Sims Ltd Sp/Adr

Welcome to the SIMS Limited half-year results release. Today's presentation may contain forward-looking statements, including statements about financial conditions, results of operations, earnings outlook and prospects for SIMS Limited. These forward-looking statements are subject to assumptions and uncertainties. Actual results may differ materially from those experienced or implied by the forward-looking statements. Those risk factors can 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 Alastair Field, Group CEO and Managing Director of SIMS Limited.

Thank you and good morning for the presentation of the FY23 half year results for SIMS. Joining me on today's call is the Group Chief Financial Officer, Stephen Mickelson. The slide presentation that we will run through has been lodged with the ASX, along with the results released. The agenda for today is that I will run through a general overview of performance and the highlights. I'll then hand over to Stephen, who will take us through our financial results before I take a closer look at the green steel momentum. I will conclude with the outlook in the short term and macro trends. Following that, there will be time for Q&A. Before I turn to slide five, which covers the key takeaways from the first half, I'd like to briefly say a few words about the recent earthquakes that struck Turkey and Syria, causing significant harm and suffering. Our thoughts are with all of those affected by this tragedy. Turkey is our largest ferrous market, accounting for 36.5% of ferrous sales volume in HY23. Five steel mills are located in the vicinity of the earthquake zone, and they represent approximately 20% of the country's ferrous production. We understand that while the steel mills are not damaged, they are not currently operating. Three cargoes were destined for these mills. Two of them have already been redirected to other locations, and one is currently under review. Although 80% of Turkey's production is largely unaffected We are closely monitoring the impacts of the earthquake on the metal markets. Turning now to slide five. It has been a challenging trading and operating environment for the first six months of FY23. I am, however, pleased with the resilience of the business and what it has shown. EBIT was above our guidance, provided at the AGM due to an overall stronger performance from the final two months of the period. I am pleased with the strong operating cash flow, even though this was expected due to a reduction in working capital from clearing inventory and lower metal prices. As always, it is very pleasing to see a continued improvement in safety to new records of performance. Turning to slide six. It was a period of significant metal price reductions and tight scrap availability that significantly squeezed trading margins. These challenging trading conditions, combined with a persistently high inflationary environment, led to a material reduction in all our profit measures. This is plain to see on this slide. Underlying EBIT was down 74% and metal operating costs were up 18%, partly impacted by new business and an increased footprint. Proprietary sales volume increased, mainly out of North America, as we reduced inventory levels aided by better freight logistics. This assisted in working capital reduction and increased operating cash flow by 10.7%. Moving to slide seven. Slide seven provides a summary of the financial outcomes in a convenient table. I've already spoken about the profit measures on the previous slide, So I will only add that we are paying 14 cents per share interim dividend, consistent with our approximately 50% payout ratio. On the next few slides, I will talk about non-financial measures, starting with health and safety on slide eight. As I've repeatedly said in prior presentations, the health and safety of our people is a huge priority for all SIMS employees. It is pleasing to see that the half-and-half lagging indicators continue to improve. The total recordable injury frequency rate has improved to below 0.9, and this is world-class. This level of performance is achieved through a great safety culture and focusing on getting the critical risk areas right, such as the investments we have made in traffic management controls. Moving now to slide nine on sustainability. Sustainability is at the core of our business, and it is pleasing to see further recognition for the effort that our employees put into ensuring that SIMS is a leader in sustainability. There are many measures, initiatives, and cultural behaviors that drive outcomes which lead to these awards. We have continued to make good progress on our three sustainability-focused areas. Operate responsibly, close the loop, and be a partner for change. Before I hand over to Stephen, I'll turn to slide 10, which sums up the markets in the first half. The charts highlight a couple of important points that resonate throughout the current half-year results. Firstly, the dramatic fall in ferrous prices from their record peak in April last year in the high 600 US dollars per tonne all the way down to the low 300s as we started FY23. There has been some sign of recovery as we finished the year in the low 400s. Solver prices declined slightly in the first half of 2023 compared to the prior period. Secondly, export freight prices have fallen, reflecting better logistics overall, and that assisted us to reduce inventory. I will hand over to Stephen now to take us through the results in more detail.

Thanks, Alastair. I will turn straight to slide 12 which summarises the group results and some key metrics. Lower sales revenue was predominantly driven by a much softer average fairest price, down 12.3%. The lower sales price, combined with stiff competition for available scrap, reduced the overall metal trading margin by 12%. When this reduction was combined with 18% higher costs in the metal business and a 62% reduction in the contribution from SA Recycling, The impact was a 74% reduction in EBIT to $93.3 million. On slide 13, for convenience, we summarized EBIT and volumes by division. To avoid being repetitive, I will turn straight to the more detailed slides. Looking at our North America metal result on slide 14, intake volumes were down, but sales volumes were up, reflecting a solid reduction in inventory. Trading margin decreased 8.6% despite a benefit from foreign exchange translation. That same foreign exchange translation benefit adversely impacted operating costs, which were up 18%, excluding the impact of the acquired ARG business. Overall, EBIT was down 73.4% to $37.8 million. Turning to slide 15, ANZ also reduced inventory with flat sales volumes, but a 4% decline in intake volumes. The trading margin was down by nearly 16% for similar reasons to NAM. However, ANZ managed to hold cost increases to 6%, a respectable outcome given the level of inflation during the period. Overall, EBIT was down 44% to 53 million. The UK is presented on slide 16. Once again, the trading margin was down for similar reasons to NAM and ANZ, with one exception that it was further adversely impacted by foreign exchange translation. Due to some significant foreign exchange translation movements, we have inserted a constant currency table comparison for the UK, NAM and SA recycling in the appendix on slide 41. Operating costs were up significantly in the UK, particularly when adjusted for foreign exchange translation. While some of this is from the opening of shuttered yards and some one of costs, there is no doubt that the UK has been more severely hit by inflation than NAM and ANZ. The combined impact of lower margins and higher costs pushed the UK into a loss-making EBIT of $3.6 million. On to slide 17. The recurring theme for the SLS business has been the lockdown in China, severely impacting resale prices. This continued throughout the first half. And while China has opened up, it is not clear when the market will normalise. Trendforce, an external party, forecast this to be the end of calendar 2023. I remain cautious about this prediction. The good news is that repurposed units grew half on half by 38.5%. And there was also a near 29% sequential half growth. Moving to slide 18. SA Recycling was negatively impacted for very similar reasons to NAM. It is worth noting that there was a $6 million benefit in HY23 compared to half year 22 from reconciling US GAAP to international standards under which SIMS reports. This benefit will continue into the future. I've also highlighted on this slide for the first time SA Recycling's gearing. Despite significant acquisitions over the last few years, its gearing has remained relatively stable. reflecting strong cash flow generation to pay down debt used to fund these acquisitions. Turning briefly to slide 19, there are only two points I want to highlight. Firstly, Sims Municipal Recycling was significantly and negatively impacted by lower plastic and paper prices. From November, as a result of a restructure into a much larger entity, we no longer equity account for SMR, and you will notice from the accounts is now classified as an asset held for sale. Secondly, while LMS had a strong first half, this was largely timing and we are not expecting a material contribution from the second half. Moving to our cash generation on slide 20. The main story on this slide is the release in working capital of around $187 million as inventory levels were reduced and prices for ferrous also reduced. Inventory reduction is clearly shown in the chart on the bottom right-hand side of the slide. Moving to slide 21. The strong operating cash flow reduced net debt from 102.7 million down to 33.4 million, despite distributing over 110 million in dividends and buybacks. It is worth noting that the large final dividend paid in October 22 utilised our available franking credits, so the half year 23 interim dividend of 14 cents per share is unfranked. My final slide is capex on slide 22. At the AGM, we forecast full year sustaining and environment capex of 170 million, down from 220 million forecast at the August results presentation. We are on track to achieve this, having spent 92.4 million in the first half. I'll now hand back to Alastair.

Thank you, Steven. The next few slides focus on the momentum building around green steel and also progress update on our growth strategy. Turning to slide 24. As we have said previously, the transition to a low carbon and circular economy presents a significant tailwind for our business. We're in a privileged position today to enable the decarbonization of the steel industry. The sector is responsible for up to 7% of global emissions. As industry leaders, NGOs, and policy makers are under pressure to reduce the negative climate impacts of the industry, a new class of steel has emerged, green steel. Although there are uncertainties regarding the standards and pricing of green steel, in the last few years, governments and industry associations have accelerated plans to create green steel markets. The slide shows some examples of plans proposed by governments and industry groups that paved the way to a green steel industry. Although some of the initiatives are more advanced than others, they are a strong signal the transition has started. Looking now at two examples, the United States and the EU have joined forces to develop a common methodology for assessing the embedded emissions of traded steel. Also in the US, the Barclean Task Force Program aims to support low-carbon construction materials, including steel. Moving to slide 25. To understand the dynamics driving the green steel momentum, we must look at the demand from our customers and end users of steel, the car and consumer goods manufacturers, as well as property groups. They all need recycled metal to decarbonize their supply chains and de-risk their businesses. Increasingly, we're also seeing these stakeholders integrating circular strategies into their business models. Moving to slide 26, which puts into context our position to capitalize on this growth. 106 years of operating in the recycled metal business places us in a privileged position to capture this growth. Our unmatched capability, assets, market position, geographic diversity, and financial strength developed over the years give us a strong platform to continue to grow our business in the years to come. In response to the green steel opportunity, we have conducted various technology trials and process refinements to enhance the quality of our product outputs to meet the most stringent future steelmaker requirements. I'm pleased to say these trials achieved very promising results in HY23. On to slide 27. which provides an update on the growth strategy. Despite a very challenging six months, we have continued to execute our growth strategy. I've already referred to a few of the items on the slide, so let me highlight some others. SA Recycling has integrated its PSC acquisition into the business. This was a significant and complicated transaction that sets SA Recycling up for further growth. We sold surplus land, and have already recycled some of the proceeds into more strategic smaller parcels of land in other locations. We have also nearly completed the Sims Resource Renewal Rocklea pilot plant. I want to move now on to the outlook on slide 28. We have seen signs of rising prices and better volumes as we completed the first half and entered the second. It is premature, however, to call a significant downturn following 18 months of record prices, volumes, and profitability over. There still remains uncertainty around inflation, labor shortages, interest rate rises, geopolitical events generally, and China's trajectory specifically. The macro trends haven't changed. As I've detailed in this presentation, the demand for scrap is positively driven by its pivotal position in reducing carbon in steel production. And in the SLS business, the positive medium-term outlook for closing the loop by repurposing the cloud remains. Before I move to Q&A, I'd like to thank all SIMS employees for the last six months. Your efforts around keeping each other safe at work are outstanding. Despite the difficult trading conditions, we have continued to perform as a team and deliver a high-credible financial result. Congratulations. Operator, back to you.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Owen Birrell from RBC. Please go ahead.

Good morning, guys. Thanks for the result today. I've just got a couple of questions. The first one is regarding your earnings momentum. Very strong beat versus the guidance that you provided in November, suggesting your second quarter was a much stronger quarter. Are you able to give us an indication of what the EBIT profile was, first quarter versus second quarter?

Yeah. Hi, Owen. Good to talk to you again. for a while, nice to hear your voice. So I think there's a couple of points on that. Firstly, in the year end result, I referred in my commentary to there was a goodwill adjustment in SA recycling and that goodwill adjustment, we didn't know what that was going to be at the AGM. And so that was some upside to the guidance. And that combined that with, we have an insurance captive, and there's the ongoing revaluation of liability expectations on that. And there was a couple of million in there. So between the two of them, let's say that was around about $8 million. Now that's ongoing, that's not one-off. The goodwill adjustment will happen from now on. So... You know, that means that the result, if we'd known about those things at the time, we would have been around about $8 million higher. So let's say that takes us to about $85.

The rest of it... Just to confirm on that, Stephen, you said that that $8 million, is that per half ongoing?

Yes, it will be. Yes, it is. And that's... Yes, sorry. Short answer is yes, it will be. The... There was definitely a stronger trading environment for the November-December than what we thought was the case at the AGM, and that was driven by the prices did rise over that period, demand was good, which was very helpful as well. So there is a skewing to the second quarter, but I wouldn't, overthink that as a significant upturn.

Are you able to give us a sense of the balance between the two? Because as simple analysts, we're just going to want to extrapolate something. I'm just wondering what your exit run rate was.

Yeah, okay. It gets a little bit complicated, to be frank, by the result from LMS because they clearly had a very strong first half and that was skewed almost entirely to the first quarter.

Could I ask maybe then just for the metals business?

Yeah, I'm a little bit reluctant to do that because I think there's many, many things. Because I clearly understand where you're coming from, where your question is coming from. But there's many swings and roundabouts within that skewing. I think it's the most balanced statement I can say is that we definitely saw some rising prices and some stronger volumes as we came into November and December period. But I wouldn't be describing that as, as Alistair said, a significant upturn that sort of signals the end of some risks that we can see in the coming six months.

Okay, that's fine. Second question, just turning to Turkey. Firstly, can I just confirm the number that Alistair mentioned at the start? Was that 36% of sales last year to Turkey?

Yep, that's correct, Owen.

Okay. And then what you're seeing at the moment, what proportion of the Turkish mills have sort of shut down and do you have any indications of when they're likely to restart?

Okay, I'll give a holistic answer here. Obviously, catastrophic and then obviously, we've obviously been in touch with all of our customers and, you know, and we're constantly in touch almost daily. Sims Limited has obviously donated to UNICEF and to ABA to obviously help that humanitarian crisis. I think the affected area that we're talking about runs between 20% and 30% of the steel industry. That remaining part that is not in the affected area, they're continuing business as usual. So let's say 80% of the steel industry in Turkey is continuing. The affected area that we're talking about, obviously a much smaller percentage, they have No damage to the actual malls themselves. The ports that they use to import scrap, there's no damage to the ports. In actual fact, they were unloading scrap yesterday in some of these ports. So both infrastructure and the ports are all ready to run and are being used in somewhat form. But also understand that those ports are also going to take vessels with humanitarian aid into that affected area. So those vessels, those ships will take priority. As a result, the mills have been asked to supply all the equipment in the aid of the rescue and obviously the facilitation of all attempts to obviously clean up some of the area. It is estimated that in two weeks' time that all that facilities would be in a position for the steel mills to start up by the end of February. I would say let's take it another week, first week into March. So the steel mill feedback that I've had from some of the owners is that their workforce is intact, their infrastructure is intact, but now the focus is really on humanitarian, and they expect at the end of the month, beginning of March, to go back to normal. I think obviously for us, we did have a few cargoes, but they've actually been shipped. They're heading towards other Turkish mills. So we are not concerned about any of our shipments. We can divert, as we have done already. But as I've just mentioned to you, some of that affected area, they are going to take our vessels, and obviously we still have very good relations and contracts in place. So we're not concerned at all, but it's really about making sure we work with them at this stage, and it's very difficult, as you can well establish.

It's probably worth mentioning as well, Alastair, that of the other unaffected mills, let's call them 70-80% of mills unaffected, they have significant capacity room as well. So the expectation that they would lift the capacity because they have substantial ability to do that.

Okay, and can I just ask sort of, I guess, a longer-term question around this? You know, the earthquake, obviously they'll resolve over time, but is that going to yield a significant amount of domestic scrap in Turkey? And do you think that will put down the pressure on Turkish demand for scrap in the medium to longer term?

No, I think it's probably going to be in the reverse. I think the demolition and obviously the cleanup is going to be something that's obviously going to be a focus to that government to obviously clean the area but we're very strong of the opinion that there will be a concerted effort to rebuild the affected areas and that will require obviously a steel industry that will have to step up and meet that requirement and I have a sense that That's going to be in quite a sense of urgency and a priority for that government to rebuild and rebuild at probably a higher quality build and therefore more steel.

That's great. Thanks guys.

Welcome.

Thank you. Your next question comes from Paul Young from Goldman Sachs. Please go ahead.

Morning Alastair and Stephen. Hope you're well. Good little EBIT beat and good operating cash flow, so that's great to see. Can I ask a question on the outlook, particularly on volumes? We've seen prices up for Ferris and non-Ferris. We've seen ANZ volumes up slightly half on half, but North America was actually down, you know, double digit half on half. You've spoken about Turkey, but I'm actually more interested in the US volumes. Your peer, Schnitzer, recently stated they're seeing some U.S. steel mills restocking and volume starting to improve? Just wanted to know what you're seeing in the U.S. domestic market.

Thanks. Yes, that U.S. domestic market, we have seen prices of rebar and other steel products going up. There is a definite sense of restocking. Obviously, in the second quarter last year, you often find destocking fall for various tax purposes and other reasons. So Part of this, we have seen an upswing in the USA intake in both domestic pricing but also in actual volumes.

Okay, thanks Nelson. That's great. And then maybe turning to capital allocation and probably a question for Stephen. Stephen, I know you're not near your net cash target of $100 million but I suspect the working cap might continue to unwind a touch. Interesting comments there but just the absence of a buyback in this result and also just versus both on M&A. You've been pretty active in M&A, but nothing in this sort of recent downturn. So I'm just curious about why a buyback wasn't announced, and I would have thought that, I know the outlook's uncertain, but now's probably a good time to do a buyback. And then just what opportunities are you looking at on the both on M&A front, particularly in the US? Thanks.

Yeah, sure. Well, firstly, on the buyback front, We've spoken now for the last year or two about our distribution policy, which is 50% of profits is what we'll distribute, and we'll distribute it through a combination of buybacks and dividends, depending on the circumstances at the time. I guess what we thought this time, with that being $0.14 per share for a dividend, to sort of reduce the dividend and replace that with a buyback, it just seemed a little small, to be honest. It doesn't mean we're It doesn't mean we're never going to do buybacks. What it means is that relative to this year's result, we've distributed 50% as we want our policy to clearly be, and it just seemed more logical to do it with dividends than a small buyback, which we thought would be a little confusing and meaningless. So that's that. In terms of bolt-on acquisitions, we continue to look. I think you're all aware we're disciplined around that. We've got our hurdles that we have to meet. I think we've been cleaning up the balance sheet quite nicely, and we've got some capital available there. So we will definitely look for bolt-on acquisitions. We are looking at bolt-on acquisitions, but everything has to come at a price that meets our required hurdle rate. So don't interpret the, you know, I know we haven't made an announcement around our acquisition for a while, but don't interpret that as we've gone off the board. We are looking actively. We just want to make sure that we get the value that we require for shareholders.

Okay. Thanks, Stephen. Just one last point on the buyback and sorry to labour on this, but isn't your dividend policy there for encouraging you to be a bit pro-cyclical here? I mean, you should be buying back stock, I would have thought, on the sectors that are low and cash flows are So I'm just curious about how you think about the value created by buyback.

Fair question, but I would just split it into two, is that we have half a year, we have our interim result and our final result, and that's when we formally do the, we're going to distribute 50%, that's our formal policy. Between those periods, we are obviously, we have the buyback program is open and we have the freedom to do buybacks between those periods if we think that's appropriate. Yeah, don't interpret it as we're not going to do anything. It's just that this is our policy.

Okay, thanks. I'll pass it on. That's it for me.

Thank you. Your next question comes from Lyndon Fagan from JP Morgan. Please go ahead.

Thanks very much. Look, my first question is just back to that volume outlook on slide 26, 9.6 million tonnes in FY25. I just wanted to gauge your level of conviction around delivering that and maybe if you could unpack it a little bit in terms of what component you think relies on doing M&A versus organic growth.

Sure. I think part of the program that we have is the bolt-on acquisitions in each one of the regions. And obviously for us, those need to meet the hurdle rates that we set. There certainly is discussions in terms of M&A where we have larger acquisitions that are potential, but these take a long time. I guess part of the aspect for us, that is an aspirational target that we definitely want to go after, but that is not at all cost. And as Stephen said, our discipline around capital and the return hurdle rates have to be met. Otherwise, that target is at risk. So part of this is working through and being able to negotiate making sure that all the filters that we put into place about choosing these acquisitions have to be in the right areas and the right continents. So that is an ongoing problem in terms of just being able to close the deal out. I would say that this does take time. So absolutely M&A is a part of that delivery. I think the organic growth, obviously we have done that right across particular areas, both in Australia and in the U.S. in particular. That is obviously a much slower process. in terms of being able to open yards from scratch. And they take six months to 12, even 18 months to actually get to the volumes that we target for those areas. And those are part of a wagon wheel approach. They typically are feeder yards that feed to shredders, et cetera. So we're not intending to open any particular yard and put a new shredder on. It just takes too long at this stage in the permitting process. So part of that is actually the M&A, how that steps in. I think another important aspect which is not part of that 9.6 million tonnes we talk about, is also supporting our joint venture partner, which is obviously SAR. And that's obviously a key strategy of ours of where they can operate and how they can actually speedily take up these smaller yards in areas we don't operate in. So it's a combined strategy and very focused, but it's not at all cost, if that makes sense.

Thanks for that. So is it fair to say that the majority of that target relative to where we are today just relies on M&A?

That is correct, and obviously from a recycling capital, that's obviously what Stephen always refers to, is that we want to be able to fund this as much as we can from utilising our existing assets.

Okay, no, I appreciate that. And so the next question I had was just on the CapEx guidance. So there's been a few evident flows around that. I'm wondering if you could maybe... put a number out there for FY23 if it's not already in the pack somewhere. Thanks.

We've got the maintenance environmental capex, we've got it at $170 million for FY23. That was down at the August results, we were guiding to $220 million. But I think with the downturn that we experienced, we definitely decided to preserve cash, so we took that back to $170. The growth capex on top of that, that's really dependent on what comes up at the time, so it's very hard to guide to that. I'll give you an example of the $34 odd million we've spent in the first half. Of that there was various bits of acquired land that probably totaled $10, $12 million. granulation plant that we've put in, we've got polishing drums, you know, all these are sort of in the one to two to three million range. So the timing of those and the opportunities to do those, it's just too hard to forecast, unfortunately, Lyndon, but 170 on your ongoing environmental and maintenance capex is what we're forecasting for the full year.

Thanks for that. And just to clarify, the $50 million that was cut, should we be just rolling that into FY24?

Yes, FY24 and FY25. It was a cash preservation move because there were some pretty uncertain times as we were in August. But that's expenditure we still have to incur at some point, absolutely. I don't think we'll get to do it all in 24. I think that'd just be too hard. But over 24 and 25, that will come back without a shadow of a doubt.

Great, thanks a lot.

Thank you. Your next question comes from Megan Kirby-Lewis from Baron Joey. Please go ahead.

Thanks for taking my question. I'm just looking for some additional commentary just on the volume outlook for second half 23. I just note that the first half was supported by that wind down of inventory. So how is your intake volumes tracked year to date? What sort of inventory do you have available? And should we be thinking about your sales volume as sort of being in line with the first half or do you think that you can lift volumes relative to the first half?

Sitting here now and, you know, I'm conscious that, you know, there's many conditions can change. I think it is fair to assume that the second half will be broadly in line with the first half without the, you know, obviously the first half benefited from that inventory sell-down, which is what we'd promised the market. We knew we'd built up inventory with these poor freight conditions, and we said our expectation was to clear that inventory in the first half, and we did. But I still think the second half is broadly, I think we can match it. We are seeing the intake levels have been pretty good. January is typically a slow month, particularly in the northern hemisphere with pretty cold winters. the January intake flows, despite that, have been nice and solid. So where I sit now, I think it's a fair assumption to say that we aim to meet the same volumes in the second half as first half, despite not having to sell down inventory.

No, that's perfect. Thank you. And I guess just then, since... Intake volumes seem to be improving slightly. It would be reasonable to expect trading margins should improve, but probably still below that sort of long-run average, just given overall things. I guess scrap supply is still fairly tight.

Yeah, I think that's a fair assumption.

Perfect. That's all from me. Thank you.

Thank you. Your next question comes from Chen Jiang from Bank of America. Please go ahead.

Good morning. Thanks for taking my questions. A few from me, please. I'm just wondering what are the primary drivers for your underlying EBIT you released today versus back to AGM, and how much bid is by your underlying business versus, you know, you mentioned accounting changes and the revaluation of insurance. Thank you. I have a few more after this.

Yeah. So I think, as I said, you know, Let's call it around about $8 million was from the additional Goodwill amortisation and the insurance revaluation. But I would stress that those are ongoing. That's not just a one-off thing. In particular, the most material part of that is in the US where SAR is based and SAR operates under US GAAP. They amortize goodwill under IFRS, which we operate under. We don't amortize goodwill. We test goodwill for impairment annually. So therefore, the amortization, the depreciation of goodwill that SAR is doing, we have to back that out. And that's the benefit we get. But that will be ongoing from an EBIT point of view. The rest of it, which is, you know, which the rest of the beat is, The underlying conditions were better than what we saw at the beginning of November when we were having the AGM. Ferris prices rose over that period. We were probably around that stage. We were probably sort of in the 370 to 380. Over November and December, they rose up to the early 400s, maybe got up to as high as 420. So that drives more scrap out of the market and the opportunity to make a better market. And it's also worthwhile pointing out that Zorba held up nicely, both Zorba and Twitch held up nicely and at the beginning of November maybe there was a little, we were thinking there might be a little bit more softness in there and that didn't eventuate. Zorba held up quite nicely despite I guess car manufacturing being fairly benign or maybe even somewhere between benign and depressed. Those are the main reasons.

Thanks, Stephen, for your answer. So since you mentioned scrap prices have been increasing in the last three months since your last update at AGM, I think around 15% increase since November. And we saw a few U.S. deal companies have increased HR prices in the last few months as well. I'm wondering... Do you think your comments today are conservative, given the market is improving? What's the upside from your views mentioned today that the uncertainties of the second half outlook? Look, it's a good question.

I hear what you're saying about the U.S. steel mills and there is confidence in them and they are restocking. and we have seen prices of finished goods rise in the United States. Obviously, the steel prices have followed that. But from a conservative point of view, we do see a number of positive indicators, like you've just mentioned, but also there are still geopolitical challenges. Turkey is obviously in wait and see at this moment. Pricing is hovering, and the market players are just sitting out at the moment. So we're trying to be conservative, yes, and then from an upside point of view, obviously, If prices rise and there's no major issues across the globe, then I would expect the Southeast Asian market to continue its good performance with non-ferrous, and hopefully Turkey can get going again end of February, beginning of March, and we'll see some stabilization in the actual ferrous market. So a lot of that is also gonna depend on the actual demand and what comes next after the restocking.

Thanks, Alistair. So based on your comments today, it feels like you think the current scrap prices are not sustainable. Is my understanding correct?

I don't know. Sorry, it's Stephen here. I don't know if we're saying that current scrap prices are not sustainable. We just think there's risk. They've risen quite nicely over the last period, but there's always risk in them. We just simply want to point out the risks.

Yes, sure, sure, I understand. May I have another two, please? Just wondering the scrap availability, if you can give us some color on the infield, the scrap availability in U.S. and Europe as well as ANZ. Thank you very much. And what do you think the risk to the, I mean, the upside and the downside risk? Thank you.

And if my context is wrong, you can send me another question. But in terms of the context in the United States, There is availability of scrap in the domestic market to meet the growth in EAFs, and hence why they still have the ability to export out of the US. I think the European position is to be determined probably by the end of June whether there's any limitations on export of scrap out of Europe, and that could affect the availability of scrap. I think from a Southeast Asia point of view, There are certain countries that are going to be importing scrap for many years to come, and China is one of them, India is another. So the availability of scrap is going to be regional, and I think that's why SIMS is in such a strong position. Geographically, we're situated where we can export scrap and make sure that that availability is met. And I think in the longer term, you've seen the growth of AAF, you've seen the decarbonization journey, you've seen the targets that the automotive industry setting out and the steel industry and our role in being able to support these steel industries. So I think the availability of scrap is going to be very competitive and I think we're very well positioned to compete in that growing market. So I'm very confident and that's really what we're saying in our medium to long-term outlook.

Sorry, Chang, it's Anna here. We have a long queue. Do you mind maybe going back to the queue and then if we have some time we'll take more questions from you?

Sure, yeah, we can take it offline. Thank you very much. Thank you. That's all from me.

Thank you. Your next question comes from Lee Power from UBS. Please go ahead.

Thanks, Alastair. Thanks, Stephen. Just the restocking piece, Alastair, do you think that's done? And if not, how much further do you think, how far through the restocking story do you think we are?

Look, I think it's going to take this quarter to probably restock when you look at across, but I also think it's going to depend on region by region. I think the U.S. has got quite a bit of confidence in terms of infrastructure spend is obviously materializing, and there seems to be a level of confidence around the steel mills. So I would think that they are going to be restocking for the next two, three months, but I also think the demand is fairly strong in the United States. So that's a positive for us, and I think the international market in terms of Turkey, et cetera. We have seen obviously restocking and the question is whether the U.S., sorry, the U.K. domestic market is also going to restock and pick up more of local scrap and that obviously restocking, you know, I think will be fairly quick in the U.K., probably end of February. But I think the overall sense that we have is that we're really waiting to see that supply pull in the rest of the market. And I think with Turkey just in a bit of a lull at the moment, I expect that to pick up again in March, April.

And then, I mean, I understand it's obviously early days with Turkey, but like operationally, are there any changes that need to be made? Like how hard is it operationally to reposition volumes from Turkey into other regions, I'm assuming Southeast Asia, or is it just price that ultimately drives it?

Well, look, I mean, let's assume everything being normal and Turkey being okay. You know, obviously we do diversify and send everywhere in the world. But Turkey is obviously one of the largest takers in the world given their EIF. So they are going to continue. I mean, as I said earlier on, 80% of their market now is carrying on business as usual. So I don't think there's any decline in Turkey taking scrap. And as I said earlier on, I think they are going to rebuild and that's going to demand scrap and obviously steel production to support that. infrastructure rebuild. As sad as this is an event, Turkey will rebuild. I've shown that before in the past. I think they are definitely going to be able to continue taking our scrap. I don't think there's any risk of that.

Excellent. Thanks for the call. I appreciate it. You're welcome.

Thanks, Lee.

Thank you. Your next question comes from Paul McTaggart from Citigroup. Please go ahead.

Morning. So two questions to follow up. So firstly, you talked about structural tailwinds for your industry being a positive. I think we'd all agree with that in terms of demand for scrap, et cetera, you know, EIF production. But the sellers of assets, when you do volatile acquisitions, must recognize that already. So I'm just trying to get a sense of, you know, how much of that gets given away in acquisition price in terms of expectations of sellers. And the second question is really around costs. I mean, you're talking confidently about holding costs into the current half flat on the previous. But in the mining sector, we're not seeing a reduction in cost inflation yet. So I just wanted to understand what you're able to do to maintain costs flat into the current half.

Yeah, sure. Thanks, Paul. It's Stephen here. The question on how other people are seeing the tailwinds and how much do you have to give away, I guess that comes into our discipline around price. We don't want to give it away. We must get our hurdle rate. What I would say, though, is that not everyone is as well positioned as we are to take advantage of those tailwinds. It's a complicated business to collect scrap from different locations and make your decisions of whether or not you're going to sell domestically or export it, and do you even have the ability to export it? Do you have access to the ports that we have access to? So we have advantages that allow us to bid competitively where both parties are happy. And I'd also add to that, not that we give away synergies, but we also have cost synergies as well around that, which we don't give away as a matter of course. But as a result of that, you do in negotiations find a price where we get our minimum hurdle rate and more, and the seller gets a price that they are happy with, because they don't have access to what we have access to.

Just on that, it is fair to say that, yes, there is an expectation from a number of these folks that might be wanting to sell their business that they want more. And that's obviously why it does take longer to negotiate.

Yeah. Yeah. Yes. On the cost side and what gives us some confidence that we're going to be able to maintain costs, and in this environment, can I say maintain costs is plus or minus 3%. It's not the old days of zero inflation, so it's hard to be deadly accurate. But I guess the inflation that we're seeing in our costs was particularly strong around... around tipping fees and energy costs and repairs and maintenance costs. And we did see that flatten off as we got to the end of the second half. And our view is that that will continue into the future. But let's be frank, it's flattening at a very elevated level on what it was just two years ago. So we still have work to do to reduce costs. I guess what we're not seeing is just that constant seven, eight, nine, 10% inflation is going to continue in our cost base into the second half. As for the miners and that, I honestly don't know. I don't know their cost structure well enough to comment on why ours would be maybe not a benign outlook, but a more flat outlook than they are.

Thanks guys. I think the miners obviously have a heavy labour component which probably skews it a bit but thanks for that.

Okay. Thank you. Your next question comes from Daniel Kang from CLSA. Please go ahead.

Good morning guys. Just one from the SLS. Really encouraging to see that volume jump nearly 40% but clearly resale prices are still under a lot of pressure. Now, with China reopening, are you seeing any signs of life on resale prices? I know that you made the point that you expect prices should normalize by the end of this calendar year. Just maybe if you can elaborate on that. Thank you.

So thanks, Daniel. I think the short answer to your question is no, we're not, which is why I sort of had some caution. I know we have this Trendforce Outlook, which is an external, you know, experts that say, you know, end of 23, they expect them to normalise. Right now, we're not seeing that, to be frank. We would have expected to see it by now, but it's not happening. So I just think we should just have a cautious outlook. You know, China shut down very quickly and very dramatically, and it's opened up in the same fashion, and it's all a little bit hectic. But I think in summary, what you should be taking away is right now, we are not seeing that improvement. But I'm going to add, you're right, it's very encouraging to see the repurposed volumes growing because when the market does eventually recover, we're in a nice position. But right now, we're not seeing it. Okay.

And when trend fours say that they expect prices to normalise, what does that mean? Is that just flattening out or just a recovery from levels...

I don't think... I mean, yeah, it's such a great word, which is the expression. I don't think anyone sees them recovering to mid-COVID levels, because mid-COVID levels, you know, we had everybody working from home suddenly, everybody needing to upgrade their home computers or whatever, because everyone was working in that environment. But I guess... you know, maybe more the prices we saw just before China shut down is where I would say it was at.

Thanks, Sam.

Thank you. Your next question comes from Gus Rehberg from Macquarie. Please go ahead.

Hi, Alistair and Stephen. I just had a question for me. Say in the event there's a US recession, how do you see that impact volumes?

I can answer the question in the sense that if you're suggesting that there's a recession in the US, we're not suggesting anything like that. Obviously from a typical indicator, and this is obviously typical, generally the health of the economy is often a guide for us in terms of scrap. If you've got domestic infrastructure, both demolitions are taking place, there is a normal turnover of motor vehicles, etc., etc., then typically you see positive volumes in a scrap market and scrap environment. I think in a recessionary sort of country, you would probably see a slowdown in scrap volumes because part of that is it's cost-based. People are not going to travel far distances to fetch scrap and then bring it back to big cities, etc., where your shredders typically sit. So in a downward recession, you typically would see much lower volumes and obviously higher costs and therefore reduced margins. But I'm not suggesting anything like that in the US.

Thanks for that. And just a second question on inflation and labour shortages that you call out in your outlook. How is this trend during the quarter? And just with energy costs coming off a little bit, do you see any of that pressure coming off in the second half at all?

I think those are the kind of the countervailing forces that we were talking about as to why we think that maybe the costs are more likely to be flat. You're right, you know, energy costs are coming off. We're seeing that in some of our R&M is maybe starting to come off a little. Flatten out is probably a better expression. Flatten out a little bit rather than grow by the big amounts they were. But, and the but in here is we still see that there are still labour shortages labour inflation and I think that's the one that is offsetting some of the other benefits coming through.

Perfect. Thank you.

Thank you. Your next question comes from Anderson Chow from Jarden Group. Please go ahead.

Oh thanks. Good morning guys. Just two questions from me. Firstly, just on the competition for volume. Could you talk about, did you observe any difference between what the integrated steel mills were willing to pay versus our scrap metal processor or scrap metal competitors in the US market?

Look, that varies from region to region. A lot of the integrated steel mills also have their own scrap feeding companies. I think the price that is set is quite openly done in the U.S. in particular. They do indicate where they're heading and what they're going to be charging. So I think the steel mills have a certain regional pricing that they typically share. As in competition between two scrap companies, that is going to depend on the scrap and obviously the difference for HMS 8020 versus shredded scrap, which normally carries a $20 premium, you're going to have that level of difference, but also that competition, depending if that scrap competitor you're dealing with has a ship to load and therefore has to purchase. So it's going to differ region to region, but typically the steel mills are quite open with where they're heading with pricing and the scrap competitors literally compete on a local level.

Right, okay. Yeah, I'm just concerned that, you know, given... steel mills have been consistently increasing their product pricing so far this year, and they can probably pay a much higher price for scrap, which kind of creates a bigger pressure on our part to secure the supply.

Anderson, I think your statement, I understand why you're making it, but I think also the that the transport costs of getting scrap from our area, because we're largely coastal, to get the scrap from there to where the mills are is pretty prohibitive. Okay. Yeah, and I guess the area that does compete with them is SAR, but SAR has a strong history of competing nicely in that business.

Yeah, okay. Well, that's actually my next question. So for SAR recycling, so... We talk about first half 23 result. Part of the negative impact to EBITDA margin was the full six months of PSC operating costs. Can we sort of provide a bit of a breakdown of what part of that EBITDA decline in the first half was related to PSC and what was due to inflationary pressure? And also whether we should be expecting operating costs for PSC improved in fiscal 24?

Yeah, a couple of comments on that. We haven't disclosed separately the PSC cost, but what I would say is obviously PSC contributed to trading margins, so EBITDA was up as a result of PSC. It's just the costs were up. I'd also just have a look at the constant currency slide that we've put in, and you'll see that while... SAR's costs were up 30-odd percent on a constant currency basis. They were only up, well, not only, they're up 20% of which PSC is quite a contributor to that. If you pull out all of that, you know, SA Recycling's costs are growing at about inflation as well.

Okay. Yep. Okay. Thank you.

Thank you. Your next question comes from Kai Berman from Jefferies. Please go ahead.

Hi Alastair and Stephen, thank you for taking my questions. Just firstly, what is the new ERP provided in terms of enhanced disability and benefits, just in the context of the delivered EBIT result being ahead of the guidance that was provided in November? And then just on top of that, is there any guide on the incremental level of OPEX and expenses to do with the new ERP system?

So on the ERP, that was completed and implemented in July, which was the rolling out mainly into our trading division. As you can see in the results, there was a $5 million of additional cost that happened over that July-August period as we implemented it, and that's the finish of that now. So we will no longer be calling out ERP costs because that part of it has been implemented. On an ongoing basis, I think for a while we will have elevated IT costs of, you know, I'm thinking $15 million per annum, maybe $15 to $20 depending on what particular systems we might be upgrading at the time, and that's consistent with what's in this result right now. That is 100% consistent with what is in the result we've presented. The benefits that have come from it, it's around, I mean, look, it's very difficult to say exactly It's very difficult to put a number on it since we got X million of benefits from this. We get two main benefits from it. Firstly, some cost reduction as we centralise services, which we are in the process of doing. You can imagine when you implement a complicated system in the form of SAP, you do run double costs for a while because you want to make really sure that that system is in and embedded and running properly before you remove those costs. And the second benefit is just more transparency on information, better ability to make pricing decisions, but it's hard to have a controlled environment in that. You can't say as a result of this I was able to make a $3 per tonne better trading decision. And then the other overall comment I'd make is that our previous systems were at a point where we had to replace them. They were out of support. There was not an optional implementation that we had to do.

Thanks, Stephen. Just one other question from me. In terms of the outlook for ferrous and non-ferrous, is there a relative confidence between the two in ferrous or in non-ferrous, and is there any view on where demand is most expected by geography?

Non-ferrous I think is going to continue with the strength that we've seen. past six months. That particularly is focused on Southeast Asia. I think Ferris, obviously for us, is a strong US market and I think the Turkey market will rebound.

Thanks, Alistair. I'll pass it on from there.

Thank you. Your next question comes from Peter Wilson from Credit Suisse. Please go ahead.

Thank you. I might just follow up a couple of the questions on North America intake volumes. So the comment that volumes improved towards the back end of the year, from a supply perspective, where are these additional volumes coming from? Which segment? It's my understanding that supply is somewhat constrained given the low inventory of autos and a decrease in construction and manufacturing activity. So which segment are these additional volumes coming from?

So the comment I made, Peter, is first of all the additional volumes are coming off a low base. So they were, you remember we said that we believed that a number of dealers were hoarding scraps, the wrong word, but stockpiling scrap because they'd just come off the back of an incredibly strong 18 months. Cash was good. They could afford to sit on it for a while. They'd seen prices come from, you know, 650 down to 300 with the view that prices were going back up. As prices went back up, that volume was released, as you would expect. We did have some increase in end-of-life consumer scrap over that period, and those things drove a slightly higher intake volume, but it was off a low base. I'm not saying it was suddenly a whole you know, the whole heap of scrap was discovered as a result of booming times. Clearly that's not the case.

Okay, good. I'll leave it there. Thank you. Thanks.

Thank you. Your next question comes from Scott Ryle from Remore Equity Research. Please go ahead.

Hi, thank you very much. Hopefully two relatively quick ones. Alex, you mentioned on slide 27 the near completion of the Rockleaf pilot plant. I was wondering if you could be a bit more specific with dates there, please.

Sure. The installation construction of the pilot plant is nearly done and we probably will put our first set of samples through early April.

Okay, great. Thank you. And then I'd just like to ask a question. There's been a couple on inventory working capital, and I appreciate Stephen's discussion around the need to reduce inventory, as you'd said, at the June 22 result. I guess I'm wondering just in the context of the need to deliver cash flow, how you as a management team think about that versus the fact that in your short-term outlook, you've got competition to scrap likely to continue in the second half. And one of the other comments you make on the longer-term macro trends is along those lines as well. And you've got the uncertainty of the macro environment. So can you just talk us through, just from a high level, how you're thinking about inventory strategically, please, and whether or not it's different now to... what it has been perhaps in the last few years?

No, so the first comment I'd make is that as a general rule that is almost always consistent, our inventory is sold. So we're not sitting on inventory that is unsold, it's sold. We aren't able to recognise it for accounting purposes until there's certain rules around revenue recognition that might revolve around when letters of credit are cleared or when it clears a port. So that inventory back in June, which I was really clear on, that was sold inventory. What was holding it up was freight, and we needed the logistics to get it out. Those logistics eased over the period, which was our expectation, and we were able to get it out. So generally speaking, generally speaking, we are short. Generally speaking, we sell, and then we build product to meet that sale. So the actual inventory level at any point in time is a function of logistics, not of a, if you like, an active decision for us to go long. Does that make sense?

Yeah, no, no, I understand that. I'm sorry, I probably started the question off with a bit of a roundabout way, but I guess what I'm wondering really is are you thinking about inventory in a different way strategically for the medium term given the macro outlook plus the competition outlook that you've given?

Look, I think as a team we're very careful in terms of taking positions as Stephen mentioned and I think the process of how we've purchased material, how we sell is quite consistent. I don't think we're going to you know, take any bets, you know, given that there is going to be a shortage of scrap in the future and therefore prices will rise and whether we want to play the game. I think we're very cautious around this. We have some very strict risk management protocols in place from our board. So I don't think we're going to be changing our strategy or the way we think. We're very conscious of how others buy and sell and we obviously, you know, make sure that we understand that as well in our decision-making process.

Okay, great. Thank you. That's all I had.

Thank you very much. I think that's the last of the questions.

There are no final questions.

Thank you very much. Thanks, everyone.

That does conclude our conference for today. Thank you for participating. You may now disconnect.