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Edited Transcript of SGM.AX earnings conference call or presentation 19-Feb-19 11:00pm GMT

Half Year 2019 Sims Metal Management Ltd Earnings Presentation

BOTANY BAY Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Sims Metal Management Ltd earnings conference call or presentation Tuesday, February 19, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alistair Field

Sims Metal Management Limited - Group CEO. MD & Director

* Stephen John Mikkelsen

Sims Metal Management Limited - Group CFO

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Conference Call Participants

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* Abraham Akra

CLSA Limited, Research Division - Research Analyst

* Daniel Kang

Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research

* James Brennan-Chong

UBS Investment Bank, Research Division - Associate Director and Mining Associate Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Owen Birrell

Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst

* Peter Steyn

Macquarie Research - Analyst

* Wei-Weng Chen

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the Fiscal 2019 Half Year Results Conference Call for Sims Metal Management Limited. It is Wednesday, the 20th of February. I need to advise you that this call is being recorded.

Today's presentation may contain forward-looking statements, including statements about financial conditions, results of operations, earnings outlook and prospects for Sims Metal Management 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 at www.simsmm.com.

As a reminder, Sims Metal Management 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 Metal Management. Please go ahead.

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [2]

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Thank you, and good morning. It's a pleasure to be here in Australia delivering the half year results for Sims. Joining me on today's call is the Group Chief Financial Officer, Stephen Mikkelsen. Unfortunately, for personal reasons, Bill Schmiedel, the President of Global Trade, cannot join us today as he normally would.

The slide presentation that we will run through has been lodged with the ASX along with the results release. As you can see on Slide 3, the format for today is that I will run through a general overview of performance and the highlights for the first half fiscal 2019. 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 and near-term market outlook and some of the challenges. Following that, there'll be time for Q&A.

Now turning to Slide 4. Clearly, it has been a challenging market that we have been operating in for the first 6 months. Demand from Turkey was lower and more sporadic, creating greater short-term volatility. This, in particular, impacted our European Metals business, resulting in both volume reduction and margin compression.

The fall in zorba prices has also squeezed margins, particularly in SA Recycling where the purchase price for shredder feed has not fallen sufficiently to compensate for lower zorba prices. Despite these market challenges, we still managed to deliver underlying EBIT close to $110 million and net PAT of approximately $77 million. While lower than the prior half year, I believe it shows our business handles tough markets much better than in the prior years. This is, in no small part, due to the commencement of 12 plants during the half year aimed at producing more and higher-quality material.

Successfully commissioning some of these plants took longer than anticipated, and I look forward to actually a full contribution in the second half. This is good news as we have started to see early signs of improvement in our markets over January and February. In particular, Turkish demand has increased and zorba is off its lows. As form of caution, however, that ongoing and unresolved tension between the U.S. and China remains a significant risk to our business. Furthermore, clarification on quotas relating to National Sword in China remain outstanding.

Turning to Slide 5, which highlights some key figures. I've already spoken on Slide 4 about EBIT and net PAT. Sales revenues and sales volumes both increased, which is a positive sign regarding the volume of scrap in the market and our ability to compete for it. Net cash was down to around $154 million, and Stephen will run through the reasons for this shortly. I am pleased to report that we have maintained the interim dividend at $0.23 per share fully franked despite the falling profit, and this reflects our confidence in the business.

Now to Slide 6, our safety slide. Our #1 priority has to be safety. The chart here shows the great achievements we've had over the last few years. It also shows that achieving a 0 harm workplace is a relentless challenge. After consecutive years of improving safety statistics, the first half has deteriorated slightly in part due to more stringent definitions of incidents. I can assure you this is not about complacency, but rather highlights the next big challenge for a step improvement in safety.

To help achieve this, I have combined safety into a new Chief Risk Officer reporting directly to me. This is headed up by Elise Gautier, and I look forward to working with Elise and our divisional CEOs and presidents to achieve our coming targets.

Onto Slide 7. At the core of Sims business model is sustainability. Our business makes a positive contribution to society by not only reducing waste that would have had otherwise gone through a landfill, but also lowering CO2 emissions. Our recently commissioned latest technology material recovery plants in New York and Chicago extract even more metal from waste and are great examples of how environmental responsibility can also make financial sense. I look forward to covering this in more detail at our April Strategy Day.

Turning to Slide 8. Stephen will be covering the financials in considerable detail, so I want to make only 2 high-level comments about first half results. Firstly, the quantum of tightening of EBIT margins was not evenly spread across the business. In the most part, it impacted SA Recycling and Europe Metals. Remediation measures have been put in place for Europe Metals, and SA Recycling has completed its zorba washing and drying facilities. While this will not compensate for the fall in zorba pricing, it increases the markets into which SA Recycling can sell.

Secondly, I remain committed to achieving above a 10% return on capital. While it is disappointing that the annualized first half return was closer to 8%, it is considerably higher than prior years when tough markets also prevail.

Turning now to Slide 9, which provides charts on market conditions in the first half. The 2 charts on the left-hand side depict the challenges faced in the first half. The top left-hand chart shows the average cargoes purchased per month by Turkey fell 41% in the last 3 months of 2018 compared with the first 9 months of the 2018 calendar year. This drove the price falls evident in the chart. Interestingly and positively, the price has recovered since the beginning of January, reflecting stronger demand from Turkey. The bottom left-hand chart depicts the fall in zorba price that commenced in July and accelerated through to October. A partial recovery commenced in late November and has held through January and February.

The charts on the right highlight the resilience of the copper scrap market over the long term. The top chart shows the strong forecasted increase in demand for copper scrap driven by the increased use of electric vehicles and further development of power grids in the developing world. The bottom chart is a deep dive into one Asian market where Korean demand for copper scrap continues to grow.

I'll hand over to Stephen now for further details on the financial results.

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Stephen John Mikkelsen, Sims Metal Management Limited - Group CFO [3]

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Thanks, Alistair. Slide 11 shows for convenience the summarized EBIT and volumes by division. I won't talk any further on this slide because the subsequent slides 12 to 19 contain more detail, and I will speak to each of them separately.

Firstly, North American metals on Slide 12. We are presenting a more deconstructed view of the results to allow better understanding of the underlying performance excluding internal recharges, which is simply accounting allocations, [namely, increased] EBIT by 11.3% or 3.6% on a constant currency basis. Furthermore, it increased both volume and EBIT per tonne. Given the strong competitive environment and challenging market conditions, this was an excellent result driven by benefits from technology investments and sound buying.

Turning to Slide 13, detailing the Australia and New Zealand result. Like NAM, ANZ also increased EBIT, in this case, by 3.4% excluding internal recharges, a very similar result to NAM on a constant currency basis. There was a slight reduction in EBIT per tonne from a strong increase in volumes of 6.2%. The volume increases were largely attributable to additional volume from purchasing the 50% we didn't own in Sims Pacific Metals and strong demand from domestic mills.

Turning to Europe Metals on Slide 14. The issues Europe Metals faced in the first half are evident on this slide. EBIT after internal recharges, EBIT presented on a constant currency basis and EBIT per tonne were all down around 60%. Issues with Turkey, in particular, impacted Europe Metals. Lower volumes were a combination of Turkish mills purchasing less and requiring high quality for the volumes they did purchase, which we initially struggled to achieve. Alternative ferrous markets also required a higher quality product, and we have been producing out of the U.K.

Also in a similar vein to SA Recycling, Europe Metals was impacted by falling zorba prices not being fully compensated through shredder feed prices. Competition is still putting pressure on margins, but we're going to the second half much better positioned with ferrous quality now at the required level and after initial teething issues, the zorba separation and copper granulation plants producing as expected.

Moving to Slide 15 in Global Electronic Recycling. While the first half of financial '19 was similar to the prior corresponding period, I acknowledge it was significantly down on the second half of financial year '18. There is often seasonality in electronic recycling's result [with] very quiet periods in August in Europe and globally in December. Having said that, it was a disappointing half driven by lower commodity prices and increased costs to increase quality. We're expecting an improved second half where the magnitude of that improvement will depend, in some part, on commodity prices.

Turning to Slide 16. SA Recycling also had a difficult first half. Underlying EBIT was down 33% with EBIT per tonne down 41%. The biggest impact was the fall in zorba prices where in SA Recycling locations, there was not a commensurate fall in shredder feed prices. There was also a general compression in margins as lower ferrous sales prices were not fully compensated through the buy price. To predict volumes, SA Recycling had to pay the higher price. SA Recycling's headline volume increase of 14% includes additional volumes from acquisitions.

Moving to Slide 17. Very briefly, once you remove internal recharges, Global Trading is essentially a cost center that earns external brokerage, which is predominantly from SA Recycling. Cost increased during the first half compared to the prior year period largely due to temporarily running 2 offices.

Turning to Slide 18. Looking at Corporate and Unallocated, there are 3 things. Firstly, corporate costs are reduced. Secondly, SMR continues to struggle under the weight of negative paper price, and we continue to talk with New York City about this issue. Thirdly, LMS Energy continue to perform well due to the development of new projects and strong LGC and wholesale electricity pricing.

Turning to Slide 19. This slide presents for convenience a consolidated picture of volumes contained in the previous slides, so I'll move straight to Slide 20.

Due to our previous releases in September and January, I'm sure you have already calculated that the second quarter was particularly tough. The deterioration over the first quarter was driven by a number of factors coming together that individually might be considered the swings and roundabouts of our business, but collectively were significant. In the second quarter, short-term market volatility in October and November was not recouped in December. Europe Metals took longer to adjust to the new quality requirements than first anticipated, ferrous margins continue to contract in SA Recycling and there was increased competition at some of our NAM sites due to increased prices for domestic scrap in the U.S. Finally, as Alistair pointed out, there was a sharp reduction in Turkish demand in the second quarter FY '19.

Turning to our cash position on Slide 21. Net cash has fallen from $300 million at 30 June 2018 to $150 million at 31 December 2018. There are a number of items accounting for the bulk of this fall. By far, the largest is the over $100 million increase in working capital. Working capital movements are complex within Sims. However, 3 items are worth calling out.

Firstly, customer mix has increased our receivables to the tune of around $50 million as we have sought alternative markets. Secondly, approximately $20 million from the working capital true-up as part of the Sims Pacific Metals deal. And finally, around $10 million relates to catching up with creditor payments from a June 2000 year-end system implementation.

Moving to Slide 22. Capital expenditure for the first half is where we thought it would be. The forecast for FY '19 of around $160 million shows the commencement of a reduction in growth CapEx as we come to the end of our current investments in quality improvement and separation expenditure. Sustaining CapEx settles at around $100 million for FY '19.

Onto Slide 23. I'm expecting to realize another $16 million of internal initiatives for FY '19, below the initial estimate of $20 million at the FY '18 year-end result. This is timing only. We are forecasting the remaining improvements will occur in FY '20.

I'll hand back to Alistair now.

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [4]

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Thank you, Stephen. Turning straight over to Slide 25. It is pleasing to see that we're nearing the end of our journey so far as this round of merger, installations and upgrades go. It has taken longer than expected to get the output volume and quality that we were after. Understanding how to tune the process to maximize the output and quality has been a steep learning curve. I'm pleased to say that after initial teething problems, the investments are now performing better than our initial expectations. But due to delays, they did not contribute fully for the first 6 months of this year.

Additional capacity will also be online by the end of June 2019, and Slide 25 provides a good summary of where we will be at that stage. I anticipate that as of June, the only remaining upgrade current and budgeted will be zorba separation at Redwood City.

Moving to Slide 26. As you will appreciate, these priorities have not changed significantly since I laid them out in August 2018. Rather, they have been refined to reflect where they are in terms of implementation.

Turning first to capital projects. We will be focusing on optimizing the returns from our investments. By and large, we have commissioned or about to commission the projects. So it is time to take the lessons we have learned in maximizing output and quality and applying it globally.

Improving capability is a journey of continuous improvement. I have my full executive management team in place, and we will be driving for improvements in safety. We must also ensure we make business decisions based on extraordinary amount of data we collect within Sims. You will recall from previous slides Stephen presented that continuous improvement has been key to delivering a fair portion of our internal initiatives to lift EBIT. This is in both cost reduction and margin enhancement.

Embedding this culture across the organization is a top priority. We're also looking at implementing a standardized and global ERP system. I expect to make the final decision on the way forward by the end of June.

Finally, on our growth objectives. We've been successful in diversifying our market so far this year, and it must continue. We have identified a number of growth opportunities for the metals business, particularly in the U.S.A. While they are at the very early stage and not all will come to fruition, we need to ensure we can execute on them if required.

Turning to Slide 27. While it is always disappointing to present financial results that are lower than the prior period, I am pleased at the resilience shown by the business in deteriorating market conditions and increased volatility driven by uncertainty. I'm also confident that our investments in quality will provide both growth and further resilience in the coming years.

The outlook for the remainder of the financial year has to caveated by the possibility of escalating trade wars that cause volatility, change in policy frameworks and clarification on the quota system relating to Category 6 restrictions in China. We now have a business that is more robust, but it is simply not possible to immunize the company from geopolitical issues. There have been times of improvement over the last couple of months, but some headwinds remain, such as the level of competition that is squeezing margins in the U.K. and some parts of the U.S. Providing there is no deterioration in market conditions, it is likely that the second half underlying EBIT will outperform the first half.

Finally, before handing back to the operator for questions, I want to thank all of our more than 5,000 employees for their dedication over the last 6 months.

Operator, back to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Abraham Akra from CLSA.

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Abraham Akra, CLSA Limited, Research Division - Research Analyst [2]

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Firstly, has there been any acceleration in nonferrous scrap sales volume to China ahead of the new Category 6 import restrictions to take place in July 2019? Hello, can you hear me?

(technical difficulty)

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Operator [3]

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Pardon me. This is the operator. It seems we have lost connection with the speaker. Please hold while we reconnect.

Pardon me this is the operator. Once again, we apologize for the inconvenience. We have temporarily lost connection with our speakers, and we are working to fix it. Please continue to hold.

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [4]

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Abraham, go ahead with your question.

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Abraham Akra, CLSA Limited, Research Division - Research Analyst [5]

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So firstly, my first question was has there been any acceleration in nonferrous scrap sales volume to China ahead of the new Category 6 import restrictions to take place in July 2019?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [6]

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Can you just reiterate the first question? I heard China. Can you just be more specific?

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Abraham Akra, CLSA Limited, Research Division - Research Analyst [7]

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[Sure, Alistair]. So following the new Category 6 import restrictions that are due to take place in July of this year, has there been any acceleration beforehand in nonferrous scrap sales volume to that destination?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [8]

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No, we haven't. We've got no more relations with all our Chinese customers who continued with that program of sales. I think the important thing to remember around Category 6 is that at this stage, there's been no clarity given by the Chinese government. They have suggested that they will give quota numbers around April and May. But at this stage, it's not confirmed. I think when you consider China and the Category 6, you need to remember that both aluminum and copper demand is still very strong for China. So we see this continuing and at some stage, we will get the data surrounding the quota and we'll continue with our program of work.

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Abraham Akra, CLSA Limited, Research Division - Research Analyst [9]

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So just to clarify, there's been no acceleration from buying from traders in China to get ahead of these restrictions?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [10]

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No, we haven't seen any increase in sales at this stage. It's a normal program of work that we've seen.

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Abraham Akra, CLSA Limited, Research Division - Research Analyst [11]

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Sure. My next question is related to the underlying EBIT per tonne in North America Metals. When I think -- do the calculation for the underlying constant currency piece, I seem to get underlying EBIT per tonne going backwards by about 4%, and I see in your documentation, employees has gone up by 11% year-on-year. Can you comment on where these employees are, I guess, being allocated to?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [12]

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Okay. I'll talk about the employees. Obviously, in North America, we have expended capital both in zorba separation plants in copper chop and in our material recovery plants. Quite considerable projects, and that's where most of the growth capital has gone. A lot of the folks are employed and are working on those projects. Naturally, for us, and I'm very pleased that the projects are now up and running, delivering the quality we want, we'll obviously have to look at the operational efficiencies and optimize these projects in the coming year. I think the overall numbers in -- across our business is also due to a number of acquisitions we've made. The Australian number, I mean, includes the New Zealand joint venture, which we bought across, as well as the U.K. acquisitions, which were about 130 people as well. So we are aware that the numbers have gone up, but they're there for a good reason.

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Abraham Akra, CLSA Limited, Research Division - Research Analyst [13]

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And lastly for me, has there been any improvement in margins of ferrous scrap sales volume following the increase in prices over the past week or so in Europe and NAM to date in the second half of '19?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [14]

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In second half of '19, obviously, as you know, the efficiencies for us would have gone down given the volume sales. We saw a decline. When you look at the number of cargoes we typically send to Turkey, they're quite considerable on a monthly basis. But when Turkey dropped its overall global intake of cargoes from an average of, let's say, 36 a month, they dropped it down to 10 cargoes in the month of December, we did see quite a sharp decline. And obviously, we then send some more domestically as the best option of that spend. So we should see an improvement in the coming half.

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Operator [15]

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Your next question comes from Peter Steyn from Macquarie Group.

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Peter Steyn, Macquarie Research - Analyst [16]

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Alistair, perhaps just a broader question around competitive position in the context of the investments that you've made. There could be a sense in which -- or it could be interpreted that you made those investments but the market hasn't necessarily adjusted to some of the structural factors at play here particularly in the nonferrous market and as a consequence, you may be seeing a bit of a drag in your returns in the short term on that investment. You continue to be confident about where you are in the longer term, which does seem to make sense. But how long do we risk -- or is there? And how long do we risk going through this adjustment process where not all your peers are playing to the new hymn sheet?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [17]

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Good question, Peter. Obviously, the investments we make are for long term. They're not short-term-results focused. The issue for us is to address quality issues and give us the opportunity to diversify both customer but also in product type, which is what we have achieved. This is for the long term, so you're correct in that. The initial stages of any project that, as for instance, this last 6 months that we've gone through now where you are commissioning projects does take a little bit longer and sometimes the cost is slightly higher. As I've mentioned, we will look at optimizing all of these projects, and that goes from top to bottom of a project. I also believe that a number of our competitors are going to and are busy installing some of this technology. So I think we do have a jump in that sense. But again, it is for longer term, and we will get the benefits out of this by having a diversified portfolio both product and we can go to different customers. And I think that will stand us in good stead, and that's really what the returns are focused on.

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Peter Steyn, Macquarie Research - Analyst [18]

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Perfect. I suppose that's something that we can continue to work around because the question remains whether or not it becomes a structural advantage for you if your competitors are doing the same thing ultimately. But just to continue on from there, if I can ask Stephen a question, just around the cash flow, Stephen, a very significant cash flow. Just keen to understand more detail there, if you could step us through. You obviously mentioned the 4 -- some of the dynamics in terms of domestic customer mix. But help us understand what's structural and what could ultimately be reversed from a working capital point of view.

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Stephen John Mikkelsen, Sims Metal Management Limited - Group CFO [19]

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Yes, thanks a lot. I think there's -- I mean, when you go see the various movements, the one to me that stands out the most, and you've highlighted it, the increase in receivables from -- of around about $50 million more than we thought it otherwise would be. And that is a result of, I guess, the conditions over the 6 months and this is at this point in time where it was more beneficial for us to be slightly more oriented toward domestic than we otherwise would be. Domestic terms and conditions are longer payments than export, and our DSOs increased a bit. And given the very [high] cash flow velocity we have within the business, it increased working capital. That's -- I don't think it's structural. I think that's just where we are in the cycle. As the export markets come back [albeit] completely relative to domestic market, I would envisage us going back to our normal position on export versus domestic, and I would expect to see that come back. The other one, the Sims Pacific Metals, [where they are today], that's the $20 million of working capital that we're [glad to get them paid. Second, post] the purchase price and the buyback of $19 million, I think we've signaled that. And the additional tax of $14 million is a one-off additional tax payment related to capital gains tax in Hong Kong. So of all of those, if I could summarize, of all of those, the working capital is the most dynamic and I also think the one less likely to reverse as we return to more market conditions. But that's where we're at, at this point in time.

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Peter Steyn, Macquarie Research - Analyst [20]

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Not that it's significant, but the creditor position, how would you expect that to evolve? Also cyclical rather than structural?

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Stephen John Mikkelsen, Sims Metal Management Limited - Group CFO [21]

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Well, that $10 million relate to payments that were outstanding at June 30, and we just implemented a new system and we paid those (inaudible) off in July. So probably strictly speaking, those -- that $10 million belongs more in the June '18 cash flow than this first half year. But other than that, looks (inaudible). The creditor flows are exactly as we'd be expecting.

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Operator [22]

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Your next question comes from Michael Slifirski from Credit Suisse.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [23]

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I guess I'm intrigued that you're the world's biggest. You've got a broad end market. Global trade gives you insights that others don't have, yet things hit you that you don't see coming. And specifically, I want to understand why the U.K. lagged so much in zorba upgrade when you recognize that in the U.S. as a priority. Why is the [missed bet] in the U.K.? Why you've lagged there? Also, with respect to SA Recycling, I think last half or maybe the half before, I think it was last half, we were told that the improved margins there were because of the acquisitions that had been undertaken, that it consolidated regions, taken out competitors, removed that scrap auction, therefore the competition dynamic had further changed. Yet you can save margin because you can't offset the lower zorba price. There's something that doesn't -- that isn't consistent with what we're told last time. So those are my first 2 questions, please.

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [24]

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Thanks, Michael. The first point with regards to the U.K. and technology, we have implemented the technology in the U.K. slightly after the U.S.A. And then one of the key issues for us was that raw material in the United States and the U.K. are quite different. The infeed to our zorba separation plant in the United Kingdom is substandard to any infeed that you were getting in the United States. And well, the result is we've had to go through a lot more operating time to actually get these machines to work. Even though they are very similar, that infeed material that comes in the United Kingdom has a lot of rubber and that's connected to some aluminum pieces and the sorting process is very different. So the lag in the U.K. has been around the infeed material which has given us a lot more time in terms of commissioning and working with the manufacturers of this equipment. So that's quite different between the U.S. and the U.K. So does that answer your question?

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [25]

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Yes, that's helpful.

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [26]

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The second question in relation to SAR, I'm referring to the first half that we discussed and that was, in particular, around the zorba and the impact of the zorba in relation to the reduction from a zorba price of $1,700 a tonne to $1,100 a tonne. A fundamental part of the SAR business is the shredding prices and the ability to sell that zorba into the Chinese market. Obviously, when that zorba price dropped, we saw the relative drop in margin in the SAR business, and you obviously can't make that up in dropping ferrous sales. So that's one of the key aspects. Part of our path forward with that was the ability for us to sell zorba in a wider market, and part of that was the capital expenditure we undertook in SAR to clean and to dry that material. As you can understand, that material in a container, when it's wet, will oxidize, will create a problem and the Chinese authorities will actually reject that cargo. So that's the second reason why we actually introduced that technology. I'm thinking that that's answering your question, Michael, but...

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [27]

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Not entirely in that I thought Bill had said to us that, last time, that the acquisitions that had been undertaken in that region had really consolidated. And so the competition dynamic would be different in the sense that there was no abatement of competition. But if anything, there's more competition if you can't offset a lower revenue line. But at a lower buy price, nothing's changed. So I guess the question is then the premium margin that you saw for the period, was that just a one-off anomaly? And where the business is now, is that what we should expect on a go-forward basis if that competition dynamic has changed?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [28]

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Yes, I would say that last year was a fantastic year for SAR. The opportunity to sell the amount of zorba and the way that consolidated was quite exceptional. I wouldn't suggest that we would see a year from SAR this year, and that's predominantly around the zorba benefit that SAR does get. It's a very big uplift for them. I'll also comment on the regionality of SAR business. They're operating right across the southern part of the United States. So the California market itself is quite different to Atlanta, Georgia, as an example, and there's been quite a bit of domestic competition in the center of the United States given the actual steel prices that are following through there. So there is competition across Georgia's business. But the largest proportion benefit for him is really around zorba. So we're seeing a slight improvement in January, February in zorba, so I would expect some improved results from SAR in that case.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [29]

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Just to explore slightly deeper, so is it the case perhaps that because you had a -- because there was a significant U.S. domestic price premium over export prices that the U.S. domestic mills could compete? Now that that's -- compete and didn't have to offset zorba because of hard pricing. Now that, that spread between U.S. domestic prices and export prices has reversed to perhaps something more, does it not restore margin?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [30]

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Not completely, not to the level that it was last year. But the domestic competition has been a lot intense this year given that steel mill. But obviously, the export model that George has in California, that versus containers is also a very competitive environment. So you must remember that all of the bulk sales that we actually export, (inaudible), from a Sims point of view, is the brokerage number. So we will see that if Turkey picks up and Southeast Asia picks up, then naturally I would expect to see an improvement in some of those -- sorry, in some of Georgia's results, but that domestic competition is still quite tough.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [31]

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And then returning to the U.K. and the challenge with Turkey, that loss of premium market, I think also Bill last time said to us when we're all expressing concerns about what was happening in the Turkish economy and the sustainability of that demand, he said, "Don't worry about it. There's always another market. It's not something we're concerned about." So what was the surprise there? Did you not recognize the quality differential that would make it more [challenging]? Just trying to reconcile why what Bill suggested didn't really play out.

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [32]

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No, Bill was suggesting is obviously we do have wider markets, but remembering that almost 80% of the U.K.'s market does go to Turkey from an export point of view. So when Turkey declined its numbers or volumes of the cargoes it was taking in, naturally, we can actually sell that into Europe and to the Middle East, which we did. But part of that is also that the U.K. inherently, and not just some, has a quality challenge, and part of the decision we made was that we needed to diversify customers that also expect a high level of quality. So we had to actually improve the quality at the same time as diversify. So we've gone through that process now in terms of quality operating for the U.K. So I'm actually pleased that we do have customer base that are diversified. Naturally, the prices also came down across the globe in terms of scrap prices. So there's both a volume issue as well as scrap pricing, but we can sell our product anywhere into Europe and Middle East now as well.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [33]

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So my last one, just understanding that U.K. quality deficit compared to evolving market. I guess the fleet is pretty consistent globally. So what is it about the technology that has perhaps lagged what you do elsewhere? And has that thing fully addressed? Or is it really just addressed by the diversified customer base?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [34]

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So the quality of material in the U.K. is not as good as it is in the United States or in Australia. So for us, the quality changes we've made is about actually rejecting supplier infeed, which we've now undertaken. And obviously, we stopped customers giving us material that is substandard to what we want. So that has taken -- that will take 3, 4 months before those suppliers actually get the message. I'm happy that we're now there, and obviously we can actually see a second half for nonferrous and for ferrous that is standard and the quality that we expect is in place.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [35]

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(inaudible) I promise this will be my last one. So if you are rejecting feed from customers that were car suppliers, does that have a volume impact? Because sure, everybody's exposed to the same challenge. If the end market's changed and demand quality and everyone's going to demand quality, does that not push up the buy price for the quality of material?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [36]

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Yes, so in the U.K., you obviously do have some customers that are going after improving quality. We have chosen to do that and yes, we have rejected and yes, that has impacted some of our volumes coming into the U.K. business, but we also expect and we have seen some of those customers come back with cleaner material.

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Operator [37]

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Your next question comes from Owen Birrell from Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [38]

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Just wanted to quickly touch on some of the intake volumes, in particular, in the ANZ market. It was -- intake volumes during the half were quite considerably higher than your sales volumes. I'm just wondering, was that a preemptive purchase, what you thought were good prices? Or was that actually impacted by deliveries that would've fallen in January?

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Stephen John Mikkelsen, Sims Metal Management Limited - Group CFO [39]

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It's Stephen here. I'm sorry. No, a portion of that's -- probably a reasonable portion of that was actually around the -- we had a fire at our Brooklyn shredder plant. And so the intake volumes continued as per normal, but the output was smaller at that period. That's now -- that's been completely rectified. The shredder has been rebuilt, and we're now producing sales volumes as you would expect.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [40]

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How many -- I was going to say, what was the outage period on that? I mean, what you're suggesting is that sales volumes out of ANZ would've been considerably higher than what you reported and effectively should revert -- or that investment should come into the second half. Is that a fair comment?

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Stephen John Mikkelsen, Sims Metal Management Limited - Group CFO [41]

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That was over 3 months. The shredder was out for over 3 months, the Brooklyn shredder.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [42]

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So it's fair to say that additional import, those basically had been sold to this point? They're going back to...

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Stephen John Mikkelsen, Sims Metal Management Limited - Group CFO [43]

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Subsequently, we're expecting to sell that, yes. We wouldn't -- yes. I mean, obviously, the input level, the sales, the (inaudible) and inventory buildup, we would be expecting to get rid of that inventory buildup now that the shredder is up and running at 100%.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [44]

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Okay. Excellent. Just a follow-up question on Michael's questions around the U.K. market. You mentioned that sort of quality issue within the U.K. I also note the zorba separation plant and the -- some of the upgrades that they put into the U.K. I'm just wondering, is the quality issue in the U.K. something that can be solved through increased processing? And are you sort of pursuing that?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [45]

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So 2 things. You've got a ferrous product and a nonferrous product. The actual ferrous product, that is one of the challenges from a entity in the United Kingdom where that quality is substandard. And obviously, rejecting supplier's feed that is substandard is the program we've undertaken. So that's from a ferrous point of view. In terms of the actual nonferrous product, that is a matter of processing and the capability of having, and I'll give you an example, where a cable goes through, you've got a lot of stainless steel and then really you're trying to get to copper. Part of it is how you separate the plastic, the stainless steel, and this entails a preshredding process in some cases. So yes, you can now process it, but it does take a little bit more capability in processing. And that's why we're working with the manufacturers on doing that. We've actually got to a level now where we actually have a consistent and the feed is at the level we want. So I think we've basically got to that standard and we are capable of dealing with that infeed material.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [46]

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The -- in a slide, it highlighted that a zorba separation plant had been installed at Long Marston. Is that ahead of schedule? I think you were talking to sort of May, June timing on that project previously. And just wondering, is the technology there similar to what you've got at Claremont? Or is it a different type of technology?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [47]

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No, it's almost identical to the U.S. material -- sorry, the U.S. equipment. As I've said earlier on, the only difference and why it's taken long is that the infeed material is different in the United Kingdom to what it is in the United States.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [48]

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And should you -- do you expect that processing capability, now that it's installed -- actually, firstly, is it fully operational at the moment? And should that help the margins in the U.K. as we move forward from this point?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [49]

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Yes to both questions.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [50]

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Excellent. And just one final one for me on E-Recycling. You've mentioned the contribution into second half '19 of a new contract win. I'm wondering if you can give us a sense of what the delta will be on that new contract into the second half.

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [51]

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This is really to do with the E-recycling in the United States and that's got to do with recycling parts of large companies' server rooms. And they contract these out and basically you're recycling (inaudible), to use a better word.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [52]

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Are you able to give us a sense of what the delta on the earnings will be from that contribution?

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Stephen John Mikkelsen, Sims Metal Management Limited - Group CFO [53]

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It's Stephen. Yes, that contract has just started up. So I think I'd rather wait until the full year results to disclose or talk about that one because it's -- the contract is just starting up. We're going through the process [till September]. It's a great contract, don't get me wrong. We're happy to have it, very happy. But I think it's premature for me to predict now what the margin would be by the -- for FY '19.

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Operator [54]

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Your next question comes from Daniel Kang from Citigroup.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [55]

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Firstly, just on scrap market. So we've seen prices recovered in recent weeks -- well, last 2 months. Can you point to what drivers that you would attribute that recovery to? Should this recent strength be sustained? And in terms of the recent strength, can we assume that margins would have been improved with the buy-in of scrap prices likely to have lagged?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [56]

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Let me answer your first question. We have seen the prices obviously go from around 2 85 and up to the sort of 3 25, 3 30 market. I think the Southeast Asian market is probably had a similar level. The driver in Turkey, obviously, they have export orders. The export orders that they have received is obviously part of a program of swinging from a domestic production to an export model, again, by selling into Europe as well as into Southeast Asia. One of the aspects, and where that driver comes from, is that if China is not exporting steel or billets, that allows Turkey then to sell into Southeast Asian markets. So I think given the rise in Turkey's demand, pricing went up given that they have a market to sell into Southeast Asia. The other aspect is obviously, as you all know, the iron ore market has come under a challenge given the recent Vale incident, and that iron ore, obviously from the requirements of China, has seen the demand go up and we don't know how long that is going to last. I mean, if you watch the iron ore prices, it went well up into the 90s and is now settling back down again. So whether that was also the Chinese markets improving or increasing their inventory levels at this stage is still a bit too early. But I would suggest that we are going to watch this space because my sense is it might drop down a little bit before it goes back up again. So we watch that scrap price very carefully. In terms of margins, I think we will be cautious on managing our margins rather than just going after volume at this stage. So we'll keep a consistent margin, I'd suggest, going forward, and there's opportunity about that as well.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [57]

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In terms of your SMR business in New York, how are renegotiations going with the New York City Council? Should we expect this business to return to profits of around the historical $8 million mark by FY '20?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [58]

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The negotiations are going well. We've gone up to various levels within the New York City Council, and they're obviously going through their program of work now. I'm hoping that we will see that result coming in June, which will bring us closer to historical numbers. But just remembering, historical numbers also have very high commodity prices in plastic paper and metal and obviously, all of those have come down in subsequent years. So we are very focused on SMR because this is also a long-term arrangement and we wanted to correct this.

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Daniel Kang, Citigroup Inc, Research Division - VP & Head of Chemicals and Packaging Equity Research [59]

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Got it. Got it. And just lastly, Stephen, in terms of your balance sheet, you're obviously net cash at the moment. You've committed to a buyback primarily to remove the employee share dilution. Why wouldn't you go more aggressive in terms of a share buyback?

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Stephen John Mikkelsen, Sims Metal Management Limited - Group CFO [60]

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So maybe -- so first of all that I'll be dealing with this much more fully at the April strategy update. So there's an entire section on capital management strategy, so let me leave it at there till we talk about that more in April. But as of -- right as of now, the buyback is around dilution.

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Operator [61]

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Your next question comes from Wei-Weng Chen from JPMorgan.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [62]

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Just a couple of questions for me. Just the first one on sort of the China trade tariff. Should China agree to sort of remove the tariffs -- trade tariffs on nonferrous scrap, how quickly do you think prices can or will adjust? And how quick was on the downside when it happened?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [63]

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Well, 2 things. In terms of nonferrous, the zorba reduction that we saw in price from $1,700 to $1,100, that was really around the quality of nonferrous material entering into China. Once they literally close that door, you could still sell zorba, but it has to be at 98% quality level. There was a lot of inferior quality zorba that went into the market and subsequently, we saw the drop in that. I don't see that recovering in a hurry at all. Secondly, I don't think -- when we talk about China and trade tariffs, I don't want to jump to conclusion that, that is going to get resolved in its entirety at this stage. So I think it's too early to speculate what would happen if China and U.S., in general, sorted out their trade tariffs. But I'm not sure that, that could include some of the steel or the copper/aluminium which comes out of the United States only. So I'm not quite sure whether we should actually speculate on when that and if it's going to happen.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [64]

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But it would be -- would it be materially -- would you consider it materially positive if it was removed?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [65]

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I think the overall sense from an economic point of view, I mean, the scrap business does well when the overall health of the industry is -- and the global economy is doing well. That is really good for our business, and we do see that improvement. So if that does get resolved, and I would say that from an overall Sims point of view, that is a good point and I would certainly look for improving results from that.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [66]

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And then just the next question, so just M&A. Clearly, what's going on from a macro perspective for you guys is having a large impact on your business. But just wondering from your point of view how much longer some of these nonscale players can hold on for -- I mean, obviously you guys would probably be feeling pain -- less pain than these guys. And then what's the opportunity for you guys in terms of M&A, just geographically and also scale?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [67]

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It's a good question. Obviously, we do look at opportunities regionally. There are certain regions that we think are better than others and where we would want to invest our capital. We range from both inorganic as well as organic opportunities. I think the bolt-on acquisitions are still where we are focusing on at this stage and those will be your $30 million to $40 million type acquisitions, which make sense in particular regions where we know we can extract good margin. I think we are focused on our longer-term strategy as well. So we will give a little bit more update on that and where we wish to spend our capital going forward.

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Wei-Weng Chen, JP Morgan Chase & Co, Research Division - Research Analyst [68]

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And what about just the general health of some of these nonscale regional players? Like, what -- how are they sort of fairing in this current environment?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [69]

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In the United States, I've only heard of one of the sort of medium-sized players is having a little bit of trouble. A lot of the smaller individuals have got such a low-cost base that they can actually survive for long periods of time. So the opportunities, I think, are the mid- to large-size companies that of either families that want to cash out or have seen a lot of pain and the kids don't want to take over the business. So I think there's a little bit of that in the U.S. In Australia, it's likely different. I think most of them are fairly competitive still, so I don't see any changes in that. So I think it's the U.S. market. I think the U.K. market is fairly tight, and I haven't heard of any companies really having a problem there at this stage.

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Operator [70]

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Your next question comes from James Brennan-Chong from UBS Investment Bank.

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James Brennan-Chong, UBS Investment Bank, Research Division - Associate Director and Mining Associate Analyst [71]

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Alistair, you just made a comment then that zorba prices at the end of last financial year were adversely impacted by China's tightening standards on scrap. Should China move towards lifting its restrictions further on Category 6 scrap in July, do you expect the zorba price to be under a similar type of pressure in the June -- in the December half year? Or how do you expect zorba prices to fare as China continues to tighten down on Category 6 scrap?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [72]

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So Category 6, if I can just confirm, we obviously haven't seen any quotas and we don't know how that is going to be structured. So that's my first comment, and I don't want to jump down there because we might be correct. So we'll obviously have to wait and see how that comes. What I do suspect in terms of China is that there still is a very good demand of both copper and aluminium. So how they actually -- that, for us, in the longer term is a key driver into China. I think the actual quality products that we have produced, we have a zorba product that is at 98%, 99% quality. We also produce a twitch. So both zorba and twitch products we can sell into China, that's going to really then rest around the quota. We have a very good relationship with our customers, and we have a very good inspection check there. So I don't see us having any problem selling our products into that. I think what happens is if a number of players don't get into the quota system, you might see a reduction in some prices because then everybody's going to have to go to the same market, which is probably India and some of the other smaller players. So I'd be very suggesting that you actually wait until we see the quota and how that program of work is actually going to go ahead. But the demand for aluminium/copper is not reducing.

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James Brennan-Chong, UBS Investment Bank, Research Division - Associate Director and Mining Associate Analyst [73]

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Right. And just a follow-up question then. The reallocation of trade away from China into other places like Southeast Asia, Vietnam, Malaysia, India, now that we've gone through 6 to 8 months of that rebalancing, your channel checks into those areas, what are they saying in terms of their ability to sustain this rate of redirection of flow? Are you confident that these guys can continue to take what China is knocking back? Or are there concerns that you need to go even further afield to diversify your customer base?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [74]

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No, I think the markets are taking it at this stage. And as I said earlier on, I have seen the zorba price up slightly, which I think is more of a supply and demand. But the market will, ultimately, will settle at a level. And as I said, if the copper and aluminum continues to progress, then I see the China demand will take up some of that slack. So I think it's -- the Southeast Asian market has seen a lot of volume going into, but I've also seen that prices normalize and the buying prices will adjust accordingly [whatever they are bought]. So the market will find its balance, and I'm seeing that -- the long term for me, it's still a good market and where we diversify our products.

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Operator [75]

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Your next question comes from Owen Birrell from Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [76]

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Just a follow-up question for me specifically on the premium for deep-sea cargoes. You mentioned last month that price premium from, I think, Turkey had largely evaporated. I'm just wondering where that sits at the moment? Have we seen the recovery in that deep-sea cargo premium?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [77]

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Not at this stage. I think parts of our sales are, I think, coming through in the next sort of 4 to 6 weeks. So we are expecting to see a shift from some of the high-level domestic we sold into Europe. I would expect that we will see that shift go back to more the export model that we have seen in the past. So yes.

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Operator [78]

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Your next question comes from Michael Slifirski from Credit Suisse.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [79]

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[Has there been a decision yet at] SA Recycling about what zorba upgrade technology they will implement and when that might be implemented. I know you're doing the zorba washing, but that's just Phase 1. So the second phase to get it to be a high-quality product, any sort of update there, please?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [80]

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That's good question, Michael. They do have 2 types of technology they are looking at. One is obviously what Sims has got, and there is another one, but it is also further integrated than just our existing technology actually takes another step. So we are busy looking at that in the prefeasibility studies at the moment.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [81]

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Okay. Then post that prefeasibility decision, what's a typical time to order, implement? I guess you made concrete 14 excavations, God knows what. But between the decision to commit and to have it commissioned in a commercial product, what would you think, please?

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Alistair Field, Sims Metal Management Limited - Group CEO. MD & Director [82]

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I would suggest probably 4 months. That depends on what project you choose to go down.

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Operator [83]

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There are no further questions at this time. That does conclude your conference for today. Thank you for participating. You may now disconnect.