Sims Limited (SGM) Earnings Call Transcript & Summary

Thanks for joining us, everyone. On the call, we have Rob Thompson, our President of North America Metals, and Rob has really been the driving force behind this acquisition. I also have our CFO, Warrick Ranson, here in the room with me in Sydney. Let's turn to Slide 4. Overnight, we announced the purchase of a Houston-based entity called Tri-Coastal Trading, TCT for short, for USD 66.5 million. We have a presentation to run through today in relation to that acquisition. It will take around 15 minutes or so, and then we'll move into Q&A. Look, let me firstly provide a high-level overview of the transaction, which Rob will cover in more detail soon. This really does solve a dilemma we've had in Houston. We turned the business around, but we needed access to better options, both domestically and internationally to really drive performance. We have a suitable piece of land to achieve this at Mayo Shell, but the capital cost to upgrade the port at Mayo Shell and I guess, the size of our existing ferrous business just did not justify the CapEx. TCT gives us this deepwater access and therefore, optionality, but it also provides much more than that. It materially increases our presence in the market in excess of another 350,000 tonnes. It significantly reduces our operating costs through the Instructure service agreement contract. And it frees up for sale all our land in Houston. We estimate in excess of USD 100 million, including the Mayo Shell property. Looking at it from a numbers perspective, we paid a bit less than 4x EBITDA post synergies, the combined businesses and by that, I mean our existing ferrous and nonferrous operations plus the TCT acquisition. So that combined business that's expected to have an annual EBITDA of USD 25 million and a return on invested capital of over 20%. I want to turn to the next slide now, which is on strategic property management, which is all about optimizing our property holdings to create value for shareholders. You will see that we have commenced the hiring process for property strategy lead. Now this is a global role looking at all of our properties, and we broadly categorize those properties into 4 areas. The first are properties such as Mayo Shell, where we have entered into a contract for sale. The second are properties we are actively marketing or getting ready for sale and will soon begin the marketing process. Obviously, the remaining sites in Houston fit nicely into this category now that we've acquired TCT. The third category is the most complicated and the area where our new property leaders are likely to spend the most time. These are the sites where it has become obvious over the next, let's say, the next 5 to 10 years that the most valuable use of that land will not be metal recycling. We need to develop a plan off these sites and relocate to alternative sites or even sites without impacting the existing franchise or book of business. Interestingly, a good example here would be the Houston sites 5 years ago. Finally, we have those sites that we would expect to retain well beyond the 10-year time frame. That's all I want to cover. So I'll hand over to Rob now.

Next slide, please operator. Well, thank you for joining us today. I'm excited to talk to you about this transaction and the opportunity. It wouldn't be possible without the hard work of the NAM leadership team. 18 to 20 months ago, we embarked on a turnaround in this region, extensive cost reductions, the difficult decisions that come with that, margin obsession in ferrous, buy-sell improvements and great growth in our nonferrous areas. A lot of self-help, we call it must-win battles, and we're excited about this opportunity as the next step with consolidation. This market and to give some context, the Houston area is one of the largest industrial markets supported by energy, but also by the heavy infrastructure and the industrialization that is there to support ports and bridges and warehousing. The Houston area itself is the fourth largest city in the U.S. It's predicted to surpass Chicago for the third spot with 2.3 million people in the city proper. And that actually blows up to about 7.8 million people when you consider the greater Houston area. The state of Texas has over 32 million people. The GDP for Texas is the second largest in the nation at USD 2.5 million -- or USD 1 trillion rather, sorry, only taking a backseat to California. From a pricing strategy opportunity point of view, the picture on the right depicts the FOB pricing for roughly but the last 12 months. And you can see or view the price premium or arbitrage when you look at the FOB pricing, international price versus domestic price. Important to note, prior to the acquisition, we did not have the ability to access the export market without considerable costs, and that was a competitive disadvantage that we had to endure. But it also affects negotiations domestically and on a larger scale where we ship from for Sims North America metals. For now, we have better proximity to Mexico and consider short sea access as well as deep sea access, effectively putting us in a competitive advantage for 2.2 million tonnes of imports into that country as well. Not to mention other South American consumers Mediterranean and European markets as well. optionality and optimization with our U.S. East Coast business. Once fully consolidated, we have a priority access to 2 berths and a scheduled access to a third if we should choose to use or load out larger Supramax class vessels. Domestically, it will allow us to be more efficient with better access to rail up to a 33 car spur served by UP, but with switching rights with the BNO as well, dual served, allowing us also to ship out by ocean-going barge for domestic consumption as well as loading out river barges as we do today in our current asset footprint. It should be noted that the Texas market has 6 steel mills, consuming approximately 7.6 million tonnes a year, while neighboring Arkansas has 6 steel mills as well, consuming around 12.6 million tonnes of scrap and scrap substitutes a year, not to mention considerable demand in Mississippi and soon to be in Louisiana. Next slide, please. So on the consolidated ferrous operations side, revenue margin perspective, I've already mentioned the optimization of the FOB premium markets. For clarity's sake, having "bullets in our gun, the capability provides us with both domestic and international leverage, sell for the best price, all modes of logistics, something we do very well in other regions." We have an exclusive in terms of recycled metals at the terminal and city dock, where Instructure operates. The acquisition of the commercial contracts and relationships broadens our supply base and catchment area. That was also very attractive to us. As Stephen said, we are adding 350,000 tonnes of ferrous volume, bringing scale and market share, but also options commercially, i.e., the international and domestic space and not ore, 30,000-tonne handysize vessels plus 20,000 tonnes of domestic shipments would priorly take us 2.5 -- or 1.5 to 2 months to accumulate. Now we can do that in a month. On the cost synergy side, we will have considerable rationalization of our footprint, targeting the sale of up to 3 additional sites beyond the mentioned Mayo Shell, all in around the Houston area. And I'll try to remind myself to show you the Mayo Shell property in the video coming up next. The Woodhouse terminal exclusively eliminates extra handling costs and transportation to the docks. The consolidation of the additional volume, as you would expect, provides a reduced cost per ton impact. The agreement with Instructure ranges over 18 years remaining, and there are 2 5-year extensions, as mentioned, logistics optionality. From a capital efficiency point of view, as Stephen mentioned, we currently have Mayo Shell under contract, and we expect a gradual wind down of our existing ferrous operations at Chapot Street as we ramp up the Woodhouse terminal capabilities. Our nonferrous location and maintenance locations, we are actively looking for a proper and suitable relocation. In the wind down, we will redeploy significant assets to facilities -- to facilitate rather the additional volume at the port, but also redistribute redundant equipment throughout the North America Metals group. CapEx avoidance, including a small shredder acquired, which will be -- which is being studied to be utilized in our aluminum shredding area, several cranes, scales, boxes and containers as well. Internally, we call this the Mayo Shell no regrets strategic acquisition as the cost to develop land geotechnically build out the civil and infrastructure were quite costly and without, obviously, the market share that we just acquired with the consolidation of the TCT business. The proceeds of the lands and mentioned CapEx avoidance can be used elsewhere. You can see and I have heard from Stephen our expectations of ROIC to be greater than 20%, driven by better earnings from margin improvements and cost outs with growth, but also with significant capital release. If we could go to the next video slide, please. And operator, if you wouldn't mind just pausing right here for a moment. This is drone imagery kudos to our friends at Instructure, and we'll give you a great view of the new site and operations. And before we go forward, if I can take your eyes to the top right-hand corner, where you see the red stacked containers. And if you glance towards the center of the page at the top, you'll see some green space as you go towards the would be water. That is Mayo Shell. So you can see we aren't moving very far in terms of location and haven't given much up in terms of opportunity in the marketplace. Inside of the gate area and once I go forward here, you're going to see our area of use is approximately 20 acres, consisting of 3 different areas. Two are within the secured area. It is a secured port. And when there is a vessel on the berth, that area is completely secured and all visitors, guess or otherwise, workers need to be properly validated with identification. We have a third site, which I'll point out later that is off-site, which will allow us to have smaller dealers, peddlers and some unprocessed or processing of unprepared material with a separate scale and so on. So we can proceed now, if you wouldn't mind, bottom or middle of the screen there, a small building with a scale and radiation detector as we come in through the gate. You can see a car passing out through that secure gated area now. Several tracks of rail structure along the left-hand side of the total site, which Instructure will continue to handle some of their steel business as well. On the right-hand side, you can see the scrap piles will continue to exist in those sites. In front of you, you see where the vessel is on berth, that is berth 1. That is no restricted over 12 meters of water. If you could pause here again, please, operator. So again, where the vessel is, we can load Supramax vessels, no restrictions. Supramax vessels allow us to go further with 45,000 to 55,000 tonnes of cargo. We have a scheduled right to utilize this berth. Directly in front of us on the left-hand side is berth 2 and the perpendicular dock that ends the waterway is berth 3. These are priority rights to us under our agreement. Berth 2 allows us to load handysize vessels just under -- or yes, just under 11 meters of water and berth 3, we can either utilize for oceangoing barges or river barges stacked along either berth 2 or berth 3. The property directly in front of the docks is the area that we will be utilizing and staging material. And you can see the railcars in the middle as well. That's all of the rail spur that we will be utilizing for inbound and outbound. And directly in front of us on the left-hand corner is a processing area that we will be utilizing as well. And if you want to go forward again, operator, you can see some of the equipment there, 7 or 8 cranes already on site, and we intend to add to that with shears and other cranes from our existing site. I will hand this back to our operator, Harmony now.

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

I was just curious around Instructure and the novation of the service agreement. Who is the counterparty to that? And could you perhaps just give us a bit of a sense of how Instructure fits into the context of TCT post acquisition?

Yes. Sure. Thanks, Peter. Rob, maybe it's best for you to take Peter through how that Instructure transaction works and their relationship with the port and our relationship with them and maybe talk a little bit about the existing relationship we have with Instructure.

Yes, sure. We currently have existing relationship and a very similar agreement with Instructure in 2 other sites additional to this. This is quite a larger version of that. We have one in Connecticut, one in Fairless, Pennsylvania as well. This particular agreement Instructure has a right and an agreement with the Port of Houston to operate on this site for Stevedoring reasons. And they have extended that to ourselves now under an agreement to ship out material or ship in material as well as process scrap metal on the site.

Got you. So they're an existing roll player that is effectively contracted for that 18-year period plus the [ 2 5 ] options.

Yes, that's correct.

Got you. If I may sneak one other one quickly. Could you comment on the base profitability of your business in Houston, how much EBITDA it generates at present?

Maybe Warrick, you're happy to take that one, I guess we disclosed the total.

Yes. I mean, Peter, we don't sort of disclose our regional earnings. I think we've provided enough sort of information that you can sort of work backwards a little bit in terms of what we've provided. I think for modeling purposes, et cetera, that's probably sufficient in terms of what you would need. But yes, for commercial reasons, we don't disclose regional earnings.

Your next question comes from Brook Campbell-Crawford from Barrenjoey.

Just first one on, I guess, the business itself, obviously, a trading business, which would seem that some of the key assets you're buying really are people, kind of know-how relationships and sort of trading capability, I would have thought, correct me if I'm wrong. So can you kind of talk about what you're doing to ensure you hold on to people who are in the business that you're acquiring, if there's any earnouts, things like that would be helpful.

Yes. I'll let Rob answer that in a bit more detail. But my view is it's -- we're buying much more than a trading business. We're buying access to an incredible facility that will provide us with competitive advantage not only for the scrap that we're buying here, the heavy melt we're buying, but also our existing business. It really reduces our operating costs significantly. It provides us much more optionality domestically and internationally, I think. So in that sense, it's much more than a trading operation. But Rob, I'll hand over you to how you've been thinking about, I guess, the people aspects of it and how we're going to take the business going forward.

Yes. This operation from a white collar perspective, and it's very largely commercial. As you can see, Instructure operates at the facility. So commercially, we have retained those key talents that we feel are necessary additional to the folks that we already have in this region. So we've -- in our opinion, we've combined to create a bit of a powerhouse team. In terms of retention and agreements, those are in place.

I think pointing out there are no earnouts on the deal.

No.

Great. And just 2 other quick ones. Firstly, just can you provide a bit of color, and you might have done this already, but just a little bit of information around where the scrap is sourced from currently? I guess how much is very local from the Houston market versus further afield? And then just a quick follow-up on what sort of depreciation and amortization should we assume that comes along with the deal just to help a little bit with our EPS accretion calc?

Rob, if I get you to cover off the issue around scrap collection in the Houston market, and then I'll get Warrick to talk about the depreciation and amortization.

Yes. The vast majority of it is fairly local. I would say, without getting into, again, commercially sensitive information, it's greater Houston areas. We're just talking about before we became live here. There are some opportunities whereby Tri-Coastal has used their logistics prowess to return barges with material. So there is some brokerage in the volume. However, in the modeling that we've done and the physical tons that will go across the dock, we've only used proprietary tonnes. So we've been fairly conservative in the volume. But I would suffice it to say majority of it is local.

Yes. And I think just on the amortization question, we still got to go through our PPA review and formalize that. But I think our expectation at this stage is that most of the price will be attributable to the service contract. And so we'll amortize that over the 18-year period to start with.

Your next question comes from Harry Saunders from E&P.

Just following on firstly from the D&A. So I just want to clarify, I think the implied incremental EBITDA versus your sort of existing business from that 4x implies about USD 17 million, including the synergies. So just wondering is that figure you were talking to, is that the incremental D&A we should assume on top of the base business? And then I'll follow on.

Yes, if you amortize the purchase price, that would be the incremental. Yes.

Got it. And then just in terms of that sort of implied USD 17 million, can you break out or give a broad sense of the split between the existing EBITDA acquired versus the synergies assumed?

No. That's sort of along the lines of Peter's question. Yes, that's not something that we would disclose commercially.

Okay. And also just following on, can you give an idea of the time frame for the acquisition to complete and then the time frame to achieve that full implied run rate of USD 17 million. Would you hit that from day 1, say, if it completed 1st of July? Or is there a ramp-up period?

I might ask Rob to sort of respond to that in more detail. But obviously, there is a ramp-up period. The acquisition has been completed. Completed today. So that's done. So the team will start moving forward. But yes, it will take some time to transition from existing sites, et cetera. So I guess Rob, when would you expect -- I mean, '27 is going to be materially there. But when would you expect like full, I guess, fully fledged synergies in place year of operation?

Yes. Our expectation, gentlemen, is by the end of this third quarter, we'll see an appreciable ramp-up and a ramp down of our existing sites. So going into our last quarter of the year, we're expecting to be almost at full throttle. 90 to 120 days maximum.

Right. So based on that, you would see '27 as -- first full year of operation, 2027 is materially if not entirely at the run rate.

Correct, yes.

Your next question comes from Lee Power from JPMorgan.

Maybe just on the rest of the property, like can you talk about what you need to do in terms of rehab, if anything, to prepare that sale?

Not a lot, Lee. So we've got to get off the site, which, as Rob said, we're off the sites entirely, let's say, by the end of June. Rob talks about the fourth quarter, there will be some residual stuff. Our nonferrous site will stay for a little bit longer as we look for an alternative leasing for that, not -- and that's not a significant cost to site. The rest of it is then really about marketing. And I guess what we've learned in Mayo Shell that it will take around 12 to 18 months of marketing, getting people in, then doing due diligence, getting bids organized. We expect there will be quite a lot of interest in this, but it will come -- all of that interest will come with complexity, some of this, some of that. So that's why we -- I guess that's why we've said it will be 12 to 18 months. But most -- the majority of that, frankly, will be getting off the site and then marketing it. We're not expecting significant environmental issues.

Excellent. And then just following on from Harry's question. So it seems like the bulk of the synergies are from the service agreement around the dock facility. Is that the right way to think about it? And that's why the synergies come relatively quickly because you implement a service agreement and you've got decent line of sight into a bulk of the synergies from that. Is that kind of the point we should be taking...

I believe so, Rob, what's your take on that, but I feel that feels correct to me.

That is the bulk of it. There's some minor executive salaries that are obviously gone as of today from the existing TCT company. But you're hitting the nail on the head. It's -- the majority is from the facility here and the cost out.

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

Congrats on the deal. Firstly, just a follow-up on that USD 25 million incremental EBITDA contribution. As you mentioned, it's more like a synergy from infrastructure, trading brokerage, et cetera. But how should we think about the incremental volume from here because TCT still has in your release 350,000 tonne per annum process scrap. So shall we assume you will have that incremental volume of sales of scrap from here?

I think, first of all, it's the USD 25 million is consolidated. It's not incremental. So it's taking all of our existing ferrous and nonferrous, combining it with TCT. And based on current prices, our estimate is USD 25 million. So it's very much consolidated. The 350,000 tonnes is absolutely incremental tonnes. And maybe, Rob, any commentary on that around your thoughts on maintaining, growing those existing tonnes, the assumptions we made around it. Sorry, those incremental tonnes extra 350,000.

Yes, it's definitely incremental. The 350,000. I would say without getting too over my skis that it is fairly conservative. So we did factor in some shrinkage, but I would say to achieve the 350,000 it won't be heroic.

Right. So you've got incremental 350,000 tonnes per annum of scrap and you have synergies plus access to the deepwater dock, which you can probably sell -- have more access to domestic as well as international market. So I'm wondering, is that USD 25 million incremental EBITDA will be conservative? Does that mean either your Houston business at the moment is not making money or it is because the TCT, they are struggling -- I mean, financially struggling, so they sell to you. What's the rationale like they are willing to sell below 4x?

We just need to make it clear, it's not USD 25 million of incremental EBITDA. It's USD 25 million of EBITDA for the new consolidated business. So you shouldn't be thinking there's an additional USD 25 million. Is it conservative or otherwise, it's our best estimate based on current pricing of what we think the business is going to produce. And I would also say it wasn't -- I mean, it wasn't a stress seller. This was a willing buyer, willing seller transaction where the synergies that we could extract for ourselves were significant as a result of combining the businesses and particularly how the Instructure contract is going to work across the combined volumes of the business.

Sure, sure. Can I squeeze last question just on the land sale. Just if you can remind us what's the remaining land sale options from here? Is that all you have from U.S.? Because from the memory, last February or last August, you mentioned, I think there's a big number of land sales.

Yes. I think we've mentioned that from my memory USD 1 million to USD 150 million, USD 100 million to USD 150 million. So what we're saying now is that this is in excess of USD 100 million. I mean we don't want -- we haven't put out very specific numbers. Commercially, we don't want to hamper ourselves as to expectations. We want to -- we will get the best price we can get. So what we're saying is this is in excess of USD 100 million. We last talked about USD 100 million to USD 150 million. So clearly, the largest proportion of what we had for sale with the Houston -- what we potentially have to sell with these Houston properties. We also have a number of smaller properties. We've got, I think, 1 or 2 in Chicago that we're looking at. None of this magnitude, but you put them all together and they add up to some tens of millions. And so those will fit into the category, I would say, our category 2, where we are either actively marketing them or getting them ready for actively marketing. Hopefully, that answers that.

Sure. So which means the remaining land property value is kind of -- you have the majority of your property in U.S.

Yes. In that category 2, that's probably fair to say. I'm still comfortable with our USD 100 million to USD 150 million number that we put out, including all of this land that we put out, was it a year or so ago, I think we said it was about.

Yes. I'd say, Chen, within the boundary of the USD 100 million to USD 150 million as this is primarily it. I think though that as Stephen said, bringing on our property lead role is about seeing where additional value can be created from the land portfolio and over what period, et cetera. So that's work in front of us. But -- so it's not the end of the U.S. sales. It's just where we are today in terms of what we know.

Your next question comes from Paul Young from Goldman Sachs.

And it seems like a pretty smart bolt-on acquisition, which wasn't competitive, which is great. And I think it is your largest acquisition since I think you bought Baltimore in '23. So -- and it does appear on strategy because I know Stephen and Warrick, you've been talking about bolt-ons, additional bolt-ons or potential for the last 12 months. So that's actually the question I have just on the landscape for M&A at the moment. The U.S. steel industry at the moment, demand is strong, utilization rates are high. So are you continuing to look out for additional deals? And what's the high-level sort of landscape for further possible further transactions?

Yes. The short answer is yes, we are because we also talked about in that strategy, and Rob, I'll get you to jump in a second. But we did talk about in that strategy that we're looking for maybe some smaller bolt-ons around our shredders to buy us more unprocessed scrap and give us a stronger network around our shredders. That work continues and nothing has changed there. Rob, any thoughts on that? Because I think it is right that it's a very dynamic market in the U.S. at the moment.

Yes. No, very much along the line, Stephen. I think, Paul, we're always on the lookout for the right opportunity. I think we have 2 or 3 conversations with small, very regional feeder yard networking, spoken hub type of arrangements, more logistics and some catchment areas, nonferrous retail. And as Stephen says, I think it takes 2 to tango, the right moment for an entrepreneur to exit. And if it's in our catchment area and/or SA recycling, we always will take a look at it. Yes.

Yes, this is not the end. We still continue with these bolt-on acquisitions and any other -- I mean, I think larger opportunities come up less frequently and we're not looking at those either.

Yes. Understood. And then as far as the export markets, is it just the traditional markets guys? Like are we talking about the scrap here is being exported into mostly Turkey, Middle East?

Rob?

It's got a little more nuance to it. It's because of the proximity in the Gulf. It tends to be a bit of a draw to Mexico as well. The nice thing there, you don't have to accumulate 30,000 tonnes. It's very, very economical and competitive to go into Mexico. As I said earlier, Mexico is a scrap deficit region, in particular, for the long products mills that need obsolete scrap. But definitely, proximity to South America and also Turkey, Greece, Italy, all who have significant long products demands for this type of scrap.

Got it. And just last one, just any -- Stephen, any tax implications on the land sale in excess of USD 100 million? Any capital gains tax or anything we should be considering?

No, we've got -- the answer is no. We've held that land for a number of years, et cetera. So -- and yes, we'll hopefully be able to book quite a good profit over the current book value.

Your next question comes from Will Wilson from UBS.

My question just got asked and answered.

Your next question comes from Ramoun Lazar from Jefferies.

Just a couple of quick ones from me. Stephen, does this broadly, I guess, signal a bit of a shift in your strategy of being a more northern coastal operator now moving further south? And should we expect more sort of transactions to bulk up the southern footprint of the business?

In short, I don't believe so. This -- we've always operated in Houston. We just never -- and we were never quite able to unlock the full value of it, and this is what that transaction does. So no, it's not a signaling of that. the southern states are largely recycling, and that will remain. This just -- there's a set of circumstances here, Ramoun, where this just worked. It was we had an existing significant business that we weren't able to really optimize. This transaction has allowed us to fully optimize it. So not much more than that really.

Okay. Got it. And just having a look at the Tri-Coastal website, it looks like they handle about 800,000 tonnes of product against the 350,000 that you were talking about. But it looks like that includes other materials like plastic and cardboard. Are you looking to exit those kind of products? And then does that 800,000 tonnes highlight the potential capacity of that facility that you could potentially switch to ferrous and nonferrous products?

I think a couple of things on that 100,000. We're not exactly sure what flies to because I agree we saw that as well. I'm not 100% sure that applies to, but it certainly would include a lot of brokerage. And we may or may not do brokerage. If it works, we'll do it, as Rob talked about. But the proprietary tonnes were less than that. And I guess we're comfortable with that 350,000 estimate. Does it signal the growth potential? I mean we do think there's growth potential there, but it's -- I mean just really it's actually got nothing to do with the gap between 800,000 and 350,000 most of that gap would be, Rob, I presume them bringing -- as you said, bringing in particularly maybe some other items.

Yes. First, I think I'll clarify to you. I believe the 800,000 is probably an old number. Two, the owner had stopped handling the plastic and the paper and cardboard long ago and largely nonexistent in nonferrous. Our existing Sims North American metal nonferrous business is very alive and well in this region. So I'm comfortable with the 350,000. Again, it's not ultra conservative, but it's not heroic either. So as Stephen says, there's some brokerage that we've modeled into retention, but it will have to work for us. I'm not going to trade 2 nickels for a dime as they say.

Your next question comes from Owen Birrell from RBC.

I guess a bit further to Ramoun's question. TCT Instructure are effectively the Stephen on the facility. Is that correct?

Instructure.

Sorry. Yes, that's correct.

Yes, Instructure, yes.

Yes. Now I saw that they were previously moving a lot of steel products, coil, structural steels and the like. Do they still have access to move other products from that site? Or your exclusive access basically means that they are exclusively stevedoring for Sims and Sims only. Is that the way I should think about this?

Rob?

No. Instructure will operate the entire dock facility for their purposes. We have a right or a use of space on site of the dock and Instructure will handle, receive, pile, process our material on the dock in addition to the other products. We have an exclusive for metal scrap recycling on the dock space. So they can handle finished products, they can handle Belgian block, they can handle anything else. Anything coming in or out of there that's related to raw materials for the metal side of the business is exclusive to us.

And so have you acquired the land holding and therefore, an exclusive use of a piece of that land? And can you give us a sense how big that piece of land is?

It's Warrick here. No, this is a services contract. So we're not acquiring any land. We're acquiring -- we've basically novated the services contract. So we don't manage the wharf -- that's Instructure. And what -- as part of that service arrangement, they provide the land and the facility and the obligation to undertake the services. So which is -- so it's not a lease per se, it's a services contract that we for into.

Right. And so can I ask about things like equipment like shredders and processing equipment. Are you going to be putting processing equipment on the site? Or do you still need another site somewhere within that region to undertake all your processing activities?

I'll let Rob answer, but it's a different material. So it's not a shredding facility. So Rob?

Yes. This is predominantly a cut grade obsolete scrap, too heavy to go through a shredder. This will be the only site for processing ferrous scrap for us. So everything will be either mobile or stationary over the 18 to 28 years of existence on this site. There will be no other site in the foreseeable future that we have imagined anyways.

And Houston that undertake, I guess, shredding capabilities or nonferrous processing? Or is this market so different from all of your other parts of your broader portfolio?

I missed the very beginning of the question, I'm sorry.

Are there other parts of the Houston hub that undertake shredding and processing activities or nonferrous processing that you will retain as part of your consolidation?

Certainly. We have -- as Stephen mentioned, we have another facility only for nonferrous, and we're currently looking to relocate that location as well, which would allow us to sell that property, and we would enter into a lease. So we have a substantial nonferrous business that we expect to continue and grow. There are other competitive shredders in this region. It just wasn't something that Sims had in the past and probably not the moment for us to enter into in this region.

Okay. And just one final question, I think, for Warrick. Fair to say you're going to make a profit on the sale of that Mayo Shell property. Can we just assume that's going to be treated as a one-off in the second half? Are you able to give us a sense of the magnitude of that profit on sale and more importantly, the potential tax impact that's going to come through the books?

No. I'm answering no to a lot of questions today, but no, that's -- I mean we're working through that. We have entered into a binding sale agreement subject to DD on that property. We'll wait until we finalize that.

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

My question is a bit more high level because I guess I share Rob's view that it very much looks like a no regrets transaction if you're selling a piece of land to fund this acquisition and you're avoiding potential CapEx going forward. That seems like a really easy equation for everyone to get around. So -- and allows your site consolidation as you've set out. So previously, I don't know who answer this, Stephen or Rob, but previously, you've set out what you were intending to do across the broader North American business, which was improve the source of volumes, improve the destination or optionality around destination and improve the composition of your intake. Could you just give me a sense, is this just a really good acquisition for Houston? Or does it actually go towards solving some of those more strategic issues that you've been working on over the last 2 or 3 years, please?

Rob, I'll let you deal with that one as part of our NAM road map. But I mean there is an element before, Rob, I'll do my overall. There is definitely an element that this transaction really does suit what we have in Houston and solved a significant dilemma. So therefore, it's very additive to shareholders. It does -- I believe it does fit in with potentially with the rest of our business. But maybe Rob, I'll let you answer a little bit more detail on that.

Yes. I think the way I would try to describe, there's a lot to unpack in your question. In the United States, somebody mentioned it earlier, operating rates are tremendous. Steel mills are very healthy. Margins are there. They're running full. Second part I will answer is basically there are 2 types of steelmaking companies around the world, those that make flat-rolled steel and those that make long steel. Flat-rolled steel is largely coil or plate requires a different metallurgical content for raw materials. sometimes even scrap substitutes like pig iron or DRI. The long steel side of the business around the world is wide flange beams, piling, merchant bar, rebar requires practically 100% scrap. And in this region, in all of the regions I just mentioned internationally, Turkey, Greece, Italy and Mexico, the majority of the customers in this region are long products mills. They want a long or a cut grade package. The reason is the price in North America for shredded has a premium to that of cut grades. And they can't afford to pay for that nor do they want to. Their mantra is to have the lowest billet or the lowest slab cost after their furnace cost. So this play here was really an opportunistic moment where somebody wanted to sell a business. It was a perfect fit for Sims. We were going to do something and develop land. We're very good at processing scrap. You are right, we wanted to diversify. The diversification that we've undertaken over the years has not only been to buy more unprocessed shreddable material to utilize our capacity in our shredders, but it's also for examples like this where we had sheer capacity or we weren't getting the most competitive pricing because we had some kind of an uncompetitive disadvantage, i.e., the bulk opportunity that we didn't have before without considerable costs, still without going to the city dock. So this really continues that. We're going to continue to buy more unprocessed material and utilize what we think is a competitive advantage here, partnering with Instructure in this wonderful facility here.

Your next question comes from Harry Saunders from E&P.

Just wanted to get more of a sense of the ballpark of the run rate to assume for the rest of this year and the first part of next year, I guess, before you hit that full sort of USD 17 million that indicated from probably Q4 calendar year, please?

Yes. So my view is our intention is to ramp it up to at or close to where we -- the run rate by the end of the year. I'm not sure if I put too much into that, though, because you've got to assume there's been some cost of doing that and there could be some delays. But I would -- I believe that we'll be ready from the 1st of July for pretty close to that, if not that number for FY '27. So I think -- my view is you should assume a full run rate from 1st of July, but not put too much into the balance of this year because it will take us a while to move off our sites and get everything ready.

Got it. I think there was some confusion around calendar year quarters. So effectively very little this FY '26 and then 1st of July full run rate.

I think that [indiscernible].

Great. And can you just give a sense of the -- I appreciate you can't provide a number for commerciality, but the proceeds from Mayo Shell, are we talking the majority, I suppose, of the acquisition consideration?

Yes. Yes, we are.

Okay. And just final one. I know we talked a lot about the optionality around export and everything else. Would you view this also similar to that SAR playbook of consolidating share in each market, market power type discussion there?

Rob, I mean, I don't -- I wouldn't use the word market power. Houston is a big market with lots of competitors. There's no doubt about that. But from my perspective, this is definitely a consolidation. I mean we had a significant cut grade business there. We've now combined it with another very significant cut grade business there. So I think we've consolidated. I still think from a competitive point of view, there's still plenty of competition. Rob, what's your view on that?

Very similar, Stephen, I concur with your comments.

Your next question comes from Owen Birrell from RBC.

I just wanted to look at the D&A for this acquisition, USD 66.5 million. You essentially acquired the assets of Tri-Coastal Trading, but have you actually bought any physical assets yet to be depreciated? Or is this 100% access agreement, so 100% amortized over, call it, 18 years?

Yes. Warrick here again. So as I said, we still have to go through a PPA allocation process, which we'll do, which we started. I think -- correct me if I'm wrong, Rob, but there's about sort of [ USD 7 million ] of fixed assets that come in with the deal, as Rob said, mobile equipment, et cetera. And -- but we believe that the majority of the purchase price, take off that [ USD 7 million ], let's say, and that there may be a small amount that's allocated to customer goodwill and then the rest will amortize over the -- we'll apply against the services contract and amortize that over the life of the contract.

Should we think 18 years? Or should we be thinking 28 years given the 2 5-year extensions?

They're options, so we would start on 18.

There are no further questions at this time. I'll now hand back to Stephen Mikkelsen for closing remarks.

Well, thanks for the interest, everyone. Lots of good questions. A couple of final points for me. You'll see we've got the Investor Day in March. So you'll get the opportunity to see Houston live. We're going to have a really nice tour of that facility. And we're also planning on having maybe a bit of an update from SA Recycling. We'll bundle that all into one big metal update in Houston, followed by a site tour, and then we'll be off to Nashville the following day to look around that facility and talk about SLS some more. So I'd encourage anyone who wants to go to come to that tickets are selling fast. For those of you who can't make it, we will see you next week at the results -- the half year results presentation. Thanks for joining us.