Cleanaway Waste Management Ltd

ASX:CWY

Thank you for standing by, and welcome to the Cleanaway FY '24 Half Year Results Briefing. [Operator Instructions]

I would now like to hand the conference over to Mark Schubert, Managing Director and CEO. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining Cleanaway's financial results briefing for the first half of FY '24 financial year. My name is Mark Schubert, CEO and Managing Director of Cleanaway. I'm joined by Paul Binfield, Cleanaway's CFO; and Josie Ashton, our new Head of Investor Relations. Firstly, I'd like to begin by acknowledging the traditional owners of the many lands on which we meet today and pay my respects to elders past, present and emerging.

I'm going to start with an overview of the financials and the progress we've made strengthening our foundations. Paul will then go through the financials in detail before handing back to me to walk you through the performance of the operating segments. I'll then provide an update on the strategy and our priorities for the rest of '24 before opening up for questions. I'm going to take the disclaimer as read. And so please turn to Slide 4.

On behalf of the entire Cleanaway team, I am proud to report that we delivered a strong set of financials for the 6 months ended December '23. We improved operating discipline and we made significant strategic progress towards delivering Blueprint 2030. Across the group, we saw new business wins and growth from existing customers, supported by operating and discipline. This was complemented with the recovery in our Queensland Solids business and the emerging recovery in health services.

We delivered a 160 basis point increase in EBIT margin as the benefit of our branch-led productivity and efficiency initiatives improved performance. During the half, we launched our VIC CDS operations. We mobilized to the IWS Santos contract and accelerated our plan to transition the GRL FORGO plant, which has now been renamed Eastern Creek Organics in order to meet our customer needs.

Our landfill gas capture and monetization program is reducing our emissions. And our methane reduction is tracking 15% ahead of the planned '24 target emissions trajectory. Our operating and strategic momentum continues to build and we are on track to deliver our FY '24 EBIT guidance of approximately $350 million as well as our midterm financial ambition and scorecard, which Paul and I will talk to you about today.

So if we turn to our financials on Slide 5. All of our key financial measures showed pleasing growth versus the prior corresponding period, reflecting the improving performance of our underlying business, driven by our strategy and the actions taken to resolve recent headwinds. Continuing on from the strong EBIT growth for the first half, underlying EBIT was $173.9 million, up 25.7% on the PCP as a result of growth in our New South Wales and ACT solids business, CBS business, liquids and IWS businesses and the recovery in commodity prices, particularly the OCC price.

Our operational excellence initiatives and our recovery plans are working and that's as evidenced with the turnaround in Queensland Solids and our health service business returning to profitability.

Particularly pleasing was the expansion of our EBIT margin by 160 basis points and the 90 basis point increase in our ROIC. The increase in these measures highlights the benefit of our efforts to systematically empower, enable and equip our frontline teams to make thousands of great decisions every single day. And in doing so strive and deliver broad-based improvements. The directors declared a $0.0245 per share interim unfranked dividend, in line with the prior corresponding period.

Moving to the next slide. 2 years ago, we made safety in the environment foundations rather than priorities. And that was for the simple reason that we never want our frontline teams to have to choose because the foundations always come first. As discussed at the Strategy Day at [ Perry Roe ] in June last year, we are committed to the execution of our 5-year HSE strategy and plan to drive progressive and sustainable change in this area.

Our goal remains ensuring all Cleanaway team members keep each other safe. And even though our [indiscernible] for the period of 4 showed some improvement compared to the same time last year, we continue to focus on implementing our improvement road map.

We started our critical risk program in August to redefine high consequence risks, including process safety, personal safety and psychosocial risks and the environment. In October '23, we implemented a new HSE culture framework to further embed expected behaviors. We developed a 5-module HSE leadership program for all leaders called Stronger Together. And to manage the increasing fire risk, we are progressively upgrading our facilities with rapid detection and response equipment. And we invested $6.3 million in the half, installing 78 fire monitors at 40 higher-risk sites.

As you can see in the chart on the bottom right corner, we have seen an improvement in the number of environmental notices issued. Although it's worth noting we do self-report as was the case with 5 of the 14 notices for the period, we are working hard to improve our environmental controls and compliance and this is translating to improving and stronger working relationships with both local communities and regulators.

Moving to Slide 7 and an update on our people foundation. During the half, we saw the benefit of a stabilized workforce, translating into initial financial benefits. The strategies that we've discussed with you to reduce vacancies and turnover are working. Replacement vacancy levels have now returned to slightly above historical levels of 300 to 400 roles and voluntary turnover has reduced significantly. Voluntary turnover for the 7 months ended 31 January 2024 was 17.6%, which is in line with our plan for the year. That said, we are now focusing on reducing our first-year voluntary turnover rate, which remains high.

So in addition to having stay conversations, improving our onboarding processes and undertaking targeted site culture reviews, we will increase our support to those relatively new to their role to help them grow in proficiency and confidence. We have reached our target of at least 40% female leaders reporting to me and we're getting close to our 40% target for female leaders reporting to the execs that report to me.

However, we are behind target for female participation across the group. In addition to the successful women's driver academy, we are looking at how we can make our ships more flexible. In a step that we see is supporting both increased female participation as well as our cultural refresh, we rolled out our Respect@Cleanaway program to all employees. And this will provide a foundation for a safe, inclusive and high-performing culture that we're building.

With that in place, excitingly, we will launch our new values during the second half of FY '24, where our focus will be on the self-reinforcing mechanics that bring them to life every day. For example, as part of our new values, we want our teams to pursue opportunities to improve and to deliver outstanding results with real ownership.

To reinforce this ownership much deeper in the organization, we are introducing a leadership incentive plan for approximately 650 leaders who don't currently receive LTIs and we'll align them with the delivery of the stretch LTI achievement of $500 million of EBIT in FY '26.

I'll now hand over to Paul for the financials.

Thank you, Mark. So turning to Slide 9, where I'll unpack the P&L from a group perspective. Unless otherwise specified all the comparisons I refer to are going to be against the prior corresponding period. As Mark has outlined, this is a really pleasing result driven by strong underlying performance across all segments of the business with clear evidence of strategy delivery and the headwinds from prior periods resolving.

Net revenue of almost $1.6 billion was 7.9% higher with higher revenue across all segments, primarily driven by contractual price increases and underlying organic growth. Underlying EBIT of almost $174 million was 25.7% or $35.6 million higher and EBIT margin was 11%, up 160 basis points. This reflects organic growth across most of the business and the realization of branch productivity and efficiency initiatives across the group, including initial modest gains to the stabilization of labor. Furthermore, we benefited from the restoration of earnings in the Queensland Solids business and a strong performance from both New South Wales Solids and also the National Liquids businesses as well.

So with the market for Cardboard known as OCC stabilizing, we're also benefiting from a recovery in the contribution from commodities. Depreciation and amortization expense, so D&A is $1.3 million lower and that's been driven by the landfill amortization expense being $5.9 million lower. The landfill airspace asset is amortized based on a fixed dollar amount per cubic meter. Hence, fewer cubic meters consumed in the period due to lower volumes and improved compaction results in a lower amortization expense. So Mark will discuss this more in detail in the Solids segment.

Underlying net finance costs increased by $11.5 million or 25.3% to $56.9 million, largely attributable to higher interest rates and that's in line with our prior guidance. Despite the higher net finance expense, underlying NPAT for the period of $82.7 million was almost 24% higher. Underlying EPS was 23.3% higher at $0.037 and ROIC increased by 90 basis points to 5.3%. The group remains comfortable with its banking covenants and at a leverage ratio of 1.90x at 31 December.

So moving on to Slide 10 and net operating cash flow. Pleasingly, net operating cash flow was $229.6 million, up $26.2 million from the PCP. The cash conversion ratio of 88.2% remains really solid. The cash outflows associated with underlying adjustments relate largely to payments made to the new term rectification, which was fully provided for last year and also the customer connect project costs related to customization, configuration of cloud-based software and hence, these costs cannot be capitalized.

Directors declared an interim unfranked dividend of $0.0245 per share. Dividend franking will recommence with the final dividend payable in October as the group resumes tax payments in the first half of FY '25.

So moving on to CapEx and capital allocation. And I will spend a few minutes on this slide because I think this is a real interest to a broad group of investors. Our first half CapEx is just over $230 million and we remain on track for FY '24 CapEx to be in the range of $430 million to $450 million.

The split of CapEx for the period is broadly in line with the guidance that we provided with maintenance CapEx run rate being approximately 75% of D&A and our target of growth CapEx for the year of approximately $150 million. Whilst the focus of HS&E capital is typically maintaining regulatory and environmental compliance, in the first half, we spent capital on landfill gas infrastructure and fire-suppression projects, both of which generate financial returns.

So landfill gas infrastructure in the form of improved gas capture and the generation of ACCUs or carbon credits, which can be monetized and fire suppression equipment in the form of less disruption caused by major buyers and ultimately, lower insurance premiums. Since the start our Blueprint 2030 landfill gas program in July of '22, we've drilled and reconnected approximately 480 wells and our monthly capture rate has increased by 66%. As Mark has mentioned, our methane reduction is currently tracking 15% of our FY '24 target trajectory.

So on business capital is that capital required to maintain existing revenue streams. So for example, new trucks required on the rollover or renewal of existing customer contracts. The incremental return on this capital is typically modest. And whilst there is often no incremental revenue, a new truck will be more efficient, it will be cheaper to run and more reliable. And hence, we benefit from improved customer service. The investment in our fleet is significant and we're in the early stages of further developing strategies to optimize returns from this critical asset.

An important stay in business project that we've undertaken this half was the insourcing of the landfill operations at Kemps Creek, so replacing an external contractor with our own team and our own yellow gear. The financial driver behind this decision was the improvement in compaction at the site and hence optimizing the use of precious airspace. And as you can start to see an amortization expense, that efficiency benefit is being delivered.

So turning now to growth CapEx. We continue to take a disciplined approach to making our investment decisions and seek ways to identify how we can improve our capital allocation process with the aim of optimizing returns. Our investments are diversified across a large number of projects, removing any significant concentrated project delivery risk.

In the last half, we lifted the hurdle rate used to assess capital projects, reflecting the higher interest rate environment and also reflective of the fact that we have more opportunities than capital. We also prioritized capital-light solutions to meet our customers' needs. We've strengthened the resourcing and our project delivery team to support the increase in the number of organic growth projects.

And we're increasing the cadence of our post-investment review process to strengthen our learning culture. So during the period, we deployed almost $84 million of growth capital into the business and this is a key source of earnings growth on one of the building blocks in meeting our midterm financial ambition.

So on this slide, we've detailed for you the major growth capital projects for the year that form part of the delivery of Blueprint 2030. So just talking to a selection of these. The rollout of the Victorian CDS network has been completed and that went into operation on the 1st of November. The IWS led Santos total waste management contract has also been mobilized in the period. So both of these projects will deliver modest earnings in the current year, but a full run rate next year.

Our CustomerConnect project is also progressing well and is on budget and timetable. The first element of release one is going live this weekend. And as we previously explained, there was both a CapEx and an OpEx element to the over $100 million project spend. The OpEx component, we've taken as an underlying adjustment given the scale and transformational nature of this project.

Our Western Sydney MRF is a major projects and is progressing well and it's due to start commissioning phase this time next year. There will be no material contribution from either of these projects until FY '26. So as previously discussed too, we're progressing the 3 energy from waste projects in a capital-light manner to create optionality. The primary focus of the current investment is on design and approvals for the projects.

So passing it back to Mark to take you through the segment results.

All right. Thanks, Paul. Moving on to Slide 13. Solid Waste segment net revenue was up 5.2% on the PCP with EBIT up 27.7%. Looking at our solid EBIT drivers, growth was driven by New South Wales ACT Solids and the turnaround in Queensland Solids, which is tracking ahead of plan and also growth in our CDS business.

Price discipline was supported with cost discipline. The contribution from commodities is up when compared to this time last year as prices recovered and the OCC market stabilize. Landfill EBIT was higher than the PCP, despite lower volumes and I'll talk more to landfills on the next slide.

Pleasingly, we saw the initial benefits of fewer job vacancies and improving voluntary turnover, emerging in the form of improving efficiency metrics and customer service stats. However, we acknowledge we still have work to do here and I'll talk more about that also shortly. EBIT growth for the period was tempered due to higher repair and maintenance costs driven by mechanic shortages and increased use of more expensive third-party mechanics and reduced activity in the construction industry, impacting C&D collection volumes.

I do want to talk a little more about the New South Wales ACT Solid performance because this is a great example of the combination of the strength in our underlying vertically integrated business, where we saw growth in transfer station collections and organic volumes and the benefit of our branch-led operational excellence initiatives, which at the same time, delivered increases in labor and network productivity. Our CDS business had a great half. In the existing business outside the COVID period, December '23 and January '24 have been a record month for the New South Wales CDS scheme.

And Queensland volumes are benefiting from the program expanding into wine and spirit bottles. We also successfully launched our VIC CDS operations, which commenced on the 1st of November. It's pleasing to report that we are already seeing big volumes tracking in line with expectations. In relation to our FOGO blueprint, our customers are asking for this service to be available as soon as possible as they seek to meet the demands of their rate payers and state government legislation requirements.

So in response to the increasing demand, we've accelerated the transition of our Eastern Creeks Organic side, which, as I said is the new name for GRL, to get this capability in place during FY '25.

Let's turn now to spend some time on the Queensland recovery and our landfill performance. The Queensland Solids team have done a great job turning this business around following the weather-driven challenges of 2022. As mentioned, the restoration of the Queensland Solids business has come through earlier than expected and the business is now set up to operate without the New Chum landfill. The new Queensland Solids management team were amongst the first to roll out visual management boards to their branches and these have proven a great success and of course, are now used across the group.

The VMBs were instrumental in supporting the effectiveness of the branch-led data-driven operational efficiency initiatives, which have driven increased productivity, particularly in relation to labor, lower operating costs and increased customer service. For example, SIFOR or service in full on time has increased to 99.3%, up from 97.6% in the previous half.

If we move on to a few insights on our landfill results. At a group level, while landfill volumes were down on PCP, EBIT was up as the respective management teams focused on balancing price and volume to optimize returns as well as delivering efficiency initiatives.

Lower volume, but a higher EBIT contribution from landfills is indicative of a more efficient use of our precious airspace through improved compaction and efficiency measures. This leads to a lower depreciation and amortization expense and ultimately to lower CapEx on sales development in the future. Continued competition, particularly in VIC at MRL was met through a combination of site-specific strategies to optimize each site's performance and returns for the period and over time. These included pricing discipline, mix shift to higher-margin waste codes and improved efficiency measures around compaction and customer turnaround times.

We now move on to Liquid Waste and the Health Services segment, where revenue increased 13.8% to $348.2 million, while underlying EBIT increased 8.6% to $28.9 million. Underlying EBIT was 8.3%, down 40 basis points from 88.7% on the PCP, but up from 7.3% from second half FY '23. This margin variation reflects the performance of the Health Services business that did not return to profitability until Q2 FY '24.

The LTS business or Liquid & Technical Services business, revenue grew 18% on PCP. The business benefited from a number of high-value projects secured during the period, including the ongoing delivery of its large-scale nickel site rehab project for BHP and continued work with government agencies, including the recycling of expired hand sanitizer.

On the 21st of August 2023, LTS completed the acquisition of Australian Eco Oils, which trades under the Scanline brand and which is delivering in line with the business case. LTS continues to build on its market-leading capabilities and growing reputation of being able to treat, reuse and dispose of complex, hard-to-treat waste streams. During the half, LTS signed 2 key statewide household recycling community contracts and was awarded the stewardship of the national paint recycling program Paintback for the next 4 years.

Health Services returned to profitability in Q2 and is on track to deliver its targeted annualized run rate of $15 million of EBIT in Q4 of this financial year. The commissioning of our new autoclaves at the end of FY '23 was an important milestone in the turnaround story, but it was only part of it. The Health Services business has implemented a broad range of initiatives, covering sales, pricing, customer service, route efficiency and production efficiency in all states. And it's their impact, combined with the new autoclaves that we now expect this business to return to its pre-COVID profitability levels in the next financial year.

Hydrocarbon revenue was up 5% on PCP, while EBIT was marginally down. This is a good performance given the lower average oil price in the period. This was achieved by deliberately focusing on selling higher margin, higher quality base oil to domestic customers that offset the impact of the lower average oil price. Growth in Cleanaway Equipment Services revenue was driven by new customers and price increases. And during the half, we continue to investigate options to further leverage the circular nature of the hydrocarbons business.

Moving on to our third operating segment, which is Industrial & Waste Services. IWS revenue increased 15.3% to $210.5 million and underlying EBIT increased to $15.6 million, driven by new contract wins and increased activity with existing customers such as Santos and [ Weaver Energy ]. Cost escalation clauses and rate card increases offset rising input costs and a project management office was established to optimize project delivery and returns. The business -- this business has gone from strength to strength over the last 2 years and delivered on the strategy to increase the portion of its surfaces to Tier 1 oil and gas and resource companies.

During the half, it mobilized to the national Santos contract and continue to have an impressive re-sign rate for existing customers and win rate with new ones. As they have grown and been focused on larger, higher margin, higher value tenders and renewals, they've also been managing their customer tail for the benefit of returns.

If we now move on to the strategy progress and outlook. You will have seen our strategic value creation staircase before, which shows how our strategic pillars come together to create value for shareholders. If we start with our existing footprint of prized infrastructure assets, which are naturally exposed to GDP plus growth. We then apply our operational excellence initiatives like VMBs, value drivers, data analytics and cultural improvements, which are aimed at margin expansion. We then add accretive infrastructure growth with recent examples being Eastern Creek Organics, Western Sydney MRF, VIC CDS or new contract win related infrastructure.

And then we integrate it together for customers, presenting our services and infrastructure in a high-circularity low-carbon way with great customer service. And this will, in part, be enabled by the investments that we're making through CustomerConnect. And then we believe that done well, this will be increasingly hard to replicate at scale. And therefore, over time, as customers seek high circularity and low-carbon solutions, our market share will grow.

Now to bring this to life even further, our FY '26 EBIT growth ambition and improvement in ROIC comes from the same 3 sources versus the baseline of FY '23 EBIT of $302.2 million, approximately $50 million will come from restoring performance of Queensland Solids Health and Labor, at least $50 million from operational excellence improvements and approximately $50 million from the incremental returns from growth projects between FY '24 and FY '26. And it's the operational excellence bucket where we see more opportunity and where we are aiming internally to deliver more than $50 million EBIT.

So if we turn to our progress. On this slide, we summarize the 3 key restoration areas, which also form part of our FY '26 ambition and scorecard. We've already walked through the turnaround in Queensland Solids and how it's tracking ahead of expectations and updated you on the Health Services restoration, which is tracking in line with expectations and forecast to deliver the annualized run rate of $15 million of EBIT in Q4 of this financial year. Where we are tracking behind is in relation to labor. Like I said, we've reduced our vacancy levels and we're seeing reduced overall turnover levels.

We've also made good progress on closing out our backlog of enterprise agreements. However, we are seeing higher first year voluntary turnover and not surprisingly, in some areas, lower productivity from less experienced team members. Given this comes after a period of rapid recruitment, we're increasing our support to those relatively new in their role to help them grow in proficiency and we're improving onboarding as well as conducting targeted stay conversations and site culture reviews.

So whilst we are seeing productivity improvement in the first half coming through in the results and through our value drivers on visual management boards at site levels, the level of historical turnover of our workforce means this is lagging behind where we'd like it to be. That said, the strength of our VMBs however means that our leaders can target the improvement activity and support to where it is most needed.

Moving on to operational excellence initiatives. The development and deployment of our data analytics tools are an important part of the enabling of our frontline leaders to manage and improve their operational performance in real time. I'm not going to spend too much time on this slide as we dive into the detail of this Blueprint initiative at our Perry Roe Strategy Day in June last year. But as those of you who were there might recall, these tools are all about the actions they enable in our frontline.

Listed on the slide are a sample of those tools which we're using in our branches today. Whether it's helping drive a conversation to manage customer profitability or supporting the management of overtime at any one of our 330-plus branches, providing leads to the sales team or managing our owner drivers better, these 4 tools are indicative of how we're using data analytics to improve our margins by equipping leaders at all levels with easy access to real-time value drivers key to their business.

We move to the next slide. Cleanaway's mission is making a sustainable future possible together. And when we talk to customers about sustainability, it boils down to circularity and carbon. Now what we've put on this slide is 5 examples of how we're bringing high circularity and low carbon to life.

Starting on the left on landfill gas, we've been focused on increasing landfill gas capture by drilling new wells and installing increased [indiscernible] capacity. At the same time, we are investing in landfill gas monetization, firstly, through increasing our generation of renewable electricity and exploring options to sell renewable gas to our customers, particularly those with hard-to-abate operations.

We recently demonstrated the use of HVO100 as a diesel substitute to decarbonize our fleet. Based on using Australian used cooking oil as a feedstock, HVO100 offers 91% fewer greenhouse gas emissions with no infrastructure modifications needed and minimal capital investment. It's a scalable drop-in option for fleet decarbonization and maintains both vehicle performance and payload.

On energy from waste, we continue to progress, as Paul said, the capital long lead time activities so that we're ready when the market, regulatory and approval setting support energy from waste facilities on the East Coast. We have been and continue to be cost-disciplined in our approach to CapEx in relation to energy from waste and will only deploy capital with a clear path to an appropriate rate of return.

Turning to the right-hand side of the slide. Together with our JV partners, Pac, Asahi and Coca-Cola, we recently opened a new $50 million facility in Victoria capable of recycling the equivalent of 1.600 billion PET plastic beverage bottles a year. And as discussed earlier, our CDS business continues to grow and plays an important role in the resource recovery supply chain.

We move on to the next slide and bringing it all together. Let's look at how we're performing against our FY '26 financial ambition and scorecard, which lists our must-achieves by the end of FY '26. Throughout the presentation, Paul and I have touched on how we are progressing on each of these elements and provided the insight underpinning the status of each initiative. Now for most of them, it was pretty easy to score these initiatives as being on track.

Where we had the greatest discussion and debate internally ends up being the 2 areas where we've marked ourselves behind target and you've heard me talk to already, the first being on our safety performance because while we're on track on the delivery of our plan, our lagging indicators in this case, TRIFR is behind plan. We have cross-checked the plan to the types of injuries and near misses we're seeing and still believe the plan is the right plan. The second being labor productivity because while we saw productivity improvements in the first half, the level of historical turnover of our workforce means this is behind where we'd like it to be. We have a plan to address this and we expect further improvement in the coming periods.

Moving to the final slide. Momentum continues to be the right description for FY '24 and this underscores our confidence in delivering our EBIT guidance of approximately $350 million for the year. In terms of priorities for the second half, we'll stay the course on executing our 5-year HSE plan. And on labor, the focus is on first year retention and productivity improvements. It is encouraging to see the system-wide benefits as we continue to embed site-level value drivers and connect those to the frontline by the use of visual management boards.

Data analytics continues to enable and equip our leaders with real-time information to drive performance. Our business teams in solids are up and running. And if you recall, this aims to ensure that our state-based solid teams get the benefits of learning from each other and that we bring the best of the best from around Australia. For example, we have business teams covering C&I collections, our landfills, our MRFs and our [indiscernible] collections businesses. Clear financial targets for business teams have been set and are being tracked.

We have a fantastic runway of short-term, midterm and long-term opportunities to grow. Therefore, it's important that we continue to improve how we allocate capital, including capital-light options, how we then execute projects and then really embed a learning culture where we learn from every project that we do. And with improved capability and clear plans, we expect improvement across all these areas.

And to conclude, I am genuinely proud of the work our 7,500-plus strong Cleanaway team do every day to serve our customers and communities around Australia. As well as delivering today, we have clear improvement plans to sustainably improve and strategically grow our business.

Our Blueprint 2030 strategy has been translated into execution through our midterm financial ambitions, where we remain on track to deliver an FY '26 EBIT of more than $450 million while improving ROIC.

That's all the formal presentation for today. So what we might do, operator, is open the lines to questions. And maybe I'll just ask the questions -- asking the questions, whether you can just maybe go one question at a time and then try and get through everybody and then we'll start again at the top for as long as time permits.

[Operator Instructions] The first phone question today comes from Jakob Cakarnis from Jarden Australia.

Mark, can I just get you to elaborate on the ongoing competition that you're seeing in solid waste? Clearly, you guys have been well-disciplined on price. But I'm just wondering whether or not there's been some margin headwinds from those cost to serve components, so increasing the customer turnaround time and also some of those self-focused initiatives? And then I guess the second part of that is, is the competition that you're seeing more in the established post-collections operations? Or is it also in tendering, please?

Yes. So I think what I'd say is generally on the competition side, it's consistent with what we've said previously. I think if you dive into it, there are some pockets where there's high competition. I think MRL, which is the Melbourne Regional Landfill, biggest landfill in the Southern Hemisphere, so we own it. There's 5 landfills in the Melbourne area. And that market is reasonably price sensitive. So therefore, we've been doing a lot of work on things like mix, getting our mix right and turnaround times, costs with [ taps ], that sort of thing and also getting the benefits of increased energy production from MRL.

I think in certain areas, C&I, we see some pockets of sort of heightened competition. Sometimes that competition actually doesn't even make sense. We look at it and go, it's loss-leading style competition where we're happy not to be part of it at that price and if customers switch -- we know they'll switch back through either or customer service or price being jacked up over time. And then on [ Muni ], I think we've certainly won more than we've lost. Really a good example of that is around VIC Regional, were definitely one more than we've lost up in the sort of northern part of Victoria. The final thing I'll just say on those sorts of things is we are as Cleanaway, we constrain ourselves capitally. And so therefore, we are super thoughtful about what the returns need to be on new business.

And then just one for Paul. I'm interested that your commentary around the net interest guidance is that you're tracking to the guide. If I annualize the first half, I get a number closer to $113 million for the full year. Just noting that there was a November rate increase in there. Can I just get from you whether or not the initial $110 million net interest guide did include an expectation for that increase, please?

I think we actually said at time, Jake, it was $110 million, assuming no further rate increases. So you're right, that was in October, then there was a further rate increase in November. So I think your sort of view of $113 million seems about right.

The next question comes from Matt Ryan from Barrenjoey.

I just had a question on your medium-term ambition. I think you're suggesting that restoration should be worth about $50 million in that bridge. So I was just wondering if there's a way to quantify how much of this will be achieved in the $350 million guidance in this year?

Yes, the way -- I thought we might get that question, actually. So the way we're thinking about that is we think sort of more than half will be -- will get delivered in the FY. So with the approximately $350 million, you should assume more than half of that is headwind recovery.

The next question comes from Amit Kanwatia from Jefferies.

Just a question on your EBIT guidance. I mean you reaffirmed it at $350 million. When I look at the implied second half growth rate on the first half, that's only a couple of percent. Maybe if you can talk to how are you seeing the environment? I mean where is the slowness coming in second half relative to first half because it's only a couple of percent growth rate to EBIT?

Yes. So just maybe a few comments on second half versus first half. So first thing is there's 3 fewer working days in the second half. And these numbers start to matter if you really get down into where the single million dollar is coming from. And so it's 126 days in the first half, 123 in the first half if you just did the math, that could be worth $4 million or $5 million just there alone. We think revenue growth will be pretty similar to the first half. And then we think there will be a modest increase in margin. So -- and how do you -- and why do we say that?

So things like in the second half, health will be a profit rather than sort of breakeven. The CTS business will move from basically not making anything in the first half because it's got all its costs and ramp up relative to the second half, where we're making money. And then Ops excellence will continue to deliver. And the Santos, you'll get the full -- you get a full 6 months of that contract. So that's how we think about the sort of second half versus the first half. So nothing really surprising there, I don't think.

I guess, Amit, the guidance was approximately $350 million. So we don't see $350 million as a cap.

The next question comes from Peter Steyn from Macquarie.

Solid result. Well done. Just very quickly on operational excellence, Mark, some really definitive benefits coming through in New South Wales, ACT and I guess, to some extent, Queensland. Could you give us a bit of a sense of where you're at perhaps in Victoria and then more nationally, perhaps some of the regions in that rollout process? And what your expectations are for the improvements at a more national level?

Yes. I think when we mentioned those businesses wasn't because the others weren't doing well as well. It was just sort of -- I think New South Wales, for example, was a bit of a standout particularly because they've got so much the one of everything business, they've got one of every part of the value chain and it's all connected. I think on ops excellence, Peter, like when we deploy VMB, they're deployed absolutely nationally. I think you saw that when you came to Perry Roe, just as an example, which was a Victorian example where we had the VMBs and value drivers for all the Muni contracts as well as the C&I businesses all in operation.

Similarly, I think what you should expect in solids is that the business teams best of the best starts to really ratchet in now. We've switched a bit of the, I think, sort of ops excellence improvement capability that we've got that has been working in the health business. We've switched that into business teams to really sort of charge that. And so we should start to see that get really start to drive things on a national level across those 4 areas that I talked to earlier.

And then similarly, data analytics. So the data analytics tools are broadly deployed. So they are deployed nationally, for example, all the way from WA to tie these. So again, we should see broad momentum improvement across all businesses on the ops excellence pretty good in the second half, but also moving into next year as well.

The next question comes from Lee Power from UBS.

Just coming back to that Muni contract tendering competition, like can you maybe talk about your assumed win rates versus historical? And are you actually finding the FOGO offering or your kind of [ SIFOR ] improvement, is that actually driving a higher win rate? Or do you think it will, given that level of interest, particularly around FOGO that you talked to?

I mean, definitely, we've seen the FOGO offering that we have in New South Wales is a -- we think it's a competitive advantage. We've probably got the #1 FOGO facility going forward located right there at Eastern Creek. So it's a fantastic location and a fantastic facility and we can progressively turn it on, as I think you know, we just split the whole, grow the FOGO and reduce the reds in. So I think that's been successful in 1, 3 contracts. We've got one starting, believe it or not as early as July calendar '24, to make sure we get it the right year and that progressively ramps up over the following year with the 2 other contracts. So that's pretty exciting.

I think in terms of Muni, again, what I'd say is we've won more than we've lost. And again, if it's a new contract, we are super thoughtful about the return that we need to earn on that because we have got capital projects and opportunities across the full spectrum of Cleanaway and a Muni contract needs to compete with other growth opportunities that we might have.

And so I think Paul mentioned, we increased -- we've increased our hurdle rates accordingly to really sort of make sure that it's the highest returning portfolio projects. Obviously, that needs to be tempered for a mix of risk versus return. And so we're very thoughtful on Muni, how much of that we want to own going forward, not just an open -- it's not just an open checkbook-style approach.

The next question comes from Owen Birrell from RBC.

Just a quick question on the Victorian CDS. You mentioned the full run rate coming in, in FY '25. You effectively come off a standing start in December. And I'm just wondering, at roughly what point do you think you'll hit that full operating run rate? Is that relying on third-party collections ramping up as well during the period? And I note that this earnings contribution is a combination of a number of JVs and so forth. Wondering if you can, in aggregate, give us a sense of what the EBIT contribution will be to you in FY '25 across all of those different JVs?

Yes. So what I'd say there is so we started on November the 1st and the way it worked is we had a very limited time to get ready alongside the other operators. So then the expectation was you had a certain amount of equipment on the ground on November the 1st and then there's another milestone, which is August, I think, for you need to have the rest of your vending machines and collection facilities ready to go.

And we're really -- we were ready at the start and we'll be ready for that one as well. I think what you should think is that we have over delivered from the VIC CDS part of the Western Melbourne and Western Victoria part. So if we've got 33% of the state, we're delivering way more than that in terms of our proportion of the collected bottles. And that's, I think, because of what we put on the ground, but also the experience of the team in terms of operating it.

Then in those early months, it's not that profitable. It will ramp up on profitability as we go through, obviously, at the summer surge with volumes coming through. And then the steady-state run rate, the way we -- the way I would think about it with you might be simplistic for you to say our business in Victoria will be about 1/3 of the size of the overall the New South Wales business just because 1/3 of the state, it's about 1/3 of the EBIT will be the contribution and we should expect that to start -- that sort of run rate in FY '25.

Do you have anything, Paul?

Yes. Look, in terms of the structure too, you just see how it works. Basically, some of Cleanaway joint venture is responsible for operating the network and it contracts Cleanaway to undertake that collection activity. The base game is that -- the way it typically works is the actual JV itself is fairly breakeven. So it doesn't generate much in the way of profit you'll see from our financials. So in terms of the profit from the scheme for Cleanaway, it basically appears 100% in our operating results.

In terms of what drives that profitability, I guess, the ramp up. Obviously, the number of collection points that are out there, as Mark mentioned, I think that the JV and obviously Cleanaway is part of that, we've done a great job in terms of that role, that's still more to go, but we are on track in terms of expanding the network. And then it comes down to adoption by the members of the public.

So it comes down then to the state government and the operators, actually their advertising scheme to get an increasing level of redemption going on. So as Mark said, I mean, in terms of -- we kicked off in November. November, December were loss-making. We made a small profit in December -- sorry, in January and we'll start to ramp up from there. And as Mark said, we'll be at full run rate come 1 July.

And is it fair to say that -- I guess, you're talking about sort of 1/3 of the overall New South Wales business. Does that include the PET and the HDPE polypropylene processing facilities in that comment?

No, completely separate. So essentially, what happens then is that the JV collects those commodities, PET being one of them and then sells those commodities on the open market and one of the purchases of those are the PET and the HDPE joint ventures.

I was wondering, are you able to give us some sense of what the contribution from those processing facilities will be given that they are largely the only game in town in Victoria and you have spent millions of dollars in developing those. I was just wondering are you able to give us a sense of what the contribution will be?

Yes. So I mean, they -- unfortunately, they're not really the only game in town. There is -- that there are other -- we're certainly the biggest, the Albury plant and the Altona plant are the biggest plants in Australia. But there is competition out there. I think probably, again, if you look at the financials, we do break out what the financial performance is from those JVs. So Albury was functional for the full year, actually generated a small operating loss for the year, again, in terms of commissioning-type of activity. And the VIC plant hasn't yet -- isn't fully operational just yet, it is in the midst of commissioning, but will be very shortly.

Just finally, are you comfortable you're going to make a profit on those facilities? You said that Albury wasn't running at a profit.

Yes.

[Indiscernible]?

Yes, no, absolutely. We are confident we'll make money out of those facilities.

The next question comes from Russell Gill from JPMorgan.

[Audio Gap]

to set up to operate in Queensland without us. 2 things. One, just on the expectation of reopening that facility and the earnings contribution and when that would flow through? And then secondly, just on cash flow relating to remediation, how much of that cash flow is still to come and the timing around that?

I'll hit the first part for you, and then I'll let Paul do the cash flow one. So where New Chum is today is obviously, it's closed and there's a lot of work going on there to build the water treatment plant that we need to have in place to manage the groundwater while we do the construction activity of Cell 3B. We won't start that construction until the dry season. Dry season notionally is sort of April time frame.

We will do 6 months of work and then we will pause again for the wet season on summer '24, '25. And then our plan would be to fill Cell 3B during sort of that period April, June '25 with a small EBIT contribution, I think it's no different to what we said it was going to be in the past. And basically, that's where it will go from. And that EBIT contribution is $3 million, $4 million, something like that. It's a fairly small. So -- but in terms of cash flow, Paul.

So in terms of rectification, you should assume sort of H2 will be probably in the region of about $20 million to $30 million in terms of rectification activity. As Mike said, we then have a short period of operating activity. And then we'll be going into sort of care and maintenance in the sense of we'll then pass it over to the remediation team. In terms of the cash flow around the timing of that remediation spend, we're still working through it right now. So we're in the throes of working with our specialists in terms of cap design and cap timing. But the plan would be to have that cap being completed over a 3 to 5-year type of window.

So just to clarify, Paul, we should expect 20% to 30% in second half '24. And then I guess from a cash perspective, ex-operating conditions from 25% for the next 3 to 5 years is kind of high single-digit type number?

Again, probably best I'm not throwing on specific figures, Russell, because we haven't completed the design and sort of detailed engineering yet. But as soon as we get to that point, happy to share what we've got to.

The next question comes from Cameron McDonald from E&P.

Can I just get a runaround on what's happening on landfills more broadly? And in particular, I noticed some of the licensing approvals that people are pursuing. So it looks like Dardanup in WA, as an example, had a license approval rejected. It -- and historically, you've expected to see a diversion in Sydney down from the Suez assets. Where are you in that process? And obviously, the so-called crisis of landfill in Sydney, what's the approach around license approvals or [indiscernible] extensions there, please?

Yes. Cool. So I think maybe just on Dardanup. I'm not worried about Dardanup. Dardanup is just going through sort of normal sort of progressive approval-type process. I wouldn't read too much into some of the stuff you read in the press that will sort itself out over time. On Sydney and [ Luco sites ], I think if you look carefully at some of the figures, I think you'll see, if you compare gross versus net revenue, you'll see you get an indicator of sort of how we're seeing volumes. So volumes are down, but EBIT is looking good and that's because we're very focused on EBIT these days rather than EBITDA and we're very focused on margins that we're earning at our landfills.

If you think about just a lot of your questions were around Luco sites. So just remember, the Luco sites, few landfill located, obviously, in Sydney, 1 or 2 landfills that sort of service the Sydney base, the other one, the Veolia or Woodlawn. Veolia's facility is connected by train. I think you all know that and has been -- have logistics constraints to get down to it.

And so what you've been asking us for a while is, will Veolia internalize that volume? And what we've been saying is that happens, but we expect that they will over time and that we are planning for them to do that. And so what we've been doing is we've been grabbing their customers and rather than Veolia send us volume from their customers we've been getting their customers directly.

And so what happens then is Veolia has more -- less of a constraint going down to the volume, though Veolia reduces their volumes. So what we're seeing is an increased sort of volume from their customers being offset by them reducing their volumes to us, which is perfectly fine. But again, remember, Luco sites is a highly contracted landfill, sort of 90% of the volumes contracted and that's kind of how it works.

In terms of sort of approval, so we are working on a couple of things around approvals. I mean, obviously, one thing we're working on is a Luco sites extension, which is really just extending it in the direction away from residence, which we think is the natural extension of that facility and we're working through the process of that both internally and externally. And we'll keep you updated when there's something to say there.

And of course, we're also exploring options for energy from waste to serve the Sydney region as well. And what we think and what I'm on the record saying externally is what Sydney needs is multiple outlets like we think it needs -- needs Luco sites extended, but also need a non-Veolia MG from waste solution, one that has a different set of logistics to get to it and that's what we're working on.

The next question comes from Rob Koh from Morgan Stanley.

Can I just ask a little bit of a question on plastics and whether your result has any impact from the temporary lifting of the export bans? And then also, I guess, if that development maybe throw up any distressed opportunities in polymers or anything like that for you guys that you're happy to look at?

Yes. No, not really.

Yes. So I mean, Rob, if you look at our commodities, the lion's share by a long, long way is OCC as is Cardboard. The chunk of that stays in domestically is processed and then there is some that is also taken up to the Asian mills as well. In terms of plastics, the most significant plastic obviously is PET and that find its way into the Albury circular plastics facility and very soon the Victorian one.

Okay. Cool. Maybe can I ask a follow-up question or a separate question actually on CDS ramp-up and thanks for all the color you've given us. Just wondering, do you get the sense that as people discover the facilities, they then work out how to use them and so there might be a bit of usage growth from habituation? Or could there possibly have been a group of people like me, for example, who bottled up a huge amount just getting ready for the start?

Well, it's definitely [ 1/3 ] to the beginning when people have been working for 6 months under the household into the car and took it down to the local location. I think so there's definitely a ramp up there. I think there's also, as Paul mentioned, there's progressive discovery going on. It's still not well understood that it exists. And I think there's a little bit of -- there's been certainly some frustration, if you read the press closely around people rock up and there's queue of 5 people, they just want to do it there and then. And so or they realize that they have to download an app or something to make it and they didn't realize that.

And so I think those things will auto-align themselves out and it will become easier to use. And then obviously, each of the proponents, not talk mainly to us, I mean, we'll obviously increase the number of sites and locations where we can -- where people can do it, particularly in Western Melbourne and Western Victoria and people will become very accustomed to doing it and get into a pattern around that.

But I think what we would say is we're really pleased with the start-up. We're really pleased with the volumes. We think we have -- we can't -- unfortunately, we can't actually share what our volumes are relative to everybody else. It's not something that they want us to say. But what I will say is that we're delivering well over out their share of the start-up volumes. And I think that's because of what we put on the ground and our experience doing that, that we're able to translate from New South Wales.

The next question comes from Scott Ryall from Rimor Equity Research.

I might sneak in my 2 brief questions just in case the operator enforces your request, Mark. I'm wondering the HVO100, where you source that from? Who and what market, if that's all right?

And then the second question is just around 18 months ago, you did your capital raise, there was an over-raise. You've been quite clear on the extra capital deployed in this half year. And you said that your guidance excludes major M&A and major CapEx projects over $50 million. So I guess my question there is, it doesn't look to me like you've exhausted the capital from the over-raise.

So do you feel comfortable that you've got plenty of capital for, I guess, the sub-$50 million organic growth opportunities that you've talked through today that you've got plenty of capital there to put to work?

Yes. I'll let Paul take your second part, I'll take the HVO100 one. So the HVO100 demonstration, that volume came from Neste, which is a Scandinavian company, the absolute leader in sort of renewable fuels. It came in by AVEVA, our fuel partner. So it's sourced. So the source base material for that HVO100 was used cooking oil. So it is a used cooking oil blend that's been turned into HVO100 and then returned to us. It wasn't physically our used cooking oil molecules, although it would be the same.

And it, again, is a demonstration. And very clearly, it's a demonstration, not a trial, because you don't need to do a trial as well. This is not there to learn anything apart and demonstrate the fact that this can be done and really feed that into the federal government's review and consultation paper on making HVO100 a fuel that's legal for produce. So we have a Section 13 exemption to use it on the road in our due trust.

So I'll hand over to Paul. And I will not use the over -- the over-raise. Paul is going to [indiscernible].

Scott, I think we said at the time there was a chunk of that raise for GRL and the fact that we have visibility to other contracts that we could see coming our way and other CapEx, obviously, as we could see coming our way. And I guess what I can say now is that we're seeing those come through.

So obviously, Santos, CDS VIC, 2 really good examples of where we're deploying that capital in good capital-returning investments. As I've said too, I think the challenge we have with capital is that we have too many good opportunities and not enough capital to meet it. So again, as we progress, you'll see more evidence of further growth CapEx coming through.

The next question comes from Reinhardt van der Walt from Bank of America.

I just wanted to go back to the EBITDA bridge out to FY '26, please, which is very helpful. You called out that the stretch in the target is probably going to be in op excellence. Could you just give us a sense of what's in the $50 million, what's not in the $50 million? If I look at those 4 back you've got on the op excellence slide.

Yes. So in terms of the EBIT guidance to say, if you look at all those 4 examples that we've given in terms of excellence that they will all be -- they will all be in there. So essentially, we have a program of something like 60 tools that we're deploying -- that we're deploying through the group. And we've simply given you an example of 4 of those that the branches are currently using. I don't think we'll look to develop more and that's what's going to be taking us from the $450 million to the $500 million.

The next question comes from Nathan Lead from Morgans Financial.

If I can take you to Slide 29, I just appreciate just a bit of a steer in terms of where a couple of cash flow items are heading over into second half '24 and into '25. So just that cash flow of underlying adjustments. Obviously, there was a pretty clean profit number this period, a bit of fairly chunky underlying on the cash. So just wondering where that's going. And also just on the payments rectification remediation and the other changes in the working capital there, if you can just sort of talk through where the trends are in those 3 items, please?

Yes, sure. So in terms of underlying adjustments, the primary drivers there are New Chum rectification and the CustomerConnect project. CustomerConnect, we basically said the total project cost would be about $100 million and the split between sort of SaaS and non-SaaS, so OpEx versus CapEx would be roughly about 50-50. And that's spread over roughly about a 3-year period, so '24, '25 in the tail and dropping into '26.

In terms of new term rectification, total sort of cash outflow would be in the region of probably about $50 million in the current year. So we had about $13 million, $15 million in the first half, jumps to about $25 million, $30 million in the second half. That will be largely -- there'll be a little bit of that dropping into '25, but not a huge amount.

So if I move then down into rectification and remediation. The bottom line is we're looking at something like $19 million. So this is ex-New Chum, we're looking at about somewhere between $30 million and $50 million for the next 2 to 3 years. And the key driver behind this is going to be in relation to the capping events at New Chum.

So as I mentioned in my earlier response, we haven't yet landed the exact design of how that cap is going to look or even when we're going to start that capping process. But that probably is our main remediation event over the next sort of 3 to 5 years. And again, as I say, when we get that capping design locked down and obviously happy to provide that guidance to the market.

In terms of working capital and essentially, it's largely driven around growth. And again, you've got to recognize the fact, of course, you've got an element of levy in there as well, so you can't -- you've got net revenue has to be the gross revenue piece. But essentially, in terms of working capital, I mean, we're pretty working capital-light as a business. DSO is largely -- is well-controlled. So DSO is largely around that sort of 44, 45 days. We've not seen any significant shifts. We've not seen any really deterioration in terms of credit quality. So again, that's been relatively stable.

Does that give you enough color there, Nathan?

Yes, that's good.

Very good.

All right. Well, thanks, everyone. We're going to call it a day because we know numbers are dropping off, but also we've got another meeting at 1:00 with a few of you. So thank you for your time this morning. Thanks for those of you who just joined and listened in. Obviously, we look forward to chatting to you as we move around over the coming days and weeks. All right. Talk soon.