Sims Limited (OTCPK:SMSMY) Q2 2023 Earnings Conference Call February 13, 2023 6:00 PM ET
Company Participants
Alistair Field – Group CEO and Managing Director
Stephen Mikkelsen – Group CFO
Conference Call Participants
Owen Birrell – RBC
Paul Young – Goldman Sachs
Lyndon Fagan – JPMorgan
Megan Kirby-Lewis – Barronjoey
Cheng Jiang – Bank of America
Lee Power – UBS
Paul McTaggart – Citigroup
Daniel Kang – CLSA
Anderson Chow – Jarden Group
Kai Erman – Jefferies
Peter Wilson – Credit Suisse
Scott Ryall – Rimor Equity Research
Operator
Welcome to the Sims Limited Half Year Results Release. 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 the forward-looking statements. Those risk factors can be found on the company’s website, www.simsltd.com.
As a reminder, Sims Limited is domiciled in Australia, and all references to currency are in Australian dollars, unless otherwise noted.
I would now like to hand the call over to Alistair Field, Group CEO and Managing Director of Sims Limited.
Alistair Field
Thank you, and good morning for the presentation of the FY ’23 half year results for Sims. Joining me on today’s call is the Group Chief Financial Officer, Stephen Mikkelsen. 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 take a closer look at the green steel momentum. I will conclude with the outlook in the short term and macro trends. Following that, there will be time for Q&A.
Before I turn to Slide 5, which covers the key takeaways from the first half, I’d like to briefly say a few words about the recent earthquakes that struck Turkey and Syria causing significant harm and suffering. Our thoughts are with all of those affected by the strategy. Turkey is our largest ferrous market, accounting for 36.5% of ferrous sales volume in HY ’23.
Ferrous steel mills are located in the vicinity of the earthquake zone and they represent approximately 20% of the country’s ferrous production. We understand that while the steel mills are not damaged, they are not currently operating. Three cargoes were destined for these mills, two of them have already been redirected to other locations and one is currently under review. Although 80% of Turkey’s production is largely unaffected, we are closely monitoring the impacts of the earthquake on the metal markets.
Turning now to Slide 5. It has been a challenging trading and operating environment for the first six months of FY ’23. I am, however, pleased with the resilience of the business and what it is showing. EBIT was above our guidance provided at the AGM due to an overall stronger performance from the final two months of the period. I’m pleased with the strong operating cash flow, even though this was expected due to a reduction in working capital from clearing inventory and lower metal prices. As always, it is very pleasing to see a continued improvement in safety to new records of performance.
Turning to Slide 6. It was a period of significant metal price reductions and tight scrap availability that significantly squeeze trading margins. These challenging trading conditions, combined with the persistently high inflationary environment, led to a material reduction in all our profit measures. This is planned to see on this slide. Underlying EBIT was down 74%, and metal operating costs were up 18%, partly impacted by new business and an increased footprint. Proprietary sales volume increased, mainly out of North America as we reduced inventory levels headed by better freight logistics. This assisted in working capital reduction and increased operating cash flow by 10.7%.
Moving to Slide 7. Slide 7 provides a summary of the financial outcomes in a convenient table. I’ve already spoken about the profit measures on the previous slide. So I will only add that we are paying $0.14 per share interim dividend, consistent with our approximately 50% payout ratio.
On the next few slides, I will talk about nonfinancial measures, starting with health and safety on Slide 8. As I’ve repeatedly said in prior presentations, the health and safety of our people is a huge priority for all Sims employees. It is pleasing to see that the half-on-half lagging indicators continue to improve. The total recordable injury frequency rate has improved to below 0.9%, and this is world-class. This level of performance is achieved through a great safety culture and focusing on getting the critical risk areas right such as the investments we have made in traffic management control.
Moving now to Slide 9 on sustainability. Sustainability is at the core of our business, and it is pleasing to see further 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, which lead to these awards. We have continued to make good progress on our three sustainability focus areas. To operate responsibly, close the loop and be a partner for change.
Before I hand over to Stephen, I’ll turn to Slide 10, which sums up the markets in the first half. The charts highlight a couple of important points that resonate throughout the current half year results. Firstly, the dramatic fall in ferrous prices from their record peak in April last year, in the high USD 600 per tonne all the way down to the low 300s as we started FY ’23. There has been some sign of recovery as we finished the year in the low 400s. Zorba prices declined slightly in the first half of 2023 compared to the prior period. Secondly, export freight prices have fallen reflecting better logistics overall, and that assisted us to reduce inventory.
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 12, which summarizes the group results and some key metrics. Lower sales revenue was predominantly driven by a much softer average ferrous price down 12.3%. The lower sales price, combined with stiff competition for available scrap, reduced the overall metal trading margin by 12%. When this reduction was combined with 18% higher costs in the metal business and a 62% reduction in the contribution from SA Recycling, the impact was a 74% reduction in EBIT to $93.3 million.
On Slide 13, for convenience, we summarized EBIT and volumes by division. To avoid being repetitive, I will turn straight to the more detailed slides.
Looking at our North America metal result on Slide 14. Intake volumes were down, but sales volumes were up, reflecting a solid reduction in inventory. Trading margin decreased 8.6% despite the benefit from foreign exchange translation. That same foreign exchange translation benefit adversely impacted operating costs, which were up 18%, excluding the impact of the acquired ARG business. Overall, EBIT was down 73.4% to $37.8 million.
Turning to Slide 15. ANZ also reduced inventory with flat sales volumes, but a 4% decline in intake volumes. The trading margin was down by nearly 16% for similar reasons to NAM. However, ANZ managed to hold cost increases to 6%, a respectable outcome, given the level of inflation during the period. Overall, EBIT was down 44% to $53 million.
The U.K. is presented on Slide 16. Once again, the trading margin was down for similar reasons to NAM and ANZ with one exception that it was further adversely impacted by foreign exchange translation. Due to some significant foreign exchange translation movements, we have inserted a constant currency table comparison for the U.K. NAM and SA Recycling in the appendix on Slide 41.
Operating costs were up significantly in the U.K., particularly when adjusted for foreign exchange translation. While some of this is from the opening of shutted yards and some one-off costs, there is no doubt that the U.K. has been more severely hit by inflation, the NAM and ANZ. The combined impact of lower margins and higher costs pushed the U.K. into a loss-making EBIT of $3.6 million.
On to Slide 17. The recurring theme for the SLS business has been the lockdown in China, severely impacting resale prices. This continued throughout the first half. And while China has opened up, it is not clear when the market will normalize. TrendForce and external party forecast this to be the end of calendar 2023. I remain cautious about this prediction. The good news is that repurpose units grew half-on-half by 38.5%. And there was also a near 29% sequential half growth.
Moving to Slide 18. SA Recycling was negatively impacted for very similar reasons to NAM. It is worth noting that there was a $6 million benefit in HY ’23 compared to half year ’22 and from reconciling U.S. GAAP to international standards under which Sims reports. This benefit will continue into the future.
I’ve also highlighted on this slide for the first time is a recycling is gearing. Despite significant acquisitions over the last few years, its gearing has remained relatively stable, reflecting strong cash flow generation to pay down debt used to fund these acquisitions.
Turning briefly to Slide 19. There are only two points I want to highlight. Firstly, Sims’ municipal recycling was significantly and negatively impacted by lower plastic and paper prices. From November, as a result of a restructure into a much larger entity, we no longer equity account for SMR, and you will notice from the accounts that is now classified as an asset held for sale. Secondly, while LMS had a strong first half, this was largely timing, and we are not expecting a material contribution from the second half.
Moving to our cash generation on Slide 20. The main story on this slide is the release and working capital of around $187 million as inventory levels were reduced and prices for ferrous also reduced. Inventory reduction is clearly shown in the chart on the bottom right-hand side of the slide.
Moving to Slide 21. The strong operating cash flow reduced net debt from $102.7 million, down to $33.4 million despite distributing over $110 million in dividends and buybacks. It is worth noting that the large final dividend paid in October ’22 utilized our available franking credits to the half year ’23 interim dividend of $0.14 per share is unfranked.
My final slide is CapEx on Slide 22. At the AGM, we forecast full year sustaining and environment CapEx of $170 million, down from $220 million forecast at the August results presentation. We are on track to achieve this, having spent $92.4 million in the first half.
I’ll now hand back to Alistair.
Alistair Field
Thank you, Stephen.
The next few slides focus on the momentum building around green steel and also a progress update on our growth strategy. Turning to Slide 24. As we have said previously, the transition to a low-carbon and circular economy presents a significant tailwind for our business. We’re in a privileged position today to enable the decarbonization of the steel industry.
The sector is responsible for up to 7% of global emissions. As industry leaders, NGOs and policymakers are under pressure to reduce the negative climate impact of the industry, a new class of steel has emerged, green steel.
Although there are uncertainties regarding the standards and pricing of green steel, in the last few years, governments and industry associations have accelerated plans to create green steel markets. The slide shows some examples of plans proposed by governments and industry groups that pave the way to a green steel industry. Although some of the initiatives are more advanced than others, they are a strong signal that transition has started. Looking now at wo examples. United States and the EU have joined forces to develop a common methodology for assessing the embedded emissions of traded steel.
Also in the U.S., the Bakken Task Force program aims to support low-carbon construction materials, including steel. Moving to Slide 25. To understand the dynamics driving the green steel momentum, we must look at the demand from our customers and end users of steel, the car and consumer goods manufacturers as well as property groups. They all need recycled metal to decarbonize their supply chains and derisk their businesses. Increasingly, we’re also seeing these stakeholders integrating circular strategies into their business models.
Moving to Slide 26, which puts into context our position to capitalize on this growth. 106 years of operating in the recycled metal business places us in a privileged position to capture this growth. Our unmatched capability, assets, market position, geographic diversity and financial strength developed over the years give us a strong platform to continue to grow our business in the years to come.
In response to the green steel opportunity, we have conducted various technology trials and process refinements to enhance the quality of our product outputs to meet the most stringent future steelmaker requirements. I’m pleased to say these trials achieved very promising results in HY ’23.
On to Slide 27, which provides an update on the growth strategy. Despite a very challenging six months, we have continued to execute our growth strategy. I’ve already referred to a few of the items on the slide, so let me highlight some others. SA Recycling has integrated its PSC acquisition into the business. This was a significant and complicated transaction that sets SA Recycling up for further growth.
We sold surplus land and have already recycled some of the proceeds into more strategic smaller parcels of land in other locations. We’ve also nearly completed the Sims Resource Renewal Rockley pilot plant.
I want to move now to the outlook on Slide 28. We have seen signs of rising prices and better volumes as we completed the first half and entered the second. It is premature, however, to call a significant downturn following 18 months of record prices, volumes and profitability ever. There still remains uncertainty around inflation, labor shortages, interest rate rises, geopolitical events generally and China’s trajectory, specifically. The macro trends haven’t changed.
As I’ve detailed in this presentation, the demand for scrap is positively driven by its pivotal position in reducing carbon and steel production. And in the SLS business, the positive medium-term outlook, closing the loop by repurposing the cloud remains. We’ll now move to Q&A. I’d like to thank all Sims employees for the last six months, through efforts around keeping each other safe at work are outstanding. Despite the difficult trading conditions, we have continued to perform as a team and deliver a high credible financial results. Congratulations.
Operator, back to you.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Owen Birrell from RBC. Please go ahead.
Owen Birrell
Hi good morning guys, thanks for the results today. I’ve just got a couple of questions. The first one is regarding your earnings momentum very strong beat versus the guidance that you provided in November, suggesting your second quarter was a much stronger quarter. Are you able to give us an indication of what the EBIT profile was first quarter versus second quarter?
Stephen Mikkelsen
Yes. Good to talk to you again. We haven’t spoken for a while. Nice to hear your voice. So I think there’s a couple of points on that. Firstly, in the year-end result, I referred in my commentary to the – there was a goodwill adjustment in SA Recycling. And that goodwill adjustment, we didn’t know what that was going to be at the AGM. And so that was some upside to the guidance. And combine that with – we have an insurance captive and there was just a – there’s the ongoing revaluation of liability expectations on that. And there was a couple of million in there. So between the two of them, let’s say that was around about that was around about $8 million.
Now that’s ongoing. That’s not one-off. The goodwill adjustment will happen from now on. So that means that the result – if we’ve known about those things at the time, we would have been around about $8 million higher. So let’s say that takes us to about $85 million. The rest of it…
Owen Birrell
So just to confirm on that, Stephen, you said that $8 million, is that per half ongoing?
Stephen Mikkelsen
Yes, it will be. Yes, it is. And that’s – yes, sorry, short answer is yes, it will be. The – then so there was definitely a stronger trading environment or a stronger trading environment for the November, December than what we thought was the case at the AGM and that was driven by – the prices did rise over that period. Demand was good, which was very helpful as well. So there is a skewing to the second quarter. But I wouldn’t over think that as a – like as a significant upturn.
Owen Birrell
Are you able to give us a sense of the balance between the two? Because a simple analysts, we just kind of want to extrapolate something. I was wondering what your exit run rate was?
Stephen Mikkelsen
Yes. Okay. It’s a little bit complicated, to be frank, by the result from LMS because they clearly had a very strong first half, and that was skewed almost entirely to the first quarter.
Owen Birrell
Could I ask maybe then just for the metals business?
Stephen Mikkelsen
Yes. I mean, look…
Owen Birrell
Proportionately?
Stephen Mikkelsen
Yes, I’m a little bit reluctant to do that because I think there’s many, many things because I clearly understand where you’re coming from, where your question is coming from, but there’s many swings and roundabouts within that skewing. I think it’s probably – I think it’s the most balanced statement I can say is that we definitely saw some rising prices and some stronger volumes as we came into November and December period. But I wouldn’t be describing that as Alastair said, a significant upturn that sort of signals the end of some risk that we can see in the coming six months.
Owen Birrell
Okay. That’s fine. Second question, just turning to Turkey. Firstly, can I just confirm the number that Alistair mentioned at the start, was that 36% of sales last year for Turkey?
Stephen Mikkelsen
Yes, that’s correct, Owen.
Owen Birrell
Okay. And then what you’re seeing at the moment, how – what proportion of the Turkish mills have sort of shut down? And do you have any indications of when they’re likely to restart?
Stephen Mikkelsen
Okay. I’ll give a holistic answer here. Obviously, catastrophic and then obviously, we’ve obviously been in touch with all of our customers and we constantly in touch almost daily. Sims Limited obviously donated to UNICEF and to [ABA] to obviously help that humanitarian crisis. I think the affected area that we’re talking about runs between 20% and 30% of the steel industry. That remaining part that is not in the affected area, they’re continuing business as usual. So let’s say, 80% of the steel industry in Turkey is continuing. The affected area that we’re talking about, obviously, a much smaller percentage, they have no damage to the actual malls themselves. The ports that they use to import scrap. There’s no damage to the ports.
In actual fact, they were unloading scrap yesterday in some of these ports. So both infrastructure and the ports are all ready to run and are being used in somewhat for. But also understand that those ports are also going to take vessels with humanitarian aid into that affected area. So those vessels, those ships will take priority. As a result, the mills have been asked to supply all the equipment in the aid of the rescue and obviously, the facilitation of all attempts to obviously clean up some of the area.
It is estimated that in two weeks’ time, that all that facilities would be in a position for the steel mills to start up by the end of February, I would say, let’s take it another week, first week into March. So there’s still more feedback that I’ve had from some of the owners is that their workforces are intact, their infrastructure is intact but now the focus really on humanitarian and they expect at the end of the month, beginning of March to go back to normal. I think, obviously, for us, we did have a few cargoes, but they’ve actually been shipped. They’re heading towards other Turkish mills. So we are not concerned about any of our shipments we can divert as we have done already.
But as I’ve just mentioned to you, some of that affected area that are going to take our vessels and obviously, we still have very good relations and contracts in place. So we’re not concerned at all, but it’s really about making sure work with them at this stage, and it’s very difficult, as you can well establish.
Alistair Field
It’s probably worth mentioning as well, of the other unaffected mills, 70%, 80% of mills unaffected. They have significant capacity room as well. So the expectation that they would lift their capacity because they have substantial ability to do that.
Owen Birrell
Okay. And can I just sort of, I guess, a longer-term question around this. The earthquake, obviously, they’ll resolve over time, but is that going to yield a significant amount of domestic scrap in Turkey? And do you think that will put downward pressure on Turkish demand for scrap in the medium to longer term?
Alistair Field
No, I think it’s probably going to be in the reverse. I think the demolition and obviously, the cleanup is going to be something that’s obviously going to be a focus to that government to obviously clean the area. But – we’re very strong in the opinion that there will be a concerted effort to rebuild the affected areas, and that will require, obviously, a steel industry that will have to step up and meet that requirement. And I have a sense that, that’s going to be in quite a sense of urgency and a priority for that government to rebuild and rebuild it probably a higher-quality build and, therefore, more steel.
Owen Birrell
That’s great. Thanks guys.
Alistair Field
Welcome.
Operator
Thank you. Your next question comes from Paul Young from Goldman Sachs. Please go ahead.
Paul Young
Thank you. Good morning, Alistair and Stephen. Good little EBIT bate and good operating cash flow, so that’s great to see. Can I ask a question on the outlook, particularly on volumes. We’ve seen prices up for ferrous and nonferrous. We’ve seen ANZ volumes up slightly half-on-half, but North America was actually down double-digit half-on-half. You’ve spoken about Turkey, but I’m actually more in U.S. volumes. So your peer net recently started, they’re seeing some U.S. steel mills restocking and volumes starting to improve? Just wanted to what you’re seeing in the U.S. domestic market. Thanks.
Alistair Field
Yes, that U.S. domestic market, we have seen prices of rebar and other steel products going up. There is a definite sense of restocking, obviously, in the second quarter, but last year, then you often find destocking for various tax purposes and other reasons. So part of this, we have seen an upswing in the U.S.A. in taking both domestic pricing, but also in actual volumes.
Paul Young
Okay. That’s great. And then maybe turning to capital allocation and probably a question for Stephen. Stephen, I know you’re not in a net cash target of $100 million, but I suspect the working cap might continue to unwind acetone comments there, but just the absence of a buyback in this results. And also just versus bolt-on M&A. You’ve been pretty active in M&A, but nothing in a sort of recent downturn. So I’m just curious about why a buyback wasn’t announced and I would have thought that I know the outlook is uncertain, but now it’s probably good time through a buyback? And then just what opportunities you’re looking at on the bolt-on M&A front, particularly in the U.S. Thanks.
Alistair Field
Yes, sure. Firstly, on the buyback front, we’ve spoken now for the last year or two about our distribution policy, which is 50% of profits is what we’ll distribute and we’ll distribute it through a combination of buybacks and dividends depending on the circumstances at the time. I guess what we thought this time with that being $0.14 per share for a dividend to sort of reduce the dividend and replace that with the buyback. It just seems a little small, to be honest. It doesn’t mean we are – it doesn’t mean we are never going to do buybacks.
What it means is that relative to this year result, we’ve distributed 50% as we want our policy to clearly be – and it just see more logical to do it with dividends than a small buyback, which we thought would be a little confusing and meaningless. So that’s that.
In terms of bolt-on acquisitions, we continue to look. I mean, I think you’re all aware, we’re disciplined around that. We’ve got our hurdles that we have to meet. We’ve been – I think we’ve been cleaning up the balance sheet quite nicely, and we’ve got some capital available there. So we will definitely look for bolt-on acquisitions.
We are looking at bolt-on acquisitions, but everything has to come at a price that meets our required yield rate. So don’t interpret the – I know we haven’t made an announcement around our acquisition for a while, but don’t do interpret that as we’ve gone off the board. We are looking actively. We just want to make sure that we get the value that we require for shareholders.
Paul Young
Okay. Just one last point on the buyback. And sorry to labor on this bit is in your dividend policy there for encouraging you to be a bit procyclical here. I mean, you should be buying back stock, I would have thought on the sector sort of low and cash flows improving. So I’m just curious about how you think about you created by that.
Alistair Field
It’s the other question, but I would just split it into two, is that we have half a year, we have interim result in our final result, and that’s when we formally do the – we’re going to distribute 50%, that’s our formal policy. Between those periods, we are obviously, we have the buyback program is open, and we have the freedom to do buybacks between those periods if we think that’s appropriate. So yes, don’t interpret it as we’re not going to do anything. It’s just that this is our policy.
Paul Young
Okay. Thanks. I’ll pass it on. That’s it from me.
Operator
Thank you. Your next question comes from Lyndon Fagan from JPMorgan. Please go ahead.
Lyndon Fagan
Look, my first question is just back to that volume outlook on Slide 26, 9.6 million tonnes in FY ’25. I just wanted to gauge your level of conviction around delivering that. And maybe if you could unpack it a little bit in terms of what component you think relies on doing M&A versus organic growth?
Alistair Field
Sure. I think part of the program that we have is the bolt-on acquisitions in each one of the regions. And obviously, for us, those need to meet the hurdle rates that we set – there certainly is discussions in terms of M&A, where we have larger acquisitions that are potential, but these take a long time. I guess part of the aspect for us, that is an aspirational target that we definitely want to go after. But that is not at all costs.
And as Stephen said, our discipline around capital and the return hurdle rates have to be met. Otherwise, that target is at risk. So part of this is working through and being able to negotiate wisely, making sure that all the filters that we put into place about choosing these acquisitions have to be in the right areas and the right continents. So that is an ongoing problem in terms of just being able to close the deal out, I would say that this does take time.
So absolutely, M&A is a part of that delivery. I think the organic growth, obviously, we have done that right across particular areas, both in Australia and in the U.S. in particular. That is obviously a much slower process in terms of being able to open yards from scratch, and they take six months to 12, even 18 months to actually get to the volumes that we target for those areas. And those are part of a wagon-wheel approach.
They typically are feeder yards that feed to shredders, et cetera. So we’re not intending to open any particular yard and put a new shredder on. It just takes too long at this stage in the permitting process. So part of that is actually the M&A, how that steps in. I think another important aspect, which is not part of that 9.6 million tonnes we talk about is also supporting our joint venture partner which is obviously SAR.
And that’s obviously a key strategy of ours of where they can operate and how they can actually speedily take up these smaller yards in areas we don’t operate in. So it’s a combined strategy and very focused, but it’s not at all cost, if that makes sense.
Lyndon Fagan
So is it fair to say that majority of that target relative to where we are today, just relies on M&A.
Alistair Field
That is correct. And obviously, from a recycling capital, that’s obviously what Stephen always refers to is that we want to be able to fund this as much as we can from utilizing our existing assets.
Lyndon Fagan
Okay. No, I appreciate that. And so the next question I had was just on the CapEx guidance. So there’s been a few evident flows around that. I’m wondering if you could maybe put a number out there for FY ’23 if it’s not already in the pack somewhere.
Stephen Mikkelsen
Yes. So we’ve got the maintenance and environmental CapEx. We’ve got at $170 million for FY ’23 that was down at the August results, we were guiding to $220 million. But with – I think with the downturn that we experienced, we definitely decided to preserve cash so we took that back to $170 million. The growth CapEx on top of that that’s really dependent.
That’s really dependent on what comes up at the time. So it’s very hard to guide to that. Like I’ll give you an example of the $34-odd million, I think, I don’t have the slide, but $34-odd million we’ve spent in the first half, of that, there was various bits of acquired land that probably total $10 million, $12 million. We’ve got granulation plant that we’ve put in, we’ve got polishing drums. All these are sort of in the $1 million to $2 million to $3 million range.
So the timing of those and the opportunities to do those, it’s just too hard to forecast unfortunately, Lyndon, but $170 million on your ongoing environmental and maintenance CapEx is what we’re forecasting for the full year.
Lyndon Fagan
And just to clarify, the $50 million that was cut, should we be just rolling that into FY ’24.
Stephen Mikkelsen
Yes. FY ’24 and FY ’25, yes. It was a cash preservation move because there were some pretty uncertain times as we’re in August, but that’s expenditure, we still have to occur at some point, absolutely. But I don’t think we’ll get to do it all in ’24. I think that’s just to be too hard. But over ’24 and ’25, that will come back without a shadow of a doubt.
Operator
Thank you. Your next question comes from Megan Kirby-Lewis from Barronjoey. Please go ahead.
Megan Kirby-Lewis
Thank you for taking my questions. Just firstly, just looking, I guess, for some additional commentary just on the volume outlook for second half ’23. And I just note, I guess that the first half was supported by that wind down of inventory. So how is your intake volumes tracked year-to-date? What sort of inventory do you have available? And should we be thinking about your sales volume has sort of been in line with the first half? Or do you think that you can lift volumes relative to the first half?
Alistair Field
Sitting here now, and I’m conscious that there’s many conditions can change. I think it is fair to assume that the second half will be broadly in line with the first half without the – obviously, the first half benefited from that inventory sell-down, which is what would prompt me to, that’s what we promised the market. We knew we’d built up inventory with these poor freight conditions, and we said our expectation was to clear that inventory in the first half and we did. But I still think the second half is broadly – I think we can match it. We are seeing – the intake levels have been pretty good.
January is typically a slow month, particularly in the northern hemisphere with pretty cold winters. But the January intake flows despite that have been nice and solid. So where I sit now, I think it’s a fair assumption to say that we aim to meet the same volumes in the second half as first half despite not having to sell down inventory.
Megan Kirby-Lewis
No, that’s perfect. Thank you. And I guess just then since intake volumes seem to be improving slightly. It would be reasonable to expect trading margins should improve but probably still below that sort of long run average, just given overall I guess, scrap supply is still fairly tight.
Alistair Field
Yes, I think that’s a fair assumption.
Megan Kirby-Lewis
Okay. That’s all for me. Thank you.
Operator
Thank you. Your next question comes from Cheng Jiang from Bank of America. Please go ahead.
Chen Jiang
Good morning, thanks for taking my questions. A few from me, please. I’m just wondering what are the primary drivers for your underlying EBIT you released today basis back to AGM? And how much is by your underlying business versus you mentioned accounting changes and the revaluation of insurance I have a few more updates.
Stephen Mikkelsen
So I think as I said, let’s call it around about $8 million was from the goodwill – additional goodwill amortization and the insurance revaluation. But I would stress that those are ongoing. That’s not just a one-off, that’s not a one-off thing. And what – in particular, the most material part of that is in the U.S. where SAR is based and SAR operates under U.S.
GAAP they amortize goodwill under IFRS, which we operate under, we don’t amortize goodwill. We take with test goodwill for impairment annually. So therefore, the amortization and the depreciation of goodwill that SAR is doing, we have to back that out. And that’s the benefit we get, but that will be ongoing from an EBIT point of view. The rest of it, which is – which the rest of the beat is the underlying conditions were better than what we saw at the beginning of November when we were having the AGM Ferrous prices rose over that period.
We were probably around that stage. We’re probably sort of in the $370 million to $380 million over November and December, they rose up to the early 400s, maybe got up to as high as 420. So we – that drives more scrap out of the market and the opportunity to make a market.
And it’s also worthwhile pointing out that the Zorba held up nicely, both organic held up nicely. And at the beginning of but maybe there was a little – we were thinking there might be a little bit more softness in there, and that didn’t eventuate, zorba held up quite nicely despite, I guess, car manufacturing being fairly benign or maybe even somewhere between benign and depressed – those are the main reasons.
Chen Jiang
Thanks. Thanks, Stephen for your answer. Since you mentioned scrap prices have been increasing in the last three months since your last update at AGM, I think, around 15% increase since November. And we saw a few U.S. steel companies have increased HR prices in the last few months as well. I’m wondering, do you think your comments today are conservative given the market is improving? What’s the upside from your views mentioned today that the uncertainties of the second half outlook?
Alistair Field
It’s a good question. I hear what you’re saying about the U.S. steel mills, and there is confidence in them and they are restocking and we have seen prices of finished goods rise in the United States. Obviously, the steel prices have followed that. But from a conservative point of view, we do see a number of positive indicators, like you’ve just mentioned, but also the hospital geopolitical challenges.
Turkey is obviously a wait and see at this moment, pricing is hovering and the market players are just sitting out at the moment. So we’re trying to be conservative, yes. And then from an upside point of view. Obviously, if prices rise and there’s no major issues across the globe, then I would expect the Southeast Asian market to continue its good performance was non-ferrous. And hopefully, Turkey can get going again end of February, beginning of March, and we see some stabilization in the actual ferrous market. So a lot of that is also going to depend on the actual demand and what comes next after the restocking.
Chen Jiang
Thanks Alistair. So based on your comments today, it feels like you think the current square prices are not sustainable, is my understanding correct?
Stephen Mikkelsen
I don’t know, it’s Stephen. I don’t know if we’re saying that current scrap prices are not sustainable we just think there’s risk. They’ve risen quite nicely over the last period, but there’s always risk in that. And that’s – we just simply want to point out the risks.
Chen Jiang
Yes, sure, sure. Understand. May I have another two, please. Just wondering the scrap availability. If you can give us some color on the infilled the scrap availability in U.S. and Europe as well as in the. And what do you think the risk to the – I mean, after and then the staff rate?
Stephen Mikkelsen
And if my context is wrong, you can send me another question. But in terms of the context in the United States, there is availability of scrap in the domestic market to meet the growth in ERFs and hence, why they still have the ability to export out of the U.S. I think the European position is to be determined probably by the end of June, whether there’s any limitations on export of scrap out of Europe, and that could affect the availability of scrap. I think from a Southeast Asia point of view, there are certain countries that are going to be importing scrap for many years to come, and China is one of them. India is another.
So the availability of scrap is going to be regional. And I think that’s why Sims is in such a strong position. Geographically, we situated where we can export scrap and make sure that, that availability is met. And I think in the longer term, you’ve seen the growth of – you’ve seen the decarbonization journey. You’ve seen the targets that the automotive industry is setting out and the steel industry and our role in being able to support the steel industry.
So I think the availability of scrap is going to be very competitive. And I think we’re very well positioned to compete in that growing market. So I’m very confident, and that’s really what we’re saying in our medium- to long-term outlook.
Operator
Sorry Jiang, it’s we have a long queue. Do you mind maybe going back to the Q1 then if we have some time, we’ll take more questions from you?
Chen Jiang
Sure. Yes, we can take it offline. Thank you very much. Thanks. That’s all from me.
Operator
Thank you. Your next question comes from Lee Power from UBS. Please go ahead.
Lee Power
Thanks Alistair, thanks Stephen. Just the restocking piece, Alister, do you think that’s done? And if not, how much further you think how far through the restocking story do you think we are?
Alistair Field
Look, I think it’s going to take this quarter to probably restock when you look at it across, but I also think it’s going to depend on region by region. I think the U.S. has got quite a bit of confidence in terms of infrastructure spend is obviously materializing and there seems to be a level of confidence around the steel mills. So I would think that they are going to be restocking for the next two, three months, but I also think the demand is fairly strong in the United States. So that’s a positive for us.
And I think the international market in terms of Turkey, et cetera. We have seen obviously restocking and then the question is whether the U.S. – sorry, the U.K. domestic market is also going to restock and pick up more of local scrap. And that obviously restocking, I think, will be fairly quick in the U.K. probably end of February. But I think the overall sense that we have is that we’re really waiting to see that supply pull in the rest of the market. And I think with Turkey, just in a bit of a low at the moment, I expect that to pick up again in March, April.
Lee Power
And then, I mean, I understand it’s obviously early days with Turkey. But like operationally, is there – are there any changes that need to be made? Like how hard is it operationally to reposition volumes from Turkey into other regions? I’m assuming Southeast Asia? Or is it just price that ultimately drives it?
Alistair Field
Well, look, I mean, let’s assume everything being normal in Turkey being okay. Obviously, we do diversify and send everywhere in the world. But Turkey is obviously one of the largest takers in the world given their EIF. So they are going to continue. I mean, as I said earlier on, 80% of their market now is carrying on business as usual.
So I don’t think there’s any decline in Turkey taking scrap and – and as I said earlier on, I think they’re going to rebuild and that’s going to demand scrap and obviously, steel production to support that infrastructure rebuild. And as sad as this is an event, Turkey will rebuild. I’ve shown that before in the past. So I think they are definitely going to be able to continue taking our scrap. I don’t think there’s any risk of that.
Lee Power
Okay, excellent. Thanks for the call. Appreciate it.
Operator
Thank you. Your next question comes from Paul McTaggart from Citigroup. Please go ahead.
Paul McTaggart
Morning. So two questions to follow up. So Firstly, you talked about structural tailwind steel distributing a positive. I think we’d all agree with that in terms of demand for scrap, et cetera, EAF production. – the sellers of assets, when you do bolt-on acquisitions, I must recognize that already. So I’m just trying to get a sense of how much of that gives away given away in acquisition price in terms of expectations of sellers?
And my second question was really around cost. I mean, you’re talking confidently about holding costs into the current half, flat on the previous. But in the mining sector, we’re not seeing a reduction in cost inflation yet. So I just wanted to understand what you’re able to do to maintain costs flat into the current half?
Stephen Mikkelsen
Yes. Sure. Thanks, Paul. It’s Stephen here. The question on how other people are seeing the tailwinds and how much do you have to give away? I guess that comes into that discipline around price. we don’t want to give it away. We must get our hurdle rate. What I would say, though, is that not everyone is as well positioned as we are to take advantage of those tailwinds. It’s a complicated business to collect scrap from different locations and make your decisions of whether or not you’re going to sell domestically or exported?
And do you even have the ability to export it. do you have access to the ports that we have access to. So we have advantages that allow us to bid competitively where both parties are happy. And I’d also add to that, not that we give away synergies, but we also have cost synergies as well around that, which we don’t give away as a matter, of course. But as a result of that, you do in negotiations, find a price where we get our minimum hurdle rate and more and the seller gets a price that they’re happy with because they don’t have access to what we have access to.
Alistair Field
Just on that, it is fair to say that, yes, there is an expectation from a number of these folks that might be wanting to sell their business that they want more. And that’s obviously why it does take longer to negotiate.
Stephen Mikkelsen
Yes, yes, yes. On the cost side and what gives us some confidence that we’re going to be able to maintain costs. And in this environment, can I say maintain costs plus or minus 3%. It’s not the old days of 0 inflation. So it’s hard to be deeply accurate.
But I guess the inflation that we’re seeing in our costs was particularly strong around tipping fees and energy costs and repairs and maintenance costs. And we did see that flatten off as we got to the end of the second half. And our view is that, that will continue into the future. I mean – but least be frank, it’s flattening at a very elevated level of what it was just two years ago. So we still have work to do to reduce costs.
I guess what we’re not seeing is just that constant 8%, 9% inflation is going to continue in our cost base into that – into the second half. And as for the mines that I honestly don’t know. I don’t know their cost structure well enough to comment on why ours would be maybe not a benign outlook but a more flat outlook than they are.
Paul McTaggart
Thanks. I think the morning is obviously going to hit a lovely component, which probably [indiscernible] a bit. Thanks for that.
Operator
Thank you. Your next question comes from Daniel Kang from CLSA. Please go ahead.
Daniel Kang
Good morning, guys. Just one from me. SLS, really encouraging to see that volume jumped nearly 40%. But clearly, resale prices are still under a lot of pressure. Now with China reopening, are you seeing any signs of life on resale prices I note that you made the point that you expect prices should normalize by the end of this calendar year. Just maybe if you can elaborate on that.
Alistair Field
Yes. So thanks, Daniel. I think the short answer to your question is no, we’re not, which is why I sort of had some caution. I know we have this force outlook, which is an external experts that say, end of ’23, they expect them to normalize. Right now, we’re not seeing that, to be frank.
We would have expected to see it by now, but it’s not happening. So I just think we should just have a cautious outlook. China shut down very quickly and very dramatically, and it’s opened up in the same fashion. And it’s all a little bit hectic. But I think in summary, what you should be taking away is we are – right now, we are not seeing that improvement but I’m going to add, you’re right, it’s very encouraging to see the repurpose volumes growing because when the market does eventually recover, we’re in a nice position. But right now, we’re not seeing it.
Daniel Kang
Okay. And when TrendForce say that they expect prices to normalize, what does that mean? Is that just flattening out or just a recovery from level?
Alistair Field
I mean, yes, it’s such a great word, which is resin. I think – I don’t think anyone sees them recovering to mid-covered levels because mid-cohort levels, we had everybody working from home, suddenly, everybody needing to upgrade their home computers or whatever because everyone was working in that environment. But I guess maybe more of the prices – probably more of the prices we saw just before China shut down as we are, I would say the same.
Daniel Kang
Thanks.
Operator
Thank you. Your next question comes from [indiscernible] from Macquarie. Please go ahead.
Unidentified Analyst
Hi Alistair, and Steven. I just had a question for me. saying in the event there was a U.S. recession, how do you see that impact volumes?
Alistair Field
I can answer the question in the sense that if you are suggesting that there’s a recession in the U.S., we’re not suggesting anything like that. Obviously, from a typical indicator, and this is obviously typical, generally, the health of the economy is often guide for us in terms of scrap. If you’ve got domestic infrastructure build demolitions are taking place. There is a normal turnover of motor vehicles, et cetera, et cetera. Then typically, you see positive volumes in a scrap market and scrap environment.
I think in a recessionary sort of country, you would probably see a slowdown in scrap volumes because part of that is it’s cost-based, people are not going to travel far distances to fetch scrap and then bring it back to big cities, et cetera, where your shred as typically sits. So in a downward recession, you typically would see much lower volumes and obviously higher costs and therefore, reduce margins. But I’m not suggesting anything like that in the U.S.
Unidentified Analyst
Thanks for that. And just a second question on inflation and labor shortages that you called out in your outlook – how has this trended during the quarter? And just with energy costs coming off a little bit, do you see any of that pressure coming off in the second half at all?
Alistair Field
I think those are the kind of the countervailing forces that we were talking about as to why we think that maybe the costs are more likely to be flat. You’re right. Energy costs are coming off. We’re seeing that in some of our maybe starting to come off a little flat and now it’s probably a better expression, flatten out a little bit rather than grow by the big amounts they were. But in the button here is we still see there are still labor shortages, labor inflation. And I think that’s the one that is offsetting some of the other benefits coming through.
Unidentified Analyst
Perfect. Thank you.
Operator
Thank you. Your next question comes from Anderson Chow from Jarden Group. Please go ahead.
Anderson Chow
Thanks. Good morning, guys. Just two questions from me. Firstly, just on the competition for volume. Could you talk about – did you observe any difference between what the integrated steel mills were willing to pay? And versus our scrap metal process or square metal competitors in the U.S. market?
Alistair Field
Look, that varies from region to region. A lot of the integrated steel mills also have their own scrap feeding companies. I think the price that is set is quite openly done in the U.S., in particular, they do indicate where they’re heading and what they’re going to be charging. So I think the steel mills have a certain regional pricing that they typically share. As in competition between two scrap companies, that is going to depend on the scrap.
And obviously, the difference for HMS 80/20 versus shredded scrap, which normally carries a $20 premium, you’re going to have that level of difference, but also that competition depending if that scrap competitor, you’re dealing with has a ship to load and therefore, has to purchase. So it’s going to differ region to region. But typically, the steel mills are quite open with where they’re heading with pricing and the scrap competitors literally compete on a local level.
Stephen Mikkelsen
Okay. Yes. I’m just concerned that given steel mills are – your steel mills are have been consistently increasing the product pricing so far this year and they can probably pay a much higher price for scrap, which kind of creates a bigger pressure on how parts to secure the supply.
Alistair Field
And – I mean I think your statement, I understand what you’re making it. But I think also the transport costs of getting scrap from our site because to remind, we’re largely coastal to get the scrap from there to where the mills are is pretty prohibitive. Yes. And I guess the area that does compete them with them is SAR, but has a strong history of competing nicely in that business.
Anderson Chow
Yes. Okay. Well, that’s actually my next question. So for recycling, so we talk about first half ’23 results, part of the negative impact to EBITDA margin was the full six months of PSC operating costs. Can we sort of provide a bit of a breakdown of what part of that EBITDA decline in the first half was related to PSC and what was due to inflationary pressure? And also whether that whether we should be expecting operating costs for PSC improve in fiscal ’24?
Alistair Field
Yes. A couple of comments on that. We haven’t disclosed separately the PSC cost. But what I would say is obviously, PSC contributed to trading margin. So the EBITDA was up as a result of PSC. It’s just the costs were up. I’d also just have a look at the constant currency slide that we’ve put in, and you’ll see that while SAR’s costs were up through the percent on a constant currency basis, they’re early only they’re up 20%, of which PSC is quite a contributor to that. If you pull out all of that, SA Recycling’s costs are growing at about inflation as well.
Anderson Chow
Okay. Thank you.
Operator
Thank you. Your next question comes from Kai Erman from Jefferies. Please go ahead.
Kai Erman
Hi Alastair and Stephen, thank you for taking my questions. Just firstly, what is the new ERP provider in terms of enhanced ability and benefits just in the context of the deliver EBITDA result being ahead of the guidance that was provided in November? And then just on top of that, is there any guide on the incremental level of OpEx and expenses to the ERP system.
Alistair Field
So on the ERP, that was completed and implemented in July, which was the rolling out into – mainly into our trading division. There was – as you can see in the in the results, there was another – there was a $5 million of additional costs that happened over that July, August period as we implemented it. And that’s the finish of that now. So we will no longer be calling out ERP costs because that part of it has been implemented.
On an ongoing basis, I mean, I think for a while, we will have elevated IT costs of – am I – I’m thinking $15 million per annum, maybe $15 million to $20 million depending on what particular systems we might be upgrading at the time. And that’s consistent with what’s in this result right now that is 100% consistent with what is in the results we presented.
The benefits that have come from it, it’s around – I mean, look, it’s very difficult to say, it’s very difficult to put a number on it. So we got x-million of benefits from this. We get two main benefits from it. Firstly, some cost reduction as we centralized services, which we are in the process of doing. You can imagine we now implement a complicated system in the form of you do run double costs for a while because you want to make really sure that, that system is in and embedded and running properly before you remove those costs.
And the second benefit is just more transparency on information, better ability to make pricing decisions, but it’s hard to have a controlled environment and that you don’t – you can’t say, as a result of this, I was able to make a $3 per tonne bidder trading decision.
And then the other overall comment I’d make is that our previous systems were at a point where we had to replace them. They’re out of support. So it was not a was not sort of an optional implementation that we had to do.
Kai Erman
Thanks Stephen. Just one other question from me. in terms of the outlook for ferrous and non-ferrous. Is there a relative confidence between the two in ferrous nonferrous? And is there any view on where demand is most expected by geography?
Alistair Field
Nonferrous, I think, is going to continue with the strength that we’ve seen in the past six months. That particularly is focused on Southeast Asia. I think ferrous, obviously, for us is strong U.S. market and I think the Turkey market will rebound.
Kai Erman
Thanks Alistair. I’ll pass it on.
Operator
Thank you. Your next question comes from Peter Wilson from Credit Suisse. Please go ahead.
Peter Wilson
Thank you. I just follow up a couple of other questions on North America intake volumes. So the comment that volumes improved towards the back end of the year – from a supplier perspective, where are these additional volumes coming from which segment? Is my understanding that was supply is somewhat constrained given the low inventory of autos and a decrease in construction and manufacturing activity. So which segment of these additional volumes coming from?
Alistair Field
So the comment I made is, first of all, the additional volumes are coming off a low base. So Dave, you remember we said that we believe that a number of dealers were holding scraps the wrong word, but stock planning scrap because they’ve just come off the back of an incredibly strong 18 months. Cash was good. that could afford to sit on it for a while. That’s seen prices come from $650 million down to $300 million with a view that prices are going back up.
As prices went back up, that volume was released. As you would expect we did have some increase in to an end-of-life consumer scrap over that period. And that just – that – those things drove slightly higher intake volume. But as of it was off a low base. I’m not saying there was suddenly a whole – the whole be scrap was discovered as a result of booming times, clearly, that’s not the case.
Peter Wilson
Okay. Good. I’ll leave I there. Thank you.
Operator
Thank you. Your next question comes from Scott Ryall from Rimor Equity Research. Please go ahead.
Scott Ryall
Hi, thank you very much. Hopefully relatively quick ones. Alex, you mentioned on Slide 27, the near completion of the Rocklea pilot plant. I was wondering if you could be a bit more specific with dates there, please?
Alistair Field
Sure. The installation construction of the pilot plant is nearly done, and we probably will put our first set of samples through early April.
Scott Ryall
Okay. Great. Thank you. And then I’d just like to ask a question. There’s been a couple on inventory working capital. And I appreciate Stephen’s discussion around the need to reduce inventory, as you said at the June ’22 results. I guess my – I’m wondering just in the context of the need to deliver cash flow, how you, as a management team, think about that versus the fact that in your short-term outlook, you’ve got competition for scrap likely to continue in the second half. And one of the comments you make on the longer-term macro trends is along those lines as well. So – and you’ve got the uncertainty of the macro environment. So can you just talk us through just from a high level how you’re thinking about inventory strategically, please? And whether or not it’s different now to what it has been perhaps in the last few years?
Alistair Field
Yes. No. So the first comment I’d make is that as a general rule that is almost always consistent, our inventory is sold. So we’re not sitting on inventory that is unsold. It’s sold. We aren’t able to recognize it for accounting purposes until the certain rules around revenue recognition that might revolve around when leaders are creditor cleared or when it clears a port. So that inventory back in June, which I was really clear on that was sold inventory. What was holding it up was freight, and we needed the logistics to get it out. those logistics eased over the period, which was our expectation, and we were able to get it out.
So generally speaking, generally speaking we are short. Generally speaking, we sell and then we build – we build product to meet that sale. So the actual inventory level at any point in time is a function of logistics, not of a not, if you like, an active decision for us to go along. Does that make sense?
Scott Ryall
Yes. No, no, I understand that. I’m sorry, I probably started the question off with a bit of a roundabout way. But I guess what I’m wondering really is, are you thinking about inventory in a different way strategically for the medium term given the macro outlook plus the competition outlook that you’ve given the macro outlook that you’ve given.
Alistair Field
Look I think as a team, we’re very careful in terms of taking positions as Stephen mentioned. And I think the process of how we purchased material, how we sell is quite consistent. I don’t think we’re going to take any bets given that there is going to be a shortage of scrap in the future, and therefore, prices will rise and whether we want to play the game. I think we’re very cautious around this. We have some very strict risk management protocols in place from our board – so I don’t think we’re going to be changing our strategy all the way we think. We’re very conscious of how others buy and sell, and we obviously make sure that we understand that as well in our decision-making process.
Scott Ryall
Okay. Great. Thank you. That’s all I had.
Alistair Field
Thank you very much. I think that’s the last of the question.
Operator
There are no final questions.
Alistair Field
Thank you very much.
Stephen Mikkelsen
Thanks, everyone.
Operator
That does conclude our conference for today. Thank you for participating. You may now disconnect.
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