Sims Limited

Thank you for standing by and welcome to the SIMS Limited HY24 results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. Today's presentation may contain forward-looking statements, including statements about financial conditions, results of operations, earnings outlook and prospects for SIMS Limited. These forward-looking statements are subject to assumptions and uncertainties. Actual results may differ materially from those experienced or implied by these forward-looking statements. Those risk factors can also be found on the company's website, www.simsltd.com. As a reminder, SIMS Limited is domiciled in Australia and all references to currency are in Australian dollars unless otherwise noted. I would now like to hand the conference over It's Stephen Mickelson, Group CEO and Managing Director of SIMS Limited. Please go ahead.

Thank you, and good morning, good afternoon, or good evening, depending on where you're dialling in from. Today we're here to present the half-year results for FY24. I apologise in advance if my voice fades a bit. I've had a scratchy throat for the last few weeks. Presenting with me today is our new Group Chief Financial Officer, Warwick Ranson. John Glide, our Global Chief Operating Officer, is also here with me and Warwick. The presentation has been lodged with the ASX, along with the results release. First up, I will run through an overview of the results and discuss our strategic progress. Warwick will then take us through the financial results. At the end, I will return to talk about the outlook, after which we will have Q&A. I'll turn straight to slide five, which covers an overview of the results. It was certainly a challenging and disappointing half year for significant parts of the group. At a high level, the modest EBIT result was driven by a compressed trading margin, down 2.6%, but more tellingly, down 5.4% at constant currency. This deterioration in trading margin was not across the board. Both ANZ and SA Recycling improved, while NAM and the UK went backwards. There are a number of reasons for this, which we are addressing, and there are subsequent slides providing further explanation. It was pleasing to see SLS grow its EBIT, particularly in the second quarter of the half. Inflationary pressures, while showing good signs of easing, did persist. Costs for the group were up 8.5%, which was 5.7% on a constant currency basis. There are several up and downs in here, and Warwick has an excellent slide explaining this later in the presentation. While headline operating cash was 68.4% lower, I'm pleased with operating cash for the half and it represented a good cash flow conversion. Last year's half year benefited from a significant fall in inventory that had built up in June 2022 and was shipped over the subsequent months and turned into operating cash. Turning to slide six. Our position as a sustainability leader continues to grow. We were awarded the most sustainable company in the world by Corporate Night's Global 100. This achievement recognises our sustainable practices, deeply integrated into every facet of our operations. Sustainability is core for us and embraced by the organisation. Beyond our walls, its impact is significant and measurable. By providing high quality products, we enable our customers to significantly reduce the CO2 emissions from the production of steel, aluminium and copper. You can see this in the photos with a few examples of high-quality copper granules, polished 6X aluminium extrusions, and low copper shred. Not only is SLS repurposing data centre equipment for its customers, it is also assisting them to extend the lifecycle of their electronic devices. Our company's value is directly linked to our role in advancing decarbonisation, an immense opportunity that drives progress and innovation here at SIMS. Moving to slide seven and the importance of having safe operations. Our safety record, as measured by the main lagging indicators, is pleasing. Total recordable injury frequency rate hit a record low, just below one. And while there was an increase in the lost time injury rate, it is still down 14% over the last four years and was more impacted by low risk events this year. Both indicators are at or around industry world class levels. We continue to focus on leading indicators, which in my view are more effective in driving good outcomes, and we have introduced a new training programme for continuous safety culture improvement. The reaction from our employees on this new training has been hugely positive. The next couple of slides look at the market. Firstly on slide eight, we focus on the seaborne market compared to the US market. The first point I will make is that common to all our markets where we procure scrap, there has been a reduction in the supply of ferrous scrap. This has been largely driven by a downturn in post-consumer scrap availability. Two charts at the bottom provide evidence for this, the downturn in durable goods and the increase in the average age of vehicles. These are both US charts, but it is a common theme across ANZ and the UK as well. China has been exporting significant steel, and this has caused price pressures, particularly in Asia. As a result, global steel production, excluding the US, has contracted. Furthermore, the steel that is being produced globally, excluding the US, is at lower margins, often already low base, and this is shown on the top right-hand chart. Compare this to the US market. Margins are strong, driven by steel import tariffs restricting competition and legislated demand stimulus, such as the Inflation Reduction Act. Paradoxically, the demand for steel is coming from projects that do not produce significant scrap in the short or medium term. For example, new wind farms, new bridges, new rail, etc. You can also see on the bottom right-hand chart the quite extraordinary growth in EAFs that has already occurred and will continue to occur in the US. In summary, in the US, we have a highly protected steel industry, growing demand for steel and therefore scrap, but currently not a sufficiently growing supply of scrap. Slide 9 provides the price dynamics for our key products. Turkey HMS prices were relatively flat half on half compared to the prior year, but down consecutive half on half. Prices have started to lift at the end of the first half. Freight has risen and been volatile throughout the period due to geopolitical tensions and drought conditions in the Panama Canal. Freight price volatility has been a significant challenge in the first half. Zorba has had a strong performance over the last 12 months and is currently around the $2,000 per tonne mark. The biggest driver of this has been the improvement in the copper price. In fact, when you compare the two bottom charts, the correlation between Zorba and copper is evident. Slide 10 provides the explanation as to why ANZ and SA Recycling were more resilient than NAM and the UK in the market conditions and price outcomes detailed in the previous two slides. I will go through it by column, starting with the source of scrap. SA Recycling and ANZ source a smaller percentage of their scrap from dealers. In other words, they procure more scrap at source. This provides them with stronger margins that do not suffer as much when the buy-sell spread tightens, as it has over the last 12 months. The second column splits sales between domestic and export. Both SA Recycling and ANZ have a greater proportion of domestic sales compared to NAM and the UK. For SA Recycling in particular, this has been very beneficial. as it is nicely exposed to the strengthening demand for domestic scrap in the US. The final column reflects the composition of scrap, where composition is defined as processed or unprocessed. Buying unprocessed scrap affords the opportunity to add value, particularly through shredding, where end-of-life goods are transformed into ferrous feed for steel mills, as well as Zorba and other valuable non-ferrous products. As pictured on the previous slide, the price for Zorba has been very strong. Clearly we need to respond to the market conditions and dynamics, and we have been, but there are further opportunities and structural changes that we will deliver over the short to medium term to strengthen the NAM and UK businesses. Slide 12 shows what we have done recently and what we will be doing in the medium term to ensure all segments of the business meet the required return on their assets. Commencing in FY22 and largely completed in calendar year 23, we sold non-metal divisions where it was obvious that they would be more highly valued by others. LMS is the most material example of this. This allowed us to recycle the capital and focus on the core metal business. A number of acquisitions are listed on this slide, of which the most material was Baltimore scrap, also completed in calendar year 23. SLS spent this period building out its repurposing business model. In FY24 we have commenced improving our domestic sales channels in the USA. The acquisition of Baltimore Scrap is one of many initiatives contributing to this. We are in the middle of the UK Strategic Review and I will provide an update on this in a few slides. ANZ has continued to drive its competitive advantage to deliver good returns. SLS is focused on innovation, particularly around using micro factories to disassemble servers. It has also been increasing its reach within customers by offering a superior service to grow its share of available business. In SRR, we have fired up the pilot plant. I'm pleased to report that it has produced syngas using our shredder residue. There are more tests before we declare victory, but it is looking very promising. Given that FY25 is only a few months away, the executive team has been prioritising what we will deliver over the next two years. Two things that will continue are the targeted acquisition of assets that enhance our existing portfolio and, where possible, using recycled capital to fund these. There will be a big focus, in NAM in particular, on sourcing additional unprocessed scrap and ensuring we have more domestic sales channels in which to deliver our products. Successful domestic channels will in part be secured by reliably providing high quality innovative products. The shift in market dynamics over the last year have shown that relying solely on volume targets is insufficient. For instance, the increasing importance of unprocessed scrap and the need for a more balanced sales portfolio between export and domestic markets. Recognising these changes, we have shifted our focus. We have moved away from a simple and single FY25 sales volume target. Volumes alone were not driving the correct behaviours. We are still finalising the most relevant targets and I will provide them at a later date. Suffice to say, we need to get profit margin back into the NAM business, not just sales volume. SLS now has a proven and profitable business model and it will concentrate on delivering this at scale. From an SRR perspective, The first commercial plant is likely to be built in the USA, and we will seek partners for this. We will not contribute significant capex to commercialisation. I said at the very beginning of the presentation that it has been a challenging market, and the results for significant parts of the group have been disappointing. On slide 13, I want to explain what we have been doing to turn this around. Firstly, and most significantly, we have greatly simplified the organisation structure. This has resulted in some extensive leadership changes. By way of example, I have reduced my executive team from nine people down to six, plus me. This was the start of a larger cost-out program, which I will talk more about on the next slide. Before I do that, let me outline some of the other things we have been doing. We have already increased our domestic channel options, with more to be delivered in the second half. We have successfully run low copper shred trials and anticipate the sale of more significant volumes at price premiums in the second half. Management KPIs have been adjusted to reflect additional targets beyond a simple volume metric. We're also embedding much stronger data analytics into the business to assist in refocusing on margins. Turning to slide 14, which covers off the cost reductions. It is important to note that it was not a panicked cut costs, I don't care where program. It was a well thought through and highly analyzed initiative. It took over six months of planning with outside assistance to design a simpler and more streamlined organization. We sensibly increased spans of control and reduced layers. Where needed, we've strengthened the commercial and growth facing parts of the business. Overall, we are budgeting to save 70 to 90 million annually. 55 to 65 million has largely been implemented and will be fully realized in FY25. There will be a further 15 to 20 million implemented in FY25, which will be fully realized in FY26. Moving to slide 15, where I want to provide an update on the UK strategic review. I must emphasize that we have not yet decided the outcome of the review. I'm open to all ideas, ranging from a sale of the whole business through to retain options where we significantly restructure the business. In between these two bookends, you have various joint venture or partnership alternatives. Non-binding indicative bid proposals are due at the end of this month, and I can confirm we have received strong interest, which is not surprising when you look at the location and reach of our assets in the UK. How the process progresses beyond the end of this month will be largely determined by the type and complexity of the proposals we receive. Before I hand over to Warwick, I'll turn to slide 16, which looks at SLS. SLS made significant progress in the first half and I expect this to continue in the second half. From a strategic perspective, I believe SLS has proven it is a business model that is profitable and valued by its customers. Its strategy is sound and grounded and the tailwinds described on this slide are only getting stronger. Artificial intelligence is predicted to drive the growth of data centres at an even more rapid rate than the extremely fast pace of the last five years. These data centres have issues with sustainability, which SLS helps solve. It now has to deliver this at scale, and its recent implementation of micro factory technology provides one of the building blocks to achieving this. Over to you, Warwick.

Thanks Stephen. I'm going to keep my comments relatively short and high level given Stephen has described the market impact at some length already and I won't necessarily talk to every slide. Of course the team is available to respond to any specific items you may wish to delve into post the call. At a group level we reported an underlying EBIT result of just over $13 million with a statutory result of just on $164 million inclusive of the gain on sale of the LMS investment. We saw a high statutory effective tax rate given the inability to utilise our tax loss position in the UK and a lower tax base on the LMS asset given we equity account for it in the financials. Slide 19 is a high level summary of the underlying EBIT performance. So I won't dwell on this one and we'll move on to slide 20. In the US, we saw increased volumes from both the northeast metal and Baltimore acquisitions, and SAR capitalized on a full six months of its steel coast ship breaking business and smaller additional acquisitions through the period. As Stephen has already explained, the industry-wide trading margin compression was exacerbated in our NAM business. Our existing sourcing network, market diversification, and scrap composition all challenged the business in a market where intake volumes in both the industrial and retail markets were constrained from lower economic activity and the supply of scrap simply couldn't keep up with demand. The impact was extended by more subdued prices in the export market and negated the benefits of the strong domestic price environment. On a positive note, the acquisition of businesses such as Illuminisource, And the successful rollout of low copper shred in a number of regions continues to reposition us as a producer rather than just a collector of scrap with upside margin going forward. I'll come back and talk about our controllable cost performance in a few slides. But whilst I'm on this slide, we did see an uplift in SAR's operating cost base, both from the additional volume but also from labour-related inflationary pressures. In ANZ, we've got a well-balanced market portfolio, providing us with a level of flexibility to respond to market movements. We've also got a strong purchasing program in regional and mining volumes, which has helped maintain margin levels, although we did pick up just under $2 million in growth costs this half with a new project in Western Australia with no attributable margin in the periods. The tightness in supply which we've talked about is clearly evident in the UK results, however. The lack of available materials significantly reduced our intake volumes with a number of major dealer suppliers switching to direct container shipping in response to prices. However, we managed to improve overall margins by reducing our lower margin sales. Moving to slide 23. And excluding the internal realignment of the precious metals business, which is now part of the broader metals segment, we had a 7% revenue uplift at SLS with 700,000 additional repurposed units. Importantly, we've broadened our customer base while also increasing our service offering. Just to note that revenue margins may vary somewhat quarter on quarter depending on the specific activities we undertake. but the uplift has certainly been a great performance by the team. I'll cover the primary cost drivers in the next slide, but just to note that we don't expect any further costs for Sims Energy in the second half following the sale of LMS, and a number of the costs for the Rockley pilot plant are one-off in nature and related to the demonstration plant activities. I'll move to slide 25 on cost to provide some colour on both the operating and corporate cost increases which are also reflected on slide 24. Firstly, FX has played a major role when we think about our costs in A dollar terms. Only about 20% of our operating costs are actually A dollar denominated. We saw the Aussie lose ground from its high at the beginning of the calendar year and a sustained strengthening of the Australian dollar is yet to play out, with the US dollar maintaining its stability and China's economic activity not gaining steam. We added $29 million to our cost base in the period through growth, principally from a full period of North East metals, as well as the addition of Baltimore scrap in quarter two. In the US, we also introduced an environmental processing charge as a cost offset, although it's mostly been counted through our margins, given the non-uniformity of the charge versus the number of our competitors. So our comparative starting point is actually about $30 million higher this year. On people costs, we've experienced around a 3% to 5% uplift in our wage levels given current inflationary pressures, which is about half of the overall increase. We employed an additional 50 people into the Australian operations as we moved to fill critical operational roles that had been left vacant through the recent bounce of labour and skill shortages. We also incurred additional one-off costs with the retirement of a number of senior executives in the half. Wage and contract labour costs certainly continue to be a cost pressure in ANZ in particular. Also in Australia, we're continuing to see an uplift in state and regulatory levies on waste disposal, upwards of 30%. We picked up $6 million in additional system and restructuring implementation costs centrally as we work to uplift our information and data capabilities. These later costs, the executive retirement costs and the impact of the general salary uplift make up the bulk of the corporate cost increase. Offsetting these has been some good wins on fuel and maintenance efficiencies reducing our overall increase in costs against the adjusted cost base to around 4%, which in the significant inflationary environment we've been operating in, has been a fairly solid result. That said, as Stephen has already touched on, we need to continue to work through our cost out opportunities, ensure we are more resilient to the cycles. Moving briefly to cash and capital, and in line with our existing capital management strategy, we were able to recycle funds from the LMS sale into the Baltimore acquisition. We also had a residual contingent liability on the IllumiSource transaction as noted in last year's full year accounts. General and sustaining capital remained sensibly constrained given the operating performance and we expect to remain within our previous guidance levels in this area for the full year. We paid a full year dividend of just under $41 million for the 2023 financial year. And as noted in the accounts, the board is determined not to pay an interim dividend for the half year, given the company's strategic focus on investing in growth initiatives and our current operating cash performance. And just before I hand back to Stephen, in December, we renewed and extended our existing debt facilities, uplifting our available liquidity reserve by just under $200 million. The terms for these facilities have remained substantially consistent with what we had and are now in place out until October 2026. Back to you, Stephen.