Earnings Call: Q4 2020

Mar 22, 2021

Ladies and gentlemen, thank you for standing by. Welcome to the team's Integrated Shipping Services Limited 4th Quarter and Full Year 2020 Results Conference Call. All participants are present in a listen only mode. Following management's formal presentation, instructions will be given for the question and answer session. As a reminder, this conference is being recorded March 22, 2021. I would now like to turn the call over to Ms. Elana Holtzman, ZIM's Head of Investor Relations. Ms. Holtzman, please go ahead. Thank you, operator, and welcome to ZIM's 4th quarter and full year 2020 financial results conference call. Joining me on the call today are Eric Leitman, President and CEO and Fabienne Cisseleux, CFO. Before I begin, we would like to remind you that during the course of this conference call, we will make forward looking statements regarding expectations, We wish to caution you that such statements reflect only the company's current expectations and that actual events or results may differ, including You are kindly referred to consider the risk factors and cautionary language described in the documents the Company filed with the Securities and Exchange Commission, including our 2020 Annual Report filed on Form 20 S today, March 22, 2021. We undertake no obligation to update these forward looking statements. At this time, I would like to turn the call over to Elie Lecombe. Elie? Thank you, Ilana. Beginning on Slide 4, I would like to welcome everyone To ZYN's first earnings conference call as a public traded New York Stock Exchange Company. Our successful IPO marks a major milestone in the same 75 year history And we are honored to be the 1st global container, again global container liner to lease in the United States. When I joined Jim as a CEO in 2017, it was clear to me The shipping industry was right for disruption and over the past few years, We have mitigated ZYN through a once in a generation transformation, conducting a complete turnaround of the company. Similar to FBSB, Amazon and Uber that have disrupted the change in the industry dramatically, We are focused on changing the shipping narrative, emphasizing the fact We do not need to own the majority of our fleet and the critical importance of technology to our business. We are proud that we succeeded to add new strength in the company An exciting spirit and a promising outlook for operating within the new realities of shipping. Today, Zhiyun is a robust, innovative and agile digital shipping company. On today's call, we will discuss our strategic objectives, accomplishments and priorities moving forward. But before that, I would like to briefly highlight a number of important milestones. 1st and foremost is our milestone of generating record profitability In the Q4 and the full year of 2020, it is clear that our unique approach Consistent earning growth and is one of the leading carriers in terms of profitability. I'm happy to report that our Q4 EBIT and EBITDA results were at the high end of the guidance range that we provided back in January just before our listing. As anticipated, In Q4 2020, we delivered on time record results, outperforming the industry average with our EBITDA margin reaching 39% and EBIT margin reaching 32%. Zim continues to deliver industry leading margins. In addition, We dramatically reduced our leverage ratio to 1.2, positioning us as the top tier of the industry. Later on the call, we will also share with you our 2021 guidance and an update On the planned dividend, shortly after the pricing of our IPO, We announced a strategic long term charter agreement with Syspa for 10 GEEN 15,000 TEU LNG 2XQ container vessels. By adding these state of the art vessels to our fleet, we'll achieve a number of important objectives. 1st, we'll strengthen our position to meet the growth market demand on the Asia Europe's cost rate. As we will discuss later on the call, this is a cost rate plan for ZYN where we have Consistent with our sustainability values, these LNG Fueled Green Vessels Also advance our commitment to environmental issues, specifically the And reduce the industry carbon footprint to critical objectives to both them and our customers. We are proud This transaction will position ZYN as a leader in terms of carbon intensity among global lines. We are also delighted to partner with industry leaders, system and Samsung Airy Industry And look forward to delivery of these first vessels in less than 2 years. Going to Slide 5. Turning to the next slide, we will now discuss the new ZYN. ZYN is unique in container shipping. We are a smaller company competing with giants from all over the world, which requires us to be different And innovative and played by new rules. Our strategy is centered on the following components. We are a global niche operator. We do not operate in every market or compete on size and volume. Rather, we serve markets where we have a competitive advantage and can provide exceptional customer experience And maximize our market position and profitability. We also employ a unique asset light model By chartering in most of all capacity, primarily on short term charter, we are able to optimize vessel deployment, Support high utilization of vessels and exploit specific trade advantages based on market changes. We'll discuss this in more details on the next slide with example of our operational agility. Next is our focus on profitability. We have used big data, business intelligence And artificial intelligence to facilitate a shift away from border and utilization To operations focus on maximizing profit, applying the most advanced technologies and in house capabilities, We manage our vessel and cargo mix to prioritize higher yield and enhance efficiency, Cost savings and profitability across the company. Innovation is the core of our culture We will more creatively utilize sophisticated digital strategies to power new service and build opportunities for customers. Specifically, we are with our Startup Nation DNA to develop growth engine with startups and industry leaders providing us additional revenue strength beyond our traditional shipping business. Lastly, we are a customer centric company The proof that Spoon customers at the core of our commercial strategy. We partner with our customers to develop smart solutions that significantly enhance their experience and drive their best to best business success. We call this powered by our customers. Going to Slide 6. As we move to the next slide, Our strategy which is uniquely tailored to our strengths enabled us to achieve impressive results in 2020. These achievements were based on 4 main pillars: operational and commercial agility, Operational resilience, innovation and digitalization. Due to the global pandemic, We confront the challenges directly and deploy a strict COVID-nineteen management plan that enable us to perform better than the market. We identified the magnitude of the crisis very early and prepared for worst case scenario immediately revising our strategy. Implementing cost reduction and avoidance measures and successfully aligned with our tour partner to adjust capacity All of this success was only possible thanks to Zix exceptional people, Organizational culture driven by our unique Z factor vision and value, which fully Which fully align with and support our strategy and long term goals. Hand in hand with operational excellence, we were able to demonstrate exceptional operational agility this year Based on our asset light model, quickly adapting the timing of our capacity to the changing market condition. Specifically, we optimized vessel deployment and size for our fleet in 2020 to support high utilization of vessels And explore specific trade and advantages given market condition. Clear to COVID-nineteen, our fleet included 68 vessels And was reduced to 59 in May 2020. As global trade resumed and began to reach pre pandemic levels, We identified new opportunities and expanded our capacity, growing our fleet to 98 vessels. This was all done in one year. Our commercial agility was also evident and reflected in our move to increase capacity. We developed new growth engines like the ZEX and the CAX, launching these to meet market demand in response to growing e commerce trends. We also spent our partnership with Alibaba in engine logistics services to its customer and service provider. This innovative in collaboration helps Alibaba offer its customer a more affordable We continue to invest in developing best in class digital technologies. A few examples of Zyngard and artificial intelligence system To detect this declaration of Dangerous Cargo, Lavengo, a technology company developing all time software For cross border shipment with which we cooperate. In the last example, this is the eye, an internal digital revenue management tool. Going to Slide 7. As I mentioned, our Q4 financial results reflect our consistent earning growth And now at the high end of the initial guidance range that was provided. As importantly, we are up On and continued deleveraging trend, which accompany net leverage improvement from 5.3 To 1.2 over the previous 8 quarters, positioning us in the top tier of the industry. We are one of the leading carriers in terms of profitability and are committed To consistently being one of the top 3 carriers in terms of EBIT margin, I will now turn the call over To our CFO, Servier, for his comments on the financial results. Please. Thank you, Eddie, and welcome, everyone. I will now briefly discuss our KPIs, specific Q4 and full year 2020 figures, including our strong cash position. Before I do, I'd like to start by reiterating Eli's comments on SIEM's operational agility. As we did maneuver through the year, that was Highly atypical. This strategy drove our financial performance and as we continue to show consistent earnings growth and industry Leading margin. On the next slide, Slide number 8, I'd like to highlight several KPIs on a year over year basis, reflective of our record results as discussed, including strong cash generation and the continued deleveraging of our balance sheet. 2020 presented unique challenges due to the COVID-nineteen and our profitable growth illustrates our ability to quickly adapt With our asset light model delivering substantial benefit throughout the year. We improved what approach That was appropriate for the 1st 6 months. And then when market conditions shifted, we acted our strategy accordingly during the second half of the year. Initially, with the extent and duration of the pandemic's even though, we acted diligently in extracting costs This is a clear distinctive benefit of not owning vessels. There are global trade rebounding Driven by increased demand for consumer goods rather than services, SEAM responded immediately to seize the opportunity. And we added best forward into our fleet, we invest economic sense and expanded capacity, launching new premium services While the rest of the industry tended to carry less volume in 2022 to 2019, this current volume slightly increased when compared to 2019. This was critical to drive our record results as the average credit facility rose by 22% in 2020 to $12.29 compared to $1,09 in the prior year. It is important to note that not only did we benefit from industry tailwind that pushed rates higher The company's prioritization of better paying travel mix and initiatives to capitalize on the e commerce group were key differentiators that allowed us to have even higher rates. Regarding our balance sheet, we significantly increased our cash position, which I will discuss shortly. We also continue to improve our leverage ratio, which decreased to 1.2x from 3.6x in 2019. Turning to our free cash flow, it totaled $846,000,000 compared to $409,000,000 in 2019, representing a 107% increase. Moving on to Slide 9, Our ability to adapt to changing market conditions is proving effective and is clearly aided by the year over year improvement in all of our financial metrics. Looking at our top line, total revenues in the 4th quarter were $1,400,000,000 compared to €827,000,000 in Q4 2019, a 64% increase. Full year revenue increased to $4,000,000,000 compared to $3,300,000,000 in 2019, a 21% increase. Even more importantly, we grew profitably as we successfully shifted towards promoting better paying cargo over seeking additional volume and market share. Net profit was a record €366,000,000 in the 4th quarter compared to €1,200,000 in Q4 2019. Full year net profit increased to $524,000,000 compared to a loss of $13,000,000 in 2019. Adjusted EBITDA in the 4th quarter also significantly increased to $531,000,000 compared to 1,000,000 in Q4 2019. Adjusted EBIT decreased to €439,000,000 in the 4th quarter compared to €47,000,000 in the prior year period. As Eli mentioned, these results were at the high end of the guidance range We have provided and also our all time record. Full year adjusted EBITDA increased to $1,000,000,000 compared to EUR386,000,000 In 2019, and full year adjusted EBIT increased to CHF 729,000,000 compared to CHF 149,000,000 in 2019. Importantly, consistent with our strategic focus and asset light approach, adjusted EBITDA and EBIT margins We have dramatically improved and continue to position this as a result of the industry. Q4 EBITDA and EBIT margin were 39% and 32% In global trade, the shipping industry period, the volume of the conference slightly increased in 2020 compared to 2019. This is mostly due to our new expedite services, Zodiac from South China to Los Angeles and CAX From China to Australia that we opened in the second half of the year as a response to identified growth demand. You can see that we did enhance our position in our 20 new strategic trades, growing our volume by more than 10% From 1017,000 TEU in 2019 to 1126,000 TEU in 2020. On our intra Mostly due to COVID-nineteen impact on hedging volume during the first half of twenty twenty, which were not fully recovered in the second half. On Slide 11, cash flow we began 2020 with a consolidated cash position of $183,000,000 During the year, our adjusted EBITDA was up $1,000,000,000 Taking into account the adverse effect of $155,000,000 of working capital in other, dollars 35,000,000 of investing cash flow, €470,000,000 of debt service and $11,000,000 of other units this year with a cash position of $570,000,000 of cash. The current cash position obviously excludes IPO proceeds, which we'll see in the Q1 this year. Thank you, and I will now hand over back to Penny. Thank you, Xavier. Now, I'm going to review the strong market fundamentals that we continue to see in the nylon sector and our positive view going forward. On this slide, Slide 12, we show that market supply demand fundamentals are positive. In terms of supply, the order book remains at record lows, supporting forward near term dynamics And demand remains strong, which has elevated both charter hire and freight rates. Specifically, New business on orders including the recently placed order by carriers currently represent less than 13% 13% of the total deployed capacity, which is a significant lower level versus previous years With levels as high as 61% in 2,008, it should be noted that considering the mid time The overall book grew from a lowest level of 8% in October 2020, We believe that current supply demand fundamentals are favorable taking into account the demand growth forecasted for the same period. The low order book combined with robust demand has resulted in higher Rate and spot rates, which in terms of driving charter rates higher as well. By increasing the size of our charter in vessel fleet during the year, ZYN was able to generate record profitability despite these higher charter rates. This highlights an important point I meant earlier about the GDP associated With our asset light model. In Slide 13, looking on the freight rates, You can see that comprehensive Shanghai Container Freight Index is maintaining its positive trend. This crossed above 1,000 points For the first time since Q4 2014, the carriers have experienced a very large qualitative shortfall In unit revenue since 2015 and there is an increase our margin now in terms of filling out the gap. We are currently seeing long term contracts signed much earlier than previous years. Today, We have signed 5 times as many contracts as compared to the same period last year and At rate of about 50% higher than 2020. The current record high contract rates I expect it to last until spring 2022. On the next slide, Slide 14, We'll discuss inventory and bunker prices. Retailers inventory levels Our dilution in 28 years, we expect retailers to target the same inventory to same ratio That adds to the pandemic. In terms of the impact of container demand, we expect import growth For the entire year of 2021 to remain elevated compared to 2019 Simply to repeat inventory. A typical development in sales in the United States could slow inventory replenishment, Sustained strong import container growth for all 2021. Prices have posted significant gains In the month of February, we're growing optimizing for improved demand as we expect vaccine rollout continue. Turning to Slide 15. We have significant momentum. The shipping industry, like many others, is changing at the record pace and the keys to success is to us decisively and adjust quickly. I am extremely proud of the progress we have made completely transforming ZYN into an innovating leader Occupational transportation and logistics services well positioned for the 21st century. As we see We will maintain an unwavering commitment to fueling ZYN's growth and maximizing profitability into the future. With a strong foundation of talented professionals, a commitment to utilizing big data and technology, A capture of innovation and clear sustainability value, I'm excited for our future. And this is the time to go to guidance Slide 16, guidance for 2021. We intend to continue our positive trajectory and expect to deliver a full year 2021 EBITDA, we see in a range from $1,400,000,000 to $1,600,000,000 And full year EBIT is in a range from $850,000,000 to $1,050,000,000 Our guidance is based on assumption of expected higher volume and higher average freight rates, But also higher banker rates and chapter rates in 2021 compared to 2020. We would like to also provide some clarity of what can be expected in terms of dividend distributions. We intend to distribute a yearly dividend beginning with 2021 earnings. So the 1st dividend can be expected to be paid 1 year from now in Q1 2022. Investors could reasonably expect a dividend payout between 70% to 50% For our 2021 net profit. Thank you very much. We will now open the call to Q and A. Your questions will be pulled in the order they are received. Please stand by while we poll for your questions. The first question is from Omar Nukhata of Clarksons Pluto Securities. Please go ahead. Hi. Thank you. Hi, guys. Congratulations on such a strong performance, obviously, in terms of results and stock Very nice to see so early on in ZYN's life as a public company. Clearly, the results are very And your guidance points to things just continuing to stay firm for quite a bit longer. A couple of questions for you. And I think Ely, you mentioned this in your remarks just a few minutes ago. I wanted to ask about the revenue mix and the shift And to some of your business being more term, could you just go over that again? Did you mention that the contract business is About 5 times as much that you booked so far this year relative to last year? The answer is yes. We do see high demand for long term contract as compared to 20 at this time 2020, if we compare, we see a high multiple by far speaking about the More, let's call it quantity of contracts have been signed and we're speaking about much higher rate, At least 50% higher rate compared to 2020. So we're speaking about contract The plan was to begin in May 2021 until May 22. In fact, The customer has already asked us to implement this contract as of the date of that we signed the contract. So we are in much better position and very high confidence, positive confidence towards 2021 and the beginning of 2022. Okay, interesting. And so what do you think that as you think about Zimn's footprint today, you're up to, I believe, as of late February, Around 98 ships, you've taken a handful of vessels in earlier this year on PC. How do you feel about your existing footprint With that type of visibility becoming more, I guess, longer, did you see opportunities to add more shifts? Do you want to increase ZYN's Footprint today or do you feel comfortable with where it is? I will begin and Sevev maybe will follow CFO. As last week, we announced together with the 2M Maersk and MSC On expanding our transpacific agreement to end with a new service from Vietnam, Southeast Asia To Savannah, U. S. East Coast. So speaking about the Transpacific, we are growing first We sell partners actually competitors. We are growing with them on the service that we are off corporate with. We have very many services as part of the partnership, strategic partnership with 2M. More than that, we see we have decided as you know to go to 10 grid LNG vessels. So we are growing with our vessels. We are going to give the 2 Hermes and MSC, Zellepark The same percentage on the new vessels. So we are growing with them. More than that, There are some services directly e commerce lines for example from LA to directly Excuse me, from Shenzhen, South China to LA. And in this service, we developed the e commerce line by ourselves. In this plan, we are not part of the cooperation with the 2 end. And maybe if I just want to add to David's We I think we look at the market and see every opportunity that we can identify. We have, as you pointed out, we have opened new trades in and towards the second half of twenty twenty. We will obviously capitalize on those trades in our 2021 full year. And if we see Got it. Thanks for that color. And maybe just one final question a bit more broadly for the industry. Obviously, we've seen freight rates at very elevated levels and they've held here kind of steady for the past couple of months. We've seen early signs maybe that the indexes are showing some signs of softness, but nothing material. Maybe just from your vantage point, how would you characterize the current situation when it comes to say the squeeze on box availability and And port congestion, how has that maybe changed here today versus say 3 months ago? I think if we look at what happened towards the second half of twenty twenty, the volumes came back up Very strongly, very rapidly. And I think maybe everyone that everyone might surprise relating on also All the operational issues that you are referring to counsel. So there is and we think there is still some issues to success and those will eventually hopefully But by now, the question is, I think maybe behind the direct question that you're asking, what is the expectation of the new normal For the industry, what is to be expected? It's difficult to say. We don't have a crystal ball here. The one thing that I think is important Maybe from where we sit, we think that we are positioned in trade where we obviously have And we are also capitalizing on the growth of the e commerce trade. And we think that COVID-nineteen has been Yes. We think that customer behavior will remain very strongly geared towards also e commerce where we are extremely active and So there will be some sort of new normalization. We don't expect any sort of collapse in this respect. Let's also remember that the industry has demonstrated its ability to navigate to shift, a significant shift maybe Yes, yes, yes, clearly new territory and it will be interesting to see how things develop from here. Well, thanks again, Xavier and Healy. Congratulations on such a strong performance. Thank you. The next question is from Randy Giveans of Jefferies. Please go ahead. Howdy, gentlemen. How's it going? Thank you. Hey, congrats obviously on the IPO and your first call as a publicly traded company. A few questions on my end. Looking first at your net debt and the balance sheet, right, it's fallen to $1,200,000,000 net leverage has fallen to 1.2 times. So I guess going forward, how much in net debt and what kind of leverage are you expecting maybe at the year end 2021, 2022, Like how low were you willing and able to take it? Thank you, Reni. Let me take this one. You're right that we have had A very, I think, impressive deleveraging trajectory over the past few quarters, and we are now closing at the level of 1.2. So how long can we go with the expectation of the guidance that we are providing for 2021? We should continue to expect, sorry, a very strong cash conversion from EBITDA to cash. And therefore, naturally, if we do not incur additional debt on balance sheet, To go back to a higher leverage, we are very fortunate to be in a position now where our balance sheet will allow us If we require to engage and maybe bring in additional debt on top of, obviously, the debt that we will keep on In carrying and reaching very weak when it comes to the vessels that we would cut on the charter exiting 1 year. Got it. Okay. Fair. And then in terms of the dividend, I guess two questions around that. Why an annual dividend Instead of a quarterly dividend. And then secondly, how do or maybe will you determine that amount within the 30% to 50% range? I think we're starting with your first question. We are still in an industry which So in this respect, we truly believe when you are a global player that it is what makes sense is an annual When it comes to assessing what will be the recommendation of the management to the Board of Directors in terms of dividend distribution, We are pleased to update that, as Eddie mentioned earlier on, that we think that the right quotation And this is important for our last, let's say, dividend policy that we Share with you during the prospectus before the IPO and we are speaking specifically on 2021. Got it. Yes. Sounds good. And then briefly just to wrap up the question around your contracting On your volumes, historically, you contract about 25% of your volumes on those 1 year kind of fixed rate bookings with your customers. I know you said the rate is about 50% higher. What is your plan for percentage of volumes to be contracted here in the next few weeks for a year? For us, the reason why you are referring to the 25%, I just needed to clarify here. The trade that we expect is very much close to long term contract with the Trans Pacific trade and that represents indeed close to 50% Of our overall guarantee, hence why the 25% that you're referring to. We want To keep a significant percentage of the growth that we carry and keep an exposure on the spot market. So today there is no real reason to think that we will achieve materially in terms of overall percentage of Got it. Okay. So around the same numbers. Good deal. Well, thanks again. Yes, nice to see the stock Getting off the floor there and well above the IPO price. So we will talk soon. This concludes the Q and A session. Ms. Glickman, would you like to make your concluding statement? I would like to thank those who will be leaving the company. I present those other questions And we are here to support the company looking forward to break The new record that we already achieved. Thank you very much. Thank you. This concludes the TIM Integrated Shipping Services 4th Quarter and Full Year 2020 Results Conference Call. Thank you for your participation. You may go ahead and disconnect.