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Executives

Galdino J. Claro - Group Chief Executive Officer, Managing Director and Director

Robert C. Larry - Group Chief Financial Officer and Member of Disclosure Committee

Analysts

Emily Behncke - Deutsche Bank AG, Research Division

Liam Farlow - Macquarie Research

Keith Chau - JP Morgan Chase & Co, Research Division

Ben Chan - BofA Merrill Lynch, Research Division

Scott Hudson - CLSA Limited, Research Division

Michael Slifirski - Crédit Suisse AG, Research Division

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Andrew Hodge - CIMB Research

Sims Metal Management Limited (OTCQB:SMSMY) H1 2014 Earnings Call February 13, 2014 5:00 PM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Fiscal 2014 Half-Year Results Conference Call for Sims Metal Management Limited. I must advise you that this conference is being recorded today, Thursday, the 13th of February 2014 in United States and Europe; and Friday, the 14th of February 2014 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 also 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 October 16, 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 in Australian dollars, unless otherwise noted.

I would now like to hand the conference over to your first speaker for today, Mr. Galdino Claro, Group Chief Executive Officer of Sims Metal Management. Please go ahead, sir.

Galdino J. Claro

Thank you, Nadia. Ladies and gentlemen, welcome to today's presentation of Sims Metal Management results for the first half of fiscal year '14. I am speaking from our Chicago's office today, and I'm joined by our CFO, Rob Larry; and our Head of Investor Relations, Todd Scott. This is my first time presenting Sims Metal Management results since joining the company last November. Later in the presentation today, I'll take a moment to share with you some of my initial thoughts, my focused areas during the first few months and a view of the work that we have ahead of us. With regard to today's format, we will follow along with the slide presentation posted this morning to our website and to the ASX. I'll start 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 following initial reviews of the company and some final thoughts from our current outlook.

Before we begin, I would like to address our employees who are listening to today's call. Over the past months, we have been working diligently together to improve the business performance despite the industry's challenges. I have to take this -- I want to take this opportunity to thank you all for the hard work and achievements and ask you to continue to work safely, which is our top priority.

Let's now begin the presentation by turning please to Slide #3. The company today announced underlying EBITDA of $129 million, underlying NPAT of $42 million and underlying earnings per share of $0.203. On a statutory basis, our NPAT was $9 million, which was negatively impacted by the writeoff of a deferred tax asset and other significant items related to restructuring the business. Positive cash flows from operations and careful attention to the capital allocation led to a 21% reduction in net debt to $121 million as of 31st December. Balance sheet gearing dropped to 5.7% from 31% in the prior corresponding period. And at 31st December, it was the lowest level since 2011.

Despite the improvement over the prior year, in the absence of meaningful statutory NPAT and other factors, including the difficult conditions still being faced by the industry, the company has affirmed not to pay an interim dividend for half-year '14. I am proud of the substantial turnaround from a year ago. There remains much work to be done to bring this company to a sustainable and affectable level of profitability and growth. But it's encouraging to see strong emerging earnings at the underlying levels, as well as a return to profitability at the statutory level despite the challenges of the industry and the global economy.

The turnaround we have shown in half-year '14 is not yet being driven by improvement in external market conditions but instead by the things within our control. Things such as increasing the focus on reducing controllable costs and improving operational efficiencies in our facilities while enhancing inventory management controls and improving supply-chain management. Though the challenges of the industry persist, I believe there is still much that can be done to improve the returns of this business in spite of the external pressures.

Please turn now to Slide #4. On an underlying basis, group EBITDA was up 38% over the prior year. The improvement was driven by better performance from our metals recycling business in all of our regions. Earnings improvement year-on-year was most significant in Australasia, where underlying EBITDA increased by $30 million over the prior year. These gains were driven by a 9% increase in sales volumes, coupled with an expansion in sales margins and higher income from joint ventures.

Underlying -- underlying EBITDA in North America and Europe was largely unchanged in Australian dollar terms versus the prior period. Encouraging, both North America and Europe benefited by stronger earnings from metals recycling, however, these gains were offset by lower earnings from our SRS business. Further in the presentation, we will go into more details on the composition of our results by region and product line.

Please now turn to Slide 5. The start of underlying earnings recovery is slowly building despite persistent challenges we are seeing in many of our key markets. However, as I already stated, much of the improvement is due to work we have been doing inside the company. Sims improved cost efficiency has allowed us to persevere in current difficult markets better than many others in the industry. However, we need to continually look at new ways to improve the way we operate. We are committed as a team to moving from being a volume-driven business to a more balanced organization with a combined focus on both volume, cost control, but most importantly, on margins. We are diligently managing every step of our integrated supply chain from scrap purchasing and inbound logistics through to our processing costs and shipments to customers and challenging our existing business model to find new and creative ways to maximize profit on every tonne we buy, transport, process, sell and deliver to our customers. This includes new separation technologies, better management systems for margins transparency across the entire supply chain, more value-adding connectivity with our customers and a strict focus on execution discipline.

Please now turn to Slide 6. Looking through the impact of currency translation, underlying controllable costs have declined by $55 million since the end of fiscal '12. On an annualized basis, this is $110 million in sustainable cost savings and therefore, in line with our $100 million cost savings target previously announced. Cost efficiencies will always be a key part of our strategy going forward, however, without jeopardizing market positions to future upside growth opportunities.

If you please now turn to Slide 7. Looking at the broader macroeconomic conditions, starting in the U.S., stimulated by a record-low interest rates in a massive liquidity injection provided by the U.S. Federal Reserve Bank, consumer confidence, new vehicle sales and employment levels have all gained positive traction. However, the current weakness in steel production still lags and has caused scrap metal generation to remain weak. According to the U.S. GS data, U.S. ferrous scrap metals collections declined 5% year-to-date in October. These low levels of scrap generation, along with persistent recycling industry exiting overcapacity -- existing overcapacity, is keeping competition for raw material extremely high. While the time lag between economic activities and scrap generation is taking longer than our historical experience, this disconnect is not sustainable long term.

In Australia, key leading indicators point to a mixed outlook. Investment in the mining sector is showing early signs of decline while several major auto manufacturers have decided to close. Consequently, GDP growth has begun to slow. In this tough environment, several of our metal recycling competitors have either left the market or substantially reduced their operations. This effect has created an opportunity for investment in new shredding operations in Western Australia, which we expect to become operational in the second half of fiscal 2015.

While in Europe, economic conditions are showing some signs of stabilization, mostly in the U.K. Consumer confidence in the U.K. has increased substantially and what is good sign of our U.K. metals recycling business, the new car market just had its best year in 2007 with 2.3 million cars registered, which is 11% more than in 2012. Overall, while we are encouraged by signs of emerging global economy growth, we remain cautious in relation to the time taken by those trends to effectively impact the secondary recycling industry.

If you move now to the next slide, which is Slide #8. Taking a snapshot across our performance by region. The first half of fiscal '14 shows stronger earnings in Australia and North America compared to the prior year. The proven results have driven by better results -- I'm sorry, the improving results were driven by better results from our metals recycling business across all regions we operate in. The slight decline in EBIT for Europe was due to lower earnings in the U.K. SRS business, which we are currently engaging in a restructuring process to stabilize and reorient that business.

On Slide 9, we will take a closer look at the North American regions results. On an underlying basis, EBITDA in North America improved at 9% over the prior year. The result was driven by significant controllable cost reductions, as well as 3% lift in sales volumes. This was offset by a decline in earnings from our North America SRS business, which was impacted by lower average commodity price related to the prior year. Controllable costs reductions in North America have been significant with $24 million in savings over the first half a year ago. We continued our program of divesting non-core business and reinvesting into high-expected returns -- return opportunities in our core markets. During the first half, we sold our non-core aerospace metals and our Birmingham, Alabama metals recycling assets. We also completed our New England operation expansion, including a new yard, a shredder and export facility based around Providence, Rhode Island, with the new facility starting a few months ago.

Moving now to Slide 10, let's talk about Australasia. On an underlying basis EBITDA in Australasia, we were up 93% over the prior year. Earnings were boosted by a significant increase in sales margins and a 9% increase in sales volumes, as well as a higher income from joint ventures. Controllable costs increased logically in support to the additional business activity, driven by a 5% increase in headcount and an 18% increase in intake volumes. The Australia metals recycle business also benefit from the departure of several competitors, which have either left markets or scaled back their operations. To meet the resulting increase in activities to our yards, we are installing a new shredder in Western Australia, which we expect to become operational in the second half of fiscal year 2015.

Now turning to Slide 11, and European region. Underlying EBITDA in Europe was down 10% or roughly $2 million relative to the prior year. However, relative to the second half of fiscal '13, underlying EBITDA improved by $39 million, returning the overall region to underlying profitability. Earnings from the region continued to be impacted by losses with the U.K. SRS business, which more than offset materially improved earnings from our U.K. metals business. The decline in sales margins from the region related to the reduced earnings in U.K. SRS and, to a lesser extent, also in continental Europe SRS. Sales margin in the U.K. metals business improved on a per tonne basis compared to the prior period. An extensive restructuring of the U.K. SRS business continued through the fiscal half-year 2014, leading to the plan for closing our facility in Daventry, in England, with the business activities consolidated into our nearby Newport site. The initial results, restructuring and cost reductions activities have been encouraging, however, with $17 million in controllable costs removed from the business over the prior corresponding period.

Now turning to Slide 12, please. Viewed by product category, the group results were most significantly impacted by lower earnings in the SRS business. On an underlying EBITDA basis, SRS fell 66% in the fiscal half-year '14 due to higher competition in North America and Europe and a drop in non-ferrous and precious metals prices. Earning compression in SRS, however, began to stabilize in half-year '14. On an underlying EBITDA basis, the SRS restructuring -- or sorry, returning to profitability after recording a $5 million loss in the second half of fiscal '13.

At this point, I would like to pass the presentation over to our group CFO, Rob Larry. So, Rob, please.

Robert C. Larry

Thanks, Galdino. Good day to everyone. Turning now to Slide 14 and looking in more detail at our group financial results. Sales revenue was up 5% in half-year '14 on a basis of reported terms. This was impacted, though, by an appreciation in local currency of our foreign subsidiaries against the Australian dollar, meaning that on a constant currency basis, holding exchange rates equal to the prior period, our sales revenues actually would have declined circa 5%. The constant currency adjusted decline related to lower average ferrous, non-ferrous, as well as precious metals prices compared to the prior year because sales tonnes were higher period-on-period by circa 3%.

Underlying EBITDA was up 38%, largely driven by a strong result from Australasia, as well as a further net reduction of circa $25 million in underlying controllable costs across the group. Statutory NPAT returned to a profit of $9 million, representing a $305 million improvement from the prior fiscal half year. Excluding significant items, as detailed in our OFR [ph], and as I'll address in our next slide, and then [ph] on an underlying basis, was $42 million in half 1, representing an underlying earnings per share of $0.203.

Now we'll turn to Slide 15. First half underlying earnings were impacted, again, by a number of significant items. This time, totaling $15.5 million pretax and circa $33 million on an after-tax basis. The majority of these items, roughly $17 million, related directly or indirectly to restructuring activities that continued across the group. $17.6 million of the significant items related -- in the schedule relate to the writeoff of a deferred tax asset related to historical losses in the U.S. applied in the context of accounting standards.

Turning now to Slide 16 to look at group cash flows. The net cash flow from operations in the first half of fiscal '14 was $38 million. The decline relative to the prior period was due to an increase in working capital, reflecting higher business activity, including intake volumes during the period and slightly higher inventories. Intake in shipments in the first half were largely in line and inventory positions at 31 December were in line with our plans.

CapEx of $29 million in half 1 were down from $82 million in the prior period and there were no acquisitions made during the first half of fiscal '14. As a result of the positive cash flows from operations and investing activities, net debt was reduced by a further $29 million during the first half when compared to 30 June.

Turning now to Slide 17, we'll take a closer look at capital expenditure trends. With our New England metal recycling expansion and Phase 1 of our New York City Municipal recycling project now complete, capital expenditures were able to be controlled in the first half to $29 million. We now expect the full year CapEx to be circa $90 million for fiscal '14, including the construction of a new greenfield yard and shredder in Perth beginning to ramp-up in the second half of this year. With the majority of our major recent capital project initiatives over the past few years now behind us, full year fiscal '14 capital expenditures will be below depreciation expense.

Turning now to Slide 18 to address debt levels and gearing. During the first half of fiscal 2014, the company reduced net debt by a further $29 million, lowering our total net debt to circa $120 million -- to circa $121 million and gearing to 5.7% over total capitalization. Our low current debt is consistent with our desire to protect the balance sheet through the cycle. It's also a recognition of current weak industry conditions and to be prepared for the demands that volatile commodity markets can place on balance sheets in our industry. Our credit facility has evolved, been recently extended to maturities of 31 October 2016.

Following those comments now, I'd like to turn the presentation back to Galdino today for a few concluding remarks.

Galdino J. Claro

Thanks, Rob. Now we are on Slide 20. Over these past 3 months, I have spent a lot of time interacting with my executive leadership team and visiting first-hand the businesses we operate across the globe. Spending time with our local people, as well as customers and suppliers in order to understand our challenges and opportunities also from their points of view.

During my review, I have found pockets of excellence across the regions in business. I have also seen wide variations in financial and operational performance across our subregions. I came across portions of our businesses, including in North America, delivering attractive returns on capital while other nearby operations struggle to cover their operating costs. My team and I have been diligently focused on understanding the root causes of such variations in performance and how they're related to our current operating model. We have concluded that there are substantial opportunities to replicate our best-in-class commercial and operational practices into underperforming business and therefore, benefit from our scale and the tremendous amount of intellectual capital internal to Sims Metal Management globally.

Our internal focus as a team will be reorient the organization to back-to-the-basic fundamentals of our business core drivers of profitability, improving the efficiency of our integrated supply chain and learn how to faster copy and paste our best practices across the company.

Sims' transformation, ladies and gentlemen, will require a substantial changed management. I acknowledge that, but I remain fully confident that we have the ingredients to create a foundation to substantially increase Sims' profitability to a bold cost of capital in medium terms. While my focus will be internally driven at first, I will not lose perspective of potential external growth, intelligent capital allocation and industry consolidation opportunities. I will be sharing with you a more detailed strategic direction and plans for Sims Metal Management prior to the end of our fiscal year.

Finally, please turn to Page 21. Looking into the second half of fiscal '14, external trading conditions continued to show the volatility which has been common in scrap metals markets. Winter weather conditions in the U.S. have been difficult to say the least. As a result, scrap collections have been largely restrained. At the same time, steel mills in our export market -- markets have reduced production as well as their demand for imported ferrous scrap. There are numerous reasons for this but some of the most important reasons include the political and economical issues in Turkey and Thailand, the general weakening of export market currencies and the approximately 10% decrease in iron ore prices since the start of the calendar year. Despite these challenges, we have had success in finding liquidity in the market with export cargoes continuing to our docks even in present difficult conditions.

Moving into the northern hemisphere spring, we anticipate flows will return in that the words -- sorry, the words [ph] to your market will fall back into its normal equilibrium. As we move through this year, this near-term volatility, however, I am more positive on the outlook. We will continue to drive further cost efficiencies both on controllable costs basis, as well as in our materials buy. We will also continue solidify gains we have made through the restructuring efforts in our SRS business. I expect the traction we have already made in these areas will become increasingly transparent in our future returns.

At this point, I would like to open the call up to questions you may have. However, I should note that it would be premature for me to answer questions on long-term strategies at this stage prior to the completion of my full review, which I'll be sharing with you in the future. So, Nadia, could you please now have our first questions, please.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Emily Behncke from Deutsche Bank.

Emily Behncke - Deutsche Bank AG, Research Division

I just have a couple of questions. Firstly, the U.S. business, obviously, I'm just wondering if the -- what your view is if the U.S. business is, in fact, fixable, given the returns have been pretty volatile to date. Secondly, I came to understand in the U.S. what lead indicators do you look at to try and understand when activity's going to turn. And finally, what do you view is your cost of capital at this point?

Galdino J. Claro

Certainly. Let's start with the first question, of course, on -- is the U.S. business fixable or not? I'm absolutely confident that it's fixable. It's not going to be completely fixed from 1 day to another but it is fixable. As I mentioned to you during my presentation, there are portions of the U.S. business that are very attractive despite of the current challenges of the industry. We have portions of our business that currently generate attractive returns. And what we need to do really is to understand the difference between those business and others that as I also said struggle to survive today and see if we can copy and paste the best practices we have across the system, so we can equalize the profit level across the footprint in North America. We have a high degree of talent in North America that has to be better leveraged to maximize profitability. So I am fully confident that the North American business is an important part of what we do today and will be even more so in the future. The short-term part -- Rob, do you want to cover the cost of capital?

Robert C. Larry

Yes. Emily, cost of capital is, as we look at it and we've reconsidered again in the context of the half-year results, but it's around 10%. It varies across the regions but on account consolidated basis, we see it as around 10%.

Emily Behncke - Deutsche Bank AG, Research Division

Sorry, Galdino, I was just wondering what lead indicators that you guys look at?

Robert C. Larry

As it relates to scrap generation?

Emily Behncke - Deutsche Bank AG, Research Division

Yes.

Galdino J. Claro

The leading indicators, you mean?

Emily Behncke - Deutsche Bank AG, Research Division

Yes, exactly.

Galdino J. Claro

Well, we have -- we look at the GDP growth, we look at unemployment, we look at consumer confidence, we look at purchasing managers index and, of course, new car sales are important to us and steel production.

Emily Behncke - Deutsche Bank AG, Research Division

Okay. Because, I guess, some of those indicators have really -- have turned a corner so I guess it's -- you're not expecting that to impact your business for a little while yet?

Galdino J. Claro

Well, they will, but there are other factors like the weather situation, for example, that make those improvements and those indicators lag a little bit. So it's a time-sensitive situation. However, I believe things will get back to normality when the weather improves a bit.

Emily Behncke - Deutsche Bank AG, Research Division

Sure. And sorry, just finally, how has the harsh weather situation in the U.S. impacted your business to date?

Galdino J. Claro

Well, I think it's impacting the entire industry and it's mostly on the scrap collection end. But it has been a little tougher than most winters, but this is the time of the year where the weather has that impact in the industry, in general, so we don't see anything substantially different this time than we have seen from the weather perspective. It's just the cycle.

Operator

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

Liam Farlow from Macquarie.

Liam Farlow - Macquarie Research

Just a quick question on your current CapEx profile. Can you give, I guess, a bit of further breakdown between stay-in [ph] business versus growth CapEx of your forecast, $90 million in FY '14 and how was your, I guess, current stay-in [ph] business been compared to prior years and periods?

Robert C. Larry

The stay-in [ph] business spend. We look at CapEx actually in 3 categories: Maintenance category; secondly, safety and environmental related; and finally, growth related. So we've really pulled back on -- to accomplish the adjustment that we've made to spending in the area of growth that we are completing. As we mentioned, 2 -- we just recently completed 2 projects. One in New England, which was significant growth. And secondly, the plant in New York -- related New York City recycling contract, which is completed in this half. Looking forward -- longer looking, I guess, the maintenance depreciation expense is about $100 million a year. Maintenance CapEx for us is probably somewhere in the range of $60 million to $80 million. Generally, we're going to spend $10 million to $20 million a year on safety and environmental-related expenditures and then anything beyond those levels would be growth.

Liam Farlow - Macquarie Research

And I guess as a follow-up question, given obviously the flow to -- [indiscernible] Turkey here, have pulled back a bit, are you able to provide some guidance around where you are shifting some tonnes to? I need your export vs. simistic [ph] tonnage split changing because of that?

Galdino J. Claro

Yes, the -- we need to understand better the challenges in Turkey. And I'm going to be visiting at our major customers there in the near future. However, we are loading ships to Turkey as we speak. So it has impacted us, but not to the extent that would represent from me, at this stage, a real major concern. I think things will get back to normality based on the best knowledge we have at this time as a consequence of our conversations with our customers and also the inputs from our traders.

Liam Farlow - Macquarie Research

Okay. Would you rather provide an approximate split between your North American export versus domestic volumes, I guess?

Galdino J. Claro

I don't think we have disclosed that. Have we in the past?

Robert C. Larry

In the full year slides, we'll give the export and domestic breakdown by end market. Because of the location of the operations in North America, primarily in the East Coast and West Coast, we certainly have the inland operations that run from the upper North Central territory down in Mississippi River to its base. We're slanted because of our locations to an export market. So it will vary as we evaluate freight-adjusted prices, but it's -- we're principally an exporter because of where we're located, but we certainly have transactions every month with the U.S. steel mills and the Mississippi rivers.

Operator

Your next question comes from the line of Keith Chau from JPMorgan.

Keith Chau - JP Morgan Chase & Co, Research Division

Just quick question following on from Emily's. I'm just wondering, Galdino, if you could provide, I guess, a bit more color on how profitable your most profitable businesses are in North America and how that compares to your weakest business? So if you're looking at it from a profit-to-loss kind of spread, what that would be between your best and worst businesses?

Galdino J. Claro

It's a large variance. I mean, we have business of both cost of capital, as I said to you, and we have portions of our SRS business that lose money. So it's a very significant range in terms of profitability, which is somehow natural based on previous experiences for a global company like ours operating in different markets and with different customer bases and different product line, so I don't see that abnormal, but it's a large range.

Keith Chau - JP Morgan Chase & Co, Research Division

Sure. And one follow-up with another one, Galdino. In terms of capacity utilization in comparison to market, do you see scope to actually close capacity or do you see competitors moving on that front to kind of try and resolve the capacity utilization issue?

Galdino J. Claro

It's a mixed bag again, isn't it? It's hard to generalize because there are, a, is where the capacity utilizations are relatively high and others where overcapacity is substantially impacting the economics of the industry. And if I give you too much information on that, I apologize, but that would put my competitive condition -- competitive situation in relation to our competition a little bit -- will make it fragile. So forgive me for not giving you more details on that but I can't.

Operator

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

Ben Chan - BofA Merrill Lynch, Research Division

I just wanted to explore the issue of the cost outs in a little bit more detail. I mean, the Australian business probably had the best results on a volume sense and controllable cost actually went up there, so can we take the view that then, I suppose how much of that $110 million underlying rate that you achieved is sort of variable and is all volume related and it's actually sustainable no matter what volumes do?

Robert C. Larry

We think that the savings are -- as we realized in the date sustainable until such time as there's a significant change in the intake. There's a lot of upside to the operating leverage in our business where we believe there's -- with the capacity that we operate, we could flex to handle a lot more tonnes, but the reality is there's portions of those controllable costs that do have a variable element to them, utilities, power, waste removal, even R&M [ph], I guess, repairs and maintenance to some degree. I guess, I would estimate of our controllable costs, it's probably somewhere in the range of 30% to 40% semi-variable and the balance would be fixed or mostly fixed. We think, though, that these savings will be sustainable to us while we're in this range of, call it, 12 million tonnes a year of scrap that we're handling. When we stretch to 14 million tonnes or perhaps beyond 14 million tonnes, certainly the costs will vary higher, but there will also be a significant addition to gross margin.

Operator

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

Scott Hudson - CLSA Limited, Research Division

I just wanted to check in terms of the, I guess, the price differential we're seeing between domestic pricing in the U.S. and I guess the export processing in the last couple of months, the domestic price seemed to have risen -- expanded quite a lot relative to the price generated out of the export market. Can you just tell me sort of how that plays into your business? Are you having to buy by the high price than you're potentially selling it?

Galdino J. Claro

Well, we -- the buy price and the sale price is oscillating, as you have mentioned, but we've been able to protect margin, which is an increasing focused area for us going forward. As I mentioned in my presentation, we are moving more from being too much volume-oriented to be more margin focused and concerned. And I think we have a good level of transparency on our margins when we buy and sell. So yes, we have oscillations on that and keeping the inventory levels low is one of the most important factors to make sure that, that margin doesn't deteriorate or dissipate, so it's always a focus area. It's the core of the business.

Scott Hudson - CLSA Limited, Research Division

Just to delve my clarification, though, does a higher domestic price, does that put pressure on the buy price or is it sort of -- I mean, given your export focus, does it come to your margins to have a higher domestic price?

Galdino J. Claro

The spread today is attractive, let me put it this way.

Scott Hudson - CLSA Limited, Research Division

Secondly, just in terms of your SRS business, I mean, have we seen a structural shift, I guess, in the competitive landscape there? And is -- do you ever think we'll get back to sort of the returns of that business has achieved historically?

Galdino J. Claro

Well, the SRS business has portions that are very attractive. And some slow patch that are extremely positive and that actually deserve to grow. In other portions that if we don't develop let's say, robust roadmap towards success, we're going to have to strategically revisit how stable long term they should be with us. So it's a continuous process. I'll be able to talk more with you when I'm ready to share our strategy in more details in the near future.

Operator

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

Michael Slifirski - Crédit Suisse AG, Research Division

Look, I'm interested in the industry structure change in Australia that's helped to generate a much better outcome because of the excellent competition. So in that context, how do you -- how should we think about the U.S. in terms of the surplus capacity compared to the volume of horizons that you expect to come on, so when do you see it actually coming into a balance where margins can improve? And how much of that would be because capacity comes out and how much will be because volumes returns, so I'm interested in understanding what that delta is in the U.S. marketplace?

Galdino J. Claro

The U.S. is such a large territory that it's hard to talk about the impact of overcapacity in the U.S. in general. There are regions in the U.S. market where we have a similar situation as we do in Australia where attractive margins and good access to the quality of scrap our customers want and a very robust and sustainable supply chain all the way from the buy end to the sell end, and we have other areas where competition has become very challenging. So I don't want to generalize that. I think we have different businesses conditions inside the U.S. when you go from East Coast to West Coast, from North to South in the Mississippi River, part of the business that are dedicated to export and other parts that are dedicated to the domestic market and we have substantial differences on levels of profitability on those business. And that's what I'm trying to address going forward, how to close those gaps.

Michael Slifirski - Crédit Suisse AG, Research Division

Okay. Secondly, listening to your peers, your U.S. peers reporting and I could say quarters with -- till the end of November, they seem to suggest that they made all their money in the November month because it was strong. Looking at what process did November was good for you, December was good for you. So without that tailwind that perhaps helped your half, what does the current half look like with a declining cross train to the stage?

Galdino J. Claro

We don't give projections or forward-looking on the profitability of the second half, so you're going to have to bear with us on that.

Michael Slifirski - Crédit Suisse AG, Research Division

Let me have the question then, to what extent did the November and December month drove the North American outcome?

Robert C. Larry

Mike, it's Rob. The first half results certainly had, I guess, a stronger Q2 than Q1. Q1 had, I guess, tougher conditions in July than what we saw at the tail end of the period. We shipped, though, in the first half in balance with intake, meaning the result wasn't attributed to an imbalance between what we're able to ship and intake. We did carry a little bit of scrap over, but nothing remarkable. In terms of where we'd come to the second half, we're still just really, I guess, just the midpoint of the second month. What we've tried to characterize is intake has been constrained to some degree because of weather. And demand has been, from the export markets, which we typically seek out, which is the emerging markets broadly described has been a little been tepid. But just because I guess we've got 6 weeks of bad weather and a bit of weakness on demand, it doesn't lead us to a conclusion to say that the second half is going to have a particular outcome, be it good or bad, just because we're still very early on. The weather will ultimately reverse and the scrap will come out. So the scrap that might be missing in the first 6 weeks isn't going for good. It will just come in as the temperatures improve and the days lengthen.

Galdino J. Claro

And another point to consider is that the scrap that we can't acquire at this stage because of the weather is not going to disappear. It's there, it's accumulating with our suppliers and it's going to be available in the network when the conditions -- the weather conditions change. So it's a delay in timing but not in business opportunities.

Michael Slifirski - Crédit Suisse AG, Research Division

And finally with respect to the export market, I think you said that despite Turkey being perhaps a little reduced, you still find the export market liquidity. Are you suggesting that the balance between domestic sales and export sales hasn't changed? That despite Turkey's weakness, you're still exporting the normal volumes that you would be exporting to the export market? And if not, is there any specification difference between what you can sell into the domestic market and what you can sell onto the export market?

Galdino J. Claro

There are differences in specifications, as you said, but they are all manageable from the processing point of view. And while -- we don't know exactly at this stage how long the economic situation in Turkey is going to persist. So I don't want to develop hypothetical schemes here or view. But we are developing more and more our capabilities to supply domestic market, as well as developing opportunities with other customers and other export markets in South and Central America that could at least partially accommodate any eventual shortfall in relation to our sales to Turkey. However, it's not going to happen from 1 day to another, but we have pre-advanced it, mostly on alternative export market development through the leadership of our trading group.

Michael Slifirski - Crédit Suisse AG, Research Division

So suggesting at the moment, the balance between exports and domestic sales has at least temporarily changed?

Galdino J. Claro

It can change if it make economic sense to us.

Operator

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

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Two questions. First of all, can you give us a feel for what the new shredder in WI will add to capacity?

Robert C. Larry

It's actually replacing capacity so we're -- we've got a smaller shredder and an older shredder, so we're already shredding in that market where, I guess, we're just upgrading the shredder to a newer, and I guess to some degree, larger, but we're not worried about, I guess, the balance that it could tip the market to.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

So it's not material necessarily?

Robert C. Larry

No.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

Okay. And, Rob, any adjustments, any profit in stock in this period?

Robert C. Larry

There wasn't any unusual ups or downs to the result as it related to stocks in this period.

Andrew Gibson - Goldman Sachs Group Inc., Research Division

And then finally, just -- Galdino, you may not be in the position to answer this yet but just wondering, do you have a sense to what opportunity there still is within the group to integrate acquisitions of the past that you feel might not have been properly integrated yet?

Galdino J. Claro

We -- you're right when you say I'm not in the position to discuss that yet, but our focus will be more and more internally oriented to fix the supply chain, as I have said, but I'm not going to lose perspective at all on opportunities that we may come across in relation to further consolidation of the industry. I just don't want that perspective to dilute the importance of what we have to do internally.

Operator

Your last question comes from the line of Andrew Hodge from CIMB.

Andrew Hodge - CIMB Research

First question just relates to the reconciliation between statutory and the underlying NPAT. Just if I look at the list of items, excluding the deferred tax asset writeoff and the loss on the business divisions. To me, the rest of those items look like business as usual items rather than below the line items. I'm just wondering what your criteria for the judgment of a significant versus a business as usual item is?

Robert C. Larry

It's a -- as we look at the list, we provide delineation of these items so each user of the financial statements can make their own judgment as it relates to the items whether they should or shouldn't be -- whether they should be above the line -- below the line or not. Our criteria is really, I guess, to look at 2 characteristics. I guess, one is relative significance and frequency in nature. So what we'll tend to identify or flag is one-off items or items that seem important enough to us to matter and infrequent in reoccurrence. And if it satisfies both, we flag it in that way. I'm looking at the list again now, and I think we've provided satisfactory information for you to make your own judgments.

Andrew Hodge - CIMB Research

Sure. And then just the second question related to the sale -- or the divestment of some assets. I guess, the divestment of those assets, was it a price that looks to be less than like 20% lower than what they were carried at in book? And I guess if we just use that as the empirical data, how does that make you feel against the actual carrying value of the existing not for sale assets in their book even if the sold assets were, like I said, 20% lower than their book value?

Robert C. Larry

We have a wide range of businesses across the global footprint. These 2 businesses that were sold in this period that you're referencing are -- were first and foremost non-core; and secondly, very small. The proceeds against the $3 billion balance sheet, I guess, you -- I would indicate to you that I think that what we've sold isn't -- can't be painted, I guess, across the entire balance sheet with the same brush. Certainly, we're comfortable and confident with the statement of the balance sheet. If we weren't, we certainly -- we would have recorded right down or adjustment. As you look at the balance sheet, the $3 billion of assets as it relates to intangible assets, which I guess is always probably, I guess, the most subject to challenge as it relates to the economic value of the asset. We have a very small portion of our $3 billion of assets currently constituted by intangible assets. We have about $175 million of goodwill that remains and $90 million of other intangible assets. But, Andrew, to respond to your question directly, we're comfortable and confident in the way we presented our balance sheet at 31 December.

Operator

There are no further questions at this time. Mr. Claro, please continue.

Galdino J. Claro

Well, thank you all very much and I don't -- I'm looking forward to the next opportunity for us to get together by the end of the year, the fiscal year. And before that, I will be certainly able to share with you in more details the strategy we are developing going forward. So thank you all very much, and I'll talk to you -- I'll talk with you when we have the opportunity to do so. Thanks a lot. Bye now.

Operator

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

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