Earnings Transcript for SGM.AX - Q2 Fiscal Year 2022

Operator: Thank you for standing by. And welcome to the Sims Limited HY 2022 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 outlooks 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 currencies are in Australian dollars, unless otherwise noted. I would now like to hand the call over to Alistair Field, Group CEO and Managing Director of Sims Limited. Please go ahead.

Alistair Field: Thank you and good morning. It’s a pleasure to be delivering the FY 2022 half year results for Sims. Joining me on today’s call is the Group Chief Financial Officer, Stephen Mikkelsen; and Chief Operating Officer, Global Metal Operations, John Glyde. The slide presentation that we will run through has been lodged with the ASX, along with the results release. The agenda for today is that I will run through a general overview of performance and the highlights. I’ll then hand over to Stephen, who will take us through our financial results, before I discuss some of the company’s strategic priorities, short-term outlook and medium- to long-term drivers. Following that, there’ll be time for Q&A. I’ll turn straight to slide five, which covers the key takeaways from the first half. You will remember that when we released half year guidance in November, underlying EBIT was forecast to be between $310 million and $350 million. I’m pleased to say, we have come in at $362 million, slightly higher than the upper end of forecast, delivering a high quality result with excellent margins. Operating cash flow for the first six months was a significant improvement from the previous six months, while intake volumes, a key signal of underlying activity continued to improve back to the pre-COVID levels of FY 2019. These excellent results lifted our return on productive assets to an annualized return of 37.5%. The strong financial performance and our overall positive outlook has given us the confidence to substantially increase cash distributions to shareholders in the form of both share buybacks and dividends. And finally, this was achieved while maintaining our strong Sims culture evidenced by 82% engagement score. Turning to slide six, there is a lot of good information on the slide about the progress we have made on our strategic initiatives. I’m not going to go through them one by one, but I will highlight a couple. Firstly, we completed several strategic acquisitions in both the Sims business and our joint venture, SA Recycling. These while highly complementary to our existing businesses were achieved at valuations, which were immediately accretive to our shareholder value. Secondly, we have found a great long-term partner for our Sims Municipal Recycling business. By bringing in Closed Loop, we have paired with a rapidly growing leader in the circular economy. This also provided capital for us to recycle into the Metal business acquisitions we have announced. Moving to slide seven. The dominant theme is that the very strong performance from the second half of FY 2021 not only continued into the first half of the current financial year, but it accelerated. This resulted in performance measures presented on this page that are in several cases several times higher than the equivalent half year in FY 2021. Underlying EBIT was 541% improvement over the prior year. This was driven by 74% increase in sales revenues on the back of exceptional ferrous and non-ferrous process and sales volumes, which improved by 9%. While inflationary pressures on cost have emerged and I believe will continue to be a risk, we have so far been able to manage this quite well. In fact, we were able to improve our trading margin despite inflation. Looking ahead, we’re also Identifying medium-term productivity gains and other cost improvements. Additionally, the business delivered strong operational cash and we will be distributing 50% of underlying profit to shareholders in dividends and on market buybacks. Most critically, all of this was achieved with a strong safety performance. Slide eight provides a summary of the financial outcomes in a convenient table. I’ve already spoken about the profit measures on the previous slide. However, it is worth highlighting the improvement in return on productive assets. This profitability metric which we have used for several years now grew from 6.2% in the last half year to 37.5% this half year. I will spend the next few slides talking about non-financial measures, starting with health and safety on slide nine. As you will appreciate the health and safety of our people is a huge priority for the Sims management team. It is pleasing to see that the half-on-half lagging indicators are showing an improvement trend, particularly Critical Risk Incidents. Another lagging indicator, the total recordable injury frequency rate has fallen to around 1.2 to 1.3 for the last few years, and we want to drive this low. In part, this will be achieved by closely monitoring the linked leading indicators. For example, we have had over 5,500 corrective action improvements identified in HY 2022. Involving employees in identifying and implementing the corrective actions is key to improving safety outcomes. Moving now to slide 10 on sustainability. Sustainability is at the core of our business and that is pleasing to see some recognition for the effort that our employees put into ensuring that Sims is a leader in sustainability. There are many measures, initiatives and cultural behaviors that drive outcomes would lead to these awards. Slide presents the progress on our FY 2025 Sustainability goals, as an example of these measures, initiatives and cultural behaviors. We’re making good progress towards achieving our FY 2025 Sustainability goals, which are to operate responsibly, Close the Loop and be a partner for change. Highlighting just a few of these, we launched woman leading at Sims, which is a great initiative to connect our global emerging female leaders. We released our Second Modern Slavery Statement, which was well received due to containing concrete actions and case studies of what we have actually done. On the operational front, we also transitioned Claremont, our largest global site to renewable electricity. This is just the beginning and I will continue to champion sustainability at Sims through measurable actions. Just before I hand over to Steven, I will turn to slide 12, which depicts the first half of FY 2022. The chart highlights several important points that resonate throughout the current half year results. Firstly, price rises for our main commodities began rapidly rising in late calendar year 2020. Stabilized at significantly higher levels around June 2021 and since then, have maintained the high levels with some volatility. Secondly, the average HY 2022 price is significantly higher than HY 2021. Finally, freight prices has also risen, but show much higher volatility around the higher price. I will hand over to Stephen now to take us through the results in more detail.

Stephen Mikkelsen: Thanks, Alistair. I will turn straight to slide 14, which summarizes the Group results and some key metrics. The substantial increase in revenue of 73.9% was driven by higher prices and volumes. This in turn lead to a 45% increase in trading margin, as we nicely managed the metal of buy/sell spreads through the period. Operating costs increased by 14.3%. From an internal perspective, higher activity and new businesses were part of the reason for this increase, together with high performance related incentive provisions related to stronger financial results. Externally the impacts of inflation have also placed upward pressure on costs. EBIT grew by 541.3% to $361.7 million, which was a record first half result. On slide 15, for convenience, we have summarized EBIT and volumes by division. Our current theme across all metal division is that EBIT we have measured in absolute terms, dollars per ton, over simple [ph] margin terms was up significantly over the prior first half and sustained a very strong uplift that occurred in the second half of last financial year. Looking at our North American metals result on slide 16, NAM sales revenue was up 87.2%, driven by higher sales prices and volumes. Sales volumes dropped 11.3%, while intake also improved, returning back to pre-COVID levels. Trading margin increased by 74.6%, as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Operating expenses increased 27.4%, largely driven by increased market activity, capital growth projects and acquisitions. Inflationary pressures also contributed to rising costs. The end result was a 478% increase in EBIT to $142 million, the largest absolute and percentage increase for the middle businesses, including SA Recycling 2017. Turning to slide 17, ANZ also delivered a very strong first half, revenue increased by 75.5% on the back of a 72% increase in sales prices. Trading margin increased by nearly 59%. Costs were up 12% with a more than doubling of EBITDA to $121 million. Higher costs related largely to increase use of contract labor to cover staffing shortages, timing of repair and maintenance activity, and general upward pressure from higher inflation. In total, underlying EBIT increased by 244% to nearly 95 million. Encouragingly, despite the stop, start uncertainty created by COVID lockdowns in Australia and New Zealand, intake volumes also showed improvement and recovered to near pre-COVID levels. Moving to the U.K. on slide 18. Sales volumes increased by just under 6% and prices rose by 64%, resulting in a nearly 74% increase in sales revenue. Due to market structure and competitive dynamics, U.K. was unable to hold on to as much of the sales price increase as NAM or ANZ, but it still improved trading margin by 39.6% and this resulted in a very healthy 180% increase in EBIT to $29.4 million. Costs were up 14%, some of which related to a stronger pound against the Australian dollar, the timing of workforce mobilization and inflationary pressure with the other main contributors. Intake volumes in the first half of 2022 were consistent with the prior corresponding period. However, they were below pre-COVID levels due to a combination of closure of non-profitable sites and COVID-19 impacts. On to slide 19, SLS produced a 45.6% growth in EBIT to $9.9 million on the back of 44% growth in repurposed units and 9% growth in sales revenue. In many ways, it was a challenging six months period for SLS to navigate. Inflow of repurposed units was not as strong as anticipated. Supply chain constraints mean the data centers were not receiving new material to refurbish and expand the cloud, and therefore they held on to material rather than send it to SLS for repurposing. And speaking with our customers, we are confident that this material must eventually lead the cloud for refurbishment, but it could be late 2022 or even 2023, before the supply chain frees up sufficiently to give customers the confidence to increase the release of materials. Moving to slide 20, As with NAM, SA Recycling performed well, as the very strong results from the second half of FY 2021 continued into the first half of FY 2022. Compared to the first half of FY 2021 sales volumes were up 18.6%, intake volumes were back to 114% of pre-COVID levels on the same stores comparison. Underlying EBIT was up 427.5%. And it’s worth noting that the acquisitions are now started the last three months, did not complete until late in the first half, so they did not materially contribute to the result. Turning briefly to slide 21 and 22. Increases in operating expenses and global trading and corporate were largely driven by internal reorganizations, where people were transferred into corporate and global trading, as well as increase incentive provisions relating to Group financial performance. Sims Municipal Recycling had an excellent half driven by increased paper and plastic prices. This is now well positioned with Closed Loop on board as a strategic partner. Moving to our net cash position on slide 23. Net cash increased from $8 million to $45 million, driven by nearly $300 million in operating cash flow and I will discuss this significant improvement on the next slide. The strong operating cash flow allowed us to complete the acquisition of Recyclers Australia, spent over $80 million on CapEx and distribute $116 million in the form of dividends and buybacks, whilst still increasing net cash by nearly $40 million. We will be distributing a further $135 million over the coming months being 50% of half year 2022’s underlying impact. The payment will comprised of $0.41 per share dividend and an on market share buyback equivalent to $54 million, which will be completed before 30 June, 2022. Moving to slide 24. The two charts on the left tell the story of the last 12 months. There has been an unprecedented sustained uplift in prices. Volumes also improved as we began our recovery out of COVID. This resulted in a significant increase in working capital. The vast majority of this occurred in the second half of FY 2021 where we find it a near $290 million increase. Furthermore, it is SA Recycling’s policy to pay 60% of EBIT as a dividend, quarterly in arrears and retain 40%. This produced a lagging effect on cash flow in the second half of FY 2021 as the strong June quarter was not paid until July. This normalized in the first half of FY 2022 and you can see $52.4 million on the bottom chart represented around 40% of SA Recycling’s $128.7 million EBIT. The upshot of these movements is that operating cash flow of $290 million is a $310 million improvement on the previous six months. My final slide is CapEx on slide 25. We forecasted turning $220 million CapEx for FY 2022 at the full year results presentation in August. This has reduced to $170 million, as we will no longer be spending capital on the Sims Resource Recovery projects in Campbellfield. I view the rest of the CapEx profile for FY 2022 is relatively average and make the point that growth CapEx must meet our 15% IRR hurdle. We have been very disciplined around this and we will continue to be so. I’ll now hand back to Alistair.

Alistair Field: Thank you, Stephen. The next few slides provide an update on our strategic initiatives, beginning on slide 27. Our strategic initiative targets were first published in April 2019, a time when fewer of us had ever heard the word COVID. Our strategy is enduring and despite the last two years, we continue to advance towards realizing the targets. This is well demonstrated in slide 28, where we summarize progress over the last six months that have continued to build momentum towards achieving targets. Growing volumes organically and also by acquiring good businesses at reasonable valuations in North America, Australia, and SA Recycling. Setting up Sims Municipal Recycling for long-term growth and success through the addition of a strategic partner in Closed Loop. Ramping up our ability to repurposed cloud materials for our major customers and pivoting away from Campbellfield as we await for new government regulation towards roughly where we will build a pilot plant, which if successful, will lead to a full scale commercial facility. Turning to slide 29. This map sets out our shredder and facility locations in North America. Highlighted in red is acquisition of ARG in Baltimore. As you can see, it fits nicely with our East Coast assets and will add to our export optionality. This optionality is created through the access we have to 15 ports. Moving to slide 30, which shows the equivalent position for SA Recycling. SA Recycling four acquisitions are estimated to add 1.1 million tonnes per annum through the addition of 35 facilities and nine shredders. SA Recycling’s major locations are deliberately complementary to Sims. It also has export optionality with access to three deepwater ports, the most important being in Southern California, where it exports through the deep sea port at the Port of Los Angeles. Turning to slide 31, which provides an update on Sims Resource Renewal. The Rocklea pilot facility has been granted its developed approval and is on target to be in operation before the end of this calendar year. I’ve always said we will be very disciplined around committing capital and this will be an important stage gate in that process. Simultaneous with the pilot plan process, we have accelerated the development of commercial facility in Queensland, including assessing the preferred location and engaging with government, stakeholders and key partners. None of these activities require committed capital. The Campbellfield facility in Victoria is on hold, as we await the implementation of the Victorian Government’s Waste-Energy Framework. Moving to slide 32, SLS has continued to position itself as a global leader in providing end of last cloud services. It has signed new contracts with large scale cloud providers, enabled by strengths and customer service, newly designed circular centers and global footprint. It has been a stop start first half as Stephen described on a previous slide. Supply chain disruptions have meant new cloud material was sporadic and cloud providers held on to equipment initially slated for replacement. This will have two consequences. Firstly, the growth we see through to 2025 will have a slower start, due to the supply chain situations, but then it will pick up more rapidly. Secondly, and more importantly, customers will want to redeploy much more back into their own data centers to remove supply chain risk. This fits perfectly with Sims market position around security, sustainability and global reach. The final slide in this strategic update is slide 33. I’m very pleased that we have found a long-term strategic path forward for SMR. Over the last few years I’ve discussed with a number of shareholders, our desire to capitalize on Sims Municipal Recycling’s position, in particular how to best maximize value from its marquee municipal recycling contract with New York City. Closed Loop brings to the table a dedicated and focused expertise that will enable Sims Municipal Recycling to continue innovating and take the next big leap in expanding its services and geography using the New York City contract as that foundation. I’m very confident that the arrangement will work well, as Loop’s ambitions and culture align with Sims, and I look forward to working with the team in the coming years. I want to move on now to the outlook on slide 34. When I presented the year end results in August 2021, I noted that the consistently strong quarters in the second half FY 2021 had continued into the July actual results. Clearly, that strong July performance progressed to be what was a strong first half FY 2022. It is therefore pleasing to report that this recent strong conditions have continued unabated into the second half of FY 2022. The key indicators of performance are tracking well. Intake levels of solid and prices are at least at the same levels as the first half average. The demand from our customers for our products is robust. We must continue to manage price volatility, including freight costs as effectively as we did in the first half, while finding efficiencies to offset inflationary pressures that have emerged. As you would expect, the positive macro trends remain the same. We continue to expect the impact from stimulus spending to increase the demand for recycled metal. We also believe decarbonisation is a global multi-decade issue. Recycled metal will play a vital role in achieving this. Cloud repurposing and recycling is an ever growing opportunity that perfectly suits Sims capabilities and sustainability credentials. Before I move to Q&A, I’d like to thank all Sims employees for the last six months. The past two years have been difficult from both of how we work perspective and the sheer volume of change our organization has been going through. It is great to see all of your efforts are coming to fruition, not only in our financial performance, but in safety, our culture and the strategy implementation. Congratulations to all of you. Operator, back to you.

Operator: Thank you. [Operator Instructions] Your first question comes from Paul Young with Goldman Sachs. Please go ahead

Paul Young: Good morning, Alistairand Stephen. Great results. Fixed lines of business, good cash flow, not much to really complain about really strong net cash flow. Congratulations. A couple of questions, first one is on volumes. I’m just kidding, obviously, you’ve got the 2025 target and we see going step up. But what is broadly speaking, the upside from here, what is your shredder, broadly speaking, your shredder utilization at the moment, particularly in the U.S.?

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

Paul Young: Yeah. Great. Thanks, Alistair. And second question is on the end markets, which is the -- which are the strongest regions on the ferrous demand front you’re seeing at the moment, Turkey versus Asia versus U.S.?

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

Paul Young: Yeah. Okay. That’s great. And last question for me is on a non-ferrous side, both particularly aluminum, it’s in a deficit at the moment, that deficit seems like it’s increasing, copper markets tight, deficits on the horizon. Are you seeing -- what are you seeing on the margin front on your non-ferrous, do you seeing the discounts on your products close up versus the LME?

Alistair Field: I’m not going to compare LME prices. But I think what you have very clearly seen is that our non-ferrous, copper, aluminum prices have remained consistently high for the past 14 months now. I don’t think the -- that’s going to abate in terms of the demand for it. They obviously drove us for decarbonisation and copper and aluminum, I think, plays very well into that and we’re obviously well positioned geographically, but also from a capability. And that brings us to our strategy and why LME was a key acquisition for us and the high quality that we wanted to be able to feed into that, which obviously feeds into primary smelting operation. So I think it’s really important that we keep the long-term focus on our non-ferrous and hence our strategy and acquisition of Alumisource. So I firmly believe that that’s got a long way to run store.

Paul Young: Okay. Thanks very much. I will pass it on.

Operator: Thank you. Your next question comes from Lee Power with UBS. Please go ahead.

Lee Power: Hi, Alistair. Hi, Stephen. Alistair, just kind of digging into your comments around volumes. So demands obviously strong, we’re only just hitting FY 2019 volumes, your comments on freight, is there anything that really is going to stop volume growth surpassing FY 2019 and kind of seeing this continue trajectory into the second half?

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

Lee Power: Yeah. So I guess I should frame that in an X acquisitions which is what I’m focusing on. Is there anything from freight? It sounds like there isn’t to kind of see these trajectory, because the North American volume growth, obviously, very strong, continuing to the second half?

Alistair Field: Yeah. And I think if we were more domestic orientated, I might hesitate a little bit more, but I’m comfort I have is that obviously the export of vessels seem to be fluid.

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

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

Lee Power: Excellent. Thank you. I might just leave it there for a moment. Thanks.

Alistair Field: No problem.

Operator: Thank you. Your next question comes from Peter Wilson with Credit Suisse. Please go ahead.

Peter Wilson: Thank you. Good morning. A question on operating costs, so understandably in this environment, there’s inflationary pressures, but I guess, you reported 14% operating costs, which per tonne is flat, but I guess, part of the Sims picture that due to that spare capacity that Alistair mentioned that you should be able to increase volumes while keeping operating costs flat. So my question is, I guess, if you look at operating costs, how much do you consider is permanent and maybe, I guess, the loss of the efficiency gains that you kind of locked in over the last few years, how much is permanent? How much is just short-term volume driven and potentially short-term inflation pressures.

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

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

Peter Wilson: It does. Really helpful. Thank you both. And next question is on Sims Lifecycle Services. So on the $160 6 million in sales revenue, can you give us a split as to how much of that is the new repurposing business? I think, about 2 million units versus, I guess, the legacy business and some commentary on the trends in that legacy business, so that…

Stephen Mikkelsen: Yes. I’ve got to be honest, Peter, off the top of my head, I don’t have that split, but that’s the split I’m quite capable of getting. So I’ll make sure that Anna publishes that, because I think that’s fine. It is obviously a growing -- it’s a growing part of the business. So I guess looking forward, I’d expect it to if we were to jump forward to five years, it will be 80%, 90% of our revenue, because that’s where the business is hitting. The second part of your question around, how are we seeing that performing generally? I guess I’ll just echo the comments that Alistair and I made or maybe provide a little bit more color than in the presentation. It really did start to emerge as we went through the second to the first half of FY 2022 that our customers were moving to a just in case type kind of entry rather than just in time. And so they’ve been holding on to cloud material. Not all of it, so we -- as you see, we’ve still continued to grow, but not as much as we thought. What we see happening there is, as these supply chain logistics ease up and they will ease up in 20 or they should ease up in 2022 or 2023. There’s a whole lot of material needs to come out. So it’s not like it’s gone forever. It’s the shape of it that will change and over that period, you should see repurposed units, because that’s what we’re really focusing on, that’s the sustainability, that’s Closing the Loop, that’s the circular economy. You should see that there is some repurposed units eventually become, like I said, 80%, 90% of revenue, but I’ll get you the split for this year.

Peter Wilson: Very good. I will leave it there. Thank you.

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

Jack Gabb: Thanks. Good morning, Alistair and Stephen.

Stephen Mikkelsen: Hi.

Jack Gabb: Just a couple of for me, I guess -- thanks. Firstly, just on the U.K., can you give us a little bit more color on how that’s performing? I guess, of all your divisions volumes dropped pretty strongly on year-over-year, but in the U.K., they were flat. And I guess in terms of sort of underlying earnings, it’s a bit of a drop half-on-half. So just curious, is that dropping volume or flat volumes is that down to the consolidation some of your yards there, is it competition or is it COVID or any other color you can provide will be great. Thanks.

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

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

Jack Gabb: That’s great. Thank you. And our next question is just on the market. I guess, just curious firstly in the U.S., are you seeing, I mean I know most of your yards are set up for the export market, but are you seeing much more demand domestically, just given what we’re seeing amongst the consumer there looking to push capacity? And then secondly just on China, have you started selling any ferrous volumes into the country yet or do you envisage doing that later this year? Thank you.

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

Jack Gabb: Thanks Alistair. And just one quick follow-up on that, just can you remind us, as you said, you’re not trying to have a huge domestic scrap market I think 250 million tonnes or something like that. Can you remind us with respect to your U.S. business how far can you transport volumes that remained economic versus shipping just sort of trade off, if you an East Coast yard in New Jersey, what’s the freight cost to, say, Turkey versus how far you can transport that domestically?

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

Jack Gabb: Perfect. Thanks Alistair and that’s all from me. I’ll pass it on.

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

Simon Thackray: Thanks very much. Good morning, just a couple of quick ones actually. Sims Lifecycle maybe Alistair just continuing or Stephen can tap, but either of you just noting your $8.5 million repurposed units by FY25 versus your run rate at the moment, which is probably around 2.5 I guess on an annualized basis. Very helpful Slide on 32 thank you Alistair for that and I understand what you guys are saying. Just to get to that target and assuming you get to that target, can you just give us a sense of the scalability and the operating leverage in that model and where margins could be expected to get to -- if and when you hit that $8.5 million target by FY25?

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

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

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

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

Simon Thackray: Sounds good. Thanks for that. And then just a real quick one on it seems Alistair, so the SA Recycling. Now adding the number of acquisitions that were done through the first half, not contributing materially because I think you made the comment that’s sort of back-ended in the first half, but on a pro forma basis, what will these acquisitions add to the second half ‘22 volume, assuming current conditions continue, I’m just trying to understand their contribution in the second half?

Stephen Mikkelsen: Yes, it’s something we haven’t disclosed yet Simon, it’s updating the business and we’ve got -- we’ve actually got a board meeting coming up at later this month or next month when we’re going to have a good look through that. So I don’t want to say -- I don’t want to talk about it now because I haven’t seen all the final numbers from them what they’re doing in terms of site rationalization, on outside rationalization, all of those things do take us time, but I will do it at the end of the year when we’re seeing what happened. But good acquisitions.

Simon Thackray: Yes. Well done. Good result.

Stephen Mikkelsen: Thanks Simon.

Operator: Thank you. Your next question comes from Anderson Chow with Jarden. Please go ahead.

Anderson Chow: Yes. Good morning, guys. Great results. Congrats. Just two quick questions. Firstly, just on the share buyback, I just wanted to make sure I have the numbers, right, you’re talking about resuming about $56 million in -- $54 million in the second half, but I think we did about $54 million in the first half, so we’ll do about $110 million instead of $150 million that we initially proposed, is that the way to think?

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

Anderson Chow: Okay, got it. And also I just wanted to make sure and it’s probably just on the lifecycle business, the earlier question about the margin and what it could get you, but I think if I could just make sure the revenue model, I mean do we charge on a per unit basis or is there sort of a revenue sharing from the sale of the scrap and reprocessing...?

Stephen Mikkelsen: It’s a combination, but where we are moving to in the repurposing is it’s a service model. So what you would expect to see. So let me give you two examples. So maybe previously before the cloud centers, we’re really looking at redeploying into those units. We would take on -- we would effectively buy it from them repurpose it and sell it in the market. So our costs and our revenue will gross up what we -- and simply say. Under the new model, where we’re hitting with redeployment, it’s much more service model so we charge each dollars per whatever we are redeploying, and so therefore, our revenue will only ever be them -- our revenue effectively will be the margin that we charge. So moving forward, if I just jump forward to 2025, you shouldn’t really expect to see, you’ll see much higher growth in margin than you will in top line revenue growth because we are moving to a service model.

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

Stephen Mikkelsen: Yes. So it is existing customers, but herein lies what gets me excited about SLS, the existing customers are huge. And so it’s not like we’re going from taking half the business two, three quarters of the business, we might be going from taking 2% of the business to 4% or 3% of the business because it’s just large, that so large which as I’ve get quite excited about. But now there is no particularly new customers, it’s our excellent existing customers, but I would say, we have good strong customer relationships with what you would consider most of the usual suspects in the large cloud players.

Lyndon Fagan: Okay. Thank you.

Operator: Thank you. Your next question comes from Peter Steyn with Macquarie. Please go ahead.

Peter Steyn: Good morning, Alistair and Stephen. Thanks for your time. Just wanted to ask you a little bit about the freight market and how you guys are working through that and I suppose more predominantly what your expectation would be when we do see some degree of moderation particularly in the container market, what influence that could have because we’ve already seen bulk come off, so I’m just curious how the mix of freight market developments play into the forward-looking perspectives, Alistair?

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

Peter Steyn: Thanks guys. And then Alistair just turning to resource renewal and specifically some of the energy-from-waste policy environment that’s clearly a lot less certain probably in Victoria and New South Wales at this point in time. Just curious to get your views on the investment that you’ve indicated that you’re quite happy with the level of engagement in Queensland, but how do you see some of the developments in Victoria and maybe even in New South Wales potentially supporting some of your plans over the medium- to longer-term?

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

Peter Steyn: Perfect, thanks Alistair. And quick one for Stephen on dividends and franking obviously you’ve sort of indicated the franking will drive your dividend decisions and how we ought to think about that for the full year and then going into next year, Stephen because at this point Australia is probably not rebounding as fast as some of the other parts of the business so proportionately you’re going to be struggling franking credits?

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

Peter Steyn: Perfect, understood. Thanks Stephen. Appreciate that gents.

Stephen Mikkelsen: Thanks Peter.

Alistair Field: Thanks Peter.

Operator: Thank you. Your next question comes from Lyndon Fagan with JPMorgan. Please go ahead.

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

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

Lyndon Fagan: And how long would that taken to build?

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

Lyndon Fagan: Thanks. And my other question was just on the SAR JV, it’s almost your highest earning division now, but I’m sort of feeling like it would be good to get a bit more disclosure on potential growth outlook given the acquisitions, is there anything specific you can point to help us forecast that business?

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

Stephen Mikkelsen: Yes, I agree. I also think the main -- I guess in some ways we had quite a good controlled experiment in these two half year results in the NAM and SA Recycling started from a very common point I think mid-$20 million, $24 million, $25 million of EBIT and they grew -- roughly NAM grew slightly stronger than that, but they grew very similarly. I would say that, the way I think about SAR looking forward is that it ended up in the -- it’s in North America, the same as NAM with the biggest difference being between the two is zorba prices and SAR is more exposed in its competitive markets to zorba prices. So when zorba prices increase faster relative to peers prices, it does the NAM with zorba prices reduce relative to peers prices, it does waste to NAM and we’ve now actually seen that happen twice. It wasn’t about I’m going to say 2,000 -- it was just after I joined 2018 or so when zorba prices -- for 2019, when zorba prices fell considerably, SAR dropped more than NAM. In the first half of 2021, when zorba prices rose quite nicely and dramatically up to sort of $1,800, $2,000 SAR proportionately did the NAM. In this first six months with zorba prices and peers prices have both been nice and high and relatively stable, but actually performed similarly. So I think that’s the way I would think about it overall but Alistair is right I think we will all be in a position where we will disclose more about SAR.

Lyndon Fagan: Thanks. And just a quick final one, working capital up another $40 odd million, is that just pricing or is there some sort of timing of sales?

Alistair Field: So it’s predominantly pricing. Interestingly, prices actually rose quite nicely into the December and have continued. So it’s just a little -- inventory volumes are actually the same, June versus December. So it’s all price.

Lyndon Fagan: All right. Thanks guys.

Operator: Thank you. Your next question comes from Nick Maclean with Surrey Asset Management. Please go ahead.

Nick Maclean: Good morning, guys. If I take a look at Slide 29 and 30 and really trying to comprehend what you can control as a management team as opposed to cyclical issues, can you talk about and you’ve mentioned freight obviously, can you talk about the advantage or really a bit more granular on the advantage of your network of assets in the U.S. relative to the smaller piece, so I’m saying that, are you achieving far superior freight costs and delivery times. I’m trying to gauge what’s the actual real advantage of that network relative to two to three-fold business?

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

Nick Maclean: So I guess another way to put it, well, freight costs and delivery times in isolation, obviously not good in isolation, but from an industry perspective, are they good for you because...?

Alistair Field: Yes. At this stage, yes.

Nick Maclean: Yes, okay. Thanks very much, guys.

Alistair Field: Welcome.

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