Sims Limited (SGM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Sims Limited FY '23 results release. [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 currency are in Australian dollars unless otherwise noted. I would now like to hand the call over to Alistair Field, Group CEO and Managing Director of Sims Limited. Please go ahead.

Thank you, and good morning. Welcome to the FY '23 full year results for Sims. Presenting with me on today's call is the group Chief Financial Officer, Stephen Mikkelsen. John Glyde, our Global Chief Operating Officer for Metal; and Rob Thompson, our Global Chief Commercial Officer for Metal, are also in the room with me. The slide presentation that we will run through has been lodged with the ASX, along with the results release. The agenda for today is that I will run through a general overview of performance and the highlights, natural results, before I discuss some of the company's strategic priorities, short-term outlook and medium- to long-term drivers. Following that, there will be time for Q&A. I will turn straight to Slide 5, which covers the key takeaways from the results. The FY '23 results are coming off the back of our all-time record FY '22. The markets have been much more subdued, but our performance has been resilient, and it shows the benefits of having market and geographical diversity. Cash flow has been solid, and we have released cash from working capital, as you would expect when markets fall. We are keeping a watchful eye on expenses. And as evidence of this, we have managed to hold our metal costs in the second half compared to the first half. Most pleasingly for me is we have further improved our safety metrics, following on from an already excellent safety outcome in FY '22. Finally, we have declared a fully franked dividend of $0.21 per share. Turning to Slide 6. Clearly, the market environment has impacted the results compared to last year. All profit indicators are substantially lower. As we go through the presentation, however, you will note that our diversity of operations across the globe and within North America has provided us with a fair degree of resilience to the subdued markets. I will be going through the Baltimore Scrap acquisition we announced this morning later on in the presentation. Suffice to say that this acquisition will provide us with further resilience as it has great access to the U.S. domestic market and export markets. Looking at those markets, steel prices have been lower, which in turn, dropped the price for scrap. Our intake was down 6.7% and there was strong competition for the scrap that was available. This meant that we were unable to pass through all the sales price falls without dropping intake volumes further. I've already mentioned the solid cash flow and dividends. So I will turn briefly to Slide 7. Slide 7 provides a summary of the financial outcomes in a convenient table. I've already spoken about most of these measures on the previous slide. However, it is worth highlighting operating cash flow, largely due to the release of working capital. This is down 18%, much lower than the 72.9% fall in profit after tax. I will spend the next few slides talking about nonfinancial measures, starting with health and safety on Slide 8. The priority for me and all Sims employees is safety. It is therefore very pleasing to report that we have again produced a record low lost time injury frequency rate and total recordable injury frequency rate. Lagging indicators are interesting, but they do not improve with our proactive safety initiatives. You will observe on the right-hand side of the slide, a few examples of what we are doing to ensure safety culture is core to Sims' values. Moving now to Slide 9 on sustainability. Sustainability is at the core of our business, and it is again pleasing to see some recognition for the effort that our employees put into ensuring that Sims is a leader in sustainability. I want to highlight our excellent progress on closing the gender pay equity gap, which falls under our operate responsibly framework. We've spent a considerable amount of time on gathering the data to measure this gap. Last year, it was 8.2%, and we have dropped that to 2.9% at the end of FY '23. Our internal view is that plus or minus 2% represents no statistically significant gap, and so we are nearly there. Before I hand over to Stephen, I will turn to Slide 10, which highlights the weaker prices in FY '23 compared to FY '22. Ferrous and nonferrous prices have significantly retreated from both the FY '22 highs and the FY '22 average. Volatility has also somewhat reduced, but we still had some difficult periods to manage. The global PMI, which is a good indicator of steel demand, has shown universal weakness over the year with the possible exception of India. I will hand over to Stephen now to take us through the results in more detail.

Thanks, Alistair. I will turn straight to Slide 12, which summarizes the group results and some key metrics. I will be going through the regional results in subsequent slides and many of the themes are summarized here. Underlying EBIT is down 66.6%, a considerable fall, but it's been compared to a record FY '22, which was driven by very high prices and a commensurate high availability of scrap. We have managed costs reasonably well, up 4.9% in what has been a tough inflationary environment. Before moving on to Slide 13, I will draw your attention to footnote 4. We have moved some costs that were previously netted off against trading margin in FY '22, but really belong as operating costs. There is no impact at all to FY '22's EBITDA, EBIT or profit after tax as it is simply a reclassification within the P&L. You will find a reconciliation in the appendix. On Slide 13, for convenience, we've summarized EBIT and volumes by division. Before moving on to the regional breakdowns, it is worth highlighting here the considered effort in releasing working capital. Metal sales volumes were down 1.7%, while intake volumes were down 6.7%. The difference represents the clearing of inventory and release to working capital. Looking at our North America results on Slide 14. The fall in NAM sales revenue was almost entirely a result of falling prices. Overall, prices were down 18.2% on a constant currency basis. NAM was impacted by competition for domestic scrap, particularly in the second half, where for some periods export sales prices fell significantly relative to domestic prices, which enabled domestic players to compete more heavily for scrap inflows. As a result, NAM could not pass through the full price decreases and this squeezed the trading margin. On a constant currency basis, NAM held costs reasonably flat, assisted by the introduction of a shredder feed levy, which is a good result. Turning to Slide 15. SA Recycling is a good example of our resilience provided through diversity of markets and geography that Alistair mentioned earlier. Partly as a result of its growth strategy over the last several years, SA Recycling sells more domestically than through export, and therefore, it wasn't as impacted as NAM when the domestic price rose significantly above the export price. As a consequence, its trading margin on a constant currency basis was only down 13.5% compared to NAM's 24.5%. This is shown perfectly on the following Slide 16. The left-hand chart compares the export price to the U.S. domestic price. It began separating in January, February and then significantly separated from March through to June. When you look at the right-hand chart, which shows the domestic export split for NAM and SA Recycling, it is clear why NAM was impacted more. Turning to ANZ on Slide 17. ANZ is also a very good example of our geographic and market diversity. Of our metal businesses, it was least impacted by the challenging market conditions by a considerable margin. While revenue, trading margin and EBIT were all lower for similar reasons to the other metal businesses, the 7.7% fall in trading margin was the same as the percentage fall in revenues, indicating that it was able to better manage the buy price. ANZ also managed costs well in a tough inflationary environment. The overall result was a 24% reduction in EBIT, considerably less than the other businesses. Moving to the U.K. on Slide 18. U.K. was impacted by both lower sales volumes and falling sales prices. Aggressive competition for available scrap, particularly shred feed, kept buy prices relatively high compared to sell prices and this reduced the trading margin. Inflation in the U.K. has been the worst of the regions in which we operate and this resulted in an 11.8% increase in net operating costs. U.K. had a stronger second half performance, returning to positive full year EBIT of $7.3 million compared to a loss of $3.6 million for the first half. On to Slide 19. I see that the first half result that I did not expect a recovery in SLS for the rest of the calendar year. This has proven to be correct so far with EBIT down 49.7% to $8.2 million. This is despite a very promising 40.7% increase in repurposed units. The reality is that the Chinese recovery is slow and China is currently the main driver of the price SLS receives for resold units. A recovery is not likely to occur until the end of this calendar year or early calendar 2024. Turning briefly to Slide 20, which rounds out the income statement. Global Trading earned less revenue due to lower exports by SA Recycling and also higher costs associated with some strategic initiatives. Corporate costs were lower, largely due to lower employee incentives. We no longer consolidate Sims Municipal Recycling, so its full year loss is the same as the half year, and we are in the process of selling it. LMS produced EBIT of $14.5 million for the year, and I believe everyone is aware that, that asset is also currently under an active sales process. Sims Resource Renewal incurred additional expenditure to run the pilot plant and it has also incurred expenses on further strategy development. Moving to our operating cash flow on Slide 21. We had a strong conversion of profit to cash flow, largely as a result of a positive working capital movement. Just a reminder that SA Recycling does not distribute its entire earnings and cash, and therefore, there is a difference between reported EBITDA and cash. This year, it was $57.6 million. I believe the other movements on the chart are self-explanatory. The last point I will make on this slide, before moving to Slide 22, is that the conversion of NPAT to operating cash in FY '23 was 286.3% compared to 94.5% in FY '22. Slide 22 bridges our opening net debt of $102.7 million to our closing position of $135.5 million, a $32.8 million increase in net debt. The 2 largest consumers of the operating cash were CapEx of $232.5 million and dividends of $123.6 million. My final slide is CapEx on Slide 23. Total CapEx for FY '23 was $232.5 million. Of this, $62 million related to growth, and $171.5 million was for sustaining CapEx. I'm currently expecting FY '20 CapEx to be similar to FY '23, up around 5% to $180 million. I'll now hand back to Alistair.

Thank you, Stephen. I'll turn straight to Slide 25, which shows how Sims has strategically positioned itself to capitalize on 3 very important megatrends. Each strategy position in the right-hand box ties back to implications that arise from 1 of these megatrends. There are numerous examples here, and I will highlight 2 of them. Firstly, Sims Lifecycle Services' pivot away from shredding electronic equipment to repurposing data centers was in response to huge data center growth that will continue to grow through the processing requirements of artificial intelligence. Secondly, the Baltimore Scrap acquisition, which we announced today, responds to many of the implications in the second box, including the significant increase in EAF capacity in the U.S. and Canada, which in turn is driven by both the environmental and economic megatrends. It is worth spending more time on our 2 acquisitions since the half year results announcement. Firstly, Baltimore Scrap on Slide 26. Over the past 12 months, we have continued to expand our metal recycling operations through targeted M&A, aligned to our long-term strategy and core competencies. Our acquisition of Baltimore Scrap is the latest of these transactions and is highly complementary to our existing U.S. footprint. Baltimore Scrap is 1 of the largest recyclers on the East Coast with sales volume of roughly 600,000 tonnes a year and operations stretching from upstate New York to Chesapeake, Virginia. Importantly, the acquisitions provide Sims with increased sales channels into growing U.S. demand for ferrous scrap through low-cost rail, barge and trucking logistics, while at the same time maintaining export optionality through coastal deep water port access. We expect the business to be immediately accretive on an EPS basis with financial close expected in October. The second acquisition is Northeast Metal Traders on Slide 27. Earlier in the year, we also acquired Northeast Metal Traders, 1 of the largest copper recyclers in the U.S. Based in Philadelphia, Northeast Metals has provided us with a distinct platform to expand our copper recycling operations based on high-quality supply partnerships and value-added processing. Growing our nonferrous business is 1 of our core strategies, and we remain very positive on the outlook for secondary copper demand. In the U.S., recent announcements of new smelting capacity are expected to triple copper scrap demand by 2027, while globally some forecasts anticipate per capita copper demand to double by 2050. In a few short months since this acquisition, we are already encouraged by the great people who are driving positive results in the business and how we are positioning for long-term success. I want to move on now to the outlook on Slide 28. We are confident in the medium and long-term fundamentals of the business. In the short term, there are some positives and negatives. On the positive side, there has been good demand for scrap in the U.S. driven by increased EAF facilities, and we expect this to continue. Zorba prices are expected to remain stable. And finally, the reconstruction of the earthquake affected areas of Turkey hasn't yet commenced, and this should increase the demand for scrap to the Turkish malls. On the downside, steel demand remains subdued and the current scrap price does not appear to be sufficient to stimulate robust scrap supply. In the medium to long term, the positive drivers have not changed. Metal-intensive infrastructure spending will drive the demand for ferrous and nonferrous scrap. Global decarbonization of the steel industry is intensifying and scrap plays a critical role in this. And from SLS' perspective, cloud infrastructure is only going to grow, particularly with the fast onset of artificial intelligence. As you're probably aware, this is my final presentation of the Sims' results before I retire as CEO in late September. So before I move to Q&A, I would like to thank all Sims' employees for the last 6 years while I have been CEO. You have delivered great results over that period despite some very trying market conditions. But just as importantly, you have achieved those results in a safe and sustainable manner. Congratulations to all of you. Operator, back to you.

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

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

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

I'm surprised that profitability rebounded quite as strongly though, Alistair. In that context, you say competitive context was still pretty intense, but your profit margin...

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

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

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

Are you talking about SAR and the U.S. NAM operations?

Yes.

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

Got you. That's useful additional color around nonferrous versus ferrous. And lastly, just on LMS, could you give us any update on timing of that process?

I'll ask Stephen to give you an update.

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

Your next question comes from Owen Birrell from RBC.

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

I'll start by the long-term commentary. I certainly don't believe that anything's changed with our long-term view on strong tailwinds for decarbonization and electrification across the globe. I think copper, aluminum, I think there's a global demand for that long term, and I don't think that's going to change. I think from a ferrous point of view, and in particular, scrap, I certainly see that as the long-term process, and that's on a global basis as well. I think certain regions are going to come out stronger at different times depending on economies. And I think part of what we're reflecting is that you're seeing a subdued market in Europe due to energy prices inflation and obviously, the Ukraine/Russian impact of that war. So I do think that Turkey is going to pick up again at some stage and feed into the rebuild or potentially Ukraine one day. I do think that the U.S. market is quite focused on its infrastructure and the money that's being put into that stimulus program. There's various initiatives, as you well know. So I do think the American domestic steel demand is going to remain, and obviously scrap is a key aspect of that growth going forward. We are going to have patches like I think we're seeing now, which is fairly quiet, but it will pick up. I think underlying, when you look at average prices over the longer term in the future, I think we'll see that, that demand in the United States remains, and hence, our strategy around being able to play domestically as well as international with our portfolio. So I guess that's the high-level part of it. And I think from a medium term, as I said, I think that's going to be consistent with what we put into the presentation and our wording. I caution that, obviously, we're 6 weeks into the new year. So I'm not going to jump any forecast around that.

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

Yes, it's Stephen. I think mid-cycle earnings is really, really hard to pick at the moment because what we have noticed is that, firstly, the cycle seemed much, much shorter. And the second point I'd note is that the bottom of the cycle definitely seems higher than the bottom of previous cycles. So if we look over the last 6 months and even the last year, when the market got down certainly this time last year, when the market got down to the low $320s million, there was a huge amount of support and it came back up again. And in the second half, when the markets got down to the $340s million, $350s million, we've seen support and back up it's come. So the cycles are shorter and bottoms higher. Let's put it that way, it's the way I've described the market at the moment. So in that context, do we see the $160 million for the half year as a good mid-cycle? I think the $160 million was a good reflection of the market conditions that we were in. As we've already commented our diversity of geography and markets, we had some businesses suffering more, others doing quite well. It doesn't answer your question specifically, I realize that. But it's because I'm not sure that this is a mid-cycle market at the moment. It feels a little bit like it's at the bottom of the cycle given where prices are.

Stephen, that's actually quite good. I think, given that the -- when you hit $320 million and you said you found support, that seems like a degree of structural change over where we were probably what, 5, 8 years ago. You were down in the $200s million and not getting any support. So would you agree that, that is a structural change to the broader market that has effectively come through?

Yes. I agree with that. And I think it's driven by 2 things: the huge growth in EAF, which is just support, whether it comes from India, Turkey, U.S. domestic, other parts of Asia. And then secondly, I think that the cost of collection has gone up with inflation in particular. So that's providing -- that the market needs to be higher in order to encourage the scrap out of the market. So I agree with you, it's definitely cyclically higher than it was structurally 5 or 8 years ago.

Your next question comes from Lee Power from UBS.

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

Good question, Lee. I think certainly, for us, the swing that we saw of domestic price versus international was obviously much larger in dollar terms of price differential that we noted. That's the first point. And the second was the actual speed at which it occurred was also fairly surprising. We did have a sense that you would expect to see a higher challenge in terms of demand and purchase pricing. So those 2 aspects for us have certainly allowed us, and then John is on the call here, so he can answer as well, is to look at our operational capability on the Eastern Seaboard in particular and how do we actually -- we do have rail barges and trucking facilities, how do we utilize that in a better format. So we do have an operating improvement that I'll ask John to talk to. And I think secondly, for us, as part of the acquisition we announced this morning with Baltimore Scrap, that's ideally a company that brings on a large volume, a well-managed business that has a good solid domestic focus, both from an asset point of view, but also in terms of steel relationships with domestic suppliers. So those 2 fronts, both on operational improvement to take our current NAM business and give us the capability of swinging that percentage, but then also the acquisition we've made with Baltimore that brings in a huge domestic capability straight off the bat. So that's the 2 parts, but I'll ask John, just, do you want to talk about the domestic?

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

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

Certainly, the distributions are enshrined in the joint venture agreement, and just as a very rough approximate, the distributions work out to be around about 60% of the EBIT. And then we then also have to pay tax out of that distribution as well. So that's in the agreement. So that distributions will move up and move down in that same proportion depending on SAR's result. That's the way it will always be.

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

Yes, that was definitely one of the major drivers. I wouldn't think there's anything else materially around that. I wouldn't be reading too much into the first half, second half split of cash, because frankly it can get hugely impacted by a cargo that slips from 1 period to the next. And we had some cargoes in the second half that didn't ship on the 30, but shipped in the next month. So I think on a going forward basis, I wouldn't read too much between our first half, second half, unless it was massively different for whatever reason. Our cash flow does vary around, particularly in bulk ships, happen to sail.

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

I think, obviously, geographically that also plays a role. When you look at SAR's past performance and where they currently sit, I think 1 of the stabilizing aspects is the demand for copper, aluminum and zorba prices, and I still think they are sitting up at the $1,750, $1,800 mark, which I think is fairly stable. When you go back 2, 3 years ago, we could see a swing from that level down to below $1,000. So I think that volatility in aluminum and copper seems to have quietened down and sobered. I do think, obviously, if your shred infeed in the Midwest shrinks, then obviously, the NFSR will decline slightly. But I think the pricing is really what I'm talking about. That seems to be remaining fairly stable.

Okay. I think it's probably worth adding one thing to that, too, is that what has been maybe heading the shred down is the secondhand car market. I mean, we all -- and this is a global phenomenon, including the U.S. We drove our cars less during COVID. We crushed them less during COVID. So there was less cars got into the system, and we're seeing that run through it now. Now that will pick up as new car sales pick up and as we're driving the cars more. So when you look at the amount of secondhand cars that have been available for shredding, there's definitely been like the opposite of a ramp, like come through the system of lower car availability for shred. Definitely seeing secondhand car pricing come off peaks. And that, in turn, should see cars eventually get scrapped and come through our system.

Yes, absolutely.

Your next question comes from Paul Young from Goldman Sachs.

Alistair, a few questions on just acquisitions and medium-term targets and balance sheet, et cetera. First of all, just on Baltimore Scrap Corp. It does seem like you continue to pivot back into the U.S. domestic market. But I think you've been looking at BSC for some time. Just firstly, a couple of things here. One is on the acquisition price. It does appear a pretty full price considering it's based on 3-year sort of trailing scrap prices. So I'm looking for a bit more information here about the rationale here. First of all, what are the synergies? Can you sort of quantify in dollar knowing what the synergies you think are per annum? And then, is there ability to grow this business to 600,000 tonnes per annum? Is that capacity? Is that current sales volumes? And can you grow this business materially?

Well, first of all, Baltimore Scrap is a very well-run company. I think, David Simon and his brothers have run a very tight ship over a number of decades and generations. They know that market very well. They fit from a cultural aspect very well with us. They've certainly looked after their assets. They're well positioned and have a good reputation in the domestic steel industry. They also have an international export capability, which they do utilize when they need to. So I think when you're looking at our strategy and the alignment with all of our filters and how we've spoken to the market, they fit perfectly well. Now a well-run company with good leadership group is also a key aspect for us when you run new companies. So I think from a fit with our strategy, with a fit with our culture, very commensurate. I also think, from a growth perspective, there is opportunity to continue to grow that organization. And I think one of the aspects for us is, as you know, 5 years ago, we set nonferrous targets and we wanted to literally double that in the United States. I think this can add to that nonferrous strategy as well. So in terms of your question of can it grow? Absolutely. And I think there's also a lesson for us to learn from David and his business in how they've run that operation. So I think it is a well-managed company, and I think we've paid a very fair price for it.

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

Glad to hear the rationale, so I appreciate that. Stephen, while you've got the floor, I guess, just talking about the balance sheet and also growth CapEx and just CapEx in general in FY '24. As far as the balance sheet is concerned, I mean, have you rethought, now that you're making some sizable acquisitions, where you want to take the balance sheet or where from a net debt perspective or gearing where the max is? And then also just on growth CapEx, I know you spent $60 million in FY '23. You did push some growth CapEx into '24, '25. Can you give us any sort of estimate on what growth CapEx you expect for '24?

Yes, a couple of questions in there. The first 1 I'd say is in terms of acquisitions, and yes, the Baltimore Scrap is a reasonable sized acquisition for us on the back of NEMT. We'll recycle capital for that. We've got -- as you're aware, we've got a couple of assets that we're in a very, very active sales process at the moment. So we'll recycle that capital effectively to fund these transactions. And interestingly, they'll probably end up settling at around about the same time. The balance sheet is still in a good healthy position. I will still maintain that a highly geared balance sheet is not appropriate for Sims. We still have a commodity cycle to our business. And yes, we release working capital when it goes down, and we build it up when it comes back up again, but those cycles are getting shorter. My view on the balance sheet is, we'll continue to recycle other capital out of the balance sheet to fund significant growth initiatives. And we've also got smaller idle pieces of land that we haven't finished selling it off either and they can fund some of the smaller growth CapEx. So I overall believe that we will be absolutely able to fund our growth within the context of a strong balance sheet. As we get larger, though, would you -- I mean, is a modest 10%, 15% gearing inappropriate for us. I need to think about that a little bit more. But my sort of initial reaction is it's not. And so if we had $400 million or $500 million of debt for a period of time as we took on some growth, and then repaid that debt down over the subsequent 2 or 3 years, I think that would still be very prudent.

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

Just quickly, Stephen, growth CapEx estimate, say, for '24?

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

Your next question comes from Daniel Kang from CLSA.

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

As I've mentioned before, we obviously do know a lot of companies in the United States and Australia, obviously, and the areas that we operate. And I think part of our M&A process is a filtration process where we need to make sure that it matches our long-term ambitions. And that doesn't just go around the size of the acquisition. It's got to do with people, safety, culture, et cetera. And that gives us the flexibility we need. And I think Baltimore Scrap was a well-run company that we've known and respected for many years. And that was a family decision that they made that they wanted to move on with their lives. And I think that's an important aspect that we have had a lot of respect for them, and you can then basically come to an arrangement and a deal as we did. There are many private companies in the United States you can't acquire because they're not for sale. There's only 1 that's listed. So I think part of this is our relationship with a lot of the vendors, as you say, and other companies that we deal with. So I think there's not a huge list of companies the size of Baltimore Scrap lying around for us to go after. And as I said, you can't acquire them when you feel like it. So these are long-term relationships going forward, if that makes any sense to you.

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

Yes. No, it hasn't changed our confidence in the business. I mean, I think in our view, the long-term outlook or the medium-term look out for that market is good. Data centers are growing exponentially. They need repurposing/recycling. We have a good position in that market. And you see our repurposed units grew by about 40-odd percent over that period. You did right, the second half has been a -- it's been a breakeven sort of type second half. So it is in the black. It doesn't consume capital. But the reality is that right now under the business operating model, it needs China to come out and grow some more. We haven't seen a further deterioration. The prices are just, I guess, languishing what we think is probably the bottom of the market, and we'll need China to recover. But our position in that market is strong. And I keep saying it's not consuming capital, it's not consuming cash even in this market. And I think it's really well positioned for when that market does take off, we believe, into this calendar year, early calendar '24. But if we're wrong on the recovery, any recovery of China, then we'll be wrong on that forecast as well. So we need that China recovery to happen.

Your next question comes from Megan Kirby-Lewis from Barrenjoey.

Just a couple of questions from me. Just firstly, on the SAR, just the acquisitions that have been noted in the presentation. Just wondering if you could give any further detail in terms of, probably most importantly, volume. And just what sort of the run rate is to help us forecast for FY '24 onwards, would be fantastic.

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

Okay. Got it. And then just on LMS, just to help us think about the right valuation and expected cash flow to come from that settlement. In terms of that $15 million EBIT reported for FY '23, is that sort of a normalized EBIT that we can be thinking about for the valuation?

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

Your next question comes from Chen Jiang from Bank of America.

All the best, Alistair, to your next chapter of your life. A few questions from me, please. So firstly, on your long-term FY '25 growth target, would you please give us an update on how are you progressing? I guess, with the recent Baltimore acquisition, how far or how close you are towards that growth target?

The FY '25 targets, as you know, we set in 2017, and Board approval and shared that with the market a bit later on. We're progressing well in terms of nonferrous. We'd like to actually speed up some of the acquisitions potentially across the globe. But again, our capital discipline obviously plays a key part in both nonferrous and ferrous acquisitions. In terms of acquisitions, I think given that Baltimore has just joined our family, I think part of the aspect for us is to make sure that we, both with Northeast Metals as well, is we go after the synergies we believe and actually integrate the 2 organizations into our business and do that carefully and do that properly. That's the first principle for me. So this is not a race just to hit the FY '25 targets. We need to do this with a capital discipline, but also integrate properly. That makes us a successful M&A program. So yes, we're on target as far as we're concerned. But I think Stephen, carrying the torch going forward, will be very disciplined about any future acquisitions and how we absorb that and what the time frame is. And as I said earlier on, many of these companies are not for sale when you feel like buying them. So part of this is continuing our relationships with all of our players in the market.

Alistair, just a follow-up. In regards to M&A, are you more concerned about valuation from a capital discipline perspective? Or it's about the competition?

I think the long term...

From North America. Yes.

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

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

Maybe can I please ask a question about your cost. Could you please give us some color on the cost pressure you are expecting in the next, I would say, 6 to 12 months, especially for NAM, because as Stephen mentioned in the call, NAM couldn't pass the cost due to competition, and the U.K. has the worst inflation of all the regions you're operating and it seems kind of okay. So what are you expecting in the next 12 months?

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

Just commenting, particularly in NAM, we've seen inflation rate certainly dip. It's still higher than, I guess, historical sort of numbers, but it's certainly well off its peaks, and we're certainly seeing a softening around labor tightness. If you go back 12 months ago, it was very, very difficult to engage. So we've seen those 2 things soften, certainly seen outbound freight, logistical cost, ocean freight, container freight, all those things come off their peaks. So certainly seeing some softer -- an improvement in costs and those things. But you can't get past it with that 2 years of very strong inflation that unfortunately accumulated.

Your next question comes from Simon Thackray from Jefferies.

Sticking with the U.K. Can we just talk about the returns from a capital point of view in the U.K., and whether at some point, are we looking at this as a source of asset recycling? At what point do you think the U.K. is sufficiently resilient to continue in the portfolio?

Yes, Simon, clearly, the U.K. market is a tough market. It has 1 large player and a couple of other players and then much fewer smaller players. So you've -- it's a very competitive market, and that shred market, in particular, in the U.K. has been extraordinarily tough. And over the years, the U.K. has had some ups and it has definitely had some downs. And so the return on capital in the U.K. has not been where it's needed to be. We've commented before that no asset -- we don't fall in love with any assets in our portfolio, that we look at them quite objectively. And I think we've shown a good history of if we believe that, that asset is either better in someone else's hands, because another group of shareholders would value it more, or it's not getting our return, and it's not capable of getting our return, we haven't shied away from divesting that asset and recycling that. As far as especially on the U.K., we've been looking at the U.K. for the last couple of years. Alistair and I, on a number of calls, have talked about that. And where we think it needs to be. So I'm not ruling it in, and I'm not ruling it out. It maintains -- it's on our watch list do we believe that it can turn around to get our cost of capital or is it not capable of doing that.

And when do you think a decision on that would be reasonable for investors to sort of say, when do you draw a line in the sand? Is it a year? Is it 18 months? Is it 2 years? How much longer do we have to sort of follow it?

It's a good question, Simon. So we're in a review at the moment, an operating review of it. And the answer could be anything from an outright sale at 1 end of the spectrum right through to a realigning of the portfolio at the other end. Can we trim that portfolio down and focus on particular areas of the U.K. You should expect that -- I mean, you should expect that review and the outcomes of that review is less than 12 months away.

Okay. That's helpful, Stephen. And then just shifting gears back to North America, it's a bit of an admin one. The contribution in terms of volume from PSC and the 6 bolt-ons to SAR in FY '23, what was the sort of volume contribution from the M&A in the period?

I think, Simon, it was just over 200,000, 245,000 tonnes in that region.

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

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

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

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

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

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

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

All the big players would be in that region.

Okay. Well, maybe we could circle back to that later. Alistair, in line with everybody else, thanks so much for your patience, and best of luck with the future. And you too, Stephen, obviously, stepping on to the new role. So thank you.

Thanks, Simon. Thanks for your support.

Thanks, Simon.

[Operator Instructions] Your next question comes from Lyndon Fagan from JPMorgan.

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

That's a difficult question to answer, other than to say, yes, overall, it is. But where that EBITDA margin improvement is going to sit? Is that as a result of us having better access to the domestic market when the market separates that will certainly improve the EBITDA margin? Is it going to be, as I talked previously, about better logistics that will absolutely preserve the EBITDA margin? The relationships that we will inherit, their domestic relationships, are they going to improve our EBITDA margins? So all of those things will. Some of it will sit -- we won't think of the 2 companies as separate, but if I just do for a moment, some of that EBITDA margin would sit in helping the existing Sims business, some of that EBITDA margin will sit because Sims can help the existing Baltimore Scrap business. That's the last time I'll separate them because, believe me, once they're integrated, we'll be viewing it as a single Sims entity.

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

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

I know I only meant to ask one question, but bundle it all under the one.

Call it 1a, Lyndon.

If you were to try to add nonferrous to that set of assets, what sort of investment would that require going forward?

It's very minor. We're talking retail nonferrous here. So it really it's very minor, there's not much CapEx in the way, or it's just utilizing our skills and our logistics and our ability to sell it. Very little capital at all. John, do you want to comment here?

I'm just going to say, Lyndon, as part of our due diligence, their facilities are well geared to accommodate nonferrous retail and making use of that geographic footprint to capture that volume is an easy step forward for us.

Your next question comes from Scott Ryall from Rimor Equity Research.

Alistair, congrats on the retirement. I've enjoyed dealing with you in your last 2 executive roles now over a decade or more. I'm wondering if you can just give us a little bit of a reflection. And then, Stephen, the same question goes to you, but obviously, with your forward-facing lens on. This result has highlighted the inevitable, I guess, variability in your earnings base. You've talked to some of it with the commodity price cycle. Stephen, you've mentioned some other variabilities in the business. But I guess I'd be interested to hear both your thoughts on what over the next 3 to 5 years can be done with the broader business to reduce the variability of earnings, please? And that is my only question.

I guess part of understanding where Sims sits from a global and industry, in particular, we are obviously part of the steel manufacturing environment. And that does go through cycles. And I think to Stephen's point earlier on, we've seen price cycles that are long; 20 years ago, the price cycles were fairly lengthy. We've seen a lot more shorter periods of volatility in the pricing of ferrous. But to say that the demand today, I think, is very different to when I joined here 8 years ago, I think we have more of a consistent tailwind in terms of the ferrous demand. And that's purely the decarbonization process where you've seen electric arc furnaces put in from China to the United States to Australia and New Zealand. So that EAF, that implementation of that, I think, is going to bring a higher level of earnings to Sims. And as we've mentioned, that scrap plays such a key component in being able to recycle, reuse that again and again. And that's not only ferrous, but also nonferrous, copper and aluminum. And I think the demand for copper and aluminum, I think, is also more stable than what it was 5, 6 years ago. And probably, when you look at the price of copper, it was only a year ago that was just short of $10,000 or even went over $10,000, sitting at $8,500 today. I see that going back up again. And I see aluminum, which might be sitting at $2,100 today, going back over to $5,000, closer to $3,000. So I do think nonferrous pricing has structurally changed and I think that will go forward. And I think ferrous pricing for the same reason has gone up, that demand is there. So I see a more stable higher level of earnings for Sims in the next period of time, 10, 20 years, as that demand continues. I don't see that changing is my gut feeling as I sit here today from what I've learned. I think we're always going to go through geopolitical events globally. I didn't think there was going to be a pandemic. I didn't think we'd see such high tariffs imposed in parts of our regions around the world. And I think the geopolitical aspects of Ukraine drove our business and the scrap demand last year to high as we've never seen or haven't seen for many, many decades. So I think part of Sims' flexibility and ability to pivot is 1 of the strengths, I think we've seen in the last 10 years. And I think that's going to put us in a good position going forward to expect volatility, but I think less so and greater demand for our products.

I guess you've spoken there to a lot of the investment tailwinds, Alistair. What is it that's in Sims' control to make sure that you benefit the most possible from the tailwinds that are coming. I guess that's what I'm kind of asking over a 3- to 5-year time frame?

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

And Scott, maybe I'll chime in with mine now. I mean the very first thing I would say is I'm a big believer in our strategy. In fact, when I was talking to the Board, I specifically said to the Board, if they're looking for a CEO to bring in a fundamental change to strategy, then I was not the person that they were looking for. As an executive team, we've developed this strategy under the guidance of Alistair over the last 5 years, and I believe it's the right strategy going forward. There can always be tweaks to the strategy, and I think that's what will happen. And I believe we're seeing 1 right now. And for me, it's all about resilience. The market is going to be the market. And I 100% agree with Alistair, we believe that the fundamentals of the market in the medium to long term are strong. But the market will be the market. What we need to do is make sure we're resilient in the face of those market conditions. And I believe we are much more resilient than we were 5 years ago in the face of some pretty challenging markets. But here's another good example that's happening right now and we're reacting to that. The strong growth in the U.S. domestic market, particularly in the EAFs, and how quickly it drove a separation between the export and domestic price, happened very, very rapidly and to a much greater magnitude than we thought. When we look at that now, we think that's possible that, that can happen again in the future. So we need to be more resilient to it. So what's the tweak in our strategy? The tweak in our strategy is to make sure that NAM has more domestic, not just options, but more domestic diversity as well without losing its export capability. And so I think a tweak to our strategy is over the coming 6 months, 12 months, 2 years, you should expect to see NAM's capability to move more domestically improve. And that's what we'll be reporting on and those types of things. So fundamental strategy is not going to change. Tweaks in the strategy to make sure we're more resilient to whatever this market throws to us and we learn. I think that's, for me, the themes in the next 6 months to 2 years.

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

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

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