Cleanaway Waste Management Limited (CWY) Earnings Call Transcript & Summary

Thank you for joining the Cleanaway FY '20 Full Year Results briefing. Your presenters today will be Mr. Vik Bansal, CEO and Managing Director; and Mr. Brendan Gill, Chief Financial Officer. [Operator Instructions] I would now like to hand the conference over to Mr. Bansal to start the briefing.

Thank you, operator, and good morning, ladies and gentlemen. Joining me on the call today, as you know, our CFO, Brendan Gill; and also our Head of Investor Relations, Richie Farrell. We appreciate you joining us this morning. Before I run through this presentation, I'll draw your attention to the disclaimer on Slide 2 of this pack, and I'll take it as read. I will now ask you to please move to Slide 3. I'll run through the safety and environmental update, group and segment performances. Brendan will cover the statutory to underlying NPAT reconciliation, balance sheet, cash flow and debt. I'll circle back to update you on key strategic developments, and we'll finish the presentation with our priorities for the remainder of the year. We will then open the line for questions. Before I start today, I want to first acknowledge all of the people that make up Cleanaway. In what has been a very challenging period, I'm truly proud of the way our people have stood up and lived the values of our organization. COVID-19 has put a strain on every organization, but it has amplified on Cleanaway as we are expected to keep providing an essential service while following all government restrictions. We kept our trucks rolling and waste centers open across the country, and we are still doing so in Victoria. This has put a huge strain on our people and their families, both frontline staff and support functions. The manner in which our people responded to the challenges posed by this pandemic is a testament to the culture that we have built at Cleanaway. I'm very proud, and I sincerely want to thank them publicly for all that they do every day. This year's results is especially dedicated to all men and women of Cleanaway. Now moving to safety and environmental on Slide 4. Our businesses faces -- our business faces daily operational and situational hazards which form part of the standard ecosystem of the waste sector. We have a responsibility to ensure all our employees and contractors go home in the same condition they arrive for work. Our equipment, especially mobile assets, is entailing interaction with the general population, and the safety of all involved remains our ongoing #1 priority. In FY '20, we successfully trial a new driver interface system in our trucks, and we are now rolling it out nationally. Our TRIFR showed an improvement of 21.1% over previous year and continues his journey of improvement. We have more work to do to reach our Zero Harm target. There is zero physical and mental harm to our people and Zero Harm to our ecosystem we live in that is air, water and soil. Having a good balance between administrative engineering controls, with the right culture and behavior, make this possible, and that is our ongoing journey. I will now run through the group performance on Slide 5. The summary slide provides a highlight of our FY '20 underlying results, our progress on key strategic initiatives and our outlook statement for FY '21 full year. I'll discuss each of the items mentioned here in the following slides. Moving on to Slide 6. I'm again pleased to report results that delivered growth, delivered on our commitments and demonstrated defensiveness in our operating leverage. To provide transparency in our reporting, we have provided our financial performance on both pre- and post-AASB 16 basis. Examining the performance of the business on a pre-AASB 16 basis enables a direct comparison to the prior year performance. Unless specified otherwise, the P&L line items that I will run through now are all on a pre-AASB basis. Net revenue was marginally lower, but earnings have grown during the year. Net revenue of $2.1 billion was 0.4% or $9 million lower than FY '19, mainly due to IWS segment. Net revenue, excluding commodities, grew by 0.5% on FY '19. Solid Waste Services grew net revenue by 0.8%, and ex commodity revenue grew by 2.4% on FY '19. Liquid Waste & Health Services grew revenue by 3.8% previous year. Underlying EBITDA was up 2.5% to $473 million, or $515.7 million on post-AASB 16 basis. Cost initiatives, operating leverage of Toxfree synergy benefits drove an improvement in EBITDA margins to a record 22.5%. Underlying EBIT was up 4.6% to $251.9 million, and EBIT margin improved to a record 12%. Underlying NPAT and AAPS were both 8.7% higher than FY '19. And NPATA of $164.6 million was 8.4% higher than previous year. Cash conversion was very strong at 108.2% with operating cash flow up 4.3% to $366 million and free cash flow up 11.5% to $230.1 million. The Board declared a final dividend of $0.021 per share which takes the total dividends for the year to $0.041 per share fully franked, up 15.5% on FY '19. This dividend represents a payout ratio of 54.9% of the underlying net profit after tax. Turning to Slide 7. This slide and the next slide clearly illustrates the improvement we have made in all our key financial metrics over the past 5 years. We are on Slide 7. For clarity and transparency, we have shown FY '20 metrics on a pre- and post-AASB 16 basis. The operational improvement we have made along with our disciplined approach to capital allocation have continued to drive an increase in shareholder returns. Moving on to Slide 8. I'm particularly pleased with the consistent growth of EPS, free cash flow and dividends. We believe Cleanaway, although, has come a long way from our 2015 TPI days, still has significant number of growth opportunities ahead, and we will work passionately to capture the stacked arithmetics while challenging at times are exciting. We do believe that significant value creation opportunities continue to exist for good quality and strategic scale player in this sector. I will now cover the operational results on following slides. So turning to Slide 9. Slide 9 highlights a decreasing commodity revenue exposure as a proportion of net revenue. In FY '20, commodity revenue represented only 3.5% of net revenue. We have taken significant action to remove rebate space to customers and are also implementing further price increases for the collection and processing of comingle recycling services. The business previously faced increased cost for sorting and now with reduced commodity prices, MRF gate fees are increasing, and we have taken appropriate action across all our MRFs. Excluding commodities, our revenue growth was 0.5% in FY '20 over FY '19. We expect that our investment in downstream assets, such as plastic pelletizer will ensure that we create significantly more margin and value from some of these commodities going forward. I'll ask you to now move to Slide 10. This is a slide that some of you would have already seen before. We have included it again to highlight to defensive nature of our business due to the contractual nature and the composition of our revenue streams. These characteristics supported the strong financial performance that we achieved in FY '20. Our Solid Waste Services segment delivers long-term revenue assurance through its municipal contracts, C&I contracts and post-collection investments. We continue to improve the quality of earnings in this segment throughout optimization and efficiencies. Our Industrial & Waste Services segment operates in the infrastructure and resources sectors where we contract with Tier 1 established industry players. Our Liquid Waste & Health Services segment is also very well diversified, covering multiple waste streams and services to a broad range of customers like infrastructure, manufacturing, oil and gas, health and age cares which makes it uniquely positioned for future growth. With a highly-contracted customer base of Cleanaway and ability to flex our cost, we can create operating leverage and can swiftly act against deleverage when black swan events, such as COVID-19 pandemic, occur. I'll ask you to move to Slide 11. This slide and upcoming 2 slides provide our response to COVID-19 pandemic. The 3 priorities that we established in response to COVID were: Number one, to keep our people safe; number two, keep our people in jobs during and post-COVID, 'keep servicing our customers as an essential service provider. In light of -- in terms of those actions, we took -- in terms of those priorities, we took following actions: We maintained salary levels and asked our corporate staff to take annual leave there possible. We re-routed our fleet and stood down trucks to reduce fleet operating costs. We reduced over time in line with the re-routed trucks. We rationalize all our discretionary costs, but we made a decision to retain all our sales staff, and they have continued to win new business and provide additional customer service. We've provided additional support to our Cleanaway team members and our customers by relocating fleet to meet increased customer demands, for example, in health care and supermarkets. We made sure our affected employees remain on full pay while awaiting COVID-19 test results and self-isolation. We promoted our employees assistant and mind fit programs to help support mental health during these tough times, and we directed our people and fleet and extended our industrial cleaning capability to enable deep cleaning of COVID-19-affected sites. Now moving on to Slide 12. Slide 12 provides a broad overview of the key impacts of COVID-19 on the subsegments of our business. As you can see, there were some positive impacts that partially offset negative impacts. There were all of varying degrees of impact both regionally versus metro and across subsections of the business. The largest negative impacts were in solid SME collections and C&D post collections; and in Liquids & Health segment in grease trap, oily water and product destruction. In the IWS segment, we saw a slowdown in new on-contracted work. We saw a mix change in health sector as electric surgeries were put on hold and replaced by extensive testing for COVID-19. We will explore this a little bit -- we will explore this a bit more from P&L impact perspective on the following slide. So moving to Slide 13. COVID-19 impacted Cleanaway's financial performance in the last quarter of FY '20. Half 2 FY '20 net revenue declined 1.4% against half 2 FY '19. Having said that, it is important to note that in quarter 3 FY '20 revenue and EBITDA were up 3.3% and 10.5%, respectively, against corresponding quarter 3 of FY '19. While the slowdown in the economy was clear, the direct COVID-19 impact across each segment and subsegment in each region is difficult to precisely measure. Residential waste was up, although the impact on revenue was felt in post-collections rather than collections. Due to good traction in the business prior to COVID hitting us and timely cost actions taken to award operating leverage, EBITDA in half 2 FY '20 increased 2.5% against half 2 FY '19. The business was running ahead in first 3 quarters of FY '20 over FY '19 both in revenue and EBITDA. Assuming no pandemic and also assuming a worst-case scenario of 0 traction in the final quarter of FY '20 over the corresponding final quarter in FY '19, that is comparing Q4 FY '20 and Q4 FY '19, and then assuming the EBITDA would have remained flat in quarter 4, full year EBITDA would have been $478.8 million pre-AASB or $521.5 million post-AASB. I'll ask you to move to Slide 14. This is a Solid Waste Services performance. The Solid Waste Services segment covers the collection, recovery and disposal of solid waste within our waste streams -- with a waste stream generally including putrescible, inert household and recovered waste. Core customer types include municipals, commercial and industrial and infrastructure. We process their waste streams through a price infrastructure assets such as resource recovery and recycling facilities, waste transfer stations and landfills. Despite the challenges in FY '20, revenue grew by 0.8% and ex commodity revenue grew by 2.4%. At a gross revenue level, revenue grew by 5.1%. Our leaders across the country managed their businesses remarkably well in a very tough environment, delivering record EBITDA. EBITDA was up by 1.5% to $358.1 million, and the EBITDA margin increased by 20 basis points to 26.1%, edging closer to our target of 27%. The EBIT margin was also up by 20 basis points to 15.2%. All SKM assets are now fully integrated within this segment, and we expect a full year contribution in FY '21. We expect to mobilize some new municipal contracts in the coming year, including new contracts like Randwick, Wyndham, City of Casey and South Australia Council Solutions and renewals with Blacktown, Mosby and Cardinia. But the impact of COVID-19 on SME segment, especially in Victoria, still remains a variable for us. Moving on to Industrial & Waste Services segment on Slide 15. The Industrial & Waste Services segment provides a wide variety of services to the resources and infrastructure markets, such as drain cleaning, high-pressure cleaning, nondestructive digging and vacuum rolling. As you can see, this segment again had a margin expansion on lower revenue. It was this revenue reduction which impacted the total revenue of the enterprise. EBITDA and EBIT margin expanded by 70 basis points and 20 basis points, respectively, both edging closer to our targets. We have now exited most of the contracts with suboptimal commercial returns. We are seeing improvement and the right focus on labor and asset utilization on our wide margin contracts across the country. Now moving on to Liquid Waste & Health Services segment on Slide 16. The Liquid Waste & Health Services segment covers 3 national strategic business units: liquids and technical services, hydrocarbons and health. All Toxfree integration activities are now complete. The segment saw solid improvement in revenue and a strong improvement in earnings. Revenue was up by 3.8%. It was pleasing to see EBITDA margin expanding by 150 basis points to 19.1% pre-AASB 16 and EBIT margin improving by 140 basis points to 12.3%, both edging closer to our targets. The hydrocarbons division has continued to perform well, driven by good volumes and production efficiencies. Health has also continued its good performance and is well on track to deliver its long-term strategic expectations. We have also resigned some major health customers for another 3 to 5 years. During the year, the Liquids & Technical Services business unit maintains its focus on people and customers while going through extensive integration efforts, which has been -- which is now complete, but has required significant effort by our team. This is now a very strong integrated business with a very good prospects and a very good management team. I'll ask us to move on to Slide '17. We had previously set medium-term EBITDA targets for each of our segments. These targets were set in the context of benchmarking to global best-in-class metrics, the market structure, capital demand, our developing price infrastructure base and the accounting standards of the day. As you would have seen, we have made significant inroads over the past -- last few years. And on a pre-AASB 16 basis, we were already very close to achieving those targets across all our 3 segments. Following the adoption of AASB 16, our metrics are now truly comparable with global peers, and hence, we have increased our post-AASB 16 EBITDA targets as follows. In solid waste, the target has been lifted from 27% to 29% to 29.5%. In IWS, the target has been lifting for 15% to 15.5% to 16%. In Liquid Waste & Health Services, the target has been lifted from 20% to 21.5% to 22%. We believe our segment targets are achievable in the medium term, but needless to say, external conditions like COVID-19 and its impact when economy remains an unknown. Segment improvements have led to significant improvement in our enterprise margins. In last few years, we have increased the enterprise EBITDA margin from 17.8% in FY '15 to 22.5% in FY '20 pre-AASB 16. You might also recall that during this time, we acquired Toxfree when it was itself going down 17.8% EBITDA margin. Today, post-integration, the combined Cleanaway sits at 22.5% EBITDA margin pre-AASB 16 and our post-AASB 16 EBITDA margin in FY '20 was 24.6%. I will now pass over to Brendan to take you through the financials. Brendan?

Thanks, Vik. Moving now to Slide 18. The underlying profit after tax attributable to ordinary equity holders was $150.3 million inclusive of a $2.9 million charge due to AASB 16. The underlying adjustments to EBIT during the year totaled $51.7 million and comprised of $39.8 million that I presented in the first half and $11.9 million in the second half. As advised in the first half, we received the insurance proceeds for the Perth MRF and booked the profit on sale of our Tullamarine buffer land, and both have been presented as underlying adjustments to profit and therefore not included in our underlying results. Our Perth MRF rebuild plans are progressing well, and we expect to be processing materials in the third quarter of FY '21. Until then, we will continue to incur higher costs from third parties to process recyclables as we honor our commitment to our customers. During the second half, we also incurred $13.4 million in cost to finalize the integration of both Toxfree and SKM including the ERP integration. The integrations have been successfully completed, and Vik will elaborate further later in the presentation. During the period, we also provided $8 million for the cost of annual leave for some of our casual workers based on the work pack the Resa to court ruling handed down in May 2020. This will not be an ongoing issue for Cleanaway as we have changed the way we employ casuals. We also understand from media reports that the judgment is likely to be appealed. Turning now to the balance sheet on Slide 19. Our balance sheet remains strong, and we continue to maintain our culture of financial discipline. The new leases accounting standard AASB 16 was applied for July 1, 2019, and increased our assets by $252.4 million and our liabilities by $264.2 million. Our right-of-use assets presented under the new accounting standard totals $416.7 million and also includes our former finance leases that were previously classified within property, plant and equipment. Trade and other receivables declined during the period as a result of lower revenues in the fourth quarter due to COVID-19, together with improved collections performance from government and some of our larger customers. The increase in other assets largely reflects the equity-accounted investment in the Cleanaway ResourceCo joint venture following a sell-down of our interest and loss of control, together with the fair value change in the cross-currency interest rate swaps of the USPP debt of $30 million. This fair value change is offset by an increase in our interest-bearing liabilities and is therefore an effective hedge. During the year, our rectification and remediation provisions reduced by $35.1 million. This reduction was mainly due to expenditure for the period, thus the unwinding of the discount rate and acquired remediation liabilities. Turning now to cash flow on Slide 20. As I've stated previously, we maintain a high level of fiscal discipline at Cleanaway, and our cash flows are consistent with our previously-stated commitments. On a pre-AASB 16 basis, excluding the $25 million one-off prior period tax refund, net cash from operating activities increased by $40.2 million or 12.3% compared to the prior year. The increase was driven by positive working capital movements from committed deferral of some government payments and improved collections from both government and nongovernment customers. Capital expenditure for the period was $209.8 million and in line with our stated planned range of approximately 10% of net revenue, and below our pre-AASB 16 D&A. Our free cash flow was therefore a record at $230.1 million and represents an increase of 11.5% from the prior year. Our cash conversion rate, which is defined as the ratio of cash flow from operating activities to underlying EBITDA, was also a record at 108.2%. One driver of the strong result is the federal estate government's permitted deferrals of certain payments including payroll tax and landfill levies. This contributed approximately $15 million to our working capital, and we are likely to repay this in FY '21. Excluding this benefit, our cash conversion would still have been a very strong 105.1%. As mentioned previously, our cash flow will benefit in FY '21 and beyond for a step down in expenditure on landfill rectification and remediation, and Vik will comment on this later in the presentation. Turning now to our debt on Slide 21. Our debt is well under control with a net debt to underlying EBITDA ratio of 1.46x on a pre-AASB 16 basis and well below our covenant of less than 3x. This is a level that provides us the flexibility we need to fund selected earnings accretive projects and acquisitions. Our gearing ratio, defined as net debt over net debt plus equity, is currently at a healthy 21.1% on a pre-AASB 16 basis. Our average debt maturity at 30 June was 5.4 years, with our next refinancing event scheduled for July 2022. As previously advised, we completed a U.S. private placement notes issue in February. Currency exposure has been hedged, resulting in 3 equal tranches of AUD 133 million with maturities of 8, 10 and 12 years. The weighted average margin of the USPP notes is 1.61% above the Australian bank bill swap rate. In addition to the USPP, during the year, we negotiated lower margins on our banking facilities and also benefited from the lower interest rate environment. This was the main driver of our $4.9 million year-on-year reduction in underlying net cash interest expense excluding AASB 16 impacts. Full details of our net finance costs are provided on Page 37 of this presentation. I will now hand you back to Vik.

Thank you, Brendan. Moving to Slide 22, ladies and gentlemen. Our disciplined approach to the allocation of capital has not diminished. Typical capital expenditure levels in global waste management companies is around 10% of net revenue. We believe this is a sustainable long-term target for Cleanaway. Depreciation and amortization expenses have changed following the adoption of AASB 16, and hence, CapEx as a proportion of D&A is not relevant at all. We will use percentage of net revenue as a metric for cash capital expenditure going forward and you will see that in FY '20, we spend right on 10% of net revenue. On Slide 23. We had 4 key enterprise projects that we had committed to deliver by June 2020. The first one was to complete the Toxfree integration and realize the expected synergies. I'm very pleased to confirm we have successfully completed the integration of Toxfree and all the financial commitments we made to you when we raised equity have been met or exceeded. We've also continued to grow our waste business while the integration was in progress as indicated from the revenue and the EBITDA increases during the same time. While integrating Toxfree, we have also developed an integration playbook for Cleanaway which is our toolkit now for all future small and big integrations. The Toxfree integration is now done and delivered and will not form part of our presentations moving forward. Moving on to Slide 24. The second commitment was integration of SKM assets, which we acquired in late October 2019. This included getting all of the assets into safe and compliant position and to re-contract with the councils and to be processing over 200,000 tonnes of annual volume. I'm pleased to confirm that it has been delivered. The assets are only safely under a good local management with councils contracted and over 200,000 tonnes will be processed this year. We have also sold one part of land in South Australia, and we expect to use the other for our new Teco. We now have the best and complete set of assets in Victoria, and we are very pleased with the SKM acquisition. This has also been done and delivered and hence will not form part of our future updates as a stand-alone items. Moving on to Slide 25. The third commitment was the remediation electrification of landfills, including legacy landfill, for which there was a $385 million provision sitting in our balance sheet at June 2015. The it was important that we manage these complex tasks carefully, pragmatically and fix its legacy issues once for all. Five years ago, we committed that we would not spend on average more than $45 million per annum for next 5 years. This was to ensure we spend the cash wisely, manage the company cash outflow plus align the rectification work with the regulators expectations. The FY '16 to FY '20 average spend was $41.4 million. We have now largely completed remediation and electrification of legacy landfills. I'm also pleased to confirm that this spend will now come down to $20 million per annum, in line with the business-as-usual remediation. What that means that this will deliver an extra $25 million cash flow benefit from FY '21 onwards every year. And provide the company with $125 million extra cash to invest in growth and other activities over the next 5 years. We've also consistently maintained that we should always be looking to offload close and remediation landfills under strict condition, so we don't have to manage them forever. During the period of remediation of rectification in the last 5 years, we have successfully sold 3 crore landfills. The major element of this legacy issue has now been fixed, but we will keep you updated on the remediation rectification as a standing agenda item moving forward for Cleanaway. Moving on to Slide 26. Our fourth commitment was delivering a comprehensive sustainability report for FY '20. This will be available on our website from early September and the target of leasing that on is -- that is 11th of September. As committed, we have identified metrics for our business to report against Sustainability Accounting Standards Board, SASB, and United Nation's Sustainable Development Goals. As you will see, our sustainability report is centered around our value-creation story which leverages our strategic pillars of people, earth, markets, assets and financials, or PMAF for sure. We apply our strategic wheelers to society's waste and recover commodities and energy. This in turn displace a demand for primary resources in potential environment. At the same time, we are creating long-term sustainable value for our people, our customers, our investors and the environment. The SDGs represent an ambitious agenda, and we will work in the coming years to make the strategic and operational changes required to increase our positive impact further. In FY '19 we also committed to align with the task force on climate-related financial disclosure reporting framework. We are currently in the process of formally integrating the management of climate-related risks and opportunities into our enterprise risk management framework, and they will receive ongoing management and review. We're looking forward to getting feedback from your ESG teams on our report. And I must say, we sincerely thank some of our investors who have guided us in this journey. While this commitment is also done and delivered, sustainability reporting will remain a standing agenda for Cleanaway, and we will seek to improve and refine it every year moving forward. Moving on to Slide 27. Our strategy of building price infrastructure continues. Although significant progress has been made, we still see many exciting opportunities. As a vertically integrated waste player, our ability to successfully process waste and internalize it through our infrastructure, provide strength and operating leverage to our earnings. The sustainable management of waste is a material property for many of our customers. By providing customers with a clear line of sight of how the waste is managed, we are developing a very and -- keen competitive advantage for future. We continue to explore options of energy for waste in the 3 large eastern states. We do see energy from waste assets as a key part of Cleanaway's value chain. I've always maintained that price infrastructure creates our strategic mode, and this work continues as will be illustrated in coming slides. Moving on to Slide 28. Developing price infrastructure while keeping within a cash CapEx budget of 10% of revenue, makes us very mindful of our capital allocation. It instills discipline, and forces us, as a management team, to truly prioritize our capital deployment. As highlighted in this slide, we have been recycling assets who are building our strategic mode. The integration of the Toxfree business has also allowed us to examine our non-licensed footprint. Over the last 5 years, we have been successfully freeing up our balance sheet through divesting assets that are nonstrategic, unlicensed or not meeting profit and our return hurdles. We will continue to seek asset recycling opportunities as we move forward. Moving on to Slide 29. In February, we announced our intention to jointly develop a PET plastic pelletizing facility with Pact Group and Asahi. And in early August, I'm pleased to say, we have formalized the JV together committing $45 million to develop the world-class PET plastic pelletizing plant. The facility will be located in over Albury-Wodonga. It is anticipated the facility will recycle approximately $1 billion PET plastic bottles each year. Cleanaway will provide this feedstock, which will be coming from a container deposit scheme in New South Wales and from the MRFs and plastic sorting facilities in Melbourne acquired as part of the SKM transaction early in the year. Both Asahi and Pact will buy the recycled plastic pallets from the facility to use in their packaging. The facility is expected to be fully operational by December '21. We are also conducting feasibility studies on developing additional facilities to process other type of plastic, for example, HDPE as well as glass beneficiation facilities, and we will keep you updated on these developments. Moving on to Slide 30. With our JV partner, Macquarie, we continue to progress energy from waste development during the year. Our proposed facility investment in Sydney provides a more environmentally beneficial alternative solution to Sydney's growing waste disposal needs. I wish to remind you that Sydney has one of the largest levy in the country at $142. It also enables us to internalize our group principal waste in Sydney and enhances our service offering to our customers. Subject to approval and final investment decision, it will be one of Cleanaway's largest single asset investment to date. During the year, we acquired a site and we recently submitted our environmental impact statement for review. We expect the final EIS to be released publicly in a matter of weeks. The project team has undertaken significant community and stakeholder engagement throughout the year. The facility will use the latest moving grade technology, which is safe and proven in over 500 facilities across Europe. It will also use world-leading technology for the treatment and scrubbing of gases. I'll ask you to now please move to Slide 31. Regulation and policy will continue to play an important part in the development of our industry and sector. Many of the recent regulatory and policy developments are interrelated in an aim to create a circular economy. We seek to ensure we are well positioned to respond quickly to any regulatory changes that can affect our commercial interest. To date, our mission to make a sustainable future possible has served us well in terms of alignment with customers and society. We expect future waste management policies and regulations to further develop and advance the circular economy agenda, which we are confident our successful Cleanaway will and should thrive. Moving on to my last slide on Slide 32. Slide 32 outlines our priorities and outlook for FY '21. Of course, safety, customer and growth are always our overarching priorities. We will continue to take actions that will improve the quality of our earnings. We expect to have a per mole operational by Q3 FY '21. We will also progress the PET plastic pelletizing facility, energy from waste project and other downstream investments. We have commenced a data and automation project that will drive an improved customer service, along with business and process efficiencies. We strongly believe that there are significant margin gains that exist from a digitized cleaner future. With respect to the outlook, I can only tell you the impact of COVID-19 is not an easy thing to nail down. The Victorian situation is hard to assess at this early stage. Having said that, training conditions so far this year have been mixed across the country, as you would expect. The impact of COVID-19 continues to be more pronounced in Victoria right now. We saw some recovery in June over April and May. Importantly, our enterprise performance in July 2021 has been in line with the FY '20 average monthly performance. That is the average of last full year 12 months. We will provide a further trading update at the AGM and hope to have a bit more clarity at that time. Now I would like to open the lines for any questions. Operator, we are good for questions now.

[Operator Instructions] The first phone question comes from Jake Cakarnis from Citi.

Vik, Brendan. I was just wondering if you could unpack some of the cost performance that you guys experienced in the second half and just let us know, firstly, the components of that. But secondly, whether or not you think that, that's sustainable into FY '21?

Yes. So good question, Jake. So if you think about -- I mean, I'll go as a standard P&L. So in our P&L, on $100, we are making about $22 EBITDA. So our cost is 78%, $78 hundred in $100. In $78, there's a labor cost, there's a fleet RMM cost, there's -- and fleeting to its fuel. There's been, obviously, the overhead and the support functions and all that running the assets, right? So labor and fleet are our 2 biggest costs. What we did not do, as I mentioned before, in the second half, we did not reduce workforce. But obviously, we park trucks. At one point, they were about 100 tucks parked. And we ask people then, obviously, we flex the overtime, we flex the annual leave, keeping all our people employed. So that has worked very well for us. We knew and we still believe that when the COVID-19 is over, and I can't tell you when that will be over, we will need all the people, getting drivers, experienced drivers and getting frontline staff is quite difficult at good times. So that strategy has worked for the second half. Now if COVID was to carry on longer nationally, and we have all the other options available to us as always is. So frankly, we have only just the tip of the cost waste so far. And the options are available to us in FY '21 if we have to flex them. Hope that answer, yes?

Just a second one, obviously, you've got statewide acquisition. You guys have reported in the accounts. And we've got a full contribution from SKM in FY '21. Do you want to talk about the statewide acquisition and maybe some of the expectations for that business moving forward? Should we extrapolate the run rate that you've mentioned in the business consolidation notes? Or is there anything around the integration of that business that we need to be considering in FY '21?

No. I mean, listen, SKM, for some of you who already know, it's a regional Victoria acquisition with one transfer station and a small collection firm. The reason why it's strategic is because we want a transfer station in that part of Victoria. So I think, no, it's not a material in the whole scheme of things. They are now $0.5 billion EBITDA, but it's not material, but it is a strategic acquisition of transfer station. So there's nothing there. Nothing material from that perspective. And SKM, we've already said, going -- everything going fine, of course, in light of COVID, it's always a question mark nowadays. We've always said there's a $6 million to $8 million EBITDA benefit for FY '21 in full run SKM, which you all already know.

The next question comes from Peter Steyn from Macquarie.

Vik and Brendan. If I may just jump into the EBITDA margin target slide, Vik. If one just looks at it, there's a couple -- there's a few basis points being added to your targets on a go-forward basis relative to where you were. Could you perhaps just give us a bit of a sense of where that uplift in margin is going to come from in your view? Is it incremental cost efficiencies? Or are you comfortable that you're going to be able to drive the top line and generate a bit of operational leverage if you wouldn't mind just giving us a bit of a sense there?

Sure. So mate, it's all of the above. I mean this -- our business needs to be consistently run properly every single day, every single week. Operational focus and cost on focus is -- has to be core D&A of Cleanaway, forever, in my mind, and I think that's what will remain, of course, right? So that provides us an operating leverage, that provides us as nimbleness. We do expect -- and again, I'm talking about non-COVID world here, I'm talking about a normal GDP. We do expect that we would expect us to win more muni contracts. We expect us to do better on revenue line consistently and flowing that extra waste and abrupt act to integrated assets, which we have now built, would help. Building downstream assets will make our commodity cost into commodity profit. We see that. And the last but not the least, I absolutely believe the data and digitalization piece, there's a margin improvement there. And it's amazing. We have a deep history. We are sitting on a data of 20, 30 years, and we have just started harvesting some parts of the data. So I'm quite excited about that. There's an automation process. There is still a lot of manual work which happens in the organization. So as you automate that, there's an efficiency there. So when you bring in more volume in a further efficient organization, it gives you margin expansion. So I can't tell you, Pete, each one of them will contribute 20 basis points, 40 basis points, but we know enough now to know collectively that we can be one of the best-in-class in the world. So that's what we're pointing into.

Perfect. And then maybe just on that theme, liquid and health services, that 150 basis point lift in EBITDA margins. Can you give us a bit of a sense of what the synergy realization contribution in the year was relative to just underlying business fundamentals, obviously, refocusing the liquid business, to some extent, on higher margin? I don't know if you're thinking about that as a synergy or not. But if you wouldn't mind just giving us a bit of a sense there.

I mean it's difficult to give you a synergy number by segment or BU because it's so mixed up. Now it's almost like a scrambled eggs. It's very difficult to bring out alone, but there's definitely a synergy benefit into APL because we have merged, as you know, the old liquid business of Cleanaway and a liquid technical business of of tox. We took the Parts washer business and put it in hydrocarbon. So it's a combination of -- there's definitely synergies there, but there's also definitely an improvement there as well. And so all of that is obviously very difficult to give that. I can absolutely assure you, we committed $35 million synergies for tox, and we have absolutely exceeded that for the enterprise. That is 100% sure. Health has performed very well. Hydrocarbons has performed very well. And so I think you're seeing a fundamental improvement in that segment with a proper focus. Combination of Toxfree and Cleanaway infrastructure assets have also added a lot of value. We can now divert waste at a right point at a right margin. So it's a combination of all the above, but yes -- but there's no doubt there's a synergy in there as well.

Second -- sorry, last quick one is just the new contracts that you've won in muni as well as the CBS in WA. How do you think about the overall contribution from a revenue point of view in the year ahead?

What I'm at right now, it's very difficult for me to give you that because if I give you those positives, I still need to see this whole COVID impact for the quarter. I mean they are, obviously, good contracts. So in CBS now, which, I think, in first of October and in WA, that's a regional WA, and you saw some muni contracts, some of them are reassigned, some of them are new. So just give me till October, and I'll give you a little bit more better signal on the guidance based on all of that, yes? So...

No worries.

Still then correct your minuses right now.

The next question comes from Russell Gill from JPMorgan.

A couple of questions. I appreciate there's a lot of uncertainty at the moment, particularly surrounding the increased lockdown measures in Victoria in your business. Can you possibly talk to -- I mean, the declared 12-month state of emergency in Victoria, which I presume would help you on some things in terms of access, but could have concerns on volumes? Can you just give us a bit more clarity about, I guess, what you've seen just in your Victorian business in the last, particularly in landfill volumes, given your exposure there? And then secondly, just timing around the West Gate Tunnel project and whether that could be something that, part of the pun, fills the hole, I guess, over the next 6 to 12 months as Victoria sees potentially material declining volumes.

Sure. So yes, there's no doubt, Victoria is a big and a good business for us, Russell. As you know, we've got a full bunch of assets. So let me go segment by segment. I don't see muni getting impacted negatively because of COVID. There's a number of people can stay home and then volume comes through. I think the C&I at the SME level, as you saw in our segment, will get affected. And that could affect our volume in landfills. Whether the muni will compensate for that, time will tell. It's very difficult to say. On your question of West Gate, there is no doubt, West Gate will more than fill the hole if I can use your language. It depends on what -- first of all, there are a couple of things on that. How much we -- first, we have to win it and how much we win it. I mean they'll have to -- but I actually think that could be a very good win for us, COVID or no COVID, anyway, from that perspective. The regional accounts are seem to be holding up well in Victoria. It's the metro, which is most affected by COVID so far. So I think that will be unknown for the next couple of months. But I think West Gate Tunnel would be -- could be accretive, COVID or no COVID, for us. Even if there's 12 months, I think, best case, depending on how much value you would get, would be quite accretive for us. So that's what we are seeing right now, mate.

Great. And do have an anticipated timing on contract announcement around West Gate and PFOS.

Listen, it's all in public domain. As you know, Transurban and they're all in -- and I understand Victorian government, they're all in mediation. So no. Understand, we are moving forward based on getting the approvals and designs done. And so is other parties as well, by the way. I do understand there are 3 parties who have a final design on the table, and we are definitely one of those. So yes, I just don't know anything more than that. Whatever is in public domain is basically enough.

Sure. And just a quick discussion on your Queensland post-collection strategy. You had a pretty significant fire at your landfill a couple of weeks back and my understanding is there's a decent EPA investigation. You initially got knocked back on your height extension. Can you just talk through -- I mean, there's clear understanding you're looking to buy a landfill up there, but you're now talking about waste-to-energy up in Queensland. So I was wondering if you could just a bit more detail about expectations on height extension on new churn, additional landfill and timing around some of those capital investments up there.

Yes. So a couple of things. So we've raised a couple of issues. Let me go one by one. So on niche recent fire, we do believe that -- we don't know for sure, 100%, but we do believe there was some trespassing there and defense was broken, and we reported that to the authorities. So that's -- just want to make sure there's a full picture around that, mate. The second thing was, listen, I think there is a -- if Switch Council has gone through a fair amount of channels of their own. As you know, the council was fired by the state government, then they had a recent elections. Diamond has announced energy from waste plant. These are other landfills, so if Switch has become quite a hot bed for voice and political agenda there. Having said that, we are continuing with a height extension. Now as far as -- and we are also looking for landfill, as far as energy from waste is concerned, most of you will remember, we managed Brisbane City Council Landfill and Transport Station. We have a long-term contract with them. We have an alliance with them and got aboard with them. And they have 0.5 million tonnes of waste, which is going into Rochedale landfill. There's a strategic reason why we wanted to in that contract a couple of years ago. Rochedale landfill runs out in '24, '25, everything going fine. And there's a whole opportunity available to Cleanaway on multiple fronts, whether it's a landfill, Russell, or energy from waste. And because we are a partner on PCC, it just gives us some insight into thinking. So those opportunities, we are pursuing all of them. And I wouldn't be surprised in future, we see ourselves having energy of waste with the Brisbane City Council as well as the landfill of our own. So we are pursuing all those options.

So just 2 follow-on questions. You mentioned in the presentation Victorian waste-to-energy as a potential strategic investment going forward. Obviously, the gate or the landfill you have is going up quite materially which would make the economic stack up a bit more. Can you also run, I guess, the largest trustful landfill in Australia down there as well? Can you just talk through, I guess, the net impact of that dynamic? I mean my personal understanding to waste-to-energy is as a huge strategic advantage, if you're running a huge land, it's almost like a defensive strategy to some degree. So you do have a lot of contracted volume. But a lot of your volume comes into your current landfill from external sources. So is the decision around waste-to-energy in Victoria, I guess, more of a defensive decision? Can you just talk through, I guess, the arguments around wast-to-energy for you guys in Victoria?

Yes. So it's a good point. So if you think about that, our landfill is in the west of Melbourne. There's a whole bunch of councils in east, which take their waste to comparators landfill, which runs out in a couple of years, as you know. And there's a whole of waste coming out of north of Melbourne, and then there's a regional one. So what we see in future is that it will be localized waste and localized solutions. And so it's quite possible for us a feature could look like us having energy from west and east of Melbourne CBD, on the eastern side of Victoria or in north, without actually compromising much of waste into -- coming into landfill. So it is as much strategic as kind of offensive and defensive. Remember, with SKM now, we have recycling contracts with municipalities, and there is a substantial amount of residuals comes out of that. And we do have a north transfer station, as you know, Russell, in Coolaroo, and we also have in Laverton. So those assets in combination with energy from waste strategically located kind of forms a local solution for the local areas where waste is now getting traveled -- traveling across the highways. So that's number one. Number two, we do believe the infrastructure and investment will carry on for ex lease. So we do see West Gate Tunnel kind of projects coming up over the next 5, 10 years. So I think it's a combination of both, and I don't -- I very well see a landfill owner owning a good energy from waste plant across Eastern state.

Okay. And then the final question, Vik, a couple of years ago, 18 months ago, you were very bullish on the ResourceCo JV in New South Wales. Obviously facing challenges about selling its fuel to the offshore markets. It was new to me that you'd sold your interest in, I guess, loss control. Can you just talk through the dynamics of ResourceCo, and maybe it's obviously been influence on how well progressed your waste-to-energy facility may be, but potentially what that means strategically for the business going forward, the decision to sell? And what your expectations are for that JV going forward?

Yes. So I'm still very bullish. The strategy is still right, mate. The future looks like for us having an energy-from-waste plant in Western Sydney, we have a transfer station in Erskine Park. We have a Wetherill Park ResourceCo facility. We have a waste coming into those 2 facilities, getting processed. You could see ourselves building a future mark and then going energy from waste. So solution is absolutely right, and the strategy absolutely right. What has happened in ResourceCo, 2 reasons. One, one of the largest customer in Australia, building company. As you know, a listed company, has its own set of challenges, and therefore, has some issues. They're working that through. And our feed material and mismatch of carbon materials in both of them. And on the top end, at the same time, Asians went through this whole phase of banning material and into that banning materials, press got caught up as well. So from other company, what we don't want to be seeing there is consolidating an asset and its earnings when it's going through the process. So we have just reduced our earnings to get to a 45%. The strategic bullishness has not changed if the timing is probably extended because of the issuers in -- out of our control. But it's still fast part of a net less of assets investments that, maybe, shall remain.

So on other things. So it's a -- rather than a sales or another party, it's essentially ResourceCo with 55% and you're now at 45%. Is that [indiscernible]

Yes, basically. that's what it is.

Okay. So rather than taking up the remaining amount, you only took up the remaining 20% of the economic interest.

Yes.

Okay.

Russell. Sorry, Vik, I just -- and that's what it was called out is that it's no longer a consolidated subsidiary. Now it's an equity-accounted investment.

The next question comes from Paul Butler from Credit Suisse.

Congrats on solid results in difficult conditions.

Thank you.

I just want to ask -- so you told us that in July, trading conditions are sort of in line with the average for FY '21 -- sorry, the average for FY '20. In sort of May and June, was it a bit better than that? And then with the issues in Victoria, it's gotten worse in July? Or how is that transition sort of fine out?

No. It was -- it's not worse than May and June. It's actually slightly better than June. But remember, when I say average of last year, first 3 quarters were good, as you know, Paul, and the last quarter was down. So when I say it's in line with the average of full year, then obviously, it's better than last quarter.

Yes. Yes. Okay. And then on the adjustments that you've made to the targets, just to be clear, is most of that -- all or most of that adjustment is simply for AASB 16?

No. Majority of this is AASB. So we wanted to give transparency to all of you guys. And so there is a part -- if you look at the slide money, you'll see partly of AASB, but we've also increased a slight extension on our margins because we feel there an opportunity is for us to improve further.

So for the industrial and the liquids, I think you've increased a little bit on the underlying basis, but solid it looks mostly simply AASB 16. Is that right? Is that correct?

Sure. Whatever the numbers on the slides, yes.

Okay. And then just lastly, a question about pelletizing facility, and you're going to take material from CBS in New South Wales. What's the term of your contracts for the New South Wales CBS?

Well, we still have a renewal to go through, so we're working through with the government of the renewal. So it will be another -- I don't have these numbers handy, call at this point, but there's a renewal process in place as well for New South Wales government.

So if it's a contract for an initial period, then you get a renewal?

That's correct.

And I mean are we talking 2 years, 5 years, 10 years? I mean...

Well, it's longer than 5. I would rather not say because it's in government's hand, of course, as you can imagine, but we have built a significant infrastructure. And the New South Wales CBS scheme is considered one of the most successful scheme in the country. So we expect to get that renewed, but the period obviously is government's hand. It is always a long, long period contract.

Okay. And there's no competitive process around this renewal, is there?

No, no that my understanding is, it's in the hands of the minister and the government. So they'll do it when they are ready to do it. And hence, I'm kind of reluctant to make a commentary around that because I just want to -- don't want to pull their hands into a situation, yes? So...

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

Just can I unpack the comment about the third quarter trading with revenue and EBITDA, and EBITDA up 10.5%. And where did that come from? Because that's starting -- that's a very steep increase over the run rate for the first half. And I think you sort of made some comments that there was some increased municipal and volumes coming through and the benefits really came through in the solids area on the post collection, so coming through in landfill. What I'm trying to understand is, does that -- is there a risk that, that unwinds as COVID sort of disappears and we go back to normal?

No, I don't think so, Cameron. I think the third quarter -- remember, we had a build -- so first -- second quarter in first year -- first half was better than the first quarter, so there was a fair amount of momentum building. We'd also done the final cost out of Toxfree-related integration in September, October last year. Some of the contracts we started were now getting mobilized. So all of that momentum was hitting us in the third quarter and hence, when COVID hit, if you, I mean, remember, I didn't make a point that we were running at the end of -- if March 31 was 30th of June, we would have hit the upper end of our guidance at that particular time, which $515 million to $525 million. So that was the confidence coming through. Now the cost out has stayed in the business, of course, which has helped us in fourth quarter, that we maintain our cost discipline. Obviously, the revenue impact we saw in SME segment and all that stuff in the fourth quarter. So I don't know for sure, Cameron, but I do expect with the cost/benefit and cost structure we have in place, if the revenue comes back, that our leverage should flow pretty quickly. But now we are getting into hypothetical, so we'll just have to wait and see how that turns out. So I'm not seeing that erosion has happened because that was part of integration synergies, cost out, revenue momentum. So -- and cost has not gone up. So we've maintained the cost structure.

Okay, great. And then just with some of the municipal waste tendering and maybe this sort of flows into SKM integration there. What are you seeing in terms of the municipal waste tendering environment? And you've made a comment, I think, on the SKM integration slide that you've renegotiated a range of contracts on commercial terms with the councils. Our understanding -- I mean clearly, SKM was loss-making, but our understanding was, in some cases, they were actually purchasing waste from council, which they within on selling and taking that sort of margin. Clearly, you won't be purchasing waste from councils under your ownership. So has all of that changed? And is that completely done? And what sort of uplift have you seen on those commercial contracts?

Well, so a couple of questions there. So one, so please remember, there are 3 types of contracts with municipalities gate: collection; comingle recycling, which SKM is about; and post-collection, which goes into landfill. So just keep in mind, there are 3 different contracts. We are not seeing any change in municipal's behavior. If the contracts are running out, contracts are running out, and they're retendering, they're putting it out there for tendering, and we are participating in them as we always did. On the SKM piece, remember they are commingled recycling, we are absolutely not buying volume, I can assure you that. The cost to the counts have gone significantly up. And they know that. I mean they know very well that the model of SKM was untenable. And you saw that. I mean you saw SKM situation what happens. So now, the contracts are being signed at a right level, I can absolutely assure you. Otherwise, we wouldn't be signing those contracts. So that volume will come through and coming at a right way. And we expect commingled recycling MRF rates to go all over the country. In theoretical terms, the gate fees of commingled recycling MRF should be matching or close to or even in some case higher than the commingle putrescible gate fees at landfill as a thumb rule. The reason is recycling cost ex higher process. And there's no longer commodity revenues to rely on which SKM is to rely on. So models, the fundamental model of commingled recycling has changed forever in the country and around the globe, by the way. So if you want, as a citizen or a councils would want, your waste to be recycled, and you want to do as a good thing, then a Cleanaway shareholder should not be paying from their pocket for you to feel good. So council has to pay for it, and citizens have to pay for it. I think that's what has changed, and that's going fine. So contracts are at a right rate. I'm very confident. Plus on top of them, we are also charging contamination, if contamination is beyond 7 points. So that's been done best to their municipalities that are as normal as trending is happening right now. And post-collections, as Russell asked before, they will put a tender out on bulk or -- and we will quote them as we go along. So no change there at all, Cameron.

Okay. That's great. So does that -- I mean does that link back into your comments about the commingling in the MRFs that links back to you, I think, one of the very early comments on the call you made about all of the MRF gate fees going up across the country. Is that linked into that comment about the...

That is correct. I mean absolutely. I absolutely believe nobody shareholder should be paying for citizens' recycling. If I want to recycle, then I need to put hand in my own pocket and give it because I want to feel good. I think those times that the companies, like waste companies like Cleanaway, would be compromising their own margin on profit to recycle is no longer valid because there's not enough revenue coming from commodities. So ultimately, recycle has -- it costs money and people have to pay for it.

Yes. Go it. And my last question is just about the federal recycling fund that was announced. What -- how are you thinking about that fund? And what it could do and what it could contribute or you could leverage from that announcement?

Well, I think what they're trying to do, to be fair with federal government, they're trying to encourage and state governments as well to encourage investment in resource recovery and recycling. The bands of the materials, which were supposed to happen has kind of been a little bit postponed by COVID, but that's still coming our way. Having said that, you can only develop a circular economy by having those assets. Now people didn't want to invest in those assets because there was not money -- much money in it. Now the model has changed. We're asking people to pay for recycling. Plus if we can create downstream assets, governments are happy to fund partly for it. So for example, the PET pelletizing plant in Albury-Wodonga, we have a $5 million brand from the New South Wales government. If we build HDPE or a glass beneficiation, we would be asking government to support those grants so rather than -- because it benefits the whole society and actually forwards the government agenda of circular economy. So it's a very good move by state -- by federal government, and they're about matching dollar-for-dollar for every state government investments. So for example, if you put $1 in and state government puts $1 in, federal government can put $1 in. So you have a 3x multiplying effect, which actually encourages investment and resource recovery. Now for us, those core agenda is to build a vertical integrated value chain with an investment in resource recovery. It's obviously music to our ears. So hence, we are very keen to participate in that, and we're very supportive of that.

The next question comes from Raju Ahmed from CCZ Equities.

Vik and Brendan. Look, a couple of quick questions. Vik, you talked about the number of trucks that were parked. Can you give us or disclose how many trucks were parked at the height of the COVID back in March, April, May and what it is now?

Raju, I don't have the numbers now, might -- it's only been Victoria, of course. But I think at peak, there were about 90 to 100 trucks parked at the peak. And then obviously, that affected the drivers and the overtimes and all that stuff. So that was a bit peak nationally.

Right. But is it materially lower now?

Oh yes, of course, because I think the other states are picking up. South Australia and WA is getting back to normal. So yes, so that's happening.

Okay. And I don't know if this is a fair question, but that change in the number of trucks, is that a reasonable or an anecdotal guide to the direction of your collections revenues? Or that's probably reading too much into it?

No, you are, mate. Don't connect those 2 data because there were some C&I tucks or liquid tank. So there's -- I mean, no. There is no correlation to that. I won't take that.

Okay. All right. No problems. The second question was, Vik, you mentioned right at the start that your trial is driver interface system and you're looking to roll it out. Is that going to be material in the context of CapEx?

No. It will be part of our program, Raju. It's Israeli technology which provides quite a interface to the drivers. And we have absolutely seen a material change in. And I think it'll pay for itself very quickly because the workers' comp and the insurance paybacks and all that stuff. So no, it's absolutely part of our CapEx. No, it's -- we're talking about under $10 million, frankly.

Okay. All right. The third one is -- we've talked about this before many times. I think the revenue and the EBITDA leverage, 1% movement in revenue is about 1.5%, 2% movement in EBITDA growth, if I recall right. With the advent of the pandemic has that equation changed? How should we be thinking about it going forward?

Yes. I don't think so fundamentally it has changed, Raju, but I think we are in an awkward time here. I mean -- so I think you'll have to give me a little bit of break on that issue during pandemic times because I just don't know. It's quite a variation we are seeing between state to state. But fundamentally, if you look at the last 5-year history, you can clearly see that come through strongly. So I don't think so fundamentally it has changed. In a short term, time will tell, yes? And because we could have taken a highly aggressive cost section in the second half of this year -- on second half of FY' 20 and given you a much higher operating leverage, but that would not have been sustainable. And I generally believe we didn't did an absolute right thing keeping all our employees. Now if COVID retains for 2 years or 1.5 years, well, obviously, that equation changes, of course, right? So your operating leverage comes from moving your labor and fixed cost, labor cost and the fleet cost. We move fleet, we move labor discretionary cost, but the other labor costs, we did not move. So in the pandemic times, we are looking at a different situation. But fundamentally, in a normal time, the operating leverage has not changed, and it should not change. And our last 5 years have proven that.

Yes. Okay. The last question, more of a strategic one. Looking at your acquisition prospects. You've pretty much got your house in order in the context of cash flows, like the mobile of the legacy landfill litigation -- rectification costs and so on. So looking ahead, the balance sheet is almost in a pristine shape, so to speak. And you've already flagged some opportunities that you're looking at, and I think it was Slide 27. How do we think about acquisition approach going forward? In the recent past, you look to have shared the risk into the acquisition as well as technical expertise and obviously, the acquisition bill with partners, for example, Western Sydney energy from waste, plastic pelletization and so on. Is that going to be the modus operandi with acquisitions going forward, particularly the larger ones?

I don't think so. I mean if there's straight-line acquisitions, which is part of our strategic agenda, which means -- I mean we have a very clear view of what we would like to have. And so if there's state acquisition like Toxfree, Raju, they'll be straightforward. But if there are technical investments like waste-to-energy, energy from waste, I think it's a prudent thing to do that we could do with the partners. So if they're a greenfield and there are new greenfield, I still believe it's always good to do with somebody who brings something to the table. But if they are pure acquisition, and we are -- I think, we are now good at integrating stuff, be a very high level of confidence that probably would do it alone, but greenfields could be joint ventures.

So if I could just focus, pretty much my final one is, on that outright acquisition, how are you seeing the landscape now in terms of opportunities? Has COVID-19 created stressed businesses that otherwise would have been fantastic, and there's a chance to be opportunistic in there? How are you reading the landscape now?

Yes. I will give -- I mean there is definitely -- not every business, as you know, Raju, gets managed sharply. So there's obviously distress in some businesses and small- to medium-sized business. So we are definitely seeing our pipeline a lot longer than we would have said 9 months ago.

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

First one is, hopefully, a very quick question. Could you just confirm that with Toxfree and SKM now having been fully integrated that the underlying adjustments for fiscal '21 will go down quite substantially?

Yes. Brendan, do you want to answer that? The answer to that question is yes, Scott. But I'll just let Brendan answer that.

Yes. Absolutely, Scott, we have maintained strong discipline about the acquisition process and the integration process. And when done is done, that's physically and financially complete. So no more of those coming forward in FY '21.

Great. And then, Vik, just hopefully, it gave you a chance to get a glass of water, but could you just comment on Industrial & Waste Services and Liquid Waste & Health Services divisions, now that you've integrated Toxfree and you've had a chance to so I guess, to a little bit more strategic thinking in those areas. Could you just comment on what you think the market size is for those divisions, please? You got about $800 million of revenue in between the 2 of them. What's the total pie that you're fighting for here?

I think it's difficult to say simply, mate, because it's a different pie charts for different. So for example, health in clinical waste has a different pie chart versus a personal health care versus a hazardous liquid versus a grease trap versus an oily water wash products. It's very difficult for me to give you -- I can give you an average of an average number. And I'm -- yes, I think we would have 30 -- if you take average of everything, I think we will have about 35% plus market share in that segment. That would be the best way I can describe that. But please remember, this is average and average of everything.

Yes, yes. It just gives me a sense of relativity, that's all. And then I guess the last question, you've spent a little bit of time on waste-to-energy, obviously, in New South Wales, and you've highlighted potential opportunities in Queensland and Victoria. The Environment Minister in New South Wales is on the record saying he's not sure that the social license exists in New South Wales for waste-to-energy. Could you just tell me what -- I know you're going through a process, but what is it that you see as the key deliverables from the JV that will allow this project to go ahead?

I think one thing, Scott, I've learned is not to comment on what politician says because simply, basically, what they have to say in the environment ecosystem they work in. I mean we are getting pretty good support from the public servants and the planning ministers' area. They're -- I think most people can see that this is coming our way. I don't think so we can pretend any more that Australia is not going to have energy for waste in the future. I mean the very fact that New South Wales have one of the highest levy in the world. If you think about why do they have highest levy in the world because you might landfill avoidance, and if you want to landfill avoidance, then where would the waste go? It has to go to energy from waste. So if you look at the fundamental core elements of it, you will see, it's prime for that. We have done a lot of work on social license to operate, a lot of work. Having said that, would it be noisy? Of course, it would be every infrastructure project in country is noisy. But I'm -- at this point, I'm very optimistic and confident. Otherwise, we won't be doing what we are doing, spending so much effort and time doing that. This is a game changer for the industry, it's a game changer for New South Wales. It's a game changer for Cleanaway and Macquarie as well. So this is one of those projects once it's done, people will remember, this is a key milestone in the waste set in Australia, especially in New South Wales. So I think the importance and the significance of that, I generally believe, will hit the politicians and the bureaucrats and everybody in coming years, I think. So we are moving forward, and we are confident. That I will say, Scott.

The next question comes from Nathan Lead from Morgans Financial.

Just first question from me, I suppose, once again on that waste-to-energy. Can you talk through your likely revenue contracting approach there? And I suppose, particularly I'm sort of thinking about volume risk, whether you'd be likely to take that or not? I understand the 2 projects over in Perth have different approaches on that front. So could you just talk through that, maybe?

You're talking about energy from waste, Nathan?

Yes, that's right.

Sorry. Well, in New South Wales, if you think about that, we don't have a landfill, and we send our waste through traceable ways to competitor's landfill. That's number one. Number two, we do understand that a lot of municipal post collections contracts will be coming up for renewal in the next couple of years. So we've got a line of sight of those. Remember, we've also -- I think, Russell asked the question before, we have a ResourceCo JV. We have a 300,000 tonne eastern or western transfer station. So we have been building, as I call, necklace of assets around energy for waste for a while. So I'm not that concerned about volume in New South Wales. I'm pretty confident by the time we cut the weapon, we'll have volume locked in.

Okay. That's good to hear. Second question, obviously, you've talked about a number of your contract wins, but has there been any meaningful contract losses during the period? And have you also noticed a change in I suppose, contracting approach across national accounts, maybe going from national to more sort of state-based contracting approaches?

So the answer to the first question is, no. We haven't had a major loss, number one. Number two, no. I think the national accounts and mid-market are similar. I mean customers go from time to time. Bullies went from centralized, central to state by decision. Other customers have gone from state to center, and we have won a couple of them. So no, but that is just part and parcel of -- there's no strategic thing I can read in that much. That's part and parcel of in our game. But no, we went at a major loss now.

And I suppose the third question I've got is, when I read the quarterly sort of transcripts for some of the major waste management companies over in the U.S.A. They talk about how working from home has created, I suppose, increased waste generation within the residential sector. And that providing them with an opportunity to maybe go and speak to many customers about increased pricing. Is that an opportunity that Cleanaway might find they come across over time?

Well, there's a fundamental difference, Nathan, I'm glad you're hearing the global peers, mate, is that is one thing is in United states, and I lived in U.S., you don't negotiate contract with council, you negotiate residential contracts individually. So that's a fundamental difference there compared to us. The second thing is when they negotiate with councils or, as they call them, call them councils, they negotiate C&I within that council with the residential. So it's a different model, and that's why they take either a price increase or price up. We can't do that. We have price up and downs levers in our contract, but we haven't used force majeure with the municipal contracts because we didn't have to. I mean we obviously -- SKM, we were quite firm on contamination charges, et cetera, when the contamination start to come through. But no, we haven't applied that as yet.

Have you noticed like a major increase in weight per bin on the resi front?

No. I mean we have seen rate per bin go up, but not to the extent that we need to go back. We saw contamination go up in our SKM assets as people were getting a little bit more lethargic about sorting it properly, and then we started negotiating with councils on increasing the contamination charges, which we have done.

The next question comes from Xindi Shao from Morgan Stanley.

Vik and Brendan. I just have 2 quick questions. And we have already touched on the Victoria lockdown impact on different segments. Just wonder in general, what's the earnings contribution from Victoria, like for the enterprise-wide.

Xindi, we will not do that. We will not keep up that level of details, plus Victoria that has solids and liquids and health and everything. So we don't give that level of detail, as you know. So sorry, I can't give you that.

Yes. No worries, that's all right. The second one is related to the Perth MRF. Just wonder what's the rough estimated reconstruction costs. And is that included in the CapEx target level?

Yes, it is, Xindi. And we also -- it was insured, so insurance money has come through. So it will be part of that. And the total cost will be -- Brendan, confirm me, if I'm wrong, it's around $25 million, correct?

That's correct, Vik. And we'll be going to absorb that do we tend to absorb that in our 10% of net revenue.

Operator, we'll take one more last question, thank you, in the interest of time.

The last question comes from James Brennan-Chong from UBS.

Just in the context of that last point you made, you haven't seen a change in weight per bin on the muni side. Just interested to know, in your conversations with existing and pre-existing muni contracts, how has COVID-19 reframed those types of discussions? Particularly in the context of, I guess, more people staying at home, I would have thought that you get more weight per bin, but you're not really seeing it right now is my understanding. So how have those conversations being reframed with new and existing customers, please?

I think -- I mean you're talking about on muni customer, James? Or...

Muni customers, yes, please.

Right. Okay. Well, I think -- I mean every time something like this happened, it actually trains our salespeople and the front staff to put things in the contract. So for example, when commodity hit as we kind of set out or we got into those costs. So now we talk about contamination quite a lot. We talk about -- if there's a new contract coming in, we'll probably talk about weight as well and the number of lifts. So that has now started to have that conversation more and more. And I think municipalities, generally, who would not engage into contamination a couple of years ago, are now quite open to have a discussion because they're seeing it themselves. So it has been quite good from that perspective. Although temporarily makes the discussions difficult but when a customer sees those challenges themselves, they are quite open to have this conversation. So we are seeing that happening now.

If I might just add to that -- or James, just -- your premise was no extra weight pee bin. So, yes, we're getting extra weight when we pick up municipal runs. What Vik was saying before is that, that's not putting any pressure on our logistics network at all. So we've got capacity in our trucks to take that extra weight, and we get the benefit of that extra weight in landfill.

Got it. Yes. Okay. And then by extension, when you think about your C&I customers, I guess, previous conversations was always about helping to reduce churn. Has COVID-19 accelerated churn at all? And in your margin targets for SWS over the medium term, what goes into that in terms of expectations around C&I and potential churn because of COVID-19?

Yes. So a couple of things on that, James. The churn -- we expect churn to slightly go up, which it did, but part of that is obviously because when the customers shut down not because when they changed the calling schedule, but if they shut down or close, that's considered as part of the churn. So you expect COVID to have a slight impact on that. On Solid Waste Services, as I was saying before, there are a couple of things in that margin expectation moving forward. Of course, management of churn is always the case. Better data harvesting gives us better pricing options. We can now see pricing by customer -- excuse me, by customer by bin by site, which gives us an opportunity of margin by route. So theoretically, we can actually make every single truck a P&L of its own, which is a quite game changer for us, if you think from a pricing and margin appreciation perspective. So that's a big part of that. Building assets. Think about plastic and glass, glass right now it cost us money. If you convert them to glass beneficiation, that goes from an average cost of disposing that of $50 per tonne to $50 per margin. So those things are all included part of the Solid Waste Services next phase of improvement, and that's where we're hitting. But churn will always go up whenever you have pandemic-like events, of course. But it hasn't gone materially up, by the way. But it hasn't improved. I mean we have been improving churn consistently for years, and we saw in quarter churn remained steady to slightly up, which is expected.

Got it. Okay. That's clear. And then just finally, just one last thing. Victoria going through a second lockdown now. Just in the context of your comments around the weak activity in Victoria. Is there anything different that you're seeing from your perspective of the Victorian lockdown in March and April versus now? Or is it impacting your business in a similar way?

No, it was similar. I think we're not seeing fundamental -- this lockdown is a little bit harder in a sense, it's been really stronger, if I can make -- but not that much. I mean it's still trucks are rolling, waste transfer stations are open, material coming into landfill and transfer station. So not much from that perspective, mate. Operator, in the interest of time, we'll call it a day. I know there are some questions on webcast. We will take it one-on-one as we go and move forward. Is that okay? So thank you all, and thanks, everybody, for the support. Appreciate it. Thank you.

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.