Sims Limited

Thank you, and good morning, good afternoon, or good evening, depending on where you're dialling in from. Today we are here to present the full year results for FY24. Presenting with me today is Warwick Ransom, our CFO. Rob Thompson, our Global Chief Commercial 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, take a look at where the market is at, and then focus on the progress we have made in implementing our business strategy, particularly in North America. Warwick will then take us through the financials. At the end, I will return to talk about the outlook, after which we will have Q&A. I will turn straight to slide five, which covers an overview of the results. There is no doubt when you look at the year-on-year comparison of the results, it was a difficult year. Warwick is going to dissect the results in some detail in later slides, so let me just make three overall comments. Firstly, it is a better result than we thought when we updated the market in early May. If you recall at that time, we were seeing a weaker second half from ANZ and SAR, and a somewhat better second half from UK and North America. ANZ, in fact, delivered a very similar second half, which was great, and UK and NAM delivered their improvements. Accordingly, underlying EBIT came in around $43 million, whereas we were originally thinking more $20 million to $25 million. So overall, it was an encouraging second-half performance from the metal business. Secondly, sales volumes for the full year were down by 1.7%, despite being up a little at the half-year, and we also had the benefit of a full six months of volumes in the second half from Baltimore Scrap. This volume reduction was deliberate as we concentrated on improving margins and not just getting volume for volume's sake. And we are starting to see the benefits of this. Thirdly, we need to show even more diligence on our operating costs. Yes, a significant part of the increase was due to acquisitions, but inflationary pressures are proving to be stubborn. Turning to slide six. I'm very proud of what we've achieved here. It can be easy in tougher times for safety to slip as everyone focuses on financial improvements. We didn't let that happen. And despite integrating 17 new sites, our total recordable injury frequency rate is now below one. I genuinely believe we have achieved this through focusing on lead indicators. The next couple of slides look at the market. Firstly, on slide seven, we look at four trends contributing to the overall market dynamics. In the top left-hand box, you have Chinese steel exports, including 2024 annualized numbers. China is exporting a lot of steel, and this is depressing prices in Asia, which is directly impacting on our West Coast NAM and Australia regions that export scrap to Asia, and indirectly, East Coast NAM and UK, where we export to Turkey. Turkish producers are increasingly using imported slab and billets from China and Russia. reducing their reliance on U.S. scrap. Additionally, Turkey consumed more domestic scrap, which was made available after the earthquake, further subduing the demand for imported scrap. The U.S. scrap market has remained relatively strong, largely due to the significant share of electric arc furnace steel production. Continued growth is anticipated, supported by policy and regulatory protections. The top right-hand box highlights the ever-increasing demand for scrap in the USA, which underpins our strategic focus on this region. The two bottom charts help explain why scrap is currently in short supply. Durable goods sales are down, which reduces shredder feed, and people are holding onto their cars longer, resulting in further reductions. Turning to pricing dynamics in the market on slide eight. Ferrous prices have been reasonably stable over the last couple of years, and overall, the FY24 average is pretty similar to FY23 at a reasonably healthy $400 per tonne, historically a number that would have seen pretty good flows of scrap. However, inflationary pressures on the cost of collecting scrap and less scrap in the market for the reasons given on the previous slide means that the price is going to have to increase to stimulate further scrap arisings. Rate costs have risen over the year but are still below the FY23 average. Zorba prices were healthy in FY23 and have increased even further in FY24 due to the continued strong non-ferrous prices. Slide 9 expands on our disclosure at the half year. where we used pie charts to show our relative performance across the regions in three different areas. One, the sourcing of scrap from dealers compared to other sources. Two, domestic sales compared to export sales. And three, unprocessed intake compared to processed intake. This slide shows the movement by region in each of those areas, first half versus second half. The most pleasing aspect for me was the significant eight percentage point increase in unprocessed material that NAMM achieved. This assisted in improving the second half EBIT result in NAMM. Even more tellingly was the significant EBIT improvement in the fourth quarter as the benefits of buying unprocessed scrap started to materialize. All the pie charts we presented at the half year are available in the appendix. Moving on to a strategic update commencing on slide 11. This slide provides a nice summary of our updated business strategy. I will leave you to read the slide in detail, but let me summarize a few key points. Importantly, our purpose to create a world without waste to preserve our planet hasn't changed. However, following the sale of the UK and closed-loop businesses, we have definitely tightened our operational footprint to the United States, Australia, and New Zealand. Additionally, we have our high growth prospect in SLS to repurpose the cloud. Our redefined strategic priorities reflect where we want to take the business. Elevating supplier and customer centricity. Simplifying business structures and using data to improve our market responsiveness. A much bigger focus on margin from both sourcing and production perspectives. Global logistics are important to our success. particularly in ensuring we deliver product to the most valuable market. We must deliver all the operational and commercial priorities within a robust financial management framework. Finally, there needs to be a cultural shift. It's not a cultural revolution. Rather, it is emphasising the importance of being agile in a volatile market and taking accountability for making decisions closer to the coalface. Slide 12 provides a little more detail on how we have commenced simplifying structures to improve our market responsiveness. The executive team reporting to me has been simplified and reduced to six people. By following the simplification mantra down through our organization, we've removed 206 roles, saving an annualized 46 million. Turning to slide 13, from a commercial perspective, There were two major initiatives we worked on in the second half. The first was the UK Strategic Review, and this has now concluded with the sale of UK metal. The second was turning around the financial performance of North American metal. Various buy-side and sell-side improvements are listed on the left-hand side of the slide, but it is the tangible outcome of these initiatives I want to highlight. You can see in the top left-hand chart, we've improved our optionality to switch between domestic and export sales, depending on market conditions. This is further reinforced in the bottom left-hand chart, where the more domestic-oriented freight modes have increased year on year, and this has provided more optionality. Our shredder utilisation has improved in the second half, as we purchased more unprocessed scraps. It is also worth noting the chart on the bottom right showing a 32% increase in the ferrous buy-sell spread. Internally, we find this a very useful way of looking at how effectively we are buying from a margin perspective. It removes some of the noise in the accounting trading margin arising from things such as the weighted average cost of inventory, timing of historic sales, overhead costs imputed into inventory, revenue recognition rules, et cetera. It simply calculates how much did we pay for scrap in the month compared to the FOB selling price for that month. You can see the improvement in NAMM second half on first half. Slide 14 highlights some of the cultural changes that helped deliver the improvements highlighted on slide 13, particularly around being agile and accountable. We made significant organisational changes, streamlining or refreshing a total of 12 key roles. To strengthen our team, we brought in new talent from outside the organization. Additionally, we expanded the roles of two key talents acquired from Baltimore Scrap and NEMT, ensuring we have the right leadership in place to drive our strategy forward. We enhanced oversight by temporarily aligning NAM's commercial leadership under our global CCO, Rob Thompson, with a graduated succession plan in place to ensure smooth leadership and continuity in our strategic direction. Finally, we've also empowered our teams by providing them with critical data, enabling better decision-making and more strategic alignment. Slide 15 shows the four major acquisitions that we have made in NAM and looks at the rationale, execution, and future opportunities for each. I'm not going to read out all the boxes, but I do want to highlight a few things. Firstly, the consistent rationale for all the acquisitions is that they add to the strength of our existing portfolio. Therefore, from a strategic execution perspective, it was very important to ensure that they operated to the benefit of our whole portfolio, not the individual businesses that we acquired. Now that these acquisitions have been successfully integrated, our focus is on expanding and strengthening our footprint in fairers and non-fairers. We are at different stages with each acquisition, and while some are fully embedded, others like NEMT and Baltimore Scrap will require additional optimization work as we continue to improve the NAM portfolio. However, they present upside potential, and we are excited about the opportunities that brings. A change of pace on slide 16 as we look at the SLS business. Clearly, it has had a very good financial year, delivering well over a 100% EBIT increase on the prior year. It has proven its business model and is ready to continue its growth. We don't see any major changes to its strategy to deliver that growth. It will continue to expand its footprint through quality-led execution, improve productivity, and optimize its scale through the further use of robotic and digital technology. It remains a relatively capital-light business, which assists in delivering shareholder value. My final slide before handing over to Warwick is slide 17. Financial year 24 can be characterized as a very tough market. With the notable exception of SLS, all regions delivered lower EBIT than FY24 than FY23. ANZ and SA Recycling performed very well in the tough market. NAM and UK struggled, particularly in the first half. On this slide, we highlight the initiatives we have undertaken and in many cases will continue to undertake. None of them relied on assistance from the market and were therefore within the things that we can control. I believe they have laid the foundation to improve performance even in the event the current tough markets persist. I'll hand over to Warwick now for a more detailed look at the financials.

Many thanks, Stephen, and good morning, everyone. Before I move on to the numbers, just to point out that with the sale of the UK operations, we've moved that asset to one health to sale in the financial statements. That requires we reclassify it and the comparative numbers as a discontinued operation. However, for the purposes of this presentation, we've included the UK in most of our analysis. It really has been a year of two halves for us, with a better than expected result reported for the second half of the year. As expected, we did have a softer result for SAR, but managed to deliver a stronger result in ANZ, despite the predicted headwinds from Chinese steel exports, with improved non-ferrous pricing providing some relief, particularly during the latter part of the year. We subsequently recorded an improved second half EBIT of $29.5 million. The statutory loss was principally influenced by higher financing charges and a review of the carrying value of a number of operating assets as we continue to work towards getting our network composition right. We also had some significant closure and dilapidation costs in the UK. These items were offset, of course, by the net after-tax gain from the sale of the LMS asset, as reflected in our first half results. I'll come back and talk about some of the influences on our cost base in subsequent slides, and of course the team is available to respond to any specific items you may wish to delve into post the call. Stephen has already touched on the improved margin performance in the second half, so I won't dwell too long on this slide. But just to point out that while year on year we've broadly managed to maintain our margin position against revenue, It was primarily due to a significant improvement in our trading performance in the latter part of the year after a disappointing first half, where the business's focus was clearly on gaining volume in an increasingly competitive market. The results from a significant restructuring of the commercial team and their more disciplined approach to buying activity came through in particular in the fourth quarter as they embedded new systems and processes contributing significantly to the second half of earnings uplift. Moving to the specific segment of performance now and beginning with slide 21. In the U.S., the Baltimore and Northeast metal acquisitions added around 350,000 tonnes on average to our intake and sales volumes, and FAR's volumes were influenced by the addition of a ship-breaking business and smaller additional acquisitions throughout the year. We were able to maintain volumes in ANZ with solid industrial scrap sourcing, although total group volumes reflected the challenging market dynamics and our strategic refocus in the second half on value over volume. Despite a gradual increase in the Baltic Dry Index during the year, we saw a reduction in total freight charges as shipping costs returned to their pre-COVID levels and container rates in particular reduced. Of course, we also had more tons staying domestically in North America. Our total revenue base this year was split around two-thirds ferrous and one-third non-ferrous, with non-ferrous sales increasing by over 30% compared to the prior year, with the average selling price increasing by some 11%. Just on this point, as Stephen mentioned, I think there's an interesting disconnect in regional markets at the moment on the price of scrap, where intake volumes in both the industrial and retail markets are being constrained from lower economic activity, and yet the supply of scrap can't keep up with end customer demand. Our view is that these market dynamics are overdue for a correction. I'll touch on each of our operating segments in the subsequent slides, but before I do, I think it's worth just comparing our half-and-half results where we were able to improve our performance across all our directly managed areas. Improved margin performance in NAMM, The closure of non-productive sites in the UK and a reduced cost base have all worked to achieve a better than expected outcome, while the market itself has continued to tighten. Our expectation of a weaker second half for ANZ was countered by an improved non-ferrous position towards the end of the year, as I mentioned. Clearly, we have more work to do across all these areas, but some green shoots are starting to emerge here. We're also working on taking a stronger risk-based approach as to how we think about the business and the areas we need to be focused on and creating competitive advantage as a result. Importantly, it's not just about the megatrends, but how we ensure the delivery of returns throughout a cycle and create value that is somewhat independent of commodity prices. We need to continue to work on getting our supply chain right, make the organisation more innovative and agile, and using our significant infrastructure network to maximise market optionality. Moving to each segment now, and in North America, in-feed volumes contracted in line with market conditions, despite the addition of Baltimore scrap from November. As Stephen mentioned, we pursued our strategy of increasing the level of unprocessed tons and improving our shredder utilisation. Underlying costs actually improved year on year, pre-acquisition, despite continuing inflationary pressures across a number of areas. A weaker Aussie dollar through the year added around $19 million to the US cost base when restated to Australian dollars. We received a lower contribution from SAR, reflective of the market conditions and the trading shift required following that significant fall-off in steel prices which we saw in the third quarter. Operating costs for the joint venture increased as the business continued to acquire small tuck-in acquisitions through the year. In ANZ, we continue to maintain a well-balanced market portfolio, providing us with a level of flexibility to respond to market movements. We've got a strong purchasing program in regional and mining volumes, which has helped margin levels. Significant cost pressures remain evident through the year, particularly for labour and waste disposal charges, though. We were able to fill a number of long-standing operational vacancies this year, but also experienced higher fuel and electricity costs. Just to note that $13 million of the cost increase relates to reclassifications on the prior year, with $8 million in NFSR processing costs, which had previously been allocated to trading margin, and around $5 million in rental income on our Pinkenbar site, which was not renewed. The tightness in supply which was talked about was particularly evident in the UK results. The lack of available material reduced intake volumes with a number of major dealer suppliers switching to direct container shipping in response to available pricing before reverting to deep sea volumes in the latter part of the year, which then helped uplift margins. Overall margin performance was, however, also assisted by a favourable currency exchange although we did produce premium product low copper shred, which similarly added to costs. Site rationalisation kept second half costs stable. Moving to slide 27 now, and excluding the internal realignment of the precious metals business, which is now part of the broader metals segment, we experienced a 20% uplift in revenue at SLS. And with the delivery of an additional 2.3 million repurposed units in FY24, We exceeded our May guidance while broadening our customer base and increasing our service offering. Major hyperscale activities supporting the growth in AI continue to make this business an exciting component of the SINs portfolio. I'll cover the primary cost drivers in the next slide, but just to note that the divested operation covers the LMS business and has previously advised a number of the costs for SINs resource renewals are for the Rockley pilot plant, which are one-off in nature. I'll move to the next slide to provide some colour on the operating costs for the year and then cover the central function and corporate costs thereafter. Firstly, FX has been a significant influence on our cost base when we consider this in $8 terms. Only about 20% of our operating costs are actually $8 denominated. We saw the Aussie lose ground from its high at the beginning of the calendar year, and any sustained strengthening of the Australian dollar is unlikely in the near term. We added $74 million to our cost base in the period through acquisitions, principally from a full period of North East metals, as well as the addition of Baltimore scrap in Q2. On people costs, we've experienced around a 3% to 5% uplift in our wage levels, given inflationary pressures. which is about half the overall increase. We employed an additional 70 people into the Australian operations as we moved to fill critical operational roles that have been left vacant through the recent bout of labour and skills shortages and added additional roles into the SLS business in line with its growth activities. In Australia, we experienced an upwards of 30% uplift in state and regulatory levels on waste disposals. And we picked up $8 million in additional system and restructuring implementation costs centrally as we work to improve our information and data capabilities. Employee incentive costs reflect the improved full-year performance outcome from both ANZ and SLS and the retirement of certain senior executives. The majority of the cost savings related to the management delaying, which Stephen has talked about. At SIMS, we carry a number of costs centrally as part of our functional model to achieve scale efficiencies and consistency of process. Only about 40% of the amount we show within corporate costs are directly attributable to running the portfolio. And this year, these include a number of costs related to the restructuring, as well as the progression of the UK strategic review. The closeout of our ERP upgrade project added to system project costs, and we committed commence the replacement of our primary weighbridge operating system, which will maintain these costs in FY25 as we target a 2026 deployment. Just to come back to the cost reductions, if you recall at the half, we set ourselves a target to reduce our overall cost base on an annualized basis of some $70 million to $90 million over the next 24 months, with about 60% of that to be executed in the year. Pleasingly, we have achieved around 80% of our intended labour savings, which has offset some of the additional costs we are now incurring with additional wage and superannuation adjustments. However, as reflected on the previous cost waterfall slide, we've seen additional costs come into the business in areas such as additional system support, insurance, leasing charges and a range of general inflationary impacts across the board. Fair to say we have much more work to do in this area and we're working through these opportunities, particularly given the recent announcement on the UK. Moving briefly now to cash and capital. Operating cash, inclusive of interest costs, at just on $202 million, reflected the lower earnings result, a lower distribution from SA recycling, higher interest payments and lower tax remittances. In line with our existing capital management strategy, we recycled funds from the LMS sale into the Baltimore acquisition. And as previously noted, we had a residual contingent liability on the IllumiSource transaction. General and sustaining capital remained sensibly constrained given the operating performance, and we kept our previous guidance levels for sustaining capital. We paid a full year dividend of just under $41 million for the 2023 financial year. And the board determined not to pay an interim dividend for the half year, given the company's operating performance. We ended the year with a net debt of just on $400 million. Just before I hand back to Stephen, I wanted to touch on capital management and how we're thinking about that. Of course, both the sale of UK metal and our residual interest in circular services are welcome contributions to cash given the difficult market environment that the industry is experiencing. Our priority is certainly to pay down debt and strengthen the balance sheet. Both management and the board remain cognizant, though, of the need to balance maintaining financial flexibility, being able to advance appropriate business growth opportunities, and ensuring we provide shareholders with returns along the journey. We've actually got a broader capital management strategy review happening at the moment, and I'll be able to talk to this in the coming months. However, based on our improved operating performance and expected cash inflows over the coming months, the Board approved the determination of a fully franked final dividend for the 2024 financial year. Back to you, Stephen.

Thanks, Warwick. The final slide before we open up for Q&A is slide 36, which looks at the outlook. As we move forward, we expect our more agile sales approach and data-driven strategies to support NAM's ongoing recovery, despite intense competition for scrap supply. We remain optimistic about the sustained strength in Zorba prices, driven by the energy transition and decarbonisation. The hyperscaler data centre market is expected to maintain its strong momentum, providing positive opportunities for SLS. Our balance sheet will be strengthened as we redeploy transaction proceeds, positioning us well for future opportunities. Global steel demand is expected to remain muted, with economic indicators showing little improvement and Chinese steel exports continuing to affect the market. Persistent inflationary pressures call for further cost reduction efforts. The macro trends haven't changed. There is incontrovertible evidence that the demand for scrap is increasing as the steel copper and aluminium industries decarbonise. From a data centre and cloud perspective, if anything, the growth has just got stronger with the commercial arrival of artificial intelligence. Before we move to Q&A, I want to take a moment to thank all CIMS employees. It's been a year of big transitions, but through it all, you've shown incredible resilience, your commitment to safety and your adaptability are deeply appreciated. Back to you, operator.