ZIM Integrated Shipping Services - Q2 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to the ZIM Integrated Shipping Services second quarter 2023 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 would like to ask a question during this time, simply press star followed by one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Elana Holzman, Head of Investor Relations, you may begin your conference.

Elana Holzman (Head of Investor Relations)

Thank you, Rob, and welcome everyone to ZIM's second quarter 2023 financial results conference call. Joining me on the call today are Eli Glickman, ZIM's President and CEO, and Xavier Destriau, ZIM's CFO. Before we begin, I would like to remind you that during the course of this call, we will make forward-looking statements regarding expectations, predictions, projections, or future events or results. We believe that our expectations and assumptions are reasonable. We wish to caution you that such statements reflect only the company's current expectations and that actual events or results may differ, including materially. You are kindly referred to consider the risk factors and cautionary language described in the documents the company filed with the Securities and Exchange Commission, including our 2022 annual report, filed on Form 20-F in March. We undertake no obligation to update these forward-looking statements.

Samuel Bland (Equity Research)

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

Eli Glickman (President and CEO)

Thank you, Elana, and welcome everyone to today's call. During the second quarter and year to date, near-term container shipping market conditions continued to be challenging. Our performance in the second quarter of 2023 reflected this reality. In Q2, we generated Adjusted EBITDA of $275 million and Adjusted EBIT loss of $147 million. Cash flow from operations was $347 million. Our total cash position of $3.2 billion at quarter end remained strong. Going to slide four. ZIM is currently in transition period. In early 2021, we embarked on all our fleet renewal program to improve our cost structure and support long-term profitable growth. During this period, we secured through a series of charter agreements, a highly competitive fleet and one that is optimally suited for our commercial strategy.

This fleet is made up of 46 newbuild vessels, including 28 LNG powered container ship. Of the 46 newbuilds, eight are already part of our fleet today: four 12,000 TEU vessels and four LNG powered 15,000 TEU vessels. We expect the delivery of three additional 15,000 TEU LNG vessels this year, and the remaining three are expected in the first few months of 2024. The commercial environmental benefits of this cost competitive capacity are worth mentioning again. Our 10 15,000 TEU LNG fueled vessels were designed and built to serve on the Asia to US East Coast trade. This is a strategic service for ZIM, and one in which our market share exceeds 10%. When we operate our ZCP service with all 10 new build 15,000 TEU vessels, we expect to benefit from a very competitive cost per TEU on this trade.

Moreover, ZIM is the first liner to operate LNG powered vessels on the Asia to US East Coast route, which we are confident will increasingly become a significant commercial differentiator. We view it as imperative that we provide customers with a service offering that enables them to reduce their carbon footprint. At the same time, adding state-of-the-art LNG fueled vessels further ZIM own sustainability goals and support our commitment to reduce greenhouse gas emissions to net zero by 2050. Our fleet renewal program also includes 32 smaller, more versatile newbuild vessels, out of which 18 are LNG powered 7,000 TEU vessels. These smaller vessels support our global niche commercial strategy and enable us to maintain flexibility to target better performing trades. The first three 7,000 TEU vessels are expected this year and the remaining in 2024.

Once we receive all 28 LNG vessels, we expect that approximately a third of our operated capacity will be LNG fuel, which will position ZIM among the lowest carbon intensity operators. In 2021, we also leverage our strong cash generation to invest almost $1 billion in renewing our container fleet, particularly our reefer equipment. Today, we operate the youngest reefer fleet in the industry, which is a competitive advantage with this higher value cargo. We were also early to identify the attractive dynamics of car carriage caused by tight supply. We successfully grew our operated capacity from two car carriers in early 2021, serving the local Israeli market, to operating 16 car carriers today, with global coverage and benefiting from strong demand.

In the near term, during this downturn period, as we await the delivery of the remainder of our cost-effective new build capacity, improving our cost structures remains an underlying priority for ZIM. We continuously review our network and services, and take action to rationalize our existing capacity to minimize our cash burn. Today, in 2023, we redeliver seven container vessels to adapt our fleet to current demand levels and maximize utilization. Xavier, our CFO, will provide additional information. During this challenging market, we continue to look for opportunities to establish resilience in our business and focus on optimizing profitability. We remain committed to our core trade lanes, specifically Asia to US East Coast and intra-Asia, and expect our network will continue to evolve as customer demand change and new commercial opportunities arise.

For example, in Q1, we suspended our express service from China to Los Angeles as rates to the West Coast collapse and launch in Q2 Colibri, a new service from South America West Coast to US East Coast. In this service, we leverage our strong growth offering, and carrying volumes have been consistently growing. Moving to slide five. While we remain cautious in our capital allocation decisions, we believe there continues to be value in investing in growth engines, which complement our core shipping activities. In June, we expanded our partnership with 40Seas, one of our portfolio companies. 40Seas is innovative FinTech platform designed to modernize cross-border trade financing. As a reminder, 40Seas uses AI tools to streamline the credit application process and can offer small and medium-sized importers and exporters, excuse me, faster and cheaper access to working capital financing needs than traditional financial institutions.

ZIM now offers this unique financing solution to customers directly, as well as via our digital freight forwarder, Ship4wd. When it comes to this investment, the capital requirements are relatively modest, yet the potential is significant. Moving to slide six. In conclusion of my prepared comments, I would like to address our revised guidance for 2023 and current freight rates. As previously announced, we now expect to generate in 2023 Adjusted EBITDA of $1.2 billion-$1.6 billion and Adjusted EBIT loss of $500 million-$100 million. This revised forecast is driven by our expectation that peak season will be soft, bringing down our expectation for volume growth to low single-digit and no material improvement in freight rates in the second half of 2023. That would normally be consistent with seasonality.

The improvement we have recently seen in spot freight rates is clearly a welcome development. However, I would like to caution that the significant improvement as it related to ZIM, is focused on Transpacific rates, whereas other trades we operate in haven't seen a similar improvement. Moreover, this improvement, even if sustained, does not have immediate impact on our financial and does not change our full year guidance. Marginally, we may benefit from improved spot freight rates as long-term contracts this year account for only about 30% of total Transpacific volume. I would also like to reiterate that our strong balance sheet and ample cash will serve ZIM well during a prolonged downturn, and allow us to operate from a position of strength and maintain a long-term view.

On that note, I will turn the call over to Xavier, our CFO, for his remarks on our financial results and additional comments on the market. Please.

Xavier Destriau (CFO)

Thank you, Eli. Again, on my behalf, welcome everyone. On slide seven, we present key financials and operational highlights. As Eli mentioned, our second quarter financial results reflected challenging near-term container shipping market conditions.

... Our second quarter average freight rate per TEU was $1,193, a 67% decline year-over-year. During the first six months of the year, our average freight rates of $1,286 was 65% lower than the first half of 2022. Our carried volume of 860,000 TEUs in Q2 was slightly up compared to last year's second quarter carried volume, compared to a market growth of negative 2%. Sequentially, our volume was up 12%. Revenues for the second quarter were driven by the continued decrease in freight rates. Q2 revenues were of $1.3 billion. Our revenue for the first half of 2023 of $2.7 billion, was 62% lower than the first half of last year.

Our free cash flow in second quarter totaled $321 million, compared to $1.6 billion in the second quarter of 2022. Turning now to the balance sheet, total debt increased by $537 million since prior year-end. That is mainly due to the net effect of the incoming vessels with longer term charter durations. Regarding our fleets, we currently operate 148 vessels, 132 container ships, and 16 car carriers. Excluding the new build capacity, the average remaining duration of our current charter capacity is 24.6 months, compared to 25.5 months in May. As I mentioned, on the out of the 46 newbuild ZIM ordered, eight have been delivered, including four 12,000 TEU vessels and four LNG powered 15,000 TEU vessels.

We have 13 vessels whose charter period ends before year-end 2023, and another 34 vessels whose charter period ends in 2024. In total, these 47 vessels, which we could renew or redeliver to the owner, compared to 38, 38 newbuilds that we expect to be delivered during the same period. It's important to highlight that the delivery of these modern, cost-efficient vessels will replace smaller, less cost-effective tonnage. On the next slide, slide eight, we present ZIM's Q2 and six months, 2023 financial results compared to Q2 and the first half of last year. The underlying dynamic for both comparisons are similar and are primarily the outcome of the decline in revenues based on the lower freight rate environment. Adjusted EBITDA in the quarter was $275 million, and the adjusted EBIT loss was $147 million.

Adjusted EBITDA and EBIT margins for the second quarter were 21% and -11% respectively, as compared to 61% and 51% in the second quarter of last year. For the first six months of 2023, Adjusted EBITDA margin was 24% and Adjusted EBIT margin was -6%. This is compared to 65% and 56% in the comparable period in 2022. Second quarter net loss was $213 million. In Q2, we recorded a one-time $46 million financial expense and $21 million capital loss in connection with the termination of the charter of four vessels, which were previously subject to a sale and leaseback transaction. After tax, the net effect to our bottom line stood at $51 million with no cash impact.

The vessels will be redelivered to their owners in the coming weeks. Moving on to slide nine. As I mentioned, our carried volume slightly increased compared to the 2nd quarter of last year, we saw a 12% improvement in carried volume from the 1st quarter. 2nd quarter 2023 volumes increased in the Pacific, Cross-Suez and Latin America trades. Turning to slide 10, I review our cash flow bridge. We ended the 2nd quarter with a total liquidity position of $3.2 billion, which includes cash and cash equivalents, also investments in bank deposits and other investment instruments. I would remind you that during the 2nd quarter, we distributed to our shareholders a dividend of $6.4 per share, or a total of approximately $770 million on account of our 2022 results.

During the second quarter of 2023, our Adjusted EBITDA of $275 million converted into $347 million of cash flow generated from operating activities. Other cash flow items included $562 million of debt service, mostly related to lease liability repayments. To remind you, we have commitments of approximately $150 million and $340 million in 2023 and 2024, respectively. This is a down payment for newbuilding vessels chartered primarily from Seaspan. To date, in 2023, over the first six months, we have paid $52 million for the four 15,000 TEU ships that were delivered....

I would like to again reiterate that we expect our significant total cash position of $3.2 billion at last quarter's end, coupled with our strong balance sheet, to enable ZIM to weather an extended market downturn. Moving briefly to review market conditions. Alphaliner's supply-demand outlook for 2023 and 2024 remains unchanged, pointing to clear oversupply. Slow steaming remains the most meaningful, meaningful tool operators have consistently used in 2023 to absorb the oversupply created in the market, with the complete unwinding of port congestions and new vessel deliveries. More recently, we have seen increased blanking, especially on Transpacific, which may have supported the recent rate increase on this trade. Other possible actions operators could have taken, namely idling or scrapping, have had a negligible effect so far.

As the charter market remained relatively strong, the motivation to scrap all tonnage remains low. However, as chartered capacity comes up for renewal and IMO 2023 enforcement come into play, the motivation to scrap may increase in 2024 and beyond. Delayed deliveries of newbuild capacity have also been minimal and are not expected to meaningfully impact the growth in supply. On the demand side, consumer spending remained relatively healthy despite rising inflation and greater macroeconomic risk. Yet, high inventory levels built over 2021 and 2022, and continued concerns over economic growth, have caused importers to be cautious and limit any meaningful renewal of inventory.

Demand development is positive globally compared to the recent six months of downturn, but this booking seems to have been prolonged into 2024, and year to date, demand levels seem to track 2019. On that note, we will open the call to Q&A.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press Star, then the one on your telephone keypad. Your first question comes from the line of Omar Nokta from Jefferies. Your line is open.

Omar Nokta (Managing Director)

Thank you. Hi, good afternoon, Eli and Xavier. Just a couple of questions for me, just related to the market and the impact, obviously, on ZIM. You know, first off, we've seen the big jump here, or maybe a moderate jump in spot rates over the past six weeks or so, really on the Transpacific, as you highlighted. That is your key area of focus. How is that translating into revenue potential? You know, are you able to say whether you've been booking higher Transpacific spot revenues, currently versus what you earned on average during 2Q?

Xavier Destriau (CFO)

Look, hi, Omar. Thank you for the question. Clearly, the increase that we see in the spot rate on the Transpacific is a welcome development after having been through a period where the rates went down consistently, week after week, and reached a level below the 2019 average. It is very, very good to see that the rates are going up. Yet, at this stage, we want to remain cautious that we don't really know whether this will stick. As a result, we are remaining quite cautious for the forecast.

That being said, what is clear to us today is that the spot market now is more beneficial to the liners than the average rates that were contracted during the contract season. As far as we are concerned, we have in terms of cargo mix, a greater exposure to spot than we have to contract. 70% spot exposure to be compared to maybe 30% contract. For as long as the spot rate today continues to be more elevated compared to the average of the contract, yes, this is going to benefit to the company.

Omar Nokta (Managing Director)

Thanks for that. That, that, that's helpful color. Thanks, Xavier. Then maybe just as a follow-up, as you mentioned, 30% contract. Have you seen shippers coming, looking to lock in contracts after the, you know, the disagreement this past May? Is everybody still kind of focusing on spot?

Xavier Destriau (CFO)

Look, as, as far as we see, as far as we see it, today, you may remember that when we were discussing during the contract season with our customers, we had a, a, some sort of a, a floor, that we were not willing to go below in terms of agreeing to agreeing to rates. This is also why we ended up with a 30%, 70% type of, type of, type of mix. We, today, we in retrospect, we feel that we made the right, the right decision at the time. Again, I would remain extremely cautious, because we only have seen today only a few weeks of improvement in the trade.

We know that this trade has been struggling for a long period, so hopefully it will, it will stick, but time will tell.

Omar Nokta (Managing Director)

Okay. Yeah. Then, just final one, for me. You know, clearly, your volumes were up quite a bit, you know, significantly, sequentially, and notably above industry averages.... You know, Transpacific volumes were their highest for you since 2021. Can we expect a similar sort of-- Is this a new baseline, at least here in the near term, what you did in the 2Q, is that achievable again, you think, so far from what you're seeing, in the 3Q?

Xavier Destriau (CFO)

Look, the increase that we've experienced on the Transpacific, as you, as you mentioned, is driven by a couple of things. Clearly, the newbuilding, so the 15, the large capacity vessels that we take delivery of, those ones are being deployed on Asia to the US East Coast trade. They come and replace the 9,000, 10,000 TEU ships that are being cascaded to a line which is also serving the US East Coast. That's the service to Baltimore, which we have, or we are in the process of upsizing, as we currently speak, moving from a biweekly service to a weekly service.

Our operated capacity deployed on the Transpacific is increasing and will continue to increase up until we get the final delivery of the 10th 15,000 TEU ship that we have ordered with Seaspan. Yes, we think that the volume increase that we've experienced in the second quarter, at least from a capacity operated perspective, providing that the volume continue to be there, should allow us to maintain this type of volume, if not more.

Omar Nokta (Managing Director)

Very good. Thank you for that color, Xavier, and Eli. I'll turn it over.

Xavier Destriau (CFO)

Thank you.

Elana Holzman (Head of Investor Relations)

Thank you.

Operator (participant)

Your next question comes from the line of Samuel Bland from JP Morgan. Your line is open.

Samuel Bland (Equity Research)

Thanks. Thanks for the question. I think I've got two, please. Actually, both on contracts again. Is, in Q3, is there a sort of profit step down from contracted rates being rebased lower? Or I think you had said in previous calls that you had, you'd already sort of taken the pain on those earlier than the sort of traditional first of May step down. The second question is, I think you just said that your share of volume on contract on the Transpacific is now about 30%. Has that... That's come down quite a bit. Am I right in thinking it used to be a, a much higher number? I'll, I'll maybe leave it there, just seeing the... Thanks.

Xavier Destriau (CFO)

Yes, Sam, thank you for the, for the, for the question. To your first point, we clearly already, as from the fourth quarter of 2022, so already, I think as we mentioned, last quarter of first quarter of 2023, we were not able to keep the contract cargo that was secured at a very high and elevated rate back in March, April of 2022. For us, there is, when we look in Q3, early Q3, and even late... Sorry, early Q2 and even late Q1, there's been no tailwind from potential higher revenue generated by a contract cargo. That was already long gone for us.

We were already in Q1, operating predominantly on the spot market with very little, again, tailwind from a, from a contract. That is also very much the case in Q2, where we've been booking very much on the, on spot. What is happening in Q2, is that now we are shifting to the new contract season, in a way, which starts the 1st of May. The second part of Q2, and now going into Q3, this is where we now say that we are loading pretty much on a 70/30% mix between spot and contract. So the 30% contract where the one volume and the rates that we have discussed we, and agreed upon with our customers earlier on this year, around the around March, April timeframe.

You're right in saying that, 30/70 is lower than what the company used to, used to, secure or lock in terms of contractual commitment, because we were more towards 50/50 in the past, at least last year and the year before. The reason why we ended up this time around at 30/70, is because we were not willing to agree to rates that were below a certain threshold that we, that we did have, set for ourselves. That's the reason. Today, now that the, you know, for, for some time, the spot market was, you know, contributing less to the contract, this seems to be turning now as we speak.

We'll see. The future weeks and months will tell us whether we made the right decision at the time.

Samuel Bland (Equity Research)

We can infer that the 30% was at a rate that was at least in line with what you were willing to accept. I think you also said that at least today, the spot rates are above whatever rate was agreed on that 30% that's contracted. Is that right?

Xavier Destriau (CFO)

That is correct.

Samuel Bland (Equity Research)

Understood. Thank you.

Operator (participant)

Your next question comes from the line of Alexia Dogani from Barclays. Your line is open.

Omar Nokta (Managing Director)

Yes, thank you for taking my questions. I also had a couple. Just firstly, on the guidance range of an EBIT loss of $100 million-$500 million, can you help us understand the upper and lower end of the range?

Alexia Dogani (Director of European Transport Equity Research)

... the second half implications. That's my first question. Secondly, can you elaborate a little bit more on the kind of cost measures you allude in the statement in terms of kind of refocusing, yeah, cost performance and some capacity rationalization that you talk about? Thank you.

Xavier Destriau (CFO)

Thank you. Yes, the, you know, when we look at the guidance range, we need to be very careful in the sense that there is still a lot of uncertainty ahead. This is why it is difficult to be precise in our assessment for the quarters to come. What are our main underlying assumptions? First of all, from a volume perspective, we revisited a little bit downwards our volume expectations compared to prior prior assessment. Now we anticipate that on a full year basis, we will be slightly up, low single digit numbers in terms of carried quantities when compared to, when compared to last year.

We have a volume, you know, assumptions that if there was to be more demand and a stronger peak season than what we initially anticipate could, you know, drive the the the volume assumptions in one direction or the other. Today, we we look at the peak season and the way it is shaping out, and we we think that if there is going to be one, it's going to be a very soft peak season, to say the least. Volume is one is one driver. The second driver, obviously, and the most meaningful one, is clearly the freight rates environment.

We've talked about the recent improvement that we have experienced and that we are continuing to experience, at least as of today, on the Transpacific trade lane. That is obviously welcome, but how long that will that improvement will stick is also an unknown. Whether it's gonna go beyond October or not is an unknown. This is also a significant potential driver when you look at the full year outlook for the company. When we talk about the Transpacific that is improving, we should not lose sight of the fact that on some other trades that have so far been more resilient than the Transpacific, there is an intensified pressure.

To name one, the Atlantic trade lane that has been extremely resilient up until recently, is today under under more severe pressure, and we see the rates going down as opposed to the rates going up. There is also here a mixed consideration that may may impact where we are going to land the year on the full on full 12 months basis.

To your second question, in terms of, you know, the cost measures that the company is taking, they are obviously the ones that we already took a couple of years ago, and that will take time in order for them to find their way all the way through the bottom line, and this is really the reprofiling of the fleet that we operate, and those newbuilding that we ordered throughout 2021 and 2022, that are coming gradually between now and the end of 2024. So that's gonna take a few quarters for us to, you know, bring in those ships and, for those ships to replace the more expensive tonnage that we are currently today operating.

Now, in a more short-term horizon, we are obviously looking at always trying to optimize our fleet and to allocate our capacity the best way we can. We are looking at a few things, as we always have, by the way, which is looking at how we can potentially partner with some other shipping lines in order to optimize a fleet network or a structuring of a line, so that both partners can be better off by joining forces as opposed to as opposed to operating alone. We've been quite successful at doing that in the past, and we will continue to explore any opportunities of the sort.

Second, we are and we will look on a case-by-case basis, if there are ways for us maybe to redeliver some of the charter that we have secured back in 2021, 2022, a little bit ahead of schedule. We'll see, we'll see if this is something that can be done.

Lastly, but even maybe more importantly, we continue to look at trades that we believe may be underserved, where there might be opportunity for us to enter, just like we've done not so long ago, when we opened this new service between the Latin America West Coast to the North America East Coast, which has been so far proven to be quite the right decision for us to do. We will also look at, you know, entering into new trades as well.

Alexia Dogani (Director of European Transport Equity Research)

Thank you, Xavier. Can I just ask a clarification on the transit, not the... Sorry, on the Asia-US East Coast, that you're upgauging the fleet to the 15,000 TEU. Obviously, you alluded in the previous answer that obviously, volume growth will reflect the upscaling or upsizing of these vessels. Can you discuss a little bit about load factor or utilization factor? And really, do you need to incentivize the price to fill the ship at the same levels as the 9,000 TEU, or is it kind of... same load factor, and therefore you're getting really the benefit of the increased capacity per ships?

Xavier Destriau (CFO)

Look, today, when we sail, and because when we need to keep in mind is there's been an intensification of blanking, and we have also blanking some some voyages on those services, which we think have participated to allowing for the rates to to go up. When we sail, the utilization on the, the 15,000 TEU ships is, is extremely good. This, this, I think is the right strategy for us to to promote blanking and to sail at optimum capacity when when we do sail.

On the other service, which is, the one that is being upsized as a result of the cascading of the 10,000 TEU ships that are now being deployed on these other, other services, we continue to to also, you know, see the volume ramping up. There is, from a capacity deployment perspective, we think we have today, and we continue to hopefully have tomorrow, the right vessels for the right trade, once we have fully completed the upsizing and the cascading that we have engaged in recently.

Alexia Dogani (Director of European Transport Equity Research)

Thank you.

Operator (participant)

Your next question comes from the line of Sathish Sivakumar from Citi. Your line is open.

Sathish Sivakumar (Research Analyst)

Yeah, thank you, Xavier and Eli. I've got three questions here. First one is actually a very basic one. Just to clarify, the contract rates are excluding bunker costs, and the spot rates obviously is all in, right? The rate uplift that we've seen in the past couple of weeks, how much of it's actually related to spike in bunker costs or the fuel costs that we have seen? I just wanted to get some clarity on that. Then second question, actually, on your volume. Obviously, Transpacific, there's a strong momentum in volume quarter-on-quarter, actually. Obviously, there is seasonality to it, too. We have seen disruption like on the US West Coast.

How much of it's actually you had, like, customers calling you at the last minute, wanted to ship some of the volumes that were meant for West Coast into East Coast? Did you have any surcharges, last minute surcharges related to that? Then finally, actually on your cost, unit cost ex bunker, you obviously quarter-on-quarter, you've seen significant improvement. You, you went from $860 to $800 odd. As you continue to upgauge, do you see further scope for this unit cost ex bunker to drop as you go into Q3? Yeah, those are my three questions. Thank you.

Xavier Destriau (CFO)

Okay. The on your, your first question, you're, you're right. The contract is, there is a, the bunker escalator, escalator that is embedded into the contract that we've signed with our customers. That would go up or down with the fluctuation in bunker and the spot. Does not. The spot is indeed an all-in rate, give or take, even though sometimes we, for internal purposes, the, you know, divide the ocean freight from the bunker element. The, the recent changes that we've seen in bunker, yes, they may have had an effect on the on the spot market, but I would say to a, to a limited extent.

If you look at, on average, how much you are burning per TEU, that you carry, from Asia to the US, you're talking half a ton, give or take. When you have $50 change, that's potentially $25 per TEU in terms of incremental cost, that is obviously being or has to be deducted from the rate improvement at stable bunker assumptions. Your view is correct. Whether this recent fluctuation in bunker has, or will have a significant impact on the rate increase, I think, not so much.

Maybe looking at the second question, you're right that there's been a lot of uncertainties going on in, by the way, on the US West Coast, due to the discussions that were ongoing in the various terminals with the ILWU. Also on the East Coast, with the current issues with the Panama Canal. There's been some, sometimes some arbitrage between customers moving from one place to the other, or by the way, also including the US, the US Gulf Coast. As far as we're concerned, as you know, today, we are no longer operating any service between Asia to L.A.

We are now only focusing on Asia, US East Coast and US Gulf, and we have a service that where we load on MSC, on PNW. For us, really, the matters relate more to what's going on in Panama with the current draft restrictions, which act as a regulator in terms of capacity being deployed to the trades, but requires that we are very up to speed and up to date, and that prioritizing light cargo in order to be able to load the vessels the way we want.

Potentially leveraging our network in South America by unloading some of the cargo before the canal, and for that cargo to find its way on the service that we recently opened between South America and the US East Coast. That's, I think, would be what is today driving the the the markets on the Transpacific, as far as we are concerned. With respect to your third question, unit cost ex bunker. Yes, we've seen an improvement quarter-over-quarter. I think, the long-term trend should be that we will continue to see an improvement only because of again, the the the change of the profile of the fleet that we will end up operating.

As we take on the newbuilding, more efficient, and cheaper tonnage, cheaper per TEU in terms of operated capacity, those vessels come in, and we'll end up replacing a more expensive charter. That is something that will take some time, and it's not gonna be an overnight effect, but it's on the way. Every quarter that passes should allow us, if we look at the vessel cost, to, for, for that cost to go down. Another element of cost reduction that is quite visible is the fact that now with the ease in the congestions in the various terminals, we do incur far less storage, for example.

We also have less land transportation related related costs, also because of lesser volume booked door-to-door from a PNW service. We also see here a less cost per TEU that we carry. Finally, as well, in terms of balancing cost, you know, balancing cost is being defined for us as the cost of repositioning an empty when we have an imbalanced trade, and we are moving a full from Asia to the US, and we don't have as many full to export out of the US back to Asia. We had a line that was heavily imbalanced, almost 100% imbalanced, and that was the ZEX line, the express service that we closed into one between Asia to the US West Coast.

As a result, we have less balancing costs as we operate in the overall network of line, a more balanced network overall.

Sathish Sivakumar (Research Analyst)

Yeah. Thank you, Xavier. Thanks for that.

Operator (participant)

Your next question comes from the line of Lars Heindorff from Nordea. Your line is open.

Lars Heindorff (Senior Equity Analyst)

Yeah, good afternoon. Thank you for taking my questions. A couple of questions on my part. The first one is regarding capacity. I don't know if you can tell us what you development in your deployed capacity has been during the quarter, and also, with the new vessels coming in here and, and the upgrade of, of some of the trade lanes, what will be the likely development in your deployed capacity as we head into the fourth quarter and the second half of this year? That's the first one.

Xavier Destriau (CFO)

Yes. In terms of capacity, we have increased the overall capacity that we are operating today. As we have taken on board, in the quarter, I mean, today, up to date, we have now four of the 15,000 TEU ships that were delivered over the first six months of 2023. We also received, received the four 12,000 TEU newbuilding that were also delivered. That's eight for us, eight large capacity ships that were delivered. We have returned some smaller tonnage to to to tonnage providers over the course of the quarter.

Today, I think, if I'm not wrong, we operate a capacity, a combined capacity, of roughly, shy of 600,000 TEUs altogether, a little bit, a little bit less than that. As we progress throughout the year, we will have the delivery of another, another three, 15,000 TEU ships between now and the end of the year. We will also start taking delivery of our 7,000 LNG, also a fuel vessels. Three of them will be delivered between now and the end of the year. Adding a 6 new newbuild tonnage to our operating capacity. That will contribute as well to increase our overall operating tonnage between now and year end.

Lars Heindorff (Senior Equity Analyst)

Okay, thank you. On the contract side, have there been any change in the behavior of your customers when you engage in contract negotiations? The reason why I ask this is I would been hearing from many other carriers that they now have a, at least a larger share of contracts which are index-linked and not at least in the beginning of the period, contract period, where is the fixed rates. Any views on that?

Xavier Destriau (CFO)

As far as we are concerned, the, the majority of the contract that we have signed and secured and agreed upon with our customers are, are, are fixed. Leave aside, obviously, the Bunker Adjustment Factor that we referred to earlier on during this call, for us is the vast majority is a agreed upon ocean freight and with no index type of linkage. That doesn't mean that we would not be considering this going forward. If we look at the present time, when I'm talking about the 30% of the of the capacity or the, the volume that we are carrying, the contracts are mainly fixed, fixed rate.

Lars Heindorff (Senior Equity Analyst)

Okay. Then last one on, on the vessel speed. I mean, are you slowing down as many other carriers are in terms of average vessel speeds, adding more vessels to loops in order to keep the sailing schedule?

Xavier Destriau (CFO)

Yes, we have, we have done that. Slow steaming is something that has been the strategy of the company for already quite some time. As a result, we, indeed, in some of the trades, have added vessels in order to maintain a weekly schedule. That has happened at least on more than two occasions, where we have added a vessel to a given service. Without, at the end of the day, increasing our offering on the trades, but absorbing some of the capacity and allowing for slow steaming.

Which is also, for us, a way to make sure that, we meet, the, the, you know, the IMO 2023 regulation as well, when it comes to, calculating the, Carbon Intensity Indicator.

Eli Glickman (President and CEO)

Okay, thank you.

Xavier Destriau (CFO)

Thank you very much.

Operator (participant)

This concludes the Q&A session. I will now turn the call back over to Mr. Glickman for some final closing remarks.

Eli Glickman (President and CEO)

Thank you. While we are clearly in the midst of a challenging period for our industry, ZIM has continued to take proactive steps in response to these market realities. Beginning in early 2021, ZIM began securing through a series of charter agreement, a highly competitive fleet that is optimally suited for our commercial strategy. As we continue to take delivery of these new build vessels this year and next year, we'll improve our cost structure and build further commercial resilience. We are in transition time. We remain committed to minimize cost in this, in the near term, continuously review our network and services to rationalize our existing capacity. Additionally, our ample liquidity and solid balance sheet, including a total cash position of $3.2 billion at quarter end, will enable ZIM to operate from a position of strength and maintain a long-term view.

As we look to the future, we believe ZIM is well positioned to further implement our differentiated strategy to best serve our customer and generate sustainable value for shareholders. Thank you to all of you.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.