Sims Limited (SGM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Sims Metal Management FY '20 Results Conference Call. [Operator Instructions] 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.simsmm.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. It's a pleasure to be here delivering the full year results for Sims. Joining me on today's call is the Group Chief Financial Officer, Stephen Mikkelsen. The slide presentation that we will run through has been lodged with the ASX, along with the results release. As you can see on Slide 3, the format for today is that I will run through a general overview, our performance and the highlights for fiscal 2020. I'll then hand over to Stephen, who will take us through our financial results before I discuss some of the company's strategic priorities and near-term market outlook and the challenges. Following that, there will be time for Q&A. Now turning to Slide 4. There can be no denying that it has been a tough year. We've had to deal with the scrap price crash in September and ongoing very low zorba prices that, together, severely compressed margins in the first half. Scrap prices were showing good signs of recovery, and we were confident of returning to a profit in the second half. The main cloud on the horizon we noted back in February was the emerging coronavirus issue. It seems such a long time ago, and that potential coronavirus issue has turned into a fully blown COVID-19 global pandemic. As you can see from the slide, all our financial metrics have been impacted. Stephen will provide a detailed run-through of all of these, so I won't elaborate any further. I do want to comment on our response, however. Our first priority will always be the safety of our employees, customers, suppliers and the community. I'm extremely proud of the work our business continuity team did in implementing excellent protocols to keep the business running safely. We have also taken a thorough look at costs and removed $70 million of largely fixed costs when comparing our budgeted FY '21 outcome to FY '19 actuals. Understandably, we also cut back on capital expenditure to preserve cash, and our FY '20 outcome is nearly 35% below what we thought it would be in August 2019. Looking forward, and on a positive note, today, we have announced the commencement of the community consultation process for a resource renewal facility in Campbellfield, Victoria. More on that later in the presentation. We secured a further 3 substantial players in the cloud space. And following the disposable of the European compliance scheme assets, that business is set up and focused on being the #1 supplier of cloud recycling services. I'll also note that after a tumultuous 12-month period, all metal divisions and Sims Limited returned to a positive EBIT for the month of July. Moving to Slide 5. I will call out 2 numbers on this slide. Firstly, it is starting to look like the scrap market impact from COVID-19 may have bottomed in April, and we have emerged on the other side, still with a positive net cash balance. Secondly, it is disappointing not to declare a final dividend. Even though there are signs of a recovering scrap market, there is still significant economic and market uncertainty, and the preservation of a strong balance sheet is the more prudent path. Now on to Slide 6, our safety slide. I am pleased to report our equal lowest total recordable injury frequency rate on record. Importantly, we have increased the size of the group we measure to now include temporary employees. Understandably, a big focus this year was employee health, particularly mental health as COVID-19 impacted our 200 global locations in different ways. Moving now to Slide 7 on sustainability. Sustainability is not an add-on for Sims. It is our business model, and it will guide our long-term strategy. We are investing in closing the loop even further with the announcement today of Campbellfield as our preferred location for the first of 11 global resource renewal facilities. Our Recycling the Cloud initiative, where we will redeploy, reuse and recycle cloud infrastructure, is a perfect example of our response to the environmental challenges presented by new technology. I'll briefly turn to Slide 8. Presented here for convenience is a summary of the group financial performance. Stephen will be covering the financials in considerable detail. So I will turn straight to Slide 9, which provides charts on market conditions. I commented on Slide 5 that the scrap market impact from COVID-19 may have bottomed in April, and we could be seeing Sims emerge on the other side. I'm very conscious that these could be famous last words. However, the charts do provide empirical support for my assertion. Firstly, you can see the ferrous price fell close to USD 200 per tonne in April, and have since rebounded to above $280. Similarly, zorba fell to USD 700 per tonne in April, and is now close to $900. Even more impressive has been intake volume recovery. In the month of April, our proprietary intake volumes were only 300,000 tonnes, over 50% lower than the FY '19 average. Since then, volumes have steadily lifted. And in July, we received close to 600,000 tonnes, still only 85% of FY '19 average, but 100% increase on April lows. We are still expecting that our high-grade non-ferrous material will be imported into China in 2020 without the requirement for quotas. I will hand over to Stephen now.

Thanks, Alistair. I'm on Slide 11 that explains the difference between statutory EBIT of minus $239.1 million and underlying EBIT. The FY '20 result caused us to rethink the structure of the business, including what assets we needed going forward and whether we were deriving value from all the intangible assets we were carrying. At the end of this exercise, we decided to write off $122 million in brand assets, other intangible assets and physical assets. We also disposed of the European compliance business as well as some underutilized property. We incurred a net loss of $9.9 million on the disposal and a gain of $20.4 million on the land. We also increased our environmental provisions by $25 million as laws are updated to reflect current community standards. The last item I will highlight is the $35.2 million in restructuring and redundancy costs as these drive the estimated $70 million in cost savings for FY '21 compared to FY '19. The next 2 slides focus on cost savings, so I'll turn to Slide 12. We have continued our first half focus on cost reduction into the second half. Moving forward, we will be concentrating on a new concept of predominantly fixed costs. That is those costs over which we have significant and direct influence, and on average, around 70% of these costs do not vary within reasonable volume ranges. From our operating costs, we have removed depreciation and leases, nonmetals businesses, nonrecurring costs and predominantly variable costs to leave around $600 million of addressable, largely fixed costs. This is the base we will measure going forward, and Slide 13 shows how we will achieve $70 million of cost savings in FY '21 compared to FY '19. You will recall at the half year result announcement, we identified $30 million of annualized cost savings. Half of those were delivered in FY '20, and the balance of $15 million to achieve the full $30 million run rate will be delivered in FY '21. At the end of FY '20, we identified a further $40 million of savings, and we will get the full run rate of these savings in FY '21. The $40 million savings fit into 2 different categories. The first $20 million has been embedded into the company through, for example, delayering the organization, increasing spans of control and consolidating facilities. The second $20 million may be categorized as doing more with less without good processes and systems to lock in the reduction. We have effectively brought forward cost savings we identified as part of our ERP implementation. And it will need this implementation if those costs aren't going to creep back into the business over time. Alistair will talk more -- in more detail about the ERP. Slide 14 shows the convenience, the summarized EBIT and volumes by division. I won't talk any further on this slide because the subsequent slides 15 to 21 contain more detail, and I will speak to each of them separately. Moving to North American Metals on Slide 15. North America suffered a full year EBIT loss of $39 million after delivering a breakeven first half. North America sales volumes were hit very hard in the second half, in fact, down 22% on the first half of FY '20 and 25% on the second half of FY '19. Our large northeast facilities, particularly in New York and New Jersey, were severely impacted by the statewide lockdowns. These states were the first 2 to impose these types of widespread restrictions in an attempt to slow the spread of COVID-19. We shuttered numerous feed yards and did not take in feedlot traffic. Additionally, a large number of our suppliers had little to no activity. Hugely lower sales volumes, combined with compressed margin per tonne from lower sales prices for ferrous and zorba, meant the North American business really struggled. In response, we have cut costs, as I have detailed on the previous slides. The full run rate of these costs will not come through until FY '21. I'm pleased to say that North America has returned to a solid positive EBIT contribution for the month of July 2020, following an improvement in volumes, higher sales prices and lower fixed costs. Turning to Slide 16. ANZ's 52% decline in EBIT is, basically, fully explained by significantly lower sales volumes. Year-on-year, they were down 19%, compounded in the second half by total COVID-19 lockdowns in New Zealand and much lower activity in Australia. Pleasingly, ANZ did not suffer margin compression measured by gross margin per tonne despite lower sales prices. This good margin management performance, coupled with swift cost reduction initiatives, partially offset the impact of COVID-19-induced volume decreases and ANZ-produced EBIT of $50.7 million. This positive EBIT performance has continued into the month of July 2020. Moving on to Slide 17 and U.K. Metals. As I'm sure you are all aware, the U.K. had a particularly poor first half for the reasons we outlined back in February. The second half, however, while not quite returning to positive EBIT, was a $25 million improvement over the first half. Pleasingly, this improvement trend has continued, and U.K. returned to a positive EBIT for the month of July 2020. Against a backdrop of 24% lower volumes, driven by both lower prices and a lockdown in the U.K., the business has restructured to lower costs, including the proposed closure of a number of additional sites, without impacting our processing capacity. Turning over to Slide 18, I will run through Sims Lifecycle Services result. The top table showing EBIT, including the European compliance scheme operations through to the sale in September 2019, is of historic significance only. The bottom table shows the baseline of SLS going forward, and it is off this baseline we intend to grow through redeploying, reusing and recycling the cloud. Like the metals businesses, cloud volumes were impacted by COVID-19 as logistics and the availability of customer personnel were restricted. Moving on to SA Recycling on Slide 19. SA Recycling had a good second half on the back of a breakeven first half. It managed to increase sales volumes by 3% compared to the first half as it’s these locations were not significantly impacted by state lockdowns. This good volume performance, combined with increased ferrous margins and controlling expenses, delivered a $12.1 million EBIT. Positive EBIT performance has continued into the month of July 2020. For the full year, volumes declined 8% and EBIT was down 66.3%, reflecting lower annual volumes and margins being squeezed from the ferrous price scrap crash in September and overall lower ferrous and zorba prices. On to Slide 20. Underlying EBIT on a constant currency basis for global trading improved 10.6%. This was due to lower operating costs, partially offset by lower brokerage volumes from SA Recycling. The final segment we analyze is on Slide 21, corporate and other. Corporate expenses, on a constant currency basis, decreased 8.6%, largely from lower employee expenses. A disappointing year for Municipal Recycling as higher waste and its intake, combined with higher waste disposal costs and lower plastic, paper and metal prices, delivered a slightly better than breakeven result. Lastly, a tougher year for LMS, as reduced wholesale energy and renewable prices caused a 25% reduction in EBIT. I'll move on to Slide 22. We have maintained a strong balance sheet throughout the pandemic, with net cash, as of 30 June 2020, of $110.4 million. This was lower than I thought it would be when I spoke at the half year for 3 main reasons. Firstly, I expected around $50 million of seasonality to reverse in the second half. Instead, there was a further negative $46.3 million of working capital movements, a near $100 million variance. This is largely due to higher receivables than expected. As COVID-19 slowed the settlement of international transactions and disrupted some shipping, where bulk sales happened later in June than expected and the settlement terms meant the cash receipt slipped into July. This can be evidenced by our July 2020 cash flow, which was slightly better than breakeven, and yet for the 2 previous Julys, it had been negative. Second outflow was an unexpected $61 million loan to Adams Steel for the purchase of other Adams' family members interests and SA Recycling. Finally, profit, excluding noncash impairments, was around $70 million less for the 6 months than we expected to the impacts from COVID-19 that we've been discussing over the previous slides. Turning to Slide 23. You can clearly see on the chart that we have reduced CapEx in FY '20 as we entered the uncertainty of a COVID-19 world and wanted to preserve cash. A reasonable portion of this was maintenance CapEx, but the work will need to be done at some point. We are assuming that at least some of this happens in the first half of FY '21, and you can see the increase there. Growth CapEx is dominated by the ERP program and resource renewal facilities. Alistair will be taking us through both of these, so I'll hand back to him now.

Thank you, Stephen. The next few slides are going to look at the progress of our strategic initiatives and targets. I wanted to start with a new initiative, business transformation, and I'll turn to Slide 25 to run through this. Business transformation will be a process that we undertake over the next 3 years. Like some of the cost reductions, it also requires the new ERP as an enabler to fully realize the gross margin benefits that I believe are there. The first and very important step is that we have realigned the global business along functional lines. Stating it simply, Michael Movsas is now responsible for global gross margin and, through combining the buy and sell functions under one structure, you will have much better line of sight to our risk position and gross margin maximization. John Glyde now oversees all our global metal operations. He will ensure best practice across the business and the optimization of all our facilities to deliver the right quality product to our customers at the lowest cost to Sims. Michael and John will be joined at the hip to ensure the best consolidated results for Sims. Moving on to Slide 26, where I want to flesh out a bit more detail on the ERP. After a thorough review over the last 18 months of our systems and upgrades required to those systems, we have decided to embark on the implementation of a single integrated global instance of an ERP system. There will be many benefits included: standardized and integrated global business processes; real-time understanding of our global inventory position across our entire product range; and greatly improved customer and supplier experiences. This program will categorically drive lower operating costs, but more importantly, I firmly believe it will be the enabler to deliver higher volumes and improved gross margin per tonne. It is a big commitment, a big cultural change commitment, a big time commitment and a big financial commitment. The cost is $110 million, and it will take 3 years to fully implement. I wanted to ensure that the program met our return hurdles on quantifiable cost reduction measures only. We have achieved this through the $30 million cost reductions and $40 million avoided current system upgrades. I know that improved gross margin per tonne and higher volumes will also be there, but they are difficult to objectively measure as there are so many externalities that influence margins and volumes, such as where we are in the commodity cycle and periodic competitive behavior. The chart on the left is a simplified cash flow model showing the timing of CapEx through to FY '23 and the cash benefits of $20 million, rising to $30 million per annum when the program is completed. Importantly, this is a staged and controlled implementation. We've reduced risk by implementing the whole solution in New Zealand first and spent a lot of time in rigorous planning. Turning now to Slide 27 and Sims Lifecycle Services. Following the sale of the European compliance scheme assets, SLS is now focused and ready to deliver an exponentially growing need to reuse, redeploy or recycle the physical assets comprising the cloud. We have increased our cloud customers from 8 to 11. And as you would expect, these are the big global players that make up the cloud. Overall, the outcomes for FY '20 were within our expectations, but they were impacted by COVID-19 from March as the logistics of getting all relevant people on site in a safer manner were difficult. Assuming we can return to good site access and our customers' employees can also be there, then we are targeting 33,000 tonnes in FY '21. Turning now to Slide 28, Sims Resource Renewal. Today is a very important day on our journey to diverting 1 million tonnes of ASR that is currently going to landfill and turning it into useful products. It's important for 2 reasons. Firstly, we have announced that Campbellfield in Victoria is our preferred location for the first Resource Renewal facility. We have commenced community consultation. Secondly, we have chosen InEnTec as the supplier of the technology. In September, we will be conducting a commercial scale demonstration at InEnTec's facility in Oregon, United States. This is exciting news, but I must suggest we will continue with our capital disciplined stage gate process. Turning now to Slide 29 and strategic targets. This slide updates our FY '25 strategic targets. There has, by necessity, been some movements to these targets over the last few months due to external factors and changing conditions as well as our own thoughts on what is most relevant. Firstly, regarding our expansion of metal volumes in favorable geographies, we have changed the volume targets from only North America targets to global targets. Upon reflection, our global target seems a better way to optimize our volumes. Secondly, we have rethought the program will work for Resource Renewal and pushed it back. We are still targeting 11 sites and 1 million tonnes of ASR, but we will have 120,000 tonnes of capacity by FY '25, not our original estimate of 290,000 tonnes. Finally, given the uncertainty around COVID-19, we will continue to conserve cash and have put the targeted megawatts for Sims Energy under review. It is also worth noting that we were not successful in FY '20 in securing any projects that met our hurdle rates. And as I have said, I'm not going to commit any CapEx to renewable energy that does not meet the 15% hurdle. On to my last slide, the FY '20 results and outlook. I won't spend any time looking back on FY '20, other than to say it was an extremely tough year with back-to-back, very difficult halves. We responded well, from a safety perspective, and the cost reduction program was implemented swiftly. I'm very pleased on our strategic growth progress, particularly considering the major changes to the way we work that COVID-19 has forced on all of us. I'm also very aware that talking about an outlook is fraught with difficulty given the still unfolding nature of the pandemic. You would have to assume the risks are to the downside. Having said that, I believe we are more robustly structured than we were, and this will assist in managing through any potential further downside. The balance sheet remains strong. Our costs are lower. We have structurally changed to better manage buy and sell risks. And in the medium term, ERP will enable us to manage the business in a more optimal way. I believe that following the cash-in-pocket stimulus that was necessary to stop the complete crash of economies, governments will turn to infrastructure spending to provide ongoing stimulus. We are well positioned to provide the recycled metals that will be needed to produce the steel and non-ferrous products to build the infrastructure. It is also worth pointing out that all metal divisions and the group returned to a solid positive EBIT for the month of July. Finally, before handing back to the operator for questions, I want to make a comment on our employees' dedication these last 12 months. In particular, the last 5 months have been very trying. I know that working from home or working on sites in a COVID-safe manner while seeing colleagues leave Sims, has been difficult. I sincerely thank each of you for successfully managing our business through this. Operator, back to you.

[Operator Instructions] Your first question comes from Peter Steyn from Macquarie Bank.

Perhaps just wanted to pick up on some of the structural combination of, I guess, it's underlying John and Michael's roles, but you mentioned the structural combination of buy and sell functions. Could you give us a bit of a sense of why that is different to what was occurring before and what your expectations are for the impact of this on a go-forward basis, particularly around margins?

I'll talk around the structure. Stephen can talk about the margin. One of the key aspects for us is around -- the buy side of the business has typically been reporting through to an operational structure. And one of the improvements that we feel is key to our future going forward is about aligning the buy and sell, which is really -- fuel gross margin. So by having a person that is in charge of the commercial component of the business, which is both buy and sell of the material at a group level, and it obviously flows through into the regions as well, was a more aligned strategy, which focuses on that gross margin. But also, once the ERP is fully implemented as well, using real-time data, it is really key that, that functional alignment is operating very effectively. And we believe it can operate more effectively than what it currently does. In terms of the operating practice, this is really where we have all operating yard facility shredders across the world, standardizing them under one leadership structure, and they focus primarily on improved productivity, efficiencies and obviously, costs as well. So this is a clearer set of alignment structure that we felt this was required. This was a body of work that took probably 6 to 8 months to undertake so that we made sure that we had the fundamentals in place to be able to do this, and obviously, that we realize the benefits. This is not new to most industries, but certainly, it is -- has been done in this industry many years ago. But we felt that this alignment is really important for us going forward.

And then just picking up on the restructuring in the U.K., it sort of feels like a replay of what we saw in North America a few years ago when you cut the middle of the continent up quite a bit from a restructuring point of view. How comfortable are you that you're going to lose organizational capability in the medium to longer term? You've spoken about capacity, but I'm just thinking about the broader competitive piece of that business in the longer term. And then probably related to that, is there potentially a capital unlock that comes from the sale of sites from that restructure?

Firstly, the focus on the U.K., obviously, has been -- over the last 2 years, as you know, we have focused on the U.K. And one of the key aspects is the numbers of yards that we have, and a number of them are small and fairly close-located to each other. We've also had acquisitions that we did in the last 2 years. So part of this was ensuring that we created rather a super yard rather than a number of smaller ones. So that we actually then focused a cooperating environment that was more effective and then cost-effective at that. That allows the competitive environment, which has changed over the last couple of years, to take place. So we needed to position ourselves so that we were more competitive, and thereby taking costs up. In terms of long-term sort of capital, a number of these facilities were also leased so we've had to make those arrangements as well. I think the ideal for us in the U.K. is we had to lower the cost base to be competitive and to be able to continue both domestic and export sales. So this has been, obviously, a key body of work that, that management team has undertaken, and they've done it fairly quickly. So I think there is a little bit more room for improvement in the coming 12 months that we're planning. So it's imperative that we actually get that cost base down. And we'll obviously be very disciplined in terms of capital management as well going forward in the U.K.

And then perhaps, just last quick one for Stephen, just around CapEx. Appreciate that you're saying that the second half of '21 will depend on what the market looks like. But broadly speaking, would you expect CapEx to still be below FY '19 levels? Or would the investment in the Resource Renewal plant potentially push that over? And could you give us a number on the Resource Renewal plant's overall CapEx, please?

Yes. So in terms of that first half, second half split, we -- as I've said in the thing -- in -- I've said in the presentation, we definitely do need to spend some more on maintenance CapEx than we did in FY '20, as we just literally considered cash as we went into that period, I don't know, around March, April, where it was really difficult to know exactly what's going to happen. So I think our maintenance CapEx will end up at similar levels to, let's say, FY '19. I think, overall, our growth CapEx may be slightly less than it was in FY '19. So I'd say, overall, we'll probably be a little bit down on FY '19. In terms of the actual total CapEx, the bulk of it in that, as I've said in that thing, is the ERP and the resource renewal facilities. I think the total for the ERP is around $41 million for the year. And ERF, I actually don't have that number just off the top of my head, although that will be weighted towards the first half and in total, will be around about, let's say, $10 million to $15 million for the full year.

And you're not providing us a full number for the RRF at this point in time, what it will take to commission it?

Well, I still think we're -- we still think we're working through those numbers. We will provide that, but there's still final configurations to be figured out, and we'll do that when we get to it.

I think, Peter, maybe I'll just jump in here as well. Obviously, as I mentioned, we go through very strict stage gates. And part of the reasoning for that is to make sure that the scope of work at each step is clearly defined. And really what we're heading for is a P85, P90 type number where we are very sure before we get final Board approval as to what the cost is. So the more engineering we do upfront, the better for that level of accuracy of the P90.

Your next question comes from Nick Herbert from Crédit Suisse.

A few for me, please. Can I just start with ferrous volumes in the U.S.? I'm just thinking about those in context of U.S. steel utilization rates. Obviously, saw that fall into the 50s. So low by historical standards. Just interested in how you view that relationship in terms of that utilization rate relative to scrap prices and volumes in the U.S.

Well, in 2 fronts. One is there's obviously an international and a domestic market in the U.S. for us. So we do balance between export and domestic markets. So export typically out of the U.S. sits at around 70%. In terms of the operating steel mills and the effectiveness or the operational capacities, the 50% to 60% mark is pretty much where they're at now. And we have seen that come down from the 80%, 90% of last year. I'm not surprised with the decline. And obviously, there's a lot of turmoil going on in the United States at the moment. But also, I think we'll start to see that operating numbers start to head north of 60%. And I would expect, if that is the case, you'll see some of the scrap prices start to rise domestically as well. There's obviously the balance between that export and domestic in our case. In some cases where you are operating in the Midwest, which is to one of the previous questions, one of the reasons Sims got out of some of the central areas of the United States is that you were too beholden to the steel mills. So being able to export as well as sell domestically is key for us. So I do see prices of scrap starting to rise, but as you know, in the United States domestically now, things are fairly quiet. It's also holiday season. So I would expect some of those volumes to start picking up as we progress to August, September.

Okay. And then just on the cost reduction. Could you just clarify what the FY '21 cost is to implement that and what the rough split of benefit is by region, just to help us out with those divisional outlooks?

So just a little bit -- that was the FY '20 on cost of the ERP. Is it -- or that...

Yes. So basically -- whatever it was, the sort of $40 million to $50 million cost out in aggregate that's due this year on FY '20. Just the cost of that and the benefits, how that is split up by region.

Right. So I can't give the regionals, but what I can say that the cost of it is pretty much if you look in the significant items in that restructuring and redundancy. That's really where the cash flow came out in order to achieve those cost savings. I also think it's worthwhile -- it's very worthwhile pointing out that of the cost savings, $15 million of what's going to happen in '21, we'd already put in place in FY '20, and that's just rolling through. And the balance of $40 million is completely new cost initiatives that we put in place towards the end of the year. So it all has a -- look, I'd be frank, it has a less than a 1-year payback or thereabouts. So I think very good from that point of view. By -- but yes, we haven't provided it by region, I think, and I'm not sure how helpful that would be in reality.

Okay. And then the positive July EBIT that you referred to across the business, are you able to advise what that is?

No, we're not because I don't want to get into sort of monthly profit cycles. I guess what we -- why we've talked about it is that, clearly, the last 6 months was very tumultuous, and you can see that it really bottomed out in April, and we had some really tough times. So what we wanted to show is that certainly empirically, and we appear to be through it. I think Alistair was right to caution that they could be famous last words, but look, volumes have increased significantly, prices come up, we've got our costs down. So all 3 of them are contributing to it. And I guess what I will say is it's more than just breakeven. It's a good solid July number, which is pleasing to see.

Okay. And then, finally, the easing of the non-ferrous classifications in China, so the removal of the closures. Where do you think that market can get back to for Sims in consideration of what you used to ship there on the non-ferrous side of things pre-closures? Just interested on your thoughts there, please, and how material that opportunity is now if that changed.

Look, I mean, the definition of new metals, obviously, that standard has now been public for quite some time. And when you've got to provide 99.3% purity levels and copper and aluminum above 90% metal content, we're quite comfortable with that. I mean 90% of our products meet those standards anyway. What I would say is that where we sell our non-ferrous products is obviously to the best customers that are offering the best value. So for us, China is an important market, but we also sell in Southeast Asia and other markets. So the focus really is where we get our best returns. And we're very comfortable that our quality, which is a really important aspect, if you choose to sell into China, we're comfortable that we can do that. And all the technology and money that we've spent in getting that quality, but also the bagging operations that are expected when you go into China, we can meet all of that. But ultimately, our non-ferrous opportunity must remain global, not only just China. But if China had the pricing and the volumes that were required, we'd be happily to sell into that market.

Your next question comes from Lee Power from CLSA.

Just looking at the strategic targets and in particular, ferrous and non-ferrous volumes, can you maybe just talk a little bit around how the market structure has changed? And maybe if that's changed, how you approach to how you kind of achieve those targets?

I think part of -- we've always wanted to grow our volumes from a geographic sense. And then -- and obviously, where we have growth potential like we have in North America, part of that is reviewing that opportunity every year. And in doing so, we also found that there are potentially other opportunities across the globe that we can incorporate into our growth strategy, which we normally would have, but we'd actually put quite a high level of focus on North America. Part of our reasoning for that more of a global focus for the next set is really about the effort that is going to be required in North America to keep our costs and our capital discipline into place in North America. There's obviously a lot of volatility in the North American market at the moment. So we felt that we want to continue growing the business, but we need to focus in other regions as well. There are other regions that are performing well. So we want to make sure that we have any opportunities that we can available there. The North American market is still the largest volume and, obviously, still has a large potential for us there. It might just take a little bit of longer time as we come out of the COVID-19 period.

Okay. And then, I mean, at the strategy day, you obviously had these 3 kind of buckets, and you gave a $670 million CapEx number, 2024 to hit them. Now you kind of -- you're taking another look now at energy, but you've got some other projects there. And then you're kind of reassessing maybe the approach of how you go into the U.S. I mean do we just ignore that number now? Or is it just the kind of the bucket shift a little bit, and that $670 million number is still thereabouts across to 2024?

Well, firstly, the energy expansion that we undertake in North America, as Stephen mentioned, we've taken 12 months now. We've renewed a number of opportunities. None of those met our hurdle rates. Our strategy, we still think, is sound. The question is the approach that we take and how we do that. So that is what is under review. It's not off the table, by any means. But part of the issue is us also, as a management team, prioritizing our effort in the next 12 months. And given the challenges that we have globally and making sure that we are very careful and disciplined with our capital, we've decided to take that review under consideration for the next 12 months and focus on the ERP and the resource renewal project. So it's a matter of prioritization for the next 12 months, but it's not off the table. In terms of the guidance, in terms of capital, it's still pretty much in that area of $640 million to $700 million, I would suggest.

I think it's probably fair to say that it is pushed back and spread out more. I mean we always see it on the day that gives a stage-gate process, and it has to get through that, we were going to be absolutely disciplined around that. And I believe we've shown that. Clearly, with the energy renewal recovery facilities, that has been pushed back because we're showing some caution around that, we're doing one at a time. And you can see from our targets that certainly by that FY '25 time frame, we're going to have less in there, but we're still targeting the whole 11. So I agree with Alistair, I think the total is still -- it's still there, but it's absolutely spread back and pushed over a longer period of time and still subject to these hurdles. So let's be frank, if for the next 5 years we don't find a project that meets our 15% hurdle in Sims Energy in the U.S., we won't be doing it. We've got to be disciplined.

Okay. And then just finally, the ERP, the benefit that you get, is that dependent -- I mean, when you calculate that, is that on current volumes? Do you need some sort of volume growth component to get that upside?

No, we don't. And that's -- I guess that was the point Alistair was making is that he was very adamant. We were all adamant that we do cost reductions. We know that there's going to be -- there will definitely be additional benefits in there, I think, in both volumes and margins. But very hard to quantify because you don't have a controlled case. So no, it doesn't need growth in volumes. And in fact, in a way, it's the other way around. We believe that ERP will be the enabler for it, but it has been justified on cost reduction.

Your next question comes from Owen Birrell from Goldman Sachs.

Just first question for me on essentially the metal margins during the period. We saw the buy-sell margins compress quite significantly in the first half. I'm just wondering whether that recovered in the second half, given that we saw pricing rise. Or did the inability to source products ensure that you still had to pay up for import products?

Good question. We did see the compression, obviously, last year. As you know, once volumes start to pick up -- sorry, once pricing starts to pick up, we do see volumes start to increase as well. So there is a linkage between the 2. We did, after April, start to see that margin widen.

And can I ask, is that margin back to where we were, say, in 2019? Or have we seen a bit of a sort of structural downshift in that?

No, we haven't seen that level yet. But I'm -- obviously, I think it's still early days in their recovery process. And I think once we get through the next quarter, would give us a better indication of how the margins might stabilize. But a lot is still hanging in how COVID and the various economies across the globe react. And as you know, Europe is on holiday at the moment so we're seeing a bit of a lull in the European area. Southeast Asia starts and stops a little bit. China seems to be quite stable at this moment in terms of their productivity levels. And the U.S. is on holiday a little bit. So I think we need to give it another 2, 3 months to draw some conclusion around where gross margin is going.

Okay. Excellent. Just a quick question on the ERP rollout. I guess I'd go back to Peter's original question is, how does this really differ from what you've been doing at this point? Because for the last 4, 5 years, we've been told that internally, you guys are matching buy and sell prices to match margins, to manage reduced peaks and inventory levels. I'm just curious to know what systems you actually have now that this ERP system is going to be so much better than? And can I just ask, is this materially different to what your competitors are doing? So does this actually give you a competitive advantage in the market?

I'm happy to answer that one. I guess the first point is that we -- and I'll give you a simple example of it. In real time, and let's say, prices move very dramatically in real time, we don't have, right now, a global inventory risk position because we have different systems in each country, and it's not real time. The ERP is going to provide an update. So when someone comes across our way bridge, whether it be with some copper or some street material, whatever it is, we will have a real-time update of our position. Which means that Michael Movsas will have a much better ability to sell that or to decide when he's going to sell it with much less risk because he'll know exactly what our position and no buffers will have to be built in. So I think that is a huge difference to what we do now. I mean -- and a further example, the ERP will completely standardize the naming of every single product that we use across the globe. Now that may sound like, well, that seems pretty simple, but it's not right now because each of our systems have grown up in each of the regions with different nomenclature, all that sort of things. So it's a really good standardization, risk reduction. I think that's the biggest single benefit of it.

[indiscernible] competitive position because we know that scrap is a very localized -- particularly from a collection perspective, very localized business. Does this actually put you at a disadvantage to competing to buy scrap in the localized market because you're trying to...

No. The collection is localized. The collection is localized, but it's a very international price. So I think it will give us an advantage. I mean -- sorry, I just remember the second part of your question. So sorry. The second part was, do I think it will give us a competitive advantage. I believe, yes, because we at Sims must -- we must have more knowledge than anybody else in the world about what's going on in the market. We are constantly out there buying globally to pull that all together in a single system, to give our traders both knowledge about what's going on in the market at a local level, but then give out to trade it globally. I think -- I really do believe that's a big competitive advantage.

Okay. ERP rollouts are fraught across multiple industries in terms of cost blowouts and timing blowouts. So I'm just wondering what level of experience do you have internally. Has anybody done one of these rollouts before in your management team?

That's a good question, Owen, and obviously, one that we took into account about 18 months ago. So we followed a very strong due diligence process. We've hired very capable individuals that have worked with SAP and rollouts and the combinations of what we're wanting. So we're very comfortable with the action team that we have. I think one of the key aspects is the scope of work and the process that we're under to determine that scope of work and the costing and who the A-team was that we required from both external but also an internal team that is now focused purely on that ERP project. So we are very comfortable with the product team and their capability and their experience. So I think just adding one other comment. When you have multiple systems that cost you lots of money over many, many years, to go to a single system also allows us to improve the current processes and potentially shorten them, and then obviously, there's a cost saving in that as well. So this has not been a project that we've taken lightly.

Alistair, I'd like to add one other thing to that, which is important is that it's not a big bang rollout either. We're not just going -- here's the SAP and BSM system all going into the globe in one big go. We're rolling out in a staged manner. And importantly, we're rolling it into New Zealand first. So New Zealand will be the first rollout. New Zealand has the advantage for us because it is small and manageable, and yet it has the same complexity, just on a smaller scale of all of our other global locations. So I think that -- I don't think -- that will significantly reduce the risk of the rollout because, not that we're expecting this to happen, but if something did go wrong with the rollout into New Zealand, we could roll it back quickly without having a significant impact. So I think that's also an important point.

Excellent. Sorry, just one last question on ERP. Is this a standard off-the-shelf SAP system? Or is it a tailored system to your requirements?

No, off-the-shelf. One of the big lessons that we've all learned. Yes, you don't tailor. Exactly.

Good. Okay. Just one final question for me. Why was Campbellfield chosen as the target site for the resource renewal project? Is it the import? Is it electricity? Government? Like what are the key drivers behind that choice on that site?

Obviously, when you're doing that type of a project, there is a due diligence process. So it has to do with, obviously, the government standards, regulations, EPA processes. And obviously, for us to be able to roll out a project, we wanted to make sure that we had a regulatory EPA that has a very determined process that is proactive, and that the community and the availability of resources to be able to deliver that project were all in line. So pretty much that's what happened with Campbellfield. It was the chosen site for a number of reasons, and the government being one of them, but also the ability for us to build that project in that community.

Your next question comes Jack Gabb from Bank of America.

Just two quick questions. Firstly, can you give us an update on the New York municipal contract in terms of profitability and the way you're looking to get that to? And then just secondly, can you remind us of the terms of the loan to George Adams? I guess it was a -- like a pretty tough year in terms of CapEx. You said yourself, you're trying to minimize maintenance CapEx. But obviously, you loaned George the money. So just a reminder of the terms would be great.

No problem. Firstly, the municipal or the Department of Sanitation New York, we were in discussions with New York around the content of waste that was coming through in our recycling products that was put on hold when New York went into lockdown in March. And they -- those discussions have now restarted. And also in terms of some of the pricing of some of the paper products and plastic that were under review. So that has all kicked off again. It has been delayed because of the situation with COVID. And obviously, we're looking forward to getting that resolved as well. So I think to your second part of your question, the terms of the Adams loan, as you know, there was a put option from 2007. So the loan was around $61 million over 8 years. There's obviously normal securities and that exercise of that put draft was pushed out for another 8 years. So does that answer your question?

Yes, that's great.

Your next question is from James Brennan-Chong from UBS Investment Bank.

Just a few things for me. Just on the set of what's happening in China, just firstly, on the non-ferrous side. So obviously, China has reclassified high-grade non-ferrous to renewable metal. But can you just tell me whether volumes are actually going into China right now underneath that renaming just yet?

Volumes are going in, but not under that new metal name. We are hearing that there is a lot of pressure on quality inspections at the various ports, but I don't believe it's going in that new name at this stage. We're expecting it...

Okay. And do you think that, that would be a positive for your volumes that you would shift more into China once that reclassification's effectively activated? Or is it just a moot point?

No. I think I'm pleased with the high levels of standard. I know that we can meet them in terms of delivering. So if others cannot meet that standard, I'm very happy to sell into China at the right price.

Got it. And then just on the third dot point, China looking to potentially reimport high-grade ferrous in calendar 2021. What do you think that this means for global ferrous scrap prices in calendar '21? And what might that mean for your volumes potentially?

Well, I guess it's a flow-on effect. I mean, obviously, China importing ferrous is a good thing. From a domestic point of view, that would probably bring their price down. But for us and the rest of the globe, you would have the ability for Southeast Asia to sell into China, which would also open the door for Turkey to sell into Southeast Asia, gives Turkey a bigger market. So I think, overall, you'd see prices probably go up.

Got it. Okay. Coming back to your guidance out to 2025, that volume growth on ferrous and non-ferrous. Can you just remind us what do you think your split is in terms of organic versus M&A to get there? I remember at the last strategy day, you had, when you talked to this, a significant component was dependent on M&A. I'm just wondering if that mix is still the same. Or what we should be thinking in terms of getting there, organic versus M&A, please?

No, I think the mix is still pretty much the same. I think, to Stephen's point earlier, any M&A activity in the next 12 to 24 months, we'd be very cautious with. Just prudent capital management. I think we've also got our strategy quite laid out in terms of the ERP and resource renewals. So I think we'll be very careful with M&A. It would have to be a compelling opportunity for us. I mean, ferrous, in particular, non-ferrous, I think, we are weaker in the United States, and that certainly would be probably something I would favor.

Right. Got it. And then coming to -- on cloud recycling, nice to see you've added 3 new customers for the FY '21 year. Just wondering how you would rank your -- rate your performance in terms of customer acquisition. Is 3 a good number? Has that exceeded your expectations? Is it lower than expected? How should we think about that? And secondly, the volume growth to 200,000 tonnes from, call it, 34,000 tonnes next year, how much of that do you think is the market continuing to grow versus you acquiring more customers?

So I'll -- so first of all, I think 3 customers is a good number. We were very happy with that because these are not small customers, if you know what I mean. These are -- by definition, these are large players. It's a -- the cloud is a global business, and the global players are big players. So it's not like just getting a small bolt-on customer. So very pleased with that. And we needed those. They'll probably add expectations because, as I'll answer your second question now, we need good growth in order to hit our targets. I think it's going to be mainly us getting more business of existing customers. I think there are some -- still some customers for us to get, but we have got most of the usual big suspects now. So I think our growth will become us getting a bigger share of what we currently have. Given the size of these players, I don't think that's unrealistic either. I mean it's large to us; it's not particularly large to them.

Right. So I guess another way to say is that you're looking to get a larger share of wallet from these large players?

Yes. Yes, that's correct.

Right. And then I guess just an extension to that, what do you think the EBIT dollar per tonne was on those, call it, 20,000 tonnes that you did? And if you think that you're going to get more share of their wallet over time, what do you think happens to margins? Are you confident that you can hold margins? Do you think we should expect some margin erosion? How should we think about that, please?

So I think 2 things. One is I wouldn't read anything into that. We're talking about low numbers at the moment. So that EBIT per tonne is kind of -- it's when you're dividing a small number by another small number, it's kind of -- it's going to be very volatile. So let's give it another year, and I'll talk with more confidence about where we think it's hitting. Having said that, we're still very, very comfortable with where that EBIT per tonne is. Do we think we're going to have to take some hiccup in future periods? I'm going to say that's certainly not our plan. And our decision or our argument there would be that this is about providing a high security service to an industry that is very sensitive around data protection and those types of issues that come with that. And we firmly have the view that dealing with Sims, a large publicly listed company, is a big advantage there. So I'm going to -- our plan is not to be cutting prices to provide the level of service that we provide.

Your next question is from Simon Thackray from Jefferies.

I just really want to go back to the -- I want to go back to the ERP because I've been fascinated by the rollout and the choice of New Zealand, acknowledging it's got all the complexity of larger sites and larger geographies. If you want to test its functionality globally, don't you have to have another site running at the same time to be able to look at these codes and classifications and global trading? How do you gain confidence on an ERP rollout out of one geography?

Well, no, because New Zealand also sells globally. So New Zealand has a reasonable export base as well. In fact, New Zealand obviously doesn't consume much of its own scrap at all. So it has...

Sure. Hence, my question. So who's on the other side? Who's on the other side to test the global functionality?

So that's around our Singapore business. So we've got another system, which we've listed there called BSM, which is a -- which is called, I think, that stands for Buy, Sell, Move, which is the logistics system. And that will be tested by Singapore. So we're confident that it is a good full test of what our -- on a smaller scale, let's be frank, clearly, on a smaller scale, but a good full test of what we will confront.

Yes. Terrific. Terrific. I've got to admit, Alistair, I mean, I'm way too old, too many gray hairs. I've been around too long. But look, what you're talking about in terms of the strategy and reduction of footprint and headcount, et cetera, is hauntingly familiar under your predecessor. I just really want to see what the difference is between that sort of shrink to greatness approach we've seen previously that actually saw costs come back with volume last time. We also had Bill Schmiedel, who was coordinating Global Trading at that stage, and as Owen pointed out, coordinating the buy and sell and the match price, what is fundamentally different here? I'm trying to work out what is the actual new news.

Cost of management, obviously, for us, is a key issue. I mean when you have a look at average pricing of ferrous over the last numbers of years, I mean, when you look at a price of $315 per tonne that we had in 2019, 2020 is around $265 a tonne. So quite a big difference on a dollar per tonne basis. And that goes with the flux of non-ferrous and zorba as well. So we've had to take measures, and that ferrous price has declined over the last 4 years. I mean that's part of the cycle. But part of the issue for us is making sure that we do optimize the yards that we have. And the U.K. hasn't gone through much of an optimization. I think the question earlier on was more about the U.S., and that was pretty much because our scrap business in the center of the U.S. was beholden to steel mills and very uncompetitive. And as I said earlier on, you want to have the ability to export domestically as well as to international markets. So the difference for us is a lower cost base in the U.K. that we can actually be competitive. We do have a lot of assets there that if we actually create those super yards, we can actually reduce the cost, and that allows us to compete at today's lower average prices of ferrous. So we've had to adjust the business accordingly. So comparing to 5, 6 years ago, there were different circumstances. And the value of ferrous and zorba were at much higher prices. So we've had to adapt to that. And I don't think we've changed our strategy in terms of buyer, sellers just getting clear alignment in terms of our structures and messaging and optimizing our systems and processes. And we want to reduce the amount of process steps. If the current process has 10 steps, and we can have 6 because we're centralizing that service. And a lot of the ERP is around the back office, the financial, HR, all of those structures and processes. We've got numerous people across the globe doing the same thing but on different systems. And I'm not surprised because this is a company that has gone up from a number of acquisitions over the last 103 years, so we needed to actually consolidate these systems. So that's part of the ERP reasoning.

Yes. I mean, I think 2014 when the strategy was announced, and we went through the horrors of 2015 and 2016 when the scrap price was lower than what we've currently seen over the last 12 months. So we faced that and more costs came out of the business. I'm trying to understand whether this is actually a step change in strategy or just business as usual in terms of looking for improvement. And notwithstanding the importance of the ERP on the go forward, is this just about addressing what has been an ever-changing scrap market and the company just has to continually respond to it rather than it being a -- sort of lauded as some new piece of strategy?

I don't think it's any radically new strategy. I mean companies look at improving effectiveness across the group all the time. So when I have a look at the markets, they have changed. For the last 2 years, I've seen a lower ferrous price. And that, when I asked the question, which is exactly what I expect from you as well was, is this structural or is this just part of the commodity cycle? So we do need to adapt, and organization must adapt likewise when new technology comes available. So it's not a radically new strategy. It's a part of the effectiveness that, I think, we need to have taken as a management team. Probably not now, we should have probably done this years ago.

Well, I think that's what your predecessor was trying to do. So -- and you've been in the seat for 3 years. So it's interesting that we're sort of arriving at the same conclusion several years on. I...

My predecessor never ever contemplated putting SAP as an ERP system.

Well, maybe we'll find that whether that was a good choice or a bad choice in the future given SAP rollouts. Part of the questions, you -- one of the statements you've made is a return to profitability in July. Can I just understand, is that gross margin improvement? Or is that improved return also based on the redundancies and the cost out that you've taken in the FY '20 year? Is that assisting the profitability in July?

Yes, it is. Yes, Simon, it's Stephen here. Yes, the cost-out is definitely assisting. But it's a combination of -- it's all -- I guess it's all 3 leaders, the way I'll describe it. So volumes are up, as you can see in that chart. We're back up -- we're close to 600,000 tonnes in July. Gross margin per tonne is looking good as well. So as the price has risen, so we're off those big lows of -- we got down to nearly $300 per tonne for ferrous and zorba, it's $700 a tonne. Those were fairly dark days, I can tell you. So as those prices have risen, we've been able to take the opportunity to expand some gross margins. So we've got volumes up, we've got some gross margin expansion, and we've got lower costs. So it's all 3.

Are you able to say, to give sort of a sense of magnitude, Stephen, in terms of the contribution from cost versus the contribution from price or the gross margin?

No, I'm not...

Is it too soon?

I'm not going to. No, I guess, I'm not going to because I think it's reading too much into what we're saying. What we're saying is that we're pleased that we've returned to good solid profit, and it's contributed. It's not just a one-trick pony. It's been all 3 have contributed to it. I think now let's see how it plays out over that -- certainly over this next quarter.

Yes. And you expressed some significant confidence that costs don't need to return when volume returns. Unfortunately, that didn't happen last time. But what's giving you that confidence? What's the different analysis of the cost base?

Yes. No, it's a fair question. What we've done this time is, and we'll track this, is we have pulled out -- like, let's be clear, no cost is truly variable and no cost is truly fixed. But what we've done in the chart is we've pulled out back to, I guess, around $600 million of addressable, what we're calling predominantly fixed costs. And what I'm saying there is that those costs -- if we're talking sensible plus minus 10%, 20% volume movements, those costs still stay materially fixed. The variable costs, things like waste disposal, electricity, fuel, they will continue to vary up and down with volume. But those addressable fixed costs, which the FY '19 equivalent was $600 million, that is the cost. If we -- that $70 million is off that cost base, and that cost base -- we've determined that $70 million won't come back for 2 reasons. Firstly, a chunk of it is actually systemic change. We have delayered. We have done the things that we've needed to do. But I will want to highlight $20 million of that does need the ERP because, frankly, we are just asking people to do more with less, and that's okay for a while, but those costs will creep back in. The ERP will enable us to keep those costs down.

Okay. That's it. And then one final question while we're on costs. I mean it's been a very difficult year, Alistair, as you pointed out, the collapse in scrap in September last year and facing COVID. And unfortunately, you've had to take some very swift and some dramatic actions that have obviously impacted on a number of employees, and that's been reflected in restructuring costs. If I note that there's been no short-term incentive paid for FY '20, just checking whether in the ordinary course of events with an EBIT loss center and an underlying EBIT loss, whether any STI would have been paid, first of all? And secondly, did executive leadership team share in some of the pain of the staff with the pay cut? And was there relocation costs paid to move from New York back to Australia?

Well, firstly, there was no STI paid out, even if we had to hit hurdles...

I mentioned that.

Yes. So there was obviously a decision made and supported by the Board on that. In terms of relocation costs, naturally, our relocation costs of moving people around the globe, so we would expect to see some of that, probably not this year. In terms of the process and the work that's been undertaken to manage COVID, obviously, there has been a lot of focus on supporting individuals in our business, both from a health perspective, making sure that, in particular, some areas in the U.S., we've had to focus on supporting folks both in Australia, U.K. and the U.S. in terms of JobKeeper type -- like support to get funding from governments to help our employees. So we've spent an enormous amount of time doing that. Obviously, some folks have had to leave the business as well, which is very unfortunate, but it was a requirement. So I think across the board, this has been a very testing time. And so there were no bonuses paid, basically, and a lot of focus on supporting our employees.

But was there any pay reduction at the ELT level as done by your peers?

No. None of our jobs changed for that.

Thank you. There are no further questions at this time. That does conclude the conference for today. Thank you for participating. You may now disconnect.