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

Welcome, ladies and gentlemen, to the 2020 Annual General Meeting of Cleanaway Waste Management Limited. My name is Mark Chellew, and I'm Chairman of Cleanaway. I will be chairing the meeting today. I also will introduce you to my fellow directors: Vik Bansal, Chief Executive Officer and Managing Director; and Non-Executive Directors, Ray Smith, Emma Stein, Samantha Hogg, Terry Sinclair, Philippe Etienne; and Mike Harding. Also in attendance are the CFO of the company, Brendan Gill; the General Counsel and Company Secretary, Dan Last; and the company's auditors, Ernst & Young, which is represented by Brett Croft, a partner with the firm. As you are aware, in response to government restrictions and the potential health risk arising from COVID-19 pandemic, the Board determined to hold this year's Annual General Meeting virtually. We very much appreciate your understanding at this challenging time and thanking you for joining our virtual meeting. The Notice of Meeting dated 11th of September 2020, was made available to all shareholders. I propose to take the Notice of Meeting as read. Today's meeting is being held online via the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting. In addition, shareholders and proxies have the ability to ask questions and submit votes. Should you experience any technical difficulties, a recording of the meeting will be available on our website after the meeting. Shareholders were given the opportunity to ask questions in advance of the meeting, and we'll endeavor to address as many questions from shareholders that we can during the course of the meeting. Questions can also be submitted at any time during the meeting using the Lumi platform. You do not need to wait until the relevant item of business to submit your question and can begin submitting questions now. They will then be addressed by me at the end of formal business. To ask a question, press on the speech bubble icon. This will open a new screen. At the bottom of that screen, there is a section for you to type your question. Once you have finished typing, please hit the arrow symbol to send. When asking a question, please specify which item of business it relates to. We will ensure there is a reasonable opportunity for shareholders as a whole to ask questions and make comments at this meeting. However, they may not be time this morning to answer every question or comment received. Questions will be moderated to avoid repetition. And if questions are particularly lengthy, we may need to summarize them in the interest of time. Questions should relate to the items of business under consideration at today's meeting. Voting today will be conducted by way of a poll on all items of business. And to further provide you with enough time to vote, I will shortly open voting for all resolutions. At that time, if you are eligible to vote at this meeting, a polling icon will appear on your screen. Selecting this icon will bring up a list of resolutions and present you with the voting options. To cast your vote, simply select one of the options: for, against or abstain. There is no need to hit or submit or enter a button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed at the end of the meeting. I now declare voting open on all items of business. Please note that only shareholders, proxy holders or all of our shareholder representatives may vote. The polling icon will soon appear. Please submit your votes at that at any time. I'll give you a warning before I move to close voting. When voting is closed, your final voting selection will be recorded. Any directed proxies given to you by a shareholder will automatically be cast as directed when the poll is closed. If you have any difficulties voting or submitting questions, please consult the Lumi -- please consult Lumi online meeting guide, which can be accessed with the Lumi platform and is attached to the Notice of Meeting available on our website. The guide includes a helpline number to call should you require assistance during the meeting. The help line is +61-3-9415-4024 within Australia. Before we move to the formal part of the meeting, I will further spend some time providing an overview of Cleanaway's performance over the past year. After my address, Vik Bansal will provide an update on the company's business activities. I will then open the formal meetings -- formal proceedings. So now to the Chairman's address. It's my pleasure to once again address shareholders as Chairman of Cleanaway Waste Management Limited. I am pleased to report that your company once again made significant advances in executing our strategy while delivering a strong financial result. During the year, we completed the integration of Toxfree Solutions and took significant steps towards completion of legacy landfill remediation and rectification program. Additionally, we acquired and integrated the -- and rehabilitated the assets of SKM Recycling Group, further strengthening our network of prized infrastructure across Australia. Exciting new initiatives in energy from waste and plastics and glass recycling are underway. The underlying net profit after tax rose 8.7% to $152.9 million or an increase of 6.7% to $150 million on a like-for-like basis, using the new AASB 16 accounting standard. This is an outstanding result given the disruptions caused by the COVID-19 pandemic. Just as important is that no Cleanaway team member lost their employment during the period as a result of these external pressures. Shareholders were rewarded with a 15.5% increased dividend, fully franked, or $0.041 per share compared to $0.035 per share paid last year. The full year dividend payout ratio of 54.9% is in line with the Board's target range of 50% to 75% of underlying earning per share. We anticipate that continued improvements in our profit and cash flows will see increased dividend payments. Safety continues to be a key priority for Cleanaway. And in full year '20, we achieved a significant reduction in our total recordable injury frequency rate. Although the rate is now at less than half the 2015 rate, we will not be satisfied until we achieve our goal of 0 harm. We recently released a comprehensive Sustainability Report, our first to be aligned to the United Nations Sustainable Development Goals and the Sustainability Accounting Standards Board Waste Management Standard. This details of your company's performance on a number of sustainability criteria, including health and safety, diversity and inclusion, resource recovery, environmental impact, climate change and transition to a low carbon energy. I commend you this report to you. Our commitments to make a sustainable future possible is overseen by our Board's Sustainability Committee, and we plan on continuing to work with our stakeholders, including government, regulators and communities in which we operate, to maximize the environmentally responsible handling and disposal of waste. Now I would like to talk about the management of your company. First, I would like to thank Vik and his management team for their dedication and commitment, especially during the COVID-19 pandemic, when sacrifice and extraordinary efforts have been required to provide our essential services to customers and communities while protecting jobs in the company. Vikas has led Cleanaway with a passion and dedication that has driven some exceptional shareholder returns. You may have recently read some media reports that raised concerns with Vik's leadership style. I can assure you that Vik takes all -- the Board takes all allegations of misconduct seriously. These are difficult matters, and we have done our utmost to ensure a balanced and measured response to claims that have been made. Following thorough investigation, the Board and Vik discussed certain of these issues extensively. And Vik has pledged to change certain aspects of his approach that have not been consistent with the development of a more progressive culture within the company. Vik has apologized to the Board, to the staff and to the public and has agreed to surrender his LTIP entitlement for 2021 as a further expression of his contrition. The Board acknowledges the sincere efforts that Vik is making and has continued to support him based on his actions and clearly stated commitment to change. I would also like to pay tribute to Brendan Gill, who has announced his intention to retire next year. Brendan has been Cleanaway's Chief Financial Officer since September 2014 and has contributed significantly to our transformation. Brendan will leave the company in a healthy financial position. We have a strong balance sheet, ample liquidity and our net debt-to-EBITDA ratio of 1.46 as of the 30th of June 2020, is well inside our covenant range and our internal target range of 1.5 to 2. Brendan has provided Cleanaway with ample notice to facilitate an orderly transition. He will hand over to Paul Binfield on the 1st of February 2021, but will remain with the company until July 2021. We are fortunate someone of Paul's caliber is replacing Brendan. Paul is a proven CFO with extensive experience in complex operating environments across many different industries. He will join us from Nufarm Limited, where he's been CFO for the past 9 years. During the year, we are fortunate enough to welcome Samantha Hogg on the Board of the company. Samantha has added to the depth of skills and the experience on the Board and has made a significant contribution since her appointment. Following on from Samantha's appointment and to assist an orderly succession process during the year, the Board established a new policy for maximum period of service for nonexecutive directors. Nonexecutive directors will now have a maximum period of service of 12 years from the date of their appointment, unless the Board determines otherwise. However, next year, we expect to continue the process of Board renewal with the appointment of another director. Ensuring appropriate diversity at the Board level, including by gender, will continue to be a key consideration in Board succession planning. I would also like to acknowledge my fellow Board members and thank them for their efforts, commitment and wise counsel over this past year. I look forward to working with them in the future. I'd now like to pass over to Vik to address the meeting.

Thank you, Mark. Good morning, everyone. It is my pleasure to once again provide this report to shareholders on the performance of your company in the past year and to update you about some exciting project -- prospects. The COVID-19 pandemic presented challenges no one could have foreseen. And I'm immensely proud of the way in which everyone at Cleanaway responded by adapting their lives and work practices to provide safe, reliable and efficient service to our customers despite this disruption. At the outset of the pandemic, we established 3 priorities, those being: ensure the safety of our people; keep our company sustainable and, hence, people and jobs; continue serving our customers as an essential service. In spite of the unprecedented challenges posed by the pandemic, I'm pleased to report that today, we have been able to deliver on all of these 3 priorities. Given this backdrop, I believe that each one of our operating segments performed very well for the year. Solid Waste Services and Liquid Waste & Health Services both reported increased net revenue and earnings. A decision was made to improve the quality of earnings in Industrial & Waste Services by exiting lower-margin, less-specialized services. This established a basis for higher returns. For the fifth consecutive year, we recorded growth in key financial metrics. I believe this demonstrates the strong defensive characteristics of our business and our revenue streams. Underlying EBITDA grew 2.5% to $473 million. EBIT rose 4.6% to $251.9 million, and underlying net profit after tax was up 8.7% to $152.9 million. For simplicity today, I'll refer to all financial measures on a like-for-like basis without adjusting for the new AASB 16 accounting standards. You can see the results on a pre and post adoption basis in our results presentation. Our statutory NPAT was slightly lower at $112.6 million due to costs associated with integrating Toxfree and SKM and net costs associated with the Perth Material Recycling Facility fire. Our strong cash conversion of 108.2% was very pleasing. Operating cash flow was up 4.3% to $366 million, and our free cash flow was up 11.5% to $230.1 million. This allowed the Board to increase the final dividend to $0.021 per share, resulting in $0.041 total dividend per share, up 15.5%. We have made significant changes to your company over the past few years -- past 5 years. We have now reached the halfway mark of our Footprint 2025 strategy. Significant milestones in this strategy realized during fiscal year 2020 include: completion of the integration of Toxfree businesses on time and realization of more than $35 million of annual synergies; completion of majority of legacy landfill remediation and rectification program; and the acquisition, integration and rehabilitation of SKM Recycling Group's assets and securing new contracts. Strategic initiatives underway for the next phase of the strategy include a proposal to develop an energy from waste facility in western Sydney in a joint venture with Macquarie Capital, utilizing technology already proven and used in Europe. The project's environmental impact statement went on public display last week. A plastic pelletizing plant in Albury, New South Wales in a joint venture with Pact Group Holdings Ltd and Asahi Beverages. This facility will create a genuine closed-loop recycling solution for PET plastics we currently recover through our collections network. We also expect to complete the rebuild of Perth Material Recycling Facility, or MRF, by the third quarter FY 2021, assuming no COVID-19-related disruptions. Cleanaway today is more than double the size of the company in 2015. This has seen our workforce grow from 4,000 people, who are mostly collecting and disposing of waste, to more than 6,000 people engaged in Australia's leading waste collection, processing and recycling enterprise. We have grown through a combination of organic growth and strategic acquisitions and have invested more than $1 billion in Australian communities. Reorganization, rationalization and integration of acquired businesses and assets have been part of this journey, but throughout here has been a stable core of experience and talent. The average tenure of the general managers in our business today is about 11.5 years. And the average tenure of the top 40 people that make up our executive leadership team is just under 5 years. Facilitating our transformation has been a formidable exercise and has necessitated some difficult decisions. I now recognize that my determination to turn around a struggling business and drive a high-performance culture led me to sometimes behave in a manner inconsistent with the values I aspire to. I am sorry for that, and have resolved to improve as we embark on the second phase of Footprint 2025. I believe passionately that we are building a great company and making a sustainable future possible by helping to drive a circular economy. We have 4 key strategic pillars which we focus on in both horizon 1 and horizon 2. They are: people, markets, assets and finance. People remains and will always be 1 of the 4 strategic pillars essential to our mission of making a sustainable future possible. We've had a lot of success with market, assets and financial pillars of our scorecard in the first half of our Footprint 2025 journey. Benefits to shareholders from company transformation have included increased dividends and a higher share price, providing a total return of over 200% from FY 2015. We need to do better on people and culture fronts. And that starts with me as your CEO, owning this fully and how I lead the business day-to-day through the second half of this strategic journey. I want to assure you, and I remain very confident, that Cleanaway will become an employer of choice in the coming years. And I intend to lead that transformation with the same passion as we have done with the other strategic pillars. I intend to bring to the table people-related key metrics and targets for the company, followed by half yearly updates, as we do with safety and other metrics. We track our people's experience through annual employee engagement surveys, with the results of 2020 engagement survey expected in coming months. We will, as always, use the outcome of this engagement survey to identify the areas that need most improvement. We will communicate metrics to ensure transparency and accountability. It is worth noting that the voluntary turnover in the company with 70% blue-collar workforce, was 14.6% in FY 2020. Any good to great journey of people and culture starts with safety. Safety is always our #1 priority. And having a workforce that is safe, takes pride in the company they work for and believes in the mission and vision of the company goes a long way towards success. Our safety performance in FY 2020 improved by 21.1%, with total recordable incident frequency rate falling to 4.5, less than half the rate of FY 2015. I will now provide you with an overview of FY 2020 performance by each of our 3 operating segments. The impact of COVID-19 on Solid Waste Services volume was mixed, with reduced volumes from mid-market and SME customers, although residentials waste was up. Revenue for the full year grew by 0.8% or by 2.4%, excluding commodity revenue, and EBITDA margin expanded by 20 basis point to 26.1%. The higher revenue and margins resulted in EBITDA up of 1.5% to $358.1 million. The SKM assets that were acquired in late 2019 are expected to deliver a full year contribution in FY 2021. We continue to win new contracts during the year, including the Randwick, Wyndham municipal contracts, South Australia Council Solutions and Melbourne's largest municipality, the City of Casey. Renewables include Blacktown, Hornsby and Cardinia. Industrial & Waste Services net revenue and earnings declined during the year as we exited contracts with suboptimal commercial returns. However, the result of focusing on higher-margin work and better asset utilization, together with the realization of synergies from integration-related activities, was a 70 basis point expansion in EBITDA margins to 14.3% and 20 basis point expansion in EBIT margins to 6.8%. The Liquid Waste & Health Services business is now a strong, integrated group of businesses with good growth prospects. The segment reported solid improvement in revenue and strong improvement in earnings in FY 2020, as EBITDA margins expanded 150 basis point to 19.1%, EBIT margin expanded by 140 basis point to 12.5%. Trading conditions have continued to be mixed through the country -- throughout the country, and impact of COVID-19 has been felt most in Victoria. On a group level, our first quarter EBITDA for FY 2021 was in line with FY 2020 full year run rate, with conditions further improving in September. We expect to see improvement from our businesses as they come out of COVID-19-related restrictions. We remain optimistic and supportive of the recently released federal budget. We expect FY 2021 full year EBITDA to be moderately higher than FY 2020, subject to a recovery in economic conditions in the second half of FY '21. We will provide a further trading update with our half year results. In closing, and on your behalf, I would like to thank the management team and all the employees and contractors of Cleanaway for their tremendous effort and sacrifices during the past year. Cleanaway would not be the great company it is without their passion and their commitment. I would like to echo Mark's tribute to Brendan, and I thank him for his friendship, support and diligent efforts during the past 5 years as we undertook the challenge of transforming Cleanaway. I would also like to extend my personal thanks to our Chairman, Mark Chellew, and the Board of Directors for their unwavering support and wise counsel to me. Their encouragement inspires me to be a better leader, and I'm optimistic about continuing to deliver improved performance on all fronts as we deliver on the full potential of Cleanaway. Ladies and gentlemen, I will now pass it back to Mark for formal resolutions.

Thank you, Vik. Transcripts of both my address and that of the CEO, Vik Bansal, are available on our website and the ASX company announcement platform. Ladies and gentlemen, we'll now continue with the formal business of the meeting. As you are aware from our Notice of Meeting, we have 4 items of business today. Items 2, 3 and 5 require a vote. Please note that item 4 in the Notice of Meeting relating to the granting of performance rights to the CEO, Vik Bansal, have been withdrawn and will not be put to a meeting. I refer you to our ASX announcement on the 24th of September 2020, for a summary of the reasons for the withdrawal of these resolutions. I confirm that I'll vote all proxy -- open proxies given to my discretion as Chairman in favor of all resolutions. The results of voting will be released to the ASX after the conclusion of the meeting. Finally, I appoint Christopher Dedrick of Computershare Investor Services as the returning officer. I'll now move to the first item of business, the financial report. The first item of business is a receipt in consideration of the company's financial report for the year ended 30th of June 2020, and the Directors' Report and Auditor's Report, which are now before the meeting. Please note, there is no vote on this item of business. Shareholders will be given a reasonable opportunity to ask questions of Mr. Brett Croft, a partner of Ernst & Young, Cleanaway's auditors, relevant to the conduct of the 2020 audit, the preparation and content of the Auditor's Report, the accounting policy adopted in preparing the financial statements and the independence of the auditor. All questions to the auditor should be, in the first instance, to be addressed to me as Chairman, and if appropriate, I'll ask Mr. Croft to address the meeting. I will now briefly speak to each of these resolutions. You'll be able to see the number of proxies received in respect of these resolutions displayed on the screen. Item 2 of the agenda is to consider the company's Remuneration Report for the year ending 30th of June 2020. The Remuneration Report is contained in the 2020 Annual Report. In accordance with the Corporations Act, the company will disregard any votes cast on this resolution by any key management personnel of the company, including the directors and closely related parties of these persons. I'll now move to the next item, the election and reelection of directors. Items 3A, 3B and 3C relate to the election and reelection of directors. A separate resolution will be put for each director. Item 3A relates to the reelection of Philippe Etienne. Philippe, who retires in accordance with the company's constitution, and being eligible, offers himself for reelection. The Board, in the absence of Philippe -- the Board, in the absence of Philippe, unanimously supports his reelection. Item 3B relates to the reelection of Terry Sinclair. Terry retires in accordance with the company's constitution, and being eligible, offers himself for reelection. The Board, in the absence of Terry, unanimously supports his reelection. Item 3C relates to the election of Samantha Hogg as a director. Samantha retires in accordance with the company's constitution, and being eligible, offers herself for reelection. The Board, in the absence of Samantha, unanimously supports her election. The Board has conducted appropriate checks into Samantha's experience and background and is satisfies she's an appropriate person for election to the Board. Now I will move on to the next item of business, increase in the non-executive director aggregate fee pool. It is proposed that the fee pool for non-executive directors be increased from $1.5 million to $1.9 million per annum, an increase of $400,000, effective from the date of this meeting. The fee pool is inclusive of superannuation contributions. Further information in relation to the proposed increase in these fees are set out in the Notice of Meeting. I will now address questions from shareholders. Dan Last, our General Company and Counsel Secretary, will read to me the questions, and I'll decide whether to respond to it myself or ask one of my colleagues, including Brett from Ernst & Young, to respond. Whilst Dan is queueing those up, just a reminder that I'll close the voting at the end of question time, so if you have not yet done so, please submit your votes.

Dan, what is our first question?

The first question is from the Australian Shareholders' Association, who have noted that shareholders have not been listed as stakeholders in certain parts of the company's Sustainability Report, and have asked whether this is deliberate or an oversight.

Thank you, and welcome ASA to the meeting. For clarity, this was not an oversight. We have the shareholders represented under the phrase capital providers, being our equity capital providers.

Our next question also comes from the ASA. In the withdrawn item 4A, approval of LTI grant to Vik Bansal, the number of performance hurdles has been reduced to 2, whereas previously, there were 3. The hurdle concerning ROIC has been withdrawn. Why was that?

ROIC was already included in the STI performance hurdles, so this was intended to simplify the LTI structure. ROIC remains an LTI performance hurdle insofar as a gateway hurdle for LTI vesting.

The next question also comes from the ASA and relates to TSR. Given the relative TSR award for the 2018 LTI, Cleanaway appears to have achieved above the 75th percentile for the relative TSR in the ASX 200 Industrial index and has done so for at least the last 2 years. Is this a measure of performance over the 3-year performance period? Or is it measured over the last year of the period? Could you please explain the calculation?

This is a 3-year measure from the 1st of July 2017 to the 30th of June 2020 for Cleanaway relative to the benchmark for the same period.

The next question also comes from the ASA, who have asked the question of the company's auditors for an explanation as to why the company's NPAT, after underlying adjustments, is substantially different to the company's statutory NPAT.

Okay. This is actually a question for the company, not the auditors. We present both statutory and underlying results and, therefore, provide more information to shareholders. Underlying results are presented to show the performance of the business on a like-for-like basis for each period. To do so, we adjust for items that are not business as usual or regularly occurring items. We have a policy that outlines how and when such adjustments are made, and a detailed reconciliation is provided on Page 35 of the Annual Report within the Directors’ Report.

The next question comes from [ Nathan Richards ], who has asked, why the Board and the AGM, HR have sat silent to the behaviors of Mr. Bansal for years.

Thanks for your question, [ Nathan ]. As discussed during my speech, the Board takes all allegations of misconduct seriously. We have conducted thorough investigations in the allegations against Mr. Bansal and to his behavior more generally. Vik has apologized for his behavior and has pledged to change aspects of his approach that have not been consistent with the development of more progressive culture within the company. He has also surrendered his LTIP entitlement for 2021 as a further expression of his contrition. The Board acknowledges the sincere efforts that Vik is making and has continued to support him based on his actions and clearly stated commitment to change.

Thank you, Chairman. The next question comes from the Australian Shareholders' Association. They have a question as to what the voting icon should look like and should they be seeing video of the speaker.

Okay. The voting icon looks like a bar graph and will appear at the top of your screen at the relevant time. The format of the AGM is a presentation with audio only.

Thanks, Chairman. That concludes the questions for the meeting.

Thanks. Thank you. Dan has advised that there are no further questions that have been submitted, so we can -- ladies and gentlemen, that concludes our discussion on the items of business. In one minute, I will close the poll. Please ensure that you have cast your vote on all resolutions that you're entitled to vote on. I will now pause to allow you a time to finalize those votes. [Voting]

Voting is now closed. The results of these votes will be released to the stock exchange and on Cleanaway's website later today. Ladies and gentlemen, that completes the business of today's meeting. On behalf of the Board, I would like to thank you for participating in today's AGM. I hope that you have enjoyed the prudent and flexibility this online format brings. I also hope that you and your families stay safe and well in the weeks and months ahead. I now declare the meeting closed. Thank you for your attendance.