the guidance we provided in March. Moving to our market discussion with some data point on our commentary so far. Market evolution since November 2023 has demonstrated the volatile nature of our industry. The underlying supply-demand balance for 2024 has been, and remains, one of significant oversupply, as you can see in the graph on the left. Events external to our industry, namely the security concerns in the Red Sea, have caused most global carriers to redivert their ships around the Cape of Good Hope....

This has extended voyage durations to North Europe, the Med, the Mediterranean, the Mediterranean, sorry, and to a certain extent, to the U.S. East Coast, absorbing significant capacity, bringing the supply-demand balance to a certain equilibrium. Yet the strength in spot rates of recent weeks extends beyond these trades, which were directly impacted by the Red Sea diversions. As you can see, the improvement in spot rates in Asia to U.S. East Coast, which we saw from December until mid-January, eased when the initial impact of the extended rotations was normalized. But as we mentioned earlier, we now see a second wave of a spot rate hikes, with the improvement in freight rates also spilling over to additional trades. We show here SCFI rates for regional trades, including Africa, Latin America, and Oceania.

This recent, more widespread strength in rates is attributable to indications of equipment constraints, coupled with improved demand. CTS data for Q1 2024 shows a healthy start of the year. As already mentioned, global volume for Q1 2024 is up 9% compared to Q1 last year, and tracking similar volume to Q1 in 2022 and Q1 2021. This suggests that the de-stocking cycle, which started in the second half of 2022, may have ended. However, on the right, you can see the recent increase in the Ocean Timeliness Indicator. The OTI measures the journey of a container from the time it is set to leave a factory to the time it is picked up from its destination port. This increase suggests some stress in the global supply chain.

Therefore, it remains to be seen if the current uptick in demand is in fact, the beginning of a restocking cycle that would translate into a more prolonged and sustainable improvement in demand, and that could continue to support freight rates. Or whether this increase is simply shippers erring on the side of caution and ordering peak season cargo early to ensure they have it available for the holiday season, signaling only a shift in the timing of peak season demand. And on this note, we will open the call for questions. Thank you.

Operator (participant)

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

Omar Nokta (Managing Director)

Thank you. Hi, Eli and Xavier. Good afternoon. Just to three questions from me, and maybe the first one, just wanted to ask, you know, clearly the market's taken off, and it seems much more broad-stroked than what we saw earlier this year, as you were just highlighting, Xavier. And on slide 14, we've got multiple geographies that are now seeing higher rates, and it's not just Asia, Europe, and a little bit of the Transpacific like we saw at the beginning of the year. How would you characterize what's really behind this? Is this a supply-driven dynamic or demand? You mentioned just now that it's due to a shortage in equipment. I guess from your perspective and your lens, you know, what has caused this equipment shortage to take place?

Is it a sudden occurrence, or is it something that's been gradually building up since the beginning of the year?

Xavier Destriau (CFO)

I would...

Eli Glickman (CEO)

We see both supply-side effect and demand-side effect. As for the supply side, as a result of the Houthi crisis and Bab-el-Mandeb, Suez Canal, vessels going through the Cape of Good Hope, Africa, much longer, many more days. In order to keep our weekly services, we need about 50% more vessels to keep the weekly service. As I said, this affect the supply side. In order to keep the service, because we spend more time on the way, we need more containers. Because of that, not in ZIM, in the industry, we feel there is shortage in the container. We seem full capacity, and we plan it in advance, and we are ready to serve this high effect of the supply side. On top of that, there is the demand side.

We see in the last few weeks, earlier than we expected, high demand side, mainly from the U.S.. This time, compared to the beginning of the Houthi crisis, the high rates and the high demand is not coming from the U.S. or the services from Asia to the U.S. only, or the Asia to the Mediterranean, but we see it all over Asia to West Coast Africa, Asia to India, Asia to Oceania. We see it Asia, in Asia to South America.... We see it from Asia to the West Coast of Central America, Mexico, and West Coast of South America, and as I said, Asia to the U.S., both East Coast and West Coast. So this is a real question. In the past, let's say, speaking about the U.S. market, we see it, a very interesting case. We see unemployment very low, historical level. We see high inflation.

In the past, these two, high inflation and low unemployment, did not live together because low unemployment bring low demand for employees, and we see the effect of low inflation. Here we see both low unemployment and high inflation. Probably there are more companies trying to attract employees, really, to pay them high salaries, and the people, the consumer in the U.S., have more money to spend. We really, we really don't know if this early demand coming, as I said, because of the early demand for the season, Thanksgiving and Christmas holidays, or this is because of low inventory. As you remember, after the COVID, the inventory level in the U.S. was on the high side, and companies, reduced the orders because of that.

As of today, as what we understand, the inventories in the world, in the U.S., are in the low side, and because of that, we see high demand. The real question, if this demand is going to stay with us until after the holiday season, or this is a short season high demand because of what I described. Xavier, if you would like to add.

Xavier Destriau (CFO)

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

Omar Nokta (Managing Director)

Yeah, makes sense. Thank you for the detail. And maybe as a kind of a second question follow-up, perhaps, to that dynamic is, you know, there's a you know, the shortage in vessel capacity. We've seen a big jump in appetite on the part of other ocean carriers to secure ships on charter. You know, ZIM's been focused on returning ships back to their owners. You highlighted the 21 that remained for this year and 37 that roll off in 2025. What's your plan, you think, with those? Has your thought changed at all about returning all of them, or do you look to retain some given the change in market dynamics?

Xavier Destriau (CFO)

Look, I would say, first, unlike other shipping line, as far as we are concerned, we had already, or we expected a significant increase in our operated tonnage throughout 2024 by just simply taking delivery of all the newbuild that we ordered back in 2021, 2022. And, you know, reminding that our operating capacity is expected to increase more than a double digit compared to end of 2023. If we look at what our capacity will be by the end of 2024, and we compare it with what it was at the end of 2023, by just taking all the 46 ships that we ordered and redelivering all the vessels that came up for renewal, we would de facto increase our operating tonnage meaningfully and significantly.

I think, by and large, as of, as we speak today, our long-term view or midterm view has not changed. So, we are, redelivering the vessels that come up for renewal in order to make, to make room for the, you know, still 16 ships that, we are awaiting between now and the end, and the end of the year. On a case-by-case basis, we will, reassess, and we always, you know, reassess, at every single occasion whether we might want to keep or, or renew for a short period some of the ship. But by and large, the, objective and the strategy, I think, remain, unchanged.

Omar Nokta (Managing Director)

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

Xavier Destriau (CFO)

Yes, you have the numbers more or less right, with one maybe clarification I should give. So for the full 2024, so from January 1 up until December 31, yes, the expectation is or is going to be an overall total payment of $339 million for the delivery of all those newbuilding. We in the first quarter, so looking at the cash flow statement in Q1, we incurred $106 million of down payment as we took delivery of two 15,000 TEU ships and four 8,000 TEU ships. So that's four times 20 plus two times 13, that's the 106.

Then, $130 million we paid as well as we exercise the right to acquire, you know, the option that we had on the five large capacity vessel, three 10,000 TEU and the two 8,500, that we acquired in Q1. So the 235 is not this quarter, is the combination of both. $106 million down payment and $129 million of exercising the option on the five vessels.

Omar Nokta (Managing Director)

Okay, I got it. So the remaining 233 is, I would assume, just evenly split for the rest of the year.

Xavier Destriau (CFO)

Give or take, yes.

Omar Nokta (Managing Director)

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

Xavier Destriau (CFO)

Thank you.

Operator (participant)

Your next question comes from a line of Muneeba Kayani from Bank of America. You're open.

Muneeba Kayani (Managing Director and Head of European Transport and Hotels Research)

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

Eli Glickman (CEO)

Yes, I will begin, Xavier will follow. First, we are very positive, and as we said, we are in positive momentum. As we said, 2024 results are going to be better than 2023 result, as we see the forecast of today. As for your question for quarter, we don't, we try to keep, not to go to quarterly results, but we're speaking about guidance for the year, not for the quarters. You can understand, and I give you the credit to understand and to take the conclusion, that we believe that, and we said it in the past even, that the first half is going to be stronger than the second half. And this is because we are trying to be cautious, as we don't know yet when the Houthi crisis is going to be ended.

In order to be conservative, and we don't know to expect in advance what will be with the Houthis and the supply side effect, we are trying to be conservative for the second half. As a result, and what we can see today, as I said before, the first half is going to be strong, and 2024 results are going to be stronger than 2023. So, yeah.

Xavier Destriau (CFO)

Yes, no, I agree, Muneeba, just to indeed add that, it is, I think, I'm sure everybody understands, very difficult to forecast and predict what's going to happen and how the situation will unfold in the coming quarters. As there are a lot of events that at the end of the day drive the current uptick in the market, that are potentially also the result of a geopolitical event that nobody has a clear control over. So clearly, what we can say at this stage is that, as Eli just said, the beginning of the year is much better than what we initially anticipated.

But if we look at the fundamental dynamics of our industry, if we leave aside for a second the disruptions that we just talked about just now, but if we look at the fundamentals, supply-demand dynamic of our industry, we are still in a situation whereby the threat of overcapacity is still around there around us. I mean, there is a lot of new built tonnage that is expected to be delivered towards the second half of the year, and vessel size that are precisely designed to get into the East-West trade that are today the very strong performer in terms of earnings generation. So that supply risk is there, and there is, I think, a good and positive signs today when it comes to the demand.

Whether the demand will be good enough to absorb that extra capacity is where we need to, you know, be, I think, a little bit more cautious. Hence why, today, we still feel that it is a likely scenario that the second half of 2024 might be a bit weaker than the first.

Muneeba Kayani (Managing Director and Head of European Transport and Hotels Research)

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

Xavier Destriau (CFO)

It could.

Muneeba Kayani (Managing Director and Head of European Transport and Hotels Research)

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

Xavier Destriau (CFO)

So in terms of lease payments, we are, and we always said indeed that 2024 is going to be a challenging year for us. Mostly because we continue to pay the charter that we secured during the COVID era days, that were more expensive than the one that could be secured today to some extent. And so, for that purpose, 2024, just like 2023 was, by the way, is quite heavy on that front.

But as we are redelivering those more expensive ships and bringing in the ones that we've ordered, the newbuild that we've ordered, for which we have a clear view, there is no debate, no question, no variable here. We have a fixed agreed-upon rates that we're gonna be paying for the foreseeable future, which again was priced as per the newbuild the ship in the shipyards, newbuild price at the time we ordered the ship, so completely co-decorrelated from what was the charter market prevailing on during those days. So we are going to go back to a far more reasonable charter payment if we bring that down to per operated TU. So that's for the charter payment.

When it comes to CapEx, in terms of vessel CapEx, we should not have or today, we don't anticipate any of those in 2024. Unless you consider the down payment that we are making at delivery of the ship as CapEx related. Just to be clear, in our cash flow statement, it is not. It is a prepayment of rental, so it goes in the lease liability repayment line. But so, as I think we previously said, that we still have $230 million of cash payment in 2024, that we relate to the delivery of those new ships.

And what may change a little bit is us having to maybe continue to invest a bit more on equipment. We just talked about the equipment shortages that resulted from the current market dynamics, and we want to anticipate and make sure that we are not taken short on our equipment requirement in order to meet our customers' expectations. So we might invest a little bit on them, on that front and bring in new boxes, mostly dry 40 ft High Cubes, which are the hot commodity right now when we talk about equipment.

Muneeba Kayani (Managing Director and Head of European Transport and Hotels Research)

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

Xavier Destriau (CFO)

Look, I mean, I think on this one, you're right. I mean, we have a dividend policy, which we intend to adhere to, unless there are good reasons for us to deviate from that dividend policy. The Board, looking at this question, felt confident that by adhering to the dividend policy, we were not putting the company at risk in terms of outlook. What do we see going forward? From a corporate law perspective in Israel, we have to meet and satisfy several criteria and tests that we did satisfy. As a result, the Board felt comfortable in agreeing to this dividend distribution.

Eli Glickman (CEO)

Keep our policy.

Xavier Destriau (CFO)

Yep, to adhere by the policy.

Muneeba Kayani (Managing Director and Head of European Transport and Hotels Research)

Thank you.

Operator (participant)

Your next question comes from a line of Sathish Sivakumar from Citigroup. Your line is open.

Sathish Sivakumar (Equity Research Analyst)

Thanks for the presentation. I got three questions here. So firstly, on the box shortages or equipment shortages, if you could just color, like, which trade lanes are you seeing this? Is it mainly on the back haul or on the front haul? And then, like, Asia to Europe, any color on that or North, South would be helpful. And then, last year in Q3, you took an impairment on your lease liabilities based on assuming the rates would be depressed for longer. Given the recent rebound in rates, how does that impairment provision work? Would you see that being unwound, or is it, like, done for now, you're not going to go and revisit that?

And then the contract rates, like, in your Q1, have you had, like, any contract rates coming in, or is it all, like, 35% contracted, you—it's just starting off only in May? And how should we think about the exit rate on your freight rates, say, versus March, versus what you are seeing in April and May? That will be helpful. Thank you.

Xavier Destriau (CFO)

... Okay, on your first question, when it comes to equipment constraint or shortages, we clearly see the pressure rising in Asia for us to be able to get the equipment positioned on time to bring the cargo to the U.S.. So for us, it's really Asia to the U.S. trade, which is in tension.

By the way, I mean, when we say Asia to the U.S., because it's our most significant trade, but from all the places of origin, Asia to destination elsewhere, for as long as, for example, Ningbo is a place where we have a shortage of equipment, and we need to make sure that we reposition the equipment as timely as possible. And as I mentioned earlier on, potentially also envisage acquiring and increasing our fleet of equipment. Which by the way, it doesn't come also as a surprise, and this is why I think Eli mentioned that we got prepared for that, but need maybe to add a little bit more due to the increase in our operated tonnage.

The more we operate capacity from a vessel perspective, the more de facto we need also additional equipment. So here we see still some pressure. But mostly this is a shortage of equipment availability in Asia, China, more specifically, that we need to monitor very closely. The second question, I think, on the impairment. The impairment is on the asset side and not on the lease liability side. But the rationale for the impairment, again, what is it? It is us looking at our long-term forecast, and we say long-term here, it's not one quarter or even one year.

We're looking at four to five years ahead and try to come with a fair assessment as to what could be the cash generation of the company. Then we use a discounting rate, which is a weighted average cost of capital, and then come to a number, which is the future discounted cash flow that we think we might be generating, and then we compare that to the book value of our assets. And that's when we did that exercise last year in the Q3, this is where we saw the decorrelation between those two numbers and allocated and accounted for this large impairment amount.

Now, every quarter, we ask ourselves the same question and need to consider whether there are impairment indicators in both directions, by the way, worsening of our forecast or an improvement that is material and meaningful that could or should lead us to revisiting that impairment analysis. Up until today, we felt that the recent change in the market, which are still, you know, from a timing perspective, we cannot safely say that the new this is the new normal. We are still, I think, in a very volatile environment.

So the long-term view, for us is still today pretty much unchanged when we look ahead into future years. But again, if we are to see or to think at some point in time that we had to revisit those assumptions, we would, and it could lead to a reassessment of the impairment. Again, both potential directions, either add to it or write back some of it. And last, your question, I think, relating to the contract rates.

Clearly, for us, when we refer to the 35% rate or percentage that we secured for the next contract season, so we talk here about as from the 1st of May 2024, up until the 30th of April 2025. We anticipate or expect that out of our volume objective on the Transpacific, 35%, give or take, of that volume objective will come from contract cargo, and de facto, 65%, the difference will come from spot.

That is, I think, very much, as we tried to explain, driven by the fact that, yes, we see the spot market today, the contract rates that we managed to agree with our customers, were not meaningfully different from what they were during the past season. So for the first quarter, in a way, of 2024, slightly higher, but not meaningfully higher. And we felt that on average, if we look at what we think will happen in our market environment for the next 12 months, on average, we think that we will earn a better income per TU on the spot market than we would on...

that we will on the contract cargo.

Sathish Sivakumar (Equity Research Analyst)

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

Xavier Destriau (CFO)

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

But, even, beyond that, one reason from a pure cost, of operation perspective, it is cheaper for us to run those ships on LNG than it would be, to run them on LSFO.

Operator (participant)

Your next question comes from the line of Marco Limite from Barclays. The line is open.

Marco Limite (VP and Equity Research Analyst of Transport and Infrastructure)

Hi, good morning. Thanks for taking my question. My first question is on leverage. So as you state, you have 2.8x net debt EBITDA as of Q1. Just wondering what's your sort of level of, well, what's your, you know, level of comfortability around leverage and if there are covenants, going forward that we should think of? My second question is on cost. So clearly, you do have some, charters that have come up for renewal this year, and, my question is, to what extent, chartering costs are now taking into effect, the Red Sea disruption? So are chartering costs becoming more expensive than what they were a couple of months ago, for example, and, by how much?

And, my third question, just a follow-up to the previous question, but on the, let's say, CapEx side. So, in your view, how more expensive are these LNG vessels compared to, let's say, standard fuel powered vessels? Thank you.

Xavier Destriau (CFO)

Okay. So maybe starting with the last one. You know, those vessels that we ordered, we ordered them via a third party in the middle. So it's a long-term charter commitment, although those vessels were ordered for us with a back-to-back charter. So if we talk about the LNG fueled vessels, all of them, the 15,000 TEU were secured with Seaspan as a vessel owner, and then on a back-to-back charter with us. The 8,000 TEU ships, 15 of them were also secured with Seaspan, and three remaining with another vessel owner. So at the time, what we did was we knew what was the shipyard price for those newbuild.

If you were to ask me, let's take the example of the 15,000 TEU ships back in 2021, the average value of those ships was maybe around $140 million apiece. Today, it is, it would be closer to $200 million. And what we got was a charter rate. So the Seaspan is acting as a financial lessor, ultimately, to us. And so the charter rates that we secured for those ships is to be looked at as a finance lease provided by a financial lessor, in this instance, Seaspan.

So, we feel that we got a very good from a timing perspective, that we went out to secure those efficient tonnage at the exact right time, where the shipyard price was still not at the level of what we see today. So that's why we are saying with absolute confidence that our cost per TEU is going to improve as a simple result of us replacing the older tonnage that we chartered via vessel owners and that will return to make room for this newbuild, which is far more cost-friendly to us. Which leads to your second question. Today, the company is not exposed to the charter market whatsoever.

We are not discussing renewing a charter contract because, quite the contrary, like I said, we make room for the newbuilds that are coming our way, for which we negotiated already three years ago, what would be the rates that we would be paying. And what we do is, we deliver all the vessels that we secured before and that come up for renewal at the end of the charter period. We don't renew. We give back, we redeliver to the vessel owner. So this is why, clearly, we can say safely that as far as our cost structure is concerned, there is no exposure to the current charter market environment. And then to your first question in terms of leverage and covenant.

First, there is no financial covenant or EBITDA-related covenant in any of our financing facility. We only have one financial covenant in a small facility, a container facility, which is a minimum cash of $250 million. So we don't have any leverage or a coverage or gearing type of covenant obligation vis-à-vis any of our financial counterparts.

Marco Limite (VP and Equity Research Analyst of Transport and Infrastructure)

Okay, thank you. If I could add one more. Just wondering, as you have just said, that you expect, let's say, spot rates to be, you know, throughout the year, a bit stronger compared to the contract rate on the Transpacific on average. Just wondering whether that, you know, the higher percentage of spot rates on the Transpacific versus contract is already in the guidance. And therefore, you know, you have been cautious in the second half just because you are anticipating the possibility of a steep correction in spot rates. Thank you.

Xavier Destriau (CFO)

Look, I mean, I will let you be the judge of whether we are, you know, conservative or not. But yes, the short answer to your question, when we provided our guidance, we took into consideration where we ended up from a contract discussion perspective and the outcome that we discussed of us willing to take a larger exposure to the spot market, which is us taking a risk. But we think it's the right risk for us to take, as opposed to lock in at a low rate a significant amount of cargo. So we take the more difficult avenue on that front.

But we have to be also mindful of the fact that the spot rate that we see today might not prevail for the whole of the year. And it is indeed factored in our guidance that we anticipate a likely scenario that the spot rate will trend downwards, then the slope of the trend is to be determined, and we will monitor the situation, obviously, quarter after quarter.

Marco Limite (VP and Equity Research Analyst of Transport and Infrastructure)

Thank you.

Operator (participant)

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

Eli Glickman (CEO)

We are pleased with our progress thus far in 2024, both advancing ZIM transformation through fleet renewal and capitalizing on stronger than anticipated market conditions to deliver a profit in the first quarter. Our cost structure continues to improve in tandem with the delivery of our highly competitive, fuel-efficient newbuild tonnage that will include 28 LNG powered vessels once our fleet renewal program is complete. As we transform our fleet profile and maintain our robust network backed by exceptional customer service, we are on track to drive long-term sustainable growth. In light of improved market conditions, we've increased our full-year 2024 guidance. While headwinds remain and market conditions are constantly evolving, we are confident in the exceptional team we have in place and our strategic positioning as an agile container shipping player with a revamped fleet.

We look forward to continuing to capitalize on positive near-term market dynamics and further implement our differentiated strategy to best serve our customers and generate enduring value for shareholders. Thank you very much to all of you.

Operator (participant)

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