ZIM Integrated Shipping Services Ltd

NYSE:ZIM

Earnings Call Analysis

ZIM Suffers Loss, Lowers Full-Year Guidance

In the third quarter of 2023, freight rates declined, leading to a significant revenue drop and financial losses for ZIM. Average freight rates fell by 66% year-over-year, while revenues in Q3 plunged to $1.3 billion, a 62% decrease from the previous year. The company reported an adjusted EBITDA of $211 million and an adjusted EBIT loss of $213 million for Q3, with free cash flow at $328 million. Due to market conditions and expecting no improvement in freight rates, ZIM revised its full-year 2023 guidance, forecasting adjusted EBITDA between $900 million to $1.1 billion and an adjusted EBIT loss of $600 million to $400 million. Despite the challenges, the company remains resilient with a strong liquidity position of $3.1 billion and anticipates a return to profitability by 2025.

Navigating through Challenges to Future Growth

The ZIM Integrated Shipping Services Third Quarter 2023 Earnings Conference Call, presided by Elana Holzman, Head of Investor Relations, and featuring President and CEO Eli Glickman along with CFO Xavier Destriau, kicked off with a solemn acknowledgment of the impact of the ongoing war in Israel on families and operations. Despite these challenges, the company assured continued services without interruption, highlighting resilience in the face of adversity.

Historic Performance and Strategic Positioning

ZIM, amidst a market downturn, stands on a strong foundation with net income approaching $10 billion from mid-2020 to 2022, bolstered by a robust cash balance exceeding $3 billion. As the company grapples with a protracted market weakness, it relies on this liquidity to navigate the downturn, with strategic initiatives aimed at a competitive repositioning in core trades. This forward momentum is rooted in a comprehensive fleet renewal program, marked by the addition of 46 new container ships, inclusive of 28 LNG-powered, poised to redefine ZIM's profile by 2025. The focus also extends to the acquisition of a billion-dollar reefer fleet and strategic investments in technology to enhance operational efficiency and customer service.

Transition to Long-Term Profitability

ZIM is in the midst of a transition—with eyes set on 2025 for a return to sustainable profitability, as the company refines its fleet with cost and fuel-efficient LNG-powered vessels. The realignment includes the redelivery of 20 charter vessels in 2023 and plans for an additional 34 in 2024, to synchronize with market demand. Concurrently, service improvements, like the revival of the ZEX line and expansion in Latin America, along with operational partnerships are anticipated to bolster market position and cost savings. The adoption of a conservative HR approach and a slew of cost control initiatives illustrate ZIM's commitment to trimming its cost structure for sustainable growth.

Earnings Call Transcript 2023-Q3

[Operator]

Hello. My name is Krista, and I will 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. [Operator Instructions]I would now like to turn the conference over to Elana Holzman, Head of Investor Relations. Elana, you may begin your conference.

[Elana Holzman, executive]

Thank you, operator, and welcome everyone 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?

[Eliyahu Glickman, executive]

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 owns in terrific and tragic events of October 7. We stand support of families and communities who are 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 result 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 for 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 involves 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 a fleet that provides us a competitive advantage in core trades.Specifically, we leveraged our successful IPO and capitalized on the extended period of historic profitability to best prepare ZIM for the years to come. First, we executed our fleet renewal program and secured through a series of charter agreements, a total of 46 newbuild container ships, of which 28 are LNG power. In 2025, ZIM's flat profile will be dramatically different. Our fleet will be much younger, more fuel and cost-efficient. Our average vessel size will be bigger and better suited to the trade in which we operate. We expect approximately 1/3 of our operated capacity in 2025 to be LNG power, making ZIM one of the lowest carbon intensity operators in the industry.As such, we will be well positioned to support our customers in reducing their carbon footprint. But even already today, ZIM is the only carrier to operate LNG vessels from Asia to the U.S. East Coast. By the end of 2024, we will have 2 different services operating with only LNG vessels as we plan to deploy our 7,000 TEU LNG vessels on our Baltimore service. In addition with the 15,000 TEU LNG vessels deployed on ZCP service, our premier Asia to U.S. East Coast service. Second, to complement our fleet renewal program, we purchased almost $1 billion worth of containers with a particular focus on investing in our [ reefer ] propositions. Today, we own and operate the youngest reefer fleet in the industry, which serves us well as we compete for this high-value cargo. Third, we entered into a strategic supply agreement with Shell to secure LNG supply at competitive pricing. And last, we invested in customer-facing and back-end digital tools and applications to propel profitability and improve customer experience.We view it as the core strength to leverage technology to promote operational and commercial excellence. We continue to invest in technology and are currently in the process of planning an extensive project to install on our entire dry van container fleet, the cutting-edge tracking devices developed by Hoopo Systems, which is also one of our portfolio companies. ZIM will be one of the first carriers in the container shipping industry to have its entire fleet equipped with tracking device. This will enable us to better manage our fleet, but also offer customer value-added services such as geofence alerts and open and closed door notifications.As we considered ZIM strategic direction back in 2021, we anticipated that the subsequent years, 2023 and 2024, were going to be a transition period. The goal was to ship ZIM's reliance on older less fuel efficient and less environmentally friendly capacity to a core cost and fuel efficient LNG-powered newbuild fleet. We understood that steps were needed to make ZIM a more resilient company. And this new fleet will effectively position us to both address the carbonization agenda of the shipping industry and drive long-term profitable growth.During these 2 years' transition period, ZIM's cost base will gradually improve as we continue to make -- to take delivery of the cost-effective newbuild tonnage and redeliver the expensive COVID-era charters. Our cost per TEU is declining. And we expect further improvement moving forward. At the remaining 33 of the 46 newbuilds we secured are added to our fleet this year and throughout 2024. I would highlight that the 6 15,000 TEU LNG vessels we have already deployed on our strategic Asia to U.S. East Coast ZCP service are meeting and even exceeding our cost saving expectations.During this transition period, our entire organization is focused on returning ZIM to long-term sustainable profitability. We expect the initiative we began to undertake 2 years ago will deliver that result in 2025 and beyond. At the same time, as we navigate near-term market challenges, we have taken steps to rationalize our existing capacity whenever possible to minimize cash burn. In 2023, we have already redelivered 20 charter vessels and expect to redeliver another 5 vessels back to owner by year end.We also have another 34 vessels up for renewal in 2024. This will allow us to better align our fleet with current demand levels. We also continue to review our services and reallocate resources to adapt our network. We are attentive to our customers' evolving needs and focused on taking advantage of new commercial opportunities with growth and profitability potential. For example, we recently decided to reinstate our ZEX service, targeting the e-commerce market from South China to L.A. Today, we are hearing from customers that they are again looking for an expedited ocean service that offers slightly longer transit time compared to the air freight but at a fraction of the cost.We also expanded our presence in Latin America this year. In early 2023, we opened our Colibri service, connecting the West Coast of South America to U.S. East Coast. Since its launch, we have consistently grown our carried volume and we are now one of the top 5 carriers on this trade. More recently, we announced the launch of 2 additional lines in Latin America. While market conditions remain challenging in this region, as elsewhere, we believe no South trades have significant growth potential as U.S. importers seek to diversify their supply chain.During this third quarter, we also announced a new collaboration with MSC, the industry's largest carrier, that is already delivering cost savings. These agreements include vessel sharing, slot purchases and swap arrangements across services, connecting the Indian Subcontinent with the Eastern Mediterranean, the Eastern Mediterranean with Northern Europe and services connecting East Asia with Oceania. This latest collaboration is consistent with our approach to leveraging partnerships that improve efficiencies and enhance our network, particularly during this period of continued headwinds in our market. Furthermore, we believe that our new cost and fuel-efficient newbuild fleet will better position us to reach similar operational arrangements in the future.In parallel, we are constantly pursuing operative steps in a wide range of cost control, optimization and cost avoidance initiatives in order to achieve improvements in our cost structure. These cost control initiatives include, among others, a strict HR hiring program to ensure our workforce is aligned with industry dynamics; lower variable costs, such as terminal-related, cargo handling and port storage costs; bunker cost, leveraging our agreement with Shell to use more LNG versus low sulfur fuel; and of course, actively seeking opportunities to redeliver charter capacity early. We expect these initiatives to continue generating measurable and sustainable savings. Moving forward, we will continue to seek opportunities to capitalize on our strengths and capabilities in order to create long-term value for our customers and investors alike. Although market conditions for the near future are uncertain, our ample cash enable us to maintain a long-term view.Turning to our third quarter results. Our results -- the third quarter performance reflect the persistent weakness of the current trading environment with soft demand and continued freight rate deterioration. The rate increases we saw in August in Transpacific were showed. In Q3 2023, we generated adjusted EBITDA of $211 million and adjusted EBIT loss of $213 million. Cash flow from operation was $338 million. As already mentioned, we maintained strong total liquidity with a cash position of approximately $3.1 billion at the quarter end.Based on our 9 months results, an expectation of no material improvement in freight rates, during this remainder of the year, we have lowered our full year '23 forecast. We now expect to generate adjusted EBITDA of $900 million to $1.1 billion and adjusted EBIT loss of $600 million to $400 million. Given this negative outlook in the near-term, we recorded a non-cash impairment of $2.1 billion this quarter. Despite the losses incurred in '23, ZIM is a resilient company. Our strong cash balance will help us withstand this prolonged downturn. And as I already indicated, we believe that '25 will mark a turning point for ZIM and return to profitability.On this note, I will turn the call over to Xavier, our CFO, for a more detailed discussion of our financial results, the impairment and our revised guidance as well as additional comments on the market environment. Xavier, please.

[Xavier Destriau, executive]

Thank you, Eli, and again, welcome everyone.On 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 9 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, and 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 9 months of 2023 of $4 billion were 62% lower than in the first 9 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 rate 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 our container shipping-related assets, primarily container vessels, but also equipment, boxes and other related assets. You can find additional information on the impairment test in the Note 7 of our Q3 2023 Interim Financial Statements. And I would note that this non-cash impairment is excluded from our adjusted EBIT and also from our adjusted EBITDA results. Our net loss of $2.3 billion this quarter includes the impairment charge for $2.1 billion.Regarding our fleet, we currently operate 145 vessels, 129 containerships and 16 car carriers. Excluding the newbuild capacity, the average remaining duration of our current chartered tonnage continues to trend down and is now 22.7 months compared to 24.6 months in mid-August. Of the 46 newbuild vessels ZIM committed to, 13 have been delivered to-date, including 6 LNG-powered 15,000 TEU vessels and also the first 7,000 TEU LNG ship.Year-to-date, we redelivered 20 chartered vessels and we have another 5 vessels who charter periods end before the end of the year. And in addition, 34 vessels have charter periods concluding next year in 2024. So in total, these 39 vessels, which we could be delivered to the owners or renew at lower rates compared to 33 newbuilds that we expect to be delivered to us during the same period. Again, I would like to reiterate here the delivery of these modern, cost-efficient vessels will replace smaller, less cost-effective tonnage, therefore, contributing to lowering our current unit cost base.On Slide 7, we present ZIM's Q3 and 9 months 2023 financial results compared to Q3 and the first 9 months of last year. The decline in revenue based on the lower freight rate environment impacted all of our metrics. Adjusted EBITDA in the quarter was $211 million and the adjusted EBIT loss was $213 million. Adjusted EBITDA and EBIT margins for the third quarter were 17% and minus 17% respectively to 60% and 48% in the third quarter of last year. For the first 9 months of 2023, adjusted EBITDA margin was 22% and adjusted EBIT margin was minus 9%. This is compared to 63% and 54% in the comparable period in 2022. This quarter, net loss was $2.3 billion; and as already mentioned, includes the impairment charge of $2.1 billion.Moving on to Slide 8. As I mentioned, we saw a slight uptick in our carried volume compared to the third quarter of last year. The increase was driven by growth in Transpacific and Latin America. We also saw a small increase in carried volume versus the prior quarter with the growth again driven primarily by Transpacific and Latin America trades.Turning now to the next couple of slides, I'll review our cash flow bridge for the quarter and 9 months period. We ended the third quarter with a total liquidity position of $3.1 billion, which includes cash, cash equivalents and also investments in bank deposits and other investment instruments. During the third quarter of 2023, our adjusted EBITDA of $211 million, coupled with a positive effect from change in our working capital, converted into $338 million of cash flow generated from operating activities. For the 9 months period, adjusted EBITDA of $859 million converted into $858 million of cash flow generated from operating activities. Other cash flow items for the 9 months period included dividend payments of $769 million and $1.5 billion of debt service, mostly related to our lease liability repayments.Moving now to our revised guidance. In light of the continued deterioration in freight rates across all our trades, we are revising our guidance and now do expect to generate in 2023 adjusted EBITDA of $900 million to $1.1 billion and adjusted EBIT loss of $600 million to $400 million. This revised forecast is based on our assumption that freight rates will not recover from the current levels with overall volume for the year to be slightly lower compared to prior year. Our assumptions also include inflation in bunker prices for the remainder of 2023. I would highlight that our adjusted EBIT forecast is positively impacted by the impairment that we recorded in the quarter as our depreciation expenses going forward are going to be lower.Moving to our market section. I believe it is clear that our current view of the market for the remainder of 2023 and into 2024 is one of continued headwinds, oversupply meeting weak demand with limited impact from capacity management actions taken by the carriers. Alphaliner's supply-demand outlook for 2023 and 2024, which you can see on the left, remains unchanged, pointing to clear oversupply in the market. At the same time, freight rates remain depressed, as you can see on the right. Here, we show the SCFI for the U.S. East Coast, a key trade for us, which accounted for approximately 40% of our volume in the 9 months period.We also excluded here 2021 and 2022 rates from the graph to provide better granularity as to where rates are compared to other years pre-COVID since 2016. You can see the decline in rates from August when we saw a short-lived improvement in freight rates following broader blanking and that rates today are lower as compared to 2019 when costs today are clearly significantly higher versus that same year 2019.On the demand side, while retailers are working through high levels of inventories, and we have seen some market growth in the third quarter, inventory levels are not declining and there are no clear data points that the restocking cycle will begin anytime soon. As such, it does not seem that the recovery in our industry will result from near-term growth in demand. At the same time, while the carriers have employed some management capacity, these have not been sufficient to sustain higher rates.Slow steaming remains the only continued meaningful action taken by carriers. Blanking has also been employed, but for limited periods of time with limited lasting impact on rates. Scrapping on the other hand, has remained negligible with approximately only 107,000 TEU worth of capacity scrapped from January to September compared to deliveries totaling 1.6 million TEUs during the same period. Alphaliner's scrapping projection for 2024 and 2025 are for 450,000 TEU each -- in each of the next 2 coming years compared to expected delivery of almost 5 million TEUs of capacity in 2024 and 2025 combined.Finally, idling has also remained limited with inactive capacity in September, standing at 1% in terms of volume or 2% by vessel count. While idled tonnage has increased over the course of 2023, it is currently lower when compared to the 2023 peak of 3.3% that was achieved in February. And just as a reference point, idle capacity in mid-2020 when COVID hit and the demand failed also dramatically was over the 10% mark.On that note, we will now open the call to your questions. Thank you.

[Operator]

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

[Omar Nokta, analyst]

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?

[Xavier Destriau, executive]

Look, 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.

[Omar Nokta, analyst]

Okay. 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 5 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?

[Xavier Destriau, executive]

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 5 vessels up for redelivery between now and the end of the year. We have another 34 vessels that we've covered 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.

[Omar Nokta, analyst]

Got it. 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?

[Xavier Destriau, executive]

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.

[Operator]

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

[Samuel Bland, analyst]

I have 2, 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?

[Xavier Destriau, executive]

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. 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 rates 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, 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 heavy fuel oil.

[Operator]

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

[Alexia Dogani, analyst]

Yes. 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. And 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?

[Xavier Destriau, executive]

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, 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. 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 this is a non-cash item and the lease liability that we have on balance sheet is today unchanged as a result of the impairment, that only reduced our fixed asset base.

[Operator]

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

[Patrick Creuset, analyst]

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?

[Xavier Destriau, executive]

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. Note, all of our vessel costs today or 99% of our vessel costs today still are being registered in -- again, with a slightly 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 2 weeks, that's the way it works in the chartering market, the 1st of the month and the 15th of the month. And if the 1st 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 5 out of 6 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 [ sell ] to our customer.

[Patrick Creuset, analyst]

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 9 months?

[Xavier Destriau, executive]

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.

[Patrick Creuset, analyst]

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.

[Xavier Destriau, executive]

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 L.A., 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.

[Operator]

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

[Alexia Dogani, analyst]

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 '24? 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?

[Xavier Destriau, executive]

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 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 2 new lines that we've also announced in opening -- addressing Latin America trade lanes. Us partnering with MSC not so long ago on 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 #1 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.

[Operator]

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

[Eliyahu Glickman, executive]

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.

[Operator]

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