Sims Limited

Thank you and welcome everyone to our call. Today we're here to present the Harkier results for FY25. Presenting with me is Warwick Ransom, our CFO. Also on the call are Rob Thompson, our North American Metal President, and John Blythe, our ANZ Metal Managing Director. First up, I will run through our strategy and strategic priorities, market dynamics, an overview of the results, and operational highlights. I'm also going to spend some time detailing the internal and external factors providing positive momentum for our business regions and divisions. Warwick will then take us through our recently formalized capital management framework, and then a decent review of the financial results. 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 looks at our strategy and strategic priorities. At our FY24 results announcement, I presented a similar version of the graphic on the left-hand side of the slide. This is effectively our plan on a page. Our purpose has endured for several years now, and our core strategy is to repurpose and recycle. We deliver this to the five elements of our strategy as detailed in the graphic. However, you can't deliver everything at once. We've had to focus on the strategic priorities that give us the biggest bang for our buck. We've simplified SIMS by, amongst other things, reducing layers and increasing spans of control to speed up decision making. There's been an enormous focus on increasing margins and not being preoccupied, particularly in NAM, with marginal profit volumes. We've continued to focus on shortening the cash cycle to improve our cash generation. The UK sale has been the most significant contributor to optimising our portfolio. It has liberated management to focus on the US and ANZ, where in many areas we have a good market position, and in those where we don't, we have a pathway to a good market position. There could be some further acquisition and disposal opportunities within regions to further optimize the portfolio. Maintaining or improving our market position will allow us to grow from a position of strength. On the buy side, we have been improving our supplier network to allow us to buy more unprocessed scrap at source. On the sales side, there has been a concerted effort to enhance our customer relationships, particularly domestic customers, and this has provided us with genuine domestic and export optionality to manage and capitalize on dynamic market conditions. Part of this relationship building has also been about ensuring we have consistent and high-quality differentiated products to suit different market segments. The benefits of focusing on these strategic priorities are starting to show in our financials. But before we get to those, I would like to cover off-market prices and safety, beginning on slide six. In a nutshell, Ferris prices were on average lower this half compared to the FY24 half, and non-Ferris prices were higher. This continues a trend we have seen over the last 18 or so months. Interestingly, we have seen a bit of recovery in Ferris scrap prices as we enter the second half of FY25, particularly in US trade prices. Our belief is that this is being driven by the pending steel tariffs and also some restocking at the mills. It is unclear whether this upward trend will continue for the second half. Moving on to safety on slide seven. I noted at the FY24 results that we had moved to managing safety through proactive leading indicators as opposed to lagging. because lagging indicators are simply an outcome. We've successfully improved our safety program by focusing on enhancing and standardizing control measures that have created a safer organization. You can see that our leading indicators shown on the left are consistently strong, which is the key driver behind the improvement trend over the last few years in the lagging indicators and the significant reduction of more serious injuries. Onto slide eight, which is a high-level summary of the financial results. The two highlighted numbers on the page are EBITDA and EBIT, both up substantially. I also want to highlight the 22% increase in trading margin despite flat sales volumes. This is a proof point that focusing on margins, not volumes, is driving better financial outcomes. While the return measures on productive assets and investor capital are still unacceptably low, there is a definite improvement in line with profit performance. Turning to slide nine, while it is titled operational highlights, it is in fact both financial and operational highlights. Looking at first at Sims Metal, excluding global trading operations, an 8.6 percentage point increase in unprocessed scrap helped drive an uplift in our shredder capacity utilization And together, these are good contributors to the 3.5 percentage point increase trading margin percentage. The trading margin percentage increase was particularly strong in NAM, which Warwick will highlight later in the financial discussion. It is also worth noting here that we have changed the structure of SIMS Metal back to a more regional model. While the functional model served its purpose at the time, the current market and SIMS position in it requires Rob Thompson to be responsible for all of NAM and John Blythe for all of ANZ. I am exceptionally pleased with SLS's performance. Strong repurposed units growth contributed to a nearly 21% increase in revenue and a 2.2 percentage point increase in the EBIT margin. Moving to slide 10 now, which drills a little deeper on NAM's operational highlights and what we have been doing to achieve the turnaround in results. Let's start with the top left-hand chart. This shows that we are responding to price signals between domestic and export markets. In July 2024, export prices were $20 per tonne higher than domestic prices, and therefore we exported more. In the current month of February, domestic prices exceeded export prices by $56 per tonne, and we significantly lifted domestic sales to 65% of total sales. We've been working hard to develop our domestic channels in the US to enable us to have genuine optionality. Moving to the top right chart, clearly our focus on buying unprocessed material is showing results. We've increased the unprocessed ferrous scrap as a percentage of total ferrous scrap from the mid-50s in the first half of FY24 to approaching 70% in this half. This increase has driven better utilization of our shredders, but also our MRPs, which capture the non-fairest fraction driving an increase in Zorba volumes. This is shown on the bottom right-hand chart, where Zorba sales volumes are up 31%. Finally, the bottom left-hand chart, a proof point showing our increased focus on margin. Despite market conditions that have at best remained flat and depressed over the last 18 months, we have lifted our buy-sell spread significantly over consecutive halves. This increased spread has flowed through to EBIT, as shown on the quarterly NAM EBIT results in the chart to the right. The next few slides show the fundamentals driving NAM, ANZ, and SLS. Let's start with NAM on slide 11. The two charts show the increase in demand coming from EAF production. In particular, the chart on the left highlights the demand for scrap outpacing the supply through to around 2030 if the new EAFs come online. Within the detail, the issue is even more pronounced as it relates to shredded material because it compromises approximately 45% of infeed with only 30% being cut grades. It is also worth noting that this analysis was undertaken before the announcements of the steel and aluminium tariffs. The impact of the tariffs may well add to a consumption line, which will add even further demand for scrap. As the demand for scrap increases, the price will also increase. So the question then becomes, are CIMS and SA Recycling well positioned to benefit from this dynamic? The answer is yes, as can be seen on slide 12. The map on this slide shows the location of existing EAFs and the EAFs under construction or proposed, where NAM and SAR have the capability to supply those EAFs. As you can see, we are well positioned to benefit from the increased demand for obsolete scrap in the US, and as I said a moment ago, tariffs will only turbocharge this growth. I want to move to ANZ now on slide 13. In many ways, we see ANZ following the path of the USA. There are currently five EAFs being proposed, one in Western Australia, three in Queensland, and one in New Zealand. It is uncertain whether all will be constructed, but it is easy to imagine that two will be built in addition to Blue Scope's Glenbrook site. We are very well positioned to meet this increased demand, as the map on this slide shows. Clearly, this will change the dynamics in ANZ, and it's quite feasible that at times in the future, ANZ will materially consume all its domestically produced ferrous scrap, and there may even be a requirement to import. Our yet to be developed Pinker Bar site with its existing deep sea dock will play a vital role in the ferrous scrap and steel markets in the coming years. The non-ferrous business in ANZ is strong, producing over $400 million in revenue and growing. In line with our metal out of waste strategy, we are investing in a fines plant in Australia to extract more non-ferrous from our waste stream, further adding to revenue and margin. The Australian market is a complex and challenging one to navigate. Our view is that, as is happening in the US, there will be a consolidation of the market. And as in the US, we are one of the logical consolidators. Moving from our metal businesses to SLS on slide 14. The magnitude of the numbers associated with data centres were quite extraordinary, even before the advent of AI. Throw AI into the mix and the growing desire to keep data within country and therefore onshore data centres, it is obvious that the USA is going to continue to be the growth engine. The rationale for repurposing data centres is an economic one. The parts are lower cost, available within country, enable frequent upgrades, and have proven to be highly reliable. On top of all these economic benefits, the carbon footprint of a repurposed unit is a tiny compared to that of a new one. SLS has benefited from all this growth. as you can see on slide 15, and it is well positioned to capture further growth. Following the sale of SLS's European compliance business in 2019, the EBIT from the remaining business was 2.9 million in FY20. We are currently expecting around 30 million EBIT for FY25, a 60% compound growth rate since FY20, even higher than the compounding 40% growth in repurposed units over the same period. SLS's proven growth strategy is set out in the right-hand box. It's set to deliver further growth in the coming years. I'll turn over to Warwick now to take us through the financials in some detail.

Many thanks, Stephen, and good morning, everyone. Before I review some of the detail behind the results, I actually want to take the opportunity to talk about our revised capital management framework and how it feeds into the basis of our capital allocation going forward. It's an area we indicated at our full year briefing that we were working on and an important strategic element in how we continue to strengthen the business, advance appropriate growth opportunities and ensure we reward shareholders along the way. We clearly operate in a market that carries an inherent level of volatility and can swing rapidly in either direction from a range of influences outside of our control. As a business that operates on a very light margin, We need to remain dynamically responsive to those inevitable cycles. We're not in an industry that has the benefit of absorbing downward market changes into its existing earnings base for the medium to longer term and wait for recovery. Having a strong balance sheet and remaining conservative in our debt profile are critical elements to how we operate and think about our capital. But we also need to remain agile and responsive to value opportunities as they arise And so structuring our facilities around varying levels of working capital, maintaining an appropriate liquidity buffer, and recycling existing capital where we aren't generating the returns we need are all part of our considerations within this framework. Of course, our overarching business strategy is connected to our purpose and drives the assets in which we choose to invest. Trading margin, EBITDA performance, and returns against direct capital employed are our key measures of performance, but these also require a commitment to appropriate levels of maintenance capital as an initial capital allocation priority. We also need to maintain a strong balance sheet at the same time. We've reviewed and established two key target measures based on both our overall risk profile acceptance, which we set at less than 15% for gearing. and an operating leverage rate of 0.5 times underlying EBITDA, which excludes finance lease commitments and supports the management of our day-to-day working capital levels. Of course, these are target ratios, and we will no doubt step outside one or both of them from time to time, particularly to capitalise on growth opportunities. But those opportunities also need to be able to bring us back in line with those levels over an appropriate timeframe. Those considerations and allocations result in an available pre-growth free cash flow outcome. Our framework subsequently prioritises an ordinary dividend allocation to shareholders before considering growth or other capital returns. And of course, growth opportunities need to link back to strategy so that all elements of the framework work together to create value. On to slide 18, and as part of our review of the framework, we've looked to provide additional clarity over our dividend policy going forward. Of course, like most companies, we have a diversified shareholder base, with each shareholder no doubt having their own preference as to the basis of how it might receive returns. We clearly can't address individual needs, but we do want shareholders to receive returns along the way, and we believe an initial allocation from pre-growth free cash flow reflective of the performance of the business and in the context of the market, and provided we have maintained balance sheet strength, is an appropriate priority that enables investors to then execute against their own objectives. As the business continues to perform in the US, our level of available franking credits will inevitably be constrained against total earnings. However, the sale of LMS last year has provided a significant top-up in our franking balance for the current time. So going forward, the board aims to provide shareholders with a partial return through an ordinary dividend of between 25 to 35% of the company's pre-growth free cash flow, and has subsequently determined to pay an ordinary interim dividend of 10 cents per share for the current financial year in accordance with the revised policy. In line with the framework, strengthening our balance sheet through an improved operating performance and recycling capital back into the business through our sale of both UK metal and our residual interest in the closed-loop investment has helped bring our performance back in line with those success measures I've just talked about. However, we recognise that we still have some way to go in this area and there are a number of other initiatives that we're currently working through to further support our position. One of those areas is our land base. While our NTA per share has improved period on period, along with our capital returns, we still have some assets that won't get us there and provide us with the opportunity to further optimise our investment base. In the course of reviewing our portfolio, we've been able to assess an indicative as-is valuation of our land over the recorded book value of some $1.5 billion. Clearly, we're not looking to physically bank that, as we believe the underlying fundamentals of the business and the market opportunities in front of us are immense, but it does indicate the fundamental foundations that exist in support of the business. Okay, back to our performance now for the half year and slide 20. Something that we experienced in the latter part of last financial year through an improved operating performance, particularly in North America, continued through the first half of this financial year. Underlying EBIT for the total metal business increased $34 million over the comparative period and the total group performance increased by $47 million with further growth in volumes at SLS and reduced costs across the functions. Our focus on regaining margin in North America and market conditions more broadly saw a marginal reduction in overall volumes period on period, although we added around 180,000 tonnes to our total sales volume from the Baltimore acquisition, which occurred towards the end of calendar year 2023. A decline in statutory earnings reflected the inclusion of the LMS sale in the comparative period results. Specifically on the total metal business, as noted, our overall volumes remained relatively flat but reflected the concerted effort to improve margins in NAM through a greater intake of unprocessed material and to more broadly remain agile and responsive across the business to the markets in which we operate, switching between domestic and export opportunities in line with market dynamics as appropriate. This was achieved against the headwinds of some very challenging market conditions and a significant fall off in steel prices globally. We've been able to offset some of those challenges with an improved non-ferrous result, given higher pricing in that market, and a significant level of cost-out reductions across the business. Normalizing for Baltimore, which added $28 million to our cost base in NAM, and removing the impact of an $18 million cost credit we previously recorded from charging customers for reimbursing environmental processing levies, so our overall cost base remained relatively flat despite increases in labour costs across the board and higher waste disposal levies in Australia, which are now accounting for about 12% of our spend here. I'll come back and talk further about our cost reduction efforts shortly. On slide 22, SLS continued to perform extremely well, and with significant growth in the number of repurposed units we are now managing, has been able to reflect the scalability of its operating model and the returns it is able to independently generate from its revenue uplift. Stephen has already touched on the key drivers of the market in which it operates, and I'm sure we're all experiencing that impact ourselves. So I won't dwell on the result. Other than tonight, this business today sits at around 20% of our underlying result, perhaps supporting greater attributable value recognition within the company's total portfolio. Slide 23, touching briefly on corporate and central costs. Again, some great work here across the business on cost out efforts. A couple of things to note here. Firstly, we're in the process of developing new yard management software with support from our existing system coming to an end, and this will contribute to some fluctuation in future costs as we progress its development. And then secondly, corporate costs include our provisioning for full year incentive payments for the total business, against its earnings performance, which has obviously improved period on period. We had marginally higher costs for CIMS resource renewal relating to IP commercialisation activities. However, these costs won't continue beyond the current financial year. Onto our Cost Out program more specifically, and we continue to look for opportunities to simplify and delay the organisation, reducing our operational and central costs and further rationalising the existing operating portfolio by potentially exiting some of our smaller non-performing areas. We delivered $64 million in annualised savings last year, for which we are experiencing the benefits in our current cost base and are targeting another circa $35 million in the current financial year. Capturing the full benefit remains dependent on the timing of certain changes and restructuring activities. but we're comfortable in our ability to fully capture those reductions over the next 12 months. I would note that whilst we have identified additional opportunities going forward and will continue to focus as a leadership team in this area, we are beginning to level out somewhat. As an example, we've just seen an 80% increase in electricity costs in our New Zealand operations. We're also a relatively labour-intensive business with labour costs forming some 40% of our overall operating cost exposure. We have some work to go on optimising our portfolio composition, and we'll need to see what we can deliver on that. But our next major opportunity remains around volume growth at margin to further spread the fixed cost base. That's becoming our focus area. Moving on to the cost waterfall slide, and you can see the impact of annual increases in people costs even with our recent rounds of restructuring. Pleasingly, other cost areas have remained relatively flat despite ongoing inflationary factors, and we picked up the benefit of some timing variations in the half. Moving on to slide 26, and I thought it worthwhile touching briefly on the sale of the UK metal business and how that flows through to the net profit result and balance sheet. As previously indicated, Our approach with this business has been to maximize cash conversion throughout the sale process. This has included a significant element of working capital conversion, whereby rather than place that expectation on the purchaser, we were able to work with them and ensure the residual working capital of the business at completion met their requests as a smaller operator. We've subsequently converted agreed inventory and receivable amounts to cash, broadly in line with the stated asset values, and received the first installment of the capital component of the sale as scheduled. From an accounting perspective, however, we've also had to account for the foreign currency translation reserve to which we previously booked the cumulative effect of exchange rate changes on consolidation. Obviously, when we acquired the full business there in 1998, the exchange rate was in a much different position at around 38 pence. Together with transaction costs, That's resulted in us booking a small capital loss on asset sale despite a significant gain on cash. And then finally for me, our overall cash movements for the half. I've talked about most of these already. Just to note, net operating cash excluding UK working capital conversion does also include our residual payment of tax in relation to the gain on sale for LMS. So somewhat understating a strong and much improved operating cash flow performance. As for prior years, we would expect sustained capital to be marginally higher in the second half and broadly in line with the prior year. Back to you, Stephen.

Thank you, Oreck. Before I go to the outlook slide, I want to run through the key themes for this half year on slide 29. We've turned NAM around from its loss-making position a year ago by focusing on the basics of buying more unprocessed volumes at source and having the optionality to sell those volumes domestically or internationally. ANZ has shown resilience in the face of headwinds, and it is well positioned for the medium-term upside we see coming. SLS is delivering really well, and it operates in a strong growth market. We've achieved good cost reductions over the last 18 months, and this positions us well to spread fixed costs over larger volumes as the industry consolidates. particularly those policies that favour US steel production, have the potential to provide an overall positive financial outcome for CIMS. Our capital management framework has evolved, and it provides the right balance between flexibility and discipline, which will deliver value to shareholders. On slide 30, I want to discuss the outlook as well as the macro trends we believe will impact us. We have seen significantly different markets depending on where you are in the world, over the last 12 months. For example, the announcement of the steel and aluminium tariffs in the US has already changed that market by lifting steel and scrap prices. Regional differences, probably both positive and negative, will continue. It is hard to see China cutting steel production in the short term and thereby lowering exports. This will continue to dampen global fair scrap prices and steel prices. Non-ferrous volumes and prices have been robust, and we expect this to continue. On balance, we see supply and demand in the second half being similar to the first half, despite the slow January and February in the U.S., most due to seasonality and extremely cold and wet conditions that we haven't experienced for years. The hyperscaler data center market is set to continue its strong growth in the short and long term. Broader inflationary pressures have eased. We still have pockets of high inflation, such as our landfill fees in Australia. The cost initiatives we have put in place should enable us to mitigate increasing costs to hold them flat with the first half. Our assessment is that overall, the tariffs will benefit the US and challenge ANZ, and therefore in aggregate, the impact should be positive, given our larger US business with North American Metal and SA Recycling. What is less certain is the timing of any positive impact, particularly whether we will see it feed into our F25 results. Looking at the macro trends, as you would expect, they haven't changed, with one exception. We have added in our expectation that the world will become more nationalised, or at least regionalised. This will ultimately create opportunities for our metal business, with our optionality to sell domestically or internationally in both the USA and ANZ. SLS is also well positioned to benefit from USA's desire to keep data in country. Finally, thanks to the whole SIMS team. Your efforts have repositioned the business over the last 12 months to be much more resilient to changing market dynamics. I know I've said it before, but to go through this change while maintaining our safety culture and delivering strong outcomes is impressive. Back to you, operator.