Hello. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the ZIM Integrated Shipping Services Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Elana Holzman, Head of Investor Relations. Elana, you may begin your conference.

Thank you, operator, and welcome to ZIM's third 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 of 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 that company filed with the Securities and Exchange Commission, including our 2022 Annual Report filed on Form 20-F in March 2023. We undertake no obligation to update these forward-looking statements. At this time, I would like to turn the call over to ZIM's CEO, Eli Glickman. Eli?

Thank you, Elana, and welcome, everyone, to today's call. Before we turn to our call today, I would like to address the ongoing war situation in Israel. During these trying times, our thoughts are with the children, parents, husband and wives and grandparents who lost their lives, their loved ones and their homes in the horrific and tragic events of October the 7th. We stand in support of families and communities who were affected by this terrorist attack, and we pray for the safe and immediate return of our people held hostage by Hamas in Gaza. Our priority is assisting our employees in Israel and ensuring their well-being while continuing to meet the needs of our customers, delivering the highest level customer care and maintaining strict operational standards to drive our business forward. Despite war-related challenges, ZIM operation and services everywhere, including to and from Israel, are continuing without interruptions. As a global company, our employees over 4,500 around the world serve more than 34,000 customers worldwide, shipping to over 200 ports in 19 countries, with only about 10% of our volumes imported or exported from Israel. Turning to our financial results, I will discuss ZIM's third quarter and our path forward. ZIM strategic transformation launched back in 2017, which involved every aspect of our company and the way we do business, delivered 2.5 years of historic financial results from mid-2020 through 2022, including net income of nearly $10 billion. This period of exceptional profitability has today led to a significant cash balance, which at quarter-end stood at over $3 billion. While market weakness has extended longer than we had originally anticipated, it is important to note that our strong liquidity will allow ZIM to weather this downturn. We believe ZIM is well positioned to emerge stronger than ever with…

Thank you, Eli, and again, welcome, everyone. On the Slide 5, we present key financial and operational results. As Eli mentioned, our third quarter financial performance reflected the ongoing weakness of the current market. Our third quarter average freight rate per TEU was $1,139. That is a 66% decline year-over-year. And during the first nine months of the year, our average freight rate of $1,235 was similarly 66% lower than the comparable period last year. Our carried volume of 867,000 TEUs is 3% higher versus last year's third quarter. This compared to market growth of approximately 5%. And looking sequentially, our carried volume also increased slightly. Revenues for the third quarter were again adversely impacted by the continued decline in freight rates. Q3 revenues were $1.3 billion. Our revenues for the first nine months of 2023 of $4 billion were 62% lower than in the first nine months of last year. Free cash flow in the third quarter totaled $328 million compared to $1.6 billion in the third quarter of 2022. Turning now to the balance sheet. Total debt increased by $401 million since prior year-end, mainly due to the net effect of the incoming vessels with longer-term charter durations. As previously mentioned, we also recorded a non-cash impairment of $2.1 billion this quarter, mainly driven by our negative outlook for container shipping in the near term, namely the deterioration in freight rates observed in recent weeks, with little expectations for meaningful recovery into 2024. In addition, we also needed to consider the increase in interest rates, which in turn increased our average cost of capital. As a result, the expected discounted cash flow the company may generate going forward are lower than previously projected, resulting in the recognition of this impairment charge. This non-cash impairment has been allocated to…

[Operator Instructions] Your first question comes from the line of Omar Nokta from Jefferies. Please go ahead.

Hi, thank you. Good afternoon, Eli and Xavier and Elana. Thanks for the update. Got some good detail here. Just wanted to ask, perhaps I had a couple of questions, but you've got the $3 billion of cash on the balance sheet. You've got the liquidity there. Just regarding the $2 billion write-down, obviously, it's non-cash. And Xavier, you just mentioned how on an ongoing basis depreciation is going to come down. But just in general, how should we think about what this now means for actual running costs on a cash basis?

Look, on that -- as far as the cost is concerned, on a cash basis, like you said, rightly, the impairment has no effect. So, in terms of lease liability, repayment profile that is being unaffected by the impairment that we are booking now in the third quarter. What will be affected is indeed our depreciation and amortization. So, our P&L and our EBIT will go up as a result of us incurring less depreciation on a quarterly basis. And to quantify that, in the quarter in Q4, and this is also what we reflected in our guidance, now, if you look the difference between EBIT and EBITDA, the impact for the quarter is going to be in excess of $150 million.

Okay, thank you. And then, I guess, just in general, as I think about or we look on the balance sheets and we see kind of a bit of a mismatch between the book value of the ships and then the remaining lease liability, I guess, how should we think about that in the long term or medium term? Perhaps you mentioned the five ships rolling off charter here before year-end and another 34 next year. That's 39. I guess -- can we think perhaps, that -- is ZIM maybe telegraphing an approach to shipowners for an amendment or early termination of the charters for beyond just these 39 ships, but the additional perhaps maybe 70, 80 that are -- that remain on charter beyond next year? Is that what this means, this write down?

Look, I think we need to disconnect a little bit what we did for the purpose of the impairment test that we needed to run at the end of the quarter from a -- at the end of the day, the overall impact vis-a-vis our commitment with the vessel owner. We are committed to honoring our charter commitment vis-a-vis the owner, and we are, and we are not hiding from that, looking at potentially redelivering early some of the vessels for which we have potentially not an employment going forward. So that is still happening and is to be looked at in a decorrelation from the impairment that we booked today. What I would say, is critical to us, is, as I think Eli mentioned, we are clearly today in a transition phase. When it comes to the profiling of the fleet that we will end up operating once we have taken delivery of all this new cost-efficient tonnage, fuel-efficient tonnage that we've ordered back in 2020, 2021, these vessels are going to come and are going to replace the existing charter. So, the message, if there was one, is that it is very likely from ZIM perspective that we will redeliver all the vessels as they come up for renewal in terms of their charter period to make room for the brand new ships more efficient that we've ordered between now and the end of next year. So, yes, we have five vessels up for redelivery between now and the end of the year. We have another 34 vessels that we cover for redelivery between 1st of January '24 to the end of December 2024. And it is very likely that the vast majority of this capacity would be redelivered.

Got it. Thanks, Xavier. And then maybe just one final one, just kind of on the revised guidance. It makes sense. Clearly, I wouldn't necessarily say there's a surprise there, but just in general, as we think about the fourth quarter relative to the third quarter, it looks like the updated range is for 4Q to be similar to 3Q. I guess, just in general, I guess from, say, an EBITDA perspective, if we just think about on the margin as we look here into the next quarter, marginally, do you think 4Q is going to be better than 3Q or kind of your -- on the margin, is it going to be worse? Anything you're willing to share on that front?

Look really our outlook for the remainder of the year, and also I think as we try to convey today is going into 2024, is that maybe very little will change in the sense that the freight rates today are at very low level and very challenging for the industry. We don't see many catalysts for that to change in the immediate future. There is clearly the looming threat of overcapacity that is still ahead of us. We've seen that very little retirement of old tonnage. Scrapping is very limited. Even idling is very limited. So, the excess supply seems to be here to stay for a while, therefore reducing the optimism for the rates to meaningfully recover. So that's the perception that we have up until things hopefully will turn out better after maybe 2024 has elapsed. The future years may see the recovery in our industry, but clearly for us today we're taking a very cautious view of the coming quarter -- and should I say the coming quarters, including the full year of 2024. We will obviously guide in more detail our view for 2024 in a few calls from now. It's a little bit early for us to guide the market. But by and large, we expect that the industry will be under severe pressure and challenged for the foreseeable future.

Understood. Thanks, Xavier. That's it for me. I'll turn it over.

Your next question comes from the line of Sam Bland from JPMorgan. Please go ahead.

Thanks for taking the question. I have two, please. The first one is sort of the same point on the sort of timing of the charter renewals. I guess, we've done 25 more this year, 34 next. It's similar to the last question. Does that sort of mean that there's, I don't know, 50, 60 or something in 2025? Are those also at sort of high COVID-era prices? And is there anything you can do to maybe bring them forward? Obviously, you got to do that with agreement from the tonnage provider. And the second question is, if you look at the -- where rates are today, you said, they're obviously low, but the newbuilds are quite cost competitive. How would you sort of characterize whether sort of current spot rates are profitable or not for the newbuild ships with their cost base? Thank you.

Thank you, Sam. So, to your first question, in terms of -- you're right in saying that we have 34 vessels that come up for renewal in 2024. We have close to 40, not 50, but close to 40 that will come up for renewal in 2025 as well. So -- and those could be characterized potentially as well as higher chartered capacity in terms of daily rate. So that will continue to unwind in the year subsequent to 2024. But we will already have redelivered in combination 59 vessels by the end of 2024. When you asked the second question in terms of do the rate today would cover the cost of the new capacity that we are bringing in, that's a difficult question to answer because it is also very much a function of our ability to fill the ships, obviously. So, if we are in a situation where the ship do sail because the capacity -- the filling factor is satisfactory, then we are in a better -- in a much better position with the new capacity. To give an indication, I think I already used this illustration on a couple of occasions, but the 15,000 TEU LNG ships that we are now gradually deploying on our Asia to the U.S. East Coast trade lane, around -- it will cost the same to operate the 10,000 TEU ship that they come and replace. So we get a 50% additional intake at the same -- more or less the same cost of a given voyage. So that illustrates the magnitude of the benefit that we expect to get from those vessels that come in in terms of charter at competitive price. But on top of it, we expect to get additional savings by running them on LNG, which today is a source of fuel, which is more cost-effective than even a heavy fuel.

Okay, understood. Thank you.

Your next question comes from the line of Alexia Dogani from Barclays. Please go ahead.

Yeah, thank you for taking my questions. I had three as well. Just firstly, obviously, I appreciate the $3 billion liquidity you currently have on your balance sheet. What do you think is the minimum liquidity you are able -- or want to operate the company at? That would be helpful. Secondly, can you remind us the down payments for the new vessels in '23 and '24 as part of these long-term agreements? I think you mentioned the number in Q1. It would be great if we can just double-check that. And then, finally, in terms of the depreciation run rate in Q4, I mean, if I annualize the number, I think it's around $1 billion now. Should we still assume, though, the kind of rough annual charter costs, in terms of cash to be around $1.4 billion? Thanks.

Thank you for the question. So the -- your first question, which is in relation to what is the minimum cash that we would want to be keeping, it's difficult to answer that question today, because clearly we are and the industry is in a transition phase, is not -- has not stabilized yet. And clearly, on some of the trades, the rates are unsustainable for the longer term. So, we wish to be very cautious here, and I don't think we have a right amount for us to provide at this stage. We want to make sure that we navigate the current turmoil in our industry with a strong balance sheet. And I think this is the case today with the $3 billion that we have sitting on our balance sheet. But with clouds on the horizon, we need to be very mindful of our liquidity position. With respect to the down payment that we intend to make per delivery of the vessels, we will be making $350 million worth of down payments in 2024 when we take the deliveries of 15 7,000 TEU ship for which we agreed to pay $20 million per ship upfront, and the remainder of the 15,000 TEU ships for which we are committed to paying [$13 million] (ph). So precisely, it's $300 million plus $39 million, $339 million of upfront payments that we will be making in 2024, after having been -- having made, sorry, in 2023 close to $140 million. Depreciation going forward is going to be impacted by the impairment, as I mentioned earlier on. So, the situation or the model that you had pre-impairment, I did guide that the fourth quarter, the effect of the impairment would be a little bit in excess of $150 million. So, you should assume that for the full year of next year, it will be slightly above $600 million in terms of overall impact versus the prior model, without impairment being registered in the third quarter. And in terms of cash payment or lease liability repayment, there should be no difference between the situation before impairment or after impairment, as [Technical Difficulty] on balance sheet is today unchanged as a result of the impairment, that only reduced our fixed asset base.

Understood. Thank you.

Your next question comes from the line of Patrick Creuset from Goldman Sachs. Please go ahead.

Hey, Eli and Xavier. It looks like you managed to limit the cash burn somewhat in the third quarter. And as we just start with the lease payments, looks like they're down $100 million quarter-on-quarter. Just trying to understand what's driving that. I mean, how much of that is coming from the redelivery of about 20 vessels? How much of it is maybe down to sort of one-off timing effects and perhaps also some costs flowing back above EBITDA? I remember with the extension of the duration of some of these charters has been just transferred from above EBITDA to below EBITDA in some of these payments. And then related to that, net-net between redeliveries and new vessels next year, what do you think is the right quarterly run rate on these charter payments, I mean, from this sort of $350 million level in the third quarter?

Thank you, Patrick. So, you're right that there's been some of a timing effect in the third quarter that I will explain. Nothing has changed in terms of the reallocation of cost between above EBITDA or below, no. All of our vessel costs today, or 99% of our vessel costs today, still are being registered in -- again, [indiscernible] effect of the impairment in depreciation and amortization. From a cash perspective, if we look at the third quarter, what happened in our lease liability timing repayment, what are our lease liabilities is mainly the charter that we pay back to the vessel owner. The payments are made every two weeks, that's the way it works in the chartering market, the first of the month and the 15th of the month. And if the first of the month is or isn't a banking day, then the payments are being pushed or delayed. So, we had one payment run less in Q3 compared to Q2. So, we had five out of six that contributed to $100 million less payments versus the prior quarter. So that's just one timing effect. We also had a positive impact in our third quarter of working capital improvement, mainly driven by less receivable on the balance sheet. That also contributed to increasing our cash flow from operation. This is going to be most probably a one-off, hopefully, because this is the result of the lower freight rates that we are able to [indiscernible] to our customer.

Okay. I mean, you've preempted my follow-up question there on the working capital. So sounds like you don't see more opportunities to optimize working capital. Do you think that's the [indiscernible] at the nine months?

I think we've made some very good progress here. I mean, leave aside the fact that the value of the receivables are less, which is something that we are not too happy about. But in terms of collection efforts and past due, we are at a very low level. So our DSO is quite good. So we are pleased on that front. So this is why I'm saying that we should not expect unless there is a continued deterioration in the freight rate environment of a significant working capital improvement. On the AP side, we are maintaining pretty much the payment terms that we have agreed with our supplier base.

Got it. And then, last one. Can you just give a quick update on how you see the Panama Canal situation evolving and how you are adapting your operations to it? I mean, I guess you run probably slightly lower utilization, maybe get slightly higher rates. But any color on how you're rerouting and then adapting be interesting. Thank you.

It is true that the Panama Canal is a worrisome situation and evolving day after day with the draft limitation that is being imposed on the industry. So, we do operate a few, a number of services that go through the Panama Canal, namely our Asia-U.S. East Cost Service, ZCP, and also our new service to Baltimore, ZXB service. So, we are trying to optimize the utilization of the ship given the draft limitation, and the draft limitation imposed mainly on the weight of the cargo that we're carrying. And we're also taking actions to utilize our feedering service in Latin America to discharge some cargo before the Panama Canal and so that the vessel can run full across the Pacific before it has to cross the canal. Obviously, we are monitoring the situation day after day and we will evaluate if there are decisions that need to be made in terms of potential rerouting or this type of alternative. Also, I think -- maybe this is linked. This is maybe driving one of the reasons -- this is one of the reason why we are now reopening the services between South China and LA, which we suspended a few months back. And, as we also see some of the cargo being redirected now back from the East Coast to the West Coast, and we see an opportunity here for us to resume service, the ZEX line, that was -- that had been quite successful for the company in the past.

Clear. Thanks very much.

Your next question comes from the line of Alexia Dogani from Barclays. Please go ahead.

Thank you for taking the follow-up question. I just had a question on the size of your fleet for next year. Obviously, the size has gone down to 145 vessels. How should we think about the size of the company in 2024? And then, given your more fuel efficient vessels entering the fleet, how quickly do you think you can regain unit costs at par with 2019 levels? Thanks.

With regards to the fleet size, if we look at -- or if we anticipate the vessel count, it might not be that very different from what we currently operate today. But you're right we will operate larger ship on average as the ships that are coming in are replacing smaller vessel. So today, give or take, we operate an equivalent capacity of 600,000 TEUs for the 129 container vessels that we operate. And this should go near or closer to the 700,000 TEU mark by the end of 2024 when we have taken delivery of all of our fleet. So, this is clearly something that is important for us when we look into 2024 and the volume that we also need to capture in terms of filling those vessels. In terms of the fuel efficiency, transitioning clearly towards energy for the 28 vessels that we -- are coming our way today and up until the end of next year, this is allowing us to get significant savings. We also get savings from the chartering cost. When will we get back or if we will get back to 2019 is a difficult determination to make. There are a lot of moving parameters as you know. So, we will provide again more guidance in 2024 when we address you and the market early next year. Today, clearly, whatever the market is doing, we are focusing on extracting costs in our organization. So, these cost actions obviously relate to taking those new more efficient vessels. It also relates to us redeploying our capacity the best way we think is the case. I mentioned the ZEX line, the new service that we reopened, the two new lines that we've also announced in opening -- addressing Latin America trade lanes. Us partnering with MSC not so long ago on the -- some of the key trades where we -- by partnering with them, did manage to lower our cost of operation. So, maximizing and optimizing our network is clearly number one priority for the company. And then, next year, we will need to capture additional volume. And we intend to do that with a stable workforce as well, therefore generating productivity savings as well in this respect.

Thank you.

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

Thank you. 2023 and 2024 are transition periods for ZIM. While these are challenging times, we expect the deliberate steps we have taken to enhance our operation on a commercial resilience to deliver positive outcomes. Our fleet renewal program will improve our cost structure and drive long-term profitable growth. In the immediate trend, we are pursuing cost control initiatives and commercial opportunities that will best position us to weather this downturn. Strong total cash position of $3.1 billion will maintain a long-term view and believe ZIM is well positioned to emerge stronger than ever, highlighted by a few -- a new core cost and fuel efficiency that provide us a competitive advantage in key trades. We remain committed to leveraging technology and digitalization to promote operational and commercial excellence, while further implementing our differentiated strategy to best serve our customers and generate sustainable value for shareholders. Thank you all for joining us today and your interest in ZIM. Hope everyone stays safe. Thank you.

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