Sims Limited (SGM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Sims Limited HY '22 Results Webcast. [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.simslimited.com. As a reminder, Sims Limited is domiciled in Australia, and all references to currencies 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 delivering the FY '22 half year results for Sims. Joining me on today's call is the Group Chief Financial Officer, Stephen Mikkelsen; and Chief Operating Officer, Global Metal Operations, John Glyde. 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. 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, short-term outlook and medium- to long-term drivers. Following that, there will be time for Q&A. I'll turn straight to Slide 5, which covers the key takeaways from the first half. You will remember that when we released half year guidance in November, underlying EBIT was forecast to be between $310 million and $350 million. I'm pleased to say we have come in at $362 million, slightly higher than the upper end of forecast, delivering a high-quality result with excellent margins. Operating cash flow for the first 6 months was a significant improvement from the previous 6 months, while intake volumes, a key signal of underlying activity, continued to improve back to the pre-COVID levels of FY '19. These excellent results lifted our return-on-productive assets to an annualized return of 37.5%. The strong financial performance and our overall positive outlook has given us the confidence to substantially increase cash distributions to shareholders in the form of both share buybacks and dividends. And finally, this was achieved while maintaining our strong Sims culture, evidenced by 82% engagement score. Turning to Slide 6. There is a lot of good information on this slide about the progress we have made on our strategic initiatives. I'm not going to go through them one by one, but I will highlight a couple. Firstly, we completed several strategic acquisitions in both the Sims business and our joint venture, SA Recycling. These, while highly complementary to our existing businesses, were achieved at valuations, which were immediately accretive to our shareholder value. Secondly, we have found a great long-term partner for our Sims Municipal Recycling business. By bringing in Closed Loop, we have paired with a rapidly growing leader in the circular economy. This also provided capital for us to recycle into the metal business acquisitions we have announced. Moving to Slide 7. The dominant theme is that the very strong performance from the second half of FY '21 not only continued into the first half of the current financial year, but it accelerated. This resulted in performance measures presented on this page that are, in several cases, several times higher than the equivalent half year in FY '21. Underlying EBIT was 541% improvement over the prior year. This was driven by a 74% increase in sales revenues on the back of exceptional ferrous and nonferrous prices and sales volumes, which improved by 9%. While inflationary pressures on costs have emerged, and I believe will continue to be a risk, we have so far been able to manage these quite well. In fact, we were able to improve our trading margin despite inflation. Looking ahead, we're also identifying medium-term productivity gains and other cost improvements. Additionally, the business delivered strong operational cash, and we will be distributing 50% of underlying profit to shareholders in dividends and on market buybacks. Most critically, all of this was achieved with a strong safety performance. Slide 8 provides a summary of the financial outcomes in a convenient table. I've already spoken about the profit measures on the previous slide. However, it is worth highlighting the improvement in return-on-productive assets. This profitability metric, which we have used for several years now, grew from 6.2% in the last half year to 37.5% this half year. I will spend the next few slides talking about nonfinancial measures, starting with health and safety on Slide 9. As you will appreciate, the health and safety of our people is a huge priority for the Sims management team. It is pleasing to see that the half-on-half lagging indicators are showing an improvement trend, particularly, critical risk incidents. Another lagging indicator, the total recordable injury frequency rate has fallen to around 1.2 to 1.3 for the last few years, and we want to drive this lower. In part, this will be achieved by closely monitoring the linked leading indicators. For example, we have had over 5,500 corrective action improvements identified in HY '22. Involving employees in identifying and implementing the corrective actions is key to improving safety outcomes. Moving now to Slide 10 on sustainability. Sustainability is at the core of our business, and it is pleasing to see some recognition for the effort that our employees put into ensuring that Sims is a leader in sustainability. There are many measures, initiatives and cultural behaviors that drive outcomes which lead to these awards. Slide 11 presents the progress on our FY '25 sustainability goal as an example of these measures, initiatives and cultural behaviors. We are making good progress towards achieving our FY '25 sustainability goals, which are to operate responsibly, close the loop and be a partner for change. Highlighting just a few of these. We launched Women Leading @ Sims, which is a great initiative to connect our global emerging female leaders. We released our second Modern Slavery statement, which was well received due to containing concrete actions and case studies of what we have actually done. On the operational front, we also transitioned Claremont, our largest global site, to renewable electricity. This is just the beginning, and I will continue to champion sustainability at Sims through measurable actions. Just before I hand over to Stephen, I will turn to Slide 12, which depicts the first half of FY '22. The chart highlights several important points that resonate throughout the current half year results. Firstly, price rises for our main commodities began rapidly rising in late calendar year 2020, stabilized at significantly higher levels around June 2021. And since then, have maintained the high levels with some volatility. Secondly, the average HY '22 price is significantly higher than HY '21. Finally, freight prices has also risen but show much higher volatility around the higher price. I will hand over to Stephen now to take us through the results in more detail.

Thanks, Alistair. I will turn straight to Slide 14, which summarizes the group results and some key metrics. The substantial increase in revenue of 73.9% was driven by higher prices and volumes. This, in turn, lead to a 45% increase in trading margin as we nicely managed the metal buy/sell spread through the period. Operating costs increased by 14.3%. From an internal perspective, higher activity and new businesses were part of the reason for this increase, together with higher performance-related incentive provisions related to stronger financial results. Externally, the impacts of inflation have also placed upward pressure on costs. EBIT grew by 541.3% to $361.7 million, which was a record first half result. On Slide 15, for convenience, we summarized EBIT and volumes by division. A recurring theme across all metal divisions is that EBIT, whether measured in absolute terms, dollars per tonne or percent of margin terms, was up significantly over the prior first half and sustained a very strong uplift that occurred in the second half of last financial year. Looking at our North America metal result on Slide 16. NIM sales revenue was up 87.2% driven by higher sales prices and volumes. Sales volumes were up 11.3%, while intake also improved, returning back to pre-COVID levels. Trading margin increased by 74.6% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Operating expenses increased 27.4%, largely driven by increased market activity, capital growth projects and acquisitions. Inflationary pressures also contributed to rising costs. The end result was a 478% increase in EBIT to $142 million, the largest absolute and percent increase for the metal businesses, including SA Recycling. Turning to Slide 17. Like NIM, ANZ also delivered a very strong first half. Revenue increased by 70.5% on the back of a 72% increase in sales prices. Trading margin increased by nearly 59%. Costs were up 12%, with a more than doubling of EBITDA to $121 million. Higher costs related largely to increased use of contract labor to cover staffing shortages, timing of repair and maintenance activity and general upward pressure from higher inflation. In total, underlying EBIT increased by 244% to nearly $95 million. Encouragingly, despite the stop-start uncertainty created by COVID lockdowns in Australia and New Zealand, intake volumes also showed improvement and recovered to near pre-COVID levels. Moving to the U.K. on Slide 18. Sales volumes increased by just under 6%, and prices rose by 64%, resulting in a nearly 74% increase in sales revenue. Due to market structure and competitive dynamics, U.K. was not able to hold on to as much of the sales price increase its NIM or ANZ, but it still improved trading margin by 39.6%. And this resulted in a very healthy 180% increase in EBIT to $29.4 million. Costs were up 14%, some of which related to a stronger pound against the Australian dollar. The timing of workforce mobilization and inflationary pressure were the other main contributors. Intake volumes in the first half of 2022 were consistent with the prior corresponding period. However, they were below pre-COVID levels due to a combination of closure of nonprofitable sites and COVID-19 impacts. On to Slide 19. SLS produced a 45.6% growth in EBIT to $9.9 million on the back of 44% growth in repurpose units and 9% growth in sales revenue. In many ways, it was a challenging 6-month period for SLS to navigate. Inflow of repurpose units was not as strong as anticipated. Supply chain constraints -- I mean the data centers were not receiving new material to refurbish and expand the cloud. And therefore, they held on to material rather than send it to SLS for repurposing. In speaking with our customers, we are confident that this material must eventually leave the cloud for refurbishment, but it could be late 2022 or even '23 before the supply chain frees up sufficiently to give customers the confidence to increase the release of materials. Moving to Slide 20. As with NIM, SA Recycling performed well as the very strong results from the second half of FY '21 continued into the first half of FY '22. Compared to the first half of FY '21, sales volumes were up 18.6%, intake volumes were back to 114% of pre-COVID levels on a same-store comparison. Underlying EBIT was up 427.5%. And it's worth noting that the acquisitions announced over the last 3 months did not complete until late in the first half, so they did not materially contribute to the result. Turning briefly to Slides 21 and 22. Increases in operating expenses in global trading and corporate were largely driven by internal reorganizations, where people were transferred into corporate and global trading as well as increased incentive provisions relating to group financial performance. Sims Municipal Recycling had an excellent half driven by increased paper and plastic prices. It is now well positioned with Closed Loop on board as a strategic partner. Moving to our net cash position on Slide 23. Net cash increased from $8 million to $45 million driven by nearly $300 million in operating cash flow, and I will discuss this significant improvement on the next slide. The strong operating cash flow allowed us to complete the acquisition of Recyclers Australia, spend over $80 million on CapEx and distribute $116 million in the form of dividends and buybacks while still increasing net cash by nearly $40 million. We will be distributing a further $135 million over the coming months, being 50% of half year '22's underlying NPAT. The payment will comprise of a $0.41 per share dividend and an on-market share buyback equivalent to $54 million, which will be completed before 30 June 2022. Moving to Slide 24. The 2 charts on the left told the story of the last 12 months. There has been an unprecedented, sustained uplift in prices. Volumes also improved as we began our recovery out of COVID. This resulted in a significant increase in working capital. The vast majority of this occurred in the second half of FY '21 where we funded a near $290 million increase. Furthermore, it is SA Recycling's policy to pay 60% of EBIT as the dividend quarterly in arrears and retain 40%. This produced a lagging effect on cash flow in the second half of FY '21 as the strong June quarter was not paid until July. This normalized in the first half of FY '22. And you can see $52.4 million on the bottom chart represented around 40% of SA Recycling's $128.7 million EBIT. The upshot of these movements is that operating cash flow of $290 million is a $310 million improvement on the previous 6 months. My final slide is CapEx on Slide 25. We forecasted $220 million CapEx for FY '22 at the full year results presentation in August. This has reduced to $170 million as we will no longer be spending capital on the Sims resource recovery project in Campbellfield. I view the rest of the CapEx profile for FY '22 as relatively average and make the point that growth CapEx must meet our 15% IRR hurdle. We have been very disciplined around this and will continue to be so. I'll now hand back to Alistair.

Thank you, Stephen. The next few slides provide an update on our strategic initiatives, beginning on Slide 27. Our strategic initiative targets were first published in April 2019, a time when a few of us had ever heard the word COVID. Our strategy is enduring. And despite the last 2 years, we continue to advance towards realizing the targets. This is well demonstrated in Slide 28 where we summarized progress over the last 6 months that have continued to build momentum towards achieving targets: Growing volumes organically and also by acquiring good businesses at reasonable valuations in North America, Australia and SA Recycling; setting up Sims Municipal Recycling for long-term growth and success through the addition of a strategic partner in Closed Loop; ramping up our ability to repurpose cloud material for our major customers and pivoting away from Campbellfield as we await for new government regulation towards Rocklea, where we will build a pilot plant, which, if successful, will lead to a full-scale commercial facility. Turning to Slide 29. This map sets out our shredder and facility locations in North America. Highlighted in red is acquisition of ARG in Baltimore. As you can see, it fits nicely with our East Coast assets and will add to our export optionality. This optionality is created through the access we have to 15 ports. Moving to Slide 30, which shows the equivalent position for SA Recycling. SA Recycling's 4 acquisitions are estimated to add 1.1 million tonnes per annum through the addition of 35 facilities and 9 shredders. SA Recycling's major locations are deliberately complementary to Sims. It also has export optionality with access to 3 deepwater ports, the most important being in Southern California, where it exports through the deep sea port at the port of Los Angeles. Turning to Slide 31, which provides an update on Sims Resource Renewal. The Rocklea pilot facility has been granted its development approval and is on target to be in operation before the end of this calendar year. I've always said we will be very disciplined around committing capital, and this will be an important stage gate in that process. Simultaneous with the pilot plant process, we have accelerated the development of commercial facility in Queensland, including assessing the preferred location and engaging with government, stakeholders and key partners. None of these activities require committed capital. The Campbellfield facility in Victoria is on hold as we await the implementation of the Victorian government's waste-to-energy framework. Moving to Slide 32. SLS has continued to position itself as a global leader in providing end-of-life cloud services. It has signed new contracts with large-scale cloud providers, enabled by its strength in customer service, newly designed circular centers and global footprint. It has been a stop-start first half, as Stephen described on a previous slide. Supply chain disruptions have meant new cloud material was sporadic, and cloud providers held on to equipment initially slated for replacement. This will have 2 consequences. Firstly, the growth we see through to 2025 will have a slower start due to the supply chain situations, but then it will pick up more rapidly. Secondly and more importantly, customers will want to redeploy much more back into their own data centers to remove supply chain risk. This fits perfectly with Sims' market position around security, sustainability and global reach. The final slide and the strategic update is Slide 33. I'm very pleased that we have found a long-term strategic path forward for SMR. Over the last few years, I've discussed with a number of shareholders our desire to capitalize on Sims' Municipal Recycling's position, in particular, to best maximize the value from its marquee municipal recycling contract with New York City. Closed Loop brings to the table a dedicated and focused expertise that will enable Sims Municipal Recycling to continue innovating and take the next big leap in expanding its services and geography using the New York City contract as that foundation. I'm very confident that the arrangement will work well. Closed Loop's ambitions and culture aligned with Sims, and I look forward to working with the team in the coming years. I want to move on now to the outlook on Slide 34. When I presented the year-end results in August 2021, I noted that the consistently strong quarters in the second half FY '21 had continued into the July actual results. Clearly, that strong July performance progressed to be what was a strong first half FY '22. It is therefore pleasing to report that these recent strong conditions have continued unabated into the second half of FY '22. The key indicators of performance are tracking well. Intake levels are solid, and prices are at least at the same levels as the first half average. The demand from our customers for our products is robust. We must continue to manage price volatility, including freight costs, as effectively as we did in the first half while finding efficiencies to offset the inflationary pressures that have emerged. As you would expect, the positive macro trends remain the same. We continue to expect the impact from stimulus spending to increase the demand for recycled metal. We also believe decarbonization is a global multi-decade issue. Recycled metal will play a vital role in achieving this. Cloud repurposing and recycling is an ever-growing opportunity that perfectly suits Sims' capabilities and sustainability credentials. Before I move to Q&A, I'd like to thank all Sims employees for the last 6 months. The past 2 years have been difficult from both how we work perspective and the sheer volume of change our organization has been going through. It's great to see all of your efforts are coming to fruition, not only in our financial performance, but in safety, our culture and the strategy implementation. Congratulations to all of you. Operator, back to you.

[Operator Instructions] Your first question comes from Paul Young with Goldman Sachs.

Great result, synchronized business, good cash flow, not much to really complain about, really strong outcomes, so congratulations. A couple of questions. First one is on volumes. I'm just keen, obviously, you've got the 2025 target, and we've seen volume step-up. But what is, broadly speaking, the upside from here? And what is your shredder -- broadly speaking, your shredder utilization at the moment, particularly in the U.S.?

Our 2025 targets, obviously, we've set quite specific targets in terms of tonnes in both the U.S. as well as on a global basis. Obviously, the organic growth and acquisition growth is obviously part of our program, and you're seeing us execute that in a very disciplined manner. So that volume growth and those targets are still in place. In terms of shredder utilization, naturally, that differs across the globe in terms of permit and operating capability. But I would say that we certainly have got room to put a lot more volume through our shredders if we could. Part of that is being able to grow those organic opportunities and feeder yards in both the U.S., the U.K. and in Australia. So I would say that we've got probably plus 20% ability to grow our shred volume going forward. And that's without acquisitions, et cetera.

Yes. Great. Second question is on the end markets. Which is the -- which are the strongest regions on the ferrous demand front you're seeing at the moment, i.e., Turkey versus Asia versus U.S.?

Look, I mean, Turkey is still one of the largest customers that we have. I mean the volumes that they take have been very steady, 45, 50 cargoes a month. That has not stopped. If you look at the percentage export that we sent to Turkey, that's still pretty much the same. I think we've got strong markets both in domestic as well as export. I look at U.S.A. and Australia. The domestic market in Australia is 55% is -- sorry, 55% is export, and the U.S. is probably closer to a 70% export. But even the domestic feed that we have is very strong in U.S. and in Australia. The U.K. is close to 80% is export. So Turkey is still a very strong ferrous exporting region for us and customer base. But I'd say it's pretty much across the board. We can sell into Southeast Asia, and there's still quite a strong demand as well. So I wouldn't highlight any one in particular, sort of percentage export volumes will remain consistent, but it's just strong all over.

Yes. Okay. That's great. And last question for me is on the nonferrous side. Both -- particularly aluminum, it's in a deficit at the moment. That deficit seems like it's increasing. Copper market is tight, deficits on the horizon. Are you seeing -- what are you seeing on the margin front on your nonferrous? Are you seeing that discount on your products close up versus the LME?

I'm not going to compare LME prices, but I think what you have very clearly seen is that nonferrous copper aluminum prices have remained consistently high for the past 14 months now. I don't think the -- that's going to abate in terms of the demand for it. There are obviously drivers for decarbonization. And copper and aluminum, I think, plays very well into that. And we're obviously well positioned geographically, but also from a capability end. That brings us to our strategy and why Alumisource was a key acquisition for us and the high quality that we wanted to be able to feed into that, which obviously feeds into primary smelting operations. So I think it's really important that we keep the long-term focus on our nonferrous, enhance our strategy and acquisition of Alumisource. So I firmly believe that that's got a long way to run still.

Your next question comes from Lee Power with UBS.

Alistair, just kind of dig into your comments around volumes. So demand is obviously strong. We're only just hitting FY '19 volumes. Your comments on freight, is there anything that really is going to stop volume growth surpassing FY '19 and kind of seeing this continued trajectory into the second half?

I think it's probably short and long term when I have a look at that. And obviously, our volume growth is based on not only organic growth and acquisitions and those that we've already made from an acquisition. So that's obviously volume growth, and we'll continue to focus on that. I think there's a difference in both domestic as well as export in terms of logistics at the moment. And I'll separate pricing for a minute. We -- from a ferrous point of view, our group has operated exceptionally well in managing bulk vessels, and I don't think we've missed any major shipments at all. So I think part of that and the planning for around bulk is really important. There are naturally challenges when you look at the U.K., where you've got the short sea challenge as well as the larger bulk sea challenging, and I see that ongoing. But in terms of being able to feed our customers from a bulk perspective, I'm quite happy, and I don't see that affecting and that hasn't really affected our bulk. I think where we've seen more of an issue is probably nonferrous and containers, not to a massive degree, but we've obviously seen delays. Instead of a 60-day, you might have a 90- or 120-day delay on a container. So I think at this stage, we've managed it very well. That's not to say that we won't have any further challenges. But I think you might have a cutoff period on 31st of December or the end of June where you might miss 3 or 4 shipments, and that's normal issues. And part of something that we culturally want to change a little bit is that I don't like vessels being loaded on 31st of December just to get a vessel out and it puts our folk in harm from a safety point of view in New York and it's snowing, et cetera. So I think overall, I'm not too worried about the logistics at this stage. It is an issue we are managing very well, very carefully, but I don't see it affecting our volume.

Yes. So I guess I should have framed that in an ex acquisitions, which is what I'm focusing on. Is there anything from freight -- and it sounds like there isn't to kind of see this trajectory. The North American volume growth obviously very strong continuing into the second half.

Yes. And I think if we were more domestic-orientated, I might hesitate a little bit more, but I'm -- comfort I have is that obviously the export bulk vessels seem to be fluid.

Okay. Excellent. And then the Michael Movsas retirement. He's obviously set up quite a good team with John Glyde in the U.S. Like how do you think that's gone? And do you like that structure? Is that something you want to continue with the replacement?

Yes. I think the structure -- so there's 2 aspects. John Glyde, obviously, Head of Operations based in L.A. and our Head of Commercial also in L.A. with Michael. Michael is obviously going to stick around for quite some months. He has built a very good team. It's very focused on their roles and their responsibilities. So it operates at a very high level, very engaging, and it's part of the culture, I guess, that Michael has set up and the way we like to work at Sims. So we are going to be replacing Michael's role, yes. So that is a process we undertake as normal. The succession planning right across our business is a very detailed issue. We work very closely with the Board. So this is no surprise to us. And as we say, we've got a 6-month leeway, and we'll work with Michael and with Brendan.

Your next question comes from Peter Wilson with Crédit Suisse.

A question on operating costs. So understandably in this environment, there is some inflationary pressures. But I guess you reported a 14% in operating costs, which per tonne is flat. But I guess part of the Sims pitch is that due to that spare capacity that Alistair mentioned that you should be able to increase volumes while keeping operating costs flat. So my question is, I guess, if you look at the operating costs, how much do you consider is permanent? And maybe, I guess, a loss of the efficiency gains that you've kind of locked in over the last few years, how much is permanent? How much is just short-term volume driven, potentially short-term inflation pressures?

Peter, Stephen here. I'll take that question initially. And I understand John is on the line out of L.A. as well. So I haven't had a chance to speak to John this morning. And then I'll maybe get John to talk about some of the inflationary pressures that -- and we -- across the business. I think a good way to look at this is if I was to split -- and this is a broad principle because I think we need to look at this because I think we can get into the minutia. In broad principles, if I was to split the increases in the metals business and cost, which is where it's happened, I'd say, of the increases, 40% relate to additional activity. And that can be -- that's activity associated with bringing up repairs and maintenance as we absolutely have to make sure that all of our equipment is available. In our current environment and the margins that we are making, having equipment down is just not good because -- and equipment down means that you're not getting middle out of waste as you need to be. So there's that increased activity around that. We've got increased volumes. So that drives around about 40%. Around 30% comes from additional growth activity, whether that's new sites, Alumisource, the additional work that they're doing. Alumisource is having an excellent result. And I have to say the growth that they're experiencing I'm very excited about going into the future. So around 30% is that. And around 30% equates to -- is inflation, which is, let's call that $20 million or so, $20 million, $25 million, somewhere around there. I think of all of those costs, the inflation is the one that worries me the most and the one that we've got to keep on top of. And if we don't do the operational efficiencies we need to do, that inflation will stick in the business, and we need to make sure that we either get operational efficiencies through global procurement, which we're working on through our continuous improvement programs, doing more with less. So that's my sort of overview from a financial perspective. But it's a really good question. So maybe John, hopefully, when I stop speaking, you're out there, maybe, John, could you just take us through what you're seeing from an operational perspective around costs?

Yes. Thanks, Stephen. Certainly, inflationary pressures in fuel, in waste, in energy, consumables within our shredder. Stephen obviously mentioned the R&M. A big portion of our R&M goes into consumers within our shredders. And we're obviously seeing that on 2 fronts, obviously, with increased activity levels, processing levels, we're seeing the increased use of consumables. But obviously, one of the upsides of high commodity prices is obviously higher selling prices on our scrap. But one of the downsides is that we pay more for our consumables. So we're obviously seeing that getting passed through on anything that goes inside our shredders. We're obviously in selected markets, seeing increased energy costs. I think we're experiencing tight labor markets in most geographical regions. We've had to supplement some of that with contract labor, which we obviously pay a premium on. And we're also incurring some overtime costs, obviously, to make up that shortfall, particularly in some sites where we're COVID-impacted and we've had to bring in additional labor just to fill those open positions and short-term needs around COVID. Does that give you some color?

It does. Very helpful. And my next question is on Sims' Lifecycle Services. So on the $166 million in sales revenue, can you give us a split as to how much of that is the new repurposing business, talking about 2 million units versus, I guess, the legacy business and then some commentary on the trends in that legacy business or that residual business?

Yes. I've got to be honest, Peter. Off the top of my head, I don't have that split, but that's a split I'm capable of giving. So I'll make sure that Ana publishes that because I think that's fine. It is obviously a growing -- it's a growing part of the business. So I guess looking forward, I'd expect it to -- if we were to jump forward to 5 years, it will be 80%, 90% of revenue because that's where the business is heading. The second part of your question around how we're seeing that performing generally, I guess I'll just echo the comments that Alistair and I made or maybe provide a little bit more color than in the presentation. It really did start to emerge as we went through the second -- through the first half of FY '22 that our customers were moving to a just-in-case type of entry rather than just in time. And so that have been holding on to cloud material. Not all of it. So as you see, we've still continued to grow but not as much as we thought. What we see happening there is as these supply chain logistics ease up, and they will lease up in -- well, they should ease up in '22 or '23. There's a whole lot of material needs to come out. So it's not like it's gone forever. It's the shape of it that will change. And over that period, you should see repurposed units because that's what we're really focusing on. That's the sustainability. That's closing the loop. That's the circular economy. You should see that those repurposed units eventually become, like I said, 80%, 90% of revenue. But I'll get you the split for this year.

Your next question comes from Jack Gabb with Bank of America.

Just a couple from me. I guess firstly, just on the U.K. Can you give us a little bit more color on how that's performing? I guess of all your divisions, volumes are up pretty strongly certainly year-over-year. But in the U.K., they were flat. And I guess in terms of sort of underlying earnings, it's a bit of a drop half-on-half. So just curious, is that drop in volume -- or flat volumes, is that down to the consolidation in some of your yards there? Is it competition? Or is it COVID? Or any other color you can provide would be great.

Look, I think the U.K. is running fairly well. I think the yards that we closed and the focus that we've had on quality has certainly played into why we are doing a lot better. I think the quality aspect for us allows us to sell our material anywhere in the world. And that has obviously given us opportunities from customer base point of view. So in that sense, very strong. As I said, 80% of it is export, and that's really important for us in being able to have that geographical reach. I think from the closure of the yards, there is an opportunity potentially to open a little bit more of those yards, but we'll take that under review. We want to keep the focus on efficiencies and costs there in particular. I think in terms of the competition, there is a lot of merchant operations that we're obviously dealing with there. It's not the same as an Australian market. I think the margin is always going to be a little bit tighter with that competition. But saying that, we've actually had a good run in both ferrous and nonferrous in the U.K. So I'm actually very pleased with the results from the U.K. It's not the same market as the U.S. or Australia. We know that. But I think the team has done very well.

Maybe I could add a little bit to it just purely financially, Jack, as I agree with Alistair. I think what the U.K. has to do because of its market environment, and it is a tougher market environment, is it has to really understand the volume margin trade-off in a lot of detail. And you can see, yes, you're dead right. Their volumes were flat from an intake point of view and definitely down versus pre-COVID. But even with that, there was a greater fall in trading margin percentage improvement versus sales, versus the other 2 regions, which shows that despite them really managing that well, the trading margin is still harder to maintain. They did it well. They still got a nearly 40% increase in trading margin. In my view, if that's just gone flat out harder for volumes, in the U.K., given the competitive market and the dynamics there, I think they just would address margin even more. And I think -- to be frank, I think we would have ended up, as it falls and chasing volume at the expense of margin, in an overall deterioration in EBIT. So tough market, harder competition, but I actually think the team managed that trade-off pretty well.

That's great. And the next question is just on the market. I guess just curious, firstly, in the U.S. Are you seeing -- I mean I know most of your yards are set up for the export market. But are you seeing much more demand domestically just given what we're seeing amongst the steel mill there looking to push capacity? And then secondly, just on China. Have you started selling any ferrous volumes into the country yet? Or do you envisage doing that later this year?

The U.S.A. market, the domestic market is still very strong. We see that with our SAR joint venture. Obviously, a lot of that volume is domestically focused, and that's still very strong. Demand is still very strong. To get sort of ebbs and flows, we know that there are operations or steel operations, BOFs or blast that will come offline for maintenance, and we'll see that going through in the next 2, 3 months as well. But the market is still very strong. This sort of goes up and down a little bit. But overall, it's a much higher demand than we have seen in the past. So I still think that will continue. That, plus the infrastructure and spending, I would imagine, are the drivers inside that. As to China, we don't and have not sold, as you know, ferrous trade into China yet. They typically took from Japan, but we've also noticed that Japan's domestic steel industry is extremely strong. So they are not exporting scrap, and it's high-quality scrap that they do export to China. We haven't seen any of that. And I am expecting at some stage, China to start taking volumes in. And when exactly, I don't know. I think now that the Olympics are potentially over and we're seeing some stimulus come into the construction and the medical industries there, I would imagine they're going to start taking. But they also have a large domestic supply of scrap in China, as you well know. And I think the focus for them is to make sure that they're using that before they import. But I would suggest that those steel mills that are probably shore-based on the coastline, you might see that ferrous intake start to happen later this year.

Just one quick follow-up on that. Just can you remind us -- as you said, China has a huge domestic scrap market. I think 250 million tonnes or something like that. Can you remind us with respect to your U.S. business, how far can you transport volumes that remains economic versus shipping just that sort of trade-off that if you're an East Coast yard in New Jersey, what's the freight cost to, say, Turkey versus how far you can transport that domestically?

Well, the first thing is that price is obviously quite volatile. I think we were seeing $24 not 2 weeks ago, and it's already probably heading towards $30. So it is quite volatile is the first point I'd make, but there definitely is opportunity for us to transport material from the East or West Coast into the Gulf. There's no problem with that. But also prices gives us the opportunity to export from our Houston operation to Turkey as well. So it works both ways. So I think from an infrastructure point of view, and there's strong growth in the U.S., we can certainly feed that. But it's going to come down to that pricing level. And then if it gets to that that's always something that we will take into consideration. And that goes right across the regions as well, U.K. as well.

Your next question comes from Simon Thackray with Jefferies.

Just a couple of quick ones, actually. Sims Lifecycle, maybe this one is near indeed to Stephen's hat. But either of you, just noting your 8.5 million repurposed units by FY '25 versus your run rate at the moment, which is probably around 2.5, I guess, on an annualized basis. Very helpful slide on 32. Thank you, Alistair, for that. And I understand what you guys are saying. Just to get to that target, and assuming you get to that target, can you just give us a sense of the scalability and the operating leverage in that model and where margins would be expected to get to, if and when you hit that 8.5 million target by FY '25?

Sure. I'll take the first part, and Stephen will take the second. In terms of capability and capacity, we can ramp up exceptionally quickly, and we have done that. We literally -- between 30 and 60 days, we can ramp up our facility in any one of the major cities in the U.S. And part of that is working very closely with these customers. So we've recently had a very large customer come on board. And obviously, for us, being able to build one of these or open these facilities up is very high standard. It's really anti-dust, high security cameras, et cetera. So probably 60 to 90 days, we're up and running. And that capacity would obviously match anything that our customers can throw at us at this stage. So very comfortable with the capacity to ramp up. I think from a -- point of view, Stephen. Any view?

Yes. So we haven't disclosed trading margin for SLS yet. We obviously disclose EBIT margin the first -- in the second -- sorry, first half, they've done 6%, which is up a little bit on the first half of last year, but down, to be frank, I suspect down on the second -- I haven't looked in isolation the second half of last year, but down. Simon, I see that margin. I see our ability to grow that margin, and I see it for a couple of reasons. Firstly, as you point out, that new slide we put on, I think, it was Slide 32, that just shows the growth in repurposed units where they're going to redeploy it into their business. That is a business model, which suits us. And that is a business model where -- what the -- our large customers are telling us, they just need that. They need it. They don't want to have it subject to uncertainty. When they need to grow the cost center -- I mean not the cost center -- when they grow the data center, they need the refurbished units available. And I think that's going to be a higher-margin business because there will be a premium paid for the quality of what we're refurbishing and the fact that it's via not just in time, just in case, just in case they need it, they want it there. So I think that will be a good time. Look, I'm not going to predict what that 6% margin is going to grow to and from an EBIT terms because I think it's early days yet, and we're building the business. But I think it's the full growth, and I really do think we're well positioned to deliver it.

That's super helpful. And just, Alistair, so the way you're describing the capabilities, it's like -- 60 to 90 days is like a plug-and-play capability. Is that the way to sort of think of it?

We've got mobile shredders which we've deployed because some customers want that done. So we certainly are pretty nimble in terms of being able to meet, and the customers do have different demands. And I think you're very aware of, obviously, the large players that we're talking about are facing logistical challenges of importing new parts into the U.S. to build these new service. So part of that is, to Stephen's point, they're not going to let go of any of their old servers and data systems at this stage until they are guaranteed they've got new capabilities. So that's why we're working very closely with them. And the capacity to jump up, we actually get quite a good head's up. So we're in a good space here.

Fair enough. Sounds good. And then just a real quick one on Sims Adams Steel, so the SA Recycling. Now noting the number of acquisitions that were done through the first half not contributing materially because I think you made the comment that's sort of back-ended in the first half. But on a pro forma basis, what do these acquisitions add to second half '22 volume, assuming current conditions continue? I'm just trying to understand their contribution in the second half.

Yes, it's something we haven't disclosed yet, Simon, as our bidding the business in. We've got -- we've actually got a Board meeting coming up either later this month or early next month when we're going to have a good look through that. So I don't want to say -- I don't want to talk about it now because I haven't seen all the final numbers from them, what they're doing in terms of site rationalization or not site rationalization. All of those things George has to take us through. But I will -- we'll do it at the end of the year when we're seeing what happened. But so far, good acquisitions.

Your next question comes from Anderson Chow with Jarden.

Just 2 quick questions. Firstly, just on the share buyback. I just want to make sure and I hope the number's right. So you're talking about resuming about $56 million in -- $54 million in the second half, but I think we did about $54 million in the first half. So we'll do about $110 million instead of the $150 million that we initially proposed. Is that the way to read it?

No. I think what we're saying is that -- I'm not limiting it to that. So what we're saying is we put in a program where we could buy up to $150 million. And we're clearly -- we -- I think it might have been $56 million or $57 million we did in the first half, actually, and there's $54 million. I'm not saying it's only going to be the $54 million. But what I am saying is that we wanted to be really clear about how much cash we're actually distributing as a result of the -- of our profit, and it's 50%, and it's split between that $0.41 per share dividend and the $54 million buyback for that result. If we feel the opportunity is right, we have more room in our overall buyback program to buy back more.

Okay. Got it. And also just -- I just want to make sure and it's probably -- just on the Lifecycle business. The earlier question about the margin and what it could get to. But I think if I could just make sure the revenue model, I mean, do we charge on a per unit basis? Or is there sort of a revenue sharing from the sale of the scrap and reprocessing...

Anderson, it's a combination. It's a combination. But where we're moving to in the repurposing is that it's a service model. So what you would expect to see -- so let me give you 2 examples. So maybe previously, before the cloud centers were really looking at redeploying into their own unit, we would take on the -- we would effectively buy it from them, repurpose it and sell it in the market. So our costs and our revenue will gross that. What we -- and as simple as that. Under the new model where we're heading with redeployment, it's much more service model. So we charge x dollars per whatever we are redeploying. And so, therefore, our revenue will only ever be -- our revenue effectively will be the margin that we charge. So moving forward, if I jump forward to 2025, you shouldn't really expect to see -- you'll see much higher growth in margin than you will in top line revenue growth because we're moving to a service model.

Yes. And also just on -- last question on this Lifecycle. I just want to make sure, do we -- the huge increase in volume that we saw in the first half, was it all from existing customers? Or do we sign up any sort of new major cloud operators?

Yes. So it is existing customers, but here in lies what gets me excited about SLS. The existing customers are huge. And so it's not like we're going from taking half their business to 3/4 of their business. We might be going from taking 2% of their business to 4% or 3% of their business because it's just large. They're so large, which is what I get quite excited about. But no, there's no particularly new customers. It's our existing customers. But I would say we have good strong customer relationships with what you would consider most of the usual suspects in the large cloud players.

Your next question comes from Peter Steyn with Macquarie.

Just wanted to ask you a little bit about the freight market and how you guys are working through that. And I suppose, more pertinently, what your expectation would be when we do see some degree of moderation, particularly in the container market, what influence that could have because we've already seen bulk come off. So I'm just curious how the mix of freight market developments play into the forward-looking perspective, Alistair?

Good question. Look, I think the relaxing or the improvement of turnaround times for containers is probably going to be over the next 6 to 12 months, I would suspect. I think the aspect for us is really when that market does get back to improved levels of service, I would think that you would see probably more competition with containers being able to be exported out of the U.K. and the L.A. basins, which is often the challenge for container operators. So you would probably see more pressure on the bulk business at that stage in scrap terms rather than what you're seeing now where lack of containers is actually good for us because the bulk obviously is the focus, and that's operating very well. So there is that difference between the container and the bulk market. But from a nonferrous point of view, which is really where our nonferrous was obviously sold through, as I said earlier on, we haven't seen a major issue, but I would expect that any delays that we would have from the 90-day or 120 down back to the normal sort of 60, 70 days turnaround, which is -- it'll come back. But in one way, it's been a very good opportunity for us to test our systems and processes. And the commercial team and the shipping team have done exceptionally well.

And then, Alistair, just turning to Resource Renewal and specifically some of the energy from waste policy environment. It's clearly a lot less certain probably in Victoria and New South Wales at this point in time. Just curious to get your views on the investment or the intent that you've indicated that you're quite happy with the level of engagement in Queensland. But how do you see some of the developments in Victoria and maybe even in New South Wales potentially supporting some of your plans over the medium to longer term?

I think we -- obviously, we put on a hold of Victoria, as you know, but we've obviously still in contact with the Victorian government. We've had touch bases with the Environmental Minister just recently. So we're obviously going to continue to look at investing in Victoria. But they've got to be very clear in terms of their permitting process. They put on a waste cap, which is up to 1 million tonnes, and we're told that we fit into that. But until I see that in writing, we're not going to be investing. So that's sort of Victoria. And hopefully that will sort itself out. And they're suspecting that that'll be done in the next 8 to 10 months. So we'll have a look at that and watch it very carefully. I think the exciting part for us is the Rocklea facility in that trial, which will be up and running by, call it, October, November. That then allows us to show a very clear process in terms of [ RRP ] with the Queensland Government who are very supportive of us building a commercial unit there. So I would suspect that the commercial unit in Queensland will be up and running before any other state in Australia. We naturally want to work with all of the government, the states in Australia. But obviously, for us, this first capital spend discipline makes that hurdle, meets the requirements, then only will we move forward to a commercial operation. But at this stage, if we can get that trial up and running and prove it, that will be in Queensland in all high probability, I would suspect, before Victoria.

Perfect. And perhaps just a quick one for Stephen on dividends and franking. Obviously, you've sort of indicated that franking will drive your dividend decisions. How we ought to think about that for the full year and then going into next year, Stephen? Because at this point, Australia is probably not rebounding as fast as some of the other parts of the business. So proportionately, you're going to be struggling for franking credits.

Yes, I think that's fair to say, Peter. So what we -- we've taken the last few months to have a really good talk to a number of our shareholders around everything from franking credit preference, dividends, buybacks, what are their preferences. Because I think at the end of the day, we need to listen hard to them, and that's how we've come up with what we've just talked today. So the headline is a 50% payout. And we've tried to -- I guess we've skewed it more to dividends than buybacks. And as a result, the franking credit is not 100%. It's 44%. I think looking forward, I think you could assume that a reasonable way of looking at it is that, I mean, all things being equal, that sort of 60-40 split of cash payment is a reasonable basis to look at it on. And whether it's 50% -- or not 50%, I guess, we will determine at the time. We've looked at it here, and we're really, really confident that making a 50% cash distribution fits well with us. Balance sheet will remain strong. We're producing good flat cash flow. We believe that what we're retaining is sufficient to both to maintenance CapEx and our bolt-on acquisitions, which we've been looking at. So we're really comfortable that type of retaining 15 -- retaining 50% -- distributing 50% gets our balance right. But obviously, every time we -- every time the Board meets, as we are declaring dividends, we update that. But I think all things being equal, that feels like a good position moving forward, but we will -- the Board will clearly -- it's their policy, we'll clearly discuss it at every Board meeting that we are discussing dividends versus buybacks.

Your next question comes from Lyndon Fagan with JPMorgan.

Just with regards to the CapEx guidance reducing $50 million because of Campbellfield, can you please remind us what the total scale of that investment is and what potential earnings that could generate once it was completed?

So we never got to the point where we disclosed the total CapEx. In fact, as we've put it on pause now, we were going through that process to finalize the CapEx. And our original intention was at our Investor Day meeting in March, we were going to run everybody through that. And then clearly, the Victorian government came along with the -- with that 1 million tonne waste cap, and they put that on hold. So I haven't disclosed that as to what that would be, in terms of if and when we do, do it, and the same with Rocklea, everything we do has to meet our minimum hurdle rate of 15% ARR. That is a gate that stays firmly closed, unless the project can meet that. What I would say is the initial things we were seeing around Campbellfield is it was quite nicely north of that, but we just now need to wait and see how that -- with the approvals.

And how long would that have taken to build?

Probably between 12 and 14 months. If we're looking at the commercial operation in Queensland once we've completed this trial, I would say that from approval -- by Board approval, probably 12 to 14 months before that could be up and running. And that, again, is going to apply some of the larger pieces of equipment at the time and whether there's any logistical challenge in producing that piece of equipment. And that will depend where we choose to buy that from. So that will be an import. So that will be -- the key lead time will determine that period I've just given you.

And my other question was just on the SAR JV. It's almost your highest-earning division now, but I'm sort of feeling like it'd be good to get a bit more disclosure on potential growth outlook given the acquisition. Is there anything sort of specific you can point to, to help us forecast that business?

I think look, the strategy has been very clear from a JV point of view of the growth profile and where we wanted that business to grow to. And as you know, that's really on the southern part of the United States and the Midwest, where George operates exceptionally well. So I think from an acquisition point of view, I think it's going to take a fair period now where we won't be doing too many acquisitions out of that group. It's going to be focusing on integrating what we've just acquired. So I would think that growth acquisition period will slow down for quite some time until we've actually taken in what we have now. And George has sorted out all the yards he needs and those that he doesn't want. So I think from a sharing with you of that SAR, we certainly probably will do that a little bit more on the Investor Day, and we can give you a lot more color around what they have and what we see going forward.

Yes. I agree, Alistair. I think the main -- I guess, in some ways, we had quite a good, controlled experiment in these 2 half year results and that NAM and SA Recycling started from a very, very common point, I think, mid-$24 million, $25 million of EBIT. And they grew roughly, and NAM grew slightly stronger, but they grew very similarly. I would say the way I think about SAR looking forward is that the -- it's in North America, the same as NAM, with the biggest difference being between the 2 is zorba prices. And SAR is more exposed in its competitive markets to zorba prices. So when zorba prices increase faster relative to ferrous prices, it does better than NAM. When zorba prices reduce relative to ferrous prices, it does worse to NAM. And we've now actually seen that happen twice. It was about, I'm going to say, 2000 -- was just after I joined. 2018 or so when zorba prices -- or 2019, when zorba prices fell considerably, SAR dropped more than NAM. In the first half of 2021 when zorba prices rose quite nicely and dramatically up to sort of $1,800, $2,000, SAR proportionately did better than NAM. In these first 6 months, with zorba prices and ferrous prices have both been nice and high and relatively stable, they've actually performed similarly. So I think that's the way I would think about it overall. But Alistair is right. I think we will be in a position where we will disclose more about SAR.

And just a quick final one. Working capital up another 40-odd million. Is that just pricing? Or is there some sort of timing of sales...

So it's predominantly pricing. Interestingly, prices are actually rose quite nicely into the December and have continued there. So it's just -- inventory volumes are actually the same June versus December. So it's all price.

Your next question comes from Nick Maclean with Surrey Asset Management.

If I take a look at Slide 29 and 30 and really trying to comprehend what you can control as a management team as opposed to cyclical issues, can you talk about -- and you've mentioned freight, obviously. Can you talk about the advantage like really be a bit more granular on the advantage of your network of assets in the U.S. relative to the smaller peers? So in saying that, are you achieving faster peering freight cost and delivery times? So I'm trying to gauge what's the actual real advantage of that network relative to 2- to 3-site business.

I guess part of it is who you're comparing to. Obviously, we're based on the East and West Coast, where major bulk exporters, a lot of competition in the area don't have access to bulk export. So we have the opportunity to either purchase that material or they have to use containers. And I think you can understand the challenge with smaller players and containers in today's logistical environment. So that's really where we get the opportunity. I think obviously, with long-term relationships with our shipping customers, that obviously is also an opportunity for us maximizing shipping and planned shipping events but also maximizing on a per tonne basis on each vessel. So there are certainly a number of our benefits that Sims extracts out of our operations. And obviously, with ships in very similar locations up and down the East and West Coast, we can certainly maximize those tonnages, be it from 1 or 2 areas versus having to pick up at every single port. We can certainly get vessels that take 2-port loads and then head straight across to Turkey or 1. Whereas in Australia, we often do it 2 stop and then out. So I think the experience that we have with our customers, the types of vessels that we use and choose, all of that adds to us being able to run very lean shipping operations. And then, obviously, understanding the future markets and matching what the bulk industry is doing and how to choose the customers that we work with. And obviously, sometimes a week's delay in the shipping decision could be a huge benefit to us.

So I guess another way to put it, while freight costs and delivery times, in isolation, are obviously not good in isolation. But from an industry perspective, are they good for you? Because you can go to...

Yes. At this stage, yes.

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