Sims Limited (OTCPK:SMSMY) Q4 2022 Earnings Conference Call August 15, 2022 7:00 PM ET
Company Participants
Alistair Field – Group Chief Executive Officer & Managing Director
Stephen Mikkelsen – Group Chief Financial Officer
Conference Call Participants
Matthew Abraham – Credit Suisse
Megan Kirby-Lewis – Barrenjoey
Scott Ryall – Rimor Equity Research
Lyndon Fagan – JPMorgan
Simon Thackray – Jefferies
Daniel Kang – CLSA
Operator
Thank you for standing by and welcome to the Sims Limited FY 2022 Results Webcast. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]
Today’s presentation may contain forward-looking statements including statements about financial conditions, results of operations, earnings outlook, and prospects for Sims Limited. These forward-looking statements are subject to assumptions and uncertainties.
Actual results may differ materially from those experienced or implied by these forward-looking statements. Those risk factors can also be found on the company’s website, www.simsltd.com. As a reminder, Sims Limited is domiciled in Australia and all references to currency are in Australian dollars unless otherwise noted.
I would now like to hand the call over to Alistair Field, Group CEO and Managing Director of Sims Limited. Please go ahead.
Alistair Field
Good morning. It’s a pleasure to be delivering the FY 2022 full 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 discuss some of the company’s strategic priorities, short-term outlook, and medium to long-term drivers. Following that, there will be time for Q&A.
I’ll turn straight to slide five which covers the key takeaways from the results. By any measure FY 2022 was a very strong year. From a safety perspective, we achieved a record low in our total recordable injury frequency rate. We produced a record EBIT, which was consistent with our updated guidance and reflected excellent margin per tonne across all metal businesses including SA Recycling.
Operating cash flow for the year was over four times higher than FY 2021. Total intake volumes also returned to pre-COVID levels, driven by North America. These excellent results lifted our return on productive assets to 39%. Finally, we have lifted our cash flow distribution to shareholders by 74% in the form of dividends and share buybacks.
Turning to slide six. There is a lot of good information on this slide about the progress we have made on our strategic initiatives. I’m not going to go through them one-by-one, but I will highlight a couple.
Firstly, we purchased a large strategic site at Pinkenba in Queensland. This provides us with the opportunity to build a world-class recycling facility including the potential for processing of shredder residue through Sims Resource Renewal. I will talk about this in more detail later in the presentation.
Secondly, both Sims and SA Recycling, secured a number of well-priced and well-located acquisitions and they’re performing to expectations. This continues the theme of market consolidation particularly in the US.
Moving to slide seven. The overriding theme for FY 2022 is that we produced a record year, while having to manage some of the most volatile markets we have witnessed.
Underlying EBIT was nearly double the prior year. This was driven by a 57% increase in sales revenues on the back of exceptional ferrous and non-ferrous prices and sales volumes, which improved by 12% for Sims and 33% for SA Recycling.
Inflationary pressure on costs continued in FY 2022 and are almost certain to continue through FY 2023. We are currently looking hard at opportunities to reduce costs through productivity gains and other cost improvements to at least partially offset the impact of inflation.
Additionally, the business delivered strong operational cash of AUD 548 million and this enabled the funding of a AUD 0.50 per share final dividend, a 66.7% increase on last. Most critically, all of this was achieved with a strong safety performance.
Slide 8 provides a summary of the financial outcomes in a convenient table. I’ve already spoken about the profit and cash flow measures on the previous slide. However, it is worth highlighting the improvement in return on productive assets. This capital efficiency metric, which we have used for several years now, grew from 23% last year to 39% this year a 16% point improvement.
I’ll spend the next few slides talking about non-financial measures starting with health and safety on Slide 9. The priority for me and all Sims employees is safety. It is therefore very pleasing to report that we had the lowest ever total recordable injury frequency rate and this continued the improving trend across all our lagging safety indicators.
Lagging indicators do not improve with our proactive safety initiatives. We had over 12,000 corrective action improvements identified in FY 2022 with a particular risk focus on traffic management and ergonomics.
Moving now to Slide 10 on sustainability. Sustainability is at the core of our business and it is pleasing to see some recognition for the effort that our employees put into ensuring that Sims is a leader in sustainability. This year we achieved significant progress on our climate strategy.
We brought forward our carbon neutrality target by 12 years and completed the value chain emissions assessment. There are many measures initiatives and cultural behaviors that drive outcomes, which leads to these awards.
Slide 11 presents the progress on our FY 2025 sustainability goals as an example of these measures initiatives and cultural behaviors. We’re making good progress towards achieving our FY 2025 sustainability goals, which are to operate responsibly, close the loop and be a partner for change, highlighting just a few of these.
Our commitment here at Sims is to achieve gender diversity across all layers of the organization. We have just had the first cohort completing the program Women Leading @ Sims. This is a great initiative to connect our global emerging female leaders and the feedback from participants has been overwhelmingly positive. This program continues and I’m meeting the second cohort in September.
We also achieved our target set out in the sustainability goals for Board gender diversity ahead of schedule. We are pleased that today four out of our seven non-executive directors of the Sims Board are women. On the operational front, we also transitioned Claremont, our largest global site to renewable electricity. And from a partner for change perspective, we became a signatory to the UN Global Compact.
Before I hand over to Stephen, I’ll turn to Slide 12, which sums up FY 2022 and the start of FY 2023. The charts highlight several important points. Firstly, volatility in FY 2022 has been very high. Secondly, price for our main commodities began rapidly rising in late calendar year 2020. They peaked between March and April 2022 depending on the commodity and have subsequently fallen closer to the FY 2021 average. Thirdly, the average FY 2022 price is significantly higher than FY 2021. Finally, freight prices have also come off the FY 2022 highs, but display even more volatility than commodity prices.
I will hand over to Stephen now to take us through the results in more detail.
Stephen Mikkelsen
Thanks, Alistair. I will turn straight to Slide 14, which summarizes the group results and some key metrics. The substantial increase in revenue of 56.6% was driven by higher prices and volumes. This in turn led to a 43.6% increase in the trading margin of the metal segments, as we nicely managed the metal buy self-spread through the period. Operating costs increased by 24.4%. Internally stronger volumes, some catch up in maintenance and new businesses were part of the reason for the increase together with higher incentives related to stronger financial results. Externally the impacts of inflation increased throughout and placed significant pressure on costs. As Alistair mentioned in a previous slide, we are investigating sensible measures to keep costs under control. EBIT grew by 95.6% to AUD 756.1 million, which was a record result.
Slide 15 provides a further breakdown of the AUD 369.5 million improvement in FY 2022 EBIT. There are two points worth highlighting. Firstly, the strong contribution from SA Recycling which forms the bulk of the AUD 144.8 million improvement in JV contribution. Secondly, non-acquired growth in volumes contributed over AUD 100 million in EBIT. When this is added to the sizable AUD 307.8 million in margin growth, you get a AUD 412.7 million increase in margin from the preexisting metal businesses, partially offset by AUD 170.9 million increase in costs to produce an additional AUD 241.8 million in EBIT.
On Slide 16 for convenience, we’ve summarized EBIT and volumes by division and provided trading margins for the metal businesses. In this slide, I would like to highlight that our trading margin in percentage terms remained strong at 19.9%. It is slightly below the previous year because of high metal prices seen in FY 2022 and a higher mix of lower percent in margin on non-ferrous retail. The product mix is presented in the appendix slides for your convenience.
Looking at our North America metal result on Slide 17. NAM sales revenue was up 66.8% driven by higher sales prices and volumes. Sales were up 17.7%, while intake also improved in fact higher than pre-COVID levels. Trading margin increased by 55%, as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Operating expenses increased by a sizable 42%, largely driven by increased volumes, some catch up in maintenance, capital growth projects and acquisitions. Inflationary pressures also continued to amount during FY 2022 driving costs higher. The end result was a 114% increase in EBIT to $293.4 million.
Turning to slide 18. Like NAM, ANZ also delivered a strong result. Revenue increased by 54% on the back of a 55% increase in sales prices. Sales volumes were flat. Trading margin increased by nearly 35%.
Costs were up 16.5%, a significantly lower increase than NAM’s, due to flat volumes and immaterial costs from acquired businesses. Increased inflationary pressure was however a common theme shared with NAM. In total underlying EBIT increased by 80% to $186.9 million.
Moving to the UK on slide 19. Sales volumes increased by 9% and prices rose by 47%, resulting in a 60% increase in sales revenue. Due to market structure and competitive dynamics UK was not able to hold on to as much of the sale of price increase as NAM or ANZ, but it still improved trading margin by 23.9%. And this resulted in a very respectable 53% increase in EBIT to $69.8 million.
Costs were up 18%, some of which related to a stronger pound against the Australian dollar. The timing of workforce mobilization and inflationary pressures were the other main contributors. Intake volumes were up 14% in FY 2022 compared to FY 2021, but still below pre-COVID levels due to a combination of closure of non-profitable sites and COVID-19 impacts.
On to slide 20. SLS experienced a disrupted and somewhat disjointed year. Repurposed unit volume grew by 29%, which was approximately 3 times the growth of the overall market. This increase was still less than expected, as supply chain constraints mean that data centers were not receiving new material and therefore they held on to existing infrastructure. We remain confident that this material must eventually be repurposed and there’s only a timing issue.
SLS EBIT fell by 25% to $16 million. The largest contribution to this fall was the 30% reduction in prices for units resold, driven by reduced manufacturing activity in China due to COVID lockdowns.
As the Chinese government imposed intermittent lockdowns in many parts of the country, the demand for units that will package for resale declined, lowering the price of those items.
Moving to slide 21. As promised we are disclosing significantly more information over the next two slides on SA Recycling, given its significance to the group result. As with NAM, SA Recycling had a very strong year with EBIT up 89% on FY 2021.
Sales volumes were up 33%, which included the benefit of recent acquisitions particularly PSC. Conversely, operating costs were up 58.5% driven by new acquisitions and inflation. Underlying EBIT was up 89%.
Slide 22 provides some historic context to the results. SA Recycling’s trading margin percentage is relatively stable, but is higher than NAMs. This is a result of buying much more source, similar to ANZ. Consequently, its EBIT per tonne in FY 2022 of $125.50 is more similar to ANZ’s $122.
Turning briefly to slide 23. Increases in operating expenses and global trading and corporate were largely driven by internal reorganizations, where people were transferred into corporate and global trading, as well as increased incentives, reflecting our improved financial performance.
Sims Municipal Recycling returned to profit in FY 2022, benefiting from better paper and plastic prices. It is also worth noting, that for the last five months of the year we only consolidated 49.5% of EBIT, due to the sale of the other 15.5% to Closed Loop on 1st February.
Moving to our operating cash flow on slide 24, this chart bridges our EBITDA for operating cash flow. We invested a further AUD58.8 million in working capital mainly due to higher inventory levels, as we confronted shipping challenges in an unprocessed material stockpile in Queensland, due to flooding.
It is important to note, that this is not a price risk on unsold inventory. It is a slower inventory movement due to supply chain constraints. SA Recycling’s policy is to pay approximately 60% of EBIT as a dividend quarterly in arrears and retain the balance for growth.
In FY 2022 that means that the cash flow distribution was AUD138.7 million lower than our recorded share of profit. The last point I will make on this slide, before moving to slide 25 is that the conversion of NPAT to operating cash in FY 2022 was 94.5%, compared to 45.5% in FY 2021.
The first point I will make on slide 25, is the benefit from selling non-productive and/or non-core assets and recycling that capital back into the business. We will continue to show discipline around ensuring all assets on the balance sheet are earning their keep.
Our strong operating cash flow, allowed us to maintain a solid balance sheet as well as complete acquisitions totaling AUD74.4 million, purchase the strategic Pinkenba site for AUD93.5 million, maintain and invest in core growth assets totaling AUD182.7 million, while also distributing AUD264 million in the form of dividends and buybacks.
My final slide is CapEx on slide 26. At the March Investor Day, we anticipated sustaining CapEx to be approximately AUD130 million for FY 2022. It has come in a bit higher at AUD148 million.
The main reasons for the increase were, firstly, rolling some right of lease assets into outright purchases. Secondly, needing to pay for long lead items much earlier than expected, due to supply constraints and finally, higher costs than anticipated due to inflation and competition for equipment.
At the March Investor Day, we also estimated that FY 2023 sustaining and environmental CapEx would be approximately AUD175 million. I’m seeing this closer to AUD220 million now largely due to increased spending on environmental CapEx, together with increased costs from inflation.
Regulations are correctly getting tighter around the world, relating to the environmental sustainability of metal recycling operations. Overall, this is a positive for us, as it both reduces unsustainable participants from entering the market and participants with poor environmental practices from remaining in the market which supports the trend of consolidation in the industry.
I’ll now hand back to Alistair.
Alistair Field
Thank you, Stephen. The next few slides provide an update on our strategic initiatives. Beginning on slide 28, which shows the progress towards achieving our FY 2025 targets first published in April 2019.
Our strategy is enduring and despite the last two years of COVID interruptions, we continue to advance towards realizing the targets. The next three slides look at our growth initiatives, including acquisitions.
Turning first to slide 29. The metals business undertook three acquisitions in FY 2022 and all are performing well. From a nonferrous perspective, Alumisource was the most significant, delivering an annualized 77,000 tonnes in the second half of FY 2022. Importantly, Alumisource produces a high-quality aluminum product using advanced technology in which Sims did not have the relevant expertise.
Atlantic Recycling Group delivered an annualized 224,000 tonnes using FY 2022 sales. It provides more outsourced material, which is an ongoing strategy for Sims, allowing us to enter a complementary market and strengthen our already solid East Coast footprint in North America. Recyclers Australia is a much smaller acquisition and a great example of a tuck-in consolidation that further enhances our Queensland operations.
Turning to slide 30. I’m very excited about the opportunities provided by the Pinkenba purchase. It is a 14-hectare site, duly located with a private deep seaport. The plan is to build an integrated facility that receives and processes scrap using best-in-class shredder technology. Potentially the residue from the shredding process will be supplied on site to Sims Resource Renewal to further process into other products including hydrogen. This will virtually eliminate the need to send anything to landfill and there are other carbon reduction benefits as well. The port facility will allow us access to vessels up to 50,000 tonnes, providing scale advantages and also optimize logistics within Australian waters and between Australia and New Zealand. It is also worth mentioning that Pinkenba eliminates the risk associated with flooding at Rocklea, which happened again this year.
Moving to slide 31. SA Recycling’s recent acquisitions will add meaningful volume through the addition of 36 facilities and eight shredders. SA Recycling’s major locations are deliberately complementary to Sims. It also has export optionality with access to three deepwater ports. The most important being in Southern California where it exports through the deep seaport at the Port of Los Angeles.
Turning to slide 32, which provides an update on SLS. It has been a difficult FY 2022 for SLS as Stephen described on a previous slide. Supply chain disruptions have meant new cloud material was sporadic and cloud providers held on to equipment initially slated for replacement.
Furthermore, the lockdowns in China severely hampered the reselling of components. None of these difficulties detract from the very strong medium-term opportunities for SLS and it has continued to position itself well as a global leader in providing end-of-life cloud services. It has signed new contracts with large-scale cloud providers enabled by its strengths in customer service, newly designed circular centers and global footprint. As a result, it has more than doubled its market share in three years.
Moving to slide 33. The Rocklea pilot facility is progressing well and is expected to be operational in February 2023. Due to flooding at Rocklea this is about eight weeks later than originally planned. Proving the pilot plant is the next critical step in releasing funding for the full-scale operation. As I’ve always said, we’ll be very disciplined around committing capital.
Simultaneous with the pilot plant process, we have accelerated the development of Pinkenba as the preferred location and we are engaging with government, stakeholders and key partners. None of these activities require committed capital.
The final slide in the strategic update is slide 34. On this slide, I summarize progress over the last year to deliver strategy by embedding a safety culture throughout the organization, a disciplined execution of our strategy to deliver FY 2025 targets, growing volumes organically and also by acquiring good businesses at reasonable valuations in NAM, Australia and SA Recycling; effectively recycling capital to fund growth; enhancing the necessary building blocks in SLS in readiness for the inevitable increase in activity; making substantial progress towards realizing the Rocklea pilot plant, strengthening our sustainability credentials.
And I’ll move on to now slide 35. FY 2022 was by any measure a very strong year. We did however see a sudden softening commence in the latter part of June and thus has continued into July. The main driver of the softening is reduced demand for metal, driven by higher interest rates and slowing economies. As we begin FY 2023 ferrous prices have been as low as $320 per tonne, but are currently closer to the $400 per tonne. My sense is that we’ll continue to see this volatility, but the lows will be higher than previous years.
Nonferrous prices have also come off, but not to the same extent as ferrous. For example, zorba is still trading above $1,500 per tonne. The rest of FY 2023 will be a function of how quickly and to what magnitude global markets recover. This will drive the demand for steel and therefore scrap. Inflation will also play an important role. We are seeing significant cost pressures throughout the business. And while we are taking sensible measures to manage costs, we will only be able to partially mitigate the impact.
I believe the impact on our markets due to higher interest rates and inflation will remain for much of FY 2023. This does not change the positive macro trends over the medium to long term. Infrastructure spending is required globally and it is metal intensive. Decarbonization is a global multi-decade issue for the metal industry. EAFs and recycled metal will play a vital role in achieving this. And cloud repurposing and recycling is an ever-growing opportunity that perfectly suits Sims’ capabilities and sustainability credentials. Before I move to Q&A, I’d like to thank all Sims employees for the last 12 months. We have delivered a great result not only financially, but importantly also from a safety, sustainability and strategy implementation perspective. Congratulations.
Operator, back to you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from Matthew Abraham with Credit Suisse. Please go ahead.
Matthew Abraham
Good morning. Thank you very much for taking my question. My query just relates to trading margins which I know you’ve spoken about a bit throughout the results. Historically trading margins have been quite consistent and that’s something that you spoke about a bit at the Investor Day. There’s been this decline in trading margin at this result. Do we expect the reversion of the trading margins back to around that 22% of the group’s level or can we expect this to be the go-forward trading margin for the group now?
Stephen Mikkelsen
Abraham you can very much expect it to return. And the point I would make is that, at extremes the trading margin percentage we’re talking about not because the trading margin in absolute terms are very much improved. And on a per tonne very much improved as well. If you look at North America it was up 30% per tonne. Australia was up 41% per tonne.
The UK was up around 14% per tonne. But if you’ve got prices at AUD 650 versus prices at AUD 200, your trading margin percentage will obviously vary. And we had over FY 2021 very high prices. And so just by definition your trading margin percentage will fall a little bit. I would still continue to know that if you look back through history there’s still surprisingly more stable than dollar per tonne. So the prices we’re back down to now we’re sort of we’re seeing around AUD 400 per tonne now. You would absolutely expect our trading margin percentage to return back to those, sort of those early 20% 22% type level.
Matthew Abraham
Okay. Great. That’s helpful. And just to clarify just talking about the percentage knowledge that there has been an increase in other margin metrics. And just one point of clarification on that. So, you’re saying that there is a reversion. And do you see that being the next half year result or what sort of period of time do you anticipate that reversion to take place?
Stephen Mikkelsen
Yes, I would expect that by the half year results. We manage margin — we’ve managed margin very carefully. And I just wanted to restate my point that those really, really high prices you would always expect to see the margin percentage be a little bit lower. Conversely really low prices like we experienced a couple of years ago down in the nearly 200% you’d expect — sorry nearly AUD 200, you would expect to see the margin percentage higher. I mean it’s just mathematically that’s the way it would work.
Matthew Abraham
Great. That’s helpful. And one more if I may. So this very just relates to operating expenses again something you’ve covered off on quite well. So, thank you for providing that detail. The last half year, we expect about operating expenses as well and one of the comments was that there was a 40% increase in activity that was driving like attributable to that OpEx increase.
And you called out a couple of factors that are also contributing to this OpEx growth. Over what period can we expect or if we can expect a reversion of operating costs to a level that was prior to some of these steep increases that we’re observing?
Stephen Mikkelsen
Yes. I mean volume will always — so there’s two very distinct aspects to it. One I don’t worry about and one I do worry about. Increases of associated with volume perfectly fine as what you would expect to see same with acquisitions that activity-driven stuff.
The inflation one is obviously more concerning and something that we’re going to focus on and are already focusing on quite significantly. I think it’s probably fair to say that we all from a cost point of view, we will never — as we’re seeing these inflation levels for the last six months 12 months whatever around 7% to 9%, we will never out to completely mitigate that from a cost point of view.
But I would also make the point that, generally speaking, there’s a correlation between high inflation and high commodity prices. So, we do have some natural hedge going on as well. But I can assure you from a cost point of view we are working diligently to combat as much of the inflationary increases as we can.
Matthew Abraham
Okay. So just to clarify, can we expect an operating cost decline in that period whether it be the next half year or thereafter, or as you’re saying we want to sort of mitigate the inflationary pressure and this could be a bit of a resetting of the cost base?
Stephen Mikkelsen
I think, there is some – definitely some resetting of the cost base as a result of inflation. I mean, I just think, it would be too hard for us to sensibly without damaging the business pull out our compounding back to back 7%, 9% increases. I think that’s just too difficult. But just to reiterate my point, I think from an overall EBIT perspective, we do have a bit of a natural hedge going on with the correlation between inflation and prices.
Matthew Abraham
Okay. Great. That’s helpful. That’s it for me. Thank you.
Operator
Your next question comes from Megan Kirby-Lewis with Barrenjoey. Please go ahead.
Megan Kirby-Lewis
Good morning. Thank you for taking my question. Just firstly just on the SA Recycling business and you called out the higher EBIT per tonne there. Can you just remind me of I guess sort of the differences between that business and yours? And then should we be thinking about sort of a trend towards SA Recycling margin, or is there sort of a structural difference that would prevent that from happening?
Alistair Field
Hi, Megan, it’s Alistair. There’s a few issues. SAR in particular has a large supplier base, which is really what we call outsourced. In other words, there’s no merchants really in between George’s business and the suppliers. So that is a structural difference in particular in the regions that he operates in. The second point, I’d make is obviously George’s business in terms of size has grown quite a bit over the past year or so, and has a very strong presence of shredders and as a factor that also absorbed. So slightly structurally different and obviously a slightly different supplier base as well.
Megan Kirby-Lewis
Perfect. And then just on Alumisource, what are the plans for the rollout there for the next couple of years and the type of CapEx needed to increase volumes?
Alistair Field
Obviously, the Alumisource business is a key part of our nonferrous growth strategy, and we’ve got set targets for that. Obviously, from a quality point of view Alumisource is something that we wanted to strive and spread that further in our business in terms of higher levels of quality, and there’s definitely growth trajectories for that business. That is currently underway. As you’ve seen the growth has outperformed, what we expected initially. So it’s a really well-structured division with a very strong growth potential in it as well.
The capital is not massive in terms of M&A. The capital literally to grow the Alumisource division itself is more sustainability CapEx, a bit of quality improvements on some of the equipment. But it’s any M&A come along that would be a separate bolt-on.
Megan Kirby-Lewis
Okay. Thank you.
Operator
[Operator Instructions] Your next question comes from Scott Ryall with Rimor Equity Research. Please go ahead.
Scott Ryall
Hi. Thank you very much. I have two questions. The first one Alistair, I guess, is more strategic. You’ve certainly made hay while the sun was shining in fiscal 2022. I was wondering if you could just talk to some of the more strategic things that you might have done to protect yourself as the market inevitably was going to come off at some stage and you’ve been pretty clear that you’re seeing a softer market heading into fiscal 2023. But just give us a sense of what you’ve done in the last couple of years to I guess make your business a little bit more resilient to the downside please?
Alistair Field
Certainly. One of the key aspects for us was the structure of our organization. And we’ve had a large focus on systems in our business the drive to one ERP systems where we’re really trying to centralize a number of our regions and structures across the group. So this centralization, obviously, has a focus on efficiency, but also has a reduced cost about it as well. It also gives us a much focus on live data. So that for us centralization has been, obviously, a very key centralization process for us.
I think the other aspect as Stephen has alluded to in terms of capital we’ve been very careful to spend capital. Any M&A we’ve really looked at trying to do that without going into any debt and hence some of the resale of assets we’ve had as well. I think the choice of the acquisitions we’ve made be it the Alumisource or AOG in Baltimore all have good synergies. They have all outperformed. So I think that capital discipline always allows us to work between the highs and lows of the commodity cycles.
The third part I would say is we’ve always had a focus on cost management across the business. We do know that we’re going to hit highs and lows. And I think the structure of the organization is key for that, but also the cost focus and the discipline of management around continuous improvement sort of culture that prepares us for the highs and lows of business cycles.
So I think overall strategically, we’ve made the right choices. We haven’t gone out and spent fortunes of capital and then we’ve just been very disciplined around how we manage the whole business. We’ve had to put structures in place and some infrastructure, which is normal for a business our size. But overall I think we’re well-prepared.
Scott Ryall
Okay. Great. And then my second one is just on Pinkenba please. Could you just give us a sense you’re starting shipments anticipated in 2023, which you’ve said in the presentation. But in terms of I guess the more ambitious potential development in Pinkenba what’s the time frame for thinking about that please?
Alistair Field
We’re still going through the pre-feasibility on that. And as you know, I would like to have an in-situ facility. In other words that’s got intake shredders off-line recovery plants and Sims Resource Renewal all in one facility. That allows us obviously to export metal straight out of the port and also import or do dual loads. In other words, get a load from another state and pick up the Brisbane load and take it out.
In other words higher volumes in one ship. So a cost-effective measure. From a timing point of view, we will obviously have to go through quite a lengthy process in terms of permitting and the like which I would think take another 18 months. In terms of shipping this is allowing us to use that site because it has a currently operating wharf we can actually bring a ship in and export our shredded metal in 2022 — sorry in 2023. So that is really what we’re talking about there. That’s not actually the actual build that we’re talking about that will — around 2024-2025.
Scott Ryall
2024-2025. Perfect. That’s all I have. Thank you. That’s all I have.
Alistair Field
You’re welcome.
Operator
Your next question comes from Megan Kirby-Lewis with Barrenjoey. Please go ahead.
Megan Kirby-Lewis
Hi, again. Just a ton of the outlook commentary and the comments around the soft market condition. Should we be in targeting that as having an impact on volumes, or is it more just in relation to the price move?
Alistair Field
Megan, look it’s obviously early start of the year, but very clearly the price decline you do see an associated drop in volumes. So as it went down to $320 volumes obviously slowed. And as it goes back up to $400 we expect some of those volumes to start coming back. There is a bit of a lag between this and that elasticity between lower prices and higher prices definitely takes two, three months to flow back into the market. So I think, the focus for us is really understanding what the sort of medium outlook is, in managing our business accordingly particularly in relation to costs.
Q – Megan Kirby-Lewis
Understood. Thank you.
Operator
Next question comes from Lyndon Fagan with JPMorgan. Please go ahead.
Lyndon Fagan
Thanks very much. I was just interested in the FY 2025 outlook slide on Page 28. Obviously, there’s a lot going on there. I’ve got a bunch of questions on it. So in order to process 120 kilotonnes of ASR per year, can you maybe provide a bit of the sense of the capital requirements for that? And what sort of returns, you believe that sort of project will generate?
Alistair Field
120,000 tonnes is probably two shredders, ASR volumes that typically would come out of that. In terms of the target that is obviously aspirational, and we’re obviously in the pre-feasibility study as I mentioned around Pinkenba, because part of Pinkenba’s volume is Brisbane shred is around 65,000 tonnes. If we can bring another shredder’s ASR into Brisbane, which is obviously what we’re working through in the pre-feasibility that would set the target of 120,000. We haven’t set out any details on the actual cost of capital, or the actual cost of that overall capital spend at this stage. We will like to finish the pre-feasibility first.
Lyndon Fagan
Thanks. And I guess, I’ve got similar questions around the desire to sort of acquire or build 50 megawatts. Is there anything, you can talk about in relation to that and the capital requirements?
Alistair Field
We did an acquisition in Florida, what 18 months ago?
Stephen Mikkelsen
18 months ago, yes.
Alistair Field
Yes. That wasn’t very, happy on capital. I think we sent out a note on the actual acquisition at the time. I don’t have that on the top of my head. But, we’re very cautious with acquisitions in that part of the world as well. We went through a number of process steps, before we purchased that facility. It’s a very well-run facility and has the potential to almost double the actual megawatt in that facility itself, without spending too much capital. So we’re probably going to do that first, before we actually acquire anything else.
Stephen Mikkelsen
Lyndon, the way I would think about it, if I were you, is that I think you should be happy we showed discipline around capital. The 50 megawatts is an aspirational target. If we can’t find investments to get our IRR hurdle, which is 15% post-tax post Exxon, if we can’t find we, won’t invest just for the sake of reaching that target, because that won’t provide shareholders value. So whether we get to 50 megawatts or not will be entirely a function of whether or not we can find projects that make that minimum hurdle.
Lyndon Fagan
Great. And I guess, if we just go back a slide so we’ve got $220 million sustaining CapEx next year that appears to have gone up from $150 million this year. Am I missing something there?
Stephen Mikkelsen
No, we are definitely — we’re predicting a higher sustaining CapEx next year, and really driven in quite a lot by environmental CapEx that we’re going to have to spend. And the comment, I would make there is, that globally the environmental standards in our view correctly are lifting quite substantially around, what you need to be to run a street at what the environmental standards need to be.
And we are going to have to spend money on meeting those environmental and exceeding those environmental standards. I think overall that is a good thing. I think it provides – I won’t use the word barrier to entry because that’s not quite what I mean. But I think it stops less scrupulous players from coming into the industry and it holds existing players up to a higher standard. Otherwise, they will lose their licenses. And I think overall that feeds into our theme of consolidation of the industry and the ability to buy some bolt-on acquisitions.
Lyndon Fagan
Thanks. And I guess just the total CapEx for next year well – well over AUD300 million that will be a record amount at least as far as that chart goes back. Is that the sort of spend we should be thinking about to deliver on that FY 2025 slide with all of those ambitions? Should we be thinking north of AUD300 million per year CapEx is the new number for Sims?
Stephen Mikkelsen
No I don’t think you should because the biggest variable there will be growth CapEx obviously, as to whether or not we get up to that type of level. And that will be – that will be a function of do the – are there acquisitions that meet our minimum hurdle rates. So I wouldn’t view that as embedded in there at all.
Lyndon Fagan
Right. And I guess just a final one for Alistair. I can’t help but feel like the company is spreading itself quite thinly. There’s so many different sort of opportunities being looked at. Can you perhaps talk about whether there’s an opportunity to shrink the portfolio a little bit and simplify it? So I guess direct management attention more to the higher value-generating opportunities, or should we be thinking that there’s all of these kind of start-up businesses within Sims and – and it’s a bit too early to actually look at which ones are core and which ones are non-core?
Alistair Field
It is a good question. It’s something that we do discuss obviously. For us about four years ago, when we looked at the portfolio obviously, setting it out and then wanting to make sure that we get the best value out of each one of these divisions was obviously a key focus for us.
As I mentioned previously, one of the key roles for us is then to look at these divisions how they’re performing now. And if they’re not going to meet the future strategy and the growth potential we really want or expect from them, we certainly will make decisions to close or sell them off. So that is always on the table for us. And I think from a focus point of view you’re absolutely correct. We will be looking at that again in the next six months.
Lyndon Fagan
Okay. Thanks a lot, guys.
Alistair Field
You’re welcome.
Operator
The next question comes from Kai Erman with Jefferies. Please go ahead.
Simon Thackray
It’s actually Simon Thackray. Hi, James. Thanks for taking my question. Sorry I was just on another call. You may have covered off on this and I apologize. I just wanted to talk about your long-term commentary about diversification of end markets for both ferrous and nonferrous. Can you just give us a sense of where – if and where you think you may be getting share growth in ferrous and nonferrous, particularly again in the ferrous market with as you rightly point out the rise and rise of EAF production? And which geographies are growing faster or slower than you expected?
Alistair Field
Thanks, Simon. Obviously from a focus for us we have set out a number of those longer-term targets. We have certainly focused on the USA as the growth opportunity that was a consolidation and the growth of EAFs and obviously, the growth in demand and obviously also the performance of the USA business. So that would be our primary focus both in ferrous and nonferrous.
Simon Thackray
And just against that backdrop Alistair, I mean, the shift I guess from always being known predominantly as an exporter and that was the shift in strategy some years ago. What do you expect going forward for domestic supply of scrap in North America to be?
Alistair Field
I think we would probably — well, we still have the ability to obviously export domestically down through the Gulf. But I think the combination of SAR and our NAM business is a very good mix both feeding domestically as well as export. I think the export percentage would, I think has been more focused towards the Turkish or the Middle East area. That diversification we took to send volume down to South America and still existence and stays. We do have that opportunity, obviously, with our Chicago operations is to grow that and continuously feed that into a domestic market coupled with George’s business. So I think we’ve got a good balance on it.
Simon Thackray
Sorry, Alistair. I’m just — sorry to be obtuse. I’m just trying to understand do you — what do you envisage for the mix of domestic versus export in say three years’ time in the North American business?
Alistair Field
I would still think that our East-West Coast is going to focus on exports and probably the percentages remain as they are now.
Simon Thackray
Okay. Thanks so much for that. Appreciate it.
Alistair Field
You’re welcome.
Operator
Your next question comes from Matthew Abraham with Credit Suisse. Please go ahead.
Matthew Abraham
Hello. Sorry, just one more for me if I may. Just on the trading margins again if possible. So just going back to that comment that you expect a reversion to the 22% group trading margin at the next half year and we spoke about the cost base not reverting to prior levels because of that sort of sticky inflation. Can you just talk us through what you anticipate to be the key drivers of that trading margin reversion and given that we’re sort of thinking that cost isn’t going to decline from its current levels. Is that then suggestive of an expectation for a pricing increase or potentially a mix change to drive that trading margin improvement?
Stephen Mikkelsen
Yes, actually — so Matthew one — actually one point I didn’t make previous as well, which I should have is that there was part of the margin percentage was a result of more non-ferrous as well. And non-ferrous margin percentage is obviously lower than ferrous particularly if you’re selling copper at $8,000 a tonne you’re going to make a lower margin percentage you’d still make a very good margin per tonne. So I will clarify that.
The other thing that also — so that’s part of it. The other thing which will drive it it’s just simply where the prices where the absolute price level is that we still — we still have a margin per tonne that we need to make to cover our costs to cover freight, to cover everything. And at $400 a tonne that margin percentage has to be higher than it is at $650 per tonne. So there’s a certain amount of natural — it will happen naturally. And when you look back through history you can see that. So that would be my first point. The second point I would make is that — and I’m just repeating myself actually. I was remiss in not referring to that nonferrous margin percentage as well.
Matthew Abraham
Okay. So there’s a bit of a mix effect that’s played out.
Stephen Mikkelsen
Yes. There was actually. There’s definitely a mix. Alumisource the growth, we’re doing in Alumisource the growth we’re doing in North America around non-ferrous will have a mix impact on the trading margin percentage. But clearly the margin per tonne will be growing.
Matthew Abraham
Right. Okay. So you expect that mix effect to revert and normalize which will be part of the drive of the uplift trend?
Stephen Mikkelsen
Look if we are hugely successful in non-ferrous, you would expect that margin percentage actually to fall a little bit as well. You wouldn’t expect it to fully reverse. So, it will be a little bit of a function about what the Alumisource growth is, what the non-ferrous growth is in North America as well because that margin percentage is lower, let me really stretch the dollar per tonne is still excellent in non-ferrous very, very strong.
Matthew Abraham
Okay. Okay. And just one more on trading margin. Again apologies. So, the reversion and the mix effect and the uplift in margin whether it be a 22% or otherwise can that be expected across each of the metal segments, or should we expect it to be more concentrated in one of those regions rather than the others?
Stephen Mikkelsen
I think look the competitor — I mean the overlay you put on top of this is the competitive environment and the market structure. So, look I would say that I’m going to make a general comment. I mean general comments are always a little bit dangerous. But the general comment is you would expect it to be across the board because that’s the same thing hold true. The prices come down everywhere. And so therefore, we need to make our dollar per tonne. So, therefore the margin percentage goes up.
But overlying that there was always different competitive tensions. Clearly the UK market has a different structure and has always had a lower trading margin per center. So maybe that will a little bit more, but I would fully expect it in the US and in Australia.
Matthew Abraham
Okay, great. That’s helpful. That’s all from me. Thank you.
Operator
[Operator Instructions] Your next question comes from Daniel Kang with CLSA. Please go ahead.
Daniel Kang
Good morning everyone. Just a couple of questions for me. Great to see the strong non-ferrous volume growth in FY 2022. Just wondering if you can talk about your expectations for growth into FY 2023? And also if you can comment on the recent pullback in zorba twitch pricing how do you see that panning out?
Alistair Field
Thanks Daniel. Obviously, for us we have the non-ferrous targets that we’ve set out for 2025. So, we’re obviously carefully looking at opportunities to grow our business and that will continue. So, the expectations I have for 2023 are pretty much the same as the focus that we’ve had on 2022. So, where we can find good acquisitions and bolt-ons we’re going to do that in 2023.
Stephen Mikkelsen
Maybe I’ll talk about the zorba. I think zorba margins have been surprisingly more robust than — sorry zorba prices and the ferrous prices. So, we still got zorba prices AUD1,600 per tonne thereabouts. Admittedly highs of let’s call it AUD2,200 a tonne. But in percentage terms, a smaller price than we had in ferrous, which we peaked at maybe close to AUD 700 per tonne and got down to as low as AUD 320 but back up to AUD 400 now. The other thing I’d say is, the twitch in a similar fashion to the zorba twitch prices are looking nice as well around that mid-AUD 1500, AUD 1600 as well.
Daniel Kang
Okay. Thanks, guys. And just on the SOS business, typically, I’m interested in your best guess of when you expect supply chain constraints will ease up? Also, really great to see that market share continue to gain, are you expecting that trajectory to continue into the next FY 2023?
Alistair Field
Yes, I do think the logistics is going to loosen up. We’re seeing a little bit of it already. I think for the 2023, we’ll see that logistical supply chain open up. I think one of the issues is really going to be around semiconductors and how that actually does come through to the US and whether any growth of that product is created in the US, which obviously helps the logistics side as well. That would obviously help the data centers and the refurbishing or new data centers that are coming in. So we’re hoping to see that improvement over 2023 in terms of the logistics setting it free
Stephen Mikkelsen
From a market share point of view, yes, we are still expecting to see that same level of growth. We need to see that level of growth to hit the 8.5 million repurposed tonnes repurposed units by 2025. And I’m not seeing at the moment why they shouldn’t be achieving that level of growth.
Daniel Kang
Okay. Thanks. And just with the 30% that in resale price, I mean are we seeing any settling in pricing?
Stephen Mikkelsen
The price is still depressed for that resale. And that’s very much driven by China. That price — that’s a very simple thing. When China comes — if and when China comes out of lockdown, the price will reverse, because it’s most of that resale product through brokers or whatever it finds, its way into China and that’s where it’s refurbished and resold out of. So, we need China to come out of lockdown.
Daniel Kang
Great. Thanks for that color. Thanks Stephen. Thanks Alistair.
Stephen Mikkelsen
You’re welcome.
Operator
There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.
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