ZIM Integrated Shipping Services Ltd.’s (ZIM) CEO Eli Glickman on Q2 2022 Results – Earnings Call Transcript

ZIM Integrated Shipping Services Ltd. (NYSE:ZIM) Q2 2022 Earnings Conference Call August 17, 2022 8:00 AM ET

Company Participants

Elana Holzman – Head, Investor Relations

Eli Glickman – President and CEO

Xavier Destriau – Chief Financial Officer

Conference Call Participants

Sathish Sivakumar – Citigroup

Omar Nokta – Jefferies

Sam Bland – JPMorgan

Alexia Dodani – Barclays

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. I am Frenzy, your chorus call operator. Welcome and thank you for joining the ZIM Integrated Shipping Services Q2 2022 Earnings Conference Call. Throughout today’s recorded presentation all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

It’s my pleasure and I would now like to turn the conference over to Ms. Elana Holzman, Head of Investor Relations. Please go ahead, ma’am.

Elana Holzman

Thank you, Frenzy. And welcome to ZIM’s second quarter 2022 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 files with the Securities and Exchange Commission, including our 2021 annual report filed on Form 20-F on March 9, 1922, sorry, 2022. 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?

Eli Glickman

Thank you, Elana, and welcome everyone to today’s call. I am very proud of our execution and continued strong financial performance during the second quarter and first half of 2022 as you can see on slide number three.

Over the past several quarters ZIM established itself as a leader in terms of EBITDA and EBIT margin in container shipping. Our first half results are record results for ZIM and we are pleased to continue delivering strong EBITDA and EBIT margins. Based on our solid performance in the first half, we are reaffirming our full year guidance for 2022 and are on track to deliver another year of record earnings and profitability.

We are also announcing today the increase in our quarterly dividend payout from 20% to 30% of quarterly net income. This quarterly increase is based on our confidence in our ability to deliver long-term and consistent profitability, while enabling our shareholders to benefit sooner from these strong results on a quarterly basis.

As you can see, slide number two, in the first half of 2022 revenue grew by 73% compared to the same period in 2021, adjusted EBITDA grew 115% and net income grew 106%, as we further capitalize on elevated freight rates and resilient demand. We remain committed to profitable growth.

In the first half of 2022, adjusted EBITDA margin improved from 52% to 65% and adjusted EBIT margin improved from 45% to 56%. Our balance sheet continues to be very strong with total equity of $5.25 billion at the end of the quarter, after the distribution of $2.4 billion in dividends during the first half of 2022.

This slide number four, you can see that the return of capital to shareholders has been and remains a top priority for us. Given our confidence in our long-term profitability and goal to reward long-term shareholders, we are increasing our quarterly dividend payout from 20% of quarterly net income to 30% of quarterly net income, with the total dividend payout of 30% to 50% annual net income.

As such, starting this quarter, we intend to distribute approximately 30% of quarterly net income for each of the first three quarters of the year, with possible step up up to 50% of our annual net income with the release of the Q4 and full year results subject to Board approval.

Accordingly, our Board declared a Q2 dividend of $4.7 — 75 — $4.75 per share or a total of approximately $571 million. The Q2 dividend includes the 10% one-time catch-up from Q1 net income.

In slide number four, you can see that the past several weeks have demonstrated the dynamic nature of our industry and the importance of staying focused on our growth strategy in key strength, innovation, agility and excellence were the foundation of ZIM’s successful turnaround, and they will continue to guide our commercial and operational strategy to further position ZIM as the top performer in our industry.

We have established a track record successfully identifying attractive growth opportunities and adjusting our fleet size based on changing market conditions. This is a direct result of our operational and commercial agility, which has enabled ZIM to optimize vessel deployment, support high utilization level of vessels and explore specific trade advantages, driving our strong results and strong profitability. We expect this approach to continue to be beneficial as the market expected to normalize from peak levels.

Our global new strategy dictates that we operate in trade names where we have a competitive advantage and can command meaningful market share. In Q2, we extended our operating fleet capacity. We now operate 149 vessels to meet customer demand. We opened new lines and adjust our service to those changes in the business environment, so vessel continues to sell full..

I remind you that we have extended fleet over the past few quarters, partly in anticipation of the changing our collaboration agreement with the 2M. We transitioned to a full slot swap agreement on the Asia to U.S. East Coast and Gulf Coast and terminated the slot purchase agreement we had on the PNW and Asia to Med trades. As a result of these changes, which went into effect in April 2022, we increased our operating capacity in order to best serve our customers.

I would also like to highlight our car carrier business, as an example of ZIM ability to identify profitable commercial opportunities. Since the beginning of the year, we grew the number of car carriers we operate to 10 as we take important steps to further capture growth in car cargo being exported out of Asia.

On the operational side, we remain committed to our strategy of relying primarily on chartered capacity, while maintaining a high level of flexibility. This flexibility allows us to adapt our fleet size to changing market environment. Yet we adopted some chartering strategy to reduce our exposure to the spot charter market due to shortage in capacity and rising daily rates, instead we hope to charter newbuild vessels for our cooperative capacity to improve our cost structure in the mid- and long-term.

As you know, during 2023 and 2024, we expect the delivery of 46 newbuild vessels, of which 28 are LNG-powered vessels. This newbuild capacity strengthens commercial proposition and improve our cost structure by securing fuel-efficient newbuild capacity. The LNG vessels also serve our own ESG goals.

We estimate that approximately a third of our capacity could be LNG-powered when we take delivery of these LNG vessels and we will be the first one to operate an LNG fleet on the Asia to the U.S. East Coast trades.

We are excited that ZIM will be more carbon and cost-efficient than it is today, while improving our competitive position and supporting our customers in meeting their on ESG uplifting. We are pleased to continue to position ZIM at the forefront of carbon intensity reduction among global liners.

In slide six, we can see that as part of our strategy we continue to leverage the Israeli high-tech startup ecosystem to identify attractive new innovative companies as growth engines. Our focus in digital initiative and technologies relevant to our coal of shipping activities in the broader the logistics sector. Our objective is to identify this opportunity at an early stage, which require modest investment to establish our position and serve as a strategic partner in implementing the technologies internally and assist this companies in their growth.

We have been very active on this front and have recently completed four investments. We did two follow-on investments in WAVE BL and Sodyo, and first time investment in Data Science Group and Hoopo Systems.

Highlighting our most recent investment in Hoopo, they are a provider of cutting-edge tracking solution for unpowered assets. The solution is extremely durable, cost-efficient and power-efficient creating a tracking device that can last up to 10 years without changing the power source. Our investment in Hoopo would be used in part to develop a solutions suitable for the containers. While all these companies are young, we believe they have significant potential in the future.

Before turning the call over to Xavier, our CFO, I would like to briefly address the current market environment and outlook moving forward. As I mentioned, the shipping industry is dynamic. Over the past several weeks, we have seen a decline in freight rates, particularly in the transpacific, despite persistent port congestion and overall positive demand trends, driven by macroeconomic and geopolitical uncertainty.

We therefore recognize the trades may help this. However, we know that current freight rate, which are of historic high remain elevated, and therefore, very profitably. While we anticipate some decline rates for the remainder of the year, we expect the normalization to be gradual and support ZIM reassume 2022 guidance, which as I mentioned, will enable us to post another year of record earnings. Furthermore, we expect the new 2023 more regulation and the agenda to the Carbonite shipping to partially offset growth in supply and support freight in the mid- to long-term.

I will now turn the call over to Xavier for his remarks on our financial results and additional comments on the market, please.

Xavier Destriau

Thank you, Eli. And again, welcome everyone. On slide seven, we present key financial and operational highlights. Our second quarter, records first half 2022 financial performance reflects the historically high freight rates, which were significantly higher this quarter compared to the full year, the prior year period, resilience in our demand as well and the value of our differentiated approach.

Specifically, our average freight rate to TEU of $3,590 in the second quarter was 64% higher compared to the second quarter of 2021. During the first six months of the year, our average freight rate was 72% higher than in the first half of 2021. Our commercial strategy and our competitive positioning able us to identify better freight cargo and more to TEU than on TX [ph].

Our current quantities in Q2 were down 7% compared to the same period last year. Lower volume this quarter resulted primarily from continued congestion exacerbated by more congestion in the U.S. East Coast ports, which we call on our transpacific trade.

Over the six-month period, our carried volume was down 1%, compared to the 2% decline in market volumes in the first half of 2022. When we look at the full year we still expect to grow our volume by 2% to 3% based on higher operating capacity and assume easy import congestion going forward.

Our free cash flow in the second quarter totaled $1.6 billion, compared to $861 million in the comparable second quarter of 2021, an increase of 93%.

Turning now to our balance sheet, total debt increased by $1.2 billion since prior to year-end. The increase is — in debt is driven mainly by the increased number of vessel fixtures, long-term charter duration, as well as higher daily charter rates.

In the first half of 2022, our cash position remained essentially flat, even after having paid approximately $2.4 million in dividends. Maintaining flexibility in our fleet management strategy, so we can match our capacity with customer demand remained a core focus for us.

The average remaining duration of our current chartered capacity is 27.7 months, slightly down from the 28.6 months in May 2022 and breaching our current operating capacity to the scheduled delivery of our chartered newbuild vessels. Also, only nine of our chartered vessels are scheduled for renewal between now and the end of 2022.

When we looked in 20 — into 2023 and 2024, 28 and 34 vessels are up for renewing, respectively. The other words, we have a total of 62 vessels up for renewal compared to the expected delivery of 46 charted newbuild vessels during this time period.

Next, moving on to slide eight, we can see that our earnings continue to grow, our net leverage has trended downward and is at 0.1 time as of June 30th this year.

Moving on to next slide, slide nine, our differentiated and proactively approach continues to generate strong results. Revenue for the second quarter was $3.4 billion, up 44%, compared to $2.4 billion in Q2 2021. Most importantly, we grew profitably in Q2, net profit of $1.3 billion, representing a 50% year-over-year increase.

Adjusted EBITDA was $2.1 billion for the quarter, improvement of 57%. Consistent with our focus on profitable growth, margins were 61% to adjusted EBITDA at 61% for adjusted EBIT, but if we compare to 66% and 49%, respectively, in Q2 last year.

Our six months 2022 adjusted EBITDA margin was 65% and adjusted EBIT margin was 66%. This bulk margins are amongst the highest in the liner industry and do reflect our outperformance during the first half of 2022.

Margin contraction in Q2 versus Q1, what we meant by higher freight cost is mostly from the transition of the slot swap agreement we had with 2M, which was terminated on April the 1st to our own operating capacity and also to higher LSFO [ph] bulk carrying rates, as well as lower unrestricted in Q2 versus Q1.

Moving on to slide 10, we carried 856,000 TEUs in the second quarter, compared to 921,000 TEUs during the same period last year. Lower volume on the transpacific caused by certain congestion on the East Coast, while partially offset by growth in Intra-Asia volume. Another trade we see has been key focus. The growth Intra-Asia was driven primarily by the new e-commerce we opened from China to Australia and New Zealand in the second half of 2021.

Moving to slide 11, regarding our cash flow, we ended Q2 2022 with a total cash position of $3.9 billion, which includes cash and cash equivalent and also investments in bank deposits and other investments that we assume. During the first half of 2022, our just EBITDA of $4.6 billion converted into $3.4 billion cash flow from operations.

Other cash flow items in the P&L included $248 million of net CapEx and $627 million of debt service. I will also remind you that during the second quarter we distributed dividends totaling approximately 2.4%.

Moving to our guidance, we are reaffirming our full year guidance and are on track to deliver another year of record earnings. We expect to generate adjusted EBITDA between $7.8 billion and $8.2 billion and adjusted EBIT between $6.3 billion and $6.7 billion the funds e year.

Our assumptions with respect to our guidance remain largely unchanged, except for lowering our expectations on volume growth from 5% to now 2% to 3% for the full year. Our guidance also includes the assumption that spot rate has been and that the gradual normalization in rate will continue through the second half of the year. In other word, on average spot rate in Q3 are expected to be lower compared to the average of Q2 and the same for Q4 versus Q3.

Turning to our view of the business environment, slide 13. The combination of very strong demand, tight supply and port congestion were the main underlying drivers of freight rates, which we expect to that have level in 2021 and early 2022. We have very few these liners.

First, port congestion and supply chain bottlenecks remain a significant challenge, especially in the United States and vessels avoiding in heavily congested West Coast port diverted cargos East Coast and Gulf Coast ports which is outside [inaudible] Group. While there have been some corrections in port operation evidenced by the improvement of major such as Flexport Ocean Standard Indicator, 90 days [inaudible] specificity, it is clear double the 45 days to go there.

There is today still little execution the port congestion will materially improve in the near future, despite this correction at the port, though, we continue to the estimate that 7% of effective capacity will be sized down in 2023 due to port congestion.

Also given the port congestion to a certain degree, outcome of landside bottlenecks, in other words, the efficiency in moving containers in and out of the port, some level to port congestion may become less in fixture in our industry. This would result in the reduction of the effective capacity on the water.

In the United States and elsewhere, there are signs that certain headwinds such an increase inflation and higher energy prices had resulted in softening of demand. Yet, overall demand trend globally and possibly in the United States remained healthy. 2022 was little higher than pre-pandemic, i.e., 2019 levels. In fact, for the first six months of 2022 volume was up 5.4% when compared with the same period in 2019.

Going forward, the current inventory to sales ratio also supports this year. While it is up from lows of approximately 1.1 — 1.2 retail inventory to sales ratio is still below historical peak levels of around 1.5. In light of persistent congestion and landslide bottlenecks, we believe that the sailors cannot and will not maintain lower inventory to sales ratio as compared to pre-COVID.

Moving to slide 15, capacity in 2023 outlook for the supply/demand balance will also change, with additional supply is expected to be delivered and supply growth is anticipated to outpace growth in demand after a long period outside supply. Yet, we believe that both short- and long-term net effective supply growth may be smaller than is implied by the current order book.

In 2023 port congestion will partially offset, yet 59% in supply growth, as well as possible slow steaming resulting from IMOs 2023 regulation are expected to go into effect in January 2023. The growth and supply will also bring about scrapping which was essentially zero in the past couple of years. Longer term, we have indicated that an increase in order book is at least partially a response to anticipated pressure to decarbonize shipping and reduce aging fleet. As such, the motivation to scrap older less efficient vessels in the Europe resulted in lower growth in actual capacity that is currently implied by the order book.

To summarize, these factors support our positive outlook on our business environment. Now if you look that the recent consolidation in the industry and we are operationalizing that also further support improved efficiencies in our industry.

With that, I will turn the call back for Eli for his concluding remarks.

Eli Glickman

Thank you, Xavier. Thank you. I am incredibly proud of our team and ZIM ability to execute at the highest level and deliver on our commitment to profitable growth reflected in our second quarter and first half of 2022 performance.

We generated our best ever first half year results and are expect to deliver another record year based on the guidance which we reaffirm today. We believe these core strategies and key strengths will continue to service us well as freight rates are expected to continue to gradually normalize from peak levels.

We have taken proactive steps to improve ZIM’s commercial proposition and competitive position both commercially and operationally. We anticipate the changing nature of the charter market and adapted our fleet strategy to secure growth fleet and reduce our dependence on the spot charter market, we entered into multiple mid- and long-term chartering agreements to secure growth and fuel-efficient newbuild capacity.

To remind you, our first chartering agreement for 10 15,000 TEU vessels, which will be larger vessel in our fleet was signed over 18 months ago. Going forward, we remain highly confident that our global new strategy and cost structure strengthened our commercial positive and investment in innovation and disruptive technologies position ZIM to be a top performer in our industry and deliver long-term shareholder value.

Elana Holzman

Frenzy, we will take questions now. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Sathish Sivakumar from Citigroup. Please go ahead.

Sathish Sivakumar

And thank you, again, to Eli, Xavier, and Elana. I got three questions here. So, firstly, on the dividend payout ratio, right? The change in from 20% to 30%, what is actually like you got this quarterly dividend payout should change given that going into H2 and then the next year, there is uncertainty around demand and also the rate — the rates starts to normalize. So could you actually explain your thought process, why you decided to increase your trade share? And then, secondly, on the vessel utilization on the ships, can you give a context like about the vessel utilization thought today and this is what it used to be at start of the year, especially out of Asia to transpacific? And then the third one is around the spot premiums surcharges, obviously, last year there was a big cushion of or at least there was a significant increase in volumes that on spot premiums surcharges, have you actually add any spot premium volumes in Q2, and out of that, do you think, outlook, actually going into Q3 in terms of that part of the premium market? Those are my three questions. Thank you.

Eli Glickman

Thank you, Sathish. If I may I will address your questions. The first one with respect to the dividend, the quarterly payout increased from 20% to 30%. You may remember that we from the outset say that, we intended to return significant capital to shareholders and that we have on — already a couple of occasions tweak or change or abated our dividend policy.

We started between zero to 50% dividend payout once a year, then we acknowledge that is what be too big and we wanted to clarify also so for investor our view on our market and our ability to continue to distribute dividends. So we switched from a yearly to a quarterly and we took the conservative view initially to only distribute 20%, even though — on a quarterly basis, even though we recommitted our intention to distribute between 30% to 50% of our full-year net earning.

So that’s meant at the end of the day that we would always end up or very likely always end up with a significant higher dividend payment once a year when we release our full-year financials, if it is just only because we would catch up from 20% to 30%.

As we feel confidence in our ability to continue to generate quarter-after-quarter ongoing profit then we feel there is no real reason to hold back for the first three quarters then to catch up to get to at least a 30% once a year, hence why we have made that change today.

Second, we are looking at or taking your second question in terms of vessel utilization, up until today, most of our vessels, if not all our vessels when we are focusing on the transpacific trade name are selling full.

We did mention that, but despite the fact that this does not necessarily or have not necessarily translated in terms of volume with the overall volume in terms of TEU that we initially expected due to congestion. But this is the congestion effect that the schedule is taking than participants, not a utilization effect.

So our vessels have been selling full up until today and for the remainder of the year we are also assuming that the utilization will continue to be extremely strong, and this is why, we think that we will be able to catch up on our volume assumption on a full year basis, because utilization will remain strong and we also assume some sort of easing in the current year congestion of the bottlenecks at the terminal as we see yet — we seeing yet.

And third you were asking, I think, about our ability to add surcharges to our income, which has been a significant feature towards the end of 2021 and also to some extent during the first quarter of 2022. So this has fairly clearly over the quarter and we are not assuming that we will generate significant additional surcharge going forward.

We take the view when we talked about our guidance for 2022, on average that’s the rate normalization will continue, albeit at a pace, which is a gradual, which has always been, by the way, our assumptions when it comes to the normalization agenda.

Sathish Sivakumar

Okay. I got couple of follow-ups, if I may. On the dividend, especially dividend payout, why not share buyback and actually it gives you flexibility, right, as we go into a potential downturn. Have you considered share buyback in the future? And then the second one actually on the volume normalization into — for the full year, so if you look at your H1 just this year versus last year, you have basically weaned off proportional volumes towards Intra-Asia, so do you expect that actually — that trend to continue and that’s what we would see your volume recovery comes through into H2? Thank you.

Xavier Destriau

So let me start with the second question that you raised. We — yes, we — on the Intra-Asia trade we continue to be very active. We talked about lines that we have recently opened between Southeast Asia, also to Australia and New Zealand. And so we see a lot of growth — opportunity growth on the Intra-Asia trade lines and we are well-positioned to capture the volume growth in this region.

Going to your first question, why not share buyback and why dividend. We have up until today promoted that returning significant dividend to our shareholder and it’s good that you asked. And if you look at our 12 months into being trading company, we returned $21.5 per share to our shareholders, $2.2 billion in terms of dividend.

We — when we guide for 2022 the numbers that we are guiding suggest that there will still be more dividends to come in the future. So up until today we have promoted returning capital to shareholders via dividend and we continue to give, thereby updating our dividend policy in terms of interim payout that we just talked about from 20% to 30%. So that’s always a commitment that we made it to the shareholders on day one and we are delivering on that front.

That doesn’t mean that the share buyback will come especially out of the table, up until today we haven’t entertained such initiative, but the Board and management will continue to always evaluate quarter-after-quarter what is the best avenue, the best way for us to continue to maximize shareholder value and share buybacks is really one way to return capital to shareholders on top of — in terms of the dividend.

Sathish Sivakumar

Thank you, Xavier. That’s quite helpful.

Operator

The next question is from Omar Nokta from Jefferies. Please go ahead.

Omar Nokta

Hi. Good afternoon. Hi, Eli and Xavier. Thanks for the update. Obviously very nice and solid quarter and good to see the guidance reaffirmed especially given spot freight rates have been coming off here the past several weeks. Having said that, some of your peers have actually been raising guidance this past or the past couple of weeks, this earning season, which I think kind of set up expectations that we could see the same from ZIM. Is there anything that you could highlight that maybe separates you from the others from — in this respect, is it higher relative spot exposure on the transpacific or is it maybe a function of being too conservative?

Eli Glickman

I would like to begin Xavier and you can follow me. First is question to manage expectation, we began the year with very high expectation from 2022 and we shared with our analyst and investors.

Looking on our EBITDA margin, EBIT margin, the first six months ZIM is doing and consider, let’s say, one of the leader compared to those company who published their results. For sure, those in the western subject to war, not by 1% to 2%.

So in Q1, so it was very short time until the first guidance for the year, we increased our expectation for the year, we set target that 2022 will be a better year speaking of EBITDA and EBIT bottomline compared to 2021, it was the best year ever for ZIM.

We believe it is our responsibility is to be conservative as we see gradual normalization of the rates, meaning, the transpacific in the freight rates. So we would like to reaffirm our guidance for the year.

As you are saying, this is rate target for ZIM to deliver vessels, compared to companies’ compound that you spoke, they decided to begin the year with slow expectation, mainly for the second half of the year and they improve their guidance from the beginning low guidance that we have given.

Xavier Destriau

Omar, I think, we need to look at the things, Omar, in absolute terms, when you look at things in absolute term, we are actually [ph] outside, we are a smaller company than some of the larger European players, those are the one you are referring to. Our operating capacity is less than 500,000 TEU to be compared to the other ones.

And if you were to do a comparison in terms of EBIT per TEU that we have been operated you may come to a very different conclusion with respect to the relative performance of the liner versus another one.

Omar Nokta

Okay. Thank you. That’s helpful and I appreciate the comments. And I guess maybe just about volumes, you have mentioned I think really that you have taken the fleet up to 149 vessels, volumes have been flattish here in the past three or four quarters, how should we think about volumes going forward. You were thinking 5% growth before, now it’s maybe 2% to 3%. So far in the third quarter, are you seeing higher volumes that give you maybe some confidence that we are going to see a bounce here in volumes or is it still more of an expectation as we proceed through the rest of the year.

Xavier Destriau

No. No. This year we expect to deliver on increase the volume current quantities into Q3 for many reasons, again, it is not that the vessels have been not selling full over the past quarter, it’s been more that there has been those issues in terms of congestion and we think we will need to go hand-in-hand.

If we assume that the rate — the freight rate will continue to normalize, it is — it has to go with the also on the landside perspective aspects of things, that congestion should start to ease a significantly, because if that doesn’t happen, then with the scenario of the — on the liner assumption that freight rates will normalize might be challenge.

So if we are taking the conservative view or the reasonable view on the freight rate level then we also need to assume that we will be less penalize in terms of carried quantity by the congestion. So that’s one.

Second is also when we look at the capacity that we are operating. We are also taking delivery of the more vessels in the third quarter and fourth quarter. We are — we got this year delivery of large capacity vessel as well that are going to be entering into Asia U.S. East Coast ahead of our big transition next year, which is around the corner where we will start getting the first roughly 10 TEU LNG vessels that will be delivered to us in February.

So that’s really could be limited off, first, operating more capacity, if you will, second, assuming that the congestion will ease and will improve, therefore allowing us to move more cargo and therefore increase current quantity.

Omar Nokta

Got it. Thank you. And just final one on the newbuildings, the 46 that are coming on starting next year that are going to be vastly much more fuel efficient. In terms of your existing footprint, how do you see these newbuildings joining the ZIM fleet? Theoretically, you have 149, is it simply 46 come out of the existing chartering fleet and you bring in these new 46, so your overall fleet size stays the same or do you expect to add some of these, a bit more permanent? And I guess that’s sort of — that’s like the one question. The other wants to have is on that, have you done sort of analysis or are you willing to give maybe what these newbuildings will look like on a ship-by-ship basis. So if we were to replace ships on a one-to-one basis in terms of TEU cost, are you able to get, how much they would reduce your unit cost line. I know there was a bit of a jump ball question, but simply I have, what does your cost go down by a few were to assume all 46 newbuilding have come in and replaced 46 existing ships that are currently in the fleet?

Xavier Destriau

Okay. Yeah. Thank you, Omar. The answer is not that simple, because starting with the beginning of your question, we are not planning on limitation ship-by-ship. So we have indeed those 46 newbuilding that are coming our way for which we are committed to and we are eagerly awaiting this capacity.

And if we look at the vessels that out of the home we did 40 container vessels that we operate today. We have our 62 vessels that will come up for renewal in — over the same TEU and we will decide whether we want to let go some our overall that capacity depending on our reading in the — of the market and whether we see options for us to grow and enter into new trade mix.

So the determination we will make as we go and as we have today, I am sure you would assume that we are preparing for 2023. We are in the budget season, as far as nothing goes, we are already looking into 2023. What is the preplan? What other trade names that we intend to continue to grow in, exit, enter, but this is very in the process as we currently speak. So it’s not something one-for-one.

To give you an example, the first series of 15,000 TEU vessels, so the 10 15,000 TEU vessels will clearly redeployed on our Asia U.S. East Coast trade the CP line, all of them and they will replace vessels that are currently of the capacity of between 9,000 TEUs to 10,000 TEUs.

What we do with this capacity of 9,000 TEUs to 10,000 TEUs? We might keep some of that capacity into other trade be it on the PNW, for example, or on our second stream on Asia to Gulf or the U.S. East Group.

We are looking into that, which is also a discussing that will take place with our partner, as you know, we have join team operating with Maersk and MSC on our transpacific trade line. So there is a lot of potential scenario that may unfold, which will lead to a different conclusion when it comes to our fleet plan going forward.

What we wanted to make sure is that we have the option to grow not obligation to grow and that’s very important in terms of ship planning the fact that as we committed for those policies of newbuildings that we have the ability to redeliver a significant portion of our current capacity going forward.

Omar Nokta

Thanks, Xavier. Yeah. That’s very helpful. That optionality is key. I will leave it there. Thanks so much.

Xavier Destriau

Thank you, Omar.

Operator

The next question is from Sam Bland from JPMorgan. Please go ahead.

Sam Bland

Yeah. Thanks. Thanks for taking the question. I have two, please. The first one is, could you talk about I think the change in the 2M relationship started at the beginning of April. Could you talk about to what extent that increased your unit cost quarter-on-quarter, please? And the second question is, you think you talked about in the opening remarks that maybe in the last few weeks spot rates have been coming down quite sharply, I can’t view, if anything congestion seems to be possibly getting worse on a global basis and I don’t think demand is falling that quickly. I guess I am interested in why you think spot rates are coming down so sharply given those two factors? Thank you.

Eli Glickman

Thank you, Sam. The first question with regards to the change in the relationship of the corporation, the partnership with the 2M, you are correct that, we entered into this new network on April. The changes were effective as of the 1st of April this year.

So in the first quarter, we were a net slot buyer from our partners and we don’t see operating their capacity, but at the end of the day, we are also in addition buying slots from our partners Maersk and MSC on the transpacific trade lines and on the Asia.

And from the 1st of April, this year, we have shifted completely to a full swap agreement, meaning that we are no longer buying any slots from Maersk and MSC, and we are purely exchanging capacity on the vessels that we currently operate on the trades where we continue to operate, which are mainly the Asia U.S. East Coast and the Asia to the U.S. Gulf Coast.

So as a result, what happened, we — and you see that we anticipated that change in the collaboration in terms of the structure of the collaboration. So we are — we have to bring in additional capacity in order to continue to be able to operate a similar tonnage at the end of the day. So that’s what has expanded to some extent, the increase in vessels that we are operating today versus what we operated a few quarters back.

And in terms of — and so we sold those vessels in the — from the chartering market at rate, that obviously, were the prevailing rates that the tonnage service providers were commanding and that’s where it was quite different from the slot rate that we were purchasing from our partners. So in terms of impact, it’s not that easy to quantify, but it’s in the region, as I say, over $100 million.

Seconds on the — on your question with respect to the rate dynamic? Why is it that we are assuming that the normalization of the rates of the spot market might continue to slide as we have already experienced already throughout the second quarter? How is that possible, if they need the congestion continue to be there or to worsen? You right, you see there is a lot of uncertainty ahead of us and it might end up being a different scenario.

What we are just here saying is that it is — we think it needs to go hand-in-hand. If we assume continued normalization in the freight rate then at some point congestion should be, otherwise we would be in a situation which would be quite awkward, where there would be no real reason to justify the rate adjustment.

So that’s why we are making that assumption if we were to be wrong in the assumptions with respect to the easing in the congestion, it is very possible as the demand is still strong, it’s not as strong as it used to be, just be clear, there are signs of weakening in demand as well and that maybe waived significantly in the explanation of why the rates are starting to normalize.

But the demand is still there. Compared to pre-pandemic level, we are very resilient. Remembering, the last year was extremely strong. So when we compare year-over-year, yes, there might be a sign of weakness, but it still a strong market. So that’s an assumption we are making. We thinking it’s a reasonable one. There might be other scenarios at the end of the day. We will see which — we will see those.

Sam Bland

Understood. Thank you very much.

Operator

The next question is from Alexia Dodani from Barclays. Please go ahead.

Alexia Dodani

Yeah. Thank you for taking my questions. I also had three, just firstly, on kind of a recessionary scenario. Can you just kind of explain to us what kind of flexibility you have to adjust the network and should you need to, I guess, kind of the reference of the number of vessels expiring would be helpful. And then, secondly, am I correct in picking up that, Eli, in his comments mentioned that you are reducing your spot exposure and you are entering in more contract agreements? If that’s right, can you give us a rough indication of how spot versus contract is evolving? And then, finally, in terms of the alliances and kind of the bronze or cons of joining an alliance, have you — is that a possibility or what do you think? Thank you.

Xavier Destriau

Thank you, Alexia. The — with respect to your first question, what are the tools or what could we do in case of a prolonged recession beyond, I guess, your question is even beyond 2022, in 2023 years and maybe 2024.

The flexibility for us is key and critical and we have 28 vessels that will come up for renew in 2023. So, if we were to end up in a situation where the global economy is entering into a prolonged recession, and as a consequence, in demand of the trade, where we operate was to significantly drop, then we would obviously not reduce those charter. We also have in 2024 another 34 vessel that will come up for renewal.

What is very important, because then you might say that, yes, that you have the 46 vessels that are coming in over the same period. What is very important, I think, for us to emphasis is that, those vessels, yes, they are green, they are brand new, but as a result, they meet our ESG strategy and commercial positioning, that’s one.

But also very importantly, when it look — when it comes to operating and the cost of operating those vessels, the chartering costs that will be paid for each of those brand new vessels, they are going to be far more competitive that they — the last vessels that we fixed in the spot charter market, as we know, very hot — has been very hot for the past few quarters and that had some effect on our cost structure.

So what it means? It means that as we enter into 2023 and every month when we take delivery of one of these brand new vessel our cost of operation per TEU our freight cost will go down compared to the current cost of operation of the company.

The second question you want, whether we were changing the mix between the contract and spot? No. We are still where we were last quarter. That of the trades where we operate mainly the transpacific trade lane is the trade that is subject to long-term contract discussions with customers. We expect order or VCOs.

We finalize those discussions towards the end of April for the new rates to kick in as of the 1st of May. We have concluded to secure 50% of our volume on the transpacific trade lane. With the contract customers we are still remaining exposed to spot at 50%.

What Eli was referring to is today the current situation is by enough spots and contracts are paying the same amounts. So it doesn’t make much of a difference for us to load a container that is from contract or a container that we source from the spot market. That is a true as of today.

And the last question that you raise, I will give up to Eli obviously. For ZIM the partnership that we entered into in 2018 with Maersk and MSC has been extremely beneficial to us, but not only to us, by the way, since it has been extremely beneficial also to our partners, which is very important partnership, it has to be a win-win combination for it to last and all parties have enjoyed significant improvements in the network, significant cost savings opportunities and that’s why this collaboration has lasted up until today.

It is — for us we continue to always keep on evaluating our options in terms of partnering with an alliance or with a liner because on top of our partnership with the two end on the transpacific trade we also have partnership agreements or VSA agreement, vessel sharing agreements with Maersk and MSC, by the way, separately from those trade lane where we operate in the two end — that we operate with the two end. Same goes of the Intra-Asia region where we partner with a lot of also smaller shipping.

So this dynamic of a shared space at the end of the day and sharing operative capacity is a feature I think of our industry, which is and has brought a lot of benefit to the liner, and at the end of the day, I think, a lot of benefits to the end customer as well has allowed for the shipping industry to deliver improve service at a lower cost.

Operator

Ladies and gentlemen, this concludes our Q&A session and today’s conference call. You may disconnect the telephone. Thank you for joining and have a pleasant day. Good-bye.

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