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Executives

Geoffrey Norman Brunsdon - Chairman, Chairman of Finance & Investment Committee, Member of Risk, Audit & Compliance Committee and Member of Remuneration Committee

Robert C. Larry - Group Chief Financial Officer

Daniel W. Dienst - Former Group Chief Executive Officer, Chair of Combined North American Metals Recycling Business, Executive Director, Member of Nomination/Governance Committee, Member of Safety, Health, Environment & Community Committee and Member of Finance & Investment Committee

Analysts

Ramoun Lazar - UBS Investment Bank, Research Division

Ben Chan - BofA Merrill Lynch, Research Division

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Jason Harley Steed - JP Morgan Chase & Co, Research Division

Scott Hudson - CLSA Limited, Research Division

Brent Thielman - D.A. Davidson & Co., Research Division

Liam Farlow - Macquarie Research

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Michael Slifirski - Crédit Suisse AG, Research Division

Sam Haddad - Bell Potter Securities Limited, Research Division

Sims Metal Management Limited (SMS) 2013 Earnings Call August 22, 2013 7:00 PM ET

Operator

Good morning, ladies and gentlemen, and welcome to the fiscal year 2013 Full Year Results Conference Call for Sims Metal Management Limited. I must advise you that this conference is being recorded today, Thursday, the 22nd of August 2013 in United States and Europe; and Friday, 23rd of August, 2013, in Australia and Asia. Today's presentation may contain forward-looking statements, including statements about the financial condition, results of operations, earnings outlook and prospects of Sims Metal Management Limited. Because 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 be found on the company's website, www.simsmm.com. Investors are encouraged to review the filings made by Sims Metal Management Limited with the Securities and Exchange Commission, including its Form 20-F, which we filed with the SEC on March 18, 2013, which describes some of the factors that may cause actual results to differ from these forward-looking statements. 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 conference over to your first speaker today, Mr. Geoff Brunsdon, Chairman of Sims Metal Management Limited. Please go ahead, sir.

Geoffrey Norman Brunsdon

Ladies and gentlemen, welcome to today's presentation of Sims Metal Management's results for the full year ended 30 June, 2013. I'm speaking to you today from Sydney, and I'm joined by our Chief Financial Officer, Mr. Rob Larry, who will be presenting our financials and Mr. Todd Scott, our Head of Investor Relations. As you know, I'm Chairman and will be leading today's call on behalf of our global leadership team that is directing our company while the board conducts our CEO search. With regard to today's format, we'll step through the slide presentation posted this morning to our websites and to the ASX website. I'll be starting off by giving a general overview of our results and operating performance. Rob will present a more detailed review of our financial performance, and I will then conclude with an update on the strategy and some final thoughts on our current outlook.

Before we begin, I'd like to address the many employees who are now will be listening to today's call. I'd like to personally thank you for the hard work you put into the business over the past year and what has been very challenging business conditions for the industry. Your safety is of critical importance to us. In that regard, we are achieving a promising reduction of 9% in total loss time frequency rates through FY '13. The board and I remain committed to putting safety as our most important priority and believe that strong safety performance is a good indicator of the company that's in control.

I'd also like to say that this is my first and I expect the last I'm presenting the results for Sims Metal Management. As most of you will be aware, the board has been evaluating candidates for the group CEO role. This process has progressed and has narrowed to a small number of external candidates. We expect to announce an appointment by the end of the first quarter FY '14. Before we begin, we have today announced the appointment of an additional Non-Executive Director, Mr. Robert Bass. Mr. Bass is a recently retired partner of Deloitte based in New York.

Let's now begin the presentation and I'm looking at Slide #3. The company today announced an underlying EBITDA of $191 million before significant items. The underlying net profit after tax of $17 million and underlying earnings per share of $0.083. On a statutory basis, net profit after tax was at $466 million loss due to significant write-downs of goodwill and intangible assets, as well as write-downs in the United Kingdom. Strong cash flows and the release of working capital reduced net debt by 47% to $154 million as of 30th of June. Balance sheet gearing dropped to 7% from 11% a year prior. Maintaining low gearing remains a focus for the company during this time of constrained activity so as to stay in a position to fund increase working capital requirements as and when underlying business conditions improve. The company's dividend policy is to distribute 45% to 55% of net profit after tax subject to the board's discretion. In the absence of a statutory net profit after tax and after looking through goodwill impairment, the board has determined not to pay a final dividend for FY '13.

Moving now to Slide 4 and looking at some of the key earnings drivers of the result. On an underlying basis, group EBITDA was down 25% over the prior year. Turning to regions, underlying EBITDA from North America improved by $29 million over FY '12, driven by higher sales margins and lower controllable costs. Underlying EBITDA from Australasia fell by $12 million, predominantly due to lower gains realized from commodity hedging compared to FY '12. In Europe, underlying EBITDA fell sharply by $74 million and was the leading contributor to the weaker group result compared to FY '12. Earnings in Europe suffered materially from the fall in non-ferrous and precious metal prices in the Sims Recycling Solutions or SRS business. This decreased the value of processed material and compressed margins. Further on in our presentation, we'll go into more detail on the composition of the results by region and product.

Turning to Slide 5. North America. As I mentioned a moment ago, North America was a bright spot in the result spot in what continues to be a challenging operating environment. Underlying EBITDA improved significantly in FY '13 notwithstanding declining ferrous scrap prices, the average price is dropping USD 60, USD 65 a tonne in FY '13 over FY '12. Our focused on controllable cost reductions and selective scrap purchases underpinned the recovery in EBIT per tonne margins which rose to $7 a tonne in the second half of FY '13.

Turning now to Slide 6, for summary of progress made on controllable cost reductions. Across the targeted metals businesses in North America, Australia and the United Kingdom, $60 million in controllable cost savings were achieved. These cost reductions were offset partially by increasing cost in the global SRS E-Recycling business due largely to 2 acquisitions made in North America in the first half of FY '13. These cost reductions are anticipated to be sustainable until intake volumes change materially. While these cost reductions are material, reducing cost further will remain a focus over the current financial year.

On Slide 7, you'll see that some of our key scrap generation drivers in the U.S. continue to improve. U.S. consumer confidence, traditionally a good leading indicator of consumer scrap generation recently hit a 5-year high in June 2013. As well on an annualized rate, U.S. light vehicle sales and household appliance shipments have increased 6% and 7%, respectively, over calendar 2012. Rising automotive and appliance sales are critically important to the scrap industries so these 2 sources alone can combine to account for 50% to 70% of feed material for metal shredders in the United States. While these signs are encouraging, due to the severity of the 2009 U.S. recession, and consistently high unemployment rates, auto scrapping rates are expected to lag new auto sales. New job creation while positive, remains modest. And while of the most of the jobs that are created, a large proportion of these will impact time and in low-wage industries, limiting the ability of the U.S. economy to break out of the current slow growth phase. Encouragingly, however, some signals of industry rationalization of installed scrap processing capacity are beginning to emerge. A trend has begun as we've seen amongst metal recycling firms, both in the U.S. and other markets to address industry overcapacity through cost reductions and operational rationalization. While these developments are promising, at present, the challenges of excess capacity persist.

Turning now to Slide 8. FY '13 was a year of mixed results across our regional segments. Underlying earnings in North America returned to profit despite a 15% decline in sales volumes. Conversely, underlying earnings in Europe struggled turning the losses in FY '13 as the business suffered from deep margin compression, largely caused by falling commodity prices in the SRS business. While in Australasia, earnings were broadly flat after looking through lower income from commodity hedging earned in FY '12.

On Slide 9, we take a closer look at North America's regional results. On an underlying basis, EBITDA in North America improved 39% over FY '12. The result was driven by meaningfully higher sales margin per tonne and reductions to underlying controllable costs. Partially offsetting this was a 15% decrease in volumes led by lower export demand which impacted brokerage tonnes, particularly through our joint venture business Sims-Adam recycling.

Over the course of FY '13, we have continued to advance our strategic agenda of optimizing the North American portfolio of assets. To this end, several noncore or underperforming businesses were divested in FY '13, including our Colorado metals business and our Nashville joint venture. In addition, we sold our Arizona metal assets to our Sims-Adams joint venture which is a better strategic fit with that business and their geographic footprint.

Moving now on to Slide 10 in the Australasia region. On an underlying basis, EBITDA in Australasia was down 12% largely due to lower gains from commodity hedging. Sales margins on a per tonne basis were broadly flat while sales volumes were down less than 1%. During FY '13, management has taken steps to further optimize the business. The Australia metals business has reduced headcount by 6% while at the same time growing the business through the acquisition of Paramount Browns in South Australia and installing a downstream non-ferrous metals extraction facility in Victoria.

Turning to Europe. Underlying EBITDA was down significantly relative to FY '12 due to several factors including sustained weak economic conditions in the United Kingdom which intensified competition for intake material across traditional metals recycling and the SRS E-Recycling business. Lower non-ferrous and precious metal prices which decreased metal recovery margin in the SRS business and negative impact from lower average ferrous scrap metal prices causing sales margin to decline in the U.K. metals business. The accounting heads responded to these challenges with cost reductions across the U.K. Metals and SRS businesses. Headcount was reduced by 13% in the U.K. Metals business with 2 shredders idled and several small yards closed. Across the total European region, headcount was reduced by 10% over FY '12 levels. At the end of FY '13, new management was appointed for both the U.K. Metals and Global SRS business. The early stage business reviews have taken place across both businesses with management continuing to examine further cost savings opportunities as a priority for FY '14.

Now to Slide 12. Due to our product category, the group results were most significantly impacted by lower earnings in the SRS business. On an underlying EBITDA basis, SRS fell 74% in FY '13 due to lower volumes, challenging economic conditions in Europe and a sharp drop in non-ferrous and precious metal prices

Over the course of the second half from January to June 2013, copper prices fell 12% and gold prices fell 21%. The corresponding impact on the SRS business caused via margin compression as the value of prices material fell faster than we could adjust our buying prices. To address these issues, management has taken steps to restructure the business to lower working capital and increase inventory turnover while also looking at additional strategies to further reduce cost. To lead the transition of this business, a new president of Global SRS, Mr. Steve Skurnac, was appointed on 1st July 2013.

At this point, I'd like to pass the presentation over to our Group CFO, Mr. Rob Larry.

Robert C. Larry

Thanks, Jeff, and good day to everyone on the call. I'd like to turn to Slide 14 now and the next few slides. We'll provide a brief overview of the financial results that we posted today for fiscal '13 just ended.

Looking at Slide 14, our sales revenue on fiscal '13 were down 20% from $9 billion to $7.2 billion in fiscal '13 and that decline in revenues mostly relates to reduced shipments in fiscal '13 which were up by 12% and a balance of the reduction was due to lower commodity prices. Underlying EBITDA in fiscal '13 was down 25% to $191 million due to lower sales margin dollars associated with our lower shipments which were offset partially by the reductions we are able to accomplish in regard to controllable costs. Tangible asset impairment was encountered in fiscal '13 in which we took charges of -- for which we took charges, $304 million. Most of that impacted the half 1 results. Our statutory loss in fiscal '13 was $466 million and it reflected the impact of the significant items which were $537 million pretax in fiscal '13, representing $483 million of after tax charges and we'll describe those items briefly in a few slides.

Underlying net profit after tax was $17 million which represented $0.083 per share of earnings. Cash flow from operations was circa $297 million for fiscal '13. CapEx was lower sequentially in fiscal '13 at $149 million and was represented most significantly by our capital projects in North America being developments of -- related to expansion of our New England region, expansion of our Southern region in the Gulf, the Southwest region and advancement of the municipal recycling plant in New York City.

Net debt declined in fiscal '13 to $154 million, being only 7% of total capital at 30 June. Intake and shipments declined by 1.9 million tonnes and 1.7 million tonnes, respectively, in fiscal '13 to 12.5 million tonnes and 12.8 million tonnes, respectively. So we're taking shipments that stayed largely in balance throughout fiscal '13.

Looking now at the balance sheet, we turn to Slide 15. On Slide 15 will note the current assets are $1.2 billion at 30 June, 2013, down by approximately 20% relative to the prior corresponding period. Current liabilities are circa $0.7 billion at 30 June, 2013. Our current ratio was -- I'm sorry, was 1.7x at 30 June, 2013, which is attractive capital and financing available to our business. Noncurrent assets are roughly $1.8 billion and comprised by our net property, plant and equipment which is about $1 billion, intangible assets which were about $270 million and investments and associates which were circa $350 million. Net debt declined by $138 million in fiscal '13 to $154 million.

Now let's turn to our cash flows for fiscal '13 noted on Slide 16. Our cash flows were strong in fiscal '13. We generated $297 million of cash flow from operations. Most of that related to reductions and cash flow generated from working capital balances. We've invested $149 million in the CapEx in fiscal '13. We realized $52 million of cash flows from the sales of 3 businesses in North America including a joint venture. Cash flows after operating and investing activities in fiscal '13 was a net inflow of $179 million.

Turning now to Slide 17. We'll provide a brief overview of the significant items we encountered and have separately flagged in our fiscal '13 results. The significant items, as mentioned earlier, were $537 million pretax, $483 million after-tax. The primary reason for the difference which -- in terms of the effective tax rate you might expect is the predominantly non-tax-deductible nature of the goodwill impairment as well as the nondeductible nature of some of the losses in the U.K. impairments that were reported.

The significant items in fiscal '13 can be characterized as follows: Nearly 60% related intangible asset impairment which was $304 million which roughly $290 million related to the first half. Impairment and losses related to and associated with our investments in Chiho-Tiande Group impacted a fiscal '13 results by $36 million, representing roughly 7% of the significant items for the year. Our U.K. item impairments impacted the results for the full year by $123 million, $16 million of that related to the half 1 result, meaning a $107 million of debt impairment in the U.K. was realized and recognized in the second half. Other significant items in fiscal '13 which are separately identified aggregated to a net of circa $74 million. With that overview of the fiscal '13 results, I'd like to now turn the presentation back to Geoff for some comments on our strategy as well as our outlook.

Geoffrey Norman Brunsdon

Thanks, Rob. So turning to strategy in Slide 19. FY '13 marked a period of transition to the business with some notable progress against the company strategic goals on cost reductions and asset portfolio optimization, many of which I've mentioned already. The company remains committed to core strategies of cost-reduction, asset portfolio optimization and development of the SRS E-Recycling platforms.

So turning to Slide 20 in cost reductions. So real focus on cost-reduction began at the start of FY '13 accelerating midyear with 85% of the total 279 net headcount reductions occurring in the second half of the financial year. It is worth noting that of the $45 million of underlying controllable costs removed during FY '13, roughly 70% of this relates to lower employee benefits. Due to the high proportion of headcount reduction in the second half, management expects the full benefit of these reductions will be weighed towards FY '14. Notwithstanding the gains made on cost reductions in FY '13, management remains focused on achieving further cost reductions over the current financial year.

In addition to the actions taken during FY '13 and summarized on Slide 21, subsequent to 30 June, 2013, 2 additional noncore and underperforming businesses were divested, both the aerospace metals business and the Birmingham Metals recycling assets were sold in July 2013 and are now anticipated to -- both transactions are anticipated to be accretive to earnings in FY '14.

Turning to Slide 22 in the United Kingdom. We moved quickly to stem the losses in U.K. and U.K. SRS -- U.K. Metals and U.K. SRS business. Headcount was reduced by 13% in the U.K. Metals business and by 16% in the U.K. SRS business during the second half of FY '13. Also in the second half, we conducted a review of the U.K. SRS business. This review has led to a restructuring of the business to reduce working capital through faster inventory turns and so better managed the predictable commodity price volatility that we face in that business. Management believes these initial restructuring efforts will stabilize the business and should lead to an improved outcome in FY '14.

Now please turn to Slide #23 for our outlook and closing comments. Thus far, FY '14, East Coast ferrous scrap export markets have improved USD 30 a tonne in July with another USD 10 per tonne through the first half of August. On the West Coast, export markets lagged in July but have shown increased demand in August. Non-ferrous prices have experienced some up momentum since the start of FY '14, but markets remain both unpredictable and volatile. At present, however, trading liquidity remains firm in the company's primary deep sea ferrous and international non-ferrous markets

FY '14 capital expenditures are currently expected to be around $80 million, down from $149 million in FY '13. Prudent use of shareholder capital and the maintenance of balance sheet strength remains a priority for management. Lastly, as mentioned in my previous comments, the board continues to evaluate candidates for the group CEO role and expects to announce an appointment by the end of the first quarter of FY '14.

On that note, I would like to thank you for attending this morning, and I'd be pleased to open the call up to questions. If we can have the first question, please.

Question-and-Answer Session

Operator

[Operator Instructions] We will now move to the first question from the line of Ramoun Lazar from UBS.

Ramoun Lazar - UBS Investment Bank, Research Division

Just wondering, Rob, if you could maybe quantify a bit more the level of the cost outs that you expect to achieve in '14 maybe from the existing headcount reductions that were mentioned but also additional targeted savings?

Robert C. Larry

I think in terms of looking forward and providing specific quantitative measures, we're reluctant to do that today recognizing that the company is in transition with respect to the CEO position. All I can comment, Ramoun, today would be to say that the pressure will remain on all businesses to continue to carefully control and ultimately reduce the operating cost in fiscal '14 relative to '13.

Ramoun Lazar - UBS Investment Bank, Research Division

Okay. And just one other one, just on North America. EBIT per tonne margin obviously improved. You mentioned better buying terms over there. I'm just wondering if you've actually seen an improvement in the product mix towards better margin product.

Geoffrey Norman Brunsdon

That's actually a very good question, Ramoun. As I noted in the presentation, we aren't really seeing that strong consumer durable flows coming in to our yards. That's a trend that we understand is pretty consistent across the industry. We still see high proportions of demolition of [indiscernible] scrap coming in. So proportionately, in our flows, ferrous is still predominant.

Operator

Your next question comes from the line of Ben Chan from Merrill Lynch.

Ben Chan - BofA Merrill Lynch, Research Division

Just had a question around North American volumes actually. They're down 15% for the year. Now if we look at the history since you've given those in 2009, it's the lowest level of North American volumes that we've had. Is the whole industry -- is that a fair assessment of the industry or is that a bit of market share? I know you stepped away from chasing unprofitable tonnes? And if that's the case, how much of that loss share, I suppose, was intentional and is it just as easy? Can you get that back pretty easily if you decided to?

Geoffrey Norman Brunsdon

Ben, there are 2 real elements there. You flagged one of them, which was the exercise of discipline in terms of chasing volume and management remains committed to looking for tonnes that we process with acceptable margins. The second element is that there was strong demand during the year from the domestic U.S. steel mills, which meant that a lot of the brokerage tonnes we would export -- normally export were being sold by the people generally, but the group's generating directly to the U.S. steel industry. So it's really a combination of those 2 factors?

Ben Chan - BofA Merrill Lynch, Research Division

So if I look at North American ferrous trading volumes x brokerage, the volumes were not down 15%? They're down less.

Geoffrey Norman Brunsdon

That's a fair conclusion, correct.

Ben Chan - BofA Merrill Lynch, Research Division

Can you give us any sort of quantum of that?

Geoffrey Norman Brunsdon

We're not. You'll see it in the slide. If you go through the slides, I think you'll get a good sense of that, Ben, when you get a chance to look at it.

Operator

Your next question comes from the line of Andrew Gibson from Goldman Sachs.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Just a few questions. First for you, Rob. It's always tricky to try and figure out exactly what your tax and interest in stone [ph] is. Last result, you actually put a helpful slide in highlighting group income, which was Slide 15. So it would be great if we could get a copy of that again. But to me, it looks like your tax rate was about -- oh, sorry, your tax expense was about $30 million. Does that sound right?

Robert C. Larry

The tax expense on the face of the P&L is actually a benefit for fiscal '13. There's a lot of impact from the significant items on the tax rate, the nondeductible nature of the goodwill and valuation allowance that we're required to establish against the tax losses in the U.K. impairments. So going -- if you adjusted the benefit for those items, it would have implied an effective tax rate for the year of about 30%. When North America begins to generate a greater share of the overall group profit, which we expect in ordinary times, the effective tax rate for the company probably will continue to be around 33% at that point.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Okay. Well, I'm obviously doing something wrong because if I look at your underlying NPAT and your underlying EBIT and take out your interest expense, this results and a bizarre tax a bit. Anyway, maybe we can talk about that later. The other question I have is just on the inventory now. What are you doing there? I mean, I would like to think you have a lot more discipline now than you have been in the past. Can you talk to some specific strategies that you have across the various regions to ensure that you'll keep a handle on the underlying value there?

Geoffrey Norman Brunsdon

I guess, I'd address that question, Andrew into 2 components. The first business -- the first component being a specific focus on the European or the U.K. SRS business. And as I mentioned in the presentation, we're reducing inventory levels there through turning out that inventory faster. Shame on us I have admit we got caught too long when gold and copper prices fell in the second half. So we need more discipline there and Steve Skurnac is very, very focused on extracting that. In other parts of the business are -- particularly on the ferrous side, our global trade, the head Bill Schmiedel is working very closely with our regional managers to manage our intake volumes that we're processing at acceptable margins. So we're continuously turning inventory, Rob, on the ferrous side upwards of 11x.

Robert C. Larry

Yes, at around 12x. Andrew, in the year we generated $215 million of cash from inventory. So I think we got the inventories down and we're satisfied -- certainly satisfied with the net debt ending for the financial year. So we're satisfied with where we landed for inventories and the company is cognizant of all the points you're raising as it relates to inventory and we're going to accelerate to the best we can, the working capital turns in the SRS business and keep doing it -- keep accomplishing what we've been focused on in the scrap metal business.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

So you're confident that across the group in all the regions, there are no more inventory issues?

Robert C. Larry

Well, certainly as of 30 June, 2013, we've scrubbed the balance sheet hard in every regard. So I'm speaking to you in the context of 30 June and also you have to recognize July and August as Geoff mentioned, scrap prices went higher and also certainly the risk to NRV in July and August was mitigated not only by low inventory levels, but also upward sloping market following the financial year.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Yes, but I mean, that's sort of NRV type adjustments which happen all the time, there's no underlying -- do you think you're confident that you resolved the underlying issues in your inventory positions?

Robert C. Larry

Yes.

Operator

Your next question comes from the line of Jason Steed from JPMorgan.

Jason Harley Steed - JP Morgan Chase & Co, Research Division

I might go back to the question on cost savings, please. Just recalling a slide from the half year in which the indication was that at the end of FY '13, you'd be at a run rate of around -- about $100 million. Now looking at where your negotiations are in terms of cost base today in North America and Australia or in Europe, it seems that you're somewhere behind that number. So I just wondered if you could sort of provide an indication of where you stand relative to that and whether indeed that's an achievable number?

Geoffrey Norman Brunsdon

Yes, you're right. We can achieve -- we did achieve the run rate we were targeting particularly in the second half. We are clear and committed that what we have achieved, we'll sustain. But as Rob said earlier, we're reluctant to point other than directionally, to specific further cost-saving targets. We've got an imminent change of leadership in the business. And with that change of leadership, I'm sure will come further close scrutiny on that cost structure in our portfolio and a renewed focus on achieving bottom cycle acceptable returns. So I'd like to be able to give you some numbers at the moment, but I just think that with the changes that are occurring in the management structure and so on, that would be misleading.

Jason Harley Steed - JP Morgan Chase & Co, Research Division

Okay. So Geoff, where would you -- so I mean that's a fairly very big gap as we calculated between where you thought you'd be and where you actually are. So there must be some fairly significant items that you felt could be extracted from the business, from a cost perspective, controllable cost obviously that have not been achievable. Could you give us any sense of perhaps what those are because it is quite a big sort of gap to bridge?

Geoffrey Norman Brunsdon

Yes. Look, I think the way I deal with that is there are a number of elements, a number across a whole range of controllable cost categories, including transport logistics energy utilization where we didn't hit our targets. And I think as a business, we got to do a lot more work in a fairly short space of time around that to extract those benefits.

Robert C. Larry

And Jason, it's Rob. The second point to consider also is what we've done is complete of a job as we could to try to separately flag the significant items or noise that we believe was running through the income statement. I think it's pretty clear especially as it relates to the European segment there was -- there's a lot of disruption, a lot of reorganization activities taking place. And while we separately flagged all that we could identify that might have contributed to cost, we might not have captured as clean of an underlying measures we could because some of the costs associated with the restructuring in Europe might still be, I guess, buried in underlying, because we weren't able to separately flag it carefully enough to separate it at least.

Geoffrey Norman Brunsdon

And Jason, as we said in the presentation, given that a lot of the headcount cost out in the second half in the letter, the fourth quarter, it's likely that we'll see the benefit of that run rate flow through somewhat to aggregate cost savings for FY '14.

Jason Harley Steed - JP Morgan Chase & Co, Research Division

Okay. And just one more, perhaps just from an operating perspective. Look at your second half particularly in the U.S., obviously a fairly -- well an improved level of volume through in that period compared to the first half, which was obviously down very sharply as you are more selective, but you do seem to have managed your COGS per tonne to a level that matched the first half. Can we take away anything from that in the context of your buying and some of the quality of the intake or is that a -- is that too early to call?

Robert C. Larry

Not. There some that might be seasonal. Jason, the second half sees better flows of scrapping in the North American marketplace. So you're right, our sales tonnes in North America in the second half were up circa 20%. The intake was up strong. Some of that clearly was intentional to go back in the market and become, I guess, an aggressive buyer of volumes, not -- certainly not without sacrificing margin. But there might be some elements of that, that's seasonal. But I wouldn't consider -- I wouldn't discount it as you look forward as being unattainable. As Geoff said, we're still bottom of the cycle, there's no question about that.

Jason Harley Steed - JP Morgan Chase & Co, Research Division

Okay. So possibly some signs that you're seeing a bit of relief around the competition over intake?

Robert C. Larry

Well, there's some benefit from hard work in buying and perhaps some benefit from the rationalization that's begun in the industry. There might be some of that in there as well.

Operator

Your next question comes from the line of Scott Hudson from CLSA.

Scott Hudson - CLSA Limited, Research Division

I was just hoping if you could maybe give us some insight into the weakness in SRS and how much of the, I guess, contraction in the earnings that we've seen was I guess driven by being caught long at inventory and how much is the result of increased competition and/or other factors?

Geoffrey Norman Brunsdon

Yes. Look, I think directionally, the vast majority was the fact that we've got caught long. But we flagged cost out in there as well. And I think under Steve Skurnac's leadership, we've seen very quickly that business being stabilized. And Steve is actually moving from the U.S. He'll be based in the United Kingdom and will have a very clear focus on our European SRS business. And it's just Management 101 you turn your inventory fast to reduce your working capital and you're less exposed to the volatility in commodity markets.

Robert C. Larry

And you focus on your operating costs.

Daniel W. Dienst

Correct.

Robert C. Larry

That's -- I think there's a kind of a new better paradigm taking place in SRS globally. We're going to accelerate inventory turns and we're going to focus really tightly on operating cost. So it was a competitive second half as well. It was -- the business is, predominantly in Continental Europe and U.K. North America certainly a significant element of it, but there was -- it's a bit similar to scrap. It's a basic material industry. And we're positioning for it for the difficult conditions we're in. But we expect to see benefits from the global attention that we're going to pay to inventories and operating costs.

Geoffrey Norman Brunsdon

And Steve has been very focused on our supplier relationships. And I think we can do a lot better in the way we manage those relationships and we need to move quickly to improve that.

Scott Hudson - CLSA Limited, Research Division

So that -- I guess that high-cost inventory that you had has now worked through the system?

Robert C. Larry

Yes, we'd be -- as we finish 30 June, there's certainly margin in inventory that we finished.

Geoffrey Norman Brunsdon

Yes, and we're -- inventory volumes in SRS we're comfortable.

Scott Hudson - CLSA Limited, Research Division

Just regards -- going back to the cost savings. Obviously, the $60 million in cost savings, is that the actual achieved number through the year?

Robert C. Larry

Yes, that's the full year '13. The $60 million is the cost reductions that came out of the metals business where the target was in fiscal '13 to accomplish cost reductions. The $60 million was across North America, across Australia metals and U.K. metals. Global SRS, we saw as costs go higher, so net of the $60 million to about $47 million for our full year measure. But the pressure is going to remain applied to accomplish further cost reductions.

Scott Hudson - CLSA Limited, Research Division

Is there any indication what the run rate was exiting FY '13?

Robert C. Larry

I mean, in the slide, you'll see the underlying controllable costs that we finished fiscal '13 with. You'll see in the first year slides where we finished the half with, so it will give you, I guess, the second half run rate, the difference would.

Operator

Your next question comes from the line of Brent Thielman from D.A. Davidson.

Brent Thielman - D.A. Davidson & Co., Research Division

Just given some of the issues and your comments on this sort of paradigm shift, Rob, toward a cost focus on SRS, have your views changed around deploying more capital toward growing that platform, which I think has definitely been a strategy in the past?

Robert C. Larry

No, I think we're -- I guess the focus of the company is going to be consistent not only -- within SRS and the traditional metals business. We're going to focus on rationalizing costs and steering towards higher returns on capital in all the businesses, including SRS. We'll continue to grow all of our businesses, but not necessarily through external opportunities. So it will be expansion of -- we'll be seeking to expand our businesses organically through expanding customer relationships and trying to -- and being as active as we can on the buy side where appropriate or attractive margin is available.

Geoffrey Norman Brunsdon

And Brent, if I can just add that in mandating a CapEx level of $80 million for cash spend on new projects for FY '14, there are no acquisitions targeted in that number.

Brent Thielman - D.A. Davidson & Co., Research Division

Okay. And then you guys mentioned some trends in terms of rationalization in the scrap industry sort of developing, with maybe some players addressing excess capacity. With you guys having the largest market share, what's your position in terms of your current capacity in the states and could we see some more rationalization on your end as well?

Robert C. Larry

I think we've -- look, where intending to rationalize the business. We're certainly never -- we're not complete. We won't be complete until we start to see economic indicators that bring the scrap flows to a higher level, which will positively impact all 3 drivers that produce our results. When the volume comes back, the margins in the industry also normalize. Our margins per tonne normalize to a higher level and the operating leverage will start to fall through. Until we start to see better generation of scrap, we're going to continue to stay focused on plant rationalization. That said, I don't -- we're not looking to close facilities that operate -- that represent a significant element of our capacity. Our capacity is flexible. We can bring back additional labor. We can bring back temporary labor. We can bring in additional equipment. So our -- capacity isn't in the scrap industry, I guess the same in concept as it relates to the steel business. Our capacity is actually quite flexible. And when the scrap generation returns and the margins normalize, we'll be active in the market. Our capacity will flex higher in that way.

Operator

Your next question comes from the line of Liam Farlow from Macquarie Bank.

Liam Farlow - Macquarie Research

Just a couple of questions from me. A few months ago there was a settlement of $4.1 million in California for processing stolen material. Are you comfortable that processes and procedures across the group now are sufficient to, I guess, prevent a repeat of that sort of fine?

Geoffrey Norman Brunsdon

Yes. I think that we are certainly in a controlled situation when that occurred at that level of the organization had taken their eye off the ball. The management of our compliance with regulation, and I'm not just talking about dealing with stolen goods, I'm talking about right across the board in all areas of compliance has had a very sharp focus and this has a very high priority at the global leadership team level. And we continue to look to improve our practices around our internal controls, particularly as it relates to regulatory compliance. But this was the experience we had to deal with earlier this year in the U.K., I have to say there's a lot more effort being put in our control environment right across the business with additional internal and additional external order resources being brought to bear at this point in time.

Liam Farlow - Macquarie Research

Okay. Now look, I appreciate it. And obviously, I don't know if it's a market issue, but there was a fire early in the week. What's your expected I guess equipment cost impact to rectify the damages that was on there?

Robert C. Larry

Our insurance policy -- risk insurance policies will cover fires, subject to a deductible. The deductible on a property limit is $500,000 in the U.S. program.

Liam Farlow - Macquarie Research

Okay. And obviously the market is expecting a fairly substantial earnings recovery into '14. What sort of I guess turnaround in Europe do you think would be required to achieve this and obviously, it's a positive story in the U.S. at this juncture? Do you think you can see European conditions improving to justify that market expectations at this stage?

Geoffrey Norman Brunsdon

Well, what we can control is our cost structure. What we can control is our working capital management. We'll deliver the team we can in the context of the market environment to maximize the returns that come out of our European business. I'll say very, very clearly, we believe we've got a very viable platform in both metals and SRS in Europe and we're committed to those businesses. Having said that, we then have to operate our business within the framework created by the economic environment and the commodity price environment.

Liam Farlow - Macquarie Research

Now, look I appreciate that. And just one last one. It might have been covered briefly, but how sustained -- what is your current, I guess, inventory level considering potential ramp up in volumes will be coming out of U.S. as it recovers? Do you think you'll need to be adding inventory positions back in or can you hold that moving forward?

Geoffrey Norman Brunsdon

Well, it's a question about -- it has a volume element and a value element. In terms of volumes, it will be very much driven by our proximity to our end consumer markets. It was global mini mills, and I anticipate the demand we anticipate from our customers will drive our intake volumes. It then becomes a question where the commodity prices settle and how much working capital we have to commit to fund the volumes that are required to address the market opportunities. So we've been very clear in managing the business, but we want to keep our working capital powder dry so that where we'd see a significant increase in volume and significant commodity pricing increases, we can fund that without stress and adequately address the market opportunities.

Liam Farlow - Macquarie Research

Yes, okay, great. And just lastly, the $5 million, I guess, adverse movement in unallocated corporate cost. Is that expected to continue or is that a one-off?

Robert C. Larry

It's the difference between the corporate costs that we incur at the parent company and what we push out to the regions. That's all at trough transfer pricing, the pricing that represents -- year-on-year the cost weren't -- the corporate costs were not higher.

Operator

Your next question comes from the line of from Sal Tharani from Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

I just wanted to go back on this fire in New Jersey. Is the operation back to normal over there?

Geoffrey Norman Brunsdon

We -- it's controlled. There is some damage, but the volumes -- our intake has not been impeded and we're managing to process enough tonnes to keep balance in the yard at the moment, but we do have some equipment to repair.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Okay. And second question is regarding some news in the press about -- that one of your big competitors in Chicago is running into some legal trouble. And I was wondering, I know you can't make comments on that, but how big is that operation in the Chicago area, that if that disruption does happen, does it benefit you at all or will benefit the -- your intake in the area?

Geoffrey Norman Brunsdon

Yes. Well, I think you're referring to General Iron.

Robert C. Larry

Acme.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

No, not the Acme issue. The Acme yard. I was just wondering how big of the competitor it is in the Midwest.

Geoffrey Norman Brunsdon

They are the big guy there. We've got directionally a small footprint in around Chicago.

Robert C. Larry

They're an industrial scrap company. We compete in the industrial scrap business there. We do business with Acme, but yes, there are -- they will be characterized as a significant player in the Chicago market, focused most significantly on the industrial scrap generations.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

I think there were some shredder they were putting over there in Chicago also.

Robert C. Larry

Well, they're contemplating it. They, and another company in Chicago are contemplating a partnership, seeking a permit to put another shredder into the market. There's currently 2 in the market, with now Iris and Geoff mentioned General Iron earlier.

Operator

Your next question comes from the line of Michael Slifirski from Credit Suisse.

Michael Slifirski - Crédit Suisse AG, Research Division

I've got a couple questions. First of all, I'd like to start on the SRS business. In the results, can we still assume 1/3 is U.S. related and 2/3 of the earnings or lack of them U.K., Europe or was -- you're commentary about U.K., Europe suggesting that the bulk of a loss was incurred there, please?

Robert C. Larry

Mike, there's the slides of Aldegan [ph]. And now there's a chart in there that shows the breakdown of Continental U.K., Continental Europe and North America. So it's still about 1/3 and 2/3.

Michael Slifirski - Crédit Suisse AG, Research Division

Okay. With your nonferrous business. I know you always hedge the cover risk so you don't get exposed. Is there any reason why you don't do the same for SRS and that mine is always there quotational period risk with copper concentrates. You can hedge gold, you can hedge copper and you're accustomed to doing it in another business. So why do you take that risk on in SRS, that you don't take on with your ferrous trading business?

Robert C. Larry

Mike, in the second -- in the beginning of the second half, we began to implement hedging into the SRS business. The way we've implemented the commodity hedging there it all relates significantly to the finished goods. The raw materials are difficult to hedge because, while they're in a raw material state, the implicit value of the precious metals and the raw materials was too difficult to take a hedge for. So the raw materials are at risk. But we have put a hedging program and as it relates to finished goods within SRS.

Michael Slifirski - Crédit Suisse AG, Research Division

Okay, so in terms of the future. The second half loss, you're saying that, that wouldn't be repeated to the same extent. Can you sort of quantify how much of the loss was intake volume versus process volume?

Robert C. Larry

No, the SRS, it's difficult to provide -- it's too difficult to provide a precise estimate for you, Mike.

Michael Slifirski - Crédit Suisse AG, Research Division

Okay. Moving on to Australia. I guess we've seen recently the demise of CMA with RM talking about withdrawing from Western Australia and Tasmania. What's the outlook for the Australian market for you? Do you see those structural changes as improving the outlook for you?

Geoffrey Norman Brunsdon

Look, it's obviously something we spend a lot of time looking at recently and particularly, in Western Australia, that's a market where we've got a significant business. So the dynamic there is changing. I guess, it just highlights in the Australia, notwithstanding the returns we're benefiting out of the Australian business just how tough a market it is. And I think we will see through the evolution of the Australian market produce some opportunities for us and we'll be very judicious in how we view those opportunities.

Michael Slifirski - Crédit Suisse AG, Research Division

Okay. And with respect to opportunities, RM also have talked about selling their non-integrated scrap businesses and they're very much in the U.S. and proximate the way you operate. In your comment that your CapEx forecast excludes any acquisitions, are you looking at acquisition opportunities bolt-ons like that, that might tuck in nicely with what you've got?

Geoffrey Norman Brunsdon

If we were to do anything like that, we would do it as part of a capital recycling strategy so that net-net, our commitment to CapEx would remain around that $80 million level this year that I flagged. And obviously if we were to acquire anything, it would be very, very much in a position where we could extract additional value through an existing footprint.

Michael Slifirski - Crédit Suisse AG, Research Division

Okay. And 2 last ones. What's left in that manufacturing segment apart from the joint venture, the Adams joint venture?

Robert C. Larry

In manufacturing, the traditional Australian Manufacturing division, the only thing that's left is we enter the series -- that's small aluminum smelting business down nearby. The joint ventures consist of SARs as you indicate. CTG is in there. We've got a joint venture up in Canada, up in Vancouver in Canada and LMS.

Michael Slifirski - Crédit Suisse AG, Research Division

Yes. And then finally, the CapEx guidance, the $80 million. In the past, you've always talked about the business being something that really did have genuine depreciation, things wearing out and guidance has always, in the past, been CapEx equals depreciation. So how sustainable is that lower CapEx number given that it is now below depreciation?

Robert C. Larry

The depreciation expense annually is circa $100 million. The CapEx budget that we set for next year is $80 million. We think the $80 million is a judicious number. It will get done for us everything that we need to do to accomplish the replacement CapEx that we need to accomplish in fiscal '14. Is it sustainable? Look, it might be sustainable for a 1 year or 2. But longer term, I would guess that replacement CapEx would be in the range of somewhere around $80 million, upwards to $100 million. So you're right, it's lower sequentially, but the primary reconciliation between the sequential number where we're at now recognizes that 3 of the significant projects of CapEx for fiscal '13 are completing, which was New York -- New England, New York City and development in the Gulf.

Operator

Due to time restraint, we will now take our last question from the line of Sam Haddad from Bell Potter.

Sam Haddad - Bell Potter Securities Limited, Research Division

Just wanted to get some further color in terms of the volume decline in ferrous brokerage versus ferrous. You spoke a bit about internal demand from steel mills in the U.S. and that having an impact. Can you just give some color on that, please?

Geoffrey Norman Brunsdon

Well, I guess we look to brokerage volumes coming out of the domestic supplier here in the U.S. If you look at Slide 30, you'll see directionally ferrous brokerage from FY '12 3.6 million tonnes down to 2.8 million, 2.9 million tonnes directionally. We -- it's pretty clear that, that difference was largely directed into the domestic market where traditionally it's been directed through our trading business in offshore markets. I think that if you keep -- from an analyst perspective, Sam, if you keep a close eye on what was steel -- domestic steel mills were doing, directionally you'll get a sense of where that goes. But obviously, that brokerage business is significantly a lower margin for us than the volumes that come through our own yards, which we process.

Can I thank everyone for dialing in and showing such interest in the company. It's been an extremely challenging year and we're looking forward to stabilizing the platform and as and when economic conditions turn, take advantage of those conditions, then I'll say farewell because I don't anticipate I'll be here doing this in February. Thank you very much.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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