Sims Limited

Thank you for standing by and welcome to the SIMS Limited FY25 results call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you would like to ask a question you will need to press the star key followed by the number one on your telephone keypad. Today's presentation has been lodged with the ASX along with the results release. It may contain forward looking statements including statements about financial conditions, results of operation, 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 will now like to hand the call over to Mr Stephen Mickelson, Group CEO and Managing Director of SIMS Limited.

Thank you and good morning from Sydney. Today we are here to present our full year results for FY25. Presenting with me today is Warwick Ransom, our CFO. John Glide, our ANZ Managing Director, is also here with me and Warwick. Rob Thompson, our President of North American Metal, is on the line from the US. The presentation has been lodged with the ASX along with the results released. First up, I will provide an overview of the results and strategy. However, I will spend the majority of the time explaining how our business units are looking to navigate and grow in the markets in which we operate. 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 looks at our strategy and strategic priorities. This slide should look familiar. It has guided us for the last couple of years. Just to summarise the left side graphic, Our purpose is to create a world without waste to preserve our planet and our business is to repurpose and recycle. We are very good at repurposing and recycling when we focus on customers, suppliers, being operationally efficient, innovative and agile when investing responsibly. What are our key strategic priorities right now and what has driven the turnaround in the business? We're simplifying SIMs. We're delaying it. widened spans of control and driven costs out. We're putting margin back in the business by buying more unprocessed tons closer to the source. We're putting more emphasis on cash generation, looking at inventory turns, getting DSO down and actively managing margin versus cash flow, particularly given some of the timing impacts we've experienced from changes we've made in our operating model, such as our increased level of domestic sales. We're recognising regional opportunities better and maximising profit across the portfolio, including SAR. These things are enabling us to grow from a position of strength by having an improved supplier network and experience, enhancing customer relationships, creating genuine domestic versus export optionality and product differentiation. Turning to slide six. where we can see the actual benefits of executing on those key strategic priorities. In the metal division, unprocessed scrap, trading margin percentage and shredder utilisation are all up. And you can see in SLS that the growth in repurposed units is driving increased revenue and EBIT margin percentage. Moving on to slide seven, and I'm conscious that Warwick is going to take us through the financial results in some detail. So I'm only going to make a couple of high-level points. FY25 has been the year that we started to deliver on the turnaround in the business, particularly NAM. It hasn't been a straight arrow month over month throughout the year, and we still have a lot of room for improvement. But in a year where market conditions were no better, but perhaps arguably worse than the prior year, we have delivered a near 50% increase in underlying EBITDA to $430 million and a near 200% increase in the underlying EBIT to $174.9 million. This has been achieved despite a drop in sales volumes, proving the benefit of our change in strategy to prioritise margin. That statement is a slight simplification, but it does capture what we are striving to achieve. Turning to safety and employee engagement. Slide 8 shows that we continue to perform well when looking at our lag indicators. They are historic lows and industry best practice. I will point out that during the year, as a management team and a board, we focus heavily on lead indicators. I firmly believe that if you have the right lead indicators and structures in place to deliver on programs such as critical risk identification and mitigation, supported with training, the lag indicators will reflect this effort. I'm also pleased to share that we've maintained the high employee engagement score achieved in FY21. Importantly, we've sustained this level through a period of significant change in some of the most difficult market conditions we've faced in recent years. This consistency highlights the strength of CIMS culture and values. These are foundations that have not only supported our record safety results, but also enabled the speed at which we've executed our strategy. The rest of my presentation looks at how our divisions are addressing the opportunities and challenges in their markets. Starting on slide 9, I want to back up my previous comment that the market has not provided assistance in FY25 compared to FY24 and therefore the significant turnaround has largely been self-help. The chart shows that export prices have drifted lower over the last two years and domestic US prices have maybe had a bit more movement but ended largely flat. Despite this, you can see the significant lift in FY25 EBIT compared to FY24. I'll explain how this has been achieved, starting with NAM on slide 10. NAM has spent FY25 executing on its turnaround plan. We have been buying more unprocessed scrap to meet the increased shredded steel demand, driving up our shredder utilisation, and in turn we are capturing more Zorba. We have focused on higher margin purchasing discipline on raw materials where we can add value. This has impacted total ferrous volumes, but as I said, we have seen an increase in unprocessed intake volumes and non-ferrous shipments. In addition, the team has done a great job in opening up more domestic channels, and we have benefited from the US domestic premium. More domestic sales also allows us to buy and sell in the same market, reducing risk. Finally, cost scrutiny is relentless. All this has seen a reversal of the declining trading margin percentage as we get margin back into the business. What is NAM's pathway to growth? I covered this on slide 11 and the short answer is it has a strong pathway. The market drivers are very supportive. Tariffs have insulated US-based steel and aluminium producers and as can be seen on the steel spreads chart, Our domestic customers have been insulated from the wider impacts of oversupply of global steel. As previously mentioned, this has led to strong investment in additional EAS capacity and the resulting new ferrous raw material plant is growing rapidly off an already high base. NAM has adjusted its business model to buy more unprocessed scrap, process it internally and sell more optimally. This is driving a margin first mindset. The Midwest premium has risen sharply as a result of the growing demand for aluminium scrap in the US, and our alumisource business is nicely positioned to capitalise on this strong market need for raw materials. NAM is now in a position to move forward with growth. We are actively pursuing land sales to fund internal growth capex and appropriate bolt-on acquisitions to strengthen our feeder yard network. Moving on from NAM and onto ANZ on slide 12. The main theme for ANZ and FY25 has been the resilience of the non-ferrous business. The flip side of that has been the weakness in ferrous, driven almost entirely by the overproduction and record exports of finished and semi-finished steel products out of China. It is worth remembering that the domestic selling price for scrap in Australia largely reflects export parity, albeit regional demand and supply imbalances are playing an increasing role. A weak global ferrous scrap price feeds directly into a weak domestic scrap price. As I said though, ANZ's large, growing and resilient non-ferrous business has enabled it to weather the storm in FY25. There are also a number of positive structural shifts on the horizon for which ANZ is preparing itself. Slide 13 looks at how ANZ is executing to take advantage of those structural shifts. In our view, the insatiable appetite for non-ferrous metals will continue for the foreseeable future. ANZ has a strong non-ferrous business with our investment in balers, cable granulation, MRPs, beneficiation and fines plans to capture and capitalise on this demand. Governments across Australia and New Zealand are showing a real willingness to support sovereign steel manufacturing. Scrap metal is a key strategic input. Without it, There is not a cost-effective, low-emission solution. ANZ is nicely positioned. We are the only player with excellent positions in all the Australian and New Zealand markets, moving scrap to meet regional supply and demand imbalances. Our capital growth is aligned with this. We see Pinkenbar becoming a strategic logistics hub for managing scrap and meeting the needs of our customers. We have plenty of spare capacity in our shredding facilities. and the capability to take on opportunistic acquisitions. Finally, turning to SLS on slide 14. SLS has found itself in the middle of an extremely fast-growing market, driven either directly or indirectly by the demands of AI. As you can see on this slide, the compound growth in SLS volumes has been impressive, but nothing compared with the growth in data center capacity. The addressable market is huge. The growth in the market, combined with the desire to control supply chains, has seen a recent and rapid hike in the price of memory represented by DRAM, or Dynamic Random Access Memory. And this is shown on the top right hand chart. The heading on slide 15 sums up SLS's opportunity, how to grow along with the hyperscalers. The market dynamics are clear. AI is fueling growth and memory everywhere. At the same time, there is the desire to achieve this with much less carbon and ensuring that the supply chain is de-risked. SLS's style of repurposing satisfies these requirements. SLS has proven that it can efficiently repurpose data centres into either the resale market or redeploy memory back into new data centres, giving it access to the fastest growing segments. This has allowed us to move up the value chain. and in some instances integrate with the hyperscaler to provide a full redeployment service. SLS's challenge and therefore focus over the coming periods is to continue this scale up through a greater use of robotics and further system integration. I'll hand over to Warwick now for a more detailed look at the financials.

Thanks Stephen and good morning everyone. I think this year's scrap metal market can be best characterised as a complex interplay of both global and local factors, with impacts varying across different metals and regions. The markets for ferrous products continue trends evident in the second half of last financial year, with global scrap markets continuing to face several significant headwinds, trade volatility and variable market dynamics. US tariff concerns created an additional factor, and the lack of policy clarity impacted supply chains, creating significant negative sentiment in most markets and unevenness in purchasing activity. Despite this, US spreads have generally remained solid, even with the pickup from summer construction not being as expected. Believingly, most scrap metal operators maintained a level of rationality in a difficult market, and our continued focus on regaining margin in North America enabled us to preserve our position in a difficult year, significantly improving underlying EBIT in that region. Prices in the Asia-Pac region, however, remain subdued. On the plus side, contraction of China's crude steel output does appear to have commenced, albeit at marginal levels. And this has been principally driven by policy change as the government moves to better manage price competition and phase out outdated industry capacity. As Stephen mentioned, offsetting these headwinds, at least partially, has been the demand for non-ferrous metals such as copper and aluminium as they continue to rise off the back of ongoing green energy and infrastructure projects. In fact, this year, non-ferrous trading accounted for 34% of group revenue, seven percentage points higher than last year. In parallel, significant growth in artificial intelligence and the accompanying development of major data centres continued to drive demand for processing capacity and SLS's activities. Tariff imposition, data protection, and a shift in manufacturing preferences by key hyperscalers further uplifted repurposing and resale activities for memory modules, as Stephen mentioned, elevating pricing to new levels following unprecedented demand and contributing to another standout performance by that business. After normalising for Baltimore and changes in cost classification and following further cost out efforts, we saw our overall cost base remain relatively flat despite increases in labour costs and general inflation across the board. I'll come back and talk about our cost reduction activities shortly. Our statutory result was impacted by the decision to cease the development of the plasma gasification technology in Queensland. restructuring costs associated with our cost out program and an accounting requirement to consider the potential for a credit loss on the balance of the UK metal receivable given their request to defer that payment into the FY26 year. Moving to underlying EBIT and I've touched on the fundamental drivers of most of these already so I won't dwell on this slide. Suffice to say though that the team in North America have done a fantastic job in turning around that business and driving the focus on getting margin to the bottom line. Our much improved underlying EBIT of $174.9 million is certainly now reflective of the strength of the geographic and portfolio diversification aspects of our business. I'll expand on some of the other factors driving these various movements in the following slides. Moving to the metal business more specifically, and our focus on sourcing more unprocessed material continued through the year as ongoing growth in EAF's further added to scrap demand in the US. Reliability of supply and scrap quality remain dominant for major steel producers, with a particular focus on upgraded or low residual quality shred, and NAM has been able to position itself as a supplier of choice to several producers. Expectations of high tariffs led to large-scale pre-buys and boosted price hikes towards the end of the first half of the year, with buyers taking advantage of pricing and purchasing large spot orders of metal in advance of any potential policy changes. Margins, however, continued to reflect strong execution discipline, with focused efforts to match purchase pricing to market movements and further progress our market recovery momentum. Severe weather on the east coast across January and February translated into the lower result in the second half. Ongoing trade uncertainties and tariff developments has also meant that many participants remained on the sidelines given that market unpredictability. Despite these factors, NAM uplifted its underlying EBIT by some $93 million and the team continues to focus on what it can control in an uncertain market. In ANZ, as I mentioned, ferrous margins were impacted by the subdued international market, which also flows onto domestic pricing. China continues at pace at or above decade-high records of steel production and exports for most of the year, putting downward pressure on prices and global production and contributed to lower buy volumes. Despite the unfavourable economic environment, non-ferrous sales increased during the year, and supported absolute trading margin performance, providing some respite and reflecting our regional supply chain advantage. Importantly, the team's buy price discipline and continual focus on costs were also contributors to it achieving a solid underlying EBIT of $72 million for the year. Our SIMS atoms joined Venture Experience softer container and bulk markets in the first half of the year as strikes, hurricanes, and logistic challenges kept overall inventory higher and reduced margins. However, a much improved second half regained trading margin performance and improved volumes as the business took advantage of the run-up in US non-ferrous prices and added a number of additional feeder yards into its network. Following a review of the Singapore hub, we reduced our operating cost base in global trade by nearly $8 million. We also picked up a brokerage benefit linked to the UK sale as we continue to trade non-ferrous for that business until the end of June. Overall, underlying EBIT for the total metal business improved $104 million, or just over 60%, on the comparative period's result. Just quickly, I think it's worth highlighting the impact on our North American operations from that severe cold weather bout we experienced in January and February this year. Those sub-zero temperatures in the Midwest through to the East Coast significantly reduced our intake levels across those months, and whilst we saw a recovery in March, we weren't able to catch up on the lost volume. Moving to slide 21 and SLS now, and the business has continued its strong year-on-year performance progression. With significant growth in the number of repurposed units we are now managing, SLS has been able to reflect the scalability of its operating model, its asset-like growth and the benefits to margin from this. Stephen's already touched on the key drivers of the market in which it operates and I'm sure we're all experiencing that impact ourselves. We can't dwell on the result other than to note this business today sits at around 20% of our underlying EBIT, perhaps supporting a greater recognition of its attributable value within the company's total portfolio. Touching briefly then on central function and corporate costs. Again, some great work here across the business on cost-out efforts with labour reductions and lower consultant expenditure. Development of new yard management software continued through the year, and we hope to see the first installation of that at our pilot sites in early calendar 26. And as previously announced, In January, we elected to cease work on the development and commercialization of the plasma-assisted gasification technology being undertaken by CIMS Resource Renewal. This has resulted in us booking closure-related and non-cash write-down costs totaling $25 million as a significant item, but will reduce future corporate and central-level costs going forward by some $10 to $12 million per year over the prior year. But that takes us to our cost performance for the year, and we continue to look for opportunities to simplify and delay the organisation, as well as further rationalise the existing operating portfolio. We set ourselves an implementation target of circa $40 million in the current financial year, noting again that capturing the full benefit remains dependent on the timing of changes and restructuring activities. Pleasingly, at a group level, We managed to keep total costs relatively flat over the period through these cumulative efforts, and what you see here on the cost waterfall slide is the flow-through benefit of the full program in the year. You can also see the impact of the annual uplift in people costs again, even with those further rounds of restructuring completed. Total labour costs comprise around half of our total cash cost base, and ongoing labour rationalisation efforts have enabled us to deliver cost savings this year of $35 million through both permanent and contract labour changes. We were also able to offset broader inflationary pressures with general OPEX savings, though incurred higher project costs associated with the new yard system, as well as higher depreciation charges from prior year activities. Moving to slide 24, and whilst we are now plateauing somewhat on our operating cost initiatives, we continue to chase cost-add opportunities where we can. As I mentioned, the decision to cease development of the CIMS resource renewal plasma gas technology will reduce expenditure by a further $6 million on this year, and we have recently commenced the transition of a number of our central transactional activities to an offshore capability centre. with the objective of taking a further $5 to $6 million per year out of our central cost pool once it is up and running. As expected, capital expenditure was higher in the second half. A number of strategic investments were made in NAMM, where we enhanced our metal and waste recovery through multiple shredded downstream investments and separation technologies, most notably in the mid-Atlantic regions. We invested further in the expansion of our national rail car fleet and barge vessel loading capabilities and also supported logistical capabilities through investments in additional trucking and rail infrastructure. In ANZ, sustaining capital was broadly in line with the prior year, with major works covering redevelopment of our Newcastle site and then equipment overall at St Mary's. Work commenced on redevelopment of the Pinkenbar site, with initial activities focused on site infrastructure and the wharf. We expect to spend around $30 million there in FY26 on both infrastructure and the establishment of a new finance plan investing through the cycle to ensure we remain well positioned going forward. Total group depreciation inclusive of leases is expected to be broadly consistent with the current year. Onto the balance sheet, and the group completed the year with net assets of just on $2.6 billion at balance date. Noting that comparative numbers separate the UK metal business, working capital increased period on period by circa $110 million, $60 million of which was because of late June bulk sales, which we collected in early July, and a change in payment terms with our SAR joint venture, to rebalance our interco terms contributing to an $80 million impact. Lifting our level of domestic sales also increased our receivable balances by some $45 million as domestic credit terms generally range from 30 to 60 days versus our shorter term export arrangements. We've placed additional focus on our working capital management as a result of those slow-on impacts. However, it did result in an increase in our net debt position to $332 million at the end of the year, together with an elevated gearing and leverage metrics outside of our preferred range. Pleasingly, in line with our revised capital management framework, the board determined a final dividend of 13 cents per share, fully franked, and taking our full year dividend to 23 cents per share. While this is at the top end of our suggested range, the board felt it appropriate to reflect the cash returns from the UK sales activities in the total dividends for the year. So all that summarises into our overall cash movement for the year. I've talked about most of these already, but just to touch on a couple of other key drivers, noting this waterfall is from our December balance, where you can see that impact from those working capital changes at year end. Following discussions with Uni Metals Recycling, the acquirer of our previous UK metal business, we agreed to defer the final payment of their principal from its original June payment into FY26 to enable the business to undertake a full refinancing of its funding arrangements. The European business has been particularly difficult this year as Turkish mills continue to contend with weak Finnish deal sales and downward pressure on prices linked to tariffs. Conversion costs have also increased significantly there in the face of rising electricity charges and DC scrap buying has remained subdued as a result. While we were required to take a non-cash credit allowance on the outstanding balance for accounting purposes, we continue to work proactively with the company as it works to extinguish the residual capital payments. And just to note that the full year net operating cash result of $297 million includes a $66 million residual tax payment, which related to a capital gain on the sale of the LMS business in the prior year. So somewhat understating a much improved year-on-year operating cash flow performance. Back to you, Stephen.