Earnings Transcript for SGM.AX - Q2 Fiscal Year 2021

Operator: Thank you for standing by, and welcome to the Sims Limited First-Half FY 2021 Results Webcast. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [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.simsltd.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.

Alistair Field: Thank you, and good morning. It’s a pleasure to be here delivering the half year results for Sims. Joining me on today’s call is the Group’s Chief Financial Officer, Stephen Mikkelsen, The slide presentation that we will run through has been lodged with the ASX, along with the results release. As you can see on Slide 3, the format for today is that I will run through a general overview, our performance and the highlights for half year fiscal 2021. I’ll then hand over to Stephen, who will take us through our financial results before I discuss some of the Company’s strategic priorities and near-term market outlook. Following that, there will be time for Q&A. Now, turning to Slide 4. It is pleasing to see significantly better results for the first-half of 2021, after a very difficult 2020 financial year. Market prices for both ferrous and non-ferrous improved substantially, but this is still to be fully reflected through increased intake volumes when compared to FY 2019, the last full-year not impacted by COVID. And all our financial metrics have improved, including our preferred measure of underlying EBIT, which lifted from a $23.2 million loss to a profit of $56.4 million, a $79.6 million turnaround. I'm also very pleased to announce a $0.12 per share fully franked interim dividend after paying our final dividend for FY 2020. We've also been very busy, progressing our strategic growth plans. Sims Resource Renewal completed the commercial demonstration, proving that Sims ASR produces high-quality syngas. We announced last week the acquisition of Alumisource, a leading aluminum processor and provider of furnace-ready product for end customers in North America. This is a great step forward to increasing our volumes of processed non-ferrous products. In Sydney, we acquired an existing purpose-built recycling facility, which will raise our exposure to the rapidly growing Southwest region. Moving to Slide 5. This slide confirms my previous comments that nearly all financial measures have improved. Sales revenue is an exception with a 9.5% decline. This does not cause me concern at the stage of the recovery, because firstly, it reflects lower volumes, as we have focused on improving margins; secondly, non-ferrous sales volumes were down proportionately more than ferrous, and this has a greater impact on our sales revenue; finally, we no longer have the European Compliance Scheme revenue, as we sold the business last year. Moving to Slide 6, our safety slide. I'm pleased to report our lowest-ever recorded number of injuries. This was an excellent result, following a concerted effort on critical risk management and continuous improvement of our environment, health and safety management system and framework. However, the decrease in hours worked by office-based employees who typically have fewer injuries impact the incident rate and is an increase to 1.7. Moving now to Slide 7 on sustainability. Sustainability is not an add-on for Sims. It is our business model. Our recently announced sustainability goals show that the purpose, profit and sustainability go hand-in-hand. And importantly, these drive economic, environmental, and social value for all our stakeholders. Our sustainability goals enable us to measure and track our progress, and I look forward to updating you as we achieve these. I'll briefly turn to Slide 8. Presented here for convenience is a summary of the Group financial performance. Because it is the first time that is mentioned, I want to highlight that we have performed very well in lowering our cost base. In fact, we're on target to exceed the $70 million annual cost reductions detailed at last year's results. Stephen will be covering this and the other financials in considerable detail. So, I'll turn straight to Slide 9, which provides charts on market conditions. Six months has proven to be a very long-term where the ferrous and non-ferrous markets are concerned. In August, I referred to the ferrous market bouncing to US$280 off its US$200 lows in April. Similarly, Zorba has risen to US$900 from its US$700 April low. As the charts clearly show, prices have subsequently risen dramatically. Ferrous reached around US$500 a tonne, before settling back to around US$400 a tonne. Similarly, the Zorba rose to around $1,500 per tonne. Even though it is pleasing to see that intake volumes have recovered from their initial COVID dark days during the fourth quarter of FY 2020, they have not yet reached pre-COVID levels of FY 2019. There are definitely signs of further recovery, however, including the good volume growth from SAR during the first-half and the Company-wide start to the second-half of FY 2021 is encouraging. Finally, before I hand over to Stephen, it is good news to see the first exports of ferrous enter China since it announced its new regulations that commenced on the 1st of January.

Stephen Mikkelsen: Thanks, Alistair. I'll quickly move through Slide 11, which shows the convenience to summarize EBIT and volumes by division. I won't talk any further on this slide because the subsequent Slides 12 to 18 contain more detail, and I'll speak to each of them separately. Moving to North America Metal on Slide 12. When I presented the full-year results in August last year, I made the observation that North America had returned to a solid positive EBIT contribution for the month of July 2020, following an improvement in volumes, higher sale prices and lower fixed costs. That improvement has continued throughout the first-half. Intake volumes stabilized at around 85% in average, cost reductions have been cemented into the business, and margins have improved. Turning to Slide 13. ANZ's EBIT increased in the first-half of FY 2021 by approximately 24% compared to FY 2020. ANZ did well in its EBIT per tonne margins on non-ferrous, and despite a fall in these volumes, the absolute margin increased. Cost reductions also contributed to the improved EBIT result. As with the other regions, volumes remained at around the 85% level compared to the average monthly volumes for FY 2019. Moving on to Slide 14 and UK Metal. The UK has continued its impressive turnaround from FY 2020, where it lost $28.4 million in the first-half, made a small loss in the second-half and has now grown for a profit of $10.5 million for the first-half of FY 2021. Sales and intake volumes have increased, margins have risen, and a disciplined cost control program have combined to produce a significantly improved outcome. Turning over to Slide 15, I'll run through Sims Lifecycle Services result. SLS is a very different business to what it was 12 months ago. It has sold the compliance scheme operations in Europe and is firmly focused on reusing, repurposing and recycling the cloud. The benefits of this are starting to appear. On a like-for-like basis, SLS delivered a strong profit improvement of $6 million. In August, we noted risks to cloud material volume growth, such as continued logistics disruptions and customer personnel availability due to COVID-19. These risks continue to manifest and cloud material volumes decreased in first-half FY21 compared to the prior corresponding period. Interestingly, despite the drop in cloud volumes measured by tonnes, there was still a significant improvement in EBIT. As we learn more and more about cloud material, we are analyzing whether volumes measured by tonnes is the best measure. This analysis continues, and we will provide an update when we have completed the work. Regardless of the COVID situation, it is pleasing to note that the commercial discussions, activity and interest remain robust, putting us in a good position when more normal times resume. Moving on to SA Recycling on Slide 16. SAR had a very good six months, contributing $24.4 million in EBIT compared to breakeven for the first six months of FY20, and principally, both margins and volumes improved. While some of the volume increase was attributed to new businesses, the underlying intake volumes were still well above FY19 average monthly levels. It appears that the West Coast of the U.S. has recovered more quickly than the East Coast. The underlying reasons for this are not entirely clear and somewhat anecdotal, but it does bode well for our East Coast business when economy recovers from COVID. On to Slide 17. Underlying EBIT for Global Trading declined 12.9%. This was primarily due to lower brokerage volumes as SA Recycling sold more to domestic markets. The final segment we analyze is on side 18, Corporate & Other. Corporate expenses were flat on a constant currency basis compared to the first-half fiscal '20, a disappointing result for municipal recycling as higher waste and its intake, combined with higher waste disposal costs and higher overtime and labor costs due to COVID-19 staffing shortages delivered a negative result. Lastly, LMS Energy, where lower electricity and renewable prices caused a 23% reduction. I'll move on to Slide 19. I introduced this measure at the full-year results presentation. The target is to reduce costs, which are predominantly fixed in nature in FY21 by $70 million compared to FY19. The progress report for the half year is good. As you can see from the chart, fixed portion of the first-half FY21 costs was $260 million. At this stage, there is no reason to believe that the second-half costs won't be similar. And that reduces annual predominantly fixed costs of $521 million, some $75 million below FY19. This is slightly in excess of our $70 million estimate. Moving on to Slide 20, which looks at the cash position. It is nice to report good growth and operating cash flow. Clearly, the positive financial result is the major contributor to cash flow, but there's also a $20 million improvement in working capital. While probably minor in the overall scheme and all things being equal, I would expect the $20 million to reverse in the second-half because it reflected increased creditors from the increased prices without a corresponding increase in debtors, as we collected the cash on the last day of December, whereas it could just have easily arrived in the first few days of January. Turning to Slide 21. We're forecasting CapEx of $140 million in the second-half, about 40% of this is maintenance CapEx, including some delayed CapEx from FY20, and you can see the increase there. Growth CapEx represents approximately 60% of total CapEx in the second-half and it's dominated by the ERP program, resource renewal facilities and growing ferrous and non-ferrous volumes, including the acquisition of Alumisource. Alistair will be taking us through all of these, so I'll hand back to him now.

Alistair Field: Thank you, Stephen. The next few slides are going to look at the progress of our strategic initiatives. I'll turn to Slide 23 to run through the progress of our ERP program. The program is on full swing, and significant modules have been delivered or will be delivered in the next few weeks. Our global sales and outbound logistics model has been implemented in the global non-ferrous trading business, based in Singapore, and also for the global trade business in North America. This is a significant step in having a single system provide us with a detailed understanding of the sales contracts and logistics for our global business. Our new human resources system is on schedule to be rolled out in the next few weeks. COVID has provided challenges. The inability to travel has meant we've had to adapt and change the schedule. It is not clear that international travel is still some way off, and we need to replan how we're going to deliver the ERP within the ongoing constraints of a COVID world. Our bottom-up replanning is happening right now, and I would expect the recommendations to be delivered in the next four to six weeks. My view is that it is highly likely that the timing of the program will need to be extended for very practical reasons. I'm confident that with detailed planning, we will still deliver the program within the $110 million budget. Turning now to Slide 24 and strategically growing our ferrous and non-ferrous volumes. This slide highlights two recent acquisitions. Firstly, a feeder yard facility Minto in Sydney Southwest. This is a turnkey facility, nicely located in the growth corridor where Sims is currently underrepresented. Cost of the facility was around $8 million, with an additional $1 million required for plant and equipment. Of more significance was the acquisition of Alumisource that we announced last week. We estimate that Alumisource will increase North America's non-ferrous retail volumes by net 33,000 tonnes per annum by providing inspec furnace-ready product in an automated and safe manner. We've been looking for a strategic acquisition like this for some time, one that meets our growth ambitions with the right cultural fit. The purchase price has been split into a guaranteed component of US$22.5 million and an expected earn-out over the next three to five years. Turning now to Slide 25 and Sims Resource Renewal. We've made good progress on our resource renewal facilities. For our proposed Campbellfield resource renewal facility, we completed the commercial demonstration of plasma gasification with Sims ASR. And pleasingly, it confirmed that Sims ASR produces a high-quality syngas. We will continue with our staged and disciplined approach to capital with our next stage gate in identifying the most suitable outputs from the high-quality syngas. The development application for the Rocklea pilot facility has been submitted, and we anticipate approval in the next few months. On to my last slide on the first-half FY21 results and outlook. In summary, the FY21 first-half has been a pleasing turnaround from a very tough FY20. Key financial measures are trending in the right direction, and we have worked hard to be well on track to deliver cost savings in excess of the $70 million we targeted. Our strategic programs are progressing well, despite the challenges COVID brings. Volumes recovered from the second-half of FY20, but still remain at around 85% of FY19 average monthly volumes. Looking forward, we have started to see some positive signs in intake volumes in January, particularly in ferrous, where they were in excess of the previous two years. I'm aware that one month doesn't signal a trend and that non-ferrous intake volumes are still subdued. We see the liquidity and price risks remaining for the rest of the financial year, particularly as the world emerges from COVID, but there is good reason to be optimistic about the medium-term outlook as countries spend on infrastructure to stimulate growth and employment. Finally, the expected return of global auto production to more normal levels and China's recent opening up to imports of high-quality and recycled ferrous are two important trends, which signal favorable market conditions for the metal recycling industry. Operator, back to you.

Operator: Thank you. [Operator Instructions] Your first question comes from Lee Power with CLSA. Please go ahead.

Lee Power: Hi. Good morning. If I just kind of dig into it a little bit more, so, intake volumes of 7%, revenues of 10%, I get the non-ferrous comments you talked about, but EBIT still up $80 million. And I can't really – I can’t see the actual number of the cost out achieved, but it seems like it's low 30s, if you can confirm that. Maybe just talk about what drove the rest of that gap from low-30s to 80? And then, maybe touch on SA Recycling, which looked like it had a pretty strong result and what drove that?

Stephen Mikkelsen: Yes. Sure, Lee. I'll deal with the bridging, the 30 to 80, and then maybe I'll hand over to Alistair to deal with the SAR result. So, your assumptions are right. The cost savings were in the low-30s. And you're also right about volumes down and versus the revenue down. The difference is around margin. So, I guess, whenever the prices are rising, you get the opportunity to take more of a margin, and we did it. And I think we actually managed that very, very well. So, it's really as simple as that. The cost bridge to the odd million, but a little bit more than $30 million. The balance of it is us making better margins.

Lee Power: Thanks.

Alistair Field: Thanks. Yes, SAR, very strong performance. And obviously, results were driven by good margins that that business makes and also their volumes. And they weren't quite impacted as our East Coast of the United States. But both from an acquisition point of view, there were a number of small ones, but the West Coast volumes in turn didn't decline anywhere close to what the East Coast did. So, I think, the recovery on the East Coast, therefore, bodes quite well for our North American business as well. But the benefit also for SAR was the price increase for Zorba. They've done very well in the non-ferrous arena. So, yes, very strong performance, we're very pleased with that and certainly support that.

Lee Power: Okay. So, it sounds like you just had so much of managing the buy price. If I think about your comments about volume growth for intake volumes January versus 2019 and 2020, can you quantify that? And maybe -- I mean, I know you made some comments before, but like how long can we expect the trend to continue? And then, if we look at the 2Q data you gave, it was kind of interesting that it was lower. I would have thought you'd seen a progressive recovery from the lows.

Alistair Field: We certainly have seen an improvement in January. So, the averages of F 2019 we've seen come through into the second-half. And obviously, it's month, and we're starting to see the same trend in February. So, we're quite positive that we're seeing the volumes come back. Obviously, there's a little bit of events with some bad weather in the East Coast, as you well know, with all the snow. But we're quite comfortable that the volumes in ferrous, particularly will come back to those F 2019 average, and that's what we're expecting going forward at this stage.

Lee Power: Okay. Can you put a percentage number on what it's done year-on-year?

Alistair Field: You mean January – January as a…?

Lee Power: I know it's only small, but...

Stephen Mikkelsen: Yes. It's always really dangerous as it take one month, but January has returned to what the average of FY 2019 was and it's up a reasonable amount on both -- 2019 as an isolated month. But really cautious about taking one month, particularly in the U.S. because weather has a big influence on what a particular month might be as you go into January and getting a lot of snow, a lot of cold. So, you've got to be a little bit cautious about that, but I agree with that Alistair entirely that it's definitely a good start from an intake point of view.

Lee Power: Okay. Thanks. And then, if I just have one final one. Look, if I try and back out Alumisource based on return hurdles, I kind of get Aussie $5 million to $6 million of EBIT for the business. Does that make sense? And is there anything you can say around maybe the operating leverage that you have in the rest of the business, given the size of Alumisource?

Stephen Mikkelsen: So ballpark, I'm comfortable with what you said. Yes. So, yes, ballpark, I'm comfortable. In terms of operating leverage, I don't think there is going to be -- we certainly haven't based our base case on big operating leverage. It is -- it does operate different equipment to us. It operates nice specialized equipment, which is really good in the market that it operates. So, we're certainly in the base case haven't got any operating leverage in there. It doesn't mean that we won't look for it, and it doesn't mean there's not other opportunities.

Alistair Field: I think the aspect for us is both strategically is that both facilities in Kentucky as well as Pennsylvania have got large facilities and room to grow. That's the first point. Second point is that from a processing point of view, very high-class aluminum shredders which then feed into a smelting operation, the customer, they’re done. So, we now are able to feed our customers who have smelters basically directly. And that's a really key step for us. So, I think, the processing skill set that we've acquired, but also the growth potential is really what we've been seeking. So, very strong operating background as well and safety culture. So, I think, it's strategic for us and certainly opportunity to grow that business.

Lee Power: Excellent. Thank you, Al. Thanks.

Alistair Field: Thanks.

A - Stephen Mikkelsen: Thanks.

Operator: Your next question comes from James Brennan-Chong with UBS. Please go ahead.

James Brennan-Chong: Hi, awesome. Just a quick one. Just on the EBIT per tonne momentum that you're seeing right now. So, if I just focus on the U.S. business, you did U.S. EBIT per tonne of about $8 per tonne. Prices tend to lead margins as you just alluded to before. I'm just wondering with volumes and prices now heading back to the 2017, 2018 period, should our expectations be that you can recapture that same level of EBIT per tonne? And then on top of that, with Alumisource, is that going to be a positive addition to margins this half year? Or does it take time for that business to integrate? Just wondering if you could comment more on just the trajectory for U.S. EBIT per tonne momentum? Thank you.

Alistair Field: Okay. Overall, I would expect EBIT per tonne across the group to get back to previous levels or better, given that we assume that volumes of F 2019, and obviously, the cost reductions we've made, I think, that's really key for us. Obviously, prices need to hang around to the levels that they're at now. But part of that for me is the Alumisource acquisition will take time to integrate and get that through the results. But, I think the EBIT per tonne expectation I have is that we certainly get back to previous levels and higher. But also the caution I would have is, obviously, there's always volatility in prices and competitive behavior. But I'm quite confident we can get back to our EBIT per tonne, and we're actually driving that and particularly around margin management.

James Brennan-Chong: Okay. That's great. And then just on China reopening to both ferrous and non-ferrous pretty much in the December quarter, what are you seeing in terms of trade flows into China? And have you started to reallocate more boats towards China? I'm just wondering what’s the state of play is there? Thank you.

Alistair Field: From a ferrous point of view, as you know, there's only been one cargo that I'm aware of that actually has gone through the whole process. It was a very small test cargo that came out from Japan and has gone through the process. I think, post China New Year, we'll obviously start to hopefully see some ferrous activity into China. But, at this stage, we've been cautious. I'm optimistic that if it does happen, we're very well positioned to be able to sell our product anywhere in the world. So, I think, the demand that China can bring to the scrap industry, I think, is quite significant, just how much and when is to be -- and I think we're looking at medium-term probably rather than next month. So, I think, the ferrous aspect is going to take time. And I think, the non-ferrous, for us, we are selling straight into the Chinese market, as you know, and into Southeast Asia. So, we haven't seen any non-ferrous restrictions, which is really pleasing. And obviously, the quality control is there. So, we meet those hurdles. So, I think we're in a position in non-ferrous where we can sell our product anywhere in the world, which is what the objective was. I think, the exciting part for us is the potential of the ferrous and how that creates a supply challenge and then what that does with prices going forward. So, I'm quite confident we can meet both. But, I think it's early days for the ferrous into China at this stage is my comment. I think, it will happen, but when I don't know.

James Brennan-Chong: Okay. And then, just coming back to the acquisition that you made at the end of last week. I think, correct if I'm wrong, but I think it was about US$25 million with the initial payment, but there's potential for further payments. Can you just talk about what are the hurdles for further payments? Is there a cap on how much could be paid for this division and when that cap or that end date occurs?

Stephen Mikkelsen: Yes. So, the actual terms are confidential, but I can talk about the general terms. So, the earn-out happens, there's hurdles over three years and five years. Our base case for the basing out, which gets our 15% IRR is that the business continues at the type of levels we're seeing at the moment. So assuming that that happens, then there will be the further payout, and we'll still make our 15% IRR. Obviously, anything above that, our IRR increases quite substantially. So, I guess, our -- we're aligned. We want gate to maximize and it maximizes the IRR that we're receiving as well. It is kept, it is kept. But again, those numbers are confidential. I guess my overall comment would be that we have to make a minimum of 15% IRR. That's what this achieves on our base case earn-out, and the base case earn-out is the type of the way the business is performing at the moment.

James Brennan-Chong: Right. And just on that acquisition as well. So 33,000 tonnes, I think you're doing, what, 140, 150 thereabouts of non-ferrous material. So, a good chunk towards your strategic goal, I think, about 200 million. What are your early thoughts on your potential to do more than that 33,000 tonnes?

Alistair Field: James, yes. We certainly do plan to improve that. And there are obviously opportunities that we are looking at right now. So, that's part of the thought process is, this was a step one in the strategic acquisition. Steps two and three give us that opportunity to grow that business more. That's exactly why we did it and why we've kept -- gave as well.

James Brennan-Chong: Got it. And finally, just one more. Sorry, I’m just taking so much time. Just in terms of where the Twitch price is right now, Twitch is $1,700 a tonne, is that a very -- relatively low discount to primary aluminum at about 20%. I think it was only this time last year that the discount was closer to 60%. When you look out and you crystal gaze, I suppose -- crystal ball gaze, what do you think can demand for recycled aluminum like Twitch and Zorba continue to close that discount to primary aluminum? What are your thoughts on the medium to longer term outlook for Twitch and how can trade in an environment where demand for recycle materials continues to lift?

Alistair Field: It's a good question, James. I think part of it is that what China is going to do and how that demand is going to increase over time. I do know that in supply chains, we're going to have hiccups every now and again. And I do know that there's obviously, in the auto industry, a few hiccups that have occurred recently with semiconductors. And putting that aside, I do think there is a good future for Twitch. Whether it actually remains at the same levels of primary, I'm not quite sure. But, I would think that our strategic decision to develop the Twitch technology and to make sure that we can sell at that price, puts us in a strong position. But, I think it's a bit too much of a crystal ball. I think the supply-demand and at the prices that we're at now, I'm actually very pleased that we have that capability, both in our joint ventures as well as our own business.

Operator: Your next question comes from Nick Herbert with Credit Suisse. Please go ahead.

Nick Herbert: Just to start with, interesting that you could provide some more insight into your trading over January and February, specifically around margins, given the rise in scrap price, and the improved volumes you talked to. Wondering if you can comment how they compare to first-half and perhaps where those margins sit versus where you hope to achieve or what you hope to achieve in a more normalized volume environment down the track?

Alistair Field: I think part of it is our focus, obviously, on margin management. The commercial team obviously is very-focused on the buy and sell arrangement and the inventory management. And that obviously leads through to EBIT per tonne ultimately. So, I think the volumes that have increased in January started to increase in December and January as well as the increase in pricing. I mean, when you consider the volatility of the pricing, we went from around 240, 250 in June to 500 in December. That quick rise and the management of margin over that sort of period is really crucial to us, the buy and sell arrangement. So, I think the margin as well as the increase in volumes that we've seen in the last 8 to 10 weeks I think is giving us a sense of positive drive going forward. And, there are going to be hiccups here and there with COVID or snow, but I'm feeling quite confident in terms of the trajectory that I'm seeing in stimulus and potential growth. So, I think we can keep our F19 volumes and go from the 85% ferrous volumes that we've seen, and we can increase back to the F9 average, we'll be in a good position going forward.

Nick Herbert: Are you able to give any specifics around the margins or the margin change in Jan-Feb versus what you experienced in the first-half?

Stephen Mikkelsen: So, Nick, I think the most specific we can be because we don't -- we haven't provided is that the margins are typically higher than they were for the first six months.

Nick Herbert: Then on the non-ferrous side, we've obviously seen a strong increase in pricing, but noticed your volumes had declined 27% versus PCP when ferrous volumes are largely flat. So, just sort of wondering if you could talk to a bit about the competitive landscape on the non-ferrous side, whether that's all coming in from retail side of the business, and just how challenging that competition is, or how much of that has changed?

Alistair Field: It is, obviously, we've seen the non-ferrous first-half was obviously down versus FY20 by about 19%, 20%. We've obviously considered what is driving that. When you have a look at the general economic health across Australia, as an example, and we're all sitting here basically you can understand that that general economic health has been inconsistent with shutdowns and startups. And what we are expecting and starting to see now is that that environment is proving that non-ferrous retail is starting to come back into play now. There's a little bit more confidence, and that there is about a two, three-month lag sometimes with non-ferrous coming back in and to be consistent. So, I fully expect our non-ferrous volumes to start improving. And that's really around that economic health when people are swapping out cars, fridges and getting a sense that things are going to -- they can see the light at the end of the tunnel. So, I think, the U.S. has got some time before that picture emerges and that lag starts to dissipate. So, I think, non-ferrous, we will see that, but I do expect that to take a bit longer.

Nick Herbert: And then, finally, just on dividends. How should we think about the future payout raise with respect to what you paid out in the first-half there? Did that include an element of catch-up, given no final last year, should we use that as a basis going forward?

Alistair Field: I'm sorry, the basis that we used was franking to be frank. So, we have a good estimate of what our franking credit balance is going to be, and we've said -- and we have to have that back in balance by June, and we've used that as the basis for the $0.12 a share. So, looking forward, if we continue to pay 100% dividend, 100% franked dividend, it will be determined largely by Australia's taxpaying position. So, therefore Australia's profit -- so that's the basis we're using at the moment, Nick.

Operator: Your next question comes from Paul McTaggart with Citigroup. Please go ahead.

Paul McTaggart: So, we talked about Alumisource before. So, you're not going to give us any more detail in terms of the potential final acquisition price. But just with the IRR, I just want to confirm the 15%. That's a pretax IRR target or post tax?

Stephen Mikkelsen: Post-tax nominal.

Operator: Your next question comes from Simon Thackray with Jefferies. Please go ahead.

Simon Thackray: Quarterly EBIT, you used to give some pretty helpful graphs, bar charts showing the sort of sequential EBIT. I just wanted to ask about first quarter versus second quarter in terms of EBIT, if you can give us a sort of a feel for the degree of the improvement. And then, how you're thinking about third quarter, now you're seeing that improvement in intake volumes?

Stephen Mikkelsen: Yes. Simon, it's Stephen here. A couple of things. Firstly, we dropped that slide on the strong feedback from our shareholders that they didn't like -- they thought that they promoted a lot of volatility into the results, particularly as we were always reporting that last quarter just as we're presenting the results. So, what I can say is that the result built nicely over the six months. There was definitely some volatility in it as prices moved up and down, and we had some -- volumes were not consistent every month, neither was price. But, when I look back at the trend, it built nicely during the period. The first quarter was also a good result. There's no issues with it. But that's the way it panned out. I think, as we're looking at this third quarter, I think the comments we've made around -- and I'm really conscious that I don't want everyone to get too obsessed about one month in January, even though it has been a good month from a volume intake point of view. But, I think, it's probably fair to say, is that our expectation is we continue to see that building. We've got -- prices have sealed again, we'll need to get through the weather challenge and NAM has been interesting over the last couple of weeks, a lot of snow, but that's temporary. That volume will still have to come out. So, I think we continue to see it building.

Simon Thackray: Okay. That's really helpful. And then, obviously, one of the things that we haven't spoken about for a while, it hasn't really worried us for a while has been currency, Aussie dollar sitting up around $0.78 now, and that's been very much in the tail end of '20 and certainly into this first part of '21. Can you remind us of the sensitivity and how you're thinking about the currency?

Stephen Mikkelsen: So, we think about currency as just -- to be frank, it's just a -- it's a medium-term risk that we have. We don't hedge against the U.S. dollar. It just -- we know that, that's predominantly what we sell into and -- but we do have a high cost base in U.S. dollars, but we've got some natural hedging going on there. You'll see -- when you look at the currency movement, we present all the results on a constant currency basis as well. So, while there has been quite a substantial movement, the overall impact wasn't huge. It clearly did impact our profit down as a result of the depreciation of the currency. But, we do have some natural hedges going on just -- even when we buy our product, it doesn't matter what country you buy, and it's ultimately linked to -- it's linked some way to the U.S. dollar because that's the market that everything from an export point of view is sold into. So yes, we definitely -- in the medium term, there's nothing we can do about and we view it as a swings and roundabout of the type of business we run.

Simon Thackray: Yes. No, that makes sense. I'm just sort of thinking about it in the current quarter, given where it is, for the current quarter, it's probably a bit more of a headwind than it would have been say in the second quarter?

Stephen Mikkelsen: Yes. That's true.

Simon Thackray: Okay. Just in terms of the targeted headcount, it looks to be an important part of the cost out in North America. And I'm just wondering how much of the cost out from headcount reduction is in the first-half '21 in all the divisions, quite frankly, in this half, and the benefit that was made from cuts made in the second-half. So, headcount is down sort of across the board around 15% year-on-year and 5% half-on-half. So, I am seeing -- looking at the year-on-year figures, a $50 million reduction in employee benefits expenses. But I'm also seeing a $60 million reduction in other expenses. So, I'm just -- I'm interested in how much of the cost out is from headcount reduction in the half? And then, in terms of the $60 million year-on-year and other expense reduction, what's the driver of the fall in those other expenses?

Stephen Mikkelsen: Yes. So, there's no doubt that headcount is a very large influence on the reductions. I mean, it kind of has to be. And that was a combination of I guess, doing more with less, but we also then shut down yards as well that we didn't feel were performing, and we were confident that we were going to be able to maintain the same volumes without those yards. And so, this fixed cost savings come with that as well. As to the $60 million of other, which I think sits in -- I think you're probably looking at the forward for that one. I just need to pull apart because some of that, I think, may well reside in the geography of where we put items like gains and losses on commodities. Let me -- I will get...

Simon Thackray: Yes, please come back to me. That's fine. Yes, no problem. No problem. Just in terms of the ERP, can you just -- I think I understand, but perhaps rather than guessing, maybe you could explain to me, how COVID impacted the ERP rollout schedule? Is it just about the folks that do this not being able to move around to go and attend the ERP rollout? And then, if the schedule is yet to be redefined, how it can remain on budget? I heard your comments earlier, Alistair that you're very confident it can still sit within the $110 million delivery, but I just want some more color on what you're thinking about timeframe and how cost can be contained if the schedule has been extended?

Alistair Field: Sure. It is a good question. For us, it is around being able to focus our support crew that was actually going to go to site where they do physical training and end-to-end testing, et cetera. So that's really the challenge in being able to move people around the world. So, you're spot on there. That's part of the challenge for us. And that has asked us to have a look at the schedule, is there another way of being smarter about this? And given that COVID is here, in my opinion, for the next 12 months, even if we do have vaccinations, moving people around is logistically going to be a challenge. To do it remotely or to do it further away, I think is not optimum. So, the team has been sent back to say, well, look at the schedule, how do you do this, how do we use people maybe in-country rather than flying people around? So, part of that is choosing the folks that can actually do that in-country training. And secondly, the cost of flying around was all already into the project. So, our contingency hasn't been touched at all. And I think if we extend the program, it's not just an extension where things cost us money, we would stop certain costs of that business until we come back to them. So, I'm quite confident the actual cost is not going to blow out just due to the reorganizing of the training and the end-to-end testing. So, I'm comfortable that when the team goes through this in a lot more detail, particularly the integration of the training and testing, that needs to be done very carefully and in a lot of detail. And that gives me the confidence that I'll have a good price understanding before we actually then commit to that new schedule. So, at this stage, given the program of work and me talking to the steering committee, I'm quite confident we won't blow the budget.

Simon Thackray: So, that seems eminently sensible to do that. I think one of the questions I've got then is -- and to be -- to use that rigor is very important, because in my understanding, and correct me if I'm wrong, is that $20 million of benefit accrues to the business, as a result of the ERP rollout. So, you've upped -- your benefits from 70 to 75 in terms of cost out this year. Obviously, it would seem -- I don't know how much of that is attributable if at all to ERP. But, does that change -- it presumably changes the timing of those benefits? Is it likely to change the quantum of those benefits from the ERP?

Alistair Field: So, the upping into 75, there's nothing in the ERP in there at the moment. Obviously, that's going to have to be in place to -- like we said, maintain 20 of those. Whether or not it pushes out six months, nine months to maintain that $20 million, we will still maintain it. I guess, I want to wait to see the retiming that they're putting in place. But, from what I've seen so far, I don't think -- I don't believe there's a material risk to that. Maybe we might talk in one particular half year. We have to hold on to another $10 million of expenses before the ERP comes in, so that we can take that out. But I think in the overall picture, in the type of NPV, we're looking at extracting from the ERP project. I don't think it's going to be material, Simon.

Simon Thackray: Okay. That's great. And then, finally, just again on Alumisource, I understand the rationale -- strategic rationale for the acquisition is very clear. And excuse me if I'm not very good with math. I understand your comments on the 15% IRR, but I'm trying to understand the $22.5 million upfront payment, guaranteed payment. And then, the earn-out payments, there's obviously a cap, as you discussed. But are the earn out payments -- how material are they relative to the 22.5%? I'm just trying to get some feel for -- I know earlier that the comment was back calc to about $5 million of EBIT. Was that for the business as it stands today? I'm just -- just trying to get some size around this thing.

Stephen Mikkelsen: Yes, it was the business as it stands today. Look, I'd love to give you -- I'd like to give you -- it would be much easier if I could just give you the number on what the potential for earn-out. It's a reasonably complicated formula, and we've actually disclosed -- we've signed a confidentiality agreement with Gabe around that. So, we can't. I guess the confidence, I think you'll get is that if the business performs around the current parameters, we will make our 15% IRR; if it performs better than that, we will obviously make more. Now if it does, but I mean to make this really clear, if it does perform as we expect, there are further earn-out payments. It's not just -- it's not -- it's to prove that we have got to -- is sustainable over that three to five-year period.

Simon Thackray: Got it. But the $5 million EBIT is an annualized number for the business as is, is that right?

Stephen Mikkelsen: Yes.

Operator: Your next question is from Peter Steyn with Macquarie. Please go ahead.

Peter Steyn: Perhaps just a little bit of a macro question in relation to COVID and its disruptive impact on your business. There's obviously been effect both on the supply side in terms of intake volume, but also on the demand side. It'd be interesting to just get your views on the balance between those in the last six months? And then, in light of your comments about how long it will be with us, Alistair, how you sort of think about the evolution of that over the next 12?

Alistair Field: Good question. I think, from a supply point of view, that's been different across the globe. In Australia, as you see, our ferrous volumes have been impacted, but certainly not to the extent that we saw in the East Coast of the United States. So, where we saw a lack of supply due to any of the challenges in North America or in the UK for that matter, we did see pricing increase quite a lot. And to go from 250 to 500 in six months is quite an increase. That is, both Turkey and building up potential steel sales that they've had, the number of cargoes per month increased quite radically over the November, December period. So, I did see the supply people were struggling to draw material out of the market. And hence, you started to see the price start to rise as well. There's also quite a drive within the United States for ferrous scrap as well. So, we've seen the EAFs pick up over the last six months in June to July. So, the supply of material, I think, did drive prices as well for different reasons across the globe. Obviously, where you have physical shutdowns, like in New Jersey and New York area, in April, May, obviously impacted the supply as well as the UK shutting down and so did New Zealand. So, that did create a bit of a supply and a bit of a lag, and you started to see pricing increase. I think, from a demand point of view from steel, I think, the positive news around stimulus and growth and low interest rates, I think, is driving that positive sentiment around growth and be it in infrastructure or just general economic health across nations. That supply is going to need to feed that. And I think, the demand is going to continue to increase and might increase, in my opinion, for the next 18 months steadily. We'll have spurts up and down again, but I see a positive trend for the next 18 months. And that's driven around the stimulus and infrastructure spending and low interest rates.

Peter Steyn: How would you describe the UK market in that context, because you've touched on the U.S., but it'd be interesting to get your perspective on the UK?

Alistair Field: Look, I mean, competition has always been strong in the UK. The competition for the buy side is consistent now. And I think, we are obviously competing in an environment, but, it's in a controlled environment. People are cautious in managing margin, which I think is a good thing in the business. There's plenty of capacity, both from a domestic and export opportunities. So, I think, the UK market, as it comes through the COVID period now, and obviously, with Brexit, hopefully behind us, I see a Sims unit in the UK is performing well and managing their margin very carefully. And I think that's really the way that the UK needs to manage keeping the costs down and watching the margins. So, I'm quite positive about the UK at this stage, and they need to obviously continue a very disciplined approach to the buy and sell arrangement.

Peter Steyn: And then, just a quick question on SLS. So obviously, volumes are down. And I already imagine that that was the key driver behind the 15.6% reduction in cost. But, just to try and understand perhaps where that cost reduction came from variable versus fixed in the context of you wanting to obviously grow this business. So, just trying to understand the investments that you're making for the long-term versus the short-term durations?

Alistair Field: Firstly, the business is really focused on its customer, listening to the customer, and I think that's really important for us. We've obviously gone into the focus of reusing, refurbishing and then only recycling when you have to. And that approach to us is really focused around the first two of those items, reuse and refurbish. And the opportunity to manage our margins through those two items is our priority. That's obviously for us the opportunity in the future, growing that margin, and then the recycling component, which obviously, we do very well anyway. The focus for us on that growth is about not so much volume anymore. When you consider the cost of managing the components of a server unit, managing the resale and reuse and refurbish is far more profitable for us than just recycling. So, that's our focus. So, the actual metric of just measuring pure tonnes is something that we are debating at the moment. It's not the ideal measure and to help you understand how that business is operating. So, we need to consider how we're going to share with you that growth. I'm extremely excited around the growth of that business. You understand that there's not capital really involved in that at all. It's more to do with variable cost management. So, I really, think we're in a good position, and we've seen the results of that. So, without having to require capital and to see that sort of growth in six months in my expectations, it will continue. So, we're still strategically very pleased with this division, and it's the way that it's heading.

Peter Steyn: And then, last one from me, very quickly. You note some -- just on Sims Resource Renewal, strong community and stakeholder engagement. So, I’m just keen to get you to elaborate and explain to us how you have found the reception of your intentions and plans there, and just the level of support you're getting?

Alistair Field: A very good question and a very important part of our work. Our engagement with the community has been positive. We've taken this extremely seriously and made sure that we engage, but also that we clarify exactly what we are doing and what we are not doing. And I think that's a really important differentiator for us in working with our community. So, the gasification process is a closed-loop process in our concept and our technical capability. And that's really important. And we've managed to share as much of that as we can with our community. We are not in competition with any of the other waste management type of companies or the technologies they deploy. So, the aspect for us is being open and honest with our community, and we've continued to do that and will continue to do that as best we can in the current circumstances. As you know, we've had to use virtual rooms and a lot of telephone calls, virtual calls as well, and inviting people into our websites to have a look at that. So, that's been really important and a lot of focus for that project team. But, the differentiator is really important in how we've explained where we're going with this.

Operator: The next question comes from Owen Birrell with Goldman Sachs. Please go ahead.

Owen Birrell: I actually wanted to follow up on some of Peter's questions. Looking at where scrap prices are at the moment, it really just, in my mind, highlights that there's a very tight supply. So, it's very much a supply constrained market. And I wondered if you could provide some color as to what you're seeing in terms of those supply constraints that are inhibiting your ability to get those intake volumes. Because I would imagine the buy price is actually pretty high at the moment? And when do you expect these supply constraints to subside?

Alistair Field: I guess, it also -- as we said, we've seen a good rise in intake volumes in January, sort of late December and into January, and we're continuing to see that. I think, part of our understanding of the market and where that material is coming from, we've started to see both, Australia, UK, as well as North America, those volumes -- those averages that we saw in F19 come back. I think it's taken a bit of time, Owen, for people to settle down, to watch the pricing. Obviously, a lot of people started to feed material when the prices started to head north of 450. We still started to see material come up right up to December, where you saw prices close to 490, 500 level. So, we did see material come up. That's obviously come back off again. The pricing dropped to about 390, 395, slowly going up again. I think, we have seen a volume intake increase over December, January, and that's what we're still seeing at the moment. So, I think, the weather is a little bit to do in the last 10 days, but putting that aside, I’m starting to see it, if prices stay at this level, then we should start to see those F19 averages consistently come back. So, I don't think there's any other reason other than those conditions that were just slower activity, particularly in North America on the East Coast, just probably due to COVID. And, when the prices start to get up to that level, everybody is starting to supply the material and then start to sell. So, as Stephen said, this is the first month, we're sort of into February now, and that sort of volume intake seems to be consistent. So hopefully that remains now.

Owen Birrell: Can I get a sense of, I guess, the level of competition for supply, at this point? I mean, I would imagine that there's -- you guys tend to historically focus very carefully on your middle margins, but other players within the market may not so. And I'm just wondering whether they're scooping up a lot of the available supply by taking a lower margin at this point, or is it very, very rational behavior?

Alistair Field: To be honest, when I look at the UK, it's rational behavior. There is spots in the U.S. that are tougher than others. The Northeast Coast of the United States is a little bit tougher. But, as I said, I've seen the volumes start to come up now in December, and I think that's driven mainly by price. But, the competition in New York is always fairly tough. And I think, the aspect that I've seen here in Australia, there is also -- has been a period in the last six months that ferrous material was actually quite scarce, and there was quite a bit of competition for that. And that subsided again. So, whether that's just a timing issue, I'm not quite sure. I think it's important to note that when you're in a buying game in a tight supply, a lot has also got to do with the behavior of the competition in terms of when they sell and how much they sell for and whether they therefore need to pay more for a tonne of scrap because they've made a commitment in terms of shipping. So, timing of sales is also important in some of these type markets.

Owen Birrell: And can I just ask on the demand side, particularly out of Europe and Turkey, there's a lot of sort of movement occurring in both those regions. Just wanted to get a sense of what you guys are seeing in terms of the demand coming out of mainland Europe but also of Turkey.

Alistair Field: So, you're talking the demand of ferrous, Owen?

Owen Birrell: Yes.

Alistair Field: We have seen, in some cases, the Europeans are a little bit quiet. They weren't prepared to pay the price -- the high prices that were going on in the ferrous market around November, December. They sort of withdrew to a part degree. And we also saw Turkey in January withdraw. So, it was a bit of a liquidity decline in January where there was a bit of temper to the steel, the Europeans and some other countries definitely backed away from buying. So, that -- we saw that sort of supply -- sorry, the demand actually decreased. But my information that I have is that the actual demand for steel is still quite consistent in the Southeast region where Turkey obviously operates.

Owen Birrell: And then, just finally from me, in terms of logistics, we're hearing a lot of issues around seaborne freight, but even landside logistics. Just wondering whether you're having any issues with I guess scheduling cargoes?

Alistair Field: Yes. I think, in the container business, non-ferrous, and obviously, those that are exporting containers in ferrous, there has been a shortage of containers at some stages in Australia, but more importantly, probably around Los Angeles, and in other parts of the world. So, I know that the container and that restriction did occur for quite some time, and in some spots, it's a little bit worse than others. But, I think that will settle down at some stage. I think from a bulk point of view, we haven't had any major problems with the actual bulk shipping, but I do know the costs have obviously increased.

Operator: Your next question comes from Jack Gabb with Bank of America. Please go ahead.

Jack Gabb: Just two quick ones from me. Firstly, just on the municipal cycling dropping to a loss, I guess, a little bit disappointing. Is that mostly down to the New York contract? And should we see it as a one-off, so there'll be no follow-on impact for the second-half? And one more question after that. Thanks.

Stephen Mikkelsen: It's Stephen here. Jack, you said it's down to partly the New York contract, but also partly, there was just two other things. There was a lot of waste in the inflow. So, we've had increased costs of disposing of that waste and obviously, increased costs and just managing the whole thing, you combined that with staff shortages, and Brooklyn was really hardly hit by COVID. And there was a period of time where we were having a huge amount of overtime just from a smaller number of staff because we simply -- there was too many of our workers couldn't get in -- had COVID and so couldn't come in. So, cost increases around that and then -- but I think there's quite a significant amount of waste in the inflow. You combine that with -- the prices haven't recovered for the products that we’ve seen ourselves. Would I see it as a one-off? I don't see a big turnaround in the next six months. But, in the medium term, we still think it's a good business. But, I think, the way we described it -- it was a disappointing result for the six months. There's no doubt about that.

Jack Gabb: Okay. And then, just one on Australia. I was a little bit surprised that revenues went stronger given the volume improvement and also given what we saw in terms of kind of ferrous and non-ferrous pricing. And I think, in fact, on the revenue per tonne metric, it's the lowest since FY16. Just curious, was there any mix change in Australia? Is this just down to FX? Yes, any comments on that, please?

Alistair Field: I think, obviously, for us, the volumes were flat in Australia. And obviously, as you know, non-ferrous is a key component for us, and we saw those volumes down as well. So, I think that's the major contributor on that.

Operator: Your next question comes from Scott Ryall with Rimor Equity Research. Please go ahead.

Scott Ryall: I have a quick question on -- in terms of the markets you are looking at globally through investment. You obviously operate in a place where circularity is a big theme. You've mentioned the stimulus being a big theme at the moment. What do you find at the moment as the most attractive, I guess, regulatory regimes or facilitating government policies for your investment if you look forward the next three to five years, please?

Alistair Field: I think, one of our sort of clear pathways forward is really, when you look at our strategy, it's around increasing volumes in our global regions we currently operate. North America, Australia are really key aspects for us in terms of growth of ferrous and non-ferrous. Cost management across the group obviously is in our existing areas. We are very cautious to go into some of the Southeast Asian opportunities in the sense that they have changed. When we looked at one or two countries in Southeast Asia, the regulations were not clear. And then, when we saw clarification, they changed within six months. So, we are going to be very cautious about using or spending any capital in areas that we're not currently operating in. So, I think, our strategy, which is fairly clear, is really to improve our business in the areas that we're operating, if that makes sense.

Scott Ryall: Yes. I guess, my question is more within the markets that you currently operate. Do you see any jurisdictions that are more attractive rather than less like -- for the two you mentioned, is North America more attractive than Australia or vice versa?

Alistair Field: I think, from a regulatory point of view, what we seek is to be very clear on what the regulations are and that there's a lot of clarity. That's one of the reasons why resource renewal was chosen to be done in Australia is they are very clear on what the expectations are. And therefore, when you spend your capital or choose to spend your capital, you understand what you're getting into. So, Australia is still for us, the clarity around -- whilst the standard might be very high, at least we know that if we meet the standard, we can actually go ahead and spend the capital and be quite confident of an outcome. The United States differs quite a lot from state to state, but I'm still comfortable about executing our strategy in the United States.

Scott Ryall: Okay, great. And then, my second question was on your targets around ESG emissions. You've got some pretty punchy targets out there for the next five years. Could you -- you've got about 60% coming from an electricity scope to about 40% coming from mostly diesel scope one. Where do you get 23% lower emissions over the next five years from, please? Could you just give us a bit more clarity on that?

Alistair Field: Obviously, when we look at 2042, which is where we want to be carbon-neutral, that was a target that was set. There was obviously a lot of work that in detail that went into that. When you consider our current operations and technologies that are available to change the current emissions, diesel, obviously being a large component in our business as well as electricity, we do have the technical capability to make those changes. So, from a scoping one point of view, there's quite a clearly well laid out plan that I won't share with you now, but we can do that at another time. But, we are quite clear on those hurdles and how we've set them and what we need to do to execute them. So, as you look at our strategy around sustainability and the three pillars, you can go into the details right across that whole set of targets, I think there's almost nine sections. We're quite clear on what our path is and quite confident we can achieve that.

Operator: There are no further questions at this time. I'll now hand back to Mr. Field for closing remarks.

Alistair Field: Well, thank you to everybody for the questions. And I just wanted to thank all the employees of Sims that have supported the Company over the last six months. I know it's been tough, but thank you very much from the management team, and look forward to continuing the good performance. Thank you to everybody.

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