Sims Limited (SLS) has reported its half-year results for fiscal year 2024, facing a challenging period with modest earnings before interest and taxes (EBIT) due to compressed trading margins. Despite these challenges, the company has shown growth in EBIT and has successfully managed inflationary pressures. The Group CEO and Managing Director, Stephen Mikkelsen, underscored the company's sustainability efforts and safe operations during the earnings call. Strategic initiatives, including cost reductions and a review of the U.K. business, were highlighted as key drivers of future savings and efficiency improvements. The company is also making headway in the data center industry and expects to see full benefits of its cost reduction program in FY '25.
Key Takeaways
- Sims Limited experienced modest EBIT growth amidst compressed trading margins.
- The company is addressing inflation and managing costs effectively, with a projected annual savings of $70M to $90M.
- Strategic reviews and initiatives are underway, particularly in the U.K., with strong interest received.
- Sims Limited is adapting to market dynamics with a focus on increasing trading margins and sourcing more unprocessed scrap.
- The company anticipates improvements in the second half of the year from both cost reductions and trading margin initiatives.
- Sims Limited is maintaining a target leverage of around 1x average EBITDA, considering market volatility.
Company Outlook
- Sims Limited expects continued profitability and improvements in trading margins in the second half of FY '24.
- A simplified organizational structure and strategic initiatives are projected to enhance efficiency and resilience to market cycles.
- The company is focusing on growth opportunities, including acquisitions and expanding in the data center industry.
Bearish Highlights
- Global market volatility, particularly in Turkey and competition from China, is impacting pricing and margins.
- Uncertainties in inventory management due to market conditions have posed challenges.
- Corporate costs have risen due to system enhancements and executive retirements.
Bullish Highlights
- ANZ and SA Recycling have shown resilience, expected to continue solid results.
- Scrap demand is on the rise as industries aim for decarbonization, bolstering Sims Limited's market position.
- The company's focus on sustainability and safe operations reinforces its leadership in the industry.
Misses
- Despite an increase in trading margin percentage, there was a decrease in volumes due to the elimination of unprofitable volumes.
Q&A Highlights
- The company is confident in regaining margins in the U.S. business, considering recent challenges as temporary.
- Structural changes in the U.S. market are expected to increase demand for scrap, with government acts like Section 232 influencing the shift.
- BlueScope's new electric arc furnace (EAF) in New Zealand may reduce export volumes, as scrap will be consumed domestically.
Sims Limited remains focused on navigating the current market environment with strategic initiatives and cost management. The company is adapting its sourcing strategy and incentivizing buyers to prioritize value over volume, aiming to improve margins, particularly in North America. With a solid net tangible asset backing in the U.K. and ongoing strategic reviews, Sims Limited is positioning itself for future growth and profitability.
InvestingPro Insights
Sims Limited (SMSMY) has been navigating a complex market landscape, as reflected in the recent half-year results. To provide a clearer picture of the company's financial health and strategic direction, here are some key insights based on real-time InvestingPro data and InvestingPro Tips:
- The company's market capitalization currently stands at $1.78B, with a Price/Earnings (P/E) ratio of 14, indicating a potentially attractive valuation for investors when compared to the industry average.
- Despite recent market volatility, Sims Limited has a strong free cash flow yield, as suggested by an InvestingPro Tip. This metric is crucial for investors looking for companies with the ability to generate cash and sustain dividends or reinvest in their business.
- Another InvestingPro Tip points out that Sims Limited is trading at a low revenue valuation multiple, which could signal an undervalued stock relative to its revenue generation capacity. This is particularly relevant for investors who are focused on the company's top-line performance and growth potential.
Investors seeking to delve deeper into the financials and strategic analysis of Sims Limited can find additional InvestingPro Tips to guide their decision-making. For those interested, there are 7 more tips available on InvestingPro, and using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Given the company's focus on sustainability and strategic initiatives, these insights may help investors understand the underlying value and future prospects of Sims Limited as it strives to enhance efficiency and capitalize on growth opportunities in the data center industry and beyond.
Full transcript - Sims Metal (OTC:SMSMY) Management Ltd PK (SMSMY) Q2 2024:
Operator: Thank you for standing by, and welcome to the Sims Limited HY '24 Results Briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Today's presentation may contain forward-looking statements, including statements about financial conditions, results of operations, earnings outlook and prospects for Sims Limited. These forward-looking statements are subject to assumptions and uncertainties. Actual results may differ materially from those experienced or implied by these forward-looking statements. Those risk factors can also be found on the company's website, www.simsltd.gov.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 conference over Stephen Mikkelsen, Group CEO and Managing Director of Sims Limited. Please go ahead.
Stephen Mikkelsen: Thank you, and good morning, good afternoon or good evening, depending on where you're dialing in from. Today, we're here to present the half year results for FY '24. I apologize in advance if my voice fades a bit. I had a scratchy throat for the last few weeks. Presenting with me today is our new Group Chief Financial Officer, Warrick Ranson. John Glyde, our Global Chief Operating Officer, is also here with me and Warrick. The presentation has been lodged with the ASX, along with the results release. First up, I will run through an overview of the results and discuss our strategic progress. Warrick will then take us through the financial results. At the end, I will return to talk about the outlook, after which we will have Q&A. I'll turn straight to Slide 5, which covers an overview of the results. It was certainly a challenging and disappointing half year for significant parts of the group. At a high level, the modest EBIT result was driven by compressed trading margin, down 2.6%, but more tellingly, down 5.4% at constant currency. This deterioration in trading margin was not across the board, both ANZ and SA Recycling improved while NAM and the U.K. went backwards. There are a number of reasons for this, which we are addressing, and there are subsequent slides providing further explanation. It was pleasing to see SLS grow its EBIT, particularly in the second quarter of the half. Inflationary pressures while showing good signs of easing did persist. Costs for the group were up 8.5%, which was 5.7% on a constant currency basis. There are several up and downs in here, and Warrick has an excellent slide explaining this later in the presentation. While headline operating cash was 68.4% lower, I'm pleased with operating cash for the half, and it represented a good cash flow conversion. Last year's half year benefited from a significant fall in inventory that had built up in June 2022 and was shipped over the subsequent months and turned into operating cash. Turning to Slide 6. Our position as a sustainability leader continues to grow. We're awarded the most sustainable company in the world by Corporate Knights' Global 100. This achievement recognizes our sustainable practices, deeply integrated into every facet of our operations. Sustainability is core for us and embraced by the organization. Beyond our walls, its impact is significant and measurable. By providing high quality products, we enable our customers to significantly reduce the CO2 emissions from the production of steel, aluminum and copper. You can see this in the photos with a few examples of high quality copper granules, polished 66 aluminum extrusions and low copper shred. Not only as SLS repurposing data center equipment for its customers, it is also assisting them to extend the life cycle of their electronic devices. Our company's value is directly linked to our role in advancing decarbonization, an immense opportunity that drives progress and innovation here at Sims. Moving to Slide 7 and the importance of having safe operations. Our safety record, as measured by the main lagging indicators is pleasing. Total recordable injury frequency rate hit a record low, just below 1. And while there was an increase in the lost time injury rate, it is still down 14% over the last four years and was more impacted by low risk events this year. Both indicators are at or around industry world-class levels. We continue to focus on leading indicators, which, in my view are more effective in driving good outcomes and we have introduced a new training program for continuous safety culture improvement. Direction from our employees on this new training has been hugely positive. The next couple of slides, look at the market. Firstly, on Slide 8. We focus on the seaborne market compared to the U.S. market. The first point I will make is that common to all our markets where we procure scrap, there has been a reduction in the supply of ferrous scrap. This has been largely driven by a downturn in post-consumer scrap availability. Two charts at the bottom provide evidence for this, the downturn in durable goods and the increase in the average age of vehicles. These are both U.S. charts, but it is a common theme across ANZ and the U.K. as well. China has been exporting significant steel, and this has caused price pressures, particularly in Asia. As a result, global steel production, excluding the U.S., has contracted. Furthermore, the steel that is being produced globally, excluding the U.S., is at lower margins off an already low base, and this is shown on the top right-hand chart. Compare this to the U.S. market, margins are strong, driven by steel import tariffs restricting competition and legislative demand stimulus such as the Inflation Reduction Act. Paradoxically, the demand for steel is coming from projects that do not produce significant scrap in the short or medium term. For example, new wind farms, new bridges, new rail, etc. You can also see on the bottom right-hand chart, the quite extraordinary growth in EAFs that has already occurred and will continue to occur in the U.S. In summary, in the U.S., we have a highly protected steel industry, growing demand for steel and therefore, scrap, but currently not a sufficiently growing supply of scrap. Slide 9 provides the price dynamics for our key products. Turkey HMS prices were relatively flat half-on-half compared to the prior year, but down consecutive half-on-half. Prices have started to lift at the end of the first half. Freight has risen and been volatile throughout the period due to geopolitical tensions and drought conditions in the Panama Canal. Freight price volatility has been a significant challenge in the first half. Zorba has had a strong performance over the last 12 months and is currently around the $2,000 per tonne mark. The biggest driver of this has been the improvement in the copper price. In fact, when you compare the two bottom charts, the correlation between zorba and copper is evident. Slide 10 provides the explanation as to why ANZ and SA Recycling were more resilient than NAM and the U.K. in the market conditions and price outcomes detailed in the previous two slides. I will go through it by column, starting with the source of scrap. SA Recycling and ANZ source a smaller percentage of their scrap from dealers. In other words, they procure more scrap at source. This provides them with stronger margins that do not suffer as much when the buy-sell spread tightens as it has over the last 12 months. The second column split sales between domestic and export. Both SA Recycling and ANZ have a greater proportion of domestic sales compared to NAM in the U.K. For SA Recycling in particular, this has been very beneficial as it is nicely exposed to the strengthening demand, the domestic scrap in the U.S. The final column reflects the composition of scrap where composition is defined as processed or unprocessed. Buying unprocessed scrap affords the opportunity to add value, particularly through shredding, where end-of-life goods are transformed into ferrous feed for steel mills as well as zorba and other valuable non-ferrous products. As pictured on the previous slide, the price for zorba has been very strong. Clearly, we need to respond to the market conditions and dynamics, and we have been, but there are further opportunities and structural changes that we will deliver over the short to medium term to strengthen the NAM and U.K. businesses. Slide 12 shows what we have done recently and what we will be doing in the medium term to ensure all segments of the business meet the required return on their assets. Commencing in FY '22 and largely completed in calendar year '23, we sold nonmetal divisions where it was obvious that they would be more highly valued by others. LMS is the most material example of this. This allowed us to recycle the capital and focus on the core metal business. A number of acquisitions are listed on this slide, of which the most material was Baltimore Scrap also completed in calendar year '23. SLS spent this period building out its repurposing business model. In FY '24, we have commenced improving our domestic sales channels in the U.S.A. The acquisition of Baltimore Scrap is one of many initiatives contributing to this. We are in the middle of the U.K. strategic review, and I will provide an update on this in a few slides. ANZ has continued to drive its competitive advantage to deliver good returns. SLS is focused on innovation, particularly around using micro factories to disassemble service. It has also been increasing its reach within customers by offering a superior service to grow its share of available business. In SRR, we have fired up the pilot plant. I'm pleased to report that it has produced syngas using as shredder residue. There are more tests before we do clear victory, but it is looking very promising. Given that FY '25 is only a few months away, the executive team has been prioritizing what we will deliver over the next two years. Two things that will continue are the targeted acquisition of assets that enhance our existing portfolio and where possible using recycled capital to fund these. There will be a big focus in NAM, in particular, on sourcing additional unprocessed scrap and ensuring we have more domestic sales channels in which to deliver our products. Successful domestic channels will in part be secured by reliably providing high quality, innovative products. The shift in market dynamics over the last year have shown that relying solely on volume targets is insufficient. For instance, the increasing importance of unprocessed scrap and the need for a more balanced sales portfolio between export and domestic markets. Recognizing these changes, we have shifted our focus. We have moved away from a simple and single FY '25 sales volume target. Volumes alone were not driving the correct behaviors. We are still finalizing the most relevant targets, and I will provide them at a later date. Suffice to say, we need to get profit margin back into the NAM business, not just sales volume. SLS now has a proven and profitable business model, and it will concentrate on delivering this at scale. From an SRR perspective, the first commercial plant is likely to be built in the U.S.A., and we will seek partners for this. We will not contribute significant CapEx to commercialization. I said at the very beginning of the presentation that it has been a challenging market, and the results for significant parts of the group have been disappointing. On Slide 13, I want to explain what we have been doing to turn this around. Firstly, and most significantly, we have greatly simplified the organization structure. This has resulted in some extensive leadership changes. By way of example, I've reduced my executive team from nine people down to six plus me. This was the start of a larger cost out program, which I will talk more about on the next slide. Before I do that, let me outline some of the other things we have been doing. We have already increased our domestic channel options with more to be delivered in the second half. We have successfully run low copper shred trials and anticipate the sale of more significant volumes at price premiums in the second half. Management KPIs have been adjusted to reflect additional targets beyond a simple volume metric. We're also embedding much stronger data analytics into the business to assist in refocusing on margins. Turning to Slide 14, which covers off the cost reductions. It is important to note that it was not a panic cut costs I don't care where program. It was a well thought through and highly analyzed initiative. It took over six months of planning with outside assistance, design a simpler and more streamlined organization. We sensibly increased spans of control and reduced layers. Where needed, we have strengthened the commercial and growth facing parts of the business. Overall, we are budgeting to save $70 million to $90 million annually. $55 million to $65 million has largely been implemented and will be fully realized in FY '25. There will be a further $15 million to $20 million implemented in FY '25, which will be fully realized in FY '26. Moving to Slide 15, where I want to provide an update on the U.K. strategic review. I must emphasize that we have not yet decided the outcome of the review. I'm open to all ideas, ranging from a sale of the whole business through to retain options where we significantly restructured the business. In between these two bookings, you have various joint venture or partnership alternatives. Non0binding indicative bid proposals are due at the end of this month. And I can confirm we have received strong interest, which is not surprising when you look at the location and reach of our assets in the U.K. How the process progresses beyond the end of this month will be largely determined by the type and complexity of the proposals we receive. Before I hand over to Warrick, I'll turn to Slide 16, which looks at SLS. SLS made significant progress in the first half, and I expect this to continue in the second half. From a strategic perspective, I believe SLS has proven it is a business model that is profitable and valued by its customers. Its strategy is sound and grounded, and the tailwinds described on this slide are only getting stronger. Artificial intelligence is predicted to drive the growth of data centers at an even more rapid rate than the extremely fast pace of the last five years. These data centers have issues with sustainability, which SLS helps solve and now has to deliver this at scale and its recent implementation of micro factory technology provides one of the building blocks to achieving this. Over to you, Warrick.
Warrick Ranson: Thanks, Stephen. I'm going to keep my comments relatively short and high level given Stephen has described the market impact at some length already. And I won't necessarily talk to every slide. Of course, the team is available to respond to any specific items you may wish to delve into post the call. At a group level, we reported an underlying EBIT result of just over $13 million with a statutory result of just on $164 million, inclusive of the gain on sale of the LMS investment. We saw a high statutory effective tax rate given the inability to utilize our tax loss position in the U.K. and a lower tax base on the LMS asset, given we equity account for it in the financials. Slide 19 is a high-level summary of the underlying EBIT performance, so I won't dwell on this one, and we'll move on to Slide 20. In the U.S., we saw increased volumes from both the Northeast Metal and Baltimore acquisitions, and SAR capitalized on a full six months of its steel coast ship-breaking business and smaller additional acquisitions through the period. As Stephen has already explained, the industry-wide trading margin compression was exacerbated in our NAM business. Our existing sourcing network, market diversification and scrap composition, all challenged the business in a market where intake volumes in both the industrial and retail markets were constrained from lower economic activity and the supply of scrap simply couldn't keep up with demand. The impact was extended by more subdued prices in the export market and negated the benefits of the strong domestic price environment. On a positive note, the acquisition of businesses such as Alumisource and the successful rollout of low copper shred in a number of regions continues to reposition us as a producer rather than just a collector of scrap with upside margin going forward. I'll come back and talk about our controllable cost performance in a few slides. Whilst I'm on this slide, we did see an uplift in SAR's operating cost base, both from the additional volume, but also from labor-related inflationary pressures. In ANZ, we've got a well-balanced market portfolio, providing us with a level of flexibility to respond to market movements. We've also got a strong purchasing program in regional and mining volumes, which has helped maintain margin levels, although, we did pick up just under $2 million in growth cost this half with a new project in Western Australia with no attributable margin in the period. The tightness in supply, which we've talked about is clearly evident in the U.K. results, however. The lack of available materials significantly reduced our intake volumes with a number of major dealer suppliers switching to direct container shipping in response to prices. However, we managed to improve overall margins by reducing our lower margin sales. Moving to Slide 23. And excluding the internal realignment of the precious metals business, which is now part of the broader metal segment, we had a 7% revenue uplift at SLS with 700,000 additional repurposed units. Importantly, we've broadened our customer base while also increasing our service offering. Just to note that revenue margins may vary somewhat quarter-on-quarter depending on the specific activities we undertake, but the uplift has certainly been a great performance by the team. I'll cover the primary cost drivers in the next slide, but just to note that we don't expect any further costs for Sims Energy in the second half following the sale of LMS and a number of the costs for the Rocklea pilot plant are one-off in nature and related to the demonstration plant activities. I'll move to Slide 25 on cost to provide some color on both the operating and corporate cost increases, which are also reflected on Slide 24. Firstly, FX has played a major role when we think about our costs in A dollar terms. Only about 20% of our operating costs are actually A dollar denominated. We saw the Aussie lose ground from its high at the beginning of the calendar year and any sustained strengthening of the Australian dollar is yet to play out with the U.S. dollar maintaining its stability and China's economic activity not gaining steam. We added $29 million to our cost base in the period through growth, principally from a full period of Northeast Metals as well as the addition of Baltimore Scrap in quarter two. In the U.S., we also introduced an environmental processing charge as a cost offset, although it's mostly being countered through our margins, given the non-uniformity of the charge versus a number of our competitors. So our comparative starting point is actually about $30 million higher this year. On people costs, we've experienced around a 3% to 5% uplift in our wage levels given current inflationary pressures, which is about half of the overall increase. We employed an additional 50 people into the Australian operations as we moved to fill critical operational roles that have been less vacant through the recent bounce of labor and skill shortages. We also incurred additional one-off costs with the retirement of a number of senior executives in the half. Wage and contract labor costs certainly continue to be a cost pressure in ANZ in particular. Also in Australia, we're continuing to see an uplift in state and regulatory levies on waste disposal, upwards of 30%. And we picked up $6 million in additional system and restructuring implementation costs centrally as we work to uplift our information and data capabilities. These later costs, the executive retirement costs and the impact of the general salary uplift make up the bulk of the corporate cost increase. Offsetting these has been some good wins on fuel and maintenance efficiencies, reducing our overall increase in costs against the adjusted cost base to around 4%, which in a significant inflationary environment we've been operating in has been a fairly solid result. That said, as Stephen has already touched on, we need to continue to work through our cost-out opportunities ensure we are more resilient to the cycles. Moving briefly to cash and capital and in line with our existing capital management strategy, we were able to recycle funds from the LMS sale into the Baltimore acquisition. We also had a residual contingent liability on the Alumisource transaction, as noted in last year's full year accounts. General and sustaining capital remain sensibly constrained given the operating performance, and we expect to remain within our previous guidance levels in this area for the full year. We paid a full year dividend of just under $41 million for the 2023 financial year. And as noted in the accounts, the Board has determined not to pay an interim dividend for the half year, given the company's strategic focus on investing in growth initiatives and our current operating cash performance. And just before I hand back to Stephen, in December, we renewed and extended our existing debt facilities, uplifting our available liquidity reserve by just under $200 million. The terms for these facilities have remained substantially consistent with what we had and are now in place out until October 2026. Back to you, Stephen.
Stephen Mikkelsen: Thanks, Warrick. The final slide before we open up for Q&A is Slide 29, which looks at the outlook. We are anticipating an improved second half performance. This is partly driven by cost savings across the group. For NAM, the work we have been undertaking around better domestic sales channels will allow us to benefit from strong U.S. demand. We also expect an improvement in securing unprocessed material, although this will be a longer journey. It is expected that ANZ and SA Recycling will continue their solid performance, and the momentum SLS took into the end of the second half should also continue. It is worth noting that strong competition for scrap is likely to remain until there is more post-consumer scrap released. The outcome of geopolitical tensions are impossible to predict, but invariably, they cause unexpected volatility in our industry. We are managing inflation well. There is a risk that remains surprisingly sticky. As you would expect, the macro trends haven't changed over the last six months. There is evidence that the demand for scrap is increasing as the steel, copper and aluminum industries decarbonize. From a data center and cloud perspective, if anything, the growth has just got stronger with the commercial arrival of artificial intelligence. Before I hand over to the operator for Q&A, a big thank you to all Sims employees. It's been a challenging six months with big changes to the business and organization structure. Most importantly, you've looked after your colleagues and work safely. Back to you, operator.
Operator: Thank you. [Operator Instructions] Your first question comes from Meredith (NYSE:MDP) Schwarz from Bank of America. Please go ahead.
Unidentified Participant: Hi. Good morning. This is Cheng (ph) from Bank of America.
Stephen Mikkelsen: Hi, Cheng.
Unidentified Participant: Thank you for taking – hey, hello. How are you? Thank you for taking my question. So firstly, the long-term target volumes. Now Stephen, you mentioned the target volume will revise by focusing on improving margins. I'm just wondering, does that mean strategically over the long term, we are going to see less bolt-on acquisitions in U.S.? And how should we think of improving margins? I understand that you have annualized $70 million to $80 million annualized cost initiative, but that seems like very, very bullish (ph) number. I'm just wondering how you are going to achieve the annualized cost initiative given you mentioned scrap competition will continue in the next few years. Thank you.
Stephen Mikkelsen: Okay. Thank you, Cheng. A couple of questions in there. The first thing I would say around the volume targets and you specifically mentioned acquisitions as well. We will definitely continue to grow the business through acquisitions, if and when those acquisitions become available and make sense. What I would say, though, is that I think Baltimore Scrap is a good example of an acquisition that not only delivered as volumes around about 600,000 -- 500,000, 600,000 tonnes per annum, but it delivered us sales channels into the domestic market. And that's just not -- now that we've integrated, that's not just sales channels for Baltimore Scrap, it's also sales channels for the rest of our business. So I think that's probably an example of how our focus is moving from just a pure volume target. Two, it's the type of volume that we are targeting and the type of margins that come with that volume. So we clearly have to get margin back into the NAM business in particular. And we -- as a result of that, we're not just going to focus on volume increases. It's type of volume increases. It's making sure that we secure more unprocessed scrap and then it's making sure that, that scrap has some domestic margin, some domestic logistics optionality. It's not just about suddenly we're going to turn everything in domestic. That's not the idea. We still have fantastic deep sea ports and that gives us all sorts of optionality. We just need to grow the domestic optionality as well. In terms of what those targets are going to be, we are working through those at the moment, and I expect to come out at a later date with the mixture of those targets. On the cost front, the $70 million to $90 million cost annualized does come from operating costs. And so we have completed a lot of that program already over the last -- I would say, over the last four months, we’ve put in place cost savings measures, whether it be around employee reductions and the various cost reductions that come with that as well. So we’ve put that in place, and now we’ll deliver on that. So I’m confident on that. We’ll keep the market up-to-date on that. A lot of it happened – a number of it happened, sorry, towards the end of the second half. So there was a little contribution – sorry, into the first half. So there was little contribution in the first half. And like I said, we’re expecting $25 million contribution in the second half. And then that full contribution will roll out over 2025 and 2026.
Operator: Thank you. Your next question comes from Peter Steyn from Macquarie. Please go ahead.
Peter Steyn: Hi, Stephen, and Warrick. Thanks for your time.
Stephen Mikkelsen: Hi, Peter.
Peter Steyn: Stephen, just expand on your thinking around the cost reduction exercise. Just philosophically, could you give us a bit of a sense of how you're approaching the business and structures? And obviously, you inherited certain structures. Just wanting to understand really the bench strength in the organization, how are you keeping that? How you're thinking about the allocation of cost from a philosophical perspective just delving a bit deeper, please?
Stephen Mikkelsen: Yeah. Sure, Peter. So my philosophy behind the cost reduction has been about simplification of the business. And I said in the previous thing, it wasn't a panic. We just got to cut the cost. Don't care where they come from, we've got to cut the cost. It was a program that we started and had six months in the making, and it was -- and the theme of the program was simplification. And as a result of that, we saw really good opportunities to increase spans of control. We had a number of, in my view, in the analysis board we had a number of people that were potentially swimming in each other's lanes. So we could increase span of control without reducing productivity -- without reducing the output whatsoever, and we could also reduce layers. We had a couple too many layers in the organization. So it was not about reducing capability because we've just got to cut costs. It was saying, we need to increase spans of control and we can reduce layers, and that does absolutely save costs. And I think my ELT structure is an example of that. When we looked at what each of the nine ELT members were doing, the remaining six had the ability to absorb those functions within their capabilities and their job profiles. And that then flow right down through the organization. From a bench strength point of view, I really like that question because that was a big focus of it. We want to make sure that the people that we had identified as key talent retained within the business. And there was that lens over the entire program is we have very good succession planning programs within Sims. We're about to go through our formal -- very formal just next week, I'm going through it with the ELT, where we identify key talent and we come up with a program for realizing that talent and seeing them through the organization. That lens was completely over the restructure as well because we wanted to make sure we didn't lose that. So I'm very confident that the bench strength remains. I mean, in some ways, when you're increasing people spans of control, you are giving bench strength the opportunity to prove themselves that they are going to meet the standards, which we think they're capable of. So I think it's a very good opportunity to teach that bench strength in a sort of half a step-up as opposed to a full step up when they ultimately replace executives.
Peter Steyn: Got you. Thanks, Stephen. That's helpful. And then just a quick question on unprocessed sourcing. What changes there in the context of your business models, particularly in markets where you're not as strong unprocessed? Do you -- why would the value chain necessarily change? And what do you have to do to essentially achieve the shift that you're hoping for particularly in NAM, I guess?
Stephen Mikkelsen: Yes. So I guess I'll answer that a little bit at a high level first, and I'll get John Glyde who we're fortunate to have here with us in Australia at the moment. He's come down from the U.S. So at a high-level model, I wouldn't describe it as us changing our business model. Our business model has at the end of the day, what's our strength. We get the scrap, we process it, turn it into high-value products and sell it to our customers. That's the core of our business model. I think it's more around the execution, particularly of the procurement of scrap. And it's fair to say, and I think those pie charts -- I forget what slide number it is, but the pie charts that show the three different categories of difference between ANZ, SAR, NAM and the U.K. highlights the importance of unprocessed scrap. And I believe we need to get back to securing more of that, and I'll get John to discuss some of the types of things we'll be doing as opposed to just securing volumes. And it's easy to secure volumes from dealers, but we don't get the same opportunity when we secure process volumes to value add. So John, like you're at the…
John Glyde: A couple of things. Obviously, tactical bolt-ons can play a role. We've obviously got a number of shredding. And I think at the last Strategy Day, we put up a slide around our sustainable shredder utilization. We've got a number of shredders that we've got an enormous amount of capacity that we can look to fill that capacity. And one of the work streams that we're doing at the moment is looking at subregions and looking at that capacity and then looking at tactical bolt-ons within those subregions that can provide a, want of a better word, a base volume around those shredders so that we're less reliant on dealer volumes. The other thing is that Rob and the commercial team have been working very, very hard in terms of shifting, I guess, the targets within our buying team around a greater focus on securing scrap at source, and in turn, getting more scrap that we can push through our shredders, push our push our boilers. So just shifting that mindset a little bit. As Stephen suggested, volume target drives certain outcomes. Segments within that volume, we just want to shift that focus a little bit.
Peter Steyn: Thanks, John. That’s just useful. Appreciate it, Stephen.
Stephen Mikkelsen: Thanks, Peter.
Operator: Thank you. Your next question comes from Lee Power from UBS. Please go ahead.
Lee Power: Good morning, Stephen. Good morning, Warrick. Stephen, is it possible to just give a little color on the guidance around the underlying improvement in the second half? Like how much of that improvement do you think is cost out versus the core business? And maybe if you're willing to say how the third quarter of FY '24 is tracking thus far against what you were doing in the second quarter?
Stephen Mikkelsen: Yes. Sure, Lee. As you know, I won't give specific guidance for the full year. That's something we don't do. But I'm happy to give a little bit more color around it. The improvement in the second half is not just about the cost reductions. I think in a sense that cost reductions are and I used the expression easier to bank because we have put in place already the necessary structural changes to achieve them. So they don't rely on a market outcome. But we are definitely anticipating improving what you're talking about is improvement in trading margin as a result of the initiatives that we are putting in place. In some ways, you could say, well, the second half should be better because the $13 million in the first half was a fairly low base to prove on. But definitely, some of it will also come from trading margin. So I just forgot the last part of your question there. Just...
Lee Power: I was just asking around like whether the third quarter -- far is tracking above or below the second quarter run rate?
Stephen Mikkelsen: Yeah. So we are -- I mean, clearly, we are halfway through the third quarter. So I get some confidence from where that -- where the third quarter appears to be going to give us -- for us to make the statement that we expect an improvement in the second half over the first half.
Lee Power: Thanks. Appreciate that. And then on the sourcing kind of the ideal sourcing mix. So I think in NAM, it's -- at your Investor Day, you said it was 63% from dealers. Like can you give us an idea of where that's been a kind of different points previously? Is this something that you've slowly shifted towards getting more process scrap or has it always been like this? And then how easy is it to shift away from that? Because it's obviously a pretty large chunk of your source scrap when you're thinking 63%.
Stephen Mikkelsen: Yes. Look, it has been there or thereabouts for a while. I mean, it fluctuates at any given period, but it has been there for a while. I think the difference as to the impact of it now is that the market conditions and the market structure have greatly contracted the margin -- the available margin. And so therefore, it's having a higher impact. In fact, when we -- if you go back in previous periods, particularly our record year from a couple of years ago, having that high volume of dealer sort of process scrap was -- it wasn't -- it was not -- it was quite beneficial because we were getting more volumes through, the export market was hugely strong, we were making good margins on it. What's happened is as that tide has gone out, it's become obvious that those dealer volumes don't work -- well, those dealer process volumes do not work well in this type of market. And our view is that the NAM market, in particular, is going to be in this space for a while. We've got the demand for scrap in the U.S. is just getting higher and higher as these EAFs are getting completed. At some point, the supply of scrap will come back. I mean, at some point, the vehicles that are sitting out there will come back to the market and durable goods will increase. And we just want to be prepared and ready for that. John, any sort of further thoughts from you having been in NAM for the last couple of years around that?
John Glyde: No. I think you answered it correctly. Dealer volumes have always, in my time, represented a fairly sizable part of the volume there. And as Stephen said, this will be a shift that takes time. As we talked about, tuck-on acquisitions, bolt-on -- small bolt-ons can play a role. Just shifting the focus of our commercial team can play a role. Only differentiation can play a role in terms of if we've got greater margins to work with because we've got price premiums attached to that quality, that gives us some opportunities around procuring more shredder feed. And as Stephen has pointed out, shredder feed is pretty crucial to us. That's where we've got a large amount of investment. We've got a lot of technology on the back end. That's where the zorba gets created, zorba pricing is quite strong. I think we highlighted sitting close to $2,000 a tonne. So more tonnes through shredder generates more zorba and zorba pricing is strong. So...
Lee Power: And then maybe just one last one, if I can. Your trading margin in NAM, like, I guess, there was quite a long period where it was in the low 20% range. We're looking at 17% for the half. Do you have a view on like what's an appropriate trading margin for the business? And does any of these changes do they have any sort of meaningful kind of change around where you think that number should be, given that it seems to have for what should have been relatively stable has swung quite a lot over the last few years?
Stephen Mikkelsen: Yes. We do have a strong view that what we're doing will improve the trading margin percentage because the more unprocessed we buy, the more value we add by processing it. And that will improve our trading margin. John has just given a very good example of zorba opportunity for trading margin in there. I guess what's really impacted NAM over the last six months to 12 months has been the shortage that really is the -- I call it a scrap drought, just the lack of supply coming into the market has tightened it up. But we've got to get back to those low 20% margins. There's no reason why we can't -- the domestic opportunities, increasing our domestic sales channels or our optionality of domestic sales will assist in that as well because you're going to be more buying and selling into the same market where we have struggled a little bit with buying out of the domestic market in the U.S. and exporting because as I showed on the -- on the slides near the beginning of the presentation. The rest of the world outside, the U.S. has been pretty weak. You've got -- you've got China has been exporting flat out into Asia, which impacts Turkey. So the rest of the world's margins are coming under pressure, which impacts their ability to pay for scrap and you've got the domestic pulling it in. So that's why we need the optionality. That's -- those are examples of things that are going to get us back to the margin that we need in NAM. And I guess that's the -- one of the things we're talking about here. We've got to get the margin back in. It's not just about volumes.
Lee Power: Thank you. Appreciate the commentary. Thanks a lot.
Operator: Thank you. Your next question comes from Owen Birrell from RBC. Please go ahead.
Owen Birrell: Hey. Good morning, guys. Just a couple of quick questions for me. First one, just looking at the global market environment, I note that the Turkish pricing slide that you put on Slide 9 shows some degree of normalization in pricing in the last few months. I'm just wondering, from your perspective, is there a large amount of volume underpinning that? Like just how sound is that pricing number in terms of an indicator for what the global market is doing? And just wanting to get a sense as to what your conversations with your international customers have been like, how are they feeling about the outlook as we look into calendar '24? And has there been a material change in their usage of scrap and inventory levels?
Stephen Mikkelsen: Let me go on the Turkish one first, and I might let John because I know John has been talking with some of our customers deal with how they're viewing the market going into next year. So the volumes into Turkey have been fine. They've been -- I would describe them as hugely point, but the volumes into Turkey have been perfectly fine. The issue that Turkey faces, and therefore, the rest of the world are facing part of a seaborne market as well as because Turkey is such a big impact on the seaborne market. It's margins are squeezing because of the competition from China. That then flows back through to us and the margins that we're achieving because we're having to buy that scrap in a very increasingly competitive U.S. market. So that's where the squeeze has gone on. It's not so much the price that Turkey is receiving. It's the squeeze on what we're having to pay for that is probably the biggest issue. And then I guess the one last comment I'll make before I hand over to John on maybe commenting on what our customers are saying. The comment I would make is that there has been significant inflation coming to the market over the last three years. And so maybe you're traditional where we've got a three (ph) 80 price that flows back down through. There's plenty of margin available that will get scrap out of the market. The price needs to be higher for that to happen. You've got increased fuel costs, increased labor costs, increased repairs and maintenance costs, increased contract costs. The people that are going out and getting the scrap are facing increased costs. And it's not is worthwhile for them to get it at these prices. And so that will need to adjust up as well. And they are -- some of the dilemma, you've still got to key competing against China that is releasing a lot of steel into the Asian market. But John, you've been speaking with our customers globally, how do you think they're feeling for the next period.
John Glyde: So the one thing I'd say about Turkey is the rebuild attached to the earthquake really hasn't taken shape at this point. So there is, obviously, at some point in time going to be a demand stream around that rebuilding phase in Turkey itself. Stephen is right. China does play a very big role. They are somewhat the elephant in the room when it comes to the total steel production and how much they export. What I would say is that Turkey is well, well aware of the domestic demand that's building in the U.S. And we're already seeing increased amounts of shred in particular, which is the ideal field stock for an EAF being drawn away from them, leaving them proportionately with more cut grade scrap and less shred being available for the export market. But they also realize that the to secure scrap, particularly off the East Coast, they've got to meet pretty much the domestic pricing. So there is a dynamic playing out there where -- in effect, you've got the Turkish demand competing with domestic demand in America.
Owen Birrell: Okay. That's good. And have you noticed any change in, I guess, inventory levels through your customers? Are they sitting on more or less stock at this point relative to, say, 12 months ago?
Stephen Mikkelsen: Inventory levels. Off the top of my head, I'm not aware of any particular change in inventory levels. I think generally speaking, and John, you jump in. I think generally speaking, over the last six months to 12 months, customers have been reluctant to hold inventory because of the inherent risk and then, particularly in the -- risk in the demand, and we keep coming back to China, but China is such a big influence, what's China going to put into the market and do you want to be holding inventory where China is just at least a hell of a lot of steel into the market. John, any update?
John Glyde: As a general observation, and we do have a look over the fence of our competitors from time to time. No one's holding any significant inventory of scrap. I think it'd fair to say that the scrap spot supply tightness is playing across the entire industry, including our major competitors.
Owen Birrell: Okay. Just one last question for me, if I may. Just looking at the ANZ business, the EBITDA margins in that business has sort of been bouncing around. You're about to cycle a very strong EBITDA margin in the second half. I'm just wondering how we should think about that business and the operating margins as we look into the second half '24 and whether there's any one-offs either in the last half or the second half '23 that we should be cognizant of when we're looking at our numbers?
Stephen Mikkelsen: I don't think so. Owen, I said in my summary on the outlook, we expect both ANZ and SAR to continue the solid results that they produced in the first half. And that's how we're seeing the second half and how we're expecting it to play out. So I'm comfortable with that.
Owen Birrell: Okay. Thanks, Stephen.
Operator: Thank you. Your next question comes from Scott Ryall from Rimor Equity Research. Please go ahead.
Scott Ryall: Hi. Thank you very much. I just want to ask you about capital management, which I think is quite a big topic if you're going to a zero dividend. So if I look at your net cash movement on Slide 26, it's a relatively small part of the movement in net cash. But obviously, it's a much bigger symbolic to go to zero. So I guess you've spelled out a number of improvements that you need to make to the business. Some of which you want to do acquisitions, some of which you've got CapEx to improve the business. Warrick, thanks for mentioning it because it was only really a passing mention on the dividend and some of your debt facilities. But I guess the point that you've got debt facilities with capacity that as per the normal terms, they're going to be subject -- drawdown is going to be subject to covenant. So if we sit here at the moment, how much headroom have you actually got to invest in the business, please?
Warrick Ranson: Scott, obviously, that varies sort of month-on-month in terms of how we -- our trading activity, et cetera. In terms of our existing debt facilities, so we have about $0.5 billion in terms of our headroom. I think though in terms of actually thinking about how much do we invest in the business versus how much we need to retain? That's something that I certainly want to have a look at more broadly. I've only been in the seat sort of 6 to 8 weeks. So it's certainly on the list to think about. I think toward -- at the end of -- well, on the reporting period, I think we had gearing sort of sat at around just over 10%. I'd certainly like to sort of have a preference for our leverage at about 1x. Our average EBITDA. So -- and again, the performance of the business going forward is going to be quite critical. We talked a lot with Owen around sort of margin -- trading margin performance, but I think the other opportunity we really have is around our fixed cost levels and how we think about those in terms of gaining some efficiencies across that to make sure that we're contributing that to the bottom line. So I think it's not just about sort of existing headroom on the facilities, but thinking about things like liquidity buffers, stock levels in terms of our existing -- in terms of our strategy around that Stephen has already described. But we've also got some opportunities, I suppose, in this quarter around close out of our closed loop investments. So there's some residual cash that's sort of sitting there that we're looking at disposing. And one of the things I'm quite keen on doing is having a look at our land and asset base and what opportunities we have to gain some efficiencies and put some money back in the business around that.
Stephen Mikkelsen: I'd underline that, Scott. I think we've got a strong history of recycling capital as what I referred to the end, and there's definitely further opportunities to recycle capital. I think we've done quite well growing the business without having to take on leverage to do that.
Scott Ryall: And then, Stephen, can you just give me a little bit more color? You've obviously sat in the Board's decision -- in the Board meeting that Fed dividend to this -- for this half. So what is it that in your view will get the Board's confidence back to declare dividends again, please?
Stephen Mikkelsen: Yes. Well, I'll also get Warrick to chime in as he feels appropriate as well. So I'll give you my sort of view and then maybe Warrick being in the meeting as well, giving his view. I think it's only -- it's an interim -- first of all, it's an interim position. We've still got the rest of the year to balance out, and let's see where the final dividend comes in at. And I think from the discussion, it was just reflective of what was our operating performance. Yes, we are seeing an improved -- we are seeing an improved second half. But let's see that play out before we would declare a dividend on it. So there was very much a conscious that it was an interim dividend. Now we're near a final dividend. We've still got the second half to play out. But I'm also happy -- Warrick also spoke with the Board at length, so what's your views on that?
Warrick Ranson: Yes. No. I mean, again, if you look at our bottom line cash performance, our operating cash was just under sort of $10 million. We've got some commitments coming up around -- from a tax perspective in relation to our sale of the LMS asset. I think the other aspect that we certainly need to see is that conversion of some of those residual assets on the balance sheet and how we go there. So the big influence, of course, will be our operating performance through the second half and what we can deliver to the bottom line. So the Board will take all those factors into consideration.
Scott Ryall: Okay. Great. thank you. That’s all I had.
Warrick Ranson: Thanks, Scott.
Operator: Thank you. Your next question comes from Rohan Gallagher from Jarden Group. Please go ahead.
Rohan Gallagher: Good morning, Stephen, Warrick, John. Good morning, everybody.
Stephen Mikkelsen: Hi, Rohan.
Rohan Gallagher: Just in regards to the cost savings program, first of all, congratulations on an appropriate initiative. With respect to that, what's the actual cost to implement these cost savings? And can you sort of help me out, I note corporate costs have doubled half-on-half. There's a bit of a disconnect with the messaging around the cost savings yet corporate costs have doubled.
Stephen Mikkelsen: So I'll get Warrick to deal with the second one corporate costs, specifically drove the corporate costs in the first half and why we see them coming down in the second half. In terms of the costs of implementing the program, typically, when we went through it, it was around about a six month to nine month payback. It's kind of the rough and ready measure of that. And that's -- yes, it's about a six month to nine month payback.
Rohan Gallagher: And do -- for the do we anticipate significant items being created?
Stephen Mikkelsen: We've created -- we've got some significant items in that first half. We have -- and there will be some in the second half related to those redundancy costs as well. Off the top of my head, I can't remember what they were in the first half, but that's fine. They were $4.6 million in the first half. I wouldn't expect it to be materially more in the second half, I guess -- yes, I wouldn't expect it to be materially more in the second half. Yes.
Warrick Ranson: And Rohan, in relation to corporate costs, I suppose sort of two sort of broader drivers. So one is when we talk about the sort of doubling of corporate costs, that's seeing an inclusive cost, including our allocated divisions corporately. So we haven't got the benefit out of Sims Energy that has flowed through there in the previous -- in the comparative period. In terms of our direct corporate costs, it's probably really sort of two main drivers there. So one has been the ongoing implementation of our system enhancements. So once we sort of have reached development phase, we end up continuing to evolve that system so that we've made continual investment in that, which is hitting our corporate cost area. We're pretty much done in terms of the ANZ implementation for that now there will still be some costs that flow through there. And then the other big sort of cost area that we've picked up was the retirement of some of the senior executives, which have hit our corporate cost line.
Rohan Gallagher: And just in terms of modeling in terms of composition, are we just going to assume those cost savings would be proportionately directed across all regions based on, I don't know, a number of employees or some particular area is going to be more exposed to that cost out than others?
Warrick Ranson: Yes. So the majority of our cost out will actually be in the U.S. in terms of the ones that we've currently flagged. And as I said, we'll continue to look at other opportunities, but mainly in the U.S. for that.
Rohan Gallagher: Thank you, Warrick. And then just finally, Stephen, with respect to the U.K., can you just remind about the NTA or book value of the U.K. operations and why volumes were down disproportionately versus the group? Was that a function of just a crappy market or market share changes, et cetera?
Stephen Mikkelsen: Yes. So let me deal with the second one first. It was a function of not being by just volume. So if you look at it, while the volumes were down, the actual trading margin percentage was up. And so we dropped volumes that were not particularly profitable, to be honest. And the U.K. has got other things, but that's the main reason for that. It was -- we just over volumes where they're not profitable volume. So that was the reason for that. In terms of the net tangible asset backing, I guess, vis-a-vis the proposals that we haven't received yet. I don't want to comment on that too much until we received the proposals. But our view is that the net tangible asset backing of the U.K. is solid, very, very solid in fact. So I don't want to comment too much on that. We're in the middle of a process now that we need to work through.
Rohan Gallagher: Okay. And then just finally, it's -- you're doing a departure away from volumes for volume stake, which is, I think, encouraging. Can you just talk about what sort of things are in the mix in terms of, I don't know, whether it be incentives for the leadership team, et cetera, more than just volumes as it was historically?
Stephen Mikkelsen: I think the major change that we've implemented already, and there will be further ones around executives. The major change we have implemented already is how we incent our buyers. And the value that we put on the source and the type of scrap, not just the volume, I think that is by far and away the larger change. So the incentive now is more around unprocessed at source. We haven't -- you can't move away from volumes entirely. Don't get me wrong. We have a fixed cost business and there are certain volumes we have to pass through. But there wasn't a recognition in the buyer program, the type of volumes you buy are also very important. So I think we've got a much more balanced incentive program for our buyers now. John, you're involved in that. You…
John Glyde: Comment absolutely. Also one to that is an overarching EBIT expectation.
Stephen Mikkelsen: Yes. Exactly. Got to get margin back into the business.
Rohan Gallagher: Thank you, gentlemen.
Stephen Mikkelsen: Thanks, Rohan.
Operator: Thank you. Your next question comes from Lyndon Fagan from JPMorgan. Please go ahead.
Lyndon Fagan: Good morning. Just back to the balance sheet. Warrick, I noted your comments about 1x EBITDA being a target for you. But I guess the EBITDA number itself is very volatile, ranging anywhere from mid- to low hundreds to almost $1 billion. I mean, how should we be thinking about that are you looking at a 10-year average or five year average? Just a bit more color about how you're thinking about managing the balance sheet? And then I've got a follow-up. Thanks.
Warrick Ranson: Hi, Lyndon. Yes, no, certainly not a point on point. EBITDA, it's -- given the volatility in this industry, it's certainly an average. I haven't yet come to a conclusion in terms of what that should look like. That's the work that's in front of us in terms of actually sort of working through that.
Lyndon Fagan: Yes. I mean it does sort of raise a few questions going forward, which sort of leads me to my next one. I mean, it's been a little while now that we've been talking about competitive pressures in scrap purchasing. I mean should there be any permanent erosion of margin in North America? I'm just wondering you've got the confidence to try and get margin back in. But when I look at the historical averages, what -- is there any certainty of getting back there? I just would love to get a bit more color on, I guess, the key drivers on why we're at such a low margin? And how you expect to unravel that back to a more comfortable position? Thanks.
Stephen Mikkelsen: First of all -- and I will definitely get John to chime in at the end here as well. I do think we have confidence that margins get back into the U.S. business. There has been some highly unusual events that have caused some of this and they will wash their way through the system. I mean for -- I mean, I know it feels like COVID is a distant memory. But COVID drove a lot of behavior that is now flowing through. People drive their cars less. Therefore, they didn't put as many [indiscernible] cars. They thrashed them less. So that rump of shredder -- potential shredder in feed hasn't come out of the system yet, but it will need to come -- it will come out of the system. And it's not just us, it's a global phenomenon. When we -- when you look at our competitor's results, you look at what's worrying them, it is this. The inflow has definitely been subdued, but it can't be subdued forever. It will come out. It's a market that should mean revert. So we do have confidence around that. The timing of it is obviously part of the issue. But completely separate from that getting margin back into the business is not just about volumes, it's about the type of volumes. And we are -- and as John said, we are well positioned. We have shredders in excellent locations that are not fully utilized. We are in a position to sensibly get margin back into the business and buying more unprocessed scrap and particularly in NAM having options to sell it domestically. John, anything specific you want to answer that?
John Glyde: No. I'd just say the longer-term tailwinds in our industry are still very, very strong. The electrification of everything. Invariably people with internal combustion engines are going to be challenged with the sort of shifting to an electric vehicle. And I think there is a little bit of hesitation at the moment. People have held on to their cars longer for all the reasons that Stephen talked about. They've been driving them less. They're probably traveling less distance, and they're not cracking them. And I think at some point, that will normalize and people will probably make that shift to electric vehicles, which means there's an enormous pool of internal combustion engines out there that eventually will need to get recycled shredded. So the medium and longer-term prospects around that are very, very strong. There's no doubt in my mind that interest rates, cost-of-living pressures, all the things that we're seeing globally, ongoing inflation, albeit off its peaks, but still there, playing a role in consumer sentiment. And if you look at consumer spend, there's a lot of spend in things like restaurants and entertainment and travel and not a lot of spend around durable goods. And again, eventually, that sentiment and the psychology around that will shift, and you will see consumers out buying durable goods again, which invariably will mean that they will throw out their old one. So there's a few dynamics at play.
Lyndon Fagan: Thanks, guys.
Stephen Mikkelsen: Thanks, Lyndon.
Operator: Thank you. Your next question comes from Simon Thackray from Jefferies. Please go ahead.
Stephen Mikkelsen: Hi, Simon.
Simon Thackray: Thanks. How are you? Just a quickie. You the covered on this stock in the last 10 years, and we've had two five-year strategies. I just want to understand whether when you give us an update? Are we looking at another 5-year strategy, which is not necessarily volume orientated? Or are you happy, by and large, with the structure of the business and it's some tweaking that you want to do around the unprocessed feed? But other than that, All systems normal.
Stephen Mikkelsen: Yes. By and large, I'm happy with the strategy that we've put in place. Clearly, I was part of that -- I just have arrived. I was part of the team that put that strategy in place. I think what we're doing here and what we're doing here is acknowledging that the market has moved over the last year in particular and quite dramatically. And we have to tweak we have to respond to it to give margin back in the business. So it is around -- our core business hasn't changed. Our core strategy hasn't changed selling high-quality products ready to our customers. We're having to tweak the sourcing of that because
Simon Thackray: That's encouraging and very helpful. So I guess with that in mind, you described a scrap drought at the moment. So maybe just explain how your joint venture partner has managed with 60% domestic and 80% unprocessed to deliver only a 100 basis point drop in trading margin versus for North America and why it's been apparent to them for so long where the market is going?
Stephen Mikkelsen: So what I would say is for the same reasons that ANZ has also gone well -- performed relatively well throughout that period as well. It's the core position of the market. I mean our assets in North America coastal facing, we've -- and have always been a great advantage. And there's been periods of time we're exactly the opposite, it's happened. And it wasn't long after I joined, we -- the market structure didn't suit SAR, and it had quite a lean period, where NAM did very well. So it's market structure because the U.S. is certainly not one market. The Northeast Coast and the Northwest is completely different from the Midwest, from the downflow They are very, very different markets depending on how that market has grown up. So I'm not too proud to say we can't learn out of SA Recycling's book as well. And we are working and we talk closely with them. And we're refining our strategy, particularly around our -- how we're going to source to meet the new market. And that's all I can say. And that's what we're going to -- I mean, I guess now, Simon, that's what we have to deliver on.
Simon Thackray: So just summarizing that. Stephen, are you characterizing that more as a cyclical and some structural elements, but more cyclical than structural?
Stephen Mikkelsen: I think there is -- I think the most structural change and the structural change is around just around the U.S. versus the rest of the world. And just the sheer growth that's been put into the market from the Inflation Reduction Act and the Build Back Stronger Act and all those various acts have just the demand that's grown in the U.S. And then you combine that with Section 232, which is the act that's say there's not going to be external competition in the U.S. It's going to be all domestic. It is really fueled and it's a structural change. It's a that domestic market and the domestic market is replied by building an extraordinary amount of growth in EAFs, which is fueling the demand for scrap. So therefore -- where there was maybe a cyclical element where export domestic, export, domestic, export domestic type cycle, I think we're saying -- we think for the next foreseeable future, I don't know, is it the next 10 years, Simon, it's really hard to those types of course, that it's hard to see the demand for scrap in the U.S. abating because I don't think who gets into governments. No one's going to remove Section 232. No one's going to try and open up. It's just not going to be popular to open up the U.S. steel market to external competition. So I think that's a structural change that we're facing.
Simon Thackray: Yes. I don't disagree with that assessment. And just at the margin little follow-up question. The new BlueScope New Zealand EAF, which is obviously backed by government funding and guaranteed scrap supply. I know this is small in the context. But what does that mean for ANZ export volumes when that comes online?
Stephen Mikkelsen: Well, I guess -- well, it means that the volume that goes into that mill won't be available for export. So I think that's interesting I think we're seeing the -- our other view is we're seeing the regionalization of scrap as countries wanting to make sure that they have a steel industry.
Simon Thackray: Great. I’ll leave it there. Thanks for taking my question.
Stephen Mikkelsen: Thanks, Simon. Thanks.
Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. Mikkelsen for closing remarks.
Stephen Mikkelsen: Thanks very much for everybody joining us on the call. We will see most of you over the next few days as we walk around Sydney and we walk around Thank you very much for attending.
Operator: Thank you, and that does conclude our conference for today. Thank you for participating. You may now disconnect.
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