Feb 12, 2015
Executives
Todd Scott - VP, IR Galdino Claro - CEO and Managing Director Fred Knechtel - Group CFO
Analysts
Emily Smith - Deutsche Bank Ramon Lazar - UBS Keith Chau - JPMorgan Rahul Badethalav - Commonwealth Bank of Australia Peter Steyn - Macquarie Owen Birrell - Goldman Sachs Scott Hudson - CLSA Limited Simon Thackray - Citi Michael Slifirski - Credit Suisse
Operator
Thank you for standing by 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 12th of February 2014 in United States and Europe; and Friday, the 13th of February 2015 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. As a reminder Sims Metal Management is domiciled in Australia and all references to currencies are in Australian dollars, unless otherwise noted.
As well any references made to percentage change relate to prior corresponding half year unless also otherwise noted. I would now like to hand the conference over to Todd Scott, Vice President of Investor Relations of Sims Metal Management.
Thank you. Please go ahead.
Todd Scott
Good morning and thank you. Joining us on today’s call are Sims’ Group Chief Executive Officer, Galdino Claro and Group Chief Financial Officer, Fred Knechtel.
In addition to today’s discussion we prepared a slide presentation that’s been posted to our website. During today’s presentation Galdino will cover the key drivers, which led to the improved earnings during the first half and the progress we have made on the implementation of our strategy.
Concluding with what we intend to achieve in the balance of the fiscal year. Fred will lead us through a more detailed discussion of our financial results.
I will now turn the call over to Galdino.
Galdino Claro
Thank you, Todd. And good morning everyone and thank you for participating in today’s call.
Before I begin I would like to introduce Fred Knechtel. Fred joined us in October as a Group CFO.
Fred’s leadership, his strategic and analytical mindset have provided immediate value. He is helping me to implement a culture of analytical thinking and continuous improvement into the business and I am very happy to have him as a member of my executive leadership team.
Now let’s begin by turning to slide two please. During the first half of fiscal ‘15 the entire industry faced very difficult market conditions.
During the period ferrous scrap prices fell 15%, iron ore prices fell 25% and our own sales volumes declined 10% over the prior half of the year. This excess fall in iron ore prices put difficult competitive pressures on our key EAF steel producing customers which reduced demand for ferrous scrap.
Despite these market challenges that impacted the entire industry, through operating discipline and the implementation of our strategic initiatives we were able to increase underlying net profit after tax by more than 50% over the prior year. The success we’re achieving, both operationally and financially are a result of our employees hard work, dedication and alignment to the strategy.
No person can change a company but through our combined efforts we are seeing a turnaround of things. We are earning our position as the global metal recycling leader while operating in a safe work place and building strong relationships with the communities where we bring jobs into business.
I want to thank all our colleagues for their efforts and I look forward to seeing what we can achieve together in the years ahead. Our improved bottom line performance was driven by higher margins and a focus on operating efficiency.
As promising as these strong results are we remain in just early stages of our five year strategy. There is still a lot of upside opportunity and work to be done to bring the company to its full potential.
Moving now to slide three please. During the first half of 2015 we advanced the pace of implementation of our five year strategic plan and we’ve done that across our global operations.
We are closing the parts of our e-recycling operations which were unprofitable in both the UK and Canada and rationalizing regional overhead in North America. And to improve our connectivity with the U.S.
domestic steel mills, consistent with our announced strategic plans we appointed Tobin Pospisil as President of our Central Region of North American metals. Tobin is a steel executive with 25 years of experience and well established relationships across the industry.
We established a dedicated project management office to drive the initiatives, to optimize our operational performance. My leadership team has given its full support and engagement to the PMO.
Each optimization is streamed across the group, has been sponsored by a member of our executive leadership team. Paul Wright, our Commercial Director for Europe Metals leads our supply relationship stream, while Darron McGree, our Managing Director for Australia and New Zealand Metals leads our operational excellence stream.
Steve Shinn, our President of North American Metals West leads our logistics streams, while Ralph Mandell [ph] and Michael Lion lead our product quality and services streams for ferrous and non-ferrous products respectively. The PMO and the executive leadership team sponsors met regularly.
Plans are developed and approved by the group. Targets are set and the business takes ownership of established goals.
Using this framework we have been able to raise the level of engagement and accountability across the business. During the second half of fiscal year 2015 we intend to advance the phase of implementation of our strategic plan.
We expect the closure of our non-profitable parts of e-recycling in UK and Canada to be completed in the early part of the second half. Additionally we expect the construction of our new shredder 80 yard expansion in Western Australia to be operational at the end of fiscal year with benefits to be realized starting in fiscal year 2016.
If you now move to slide four please. The accomplishments of our first half give us confidence that our embraced operating principles and practices are being firmly embedded within the company.
We are confident our ambitious goal to improve underlying EBIT by more than 350% by fiscal year ’18 will be reached. The $91 million underlying EBIT for the first half keeps us on track to reach our goals with a clear pathway for significant further EBIT growth.
Turning now to slide five please. Based on the strong first half financial performance, and Sims net cash position, the company determined to pay dividends of $0.16 per share.
This dividend will be our highest paid since fiscal 2011. We believe our strategy will over its term create a considerable wealth for shareholders through both investments into the business for earnings growth and returns to shareholder and we recognize that dividends are an important component of the total return for many of our investors.
Sims remains committed to profit growth. The dividend payment in no way restricts our ability to invest for growth and operational excellence that is consistent with our strategy.
Moving towards slide six now I will transfer the presentation to Fred. So Fred please?
Fred Knechtel
Thank you Galdino. I'm very excited to be a business partner and part of the executive leadership team.
Sims has a lot of upside opportunity and I believe that my analytical approach will drive a higher level of business analytics into the organization as we leverage PMO initiatives to execute on our strategy. I will start on chart seven; despite a challenging market where ferrous prices were down 15%, underlying EBITDA improved 35% from $68 million in the first half of 2014 to $91 million.
The strong underlying EBITDA improvement was driven by return to our core drivers of profitability across the business. The beneficial impacts from currency movement was only minor within underlying EBITDA by $2 million.
North American metals was the largest single contributor to the higher earnings. Underlying EBIT improved $23 million driven by a focus on gross margin and operational cost improvements.
Australia New Zealand Metals underlying EBIT declined by $9 million and was impacted by a set of challenging market dynamics experienced in the first half. Europe metal underlying EBITDA increased by $7 million benefiting from the cost control and an adoption of global best practices.
Underlying EBITDA of our global e-recycling segment improved from breakeven to $12 million driven by better performance in Continental Europe and reduced losses from the operations being wound down Moving to slide eight, North American metals was the largest earnings contributor to the group representing 57% of sales revenue and 36% of underlying EBITDA in the first half. Global e-recycling was the second most improved segment.
From a breakeven condition in the first half of 2014 the business has returned to much healthier state. E-recycling is now a positive and meaningful contributor to the group, representing 14% of total underlying EBITDA.
Turning now to slide nine, on a product basis ferrous metals remains the largest contributor to total sales revenue and tons, representing 66% and 99% respectively. Our strategy of growing our non-ferrous business, particularly in North America has resulted in a positive mix shift towards the non-ferrous in both sales revenue and volume.
We will now take a closer look at each segment starting on slide 10. The strongest evidence of the success of our strategic initiatives can be seen within our North American metal segment.
Underlying EBITDA of $33 million was $23 million higher than the previous half year or over three times. Stronger earnings were driven by higher gross margins and a disciplined approach to lowering operating costs and increasing yields which offset a 12% reduction in sales volume.
The segment also benefited from our increased investments in the New England region and New York City Municipal recycling plant in Brooklyn. EBIT margins increased $9 per tons the highest in three years.
Turning now to slide 11 and Australia and New Zealand metals. Earning in Australia New Zealand metals were impacted by challenging market dynamics in the first half.
Underlying EBITDA of $30 million declined by 24%. Earnings were partially impacted by lower sales volumes which were down 3%.
The segment also was impacted by margin contractions to a greater extent than in other regions while the underlying operations of Australian New Zealand metals remained healthy, unique contracts supply arrangements prevented the business from reacting quickly to the sharp fall in ferrous prices in the first half. We are working diligently with our suppliers on a case by case basis to ensure that we and they can manage this dynamic more profitably.
Looking at the results of Europe metals on slide 12, underlying EBITDA improved 89%. Improved margins were a consequent of lower operational costs and better yields across the region’s three shredders.
The improved operational performance more than offset lower sales volumes of 9%. The region continues to benefit from restructuring actions and the ready adoption of PMO best practices that are now being shared across the Group’s global operating footprint.
This has led to a noteworthy improvement in underlying EBITDA per ton which doubled over the prior period. Now turning to slide 13, for a look at our global e-recycling segment.
Following the decision to exit the loss making operations in the UK and Canada global e-recycling realized a material earnings recovery, while sales revenue contracted by 5% due to the wind down of e-recycling facilities in UK and Canada. Underlying EBIT increased to $12 million the highest in two years.
The stronger profit was driven by reduced losses incurred from closed operations and improved performance in the Continental European business. Moving into the second half of fiscal year 2015 we anticipate additional gains from these restructuring actions to be achieved.
The non-profitable operations in the UK and Canada are anticipated to be fully wound down prior to the end of fiscal year ’15. Now turning to slide 14 for a detailed look at our cash flows during the first half.
At the end of the first half cash and cash equivalents were $9 million higher than June of 2014. Net cash inflow from operations was $53 million, an increase of $15 million from last year.
This was primarily due to stronger net cash receipts from operations, increased dividends from joint ventures and associates and lower interest payments, which was partially offset by increased taxes paid. $40 million were used for capital projects.
The company received $14 million in cash proceeds from the sale of fixed assets. $4 million was spent on the acquisition of two small businesses in North America Metals and Australia New Zealand Metals and finally $21 million was used for cash payments of dividends relating to last year.
I should point out that this balance does not include the cash receipts expected from the sale of our equity stake in CTG. I would now like to turn the call over to Galdino for closing remarks.
Galdino Claro
Thank you Fred. As pleased as we are with the first half results, market and industry conditions remain difficult.
The steep dropped in iron ore prices has challenged the competitiveness of our EAS [ph] steel mill customers. As a consequence ferrous scrap demand and prices continue to be volatile, falling by more than 15% even in the past few weeks.
In the near term we expect the decline in ferrous scrap prices will have a negative impact on supply, leading to elevated levels of competition. As the price relationship between ferrous scrap and iron ore rebalances we expect the demand from customers and availability of supply will improve.
As we ramp up our strategic initiatives in the second half of this year we expect improved operating and commercial efficiencies to be realized, which should assist in mitigating near term commodity market headwinds. However at this early stage of the second half we remain prudently conservative in our outlook.
At this point I would like to open the call for questions that you certainly will have. So operator could you open up for questions please.
Operator
Sure, thank you ladies and gentlemen. Welcome to the question-and-answer session.
[Operator Instructions]. Thank you.
Your first question comes from the line of Emily Smith from Deutsche Bank. Go ahead please.
Emily Smith
Good morning Galdino and Fred and Todd. Just couple of questions to me.
Firstly on the strategic initiative that you successfully implemented in the first half. I'm just wondering if you could give us some sense as to the magnitude achieved in the first half and perhaps some, if you’re expecting - it sounds like you’re expecting an acceleration of those initiatives in the second half of ’15.
I'm just wondering if you could give us some guidance on your payout ratio expectations given I guess the higher dividend recorded today?
Galdino Claro
Well, thanks Emily good to hear you. The continuity of our strategy implementation is at full speed, Emily.
The team is motivated the initiatives underneath each driver of profitability or each pillar of our strategy have been fully incorporated by the team now and we are executing properly as we could see the impact in the first half. We see that continuing through the year and through the years to come till we get to the 350% EBIT improvement that we target at the end of this five year strategy.
So I don’t see any reason for us to be concerned in relation to the speed of implementation. Just the opposite, I think more as we evolve as a team in relation to executing the strategy more confident we become ourselves that really we depend less from the turbulences in the outside environment and more from controlling our own destiny.
So I don’t see any reason to doubt about the continuity of the strategy and the outcomes. We see in the beginning of this second half now that the declining in prices might be slow our -- is slowing down the flow of material and that of course has a negative impact in the entire industry.
But the premises and the foundation of the strategy from the beginning has always been, forget what’s happening in the market. Let’s take what we can control and execute against and move ahead.
So very excited with what we have achieved and very motivated with the opportunity we have ahead of us.
Fred Knechtel
And just in regard to the payout ratio we paid out 45% of EBIT and that will be determined on a semester by semester basis by the Board regarding our policy.
Emily Smith
Thank you.
Operator
Thank you. Next question comes from the line of John Hunt [ph] from Merrill Lynch.
Go ahead please.
Unidentified Analyst
Good morning. I just wanted to perhaps get a little bit more color around the global e-recycling business.
The result looks pretty good, and there was some good expansion there. How should we be looking at the business going forward?
And also if we could just touch on the freight initiatives, they seem to have come down a fair bit this year. How should we look at that going forward as well please?
Galdino Claro
Certainly John. Listen e-recycling is a business that has made past mistakes and we are now correcting the direction of that business.
What we have cut back to is a very core attractive portion of the business that we continue now and we have strong direction in terms of the long-term continuity of that business. Like any business in our portfolio business needs to achieve cost of capital to earn the right growth.
I mean I have been saying that since our initial conversations and I didn’t change my perception of that. But you are right our e-recycling business is showing a very solid foundation for growth and as it evolves and achieves cost of capital we certainly will give continuity to our development.
It’s an important portion of the group today.
Unidentified Analyst
And just on freight as well how does that fit into the margin improvements in the North American business?
Galdino Claro
On what sorry?
Unidentified Analyst
On your freight initiatives the work that you have been doing on freight.
Galdino Claro
On the logistics initiatives, well, listen the whole framework of the strategy is really based on us identifying the right source of raw material, the right transportation system from search to our operations and then at the end to our customers. And those are really case by case, John I mean we are looking at initiatives that maximize loading.
We are looking at alternatives from trucking versus barging, railing all the aspects of logistics and we have now experts in logistics that are fully dedicated to understand those dynamics to, as we discussed before this is a much more logistic oriented business then many people could consider. So most of the achievements we have obtained in the first half are coming as you could see from the optimization phase of our strategy.
I mean the half of the right sizing of our Canadian and UK e-recycling has been [indiscernible]. The part of those savings are impacting our first half but most is coming from optimizing in the freight and logistics part is important part of optimization.
Unidentified Analyst
All right, thank you.
Operator
Thank you. The next question comes from the line Ramon Lazar from UBS.
Go ahead please.
Ramon Lazar
Good morning everyone. I was just wondering there was a few comments around the Australian business and some unfavorable contract impacts.
I was just wanting to see if you could provide a bit more color on when you expect some of those contracts to roll off and whether will be any impact from a continuation of those through the second half?
Galdino Claro
Well, they are more agreements then contracts and how you should be thinking about that is we are contracted for purchase prices a month in arrears and there is a lag, so that we will be paying a higher price for our input then the pricing does and we are addressing that lag on a case by case basis with each one of our vendors. We are looking to see what’s the best opportunity for both us and our suppliers to create value in the value chain to get a better match in a declining price environment.
And just to point out in an increasing price environment there is a still a lag that would show a benefit to the Australia business. So depending on which side of the pricing curve you are on, it’s either a benefit or a detriment and we are trying to better match that cost spread a little better between both of us.
Ramon Lazar
Okay so presumably given the scrap cost decline the impact will probably give worse through the second half or the early part of the second half?
Galdino Claro
I don’t think it’s going to get worse, if the price continues to decline it would probably get better in the first moment as we go through those renegotiations with our vendors as Fred pointed out but it’s for the interest of the vendors too. So I think we’ve had some very positive outcomes of our initial conversations with them because it’s important for the entire supply chain to have a more realistic approach in relationship to the price deployment across the chain, so it can be beneficial for our vendors, for ourselves and for our customers to have a mechanism that correct that lag in the price faster.
So I think the acceptance of that new way of thinking is new strong in Australia as well. It has been very strong in North America.
So I don’t think it’s going to get worse and I only see that kind of equalizing itself with time, not in weeks but certainly it’s not going to take too long for us where we need to be there.
Ramon Lazar
Okay, great. Thanks very much and also just one more, how should we be thinking about the acquisition or contribution from those acquisitions, are they material or generally see those as being immaterial.
Galdino Claro
They are pretty small at this point. I would consider immaterial.
Ramon Lazar
Okay, thank you.
Operator
Thank you. The next question comes from the line of Keith Chau from JPMorgan.
Go ahead please.
Keith Chau
Good morning gentlemen. Quick question from me on working capital and inventory management.
In light of the recent scrap price declines or the acute scrap price declines, have you taken any further measures, I guess to mitigate the potential impact of the scrap price decline or is it operations as usual?
Galdino Claro
See this is very interesting point. One of the major changes we have made in Sims is really to move from the concept of pushing inventory through, to the concept of pulling material to the customer.
So for us the process starts now when we go and identify an opportunity to sell first and that’s the pull system, when we identify sales opportunity we will go back to the chain to identify the best source of that raw material, the best operation to produce that type of configuration of product and the best logistic way to get from the source to the customer. It’s only then we go and buy the raw material.
So most of what we have in our pipeline today is locked in both from the sales price and the buy price point of view so the exposure of the margins through the pipe if you will, is minimum. So we are not operating as typically I would say the industry operates where you go and buy whatever you buy, put in an inventory and then keep praying for the price to go up so you can make money out of it.
And when it goes down you pay the cost of it. We are moving into a more sophisticated system to operate where the margins are protected through the entire transaction from closing of a deal with a given steel mill customer all the way through the buy of the raw material and that’s what’s protecting our margins in declining prices or we will protect our margins also if the dynamics of the industry change.
I like your question because it helped me to explain really how differently we are operating today versus the way we used to operate. Of course it requires a much more transparent mechanism across the entire enterprise.
So the guys selling the product and the operators and the buyers and the transporters they have all to be integrated that supply chain with full visibility about what they are doing so the margin gets protected and the returns is guaranteed.
Keith Chau
And Galdino just to clarify when you say in the past it’s been a push system, has this pull system really been -- only implemented say in the last six to 12 months whereas previously the entire operation or the entire company was operating on a push system?
Galdino Claro
I think the whole industry used to operate on the push system. The lynchpin point of our strategy is really to move from push to pull.
So we implemented a strategy, we are much more oriented towards pull system that starts when Bill Schmiedel and our commercial team goes and sit in front of a customer and understand exactly what type of material they are looking for and the price that they are willing to pay. And from that point on we pull all the raw material through the supply chain in a way that the margin is guaranteed from the beginning.
Keith Chau
Great, thanks very much Galdino, cheers.
Galdino Claro
No problem, cheers.
Operator
Thank you. Next question comes from the line of Rahul Badethalav from Commonwealth Bank.
Go ahead please.
Rahul Badethalav
Good morning. I was just wondering if you could help me get an understanding of where your EBIT per ton or sales margin in North America could get to, I guess on a long-term basis and perhaps an understanding as to what drives the difference between what you achieve in North America relative to your other regions?
Galdino Claro
The strategy drives us to an improvement of 350% in terms of our base year fiscal ’13. So if you do the math reverse there you are going to come to a certain margin that we need to achieve to get to that point.
I will, for competitive reasons I will prefer not to talk too much about margin specifically in country by country and what we are targeting in relation to that. But North America has all the elements to be as profitable as any other portion of our business and it’s marching firmly in that direction.
Rahul Badethalav
Okay, thank you.
Operator
Thank you. Next question comes from the line of Peter Steyn from Macquarie.
Go ahead please.
Peter Steyn
Thanks very much, gents. Just a quick question around the supply dislocation around the falling prices.
How long would you expect pressure to be on volumes and at what point do vendors become more realistic in price expectations?
Galdino Claro
Of course we debate that among ourselves a lot. And there is, depending upon the regional aspect, in Australia for example where most of our vendors have more area to start material and wait for -- with expectations of better prices sometimes it impacts us more than in big centers like New York where suppliers have a limited availability of area.
So they have to let the material flow to make space available. But in general I think it takes somewhere between two and six weeks, that has been our experience for people to really look at that and say well, this has to move.
So I think it will have an impact in the beginning of the second semester as we had in first semester. But I don’t think it’s a long-term thing.
If you go back historically the scrap used to flow not long ago on prices of $150, right. So we are not there yet and of course there are oscillations in this process but I think there’s no reason for panic.
Peter Steyn
Thank you very much, Galdino.
Operator
Thank you. The next question comes from the line of Owen Birrell from Goldman Sachs.
Go ahead please.
Owen Birrell
Hi thanks for the questions. Look I just got two questions for you, just one looking at the e-recycling business.
It’s obviously a fairly different business model to traditional scrap. And you’ve gone from a breakeven position to trying to build out more profitable margins here.
I'm just wondering from an industry perspective what do you think are acceptable margins within this type of business going forward? And my second question comes is with regards to free cash flow and priorities that the business has for reinvestment versus distribution to shareholders.
What is the actual cash demand of this business going forward in terms of the free cash flow that you’re generating over the next couple of years?
Galdino Claro
I’ll cover the part of the question and I will let Fred comment on the cash flow. The margins for e-recycling, we have, in our long-term strategy for e-recycling a very strong definition of margin improvement path to bring this business to cost of capital.
And the first indications that have been achieved in relation to that are very encouraging. So I am very confident that as we march in direction to the implementation of our strategy, the healthy portion of e-recycling that we have under our management now will follow that direction properly.
So it’s hard to define exactly what the margin is, because as you pointed out e-recycling is a combination of different smaller business units that grow from really recycling to asset management and they are very ancient in terms of margin and profitability on those business. So depending upon how we expand the footprint will have different average margins for the business going forward.
But certainly all portions that we have today of our e-recycling business are profitable and promising. And Fred on the…
Fred Knechtel
Yes, so Owen, maybe I can refer you to chart five on the presentation deck, and that describes really how we think about our cash investments back into the business and what we think we want to return back to shareholders currently. And we prioritize our CapEx spending, really around the sustaining part of CapEx and that’s the general maintenance, keeping all the assets going that we have, and then expansionary CapEx.
And in the near term that balance will probably change a little bit and we’ll be investing more in our PMO projects as we’re optimizing the business and we’re expanding and we’re growing the internal value from that perspective. So expect CapEx spending to be roughly equivalent to depreciation, pretty much in the near term.
And -- sure go ahead.
Owen Birrell
Sorry I was going to ask, in terms of sort of I guess, acquisition-led expansion CapEx, for even just new project, what sort of hurdle, the return on capital hurdles do you have for new projects?
Fred Knechtel
Well for our hurdle rate we look at the cost of capital return and what we do as we rank and prioritize on our CapEx based on net present value in return, we look very closely at pay back as well, what that is equivalent to value of projects. And so capital is not unlimited, as we know.
So we’ll work through our prioritization that creates the most value for our company and we’ll work it that way and the hurdle rate is we need to earn a return greater than our cost of capital. So that would be the minimal return that we will be looking for.
Galdino Claro
That’s the entry gate.
Fred Knechtel
Right, and then we prioritized based on that. And then with some of our other cash flow we are still focused and will continue with our policy of paying between 45% to 55% of the EBIT back to shareholders in the form of dividends -- I am sorry no PAT, NPAT and we will continue to look at select acquisitions.
It’s not part of our immediate strategy right now. We are going to go through out optimized phase and when the opportunities come up for acquisition then I think we are in pretty good position from a capital structure standpoint to be able to fund those when they arrive.
Owen Birrell
Right, thanks.
Operator
Thank you. Your next question comes from line of Scott Hudson from CLSA.
Go ahead please.
Scott Hudson
Yes, good morning gentlemen. I just had a quick question on the streamlining benefits that you highlighted in the strategy documents, you talked about $32 million over FY ‘15 and ’16, with 50% to be realized in FY ’15.
Could you just give us an update on how much you think of those benefits flow through in the first half results and that you are still confident of the $60 million benefit in the second half?
Fred Knechtel
So we are not going to be commenting in the half year specifically, what will be contributed in each one of the category. But what I can tell you is that we are on plan, we are on target for achieving the goals that we’ve presented everyone and we are confident that at the end of the year that we will achieve the goals that we put in front of you.
Scott Hudson
And then in terms of the benefits in the e-recycling business how much of that $12 million was benefit as a result of the streamlining benefits?
Fred Knechtel
We are still incurring in some costs related to discontinued operations. So the major -- not the major but the larger proportion of the $60 million savings will come in the second half.
Scott Hudson
Okay, And then so could I just clarify did you say the currency benefit through the first half was only $2 million on EBIT contribution?
Fred Knechtel
Yes, that’s right.
Scott Hudson
Does that part of the majority of those earnings were incurred in the, I guess the first quarter?
Fred Knechtel
No, that would be towards the back end. The currency really started moving towards the end of the semester, so that’s when we saw the major impact.
Scott Hudson
Yes, so I guess you saw a 7% sort of year-over-year decline in the currency. I mean if you take the sort of the second half run rate or the second quarter run rate, I mean does that imply that the majority of your earnings were weighted towards the first quarter?
Fred Knechtel
It’s on a transaction by transaction basis, the currency impact. So there wasn’t a great impact in the first part of the year.
The currency really started to moving, so if you look at it from the end of the year there is going to be a greater currency change relative to the earnings impact but as we get to a steady state and currency stays the same then there will be more of an impact in the second half.
Scott Hudson
Okay, and then just in relation to your explanation earlier Galdino about your pulling, I guess strategy, we saw some of your competitors kind of get impacted by customers cancelling or kind of renegotiate contracts. What the risk that you have with regard to that -- to your strategy with regards to that pulling materials of customers sort of reneging on contracts?
Galdino Claro
We sporadically, we have some situations in which our customers want to renegotiate contracts but really it’s has been far from material. We have a very good relationship with our customers and they are all large institutions, most of them are.
And so we have had few new customer that during the course of this first semester argued about price that has been established in contractual terms but and they were renegotiated, not really material at all.
Scott Hudson
And then how long does it take you to I guess fulfill those orders once you receive them?
Galdino Claro
Well, typically the whole flow is about 30 days. So it’s somewhere between four and six weeks.
Scott Hudson
Okay, that’s great, thanks.
Galdino Claro
It depends upon the size of the vessel, where it goes and it’s a big variation there but in average I would say four to six weeks.
Operator
Thank you. Your next question comes from the line of Simon Thackray from Citi.
Go ahead please.
Simon Thackray
Thanks very much. Good morning gentlemen.
A couple of questions, really following on from some of others that have been asked. Allow me to be stickler, but Galdino with the strategy in July last year, the strategy that you did actually say that you would give us clarity on the streamlined optimized benefits as we progress each half.
And I am interested as Scott is just to understand at least what percentage out of the buckets of those benefits pools, how much was realized in that first half, firstly. Second question would be about Australian volumes, which were actually were surprising disappointing in that first half.
If you could just, I actually would have thought as mining was slowing down. Scrap would have probably going up but perhaps I’m reading that the wrong way, maybe you can give me some clarity on that.
And then finally returning to the three horizon strategy for streamlined optimizing growth, which was premised on FY ‘13 volume as the baseline, if there was a challenge structurally to the volume that you would say you anticipate out for the next five years or the five years to FY ‘18 would that necessarily change the total benefits that you think you could deliver on the strategic initiative?
Galdino Claro
All right so starting on the reporting of the three drivers of profitability, the three stages of the strategy there, I mean the sugar line [ph] we’ve discussed it and you know the impact in this first year is half of the $32 million, $16 million above and we’ve already said that a big part of it’s going to come in the second half, because we are still incurring on cost of discontinued operations in our SIS Canada and the UK. The growth phase is really not happening yet as you could see in our volumes and revenue.
So the majority or the totality I should say of the improvements that we have seen in fiscal year ‘15 first half and certainly in the second half or probably in the second half, will come from the optimization. If we were not focused on optimizing our supply chain and deploying the strategy we have today, we would be in a much tougher situation here in this conversation with you today.
And so it is almost the totality what you see impacting our bottom line today is coming from the optimization phase. So can you repeat the other part of the…
Simon Thackray
I was talking about the volume dynamic in Australia.
Galdino Claro
Yes, the volume dynamics in -- you are talking about Australia specifically or talking about it in general terms.
Simon Thackray
No, Australia just the dynamic in Australia, but given the commodity slowdown. What you would have expected in terms of scrapping volumes and I would have thought the scrap availability would be increasing.
So the volumes so maybe were little confusing, I am just trying to understand what happened in Australia?
Galdino Claro
On the first half what happened in Australia is that as the prices declined the suppliers, the vendors waiting to see if there is a change on the pricing dynamics, that would accelerate their profitability. So they are holding in volume and that is slowing down the flow as we discussed before depending on how long it takes.
You do of course continue to flow but sometimes there is a delay, driven by the reduction prices. In Australia it tends to be, as been historically more eminent in other regions where we operate.
Simon Thackray
Terrific and then just the baseline of benefits because it’s referenced to FY’13 for the 350% improvement in EBIT. I presume if there were hypothetically a structural change in volume would that impact the total amount of benefits that you expect to get?
Galdino Claro
No, we do not see any risk on our five year targets driven by that. The fundamental basis of our five year strategy is to improve underlying margins.
So it’s margin focused and to this point we don’t see any risk on the implementation. It’s as you could see we are extremely focused on making sure that every volume we put through the pipe has a margin associated to that, and that’s the scope of the strategy.
Simon Thackray
I think that’s excellent, Galdino because I understand exactly where that margin provident comes in and you are certainly demonstrating that in the results. So that basically underscores the leverage used to volume.
Galdino Claro
Yeah, of course if the volume comes to a point where we need to redesign and flexibilize our fixed costs to keep the profitability protected, it will happen too. So what Fred and I have been working diligently now is how do we move more cost towards -- the fixed I mean to the variable end of the equation, so we can offset variations in volume more efficiently.
So you’re right. There is an impact on that end.
But much less than the impact on volume. If you look at components of our cost, the raw material cost, as we discussed before represents sometime 75% of our total cost right.
So if you buy right your chances to succeed are substantially higher than if you operate right. So not the operation is not extremely important, it is, but it’s more of a buy sell business and logistics oriented then really the dilution of fixed cost.
Simon Thackray
Excellent, just I'm going a little bit more short-term, which is a little bit more myopic I guess but short-term yes we have seen some interesting dynamics but in the steel market, AIF market and of course the scrap market this quarter in terms of the trend on the volume, what would be the expectation, what are you seeing currently in terms of delta, in volume of delta and demand in this current quarter, [indiscernible], the second quarter, so Q3 on Q2 what would be the trend or percentage trend in volume?
Galdino Claro
Right, it’s harder to say. I mean the beginning of the second half is slow, as it has been typically, right.
If you recall last year’s as a consequence of the weather [ph] we also had say the same impact. And I don’t think this is going to be especially different.
I mean the winter time in the Northern hemisphere slows down the flow of scrap. Steel mills get a little more conservative and I think it’s happening this year.
It happened last year. But again I see that as the factor that will impact weeks, not months going forward.
Simon Thackray
Got you. That’s very helpful.
Thank you gentlemen.
Operator
Thank you. Next question is from the line of Michael Slifirski from Credit Suisse.
Go ahead please.
Michael Slifirski
Thank you. I got four pretty straight forward questions.
First one, I'm really quite confused by your guidance. I listened to your last response and if I'm reading you correctly you’re saying that volume dislocation is very short-term, that will recover.
The connection between iron ore and scrap you are saying when it normalizes. I would have thought that had normalized.
So I am interested in your view why there is more normalization to occur. So are you saying that second half volume should be the same as first half volumes, margins should be higher and then you get the benefit of the cost ups or are you saying the other way?
I could read it either way from your guidance points.
Galdino Claro
Well you practically answered most of the questions you are asking. So I’ll probably repeat what you have said.
I don’t know, I don’t have the elements to evaluate what’s going to happen in the marketplace and how long it’s going to take for scrap prices to go up or down and based on way we decided to operate our business it’s really that’s relevant and I think the results of the first semester show to you and to our shareholders that this strategy orient us towards the direction we should go. However I think the slowdown in flow on the scrap that we see now in the beginning of the second semester, as I said will be a matter of weeks and things go back to normality.
So I don’t see that being a major factor on impacting substantially the second semester. Like we had last year that factor associated with the winter tend to create a gap, a lagging on the material flow that is almost typical in our industry or has been typical during the last few years.
I don’t see that being a factor that should be taken into consideration or that we should be worrying too much about it.
Michael Slifirski
Okay. So in terms of margins you believe you could extract the same margin or improving margin from a scrap price that’s more than $100 low and non-ferrous prices about 20% lower?
Galdino Claro
I don’t know from you have taken the $100, in the spread, it’s the same thing.
Michael Slifirski
Say it again.
Galdino Claro
I think the question is for example if prices went down to $100 could we maintain our…
Michael Slifirski
No, no. I am not talking of that.
So I was saying that the -- as you call the semester the second half, scrap price is materially lower year-to-date than what the first half was. The non-ferrous price is materially low as a starting point.
So with that basis as background can you achieve the same margins?
Galdino Claro
Margins are our priority and we will extract the largest margin we can to protect the returns that we have to generate to you. So we have focused on that and we’ll continue to focus on that as we go through the second semester.
I don’t see any reason for us to re-evaluate our orientation towards margin protection as a consequence of the scrap prices being lower now than they have been six months ago.
Michael Slifirski
Okay, thank you. Secondly with respect to fuel prices, the lower energy cost, lower diesel price is that an advantage to you.
Do you take that and how does that impact your suppliers and your freight? It would seem to be quite a kicker for you.
Galdino Claro
It gets offset because it impacts the entire industry but it has a positive impact in the first moment.
Michael Slifirski
Okay, thank you. Thirdly your guidance, the 350% EBIT growth, when you gave that currency I think was $0.94.
Today it’s sub $78, $77 does that EBIT target made all terms then get revised up by that currency change?
Fred Knechtel
It does, the currency of course impacts that, yes.
Michael Slifirski
So is the math just that number, the implied number divided by the change in the two currencies point to point?
Fred Knechtel
That’s yes, I think so.
Michael Slifirski
Thank you. And then finally with respect to cash generation you said you had a reduction in volume replacing high priced inventories with low priced inventories across the business.
Why wasn’t the case generation stronger or do you expect that benefit to come in the second half, the second leg down in metal prices?
Galdino Claro
Can you repeat the question?
Michael Slifirski
Yes, so I am looking at the operating cash flow that you generated in the context of falling prices and falling volumes. So normally when you are selling more than you are buying and you are buying back at lower price than what you sold, you should see a significant working capital release and therefore I would have expected the cash in the half to be higher or is it that those changes are more a driver of cash release in the calendar half?
Fred Knechtel
No, we are not buying more than what we sell or vice-versa. We are only buying when we can afford to protect the margin.
So it’s a very interconnected activity. When we look at what the sales price is and then we drive backwards to see how much we can afford buying, protecting the margin and what type of processing we’re going to have, which operations going to be processing it, from where we are going to buy, what’s the best way to logistically bring the material through the process other way from first to the customer.
So it’s not an -- it’s an equation more than physical activity and that’s the way you can make sure that when you buy something there is a margin associated to that transaction all the way through to this.
Michael Slifirski
Yes, I understand but the question is more related to the volume decline and the price decline, that should release significant working capital, if you go point-to-point buying less volume than what you were. So you’re releasing working capital there and you are buying at a low price, there should be a significant working capital release.
So I'm just wondering when we actually see that in the cash flow statement?
Galdino Claro
So just to point on the inventory it is a lot of dynamics that affects that, impacts inventory. So our absolute inventory in tons could go up slightly and that’s a matter of matching customer demand and has different dynamics between the mix that we have of ferrous and non-ferrous.
So from a working capital release we have -- we’re not really seeing a reduction in the inventory levels from a cash standpoint. The working capital investments really more around payment terms with our suppliers and vendors year-over-year.
And I understand you point that you would expect to see a little bit more cash released from that dynamic but the last year there was a different dynamic on payables and customer relationships and we manage them on a regular basis there’s always a trailer between the terms and the price, and when we need the absolute material and when we’re pushing it off. So I think you’re thinking about it in the right way on an absolute term but there are some dynamics that happen within the months that maybe change that and we would expect that once that normalizes out that we’ll see more cash generated from working capital certainly in the second half.
Michael Slifirski
Okay, thank you.
Operator
Thank you, ladies and gentlemen. That’s all the time we have for questions.
I’ll now hand back to our team for closing remarks.
Galdino Claro
Well, thank you all for your questions and I will be available for conversations later on one-to-one, if you reach out to us, via talk and looking forward to meet with you guys six months from now.
Operator
Thank you. Ladies and gentlemen that does conclude our conference for today.
Thank you for your attendance. You may all now disconnect.