Earnings Transcript for SGM.AX - Q4 Fiscal Year 2021

Operator: Good morning, and welcome to the Sims Limited FY '21 Results Briefing. 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. Please go ahead.

Alistair Field: Thank you, and good morning. It's a pleasure to be delivering the full year 2021 results for Sims. Joining me on today's call is the Group's 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. As you can see on Slide three, the format for today is that I will run through a general overview outperformance and the highlights for 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, short-term outlook and medium and long-term drivers. Following that, there'll be time for Q&A. Now turning to Slide four. After what was a very dramatic 2020, it is very pleasing to see the business bouncing back and performing so strongly. What started off as a solid first half had turned into an exceptional second half, delivering an annual underlying EBIT of $386.6 million, our strongest results in 13 years. All financial return measures across all business regions and divisions showed significant improvements. Stephen will detail this shortly. I'm particularly pleased with our return on productive assets exceeding 20%. We have also continued implementing our long-term strategy. Sims Resource Renewal now has planning development approval at roughly and after considerable analysis, we can confirm that we will be producing hydrogen from Campbellfield not electricity. Latest modeling shows Campbellfield will materially exceed the 15% internal rate of return hurdle. Moving to Slide five. This slide underlines my previous comments that all financial performance measures have materially improved. Cash balance is down, puts us this entirely expected considering the extra working capital in the business from higher volumes, prices and a strong inventory position. Stephen will cover this in more detail later. While the full year dividend per share represents a 600% increase over FY '20. It is a lower part ratio than recent prior years. The improved proportional size of foreign source profit during FY '21 resulted in a lower relative profit contribution from Australia and therefore insufficient franking credits for dividend payout ratio similar to recent prior years. The company has sought to find an appropriate balance between returning profits as dividends and ensuring those dividends are fully franked. Accordingly the FY '21 final dividend will be 50% franked. Moving to Slide six, Health Safety slide. The good results in safety are presented at the half year have improved even further for the full year. I'm pleased to report our lowest ever recorded number of injuries. This was the major driving force to us also achieving our lowest ever total recordable injury frequency rate of 1.2. This was an excellent result following a concerted effort on critical Risk Incident Management and continuous improvement of our environment, health and safety management system and its framework. Moving now to Slide seven on sustainability. Sustainability is at the core of our business. Earlier this year we launched our FY '25 and beyond sustainability targets. We are pleased with the progress we are making against these despite the COVID-19 disruptions. This past year, we have reduced our carbon emissions by more than 5%. We have started converting our electricity consumption to come from renewable sources across our operations, with now over 12% coming from renewable sources. We continue to look at ways to reduce and eliminate our emissions and have built a pipeline of projects that we've started implementing. I look forward to updating you as we continue to make progress. I'll briefly turn to Slide eight. Presented here for convenience is a summary of the Group financial performance. As always, business units' performance behind these high level results are covered in later slides. Also covered in later slides is the successful achievement of the promise cost savings and the main driver behind the significant item adjustment, which is entirely a technical accounting method. I'm turning to Slide nine which provides charts on market conditions. Looking at the charts, it's a pretty simple story. Ferrous and non-ferrous classes have voluntarily recovered from the lows in April 2020. The recovery has shown some volatility as you would expect, given the world is still dealing with COVID and that periodically produces illiquidity in the market. However, this also highlights our ability to navigate this volatility, and protect and grow our margins. This has been greatly improved by our new global functional structure, bringing the buy and sell together under Michael Movsas as Chief Commercial Officer Sims Metal. I'm very excited about taking this to the next level of coordination once the new ERP is implemented, and we will have a close to real time understanding of our global inventory position. Additionally, the COVID-19 pandemic has prompted unprecedented fiscal stimulus packages across the world, which is supported economic recovery. It is also pleasing to note, that global volumes are returned to FY '19 levels. This is currently not consistent across all regions, with North America showing the best improvement. I'll hand over to Stephen, and now to take us through the numbers in more detail.

Stephen Mikkelsen: Thanks Alistair. I'll quickly move to 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 on slide 12. Really strong themes across all major regions. Firstly, higher prices combined with excellent margin management have produced a significant uplift in margins per ton. Secondly, everyone has delivered on the cost savings initiatives. Finally, sales will materially up over FY '20. The unique aspects of managed result is in the second half the average monthly intake volumes exceeded FY '19s average. Data shows that economies that have been enjoying higher levels of activity as measured by the latest PMI, as those that have eased restrictions the most. What we saw in the U.S. was manufacturing activity reaching strong levels in the second half of 2021. And just as emphasize how strong the recovery has been March manufacturing sector index was the highest in 37 years. Turning to Slide 13. ANZ performed well lifting underlying EBIT by over 100% the same things drove this improvement as we mentioned on the previous slide. ANZ continued to show good signs of recovery in its intake tons of the low of the first half of FY '21. However, it is still below that average monthly intake experience in FY '19. We expect business activity returning to normal will help lift volumes to the FY '19 levels, although this will be volatile, as evidenced by the reintroductions of lockdowns, we have all experiencing to varying degrees and severity. Moving on to Slide 14, on UK Metal. In many ways, I find the turnaround in the UK to be the most impressive of the three regions. It is not just the significant uplift on last year's results, but it also represents well over 100% underlying EBIT improvement on the FY '19 result. Sales and intake volumes have increased, margins have risen and a disciplined cost control program has combined produce this significantly improved outcome. Intake volumes remain a fair distance below FY '19 levels, but much of this was deliberate as we close loss making sites in FY '20 that were producing unprofitable volumes. Turning over to Slide 15, I will run through Sims Lifecycle Services results. SLS has had a great year, and is now delivering on the strategy and EBIT uplift promise we have been talking about for the last 18 months. We have developed strong relationships with meaning of the major providers of cloud services. On a like-for-like basis, the business has lifted underlying EBIT by 651.7% to produce a meaningful $21.8 million result. We've learned a great deal about the market and our position in the market, we have developed a more meaningful measure of the market and therefore our share of the addressable market. The measure is repurpose units. And Alastair will cover this in more detail later in the presentation. Moving on to SA Recycling on Slide 16. By any measure SA Recycling has had an outstanding year. We haven't specifically discussed SA Recycling in the last couple of years. So Alistair has included discussion on these and the strategic progress and outlook section of his presentation. The overall theme of SA Recycling as similar to the other metal businesses, hire prices, combined with excellent margin management have produced a significant lift in margins per ton. There are two further drivers of the results however, firstly, due to the competitive dynamics of where they operate, increased all the sales prices don't always materially raise prices intake trend and therefore the sales price increase flows through to the EBIT line. Secondly, the volumes have recovered to well above FY '19 levels. This is a combination of acquisitions and a faster recovery in the states in which they operate. On to Slide 17 and 18. The material points to note on these two slides are; firstly, increased expenses in corporate due largely to increased variable employee expense benefits in FY '21. In FY '20 variable employee expenses were close to zero. Secondly, there are early green shoot of signs of recovery in SMR as market prices saw some increases. Remember, they made a loss of $2.8 million on a constant currency basis for the first half of FY '21, but managed to $6.3 million second half to produce an annual EBIT of $3.5 million. And finally, LMS produced a very critical result despite the collapse in electricity and related products pricing. I'll now move over to Slide 19. Very pleasing to note that we delivered $75 million of predominantly fixed cost savings compared to FY '19. This is $5 million better than our original target of $70 million. This is a particularly good result, as there are not many costs that are genuinely 100% fixed across different volumes outcomes. And FY '21 volumes were a bit higher than we originally thought when setting the target. Moving on to Slide 20, which looks at the cash position. Understandably, the closing cash balance was lower than the opening. This was almost entirely driven by an increase in working capital due to much higher prices and a very strong inventory on-hand position at the end of the year. It is also worth noting that there was a lag in dividends received from SA Recycling, dividends are received quarterly in arrears, and therefore, only the third quarter of the very strong second half result has been received in cash. The fourth quarter dividend of $42.4 million will be received in the first quarter of FY '22. Turning to Slide 21. As you will be aware a CapEx freeze was instituted when we first entered the COVID pandemic. It was slowly eased over FY '21, which resulted in FY '21 sustaining CapEx of $88 million being above the $75 million of FY '20. We need to catch up on this in FY '22 and are currently forecasting $160 million for sustaining CapEx. This will take the three year average across FY ' 20 '21 and '22 from more normal level and closer to depreciation excluding leased assets. We will also commence our first significant capital expenditure on resource renewal in FY '22. Onto Slide '22. I need to spend a brief periods talking about the impact of yet another lift field accounting change and the impact SA has had and will have on the reporting of costs associated with implementing the ERP. Firstly, let me make this very clear. The change does not impact cost, it does not impact cash, and it does not impact the benefits we expect to realize. Put simply, we can no longer recognize that ERP as an asset, and we have to expense it entirely as it has occurred. The FY '21 we've had to write off expenditures today of $60.8 million. For the next couple of years as we complete the ERP I will call it out and present EBIT, excluding that expenditure. You may of course treat it how you want when performing your analysis. The point is that I will be very transparent with the number. I'll now hand over to Alistair.

Alistair Field: Thank you, Stephen. The next few slides we're going to look at SA Recycling in a little more detail as well as our cloud initiative and progress on Sims Resource Renewal. Firstly to SA Recycling on Slide 24 and 25. Circling update to everyone has to where SA Recycling operates. As you can see from the map, SA Recycling has significant operations in Southern California and throughout the south, and now reaches over to Florida on the East Coast. This footprint nicely complements Sims footprint of broadly Northern California, Chicago and the East Coast. SA Recycling is quietly grown about acquiring some excellent assets over the last five years, in strategically important locations. These 10 acquisitions have added approximately 600,000 tonnes per annum in FY '21 compared to FY '17. Slide 25 also shows the upward trajectory in the production of zorba. As both ferrous, SA Recycling operating markets, where it gets a lot of the zorba at source, which results in better margins. As they are also has unique operational advantages of which competitors in the markets it operates, allowing them to benefit more from high zorba pricing, because they do not have to raise zorba prices for sure it exceeded at the same rate. Moving on to Slide 26, and the great strides SLS is making. It still remains early days for SLS and its plans to become the premier provider of services that minimizes waste as the cloud continues its astonishing growth. SLS value proposition of providing sustainable, safe and secure solutions at scale has proven to resonate well with our customer base, which currently includes some of the top 50 global digital companies as ranked by Forbes. We are developing with the market. The focus for our sustainable customers is moving towards redeploying, reusing or selling material at its end of cloud life rather than simply recycling it through a shredder. We have adapted to this and the key measurement we are monitoring is a number of repurposed units we provide. In FY '21, we repurposed 2.1 million units, up 26% over FY '20, and we are forecasting 2.6 million units in FY '22. To put this in context, the size of the market is huge. It is estimated there to be 85 million units in the cloud and storage alone, which is a big driver of units and is expected to grow at 250% over the next 5 years. Turning now to Slide 27 and Sims Resource Renewal. It has been a big year and a successful year for SRR. Importantly, we received statutory planning approval for the Rocklea Pilot Facility. We intend to prove up this proprietary technology and deploy it at large scale at our global sites. We completed a significant trial at scale using our shredder residue at a demonstration facility in Oregon U.S.A. This confirms that our Campbellfield facility will produce hydrogen from syngas rather than generate electricity. Carbon dioxide that is produced from the syngas process at Campbellfield will be fully captured and, because of it, is such a high purity, it is likely to be sold into the food and beverage industries. Avoiding sending shredder residue to landfill makes such good sense for us. It contributes to our purpose, which is to create a world without waste to preserve our planet. We're also expected to add significant value well beyond our 15% internal rate of return. It removes the significant and growing cost of landfill and provides revenue streams through the sale of hydrogen and crude grade carbon dioxide. On to my last slide on the FY '21 results and outlook. In summarizing fiscal '21, it is really pleasing to see the business delivering financially for our shareholders. It is also pleasing to see substantial progress on our strategic initiatives, which will provide shareholders with solid and growing revenue streams from adjacencies to our metal recycling business. FY '22 has started very well. The consistently strong quarters in the second half of FY '21 have continued into July actual results. COVID still remains the biggest direct and indirect risk to disrupting this very good start, whether it be through disrupting demand, supply or the supply chain. Looking further ahead into the potential drivers of the medium to long term, we expect to see the impact of stimulus spending to increase the demand for recycled metal, whether it be infrastructure spending or retail consumption. Our view is that cloud repurposing and recycling is an ever growing opportunity that perfectly suits those capabilities and sustainability credentials. Global decarbonization is a multi-decade issue. Steelmaking and electricity generation are huge industries that must make significant contributions if we are to achieve a lower carbon world. Recycled metal will play a vital role in this. Finally, I would like to thank all Sims employees. FY '20 was a really challenging year, and it would have been easy to slow down in FY '21 as the business improved. Rather, our employees have captured the opportunities in a very safe and sustainable manner. Congratulations to all of you. Operator, back to you.

Operator: [Operator Instructions] Your first question comes from Lee Power from UBS. Please go ahead.

Lee Power: [Indiscernible] 0

Alistair Field: Thanks, Lee. Yes, July certainly has continued the trend that we saw in the third and fourth quarters of '21. So yes a really good start.

Lee Power: Okay. And then, I mean, I guess it's hard because there's been so many disruptions across the business, you can see that in terms of the intake with ANZ. I mean is SAR, can we use that as a guide, the cleanest guide, as to where intake volumes would be without kind of COVID disruptions ex the acquisitions, obviously?

Alistair Field: Naturally, it does differ from region to region. SAR had a really strong performing year across its whole Southern region of the United States. And obviously, from a regional point of view, those states have obviously economically operated far sooner than the other states, New Jersey and New York, that were shut down for quite a bit of the first half last year. But it does go from region to region. The U.K. has probably been a little bit more consistent in and out of COVID. Australia has typically, as you can see from last year, improved. But I do get the sense that the period that we're in now will just create a buildup of material and that will be released. I would suspect once COVID lockdowns have closed. But it is regional. I think SAR is quite unique in its operation in Southern U.S.A.

Lee Power: Yes. I guess it's just hard trying to split out what's COVID and what's just the recovery business. Obviously, it seems to have come back probably slower than I would have thought. In terms of Sims Lifecycle, can you just maybe give us an idea of the percentage of EBIT that comes from repurposed resale units and maybe how the margin differential between doing that versus shredding the product?

Alistair Field: I'll comment, and then I'll hand over to Stephen. Obviously, for us, shredding is not ideal in terms of margin operation and our movement of measurement of that business from tonnes, which is typically a metal play, which is all about shredding, is obviously not what our customers are seeking. So that switch and that ability to listen to the customer from that division was very focused on listening and then, obviously, switching to a refurbish, reuse, resell type proposal. And that is certainly from a margin improved basket compared to just a shredding operations. So Stephen, I don't know if you want to comment.

Stephen Mikkelsen: Yes. Sure, Alistair. So the two points I'd make. Firstly, the contribution from sort of repurpose, reselling, redeploying is getting larger and larger. During the year, there was still - there's still a reasonable contribution from the straight recycling. But what I would say is we see the growth. So we see the numbers going forward. It's going to be the repurposing business, with the repurposing product or the offering is going to be, by far and away, the most significant part of the growth because that's the way that our customers are wanting to go. I mean they're all trying to achieve sustainability standards as well. And I guess the gold standard of sustainability is reusing, redeploying, repurposing. Sorry, I just forgot the second part of your question Lee.

Lee Power: So the first part was just on the percentage, if you have an idea of how - what percentage is still to go. And then there was a question around relative margins, but it sounds like...

Stephen Mikkelsen: So the relative margin of repurposing is much, much larger because it's mainly done as a service, if you like. So we're not taking on ownership. So we don't - we can recognize a sale and then take a margin off that. We provide that as a service. So the actual margin is significantly larger.

Lee Power: Thank you, I'll let others to get in. Thanks.

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

Peter Steyn: Good morning, Alistair and Stephen, thanks very much. I just wanted to hone in briefly on the SAR. With that $85 a tonne EBIT margin, I'm just curious exactly how much was essentially attributed to, let's call it, the extreme level of profitability by being able to delay intake price increases. Can you give us a bit of a sense of that? Sorry, I'm going to assume that it's slowly normalizing.

Stephen Mikkelsen: Yes, I'm happy to answer that one, if you like, Alistair, so it's a little bit more difficult. We're all dealing remotely on phones and we can't be together. If you're happy, Alistair, I'll go with that.

Alistair Field: Sure.

Stephen Mikkelsen: I think describing it, I mean it is - they're definitely good margins. Extreme margins, I think is describing it a little dramatically. What we're looking at as well at the moment is if you look at the - and it's across all of our businesses, it's not just across SAR. But if you look at the margin percentage, it's actually - it's really a lot more stable. And what's happening is that our margin percentage, we're holding fairly steadily just across a higher price. So really, the view about whether or not that margin per tonne will normalize, and I use the word normalize and inverted comments and come back down to a sustainable level, is really a function of the price. So it's what you think about what you view the price of the product is going to be. And then the margin as a percentage terms of that sales falls out of that. So I think that's a much more stable way of looking at it. I'm not sure if that makes sense or not, Peter.

Peter Steyn: Yes. Thanks, Steve. So yes, it does. And yes, we can probably take the coloring end of that off-line. I guess I'm just curious whether the competitive position that you have in SAR, therefore, begets, at these kind of prices, a sustained level of margins, so you would not expect any degradation in that $85 a tonne if current conditions remain.

Stephen Mikkelsen: History would show that our margins would be maintained, yes. But I mean, these are very - these are high prices. And you would - I guess, over time, you'd expect some competitive reaction. But the high prices also draw out high volumes. And so supply is suppliers there as well. So it's a dynamic equation. And what I would say is that our margin percentages actually stay surprisingly stable across all of these price ranges.

Peter Steyn: Okay. Steve, I appreciate that. And then just a quick question on the Sims Resource Renewal. You start up first half of calendar '22, how we to think about the return profile? Does it ramp up reasonably quickly? Or is there a bit of a process involved in that, if you wouldn't mind just giving us a bit of a sense, Alistair?

Alistair Field: Sure. We're probably the Campbellfield facility will obviously become operational more in the beginning of '23. So that period of commissioning typically takes 3 to 4 months and I think, obviously, depending on how we contract negotiations with regards to the off-take products that we're going to produce. But I would say that it's going to be fairly slow, and we want to get very comfortable with the operation of that. So I'd say over the following 2 years, it's started to see a good return.

Peter Steyn: Sorry, I was picking up the wrong key dates. Perfect, thanks. Thanks Alistair. Appreciated.

Alistair Field: Thanks Peter.

Operator: The next question is from Simon Thackray from Jefferies. Please go ahead.

Simon Thackray: Thanks. Good morning, Alistair, good morning, Stephen. Just follow-on to one of the Lee's questions, if I may, just in terms of the external trading environment. Just in terms of between ferrous and non-ferrous, I mean your own charts are showing just a slight softening in pricing. But where are the key export markets that you're seeing still encouraging signs of growth in both ferrous and non-ferrous at the moment?

Alistair Field: I think when you look at ferrous, we've obviously, as you know, Simon, had a diverse strategy in terms of not only just feeding Turkey, which is typically off the East Coast of the U.S. We've obviously gone into the sort of the whole Middle Eastern region. That area still for us outside of Turkey, there are still opportunities over there from market. South America, obviously, that depends on their economies. But we do obviously diversify around South America. But I think part of the challenge is where the demand is picking up, and that is quite different at different times of the year. And we're seeing in Australia has, obviously, got a very strong domestic market currently. And therefore, we're selling into Southeast Asia like most forks off but not directly into China. And I think there are Southeast Asian markets that are feeding China, and we're obviously feeding Southeast Asia. So it's a bit of a push and a pull. But I think we're quite diversified across the globe. There's no real clear suddenly start out. And I think part that, that is also to do with stimulus are being generated, but also impacted by COVID at the moment. We're seeing Southeast Asia a little bit quieter. They're going to quite a challenge as we are in Australia.

Simon Thackray: Yes, indeed. No, that's helpful, Alistair. And appreciate very much the bit more detail there on SAR. It's extremely helpful. I just want to get a sense of SAR's market position in the U.S. in nonferrous in terms of its relative size, particularly post all the acquisitions it's made and how consolidated that market is already. Are there additional opportunities for SAR? So it's size now and the consolidation opportunities of SAR.

Alistair Field: Sure. SAR, obviously, has a really strong retail non-ferrous business as well as the products that they put through their shredding facilities which generate Zorba and Twitch. The opportunities for them continue. They are extremely good at bolt-on acquisitions, small at source material opportunities. So I still think there's room for growth for SAR in the United States field. I think nonferrous is obviously a strength of theirs as well as ferrous. So I think they would always approach it on what is the best opportunity, and it could be in both ferrous or non-ferrous or just a singular non-ferrous company if there was an opportunity. There's not many outside those that are owned by steel companies, large non-ferrous opportunities just lying around. Otherwise, they would have been taken already. But it's a good performance from that group and quite focused and strategic.

Simon Thackray: No, that's super helpful. And then just a couple of housekeeping ones. I mean, I noted that in all regions other than North America, head count is down again but the North American head count just went up pretty much in line with volume. Just want to understand where we are on that journey and how much the head count reduction contributed to cost out. And do - is that it, I guess, now from rightsizing the business from a head count perspective? And will that head count just sort of grow more in line with volume now?

Alistair Field: That's a good question. So obviously, in North America, we did open a number of feeder yards. As we've shared with you, we do have some organic growth. And those yards are obviously opening up and obviously acquire or require personnel. I think the volume ramp-up, obviously, is obviously a component of our variable cost, and we have seen that go up to match, and that would continue, being same story even declines. But I think from a head count point of view, we're not going after any purposeful reductions. I think we've got a lot of work on our plate and a lot to deliver. So at this stage, it's pretty much status growing at that point.

Stephen Mikkelsen: Alistair I also think it is - I thought it's worthwhile adding that in terms of maintaining the cost out that we do need to get the ERP up and running as well because we are going to get - consolidate the savings around centralizing and standardizing our global processes. So I wouldn't expect, Simon, I wouldn't expect any further sort of major cost reductions. I think we did really well with what we've done, and it's now getting - it's now about consolidating around that.

Simon Thackray: Now, that's helpful. And while I've got your base there one final follow-up on the dividend. If just looked at the $0.30 final, I think the market would have - the Street had about $0.50 for the final dividend. Can you just talk to the decision around the $0.30 ordinary for the final dividend?

Stephen Mikkelsen: Yes, sure. So it's all to do with franking credits. The actual statement that we made to the market back in April 2019, the one we continued to make, is that our desire is to pay 100% franked dividends, which at the end of the day, means that to pay 100% franked dividends, they're only generated in Australia, they're not generated anywhere else. Even in the ANZ result then you've got to back out. New Zealand, you've got a back out. Papua New Guinea, you've got to back out transfer pricing of corporate costs. So it's only Australia that produces them. Now the issue we've had is everyone had a great year, a very, very good year, including Australia, but the proportional size of the foreign-sourced earnings has now got higher. So we decided that we would back away a bit from our paying 100% franked dividends and go for a 50% franked dividend. But as you point out, mathematically that results in a lower payout ratio despite the higher profit.

Simon Thackray: Okay, alright. Thanks, I'll leave it there. Thanks, that's appreciated.

Alistair Field: Thanks Simon.

Operator: The next question is from Peter Wilson from Credit Suisse. Please go ahead.

Peter Wilson: Thanks, good morning. Just to clarify on the comments of FY '22 is starting well and continuing the trend. Do you mean that in an earnings sense, i.e., the earnings over the last two quarters are repeated? Or do you mean that in a volume sense that the volumes have continued to 95% plus of FY '19 levels?

Alistair Field: Yes. Volumes have continued as well as earnings.

Peter Wilson: Okay. So given that, and I guess that given the prices are high but they're stabilized, what you're saying is that in the second half of '21, there was nothing exceptional in those results related to timing and the change in price. There was nothing exceptional in the second half '21 that you want to call out?

Stephen Mikkelsen: Alistair, I'll have the first. So the direct answer to that would be no in the sense that FY '21, the second half of FY '21, was very consistent quarters and pretty consistent months, you always get some variability. So what it did reflect is - as I said before, it simply reflects the margin percentage we make at that price. So there was no particular - when you look over the whole 6 months, there was no particular exceptional gains on inventory position or anything like that. It was just a very good management - margin management 6-month period.

Peter Wilson: Okay. And in terms of the strategic targets, is there any update on the ferrous targets for FY '25? I know there wasn't any bullet point there. Are those targets still in place?

Alistair Field: Yes, they are. Those targets obviously were set 2, 3 years ago. We obviously do have a program of work that we undertake to achieve those targets, and we're on that journey. Obviously, acquisitions get slowed down during pandemic, et cetera, but we still have a file and we're obviously still progressing some of that. So both organic as well as bolt-ons.

Peter Wilson: And when would you expect to see material progress there? Is it this year? Or is it in later years?

Alistair Field: No, we're obviously busy with that now. So some of these take a little bit longer given travel restrictions around at the moment. But during the next couple of years, we certainly should be acquiring.

Peter Wilson: Okay. And then on cash flow, Stephen, you attributed much of the poor cash outcome to an increase in working capital and inventories as well as the one quarter delay that SAR dividend. Can you confirm whether as of, I guess, the end of July or today, what that cash balance is and whether those 2 factors have reversed?

Alistair Field: I can confirm they're certainly starting to reverse. I can't recollect the number on the call. I guess they are starting to reverse. And I guess what it is, and it beats pricing levels, where you've got Zorba at, $1,600 $1,700 you've got ferrous at $450 $500, some cases even, even above $500 our main focus is on optimizing EBIT. And so therefore, we didn't take a position to maximize cash flow at the year end, which we could have done. I mean, we could have, I think, done some suboptimal sales, early to make sure that the cash was in, you by the 30th of June, and we would have produced a significantly higher cash balance. I'm just looking at the numbers in the 4A that we filed. There's about another $300 million odd, we've got an inventory in June 30, '21 versus June 30 2020. We could have taken a view to like, clear the decks, but I think that would have been a suboptimal outcome from an EBIT point of view. And we took the decision, I think, the correct decision that this we should be optimizing EBIT and cash will fall where the cash falls. And at the end of the year, we had a lot of money in working capital.

Peter Wilson: Can I ask what the strategy is because I guess many other businesses would seek to minimize inventories when you process. So just wondering what the strategy there is, and ethically kind of what pricing environment you're anticipating.

Alistair Field: Right, so just quickly those inventories at the year end, they're not unsold. They are inventories that have sold that we haven't yet reached or largely sold that we haven't yet received the cash for. So our strategy is one around risk management where we constantly monitor sales price versus what the data we're getting back in the input, we're getting on buy price. And we look at clearly we look to minimize risk and maximize margin in that equation. But the cash is the final outcome, where the cash definitely flows, but it's the final outcome. And just the way the market was in the last few months of FY21, it just means that we had more inventory on hand, sold inventory and not inventory, that we were sitting there waiting for the - like we didn't make this big decision to go long inventory, because we think the price is going to rise and hopefully there'll be a better outcome. It wasn't. It was completely not that. It was a constant managing of our margin, optimizing that equation on EBIT and in the cash flow.

Peter Wilson: Sold materials. Got it. That's all for me. Thank you.

Operator: Thank you. The next question is from Daniel Kang from CLSA. Please go ahead.

Daniel Kang: Good morning, Alistair, good morning, Steven.

Alistair Field: Hey, Daniel.

Stephen Mikkelsen: Hi, Daniel.

Daniel Kang: So I just wanted to make a quick update on your scrap market conditions, around the regions. We have seen prices ease back in recent weeks as pig iron prices soften. Also, in that context, if you can talk about recent and likely China policy moves.

Alistair Field: Certainly. Look, I mean, the regions are varied. As I mentioned, Southeast Asia, from a ferrous point of view, fairly quiet. We've seen some challenges in Turkey, floods, fires, etc. But the demand seems to be consistent in July or August from the shipments that we're seeing. So I think Turkey with its COVID seems to be managing very well through this period of time. So we are not expecting any changes around that at this stage. I think China in terms of its growth, it's such a large beast, and it turns around very quickly. We don't sell ferrous directly into China. As you know, it's more non-ferrous and our non-ferrous business is quite diversified as is the ferrous business. The policies that China have opened up in terms of ferrous, we have not seen a large uptake in that. At least this is sort of opinion that that will start picking up in the coming years. The non-ferrous I think we still seen quite a strong draft for copper, aluminum via the auto industry and obviously the shortage in semiconductors as well. So I think both ferrous and non-ferrous, from a global point of view, whilst there seems to be a bit of a lull at the moment, that part of that is also the northern hemisphere has that summer holiday and we do we do expect northern hemisphere to be fairly quiet during these periods. But the process seem to be holding up. There still seems to be demand and this is obviously the promise of stimuluses across the globe. So I think fairly positive in our view.

Daniel Kang: Thanks. Alistair, great color. I guess on the other side of the equation, I'm interested in your take of the level of buying competition for sourcing scrap. Obviously, it was an issue when prices were a lot lower a few years ago. Have the increased supply from higher scrap prices meant reduced competition for the buyer price? Yeah, just a bit of color around that, they'll be great.

Alistair Field: Sure. I think part of it depends on what we buy. So if you're talking about high quality and ferrous materials, be in the UK or Australia there is obviously strong competition for that, particularly that which is the opportunity for non-ferrous material within that purchase. So I think there is definitely - when you take Australia's example, there is some competition for particularly motorcars. But there's a high value in non-ferrous products. So I think that's where you're starting to see or continue to see good competition is around the non-ferrous purchase level.

Daniel Kang: Right. And just lastly, in terms of SLS, can you just remind us of the competitive landscape who are your key players, I guess, key rivals. You've seen some good growth there? Are they really mainly regional local players?

Alistair Field: Look, the focus for us has been North America, obviously, we're a global operation. And that's part of the offering we have with these large tech players. So I think being able to meet the customer expectations of being a listed company, a sustainable company, global operations, does put us into a different level against the local competitor. So I'm sure there are competitors that are in and around the North American region. But it's really our positioning as a global player that I think, is really the advantage of the state. So there's nobody that stands out, other than the companies themselves wanting to do that work.

Daniel Kang: So your customers are global, mainly all global players.

Alistair Field: Yes.

Daniel Kang: Got it. That's it for me. Thanks. Thanks, guys.

Alistair Field: Thanks.

Operator: Thank you. The next question is from Lyndon Fagan from JP Morgan. Please go ahead.

Lyndon Fagan: Thanks very much. I was hoping to pick up on the conversation around managing the business EBIT rather than PAT. I guess I couldn't help I think the managing the business to cash would give you more cash to pay dividends, and then the auto return. I'm wondering if you could perhaps, walk me through the rationale there a little bit.

Stephen Mikkelsen: Yeah, Steven here. So I made the statement. So I guess it's my obligation to justify. This is a short - I mean, we know, this is a short term thing. What we do is by managing the business for EBIT, we're managing risk. And what we should be doing. We should be, in my view, minimizing the gap between the time we buy and the time that we sell, because we can't buy and sell instantaneously. So we tend to - I'm talking ferrous in particular here, which is where the bulk of the cash flow is. We sell in large shipments, 30,000, 50,000 tons, at a go, and we're buying on a daily basis. So managing that risk is very, very important. I guess the point I was making was that by managing for EBIT and managing the cash flow in a present value point of sense, you're managing to the identical amount. We're only talking, maybe weeks of difference between when the EBIT is recognized and when the cash flow happens. And I guess my point was that, in particular, as we were coming into the end of end of June, we just saw - we saw opportunities to be maximizing EBIT, and the cash flow just flows a little bit later. The cash flow flows, in July, August and that just seemed a more appropriate way of doing it, as opposed to saying, well, let's get $20 million in on the 30 of June, rather than on the fifth of June. And yet we're sacrificing, we're either taking on more risk or we're sacrificing, $0.5 million dollars of EBIT. It's - I understand it's a tradeoff, but I think we've got the trade-off. We got the tradeoff, right.

Lyndon Fagan: Okay. And I guess the other thing I was hoping to do is a bit of a bridge between your EBITDA which is $580 million and your operating cash flow, which is $129 million, I know, give or take $30 million of tax and interest. But what - obviously all of that's working capital? Are you able to break it down a little bit? And maybe give a sense of whether some of that unwinds in a material way, next half? Or do we actually need a downturn to really see that working capital come off?

Stephen Mikkelsen: I guess, yes, it will unwind. I mean, but in order for the whole lot to flow back in, you would need to see a decline in the market, and it flows back pretty quickly then, which gives us I guess, a natural hedge against declining markets from a cash flow point of view. But provided the prices stay around these levels, and we're seeing the EBIT, that we're performing eventually, that working capital will flow through the business, and yet we may have had a one-off investment in that working capital, but from then on, you would expect that EBITDA conversion to be pretty good, like it has historically. I guess, what I'm saying is, you're not going to - at these price levels, you're not going to see us constantly increasing the working capital like we have because prices have moved from $250 up to $500. So I would expect to see - I would expect to see a much better EBITDA conversion in FY22.

Lyndon Fagan: Great, so there's no easy way of splitting, how much is related to the bulk of…

Stephen Mikkelsen: The bulk of its inventory. If you look at it obviously the results have just come out. But if you go into the detail of the 4E, you will see there's a cash in there and an inventory note in there. And you'll see that the bulk of it comes from inventory for two reasons. Firstly, yes, we are carrying more inventory at the yearend than we were in in June. But I must stress that, that inventory was largely sold. It was not a position we were holding. It was just that's what it was. But secondly, clearly the price of that inventory is significantly higher as well.

Lyndon Fagan: Yeah, I guess I was just trying to get down to whether there was a missed shipment or several missed shipments or anything like that that might have might unwind fairly quickly.

Stephen Mikkelsen: Everything we did was deliberate. But there was not - we weren't impacted by anything in particular, where we thought a ship was going to come in and be fully loaded and out on the night of the 30th, and out on the night of the 2nd. Everything we did was a deliberate plan.

Lyndon Fagan: Yeah, great. And Alistair, if I may, I just wanted to touch on growth. So I guess Sims has now got a bunch of things going on. You've got the traditional scrap business, but then we're recycling cloud infrastructure where we're trying to extract value from waste dumps. I'm just wondering what your sort of - how you rank these opportunities as far as growth? What is the top of the list in terms of your priorities to grow the business? Is it more traditional scrap? Is it the cloud approach? Or would you actually consider looking at some new metals like, say, lithium, and building some capability to recycle car batteries, which I imagine in the not too distant future, there'll be significant waste related to car batteries.

Alistair Field: Good question. And as you know, the structure of organization that I presented three, four years ago, has the core of our business still being metals, obviously. And that's obviously into ferrous and non-ferrous. But the other divisions, the SLS, we obviously weren't in [indiscernible]. But this is really refocusing and repurposing onto the cloud growth. And that for us was a really clear and path forward in terms of that growth. And I think you've seen the startup sort of trends that we're seeing in that business. So that in our view, is an absolute division on its own and then quite capable of growing to substantial numbers as well. Some resource renewal, again is also a promise that we made in terms of delivering our purpose to our shareholders, and that was to create a world without waste. And so we don't want to stick that million tons of ASR into landfill. And obviously, using the plasma gasification process and obviously producing hydrogen and CO2, that's a new revenue stream for us. And instead, it's currently a large cost and an impost [ph] frankly, because it's a rising cost and obviously doesn't match our purpose either. So again, another the third division. So I think all of the divisions that we have, in my view are critical to giving us that diverse approach. But as a circular economy run across our business, so the idea of being obviously we want to remain sustainable other 50, 100 years. But I also want to make clear that each division has to make its money. And they are different paces, the metal divisions are under four years old, SLS is two years old. So each one of them are fairly new. And that's all part of the long term strategy. We never looked at this as a three-four year picture. This was a 20, 30 year view that the board took and how we presented our strategy. So we're on target to deliver that. And I don't think there's anyone that I'm going to give any favor to, I expect and have expectations of each one of those divisions to deliver what we can. Hopefully that gives you an all-round sense of - the strategy for us is really about delivering the purpose and the commitments we've made. But it is long term.

Lyndon Fagan: And any quick thoughts on lithium recycling?

Alistair Field: Yeah, sorry about that. I'm - with the team have gone through the whole issue of battery recycling, and it doesn't match our purpose. It's not a part that I want to get into. I think there are so many players in that game, and whether you choose the right battery to recycle lithium being one option. I think there's going to be fierce competition. I think we've chosen our path forward.

Lyndon Fagan: Okay. And final question, just on hydrogen, you mentioned, you're looking to sell that to customers. Could you maybe elaborate on how - what sort of quantities and materials could that be and is that an area you'd like to grow more into?

Alistair Field: Well, this is the first plant. Campbellfield. And obviously, for us, we just going through the final hydrogen engineering stages now. So I won't give you any volumes at this stage. And we will share that with you when we can. The opportunity for us is definitely the quality of the syngas we have allows us to produce an industrial class hydrogen. Now obviously, for us, it's about, the blue, the green of hydrogen, and that spectrum still needs to be stabilized or agreed to here in Australia. But our idea of using renewable energy to generate hydrogen, etc., is obviously on one of our programs to make sure that we do produce a green hydrogen. It will take time to do that. We'll go through the phases. So we actually are quite clear that this is going to be part of our future, producing hydrogen and CO2 that's around getting that RP stabilized and hence the Rockley Plant and how we can actually scale up this division. And we've got a very competent team, led by our Chief Technology Officer, and obviously for us, this is definitely a return on a project that we are expecting much greater than 15% return.

Lyndon Fagan: Right, thanks for all of that. I appreciate it.

Alistair Field: You're welcome.

Operator: Thank you. The next question is from Jack Gabb from Bank of America. Please go ahead.

Jack Gabb: Thanks for the opportunity. Just want to follow up on actually one of Lyndon's questions. So if you're not interested in recycling batteries, does that put you at a disadvantage when it comes to recycling EV's and let's say the U.S. gets to that target of 50% by 2030 you're going to be able to set up to be taking those sort of EVs when they come around to be recycled. Thanks.

Alistair Field: I think part of the process of recycling, Jack, is you always take the batteries out. We would never put a car with batteries through a shredder. One that's environmentally but secondly, it's highly dangerous. So any battery whether it's lithium or other has to come out of motor car. We can recycle the rest of the motorcar very easily. So the batteries we typically hand currently and in the future will hand to the battery individuals that actually want to recycle batteries. And we've view that in the past as not something we've wanted to do both financially but also environmentally. So we don't see we will miss out on that at all. We actually could then sell those batteries to anybody.

Jack Gabb: Perfect. Okay, thanks. And then secondly, do you have a view on the European Union obviously, coming out, trying to ban ferrous exports? Obviously, you're not set up there, but would it benefit your UK and US business?

Alistair Field: I think it's the ebb and flow. I guess if Europeans ban export of scrap, that scrap will obviously have to be sold domestically. But if there's a shortage in the market, the demand will rise and therefore the price will, or rather than potentially that might overcome any tariff and you might see that being exploited anywhere. And we've seen that play across the world. So I think the supply and demand equation will play out in the short term if that happened. Yeah, we probably would benefit and not being sold into Turkey and then obviously Turkey then need it from somewhere else.

Jack Gabb: Okay, thanks. I'll leave it there. Thanks.

Operator: Thank you. The next question is from [indiscernible] from RBC. Please go ahead.

Unidentified Analyst: Hey, Alistair, Stephen. The first question, I guess this has kind of been a done in a few different ways already on the call, but I'm just looking at the ferrous metal margins, the $150 price increase that you've seen, half-on-half or year-on-year. I'm just wondering how much of that $150 per ton, are you guys able to keep at this point? Or is that all being passed through to the scrap suppliers?

Alistair Field: Steven, you want to try that?

Stephen Mikkelsen: Yes, no. We're able to - we're absolutely keeping a reasonable portion of it, which has driven up the result? But if we pay for - had to pass the whole lot through, then we wouldn't have achieved the result that we do. And I guess that's why I've been looking at and I think I'm focusing more and more on what is our trading margin that we make on the sales price, and that trading margin has been surprisingly consistent, which shows that as the - and what it basically shows is that as the price rises, we maintain our trading margin percentage, but because we're making a percentage on the higher sales price it flows through to flow through to EBIT.

Unidentified Analyst: So as a percentage is the best way to look at it in terms of…

Stephen Mikkelsen: I think so. And we disclose quite a lot about that in the 4E. So I'm happy. I think over the next few days, I'll talk through it as I speak to various people, including you guys. And the information's there in the 4E that allows you to look at what is the trading margin percentage we've been making over the last over the last three to five years and surprisingly consistent.

Unidentified Analyst: Okay. And can I ask, with the shipments to Turkey have you seen the bulk premium return, because I remember it's something that evaporated about 12 months ago?

Alistair Field: Yeah. Good question. And yes, you do see that in the UK, particularly, where we seeing such a freight challenge where you've got containers in such demand that the competition obviously has a challenge then in not being able to get containers and obviously, for us in the bulk business, both LA as well as the UK, we do have a benefit.

Unidentified Analyst: Can I ask, is that premium higher now than then it was? So what's to think about that? [ph]

Alistair Field: Not pretty much as it might suggest.

Unidentified Analyst: Okay, so it's just returned. And can I ask in terms of the grade demand, are you seeing significant demand for premium grades in the market? And is that causing any issues with your ability to supply those premium grades?

Alistair Field: We can certainly supply them. We - I wouldn't say - it's obviously not the whole market. But certainly we do see when there's bit of competition for a high quality material, a lot of the players drop off, and then the fewer high level competitors that can provide that quality, but it's also around timing. If you've just sold a product now and a request comes up for some more high quality, and you just don't have that in that particular region, somebody else might fill it. So it's a timing issue. But certainly from a steel mill perspective, they are definitely wanting high quality material. And I think that goes to the efficiencies as well.

Unidentified Analyst: Can I ask, similarly with them, I guess in terms of in markets for twitch and zorba the Alumisource acquisition in the US and that - has that changed your destination mix in terms of where you're sending your non-ferrous product.

Alistair Field: The Alumisource acquisition was really focused on being able to allow us to get closer to the end source. So yes, that has happened. And secondly, the actual Alumi quality that we provided at that facility is also a much higher level than we normally provide. And that [multiple speakers].

Unidentified Analyst: I guess where I'm coming from - yeah are you exporting as much non-ferrous, as you were, say a couple years ago?

Alistair Field: Yes, we are. That Alumisource is more domestic at this stage.

Unidentified Analyst: And just for the UK market, you've closed a number of sites over the past two years as you're sort of rationalized that platform. We've seen a very big bump in volumes this period. I'm just wondering how what levels of utilization would you think you're running at in the UK? How much how much more volume can you take? I'm going to ask John Glyde, our Operating Officer to give his view.

John Glyde: Yeah, thanks, Alistair. Look, we close for [ph] insights, they were largely unprofitable sites. But we still have plenty of capacity to cope with increased volume. We have one [indiscernible], that can be easily returned to production very, very quickly. So capacity is not a problem.

Unidentified Analyst: And just one final question, in terms of this production of hydrogen out of the site, is that hydrogen is being extracted from the gas? Or are you using the gas to generate electricity, then generate hydrogen?

Alistair Field: The hydrogen is extracted out of syngas.

Unidentified Analyst: Okay, thanks guys.

Alistair Field: No worries.

Operator: Thank you. The next question is from Scott Mile from Remote Equity [ph] Research. Please go ahead.

Unidentified Analyst: Hi, thank you very much. I just had two questions on your - on some of the newer businesses just following on, on the resource renewal business. Could you just clarify why you ended up choosing to make hydrogen not electricity, please? And do you - are you going ahead with that offtake, I guess, for both the hydrogen and the glass product.

Alistair Field: Thank you. The hydrogen, for us was an outcome of the high quality syngas that we ran a trial in Oregon, which I shared with you last year. That trial, which was with our ASR in particular produced very high quality syngas. And what clearly came from that was that there's a large amount of hydrogen, then just using that in the form of generating electricity is not a long term and sustainable process for us. So that was always just a one-off the thinking of having energy produced that hydrogen has obviously allowed us to have the long term view that we've always wanted, and with that quality of syngas, and that quality of hydrogen that we can get the viability of that project is far greater for us. So that is really pleasing for us that it is hydrogen and not the generation of electricity.

Unidentified Analyst: Okay, and you - you don't - you need offtake before you go ahead with that project?

Alistair Field: We have plenty offers, but I think at this stage, as we are closing, of the final design of the hydrogen plant, etc., etc., those negotiations will start taking place at a more meaningful level. But we certainly will make sure that we negotiate for the long term as well.

Unidentified Analyst: Okay. And any idea of that the volume of hydrogen you can produce?

Alistair Field: Not at this stage. Obviously, I do have an idea. But until we finished engineering design, I'll share that post that event with you.

Unidentified Analyst: Okay, and Lifecycle Services business, could you just - what's the life span of data center equipment that you recycle, typically?

Alistair Field: Three to four years?

Unidentified Analyst: Wow, that's short. Okay. Thank you very much.

Alistair Field: You're welcome.

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

Alistair Field: Thank you very much. To all of the listeners. Thank you very much for your questions. And I look forward to talking to you over the next few days. And as mentioned, I think strategically Sims very aligned in its strategy and going hard after its purpose. So I'm very pleased with overall performance of Sims. And the employees I think, are doing a fantastic job in the COVID circumstances. So to all of you travel safe and be safe. Thank you very much.

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