Sims Limited

Thank you for standing by and welcome to the SIMS Limited HY26 results call. 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 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 operations, earnings outlook, and prospects for SIMS Limiteds. 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 call over to Stephen Mickelson. Group CEO and Managing Director of FIMS Limited. Please go ahead.

Thank you and good morning from Sydney. Today we're here to present our half-year results for FY26. Presenting with me today is Warwick Ransom, our CFO. We are fortunate today to have all of our business units leads here with me in Sydney. So we have John Glide, our ANZ Managing Director, Rob Thompson, our President of North American Metal, and Ingrid Sinclair, our President for SLS. 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. 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 will turn straight to slide five, which looks at our strategy and strategic priorities. By now, the left-hand part of this slide should look familiar, as it has guided us for the last few years. I'm going to focus on some of our recent key strategic achievements. From a customer and supplier perspective, we have made great strides in increasing our unprocessed intake, particularly in NAM, and this is definitely driving increased margin when we process it into higher value material. We have signed a couple of significant key supplier agreements in ANZ with New Zealand Steel and Alta, and SLS is expanding into Ireland. Looking at operational efficiency, NAM has really improved its logistics infrastructure, particularly the ability to deliver domestically through rail, and this has allowed us to take advantage of the domestic shred premium. Work on Pinkenbar continues at pace, including a fines plant, and rail infrastructure works at Otahuhu will allow us to effectively service the Glenbrook EAF. From an innovation agile perspective, we are transitioning to an outsourced global shared services model, which will improve our service offering, lower costs, and improve our ability to integrate new operations as we grow. We've just about completed relocating this SLS senior management team to Irvine in California, and are already seeing the benefits around innovative thinking and ideas from the increased collaboration. We've also added a new position to the senior team with a chief digital officer, Given the strategic importance of deeper integration with hyperscalers, we've appointed a dedicated role to drive closer alignment with their operational workflows. The first three bullet points under Invest Responsibly are linked. Warwick and I will talk more about Tri-Coastal, the Houston land base, and the property strategy lead role in the coming slides. It is also worth noting that we've extended our debt facilities by 12 months as we position our balance sheet for further growth. Moving on to slide six. Firstly, safety on the left-hand side. Total recordable injury frequency rate for the first half has been maintained at best-in-class historical lows, and just as importantly, we are tracking well on our lead indicators. As a management team, we all continue to focus on making sure our employees can go home each day just as they came to work. On the right-hand side, you can see that we are progressing nicely across governance, systems, strategy and risk assessment in support of our climate commitments, including the integration of climate data into financial and operational systems to enhance transparency and decision making. 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 highlight a few points from the consolidated result. Metal sales revenue is flat. despite sales volumes being down 2%. This is all about the price and contribution of non-ferrous, whether it be copper, aluminium or Zorba. The market is very strong. SLS revenue is up nearly 70% and repurposed units are up close to 18%. SLS has had an incredibly strong first half, driven by the demand for DDR4 memory. And we will talk about this in subsequent slides. A more subtle point to highlight is the flat metal trading margin percentage despite the significantly higher revenue from non-ferrous, which has a high absolute margin but lower margin percentage. This means that we have grown our ferrous trading margin percentage through disciplined buying of non-dealer material. I'm very happy with our cost control and it is also pleasing to see the growth in return on invested capital. Returns have improved materially over the last two years, and we remain focused on closing the gap to our cost of capital. Slide 8 separates the main performance highlights between metal and SLS. The only additional points I would comment on here is the 3.5 percentage point increase in unprocessed scrap in metal, driving higher shredder capacity utilisation in metal, and the 7.7 percentage point increase in EBIT margin for SLS. Slides 9 and 10 look at the factors influencing our metal businesses. Let's look at slide 9 first. The top two slides actually show how tariffs are providing protection for NAM and SAR in North America. You can see on the top left-hand slide the fall-off in US construction activity over the last year or so. All things being equal, this would have resulted in quite a depressed steel market in the US. But look at the right-hand top slide. and you can see the fall off in steel imports, commencing with the introduction of Section 232 in 2018 and then continuing with the tariffs. US steel manufacturers have benefited more from the fall in US imports than they have suffered from falling construction spend. What these charts indicate for the scrap market is that domestic pricing has been supported by strong demand, although softer construction activity continues to constrain intake volumes. The bottom charts explain ANZ's dilemma and depressed Ferris results. Quite simply, global Ferris scrap prices have fallen as Chinese exports have risen. Slide 10 shows why non-Ferris is in many ways the hero of the metal results, and it is quite simple. The chart shows the price in Australian dollars that Sims actually realised for its sales of Ferris and non-Ferris products. Ferris has fallen from a bit under $570 to around $545. Non-ferrous combined has risen from around $4,100 to nearly $5,000 on a blended basis. Focusing on NAMM on slide 11, these four charts capture the progress we have made at NAMM and explain not only the turnaround of FY25 but now the continued improvement in FY26. Firstly, the top left chart shows the benefit of focusing on profitable tons. We have grown trading margin percentage by five percentage points over the last two years. This has been achieved by focusing on, amongst other things, unprocessed ferrous, which has increased by 12 percentage points over the same period. And this has increased shredder utilisation by the same amount. Those shredder tonnes are producing more Zorba, which, like all non-ferrous products, has risen nicely in price. Finally you can see that we are exporting less as we have grown our domestic channels to market. This is particularly so for shred, where domestic premiums to export have been growing and currently sit at $50 per tonne. As a point of interest, we sold around 85% of our shred domestically from the East Coast. This would have been around 10% just a few years ago. It is important to note we still maintain our export optionality if market dynamics change in the future. Slide 12 summarises the tri-coastal acquisition we announced last week. As I said at the time of the announcement, over the last couple of years we had materially turned the Houston business around, but we needed access to better options both domestically and internationally to really drive performance. We had a suitable piece of land to achieve this at Mayershell, but the capital cost to upgrade the port at Mayershell and the size of our existing Ferris business did not justify the capex. PCT gives us this deep water access and therefore optionality, but it also materially increases our presence in the market in excess of another 350,000 tonnes, significantly reduces our operating costs through the end structure service agreement contract, and it frees up the sale of all our land in Houston. We estimate in excess of U.S. $100 million, including Mayeshaw. From a numbers perspective, we have paid a bit less than four times EBITDA post synergies. The combined businesses, and by that I mean our existing Ferris and non-Ferris operations plus the TCT acquisition, are expected to have an annual EBITDA of US$25 million and a return on invested capital of over 20%. Turning to slide 13, SA recycling. As the chart shows, SA Recycling has done a great job in ensuring resilience in its trading margin percentage. They have been pretty consistent at around 30% for the last five or six years. In the last two years, this has been achieved by increased revenue from non-ferrous, including Zorba, and this has combated the more depressed ferrous market. SA Recycling has strategically developed a really strong hub and spoke model in regional markets. It now has a very consistent source of unprocessed material being fed from around 150 feet of yards into its 24 shredders. This means more Zorba from shredding and more opportunity to attract retail non-ferrous from peddlers. I expand on this theme a little more on slide 14. Firstly, you will note the deliberate acceleration of the hub and spoke model. Since 2021, SA Recycling has acquired 76 yards compared with 52 for the 10 years preceding 2021. And you can see from the map that it is still a highly fragmented market, so there remains considerable further opportunities and there is significant headroom in its existing shredders. Its strong cash flow and balance sheet strength support the growth. SA Recycling has developed a real expertise in integrating these small bolt-on acquisitions and implementing its operational and commercial practices. What all this means is that the business is underpinned by strong unprocessed inflows and strong non-ferrous markets. This provides a very solid earning space in the current market conditions, and when the ferrous market cycle turns, SA Recycling is very nicely positioned to capture the upside. Moving to slide 15. There is no doubt that ANZ continues to operate in a subdued global ferrous environment and it does not have the protection of the tariffs that NAM and SA Recycling enjoy in the US. It does have a very strong non-ferrous business, a good hub and spoke network and good domestic access for sales. In many ways it is a business that is structured very similarly to SA Recycling. It is worth noting that the non-ferrous contribution is even more important to ANZ as the ferrous market conditions are considerably worse than North America. However, it will also benefit from an upturn in the ferrous market, although over the next couple of years this is largely dependent on a meaningful reduction in Chinese exports of steel, which seems unlikely. Beyond two years, however, the structure of the ANZ market is likely to change as domestic EAS come online, and this is the focus of slide 16. The chart shows that currently about 50% of the scrap generated in Australia is exported. However, by 2027, maybe 2028, this could reduce to under 20% as a result of increased EAF demand and additional charging of scrap and blast furnaces. This local demand is likely to support prices and potentially de-link Australia and New Zealand from the full impact of Chinese exports. In our view, our Pink and Bar site in Queensland will play the major logistics role in facilitating scrap finding its way to the right location at the most efficient price. This could well include importing scrap from our facilities on the west coast of the USA. No other participant in Australia or New Zealand has the capability to manage scrap flow between all states, New Zealand and the west coast of the USA. I now want to turn to SLS on slide 17. The chart on the right tells the headline story of the dramatic rise in DDR4 chip prices. But what has driven this? There are four interrelated points I want to make. One, we still need DDR4 chips as they are the workhorse of many of our devices and the Internet of Things. Two, manufacturers are switching to making DDR5s. where the demand from hyperscalers building AI data centres is almost insatiable. Three, this has created a structural supply demand imbalance for DDR4s. High quality repurposed DDR4s are a practical solution, but they are also limited. Four, a number of suppliers and market commentators are saying that the imbalance is likely to persist beyond 2027. I want to provide an update on our SLS expansion into Ireland, and this is on slide 18. Firstly, the expansion is well underway, and we expect we will open the 120,000 square foot facility in early April. There will be some ramp up and other costs, so I expect meaningful contribution to EBIT will not happen until sometime in June, maybe July. If the analysis shows, Ireland is an ideal place for expanding our data centre infrastructure services. It is a major hyperscale hub in Europe where we already have a presence. We have a proven track record in these types of facilities and I expect it to look very similar to our Nashville site, which a number of you have visited. We currently anticipate growing the business over the next two years to repurpose approximately one million units per annum with a skew towards DDR4s. This is an exciting opportunity for us and is driven by an existing relationship we have with a major hyperscaler. I'll hand over to Warwick now for a more detailed look at the financials.

Many thanks Stephen and good morning everyone. Despite mixed construction activity in Australia, continued elevated Chinese steel exports and softer US consumer sentiment impacting prices, ferrous scrap markets remain supported. assisted by the progressive expansion of EAF capacity globally. With export markets exposed to global scrap dynamics, we continue to leverage the arbitrage in our key domestic and international markets and solve volume proactively between the two to maximise margins, reflecting the significant agility and flexibility embedded within both our inbound and outbound logistic chains. In parallel, non-ferrous markets delivered a structurally strong performance and provided meaningful earnings stability, with LME copper increasing by approximately 13.5% year-on-year, while LME aluminium prices rose by 9.8%. The Asian spot price for aluminium reached its highest level since 2022, supporting considerable Zorba price increases, as Stephen mentioned. Not surprisingly, non-ferrous trading accounted for over 40% of group revenue in the half, up from around 35% in the comparative period. Concurrently, of course, prices for DDR4 memory continued to increase exponentially, rising by over 450% year-on-year, as demand continued to increase against diminished supply with manufacturing shortfalls and a focus on new generation cards continuing to uplift repurposing and resale activities. Across the business, we continue to deliver disciplined cost efficiency initiatives. Current activities such as moving to a global shared services platform and the operational changes now targeted for our Houston operations will continue to provide performance improvements in the business. We saw our overall cost base remain relatively flat like increases from higher inflows of unprocessed material in NAM and volume growth in SLS, and of course general inflation across the board. I'll come back and talk about our cost performance shortly. Our statutory result reflects targeted restructuring initiatives and non-cash hedge book mark-to-market adjustments associated with the significant rise in copper and aluminium prices at period end. We continue to work on the recovery of our UK metal receivable following collapse of that third-party business in an extremely difficult market. But, in line with prudent accounting practice, we updated the potential credit loss on the residual by a further £30 million to reflect current estimates. Although we have effectively reversed our prior accounting position on this sale, we remain pleased with our decision to exit the UK, the price we got for the business and the way we were able to maximise cash flow, particularly given the number of subsequent business failures in the industry there of late. Moving to slide 21 now, and I've touched on the principal drivers of most of these already, so I won't dwell on this slide. Positive contributions by both the NAM and SAR businesses absorbed the impact of the current market pressures on ANZ, while the strong performance from our SLS business And a range of cost reduction initiatives, as I've mentioned, contributed further to the uplift in underlying results, reflective of the strength of the geographic and diversification aspects of our business. I'll expand on some of the other factors driving these various movements in subsequent slides. Moving to the metal business more specifically, and in North America, total material inflows remain consistent with the prior comparative period. and converted metal volume moderated by 3% as we prioritised unprocessed intake in line with our value strategy, improving our overall margin position. While this added to comparative costs, the team were able to generate a number of offsets through further site restructuring and productivity initiatives. Period on period, we actually experienced around a 5% reduction in average realised ferrous prices generating a circa $13 million impact on the underlying EBIT for NAM, which we mitigated through that margin discipline and our cost-out initiatives. In ANZ, Ferris margins were again impacted by the subdued international market, which also flowed onto domestic prices. Favorable non-Ferris prices provided overall revenue support and helped offset shredder downtime at our St Mary's operation in the first quarter. Notwithstanding elevated consumable input costs, particularly in the areas of waste disposal and electricity charges, net operating costs continued to be well controlled here as well. Noting the current result does include an 8.8 million reclassification reduction. While US still spreads improved over the course of the half, influenced by tariff constrained imports, which are reflective of the US domestic market, in December our Sims Adam joint venture actually reported its first up market for Ferris pricing since April. Despite the comparative headwinds, the joint venture was able to close out the half year strongly, riding the uplift in non-Ferris prices as Zorba continued its surge. Our global trading platform was able to keep its costs flat, They saw reduced broker revenue following the cessation of trading activities for unimedals in the UK early in the period. Moving to SLS now, and Stephen covered a number of the drivers here already. As we've noted, the business continues to see significant growth in the number of repurposed units, as well as benefiting from the dynamics of the market. Pleasingly, we also expanded our hyperscale service offerings. adding diversification to the business's revenue streams. Increases in operating costs reflect both volume gains and expansion activities, and the team continues to look at additional opportunities around automation and robotics to support its cost management program. The result further validates SLS's positioning within a structurally expanding hyperscaler ecosystem and its connected drivers. Moving to slide 24 and touching briefly on central and functional costs now. As previously mentioned, we continue to look for cost out efforts in this area. We recently relocated our corporate office to further reduce costs, as well as successfully transitioned our purchase to pay function to our new global shared services hub as part of a more expensive shared services model being progressed over the next two years. Following stabilisation of the company's SAP platform implementation, project costs fell by $2.5 million, noting that we continue to incur costs in developing our new yard management software, which we hope to take live later this year. As previously advised, we elected to cease work on the development and commercialisation of the plasma-assisted gasification technology that was being undertaken by CIMS Resource Renewal during last year. This further reduced the central cost pool by some $10 to $12 million per year. Moving on then to our overall cost performance for the half, and we continue to look for opportunities to simplify and optimise our organisational structure, as well as further rationalise the existing operating portfolio. At a group level, we were once again able to keep total costs relatively flat over the period. limiting the increase to just on 4% off the rebase comparative half. Included in this was $16 million in additional variable costs related from the increase in unprocessed material and the higher repurposed units at SLS. Labor remains our largest cost element at around 40% of operating costs, and ongoing labor efficiency initiatives continue to provide significant benefits in this area and in line with our previous cost-out commitments. The group completed the year with net assets of just on $2.5 billion at balance date, broadly consistent with June, reflecting a stronger comparative Australian dollar at period end, dividend payments and the further provisioning of the unimedals receivable. Of note, this includes a $200 million expansion of working capital levels from the uplift in non-ferrous prices, impacting both our inventory and receivable values, and a $72 million transfer to broker deposits related to our derivative trading activities following the run-up in copper and aluminium prices. And I'll talk a little bit more about the impact of this on the next slide. Pleasingly, as a result of our positive trading performance, the board has determined an interim dividend of 14 cents per share payable in March. So a little bit more on our work in capital movements and the group's focus. On slide 27, we've isolated the overall movement to show the impact of those higher non-ferrous prices on the business, which has been quite significant on a number of fronts. The impact of the run-up in the copper price from October in particular is certainly reflected in our numbers. Working capital performance through better managing inventory levels, receivable conversion rates and payment terms continues to be a key focus for us. Moving to slide 28, and we put up this slide last week as part of our announcement on the tricoastal acquisition. We've highlighted the potential to generate better returns from our property portfolio a couple of times now, and I just wanted to reinforce our focus on this area. We've broadly categorised our properties into four areas, with the third category the most complicated and the area where we're most likely to spend a fair bit of time working through. As Stephen has previously mentioned, these are the sites where it is becoming obvious that over the next five to 10 years, the most valuable use of that land will not be in metal recycling. In most cases, this will require comprehensive planning, permitting and other dependencies to fully capitalise on value. As such, we're committing to a dedicated resource to ensure full management of the opportunity going forward. and continuing our approach to discipline capital recycling and unlocking embedded asset value. All that summarises into our overall cash movement for the last six months. I've talked about most of these already, but just to touch on capital, the majority of this spend occurred in our North American operations, primarily focused on improved metal recovery and incremental throughput initiatives, including the completion of channel dredging at our Claremont operations. In ANZ, investment continues into the redevelopment of our Pinkenbar site, including the construction of a new copper recovery plant. We expect to remain within our previous guidance in this area of between $120 to $140 million of sustained capital for the full year. We've pulled out the restricted cash allocation on the derivatives to better reflect underlying EBITDA to operating cash conversion, noting these deposits will unwind in the second half. In October, we made our final dividend payment of $25 million in relation to the 2025 financial year. And as previously noted, the board has determined an interim dividend of 14 cents per share, fully franked, for 2026 in line with our capital management framework after taking into account the restricted cash impact. Back to you, Stephen.