Thank you for standing by, and welcome to the Sims Limited HY 2022 results webcast. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. Today's presentation may contain forward-looking statements, including statements about financial conditions, results of operations, earnings outlooks, and prospects for Sims Limited. These forward-looking statements are subject to assumptions and uncertainties. Actual results may differ materially from those experienced or implied by these forward-looking statements. Those risk factors can also be found on the company's website, www.simslimited.com. As a reminder, Sims Limited is domiciled in Australia, and all references to currencies are in Australian dollars, unless otherwise noted.
I would now like to hand the call over to Alistair Field, Group CEO and Managing Director of Sims Limited. Please go ahead.
Thank you, and good morning. It's a pleasure to be delivering the FY 2022 half year results for Sims. Joining me on today's call is the Group Chief Financial Officer, Stephen Mikkelsen, and Chief Operating Officer, Global Metal Operations, John Glyde. The slide presentation that we will run through has been lodged with the ASX along with the results release. The agenda for today is that I will run through a general overview of performance and the highlights. I'll then hand over to Stephen, who will take us through our financial results before I discuss some of the company's strategic priorities, short-term outlook, and medium to long-term drivers. Following that, there will be time for Q&A. I'll turn straight to slide five, which covers the key takeaways from the first half.
You will remember that when we released half year guidance in November, underlying EBIT was forecast to be between AUD 310 million and AUD 350 million. I'm pleased to say we have come in at AUD 362 million, slightly higher than the upper end of forecast, delivering a high-quality result with excellent margins. Operating cash flow for the first six months was a significant improvement from the previous six months, while intake volumes, a key signal of underlying activity, continued to improve back to the pre-COVID levels of FY 2019. These excellent results lifted our return on productive assets to an annualized return of 37.5%. The strong financial performance and our overall positive outlook has given us the confidence to substantially increase cash distributions to shareholders in the form of both share buybacks and dividends.
Finally, this was achieved while maintaining our strong Sims culture, evidenced by our 82% engagement score. 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 completed several strategic acquisitions in both the Sims business and our joint venture, SA Recycling. These, while highly complementary to our existing businesses, were achieved at valuations which were immediately accretive to our shareholder value. Secondly, we have found a great long-term partner for our Sims Municipal Recycling business. By bringing in Closed Loop, we have paired with a rapidly growing leader in the circular economy. This also provided capital for us to recycle into the metal business acquisitions we have announced. Moving to slide seven.
The dominant theme is that the very strong performance from the second half of FY 2021 not only continued into the first half of the current financial year, but it accelerated. This resulted in performance measures presented on this page that are, in several cases, several times higher than the equivalent half year in FY 2021. Underlying EBIT was 541% improvement over the prior year. This was driven by a 74% increase in sales revenues on the back of exceptional ferrous and non-ferrous prices and sales volumes, which improved by 9%. While inflationary pressures on costs have emerged, and I believe will continue to be a risk, we have so far been able to manage these quite well. In fact, we were able to improve our trading margin despite inflation. Looking ahead, we're also identifying medium-term productivity gains and other cost improvements.
Additionally, the business delivered strong operational cash, and we will be distributing 50% of underlying profit to shareholders in dividends and on-market buybacks. Most critically, all of this was achieved with a strong safety performance. Slide eight provides a summary of the financial outcomes in a convenient table. I've already spoken about the profit measures on the previous slide. However, it is worth highlighting the improvement in return on productive assets. This profitability metric, which we have used for several years now, grew from 6.2% in the last half year to 37.5% this half year. I will spend the next few slides talking about non-financial measures, starting with health and safety on slide nine.
As you will appreciate, the health and safety of our people is a huge priority for the Sims management team. It is pleasing to see that the half on half lagging indicators are showing an improvement trend, particularly critical risk incidents. Another lagging indicator, the total recordable injury frequency rate, has fallen to around 1.2-1.3 for the last few years, and we want to drive this lower. In part, this will be achieved by closely monitoring the linked leading indicators. For example, we have had over 5,500 corrective action improvements identified in HY 2022. Involving employees in identifying and implementing the corrective actions is key to improving safety outcomes. Moving now to slide 10 on sustainability.
Sustainability is at the core of our business, and it is pleasing to see some recognition for the effort that our employees put into ensuring that Sims is a leader in sustainability. There are many measures, initiatives, and cultural behaviors that drive outcomes which lead 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 are making good progress towards achieving our FY 2025 sustainability goals, which are to operate responsibly, close the loop, and be a partner for change. Highlighting just a few of these. We launched Women Leading @ Sims, which is a great initiative to connect our global emerging female leaders. We released our second modern slavery statement, which was well-received due to it containing concrete actions and case studies of what we have actually done.
On the operational front, we also transitioned Claremont, our largest global site, to renewable electricity. This is just the beginning, and I will continue to champion sustainability at Sims through measurable actions. Just before I hand over to Stephen, I will turn to slide 12, which depicts the first half of FY 2022. The charts highlight several important points that resonate throughout the current half-year results. Firstly, price rises for our main commodities began rapidly rising in late calendar year 2020, stabilized at significantly higher levels around June 2021, and since then have maintained the higher levels with some volatility. Secondly, the average HY 2022 price is significantly higher than HY 2021. Finally, freight prices has also risen but show much higher volatility around the higher price. I will hand over to Stephen now to take us through the results in more detail.
Thanks, Alistair. I will turn straight to slide 14, which summarizes the group results and some key metrics. The substantial increase in revenue of 73.9% was driven by higher prices and volumes. This, in turn, lead to a 45% increase in trading margin as we nicely managed the metals buy-sell spreads through the period. Operating costs increased by 14.3%. From an internal perspective, higher activity and new businesses were part of the reason for this increase, together with high performance-related incentive provisions related to stronger financial results. Externally, the impacts of inflation have also placed upward pressure on costs. EBIT grew by 541.3% to AUD 361.7 million, which was a record first half result. On slide 15, for convenience, we summarize EBIT and volumes by division.
A recurring theme across all metal divisions is that EBIT, whether measured in absolute terms, dollars per ton, or percentage margin terms, was up significantly over the prior first half and sustained the very strong uplift that occurred in the second half of last financial year. Looking at our North America Metals result on slide 16. NAM sales revenue was up 87.2%, driven by higher sales prices and volumes. Sales volumes were up 11.3%, while intake also improved, returning back to pre-COVID levels. Trading margin increased by 74.6% as a significant proportion of the trading margin spread in percentage terms was retained due to higher commodity prices. Operating expenses increased 27.4%, largely driven by increased market activity, capital growth projects, and acquisitions. Inflationary pressures also contributed to rising costs.
The end result was a 478% increase in EBIT to AUD 142 million, the largest absolute and percentage increase for the metal businesses, including SA Recycling. Turning to slide 17. Like NAM, ANZ also delivered a very strong first half. Revenue increased by 70.5% on the back of a 72% increase in sales prices. Trading margin increased by nearly 59%. Costs were up 12% with the more than doubling of EBITDA to AUD 121 million. Higher costs related largely to increased use of contract labor to cover staffing shortages, timing of repair and maintenance activity, and general upward pressure from higher inflation. In total, underlying EBIT increased by 244% to nearly AUD 95 million.
Encouragingly, despite the stop-start uncertainty created by COVID lockdowns in Australia and New Zealand, intake volumes also showed improvement and recovered to near pre-COVID levels. Moving to the U.K. on slide 18. Sales volumes increased by just under 6% and prices rose by 64%, resulting in a nearly 74% increase in sales revenue. Due to market structure and competitive dynamics, U.K. was not able to hold on to as much of the sales price increase as NAM or ANZ, but it still improved trading margin by 39.6%. This resulted in a very healthy 180% increase in EBIT to AUD 29.4 million. Costs were up 14%, some of which related to a stronger pound against the Australian dollar. The timing of workforce mobilization and inflationary pressure were the other main contributors.
Intake volumes in the first half of 2022 were consistent with the prior corresponding period. However, they were below pre-COVID levels due to a combination of closure of non-profitable sites and COVID-19 impacts. On to slide 19. SLS produced a 45.6% growth in EBIT to AUD 9.9 million on the back of 44% growth in repurposed units and 9% growth in sales revenue. In many ways, it was a challenging six-month period for SLS to navigate. Inflow of repurposed units was not as strong as anticipated. Supply chain constraints meant that data centers were not receiving new material to refurbish and expand the cloud, and therefore they held on to material rather than send it to SLS for repurposing.
In speaking with our customers, we are confident that this material must eventually leave the cloud for refurbishment, but it could be late 2022 or even 2023 before the supply chain frees up sufficiently to give customers the confidence to increase the release of materials. Moving to slide 20. As with NAM, SA Recycling performed well, as the very strong results from the second half of FY 2021 continued into the first half of FY 2022. Compared to the first half of FY 2021, sales volumes were up 18.6%. Intake volumes were back to 114% of pre-COVID levels on the same stores comparison.
Underlying EBIT was up 427.5%, and it's worth noting that the acquisitions announced over the last three months did not complete until late in the first half, so they did not materially contribute to the result. Turning briefly to slides 21 and 22. Increases in operating expenses in global trading and corporate were largely driven by internal reorganizations, where people were transferred into corporate and global trading, as well as increased incentive provisions relating to group financial performance. Sims Municipal Recycling had an excellent half, driven by increased paper and plastic prices. It is now well-positioned with Closed Loop on board as a strategic partner. Moving to our net cash position on slide 23.
Net cash increased from AUD 8 million to AUD 45 million, driven by nearly AUD 300 million in operating cash flow, and I will discuss this significant improvement on the next slide. The strong operating cash flow allowed us to complete the acquisition of Recyclers Australia, spend over AUD 80 million on CapEx, and distribute AUD 116 million in the form of dividends and buybacks, while still increasing net cash by nearly AUD 40 million. We will be distributing a further AUD 135 million over the coming months, being 50% of half year 2022's underlying NPAT. The payment will comprise of a AUD 0.41 per share dividend and an on-market share buyback equivalent to AUD 54 million, which will be completed before 30 June 2022. Moving to slide 24. The two charts on the left tell the story of the last 12 months.
There has been an unprecedented, sustained uplift in prices. Volumes also improved as we began our recovery out of COVID. This resulted in a significant increase in working capital. The vast majority of this occurred in the second half of FY 2021, where we funded a near AUD 290 million increase. Furthermore, it is SA Recycling's policy to pay 60% of EBIT as a dividend quarterly in arrears and retain 40%. This produced a lagging effect on cash flow in the second half of FY 2021 as the strong June quarter was not paid until July. This normalized in the first half of FY 2022, and you can see AUD 52.4 million on the bottom chart represented around 40% of SA Recycling's AUD 128.7 million EBIT.
The upshot of these movements is that operating cash flow of AUD 290 million is a AUD 310 million improvement on the previous six months. My final slide is CapEx on slide 25. We forecasted AUD 220 million CapEx for FY 2022 at the full year result presentation in August. This has reduced to AUD 170 million, as we will no longer be spending capital on the Sims Resource Renewal project in Campbellfield. I view the rest of the CapEx profile for FY 2022 as relatively average and make the point that growth CapEx must meet our 15% IRR hurdle. We have been very disciplined around this and will continue to be so. I'll now hand back to Alistair.
Thank you, Stephen. The next few slides provide an update on our strategic initiatives beginning on slide 27. Our strategic initiative targets were first published in April 2019, a time when few of us had ever heard the word COVID. Our strategy is enduring, and despite the last two years, we continue to advance towards realizing the targets. This is well demonstrated in slide 28, where we summarize progress over the last six months that have continued to build momentum towards achieving targets. Growing volumes organically and also by acquiring good businesses at reasonable valuations in North America, Australia, and SA Recycling. Setting up Sims Municipal Recycling for long-term growth and success through the addition of a strategic partner in Closed Loop.
Ramping up our ability to repurpose cloud material for our major customers and pivoting away from Campbellfield as we await for new government regulation towards Rocklea, where we will build a pilot plant, which if successful, will lead to a full-scale commercial facility. Turning to slide 29. This map sets out our shredder and facility locations in North America. Highlighted in red is the acquisition of ARG in Baltimore. As you can see, it fits nicely with our East Coast assets and will add to our export optionality. This optionality is created through the access we have to 15 ports. Moving to slide 30, which shows the equivalent position for SA Recycling. SA Recycling's four acquisitions are estimated to add 1.1 million tons per annum through the addition of 35 facilities and nine shredders. SA Recycling's major locations are deliberately complementary to Sims.
It also has export optionality, with access to three deep water ports, the most important being in Southern California, where it exports through the deep-sea port at the Port of Los Angeles. Turning to slide 31, which provides an update on Sims Resource Renewal. The Rocklea pilot facility has been granted its development approval and is on target to be in operation before the end of this calendar year. I've always said we will be very disciplined around committing capital, and this will be an important stage gate in that process. Simultaneous with the pilot plant process, we have accelerated the development of commercial facility in Queensland, including assessing the preferred location and engaging with government, stakeholders, and key partners. None of these activities require committed capital. The Campbellfield facility in Victoria is on hold as we await the implementation of the Victorian Government's Waste to Energy Framework.
Moving to slide 32. SLS has continued to position itself 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. It has been a stop-start first half, as Stephen described on a previous slide. Supply chain disruptions have meant new cloud material was sporadic and cloud providers held on to equipment initially slated for replacement. This will have two consequences. Firstly, the growth we see through to 2025 will have a slower start due to the supply chain situations, but then it will pick up more rapidly. Secondly, and more importantly, customers will want to redeploy much more back into their own data centers to remove supply chain risk. This fits perfectly with Sims' market position around security, sustainability, and global reach.
The final slide in this strategic update is slide 33. I'm very pleased that we have found a long-term strategic path forward for SMR. Over the last few years, I've discussed with a number of shareholders our desire to capitalize on Sims Municipal Recycling's position, in particular, how to best maximize the value from its marquee municipal recycling contract with New York City. Closed Loop brings to the table a dedicated and focused expertise that will enable Sims Municipal Recycling to continue innovating and take the next big leap in expanding its services and geography using the New York City contract as that foundation. I'm very confident that the arrangement will work well. Closed Loop's ambitions and culture align with Sims, and I look forward to working with the team in the coming years. I want to move on now to the outlook on slide 34.
When I presented the year-end results in August 2021, I noted that the consistently strong quarters in the second half FY 2021 had continued into the July actual results. Clearly, that strong July performance progressed to be what was a strong first half FY 2022. It is therefore pleasing to report that these recent strong conditions have continued, elevated into the second half of FY 2022. The key indicators of performance are tracking well. Intake levels are solid, and prices are at least at the same levels as the first half average. The demand from our customers for our products is robust. We must continue to manage price volatility, including freight costs, as effectively as we did in the first half, while finding efficiencies to offset the inflationary pressures that have emerged. As you would expect, the positive macro trends remain the same.
We continue to expect the impact from stimulus spending to increase the demand for recycled metal. We also believe decarbonization is a global multi-decade issue. Recycled metal will play a vital role in achieving this. Cloud repurposing and recycling is an ever-growing opportunity that perfectly suits Sims' capabilities and sustainability credentials. Before I move to Q&A, I'd like to thank all Sims employees for the last six months. The past two years have been difficult from both a how we work perspective and the sheer volume of change our organization has been going through. It's great to see all of your efforts are coming to fruition, not only in our financial performance, but in safety, our culture, and the strategy implementation. Congratulations to all of you. Operator, back to you.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Paul Young with Goldman Sachs. Please go ahead.
Morning, Alistair and Stephen. A great result. Ticks in the ANZ business. Good cash flow. Not much to really complain about. Really strong outcome, so congratulations. Couple of questions. First one is on volumes. I'm just keen. Obviously, you've got the 2025 target, and we've seen volumes step up. What is, broadly speaking, the upside from here, and what is your shredder, broadly speaking, your shredder utilization at the moment, particularly in the U.S.?
Our 2025 targets, obviously, we've set quite specific targets in terms of tons in both the U.S. as well as on a global basis. Obviously, the organic growth and acquisition growth is obviously part of our program, and you're seeing us execute that in a very disciplined manner. That volume growth and those targets are still in place. In terms of shredder utilization, naturally, that differs across the globe in terms of permit and operating capability. I would say that we certainly have got room to put a lot more volume through our shredders, if we could. Part of that is being able to grow those organic opportunities and feeder yards in both the U.S., the U.K., and in Australia.
I would say that we've got probably plus 20% ability to grow our shred volume going forward, and that's without acquisitions, et cetera.
Yeah. Great. Thanks, Alistair. Second question's on the end markets. Which are the strongest regions on the ferrous demand front you're seeing at the moment, i.e., Turkey versus Asia versus U.S.?
Look, I mean, Turkey is still one of the largest customers that we have. I mean, the volumes that they take have been very steady, 45-50 cargos a month. That has not stopped. If you look at the percentage export that we send to Turkey, that's still pretty much the same. I think we've got strong markets both in domestic as well as export. I look at USA, and Australia, the domestic market in Australia is 55% export, and the U.S. is probably closer to a 70% export. But even the domestic feed that we have is very strong in U.S. and in Australia. The U.K. is, you know, close to 80% export.
Turkey is still a very strong ferrous exporting region for us and customer base. I'd say it's pretty much across the board. We can sell into Southeast Asia, and there's still quite a strong demand as well. I wouldn't highlight any one particular. Our sort of percentage export volumes will remain consistent, but it's just strong all over.
Yeah. Okay. That's great. Last question for me is on the non-ferrous side. You know, both particularly aluminum, it's in a deficit at the moment. You know, that deficit seems like it's increasing. You know, copper market's tight. You know, deficit's on the horizon. What are you seeing on the margin front on your non-ferrous? Are you seeing that discounts on your products close up versus the LME?
I'm not gonna compare LME prices, but I think what you have very clearly seen is our non-ferrous copper, aluminum prices have remained consistently high for the past 14 months now. I don't think that's going to abate in terms of the demand for it. You know, there are obviously drivers for you know, decarbonization, and copper and aluminum, I think you know, plays very well into that. We're obviously well-positioned geographically, but also from a capability. That brings us to our strategy and why Alumisource was a key acquisition for us and the high quality that we wanted to be able to feed into that, which obviously feeds into primary smelting operations.
I think it's really important that we keep the long-term focus on our non-ferrous and hence our strategy and acquisition of Alumisource. I firmly believe that that's got a long way to run still.
Okay. Thanks very much. I will pass it on.
Thank you. Your next question comes from Lee Power with UBS. Please go ahead.
Hi, Alistair. Hi, Stephen. Alistair, just kind of digging into your comments around volume. Demand's obviously strong. We're only just hitting FY 2019 volumes. Your comments on freight, is there anything that really is gonna stop volume growth surpassing FY 2019 and kind of seeing this continued trajectory into the second half?
I think it's probably short and long term when I have a look at that. Obviously, our volume growth is based on, you know, not only organic growth and acquisitions and those that we've already made from an acquisition. That's obviously volume growth, and we'll continue to focus on that. I think there's a difference in both domestic as well as export in terms of logistics at the moment. I'll separate pricing for a minute. We, from a ferrous point of view, our group has operated exceptionally well in managing bulk vessels, and I don't think we've missed any major shipments at all. I think part of that and the planning for around bulk is really important.
There are naturally challenges when you look at the U.K., where you've got the short sea challenge as well as the larger bulk sea challenge, and I see that ongoing. In terms of being able to feed our customers from a bulk perspective, I'm quite happy, and I don't see that a ffecting, and it hasn't really affected our bulk. I think where we've seen more of an issue is probably in non-ferrous and containers. Not to a massive degree, but we've obviously seen delays. Instead of a 60-day, you might have a 90- or 120-day delay on a container. I think at this stage, we've managed it very well.
That's not to say that we won't have any further challenges, but I think you might have a cutoff period on about 31st of December or the end of June, where you might miss three or four shipments, and that's normal issues and part of something that we culturally want to change a little bit is that I don't like vessels being loaded on 31st of December just to get a vessel out, and it puts our folk in harm's way, you know, from a safety point of view in you know New York and it's snowing, et cetera. I think overall, I'm not too worried about the logistics at this stage. It is an issue we are managing very carefully, but I don't see it affecting our volume.
Okay. Yeah. I guess I should have framed that in an ex acquisitions, which is what I was focusing on. Is there anything from freight, and it sounds like there isn't, to kind of see this trajectory? The North American volume growth's obviously very strong continuing to the second half.
Yeah. I think if we were more domestic-oriented, I might hesitate a little bit more, but I'm, you know, the comfort I have is that obviously the export bulk vessels seem to be fluid.
Okay. Excellent. The Michael Movsas retirement, he's obviously set up quite a good team with John Glyde in the U.S. Like, how do you think that's gone? Do you like that structure? Is that something you wanna continue with a replacement?
Yeah, I think the structure. There's two aspects. John Glyde, obviously head of operations based in L.A., and our head of commercial also in L.A. with Michael. Michael's obviously gonna stick around for quite some months. He has built a very good team. It's very focused on their roles and their responsibilities, so it operates at a very high level, very engaging and as part of the culture, I guess, that Michael has set up and the way we like to work at Sims. We are going to be replacing Michael's role, yes. That is a process we undertake as normal. You know, the succession planning right across our business is a very detailed issue. We work very closely with the board. This is no surprise to us.
As we say, we've got six-month leeway, and we'll work with Michael and with Brendan.
Excellent. Thank you. I might just leave it there for a moment. Thanks.
No problem.
Thank you. Your next question comes from Peter Wilson with Credit Suisse. Please go ahead.
Thank you. Morning. A question on operating costs. Understandably, in this environment, there is some inflationary pressures. I guess you reported a AUD 0.14 in operating costs, which per ton is flat. I guess part of the Sims pitch is that due to that spare capacity that Alistair mentioned, you know, you should be able to increase volumes while keeping operating costs flat. My question is, I guess if you look at that operating cost, how much do you consider is permanent, you know, and maybe, you know, I guess a loss of the efficiency gains that you've kinda locked in over the last few years. How much is permanent? How much is just short-term volume driven and potentially short-term inflation pressures?
Hi, Peter. Stephen here. I'll take that question initially. I understand John's on the line out of L.A. as well. I haven't had a chance to speak to John this morning. Then I'll maybe get John to talk about some of the inflationary pressures that we see across the business. I think a good way to look at this is if I was to split. This is a broad principle 'cause I think we need to look at this 'cause I think we can get into the minutiae. In broad principles, if I was to split the increases in the metals business and costs, which is where it's happened, I'd say of the increases, 40% relate to additional activity.
That's activity associated with bringing up repairs and maintenances, as we absolutely have to make sure that all of our equipment is available. In our current environment and the margins that we are making, having equipment down is just not good because an equipment down means you're not getting metal out of waste as you need to be. There's that increased activity around that. We've got increased volumes. That, you know, that drives around about 40%. Around 30% comes from additional growth activity, whether that's new sites, Alumisource, the additional work that they are doing. You know, Alumisource is having an excellent result. I have to say, the growth that they're experiencing, I'm very excited about going into the future.
Around 30% is that, and around 30% equates to is inflation, which is, you know, let's call that AUD 20 million or so, AUD 25 million, somewhere around there. I think of all of those costs, the inflation is the one that worries me the most and the one that we've gotta keep on top of. If we don't do the operational efficiencies we need to do, that inflation will stick in the business, and we need to make sure that we either get operational efficiencies through global procurement, which we're working on through our continuous improvement programs, doing more with less. That's my sort of overview from a financial perspective, but it's a really good question. Maybe John, hopefully when I stop speaking, you are there.
Hopefully, maybe John, could you just take us through what you're seeing, you know, from an operational perspective around costs?
Yeah. Thanks, Stephen. Hello, Peter. Certainly inflationary pressures, you know, in fuel, in waste, in energy, consumables within our shredder. Stephen obviously mentioned the R&M. A big portion of our R&M goes into consumables within our shredders. We're obviously seeing that on two fronts, obviously with increased activity levels, processing levels.
We're seeing the increased use of consumables, but obviously, you know, one of the upsides of high commodity prices is obviously higher selling prices on our scrap. One of the downsides is that we're paying more for our consumables. We're obviously seeing that getting passed through on anything that goes inside our shredders. We're obviously in selective markets seeing increased energy costs. I think we're experiencing tight labor markets in most geographical regions. We've had to supplement some of that with contract labor, which we obviously pay a premium on. We're also incurring some overtime costs, obviously, to make up that shortfall, particularly, you know, in some sites where we're COVID impacted, and we've had to bring in additional labor just to fill those open positions and short-term needs around COVID. Does that give you some color?
It does. Very helpful. Thank you, both. The next question is on Sims Lifecycle Services. So of the AUD 166 million in sales revenue, can you give us a split as to, you know, how much of that is the new repurposing business, about 2 million units, versus, I guess, the legacy business and some commentary on the trends in that legacy business or that residual business?
Yes. I've gotta be honest, Peter, off the top of my head, I don't have that split, but that's a split I'm capable of getting. I'll make sure that Anna publishes that because I think that's fine. It is obviously a growing part of the business.
I guess looking forward, I'd expect it to, if we were to jump forward to five years, it will be 80%-90% of revenue because that's where the business is heading. The second part of your question around how we're seeing that performing generally, I guess I'll just echo the comments that Alistair and I made or maybe provide a little bit more color than in the presentation. It really did start to emerge as we went through the first half of FY 2022, that our customers were moving to a just in case type of inventory rather than just in time.
They've been holding on to cloud material. Not all of it, you know. As you see, we've still continued to grow, but not as much as we thought. What we see happening there is, as these supply chain logistics ease up, and they will ease up in 2022 or 2023, there's a whole lot of material needs to come out. It's not like it's gone forever. It's the shape of it that will change. Over that period, you should see repurposed units, 'cause that's what we're really focusing on. That's the sustainability, that's closing the loop, that's the circular economy. You should see that those repurposed units eventually become, you know, like I said, 80%, 90% of revenue. I'll get you the split for this year.
That'd be good. I'll leave it there. Thank you.
Thank you. Your next question comes from Jack Gabb with Bank of America. Please go ahead.
Thanks, and good morning, Alistair and Stephen. Just a couple from me-
Hi, Jack.
I guess. Thanks. Firstly, just on the U.K., can you give us a little bit more color on how that's performing? I guess, you know, of all your divisions, volumes are up pretty strongly, certainly year-over-year, but in the U.K. they were flat. I guess in terms of sort of underlying earnings, you know, it's a bit of a drop half on half. Just curious, you know, is that drop in volume or flat volumes, is that down to the consolidation of some of your yards there? Is it competition or is it COVID or any other color you can provide would be great. Thanks.
Look, I think the U.K. is running fairly well. I think the yards that we closed and the focus that we've had on quality has certainly played into why we are doing a lot better. I think the quality aspect for us allows us to sell our material anywhere in the world. That has obviously given us opportunities from customer base point of view. In that sense, very strong. As I said, 80% of it is export and that's really important for us in being able to you know have that geographical reach. I think from the closure of the yards there is an opportunity potentially to open a little bit more of those yards, but we'll take that under review. We wanna keep the focus on efficiencies and costs there in particular.
I think in terms of the competition, there is a lot of merchant operations that we're obviously dealing with there. It's not the same as an Australian market. I think the margin's always gonna be a little bit tighter with that competition. Saying that, we've actually had a good run in both ferrous and non-ferrous in the U.K. I'm actually very pleased with the result from the U.K. It's not the same market as the U.S. or Australia. We know that. I think the team has done very well.
Maybe I could add a little bit to us, just purely financially, Jack, is I agree with Alistair. I think what the UK has to do because of its market environment and, you know, it is a tougher market environment, is it has to really understand the volume margin trade-off, in a lot of detail. You can see, yes, you did, right, their volumes, you know, their volumes were flat from a intake point of view, and they were definitely down versus pre-COVID. But even with that, there was a greater fall in trading margin percentage improvement versus sales, you know, versus the other two regions. Which shows that despite them really managing that well, they, you know, the trading margin is still harder to maintain. They did it well.
They've still got, you know, nearly 40% increase in trading margin. In my view, if they'd just gone flat out harder for volumes. In the U.K., given the competitive market and the dynamics there, I think they just would have eroded margin even more. I think to be frank, I think we would have ended up busy fools and chasing volume at the expense of margin in an overall deterioration in EBIT. Tough market, harder competition, but I actually think that the team, you know, managed that trade-off pretty well.
That's great. Thank you. My next question is just on the markets. I guess, just curious, firstly in the U.S., are you seeing—I mean, I know most of your yards are set up for the export market, but are you seeing much more demand domestically, just given what we're seeing amongst the steel mills there and looking to push capacity? Then secondly, just on China, you know, have you started selling any ferrous volumes into the country yet? Or do you envisage doing that later this year? Thank you.
The USA market, the domestic market is still very strong. We see that with our SA Recycling joint venture. You know, obviously a lot of that volume is domestically focused and that's still very strong. Demand is still very strong. You get sort of ebbs and flows. We know that there are operations or steel operations, EAFs or blast that will come offline for maintenance, and we'll see that going through in the next two, three months as well. But the market is still very strong. They sort of goes up and down a little bit, but overall, it's a much higher demand than we've seen in the past. I still think that will continue. That plus the, you know, infrastructure and spending, I would imagine are the drivers inside that.
As to China, we don't and have not sold, as you know, ferrous straight into China yet. They typically took from Japan, but we've also noticed that Japan's domestic steel industry is extremely strong. They are not exporting scrap, and it's high quality scrap that they do export to China. We haven't seen any of that. I am expecting at some stage China to start taking volumes in. When exactly, I don't know. I think, and now that the Olympics are potentially over and, we're seeing some stimulus come into the construction and, the motor car industries there, I would imagine they're gonna start taking. They also have a large domestic supply of scrap in China, as you well know. I think the focus for them is to make sure that they're using that before they import.
I would suggest that those steel mills that are probably shore-based or on the coastline, you might see that ferrous intake start to happen later this year.
Thanks, Al. Just one quick follow-up on that. Just can you remind us, you know, as you said, you know, China has a huge domestic scrap market. I think, you know, 250 million tons or something like that. Can you remind us with respect to your U.S. business, you know, how far can you transport volumes that remains economic versus shipping, just that sort of trade-off there. If you're an East Coast yard in New Jersey, you know, what's the freight cost to, say, Turkey versus how far you can transport that domestically?
Well, the first thing is that price is obviously quite volatile. I think we were seeing $24 not, you know, two weeks ago, and it's already probably heading towards $30. It is quite volatile is the first point I'd make. There definitely is opportunity for us to transport material from the East or West Coast into the Gulf. There's no problem with that. Also prices, you know, gives us the opportunity to export from our Houston operation to Turkey as well. It works both ways. I think from an infrastructure point of view and there's strong growth in the U.S., we can certainly feed that. It's gonna come down to that pricing level.
You know, if it gets to that's always something that we will take into consideration, and that goes right across the regions as well, U.K. as well.
Perfect. Thanks, Alistair. That's all from me. I'll pass it on.
No problem.
Thank you. Your next question comes from Simon Thackray with Jefferies. Please go ahead.
Thanks very much. Good morning, gents. Just a couple of quick ones, actually. Sims Lifecycle. Maybe I know this one's near and dear to Stephen's heart, but either of you just noting your 8.5 million repurposed units by FY 2025 versus your run rate at the moment, which is probably around 2.5, I guess, on an annualized basis. Very helpful slide 32. Thank you, Alistair, for that. I understand what you guys are saying.
Just to get to that target and assuming you get to that target, can you just give us a sense of the scalability and the operating leverage in that model and where margins could be expected to get to, you know, if and when you hit that AUD 8.5 million target by FY 2025?
Sure. I'll take the first part, and Stephen will take the second. In terms of capability and capacity, we can ramp up exceptionally quickly. We have done that. We literally between 30 and 60 days, we can ramp up a facility in any one of the major cities in the U.S. Part of that is working very closely with these customers. We've recently had a very large customer come on board. Obviously for us, being able to build one of these or open these facilities up is very high standard. It's really anti-dust, high security cameras, et cetera. Probably 60 to 90 days, we're up and running and that capacity would obviously match anything that our customers can throw at us at this stage.
Very comfortable with the capacity to ramp up. I think from your point of view, Stephen, any view?
Yeah. We haven't disclosed trading margin for SLS yet. We obviously disclose EBIT margin in the first, sorry, first half. I've done 6%, which is up a little bit on the first half of last year, but down, to be frank, I suspect down on the second. I haven't looked in isolation of the second half of last year, but down.
Simon, I see that margin. I see our ability to grow that margin, and I see it for a couple of reasons. Firstly, you know, as you point out, that new slide we put on, I think it was slide 32, that just shows the growth in repurposed units, where they're going to redeploy it into their business. That is a business model which suits us, and that is a business model where what these our large customers are telling us is they just need that. They need it. They don't want to have it subject to uncertainty when they need to grow the call center, when they grow the data center, they need the refurbished units available.
I think that's going to be higher margin business because there will be a premium paid for the quality of what we're refurbishing and the fact that it's there, not just in time, just in case they need it. They want it there. I think that will be a good time. Look, I'm not gonna predict what the 6% margin is going to grow to and from an EBIT terms, because I think it's early days yet, and we're building the business. You know, I think it's there for growth, and I really do think we're well positioned to deliver it.
That, that's super helpful. Just, Alistair, so the way you're describing the capabilities, it's like a 60-90 days is like a plug-and-play capability. Is that the way to sort of think that?
We've got mobile shredders which we've deployed because some customers want that done. We certainly are pretty nimble in terms of being able to meet. The customers do have different demands, and I think you're very aware of obviously the large players that we're talking about are facing logistical challenges of importing new parts you know into the U.S. to build these new servers. Part of that is to Stephen's point, they're not gonna let go of any of their old servers and data systems at this stage until they are guaranteed they've got new capabilities. That's why we're working very closely with them and the capacity to jump up we actually get quite a good heads up, so we're in a good space here.
Yeah, that sounds good. Thanks for that. Then just a real quick one on SA Recycling, so the SA Recycling. Now, noting that the number of acquisitions that were done through the first half and not contributing materially, 'cause I think you made the comment that's sort of backended in the first half. On a pro forma basis, what will these acquisitions add to second half 2022 volume, assuming current conditions continue? I'm just trying to understand their contribution in the second half.
Yeah. It's something we haven't disclosed yet, Simon, is our bidding the business in. We've actually got a board meeting coming up either later this month or early next month when we're going to have a good look through that. I don't wanna say. I don't wanna talk about it now because, you know, I haven't seen all the final numbers from them, what they're doing in terms of site rationalization or not site rationalization, all of those things George has to take us through. But I will-
Fair enough.
I will do it at the end of the year when we've seen what happened. You know, suffice to say.
No, fair enough, Steve.
They're good acquisitions.
Yeah. No. Good. It's gone well done. Good result.
Thanks.
Thanks, Simon.
Thank you. Your next question comes from Anderson Chow with Jarden. Please go ahead.
Yeah. Good morning, guys. Great result. Congrats. Just two quick questions. Firstly, just on the share buyback. I just wanted to make sure I add up the numbers right. You're talking about resuming about AUD 56 million in, AUD 54 million in the second half. I think we did about AUD 54 million in the first half. We'll do about AUD 110 million instead of the AUD 150 million that we initially proposed. Is that the way to read it?
No. I think what we're saying is that, I'm not limiting it to that.
Oh.
What we're saying is, you know, we put in a program where we could buy up to AUD 150 million.
I see.
We clearly, you know, I think it might have been AUD 56 million or AUD 57 million we did in the first half, actually, and then AUD 54 million. I'm not saying it's only going to be the AUD 54 million, in the-
Okay.
What I am saying is that we wanted to be really clear about how much cash we're actually distributing as a result of our profit, and it's 50%, and it's split between, you know, that AUD 0.41 per share dividend and the AUD 54 million buyback for the result. You know, if we feel the opportunity's right, we have more room in our overall buyback program to buy back more.
Okay. Got it. Also, I just want to make sure, and it's probably related, just on the lifecycle business. The earlier question about the margin and where it could get to, but I think if I could just make sure the revenue model, I mean, do we charge on a per unit basis, or is there sort of a revenue sharing from the sale of the scrap and reprocessing?
Anderson, it's a-
Yeah.
It's a combination. Where we're moving to in the repurposing is it's a service model. What you would expect to see. Let me give you two examples. Maybe previously, before the cloud centers were really looking at redeploying into their own unit, we would effectively, you know, buy it from them, repurpose it and sell it in the market. Our costs and our revenue were grossed up. Simple as that. Under the new model where we're heading with redeployment, it's much more a service model. We charge, you know, X dollar per whatever we are redeploying. Therefore our revenue will only ever be the, our revenue effectively will be the margin that we charge.
Moving forward, if I was to jump forward to 2025, you shouldn't really expect to see you'll see much higher growth in margin than you will in top line revenue growth because we're moving to a service model.
Yeah. I also just on last question on this life cycle. I just wanna make sure, the huge increase in volume that we saw in the first half, was it all from existing customers or did we sign up any sort of new major cloud operators?
Yeah. It is existing customers, but, you know, herein lies what gets me excited about SLS. The existing customers are huge. It's not like we're going from taking, you know, half their business to three-quarters of their business. We might be going from taking, you know, 2% of their business to 4% or 3% of their business because it's just large. They're so large, which is what I get quite excited about. No, there's no particularly new customers. It's our existing customers. I would say we have good, strong customer relationships with, you know, what you would consider most of the usual suspects in the large cloud players.
Okay. Thank you. Thank you.
Thank you. Your next question comes from Peter Steyn with Macquarie. Please go ahead.
Morning, Alistair and Stephen. Thanks for your time. Just wanted to ask you a little bit about the freight market and how you guys are working through that. I suppose more pertinently, what your expectation would be when we do see some degree of moderation, particularly in the container market, what influence that could have, 'cause we've already seen bulk come off. I'm just curious, how the mix of freight market developments play into the forward-looking perspective, Alistair.
Good question. Look, I think the relaxing or the improvement of turnaround times for containers is probably gonna be, you know, over the next six to 12 months, I would suspect. I think the aspect for us is really when that market does get back to, you know, improved levels of service, I would think that you would see probably more competition with containers being able to be exported out of the U.K. and the L.A. basins, which is often the challenge for container operators. You would probably see, you know, more pressure on the bulk business at that stage in scrap terms, rather than what you're seeing now, where lack of containers is actually good for us because the bulk obviously is the focus and that's operating very well.
There is that difference between the container and the bulk market. From a non-ferrous point of view, which is really where our non-ferrous is obviously sold through, as I said earlier on, we haven't seen a major issue, but I would expect then that any delays that we would have from the 90-day or 120 days down back to the normal sort of 60 days-70 days turnaround. It'll come back, but in one way it's been a very good opportunity for us to test our systems and processes and the commercial team and the shipping team have done exceptionally well.
Thanks. Thanks for that. Alistair, just turning to resource renewal, and specifically some of the energy from waste policy environment that's clearly a lot less certain, probably in Victoria and New South Wales at this point in time. Just curious to get your views on the investment or the intent that you've indicated is that you're quite happy with the level of engagement in Queensland. But how do you see some of the developments in Victoria and maybe even in New South Wales, potentially supporting some of your plans over the medium to longer term?
I think we've obviously put on hold the Victorian, as you know, but we're still in contact with the Victorian Government. We've touched base with the environmental minister just recently. We're obviously going to continue to look at investing in Victoria. They've got to be very clear in terms of their permitting process. They put on a waste cap, which is up to 1 million tons. We're told that we fit into that, but until I see that in writing, we're not going to be investing. That's sort of Victoria, and I'm hopeful that will sort itself out. They're expecting that that'll be done in the next eight to 10 months. We'll have a look at that and watch very carefully.
I think the exciting part for us is the Rocklea facility and that trial, which will be up and running by, call it October, November. That then allows us to show a very clear process in terms of our RP with the Queensland Government, who are very supportive of us building a commercial unit there. I would suspect that the commercial unit in Queensland will be up and running before any other state in Australia. We naturally want to work with all of the government, the states in Australia. Obviously for us, this first capital spend discipline makes that hurdle, meets the requirements, then only will we move forward to a commercial operation.
At this stage, if we can get that trial up and running and prove it'll be in Queensland, in all high probability, I would suspect, before Victoria.
Perfect. Thanks, Alistair. Perhaps just a quick one for Stephen on dividends and franking. Obviously, you've sort of indicated that franking will drive your dividend decisions. How we ought to think about that for the full year and then going into next year, Stephen, 'cause at this point Australia is probably not rebounding as fast as some of the other parts of the business, so proportionately you're gonna be struggling with franking credits.
Yeah. I think that's fair to say, Peter. What we've taken the last few months to have a really good talk to a number of our shareholders around, you know, everything from franking credit preference, dividends, buybacks, what are their preferences? Because I think at the end of the day, we need to listen hard to them. That's how we've come up with what we've just talked about today. You know, the headline is a 50% payout. We've tried to. I guess we've skewed it more to dividends than buybacks. As a result, you know, the franking credit, it's not 100%, it's 44%.
I think looking forward, I think you could assume that's a reasonable way of looking at it is that, I mean, all things being equal, you know, that sort of 60/40 split of cash payment is a reasonable basis to look at it on. Whether it's 50% or not 50%, I guess we'll determine at the time. We've looked at it here, and we're really confident that making a 50% cash distribution fits well with us. Balance sheet will remain strong. We're producing good flat cash flow. We believe that what we're retaining is sufficient to both do maintenance CapEx and our bolt-on acquisitions, which you know we've been looking at.
We're really comfortable that that type of retaining 50%, distributing 50% gets our balance right. Obviously, you know, every time the board meets as we are declaring dividends, we update that. I think all things being equal, that feels like a good position moving forward. You know, the board will clearly, our fair policy will clearly discuss it at every board meeting that we are discussing dividends versus buybacks.
Perfect. Understood. Thanks, Stephen. I appreciate that, gents.
Thanks, Peter.
Thank you. Your next question comes from Lyndon Fagan with JP Morgan. Please go ahead.
Thanks very much. Just with regards to the CapEx guidance reducing AUD 50 million, because of Campbellfield, can you please remind us what the total scale of that investment is and what potential earnings that could generate once it was completed?
We never got to the point where we disclosed the total CapEx. In fact, as we've put it on pause now, we were going through that process to finalize the CapEx. Our original intention with our Investor Day meeting in March, we were going to run everybody through that. Clearly the Victorian Government came along with that 1 million ton waste cap, and that's put that on hold. We haven't disclosed that as to what that would be. In terms of when, if and when we do it, and the same with Rocklea, everything we do has to meet our minimum hurdle rate of 15% IRR. It is a gate that stays firmly closed unless the project can meet that.
What I would say is the initial things we were seeing around Campbellfield is that it was quite nicely north of that, but we just now need to wait and see how that turns out with the approvals.
How long would that have taken to build?
Probably between 12 months and 14 months. If we're looking at the commercial operation in Queensland, you know, once we've completed this trial, I would say that, you know, from approval via Board approval, probably 12 months-14 months before that could be up and running. That, again, is gonna apply some of the larger pieces of equipment at the time and whether there's any logistical challenge in producing that piece of equipment. That will depend where we choose to buy that from. That will be an import. That will be the key lead time will determine that period I've just given you.
Thanks. My other question was just on the SA Recycling JV. It's almost your highest earning division now, but I'm sort of feeling like it'd be good to get a bit more disclosure on potential growth outlook given the acquisitions. Is there anything sort of specific you can point to help us forecast that business?
I think, look, the strategy's been very clear from a JV point of view of the growth profile and where we wanted, you know, that business to grow to. As you know, that's really on the southern part of the United States, and the Midwest, where George operates exceptionally well. I think from an acquisition point of view, I think it's gonna take a fair period now where we won't be doing too many acquisitions out of that group. It's gonna be focusing on integrating what we've just acquired. I would think that growth acquisition period will slow down for quite some time until we've actually taken in what we have now and George has sorted out all the yards he needs and those that he doesn't want.
I think from a sharing with you of that SAR, we certainly probably will do that a little bit more in the Investor Day, and we can give you a lot more color around what they have and what we see going forward.
Yeah, I agree, Alistair. I think the main. I guess in some ways we had quite a good controlled experiment in these two half-year results and that NAM and SA Recycling started from a very common point, I think AUD 24 million-AUD 25 million of EBIT. They grew roughly. I mean, NAM grew slightly stronger, but they grew very similarly. I would say the way I think about SAR looking forward is that at the end of the day, it's in North America, the same as NAM, with the biggest difference between the two is Zorba prices. SAR is more exposed in its competitive markets to Zorba prices. When Zorba prices increase faster relative to ferrous prices, it does better than NAM.
When Zorba prices reduce. Relative to ferrous prices, it does worse than NAM. We've now actually seen that happen twice. It was just after I joined, 2018 or 2019, when Zorba prices fell considerably. SAR dropped more than NAM in the first half of 2021 when Zorba prices rose quite nicely and dramatically up to sort of $1,800-$2,000. SAR proportionally did worse than them. In this first six months, you know, Zorba prices and ferrous prices have both been nice and high and relatively stable. They've actually performed similarly. I think that's the way I would think about it overall. Alistair is right. I think we will be in a position where we will disclose more about SAR.
Thanks. Just a quick final one. Working capital up another AUD 40-odd million. Is that just pricing or is there some sort of timing of sales that would?
No, it's predominantly pricing. You know, interestingly, you know, prices actually rose quite nicely into the you know to December and have continued there. So it's just a little inventory volumes are actually the same, June versus December, so it's all price.
Great. Thanks, guys.
No worries. Thanks.
Thank you. Your next question comes from Nick MacLean with Surrey Asset Management. Please go ahead.
Morning, guys. If I take a look at slide 29 and 30, I'm really trying to comprehend what you can control as a management team as opposed to cyclical issues. Can you talk about what you've mentioned, freight, obviously. Can you talk about the advantage? Like, really be a bit more granular on the advantage of your network of assets in the U.S. relative to the smaller peers. In saying that, are you achieving far superior freight costs and delivery times? I'm trying to gauge what's the actual real advantage of that network relative to, you know, a two to three site business.
I guess part of it is, you know, who you're comparing to. Obviously we're based on the east and west coasts. We're major bulk exporters. A lot of competition in the area don't have access to bulk export. We have the opportunity to either purchase that material or they have to use containers. I think you can understand the challenge with smaller players and containers in today's logistical environment. That's really where we get the opportunity. I think obviously with long-term relationships with our shipping customers, that obviously is also an opportunity for us maximizing shipping and planned shipping events, but also maximizing on a per ton basis on each vessel.
There are certainly a number of our benefits that Sims extracts out of our operations and obviously with ships in very similar locations, you know, up and down the east and west coast, we can certainly maximize those tonnages, be it from one or two areas versus, you know, having to pick up at every single port. We can certainly get vessels that take two port loads and then head straight across to Turkey or one. Whereas in Australia we often do a two stop and then out. I think the experience that we have with our customers, the types of vessels that we use and choose, all of that adds to us being able to run very lean shipping operations.
Obviously understanding the future markets and matching what the bulk industry is doing, and how to choose the customers that we work with. Obviously sometimes, you know, a week's delay in a shipping decision could be a huge benefit to us.
I guess another way to put it, while freight costs and delivery times in isolation are obviously not good in isolation, but from an industry perspective, are they good for you? Because you-
At this stage, yes.
much more efficiently? Yeah.
Yeah. At this stage, yes.
Yeah. Okay. Thanks very much, guys.
You're welcome.
Thanks.
Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.