Sims Ltd Sp/Adr

Thank you for standing by and welcome to the SIMS Limited FY23 results release. 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 1 on your telephone keypad. 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 these forward-looking statements. Those risk factors can also be found on the company's website, www.simslimited.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 Alistair Field, Group CEO and Managing Director of SIMS Limited. Please go ahead.

Thank you and good morning. Welcome to the FY23 Full Year Results for SIMS. Presenting with me on today's call is the Group Chief Financial Officer, Stephen Mickelson, John Glyde, our Global Chief Operating Officer for Metal, and Rob Thompson, our Global Chief Commercial Officer for metal are also in the room with me. The slide presentation that we will run through has been lodged with the ASX along with the results release. The agenda for today is that I will run through a general overview of performance and the highlights. Natural results before I discuss some of the company's strategic priorities, short-term outlooks and medium to long-term drivers. Following that, there will be time for Q&A. I will turn straight to slide 5 which covers the key takeaways from the results. The FY23 results are coming off the back of our all-time record, FY22. The markets have been much more subdued but our performance has been resilient and it shows the benefits of having market and geographical diversity. Cash flow has been solid and we have released cash from working capital as you would expect when markets fall. We are keeping a watchful eye on expenses, and as evidence of this, we have managed to hold our metal costs in the second half compared to the first half. Most pleasingly for me is we have further improved our safety metrics, following on from an already excellent safety outcome in FY22. Finally, we have declared a fully frank dividend of 21 cents per share. Turning to slide six. Clearly, the market environment has impacted the results compared to last year. All profit indicators are substantially lower. As we go through the presentation, however, you will note that our diversity of operations across the globe and within North America has provided us with a fair degree of resilience to the subdued markets. I will be going through the Baltimore scrap acquisition we announced this morning later on in the presentation. Suffice to say that this acquisition will provide us with further resilience as it has great access to the US domestic market and export markets. Looking at those markets, steel prices have been lower, which in turn dropped the price for scrap. Our intake was down 6.7% and there was strong competition for the scrap that was available. This meant that we were unable to pass through all the sales price falls without dropping intake volumes further. I've already mentioned the solid cash flow and dividends. I will turn briefly to slide seven. Slide seven provides a summary of the financial outcomes in a convenient table. I've already spoken about most of these measures on the previous slide. However, it is worth highlighting operating cash flow, largely due to the release of working capital, This is down 18%, much lower than the 72.9% fall in profit after tax. I will spend the next few slides talking about non-financial measures, starting with health and safety on slide eight. The priority for me and all SIMS employees is safety. It is therefore very pleasing to report that we have again produced a record low lost time injury frequency rate and total recordable injury frequency rate. Lagging indicators are interesting, but they do not improve without proactive safety initiatives. You will observe on the right-hand side of the slide a few examples of what we are doing to ensure safety culture is core to CIMS values. Moving now to slide nine on sustainability. Sustainability is at the core of our business, and it is again pleasing to see some recognition for the effort that our employees put into ensuring that SIMS is a leader in sustainability. I want to highlight our excellent progress on closing the gender pay equity gap, which falls under our Operate Responsibly framework. We've spent a considerable amount of time on gathering the data to measure this gap. Last year, it was 8.2%, and we have dropped that to 2.9%, at the end of FY23. Our internal view is that plus or minus 2% represents no statistically significant gap, and so we are nearly there. Before I hand over to Stephen, I will turn to slide 10, which highlights the weaker prices in FY23 compared to FY22. Ferrous and non-ferrous prices have significantly retreated from both the FY22 highs and the FY22 average. Volatility has also somewhat reduced, but we still had some difficult periods to manage. The global PMI, which is a good indicator of steel demand, has shown universal weakness over the year, with the possible exception of India. 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 summarizes the group results and some key metrics. I will be going through the regional results and subsequent slides, and many of the themes are summarized here. Underlying EBIT is down 66.6%, a considerable fall, but it's been compared to a record FY22, which was driven by very high prices and a commensurate high availability of scrap. We have managed costs reasonably well. up 4.9% in what has been a tough inflationary environment. Before moving on to slide 13, I will draw your attention to footnote 4. We have moved some costs that were previously netted off against trading margin in FY22, but really belong as operating costs. There is no impact at all to FY22's EBITDA, EBIT, or profit after tax, as it is simply a reclassification within the P&L. You will find a reconciliation in the appendix. On slide 13 for convenience, we've summarized EBIT and volumes by division. Before moving on to the regional breakdowns, it is worth highlighting here the concerted effort in releasing working capital. Metal sales volumes were down 1.7%, while intake volumes were down 6.7%. The difference represents the clearing of inventory and release to working capital. Looking at our North America results on slide 14. The fall in NAM's sales revenue was almost entirely a result of falling prices. Overall, prices were down 18.2% on a constant currency basis. NAM was impacted by competition for domestic scrap, particularly in the second half, where for some periods export sales prices fell significantly relative to domestic prices, which enabled domestic players to compete more heavily for scrap inflows. As a result, NAM could not pass through the full price decreases and this squeezed the trading margin. On a constant currency basis, NAM held costs reasonably flat, assisted by the introduction of a shredder feed levy, which is a good result. Turning to slide 15. SA recycling is a good example of our resilience provided through diversity of markets and geography that Alistair mentioned earlier. Partly as a result of its growth strategy over the last several years, SA Recycling sells more domestically than through export, and therefore it wasn't as impacted as NAM when the domestic price rose significantly above the export price. As a consequence, its trading margin on a constant currency basis was only down 13.5% compared to NAM's 24.5%. This is shown perfectly on the following slide 16. The left-hand chart compares the export price to the US domestic price. It began separating in January-February and then significantly separated from March through to June. When you look at the right-hand chart, which shows the domestic export split for NAM and SA Recycling, it is clear why NAM was impacted more. Turning to ANZ on slide 17. ANZ is also a very good example of our geographic and market diversity. Of our metal businesses, it was least impacted by the challenging market conditions by a considerable margin. While revenue, trading margin and EBIT were all lower for similar reasons to the other metal businesses, its 7.7% fall in trading margin was the same as the percentage fall in revenues, indicating that it was able to better manage the buy price. Ainsley also managed costs well in a tough inflation environment. The overall result was a 24% reduction in EBIT, considerably less than the other businesses. Moving to the UK on slide 18. UK was impacted by both lower sales volumes and falling sales prices. Aggressive competition for available scrap, particularly shred feed, kept buy prices relatively high compared to sell prices, and this reduced the trading margin. Inflation in the UK has been the worst of the regions in which we operate and this resulted in an 11.8% increase in net operating costs. The UK had a stronger second half performance returning to positive full year EBIT of 7.3 million compared to a loss of 3.6 million for the first half. On to slide 19. I see that the first half result that I did not expect a recovery in SLS for the rest of the calendar year. This has proven to be correct so far, with EBIT down 49.7% to 8.2 million. This is despite a very promising 40.7% increase in repurposed units. The reality is that the Chinese recovery is slow, and China is currently the main driver of the price SLS receives for resold units. A recovery is not likely to occur until the end of this calendar year or early calendar 2024. Turning briefly to slide 20, which rounds out the income statement. Global trading earned less revenue due to lower exports by SA recycling and also higher costs associated with some strategic initiatives. Corporate costs were lower, largely due to lower employee incentives. We no longer consolidate Sims municipal recycling, so its full year loss is the same as the half year, and we are in the process of selling it. LMS produced EBIT of $14.5 million for the year, and I believe everyone is aware that that asset is also currently under an active sales process. CIMS resource renewal incurred additional expenditure to run the pilot plant, and it has also incurred expenses on further strategy development. Moving to our operating cash flow on slide 21. We had a strong conversion of profit to cash flow. largely as a result of a positive working capital movement. Just a reminder that SA Recycling does not distribute its entire earnings in cash and therefore there is a difference between reported EBITDA and cash. This year it was $57.6 million. I believe the other movements on the chart are self-explanatory. The last point I will make on this slide before moving to slide 22 is that the conversion of NPAD to operating cash in FY23 was 286.3% compared to 94.5% in FY22. Slide 22 bridges our opening net debt of 102.7 to our closing position of 135.5 million, a 32.8 million increase in net debt. The two largest consumers of the operating cash were capex of 232.5 million and dividends of 123.6 million. My final slide is CapEx on slide 23. Total CapEx for FY23 was $232.5 million. Of this, $62 million related to growth and $171.5 million was for sustaining CapEx. I'm currently expecting FY20 CapEx to be similar to FY23, up around 5% to $180 million. I'll now hand back to Alastair.

Thank you, Stephen. I'll turn straight to slide 25, which shows how SIMS has strategically positioned itself to capitalize on three very important megatrends. Each strategy position in the right-hand box ties back to implications that arise from one of these megatrends. There are numerous examples here, and I will highlight two of them. Firstly, SIMS lifecycle services Pivot away from shredding electronic equipment to repurposing data centres was in response to huge data centre growth that will continue to grow through the processing requirements of artificial intelligence. Secondly, the Baltimore scrap acquisition, which we announced today, responds to many of the implications in the second box, including the significant increase in EAF capacity in the US and Canada, which in turn is driven by both the environmental and economic megatrends. It is worth spending more time on our two acquisitions since the half-year results announcement. Firstly, Baltimore scrap on slide 26. Over the past 12 months, we have continued to expand our metal recycling operations through targeted M&A aligned to our long-term strategy and core competencies. Our acquisition of Baltimore Scrap is the latest of these transactions and is highly complementary to our existing US footprint. Baltimore Scrap is one of the largest recyclers on the East Coast with sales volume of roughly 600,000 tons a year and operations stretching from upstate New York to Chesapeake, Virginia. Importantly, The acquisitions provide SIMs with increased sales channels into growing U.S. demand for ferrous scrap through low-cost rail, barge, and trucking logistics, while at the same time maintaining export optionality through coastal deepwater port access. We expect the business to be immediately accretive on an EPS basis with financial closures expected in October. The second exposition is Northeast Metal Traders on slide 27. Earlier in the year, we also acquired Northeast Metal Traders, one of the largest copper recyclers in the US. Based in Philadelphia, Northeast Metals has provided us with a distinct platform to expand our copper recycling operations based on high-quality supply partnerships and value-added processing. Growing our non-ferrous business is one of our core strategies, and we remain very positive on the outlook for secondary copper demand. In the US, recent announcements of new smelting capacity are expected to triple copper scrap demand by 2027. While globally, some forecasts anticipate per capita copper demand to double by 2050. In the few short months since this acquisition, we are already encouraged by the great people who are driving positive results in the business and how we are positioning for long-term success. I want to move on now to the outlook on slide 28. We are confident in the medium and long-term fundamentals of the business. In the short term, there are some positives and negatives. On the positive side, there has been good demand for scrap in the U.S., driven by increased EAF facilities, and we expect this to continue. Zorba prices are expected to remain stable, and finally the reconstruction of the earthquake-affected areas of Turkey hasn't yet commenced, and this should increase the demand for scrap to the Turkish mills. On the downside, steel demand remains subdued, and the current scrap price does not appear to be sufficient to stimulate robust scrap supply. In the medium to long term, the positive drivers have not changed. Metal-intensive infrastructure spending will drive the demand for ferrous and non-ferrous scrap. Global decarbonisation of the steel industry is intensifying and scrap plays a critical role in this. And from SLS's perspective, cloud infrastructure is only going to grow, particularly with the fast onset of artificial intelligence. As you're probably aware, this is my final presentation of the SUMS results. before I retire CEO in late September. So before I move to Q&A, I would like to thank all SIMS employees for the last six years while I have been CEO. You have delivered great results over that period, despite some very trying market conditions. But just as importantly, you have achieved those results in a safe and sustainable manner. Congratulations to all of you. Operator, back to you.

Thank you. Once again, if you would like to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you would like to cancel your request, please press star 2. If you are on a handset, sorry, if you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Peter Stein from Macquarie. Please go ahead.

Thank you. Good morning, Alistair and Stephen, and Alistair, all the best as you move to your next phase, and congratulations. If I may, just a little more colour on Australia or ANZ, if I could. Just trying to understand, you saw really decent recovery in Australia demand in the second half, so it looks like your volumes were up 3%, and a really significant uplift in profitability relative to what you experienced in the first half. Could you just step through that in a little more detail for us, please?

I think the differences in first half and second half across the group are actually quite different in many aspects. And I think in Australia, we did see quite a come down from the highs of 22. And then obviously coming into the second half, I think part of the economy also started to get past the pandemic and the COVID aspects. We started to see some pickup. There's still a lot of competition in this market. both for shred material but also for non-shreddable material. And I think the opportunity for us, both from a domestic as well as an export market, walking that balance is obviously something that we are focused on and making sure that we are aware of what the international pricing is versus the domestic. So I think we saw a firmer second half, and I think that's just generally the economy that was fairly stable. Yeah.

I'm surprised that profitability rebounded quite as strongly, though, Alistair, in that context. You say competitive context was still pretty intense, but your profit was pretty much in 12%.

Yeah, that's in general. I think when you look at Ferris and non-Ferris, our non-Ferris business, as you know, is fairly strong in Australia. And we definitely saw a pickup of non-Ferris in the second half. And that obviously contributes quite a bit. And that focus on aluminium and copper, as you know, the Zorba pricing hasn't dropped relative compared to a Ferris market. So I think that's also about the strength of the signal.

I think on anything else, I think ANZ, Peter did really manage its buy price well. There was a focus on margin management as well as trying to hold volumes. And I think they got that balance, particularly in the second half, very, very well.

And extending that, it seems like, notwithstanding the domestic versus export market dynamics in SAR, they did a similar thing?

Are you talking SAR in the US name operation?

Yes.

Okay. So, look, I think the SAR business, you know, as you know, is a domestically focused business and obviously works in unison with our NAM business. I think the domestic strength was really around the ferrous market in particular in the United States. And as you know, in the non-ferrous area, we've obviously, as our strategy was to double that and hence acquisitions and growth in that field. But it was the domestic ferrous market that I think really helped SAR's results. And obviously with the stable Zorba pricing, that goes with that huge shredding capacity that Georgia and company has. So they did very well.

Yeah. Gotcha. Thanks. That's useful additional color around non-ferrous versus ferrous. And lastly, just on LMS, could you give us any update on timing of that process?

I lost Stephen to give you an update. Yeah, timing still, the process is going very, very well. Very happy with that. It's deep in due diligence, as you would expect right now for final bids. We're currently expecting those September, October, and that timing's been set from the start. So I see no reason to alter that, Peter. I think that's still good timing. Right.

Thanks, Stephen. And again, all the best, Alistair. Thank you, Peter.

Thank you. Your next question comes from Owen Burrell from RBC. Please go ahead.

Good morning, guys. Thanks for the results. I just wanted to, I guess, follow up a little bit on your outlook commentary. It does appear a little bit mixed. It's almost like you've gone a little bit both ways. You talk about steel demand being down and softer volumes into the second half, but then you also talk about sort of strong scrap demand in the US and stable Zorba prices. I'm just wondering, to get a sense, is that... Is that just a material shift in, I guess, where the demand is coming from back to the US market out of the global markets? And how does that all compare to, I guess, long-term trends in the levels of demand in both markets?

Thanks, Owen. I'll start by the long-term copy. I certainly don't believe... that anything's changed with our long-term view on strong tailwinds for decarbonisation and electrification across the globe. I think copper, aluminium, I think there's a global demand for that long-term, and I don't think that's going to change. I think from a Ferris point of view, and in particular scrap, i certainly see that as the long-term process and that's on a global basis as well i think certain regions are going to come out stronger at different times depending on economies and i think part of what we're reflecting is that you're seeing a subdued market in europe due to energy prices inflation and obviously the ukraine russian impact of that war so i do think that turkey is going to pick up again at some stage and feed into you know the rebuild of potentially a ukraine one day I do think that the U.S. market is quite focused on its infrastructure and the money that's being put into that stimulus program. There's various initiatives, as you well know. So I do think the American domestic steel demand is going to remain, and obviously scrap fits a key aspect of that growth going forward. You are going to have patches like I think we're seeing now, which is fairly quieter, but it will pick up, I think, underlying when you look at average prices over the longer term in the future. I think we'll see that that demand in the United States remains and hence our strategy around being able to play domestically as well as internationally. with our portfolio. So I guess that's the high-level part of it, and I think from a medium term, as I said, I think that's going to be consistent with what we put into the presentation and our wording. I'd caution that, obviously, we're six weeks into the new year, so I'm not going to jump any forecasts around that.

Maybe just let me ask you a question. This half... It's cycling a very, very strong half in the PCP and it's also comping a very weak half in the first half of this fiscal period. Even within the second half, you sort of had a strong start and a softer end. Can I just ask you, is 160 mil EBIT what you would regard as kind of mid-cycle earnings? I'm just trying to get a gauge of where the mid-cycle earnings on this business should be today given the change in the nature of the business.

Yeah, I think mid-cycle earnings is really, really hard to pick at the moment because what we've noticed is that firstly, the cycles seem much, much shorter. And the second point I'd note is that the bottom of the cycle definitely seems higher than the bottom of previous cycles. So if we look over the last six months and even the last year, When the market got down, certainly this time last year, when the market got down to the low 320s, there was a huge amount of support and it came back up again. And, you know, this in the second half, you know, when the markets got down to the 340s, 350s, we've seen support and back up. It's come. So the cycles are shorter and bottoms higher. Let's put it that way. It's the way I would describe the market at the moment. So in that context, do we see the 160s for the half year is a good mid-cycle. I think the 160 was a good reflection of the market conditions that we were in, where, you know, as we've already commented, our diversity of geography and markets, you know, we had some businesses suffering more, others doing quite well. Doesn't answer your question specifically, I realise that, but it's because I'm not sure that this is a mid-cycle market at the moment, it feels a little bit like it's at the bottom of the cycle, given where prices are.

Stephen, that's actually quite good. I think given that when you hit $3.20 and you said you found support, that seems like a degree of structural change over where we were probably what, five, eight years ago. You were down in the 200s and not getting any support. So would you agree that that is a structural change to the broader market that has effectively come through?

Yes, I agree with that, and I think it's driven by two things, the huge growth in the AF, which is there's just support there, whether it comes from India, Turkey, US domestic, other parts of Asia. And secondly, I think that the cost of collection has gone up with inflation in particular, and so that's providing support. the market needs to be higher in order to encourage the scrap out of the market. So I agree with you. It's definitely cyclically higher than it was structurally five or eight years ago. Excellent. Thank you.

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

Hi, Alistair. Hi, Stephen. Alistair, good luck. With your future endeavors, and thank you for your help over the last few years, just a couple of questions. So we obviously know NAM's an export business and SAR's a domestic business. You're constrained, I guess, with NAM around where your operations are. Should we assume that export versus domestic split Largely holds where it is now for now. Is there anything that you can do to kind of try and position?

tons more domestically a good question Lee I think certainly for us the the swing that we saw of domestic price versus international was obviously much larger in dollar terms of price differential that we we noted that's The first point and the second was the actual speed at which it occurred was also fairly surprising. We did have a sense that you would expect to see a higher challenge in terms of demand and purchase pricing. So those two aspects for us have certainly allowed us, and John's on the call here so he can answer as well, is to look at our operational capability on the eastern seaboard in particular and how do we actually – You know, we do have rail barges and trucking facilities. How do we utilize that in a better format? So we do have an operating improvement that I'll ask John to talk to. And I think secondly, for us, as part of the acquisition we announced this morning with Baltimore Scrap, That's ideally a company that brings on a large volume, a well-managed business that has a good, solid domestic focus, both from an asset point of view, but also in terms of steel relationships with domestic suppliers. So those two fronts, both an operational improvement. to take our current NAM business and give us the capability of swinging that percentage, but then also the acquisition we've made with Baltimore that brings in a huge domestic capability straight off the bat. So that's the two parts, but I'll ask John, do you want to talk about the domestic?

Hi, Lee, thanks. Yeah, look, we've got a number of facilities that do have rail infrastructure that we probably haven't capitalised on in the past. and we're looking to obviously use that rail infrastructure to tap those markets. A lot of domestic scrap in America gets traded on barges. Obviously, we can use our coastal facilities, river facilities, port facilities to also tap those markets. So there's those opportunities.

And then, thanks for that, Kala. And then, I mean, you obviously talked about the operating cash flow. I mean, it was strong for the year, but the second half was quite weak. I know that The SAR distribution is probably a large driver of that. You've already talked to why that was lower in the mismatch between the distribution and EBIT. Like, does that... I'm just trying to get my head around how should we think about that in the longer term? Do we assume that that distribution remains quite weak? Or, like, are they... You know, I know he's got his own growth ambitions, but do we, you know, do we assume that there's he's saving up to grow his business or should we assume distributions maybe lift from the level they were in the second half?

Yeah, no, certainly the distributions are enshrined in the joint venture agreement. And just as a very rough approximate, the distributions work out to be around about 60% of the EBIT. And then we then also have to pay tax out of that distribution as well. So that's in the agreement. So distributions will move up and move down in that same proportion depending on SAR's result. That's the way it will always be.

Okay. And am I right in the second half? Because I think it was $127 million of cash flow in the second half. You obviously had a great first half. Was that the biggest driver? Like what else was kind of moving around in the second half that had that result?

Yeah, that was definitely one of the major drivers. I wouldn't think there's anything else materially around that. I wouldn't be reading too much into the first half, second half split of cash because, frankly, it can get hugely impacted by a cargo that slips from one period to the next. And we had some cargoes in the second half that didn't ship on the 30th but shipped in the next month. I think on a going forward basis, I wouldn't read too much between a first half, second half split unless it was massively different for whatever reason. Our cash flow does vary around, you know, particularly when bulk ships happen to sail.

Okay, thanks. And then maybe just a final one if I can. So in your short-term outlook, Alistair, Zorba price remains stable with subdued shredder infeed. Like I think in the past when we've seen subdued, shredding feed there's been the risk around increased competition for that and you've seen kind of buy buy sell spread get hit as a result and people go out and probably slim their margin to make sure they can obtain that like how do you how do you make sure that kind of doesn't happen this time around

I think obviously geographically that also plays a role when you look at SAR's past performance and where they currently sit. I think one of the stabilizing aspects is the demand for copper and aluminum and Zorba prices, and I still think are setting up at the $1,750, $1,800 mark. which I think is fairly stable. When you go back two, three years ago, we could see a swing from, you know, that level down to, you know, below 1,000. So I think that volatility in aluminium and copper seems to have quietened down in Sorba. I do think, obviously, if your shred in feed in, you know, in the Midwest shrinks, then obviously, you know, the NFSR will decline slightly. But I think the pricing is really what I'm talking about that seems to be remaining fairly stable.

Okay. Excellent. Thank you. I think it's probably worth adding one thing to that too, is that what has been maybe having this shred down is the secondhand car market. I mean, we all, and this is a global phenomenon, including the US, we drove our cars less during COVID. We crashed them less during COVID. So there was less cars got into the system. And we're seeing that run through it now. Now that will pick up as new car sales pick up. and as we're driving the cars more. So when you look at the amount of secondhand cars that have been available for shredding, there's definitely been like the opposite of a rump, like a come through the system of lower car availability for shreds.

Definitely seeing secondhand car pricing come off the peaks and that in turn should see cars, you know, eventually get scrapped and come through our system. Yeah, obsolete. Okay, next call.

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

Yeah, morning, Alistair, Stephen, John and Rob. Hope you're all well. Alistair, a few questions on just acquisitions and medium-term targets and balance sheet and et cetera. First of all, just on Baltimore Scrap Corp, it does seem like you continue to pivot back into the US domestic market, but I think you've been looking at BSE for some time. Just firstly, a couple of things here. One is on the... the acquisition process does appear a pretty full price considering it's based on three-year sort of trailing scrap prices. So I'm looking for a bit more information here about the rationale here. First of all, what are the synergies? Can you sort of quantify in dollar million what the synergies you think are per annum? And then is there ability to grow this business 600,000 tonnes per annum? Is that capacity? Is that current sales volumes? And can you grow this business materially?

Well, first of all, Baltimore Scrap is a very well-run company. I think David Simon and his brothers have run a very tight ship over a number of decades and generations. They know that market very well. They fit from a cultural aspect very well with us. They've certainly looked after their assets. They're well positioned and have a good reputation in the domestic steel industry. They also have an international export capability, which they do utilise when they need to. So I think when you're looking at our strategy and the alignment with all of our filters and how we've spoken to the market, they fit perfectly well. You know, a well-run company with good... leadership group is also a key aspect for us and when you run new companies. So I think from a fit with our strategy, with a fit with our culture, very commensurate. I also think from a growth perspective, there is opportunity to continue to grow that organization. And I think one of the aspects for us is, as you know, five years ago we set, you know, non-ferrous targets and we wanted to literally double that in the United States. I think this can add to that non-ferrous strategy as well. So in terms of your question of can it grow, absolutely. And I think there's also lessons for us to learn from David and his business and how they've run that operation. So I think it is a well – a well-managed company, and I think we paid a very fair price for it.

I can add a couple of things. So first of all, we haven't published specifically what we believe the synergies are, but I'll give you a for example, is it's going to enable us to better utilize our existing assets. For example, ARG, the acquisition we made 18 months or so ago, You can just see that we can better utilise those assets, have capacity factors better, all those types of things that you would expect, not least of all logistics as well. We're going to better manage logistics between yards and domestically. There's lots of opportunities there. On the price front, I actually believe the multiple that we've paid is quite favourable to other transactions in the US over that same time period. So I think I'd describe we've paid a fair price, but I don't think I would describe it a full price in that context. I guess just to reiterate what Alistair said, that's because we're actually very confident on the outlook. Well-run company, good location, fits well with our assets. I think it's going to be a great transaction for us.

Great to hear the rationale, so I appreciate that. Stephen, while you've got the floor, I guess, just talking about the balance sheet and also growth CapEx and just CapEx in general and FY24, as far as the balance sheet is concerned, I mean, have you rethought now that you're making some sizable acquisitions where you want to take the balance sheet or where, from a net debt perspective or gearing, where the max is? And then also... Just on growth capex, I know you spent $60 million in FY23. You did push some growth capex into 24, 25. Can you give us any sort of estimate on what growth capex you expect for 24? Thanks.

Yeah, a couple of questions in there. The first one I'd say is in terms of acquisitions, and yes, you know, the Baltimore scrap is a reasonable size acquisition for us on the back of NEMT. We'll recycle capital for that. We've got, as you're aware, we've got a couple of assets that we're in a very, very active sales process at the moment. So we'll recycle that capital effectively to fund these transactions. And interestingly, they'll probably end up settling at around about the same time. The balance sheet is still in a good healthy position. I will still maintain that a highly geared balance sheet is not appropriate for SIMS. We still have a commodity cycle to our business and yes, we release working capital when it goes down and we build it up when it comes back up again, but those cycles are getting shorter. My view on the balance sheet is we'll continue to recycle other capital out of the balance sheet to fund significant growth initiatives, and we've also got smaller, idle pieces of land that we haven't, you know, finished selling it off either. And they can fund some of the smaller growth CapEx. So I believe that we will be absolutely able to fund our growth within the context of a strong balance sheet. As we get larger, though, would you, I mean, you know, is a modest 10, 15% gearing inappropriate for us? I need to think about that a little bit more. But, you know, my sort of initial reaction is it's not. And so if we, you know, if we had, four or five hundred million dollars of debt for a period of time as we took on some growth and then repaid that debt down over the subsequent two or three years. I think that would still be very, very prudent.

We've demonstrated over the last number of years that we have a long focus on capital and the discipline that goes around capital, be that sustaining or growth. And we want to be able to take this company forward without too much of a risk.

Thanks, guys. Just quickly, Stephen, growth cap estimate for 24?

Right now, nothing's approved. So that's growth cap has to come to us and get its 15% return. So we'll see what comes up. But right now, there's still projects that I know in the pipeline or they haven't come to us for approval yet from the balance sheet point of view.

Okay. All right. Thank you very much.

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

Good morning, everyone. Alastair, congrats on great earnings at SIMS. Firstly, just wanted to ask in terms of the acquisition of Baltimore Scrap, I guess, stepping back a little bit, are we seeing vendors becoming more receptive to selling maybe because of the high interest rate environment? And just how is the acquisition pipeline looking beyond this acquisition?

As I've mentioned before, we obviously do know a lot of companies in the United States and Australia, obviously, and the areas that we operate. And I think part of our M&A environment process is a filtration process where we need to make sure that it matches our long-term ambitions. And that doesn't just go around the size of the acquisition. It's got to do with people, safety, culture, et cetera. And that gives us the flexibility we need. And I think Baltimore Scrap was a well-run company that we've known and respected for many years. And You know, that was a family decision that they made that, you know, they wanted to, you know, to move on with their lives. And I think that's an important aspect that we have had a lot of respect with them. And you can then basically come to an arrangement and a deal as we did. There are many private companies in the United States you can't acquire because they're not for sale. There's only one that's listed. So I think part of this is our relationship with a lot of the vendors, as you say, and other companies that we deal with. So I think there's not a huge list of companies the size of Baltimore Scrap lying around for us to go after. And as I said, you can't acquire them when you feel like it. So these are long-term relationships going forward, if that makes any sense to you.

It does. Thank you, Al. Second question I want to ask was with regards to the SLS business. The second half looked to have materially weakened, looked to have barely broke even. Are we still seeing resale prices from China continuing to fall? Is the business in the black at the moment? I mean, does it change your overall thoughts on the overall industry and your confidence in the business.

Yeah, no, it hasn't changed our confidence in the business. I mean, you know, I think in our view, the long term outlook or the medium term look out for that market is good. Data centres are growing exponentially. They need repurposing slash recycling. We have a good position in that market. And, you know, you see our repurposed units grew by about 40 odd percent over that period. You're dead right. The second half has been a, you know, it's been a It's been a break even-ish sort of type second half. So it is in the black. It doesn't consume capital. But the reality is that right now under the business operating model, it needs China to come out and grow some more. We haven't seen a further deterioration. The prices are just, I guess, languishing what we think is probably at the bottom of the market and it will need China to recover. But our position in that market is strong. I keep saying it's not consuming capital. It's not consuming cash, even in this market. And I think it's really well positioned. for that when that market does take off you know we believe into this calendar year early early calendar 24 but if we're if we're wrong on the recovery any recovery of china then we'll be wrong on that forecast as well so we need the china recovery to happen thanks for that steven i'll pass it on thank you your next question comes from megan kirby lewis from baron joey please go ahead

Hi there, just a couple of questions from me. Just firstly on the SAR, just the acquisitions that have been noted in the presentation, just wondering if you could give any further detail in terms of, probably most importantly, volume and just what sort of the run rate is to help us forecast for FY24 onwards would be fantastic.

Yeah, what I think we'll do there, Megan, is we'll cover that off at the site presentation that George and Tyler and the SA Recycling team are going to give in Los Angeles in September. We'll do a much deeper dive on SA Recycling, and so I'll leave that for that presentation.

Okay, got it. And then just on LMS, just to help us think about the right valuations, and expected cash flow to come from that settlement. In terms of that 15 million EBIT reported for FY23, is that sort of a normalised EBIT that we can be thinking about for the valuation?

I'm not going to say on the call what I think normalised EBIT should be on that business, or not, given that there might be some potential buyers on the call as well. So it'll be up for the buyers to determine what the normalized EBIT is. What I would say is that, you know, we believe LMS is a good business, really well positioned in a market that wants to decarbonize. And so let's wait and see what the price is in September, October.

Got it. That's all for me. Thank you.

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

Good morning, Alistair and Stephen. Thanks for taking my questions. Alistair, to your next chapter of your life, a few questions from me, please. So firstly, on your long-term FY25 growth target, would you please give us an update? How are you progressing, I guess, with the recent for TMO acquisition, how far or how close you are towards that growth target? Thank you.

Thank you for that question. The FY25 targets, as you know, we set... 2017 and bought approval and shared that with the market a bit later on. We're progressing well in terms of non-ferrous. You know, we'd like to actually speed up some of the acquisitions potentially across the globe. But again, our capital discipline obviously plays a key part in both non-ferrous and ferrous acquisitions. In terms of acquisitions, I think, you know, given that to join our family. I think part of the aspect for us is to make sure that we, both with Northeast Metals as well, is we go after the synergies, we believe, and actually integrate the two organizations into our business and do that carefully and do that properly. That's the first principle for me. So this is not a race just to hit the FY25 targets. We need to do this with the capital discipline, but also integrate properly. That makes us a successful M&A program. So ultimately, Yes, we're on target as far as we're concerned, but I think Stephen, you know, carrying the torch going forward, will be very disciplined about any future acquisitions and, you know, how we absorb that and what the timeframe is. And as I said early on, many of these companies are not for sale when you feel like buying them. So part of this is continuing our relationships with all of our players in the market.

Yes, thanks for that answer. Alistair, just a follow-up. In regards to M&A, are you more concerned about valuation from capital discipline perspective or it's about the competition? I think the long-term... From North America, yeah.

Look, I think NAM has got a strong demand. As I said earlier on, the stimulus in the United States is very good for, you know, we see that as a long-term outlook in terms of the demand for scrap, both on the global but also in NAM itself. I think from a valuation point of view, obviously we don't want to overpay for companies, even though I do think that the tailwinds that we talk about are going to be beneficial for us. And, you know, we have seen some high multiples paid in the United States. I don't think we've overpaid for any of our acquisitions since I've been here. But again, that's a discipline around actual not overpaying, but also seeing the long-term value in the synergies. And further than that, the tailwinds that can then take the whole company forward. So I think valuation is is something that we do look at, but we're just very cautious that it's the big picture of M&A and not just the monetary side that we pay today. Stephen, I don't know if you've got any thoughts.

No, I would concur with those comments, Alistair, and clearly we're going to maintain our discipline around investments and CapEx in the future.

Sure, sure, I understand, Alistair and Stephen. Maybe can I please ask a question about your course? Could you please give us some color on the cost pressure you are expecting in the next, I would say, six to 12 months, especially for NAMM, because as Stephen mentioned in the call, NAMM couldn't pass the cost due to competition, and the UK has the worst inflation of all the regions you are operating in. So what are you expecting in the next 12 months? Thank you.

I'll make a comment first and then I'll hand over to John, who obviously sees the operating costs. Obviously, the cost profile is different from country to country. Australia and the UK in particular has had a very high cost impost on it. I think the cost is obviously going to remain with us for the next 12 to 18 months as well. But I think part of that is the regional differences and the regional strategies that are going to play out. So, John, maybe you can just give us some... Just commenting, you know.

Particularly in NAM, we've seen inflation rate certainly dip. It's still, you know, higher than I guess historical sort of numbers, but it's certainly well off its peaks. And we're certainly seeing that softening around labour tightness. You know, if you go back 12 months ago, it was very, very difficult to engage people. So we've seen those two things soften. Certainly seeing outbound freight, logistical cost, ocean freight, container freight, all those things come off their peak. So certainly seeing some softer and improvement in costs in those things. But you can't get past it with that two years of very strong inflation that unfortunately accumulates.

Thanks for that. Yeah, thank you. I'll pass it on.

Thank you.

Thank you. Your next question comes from Simon Thackeray from Jefferies.

Please go ahead. Please go ahead. Thanks. Good morning, gents. Sticking with the UK, can we just talk about the returns from a capital point of view on the UK and whether at some point are we looking at this as a source of asset recycling? At what point do you think the UK is sufficiently resilient to continue in the portfolio? Yeah. Yes, Simon. Clearly, Simon.

Clearly. Well, there's quite a bad echo going. Quite a bad echo going. Well, I'll talk for it.

I'll talk for it.

Clearly the UK market is a tough market. It has, you know, one large player and a couple of other players and then much fewer smaller players. So it's a very competitive market and that shred market in particular in the UK has been extraordinarily tough. And over the years, you know, the UK has had some ups and it's definitely had some downs. And so the return on capital in the UK has not been where it's needed to be. We've commented before that we don't fall in love with any assets in our portfolio, that we look at them quite objectively. And I think we've shown a good history of if we believe that asset is either better in someone else's hands because another group of shareholders would value it more, or it's not getting our return and it's not capable of getting our return, we haven't shied away from divesting that asset and recycling that into it. As far as specifically on the UK, we've been looking at the UK for the last couple of years. Alison, on a number of calls, have talked about that and where we think it needs to be. So I'm not ruling it in and I'm not ruling it out. It's on our watch list. Do we believe that it can turn around to get our cost of capital or is it not capable of doing that?

When do you think a decision on that would be reasonable for investors to sort of say, okay, when do you draw a line in the sand? Is it a year? Is it 18 months? Is it two years? How much longer do we have to sort of follow it?

It's a good question, Simon. So we're in a review at the moment, an operating review of it. And the answer could be anything from an outright sale at one end of the spectrum right through to a realigning of the portfolio trim that portfolio down and focus on particular areas of the UK? You should expect that. I mean, you should expect that review and the outcomes of that review is less than 12 months away.

Okay, that's helpful. Thanks, Stephen. And then just shifting gears back to North America, a bit of an admin one. The contribution in terms of volume from PSC and the six bolt-ons to SAR in FY23, what was the sort of volume contribution from the M&A in the period?

I think, Simon, it was just over 245,000 tonnes in that region.

Again, Simon. the other stuff, we will give a really good in-depth update of SA Recycling at that September investor tour. And the good news is we're going to have George and his son, Tyler, in the room with us. So I think that'll be a really, really good update and an opportunity to ask some really detailed questions.

Looking forward to that. And then the final one, I think it's fair for us to understand with Baltimore Scrap Corp, And given what you're saying is they are predominantly a domestic player, they do have export capability, they're predominantly a domestic player. How many steel companies, not mills, how many steel companies are they servicing? What's the customer concentration for Baltimore scrap?

Yeah, Rob's going to answer that question. I mean, we haven't disclosed it, but I think maybe Rob can give a, you know, he's spent a lot of time working with them. He can give us a good overview of their relationships and how their domestic market works. But I would also make the comment that they can send a significant amount of export as well. They've chosen to send it domestically over the last, you know, period of time simply because that was the better market for them. But don't underestimate their ability to export combined with us as well.

I think we're very pleased with what was disclosed in their due diligence of where David Simon and his group have optimized their opportunities domestically and internationally, as Stephen has mentioned. So the North American picture is they have a great opportunity to achieve. And then internationally is a pivot that we think with our NAM asset, both bolted on together will be optimized in a greater way going forward.

Right, Rob. So is that where the synergies are coming from? Is that what you're saying between NAM and...

I think there's a combination of synergies, Simon, between the NAM assets and Baltimore Scrap. I think the assets, they're definitely the inbound logistics and outbound logistics. There are synergy potentials. But I also think that there is relationships that Baltimore Scrap has that we can learn from and certainly grow our business and the synergies across that sort of space as well.

And Simon, if you look at our slide, you can see that their locations, and I realise we haven't specifically answered how many relationship with steel mills versus steel companies, but we haven't disclosed that. But if you look at the map there, their locations are really nice from a logistics point of view as to where the domestic mills are. And their locations are pretty good too, and a number of them to get the export market as well.

All the big players would be in that region.

Yeah. Yep, yep. Okay, well, maybe we can circle back to that later. As I said, in line with everybody else, thanks so much for all your patience and best of luck with the future. And you too, Stephen, obviously stepping up to the new role.

Thanks, Simon. Thanks for your support. Thanks, Simon.

Thank you. We ask that any remaining questions limit themselves to one question each for the sake of time. Your next question comes from Lyndon Fagan from JP Morgan. Please go ahead.

Thanks very much. Just as we look to integrate the Baltimore acquisition into NAMM, I'm wondering if you can just answer the question around whether it's improving the EBITDA margin or not.

That's a difficult question to answer, but other than to say yes over all it is, but where that EBITDA margin improvement is going to sit, is it as a result of us having better access to the domestic market when the market separates? That will certainly improve the EBITDA margin. Is it going to be, as I talked previously, about better logistics that will absolutely preserve the EBITDA margin, the relationships that we will inherit, the domestic relationships that are going to improve our EBITDA margin? So all of those things will, some of it will sit. We won't think of the two companies as separate, but if I just do for a moment, some of that EBITDA margin would sit. in helping the existing Sims business. Some of that EBITDA margin will sit because Sims can help the existing Baltimore scrap business. That's the last time I'll separate them because, believe me, once they're integrated, we'll be viewing it as a single Sims entity.

Sorry, just to clarify. So historically, is this a higher margin business than your NAM divisions?

I guess we haven't disclosed that, but I would say on average, I mean, because we've had some up and down, if you look at through the cycle, right through the cycle, you would expect it to be a similar margin business. It doesn't have lots of peddler traffic, for example. And it doesn't, and actually a very good point, it doesn't have any non-ferrous business at the moment either, which is another example of a potential synergy. Clearly, we have a strong and growing non-ferrous business and they have yards which would be very suitable to increase our non-ferrous intake.

I know I've only meant to ask one question, but bundle it all under the one... If you were to try to add non-ferrous to that set of assets, what sort of investment would that require going forward?

Very, very minor. We're talking retail non-ferrous here, so it really is very minor. There's not much CapEx in the world. It's just utilising our skills and our logistics and our ability to sell it. Very little capital at all.

John, you want to come? Yeah, no, just going to say, you know, as part of our due diligence, their facilities are well geared to accommodate non-ferrous retail. And, you know, making use of that geographic footprint to capture that volume is an easy step forward for us. Great.

Thanks a lot, guys.

Thanks, Lenny.

Thank you.

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

Hi, thanks very much. Alice, congrats on the retirement. I've enjoyed dealing with you in your last two executive roles now over a decade or more. I'm wondering if you can just give us a little bit of a reflection. And then, Stephen, the same question goes to you, but obviously with your forward-facing lens on. This result has highlighted the inevitable impact you know, I guess, variability in your earnings base. You know, you've talked to some of it with the commodity price cycle, Stephen. You've mentioned, you know, some other variabilities in the business. But I guess I'd be interested to hear both your thoughts on what over the next three to five years, you know, can be done with the broader business to reduce the variability of earnings, please. And that is my only question.

I guess part of understanding where Sim sits from a global and industry in particular, we are obviously part of the steel manufacturing environment. And that does go through cycles. And I think to Stephen's point early on, we've seen price cycles that are long. You know, 20 years ago, the price cycles were fairly lengthy. We've seen a lot more shorter periods of volatility in the pricing of ferrous. But to say that the demand today, I think, is very different to when I joined here eight years ago. I think we have more of a consistent tailwind in terms of the ferrous demand, and that's purely the decarbonization process where you've seen electric arc furnaces put in, you know, from China to the United States to Australia, New Zealand. So that EAF, that implementation of that, I think is going to bring a higher level of earnings to SIMS. And as we've mentioned, that scrap plays such a key component in being able to recycle, reuse that again and again. And that's not only ferrous, but also non-ferrous copper and aluminium. And I think... The demand for copper and aluminium, I think, is also more stable than what it was five, six years ago. And probably when you look at the price of copper, you know, it was only a year ago that it was just short of $10,000 or even went over $10,000. Sitting at $8,500 today, I see that going back up again. And I see aluminium, which might be sitting at $2,100 today, going back over $2,500, closer to $3,000. So I do think non-ferrous pricing has structurally changed um changed and i think that will you know go forward and i think ferris pricing for the same reason has gone up that demand is there so i see a more stable higher level of earnings for sims in the next you know period of time 10 20 years as that demand continues i don't I don't see that changing is my gut feeling as I sit here today from what I've learned. I think we're always going to go through geopolitical events globally. I didn't think there was going to be a pandemic. I didn't think we'd see such high tariffs imposed in parts of our regions around the world. And I think the geopolitical aspects of Ukraine, you know, drove our business and the scrap demand last year to highs we've never seen or haven't seen for many, many decades. So I think part of SIM's flexibility and ability to pivot is one of the strengths I think we've seen in the last 10 years. And I think that's going to put us in a good position going forward to expect volatility, but I think less so in greater demand for our products.

That's my view. I guess you've spoken there to a lot of the investment tailwinds, Alistair. What is it that's in SIMS' control to make sure that you benefit the most possible from the tailwinds that are coming? I guess that's what I'm kind of asking over a three to five year time frame.

Yeah, well, I think the positioning in North American market growth, I think Australia is a classic, and I think our access to the Southeast Asian markets and that U.S. market is really key. So those are the strategies we've deployed both in Ferris and non-Ferris. So I think it's the geographical positioning of our company but also balance sheet strength and knowing what we're doing in that scrap business. I think those are the strengths for us going forward.

And Scott, maybe I'll chime in with mine now. I mean, the very first thing I would say is I'm a big believer in our strategy. In fact, when I was talking to the board, I specifically said to the board, if they were looking for a CEO to bring in a fundamental change to strategy, then I was not the person that they were looking for. You know, as an executive team, we've developed this strategy under the guidance of Alistair over the last five years, and I believe it's the right strategy going forward. there can always be tweaks to the strategy and I think that's what will happen and I believe we're seeing one right now and for me it's all about resilience. The market is going to be the market and I 100% agree with Alistair. We believe that the fundamentals of the market and the medium to long term are strong but the market will be the market. What we need to do is make sure we're resilient in the face of those market conditions and I believe We are much more resilient than we were five years ago in the face of some pretty challenging markets. But here's another good example that's happened right now, and we're reacting to that. The growth, the strong growth in the US domestic market, particularly in the EAFs, and how quickly it drove a separation between the export and domestic price, happened very, very rapidly and to a much greater magnitude than we thought. When we look at that now, we think that's possible that that can happen again in the future. So we need to be more resilient to it. So what's the tweak in our strategy? The tweak in our strategy is to make sure that NAM has more domestic, not just options, but more domestic diversity as well without losing its export capability. And so, you know, I think a tweak to our strategy is over the coming, six months, 12 months, two years, you should expect to see NAM's capability to move more domestically improve. And that's what we'll be reporting on and those types of things. So fundamental strategy is not going to change. Tweaks in the strategy to make sure we're more resilient to whatever this market throws to us and we learn. I think that's, for me, the themes in the next six months to two years.

Okay, great. Thank you.

Thank you. Unfortunately, that does conclude our time for questions today. I'll now hand back to Mr Field for any closing remarks.

Thank you, firstly, to everybody that was on the call. Great questions today. Thank you for all the well wishes, and I do wish you all the best going forward. And to the SIMS management team, to the new family members, Baltimore Scrap and Northeast Metal, welcome. And thanks again for everything. Take care.

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