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

Thank you for standing by, and welcome to the Cleanaway FY '21 Full Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Brendan Gill, COO. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen. Joining me on the call today is our CFO, Paul Binfield; and our Head of Investor Relations, Richie Farrell. We appreciate you joining us this morning. Just turning over to the disclaimer on Slide 2. Before I run through the presentation, I draw your attention to the disclaimer. I will take it that you have read this. I'll now ask you to please move to Slide 3. In terms of the agenda today, I'll take you through the highlights and some of our ESG metrics. I'll discuss the financial performance from a group perspective, including some of the COVID-19 challenges. I will then take you through the performance of each of our operating segments. Paul will then cover the statutory to underlying NPAT reconciliation, capital expenditure and cash flows and financial position. He will also address our debt funding position and key metrics. I will then take you through key policy and market developments. I'll also provide you with an update of our key projects, and I'll finish the presentation with our priorities and outlook for the next year. Following that, I'll open the line for questions. Moving now to the FY '21 highlights. I'm pleased to advise that we have continued to grow the business from top line, bottom line and cash flow perspectives. Group net revenue was up 4.7% to just under $2.2 billion, reflecting new customer contracts and recent acquisitions. Group underlying EBITDA was up 3.8% to $535.1 million, with each of the 3 segments delivering higher EBITDA compared to FY '20. Underlying NPAT increased 2.1% to $153.2 million, while statutory NPAT was up 31.2% to $147.7 million. Operating cash flows increased 5.7% to $424.4 million, reflecting higher EBITDA, lower remediation costs and working capital movements. The directors declared a fully franked final dividend of $0.0235 per share, taking the total dividend up 12.2% to $0.046 per share, representing a payout ratio of 62.9% of underlying NPAT. Some of the key strategic outcomes delivered during the year included reaching an agreement to acquire 2 landfills and 5 transfer stations in Sydney from Suez. We now expect the transaction to complete around the middle of FY '22. Works approval for the extension of the Melbourne Regional Landfill was upheld by the High Court after years of court processes. The resolution of this matter ensures the security of critical landfill airspace required to manage Melbourne's residual waste streams well into the future. We continue to execute our strategy with further greenfield developments and acquisitions, including the Grasshopper C&D business in Sydney, the Stawell landfill in regional Victoria and the Pinkenba recycling business in Brisbane. Construction of the PET plastic pelletizing joint venture facility in Albury is on track for completion prior to calendar year-end, and our energy-from-waste project in Western Sydney is progressing to plan. We have also been diligently advancing our digitization, data and analytics program of work. Moving now to people and culture. While this slide covers statistics in relation to our people and culture, I want to take this opportunity to acknowledge the people that make up Cleanaway. It has been a challenging time during the pandemic. And our people, regardless of their role or position, has stood up to those challenges and made it possible for us to continue to provide a very essential service to society. I'm extremely proud of each and every member of the Cleanaway team. I'm pleased to report that once again, we have improved our total recordable injury frequency rate, or TRIFR, which measures incidents per million hours worked. As at 30 June 2021, our TRIFR was 3.6, representing more than a 20% improvement from 30th June 2020. We are always striving to improve our safety performance, and Zero Harm remains our goal. During the year, we invested $5 million to roll out Mobileye across our fleet. With the technology, drivers become more aware of their driving behaviors and their surrounds, and it delivered a measurable decrease in driver at fault accidents and a reduction in incident severity. We conducted an employee engagement survey in October last year, which had been delayed from the usual time slot due to COVID and reported a record level of engagement at 64%. I'm particularly pleased to report we completed another survey in June 2021 with engagement improving even further to 66%. Overall, voluntary turnover rates ticked up slightly, largely due to increased workforce participation rates and high demand for experienced labor. From a leadership perspective, we have a stable and effective team in place with no changes to the executive committee through the recent leadership transition. Female representation in absolute numbers continues to increase, but further work is required to meet our targets. Gender diversity targets have now been included as a management KPI for FY '22 to help improve the rate of change. Moving on to the circular economy. Societal demands, policies and regulations continue to encourage greater circularity in the economy. Additionally, recovering resources for reuse by society just makes good sense and helps to ensure ongoing resources for future generations. We are proud to be leaders in completing the circle for commodities such as PET, HDPE and PP plastics. And we will do more where opportunities present. We are equally proud of our significant role in the other processes that make closed loop recycling possible. This is where others purchase our high-purity recovered materials as a feedstock in their manufacturing processes. Our earnings are generated by charging to sort and process materials, and we may also capture commodity value, which fluctuates in response to market conditions. We seek to reduce volatility in earnings from the sale of recovered commodities by entering short-, medium- and long-term contracts and by sharing price risk with major commodity suppliers. We continue to explore the value chain for opportunities to create value, and we have recently invested in construction and demolition resource recovery capability in Victoria, Queensland and South Australia. Our acquisition of the Grasshopper C&D collections business during the year complements our resource recovery processes in New South Wales. During the year, we completed the rebuild of the high specification Perth MRF, and we will begin commissioning the PET plastic pelletizing plant in Albury next quarter. Planning is also well progressed for the Sydney MRF and the HDPE and PP plastic pelletizing plant in Melbourne. Of course, there will always be residual markets that end up in landfill -- materials that end up in landfill. Where it does so, we seek to capture the methane produced and beneficially reuse it as a direct fuel or to produce renewable energy. This now takes me to climate change on the next slide. The recently published Sixth Assessment Report by the Intergovernmental Panel on Climate Change included some sobering climate statistics and predictions. At Cleanaway, we recognize the need to reduce our carbon emissions and contribute to mitigating global warming. Our ambition is to align the reduction in our carbon emissions to the 2015 Paris Agreement goal. We see this as a significant challenge but one we must face. We will be action-orientated. And in FY '22, we'll be setting short- and long-term emission reduction targets supported by credible actions. Moving now to the next slide covering the group performance overview. I'm pleased to report another year of growth and improvement across key financial metrics. Our net revenue was 4.7% higher than the prior corresponding period at $2.2 billion. Underlying EBITDA was 3.8% higher at $535.1 million despite the ongoing impacts of COVID-19. EBITDA margin of 24.3% was 30 basis points lower than the corresponding period. This was due to a change in mix in our solids business, including lower earnings from 2 of our landfills, together with new customer wins and recent acquisitions that I will elaborate on later in the presentation. Underlying EBIT was 0.8% higher at $258.7 million, but EBIT margin was 40 basis points lower, which again was largely attributable to the performance of the landfills, together with higher depreciation in the solids business. Underlying NPAT was 2.1% higher at $153.2 million, and EPS was in line with FY '20 at $0.073 per share. Compared to FY '20, operating cash flow increased 5.7% to $424.4 million, and cash conversion was strong at 102.4%. The Board has declared a fully franked final dividend of $0.0235. This takes the total dividend to $0.046 per share, which is 12.2% higher than the prior corresponding period. Net debt-to-EBITDA ratio on a pre-AASB 16 basis for covenant testing purposes was 1.61x at 30 June 2021. Paul will comment further on debt capacity later in the presentation. Moving now to the next slide on COVID-19 impacts. Like many businesses, COVID-19 continued to create challenges for us with both positive and negative impacts on our financial performance. In the municipal waste sector, general household and hard waste has delivered a net benefit, but it has not been as pronounced in recent months as it was in the initial lockdowns last year. More recently, there's been less panic buying, which drove household and supermarket waste volumes last year. The initial lockdowns last year provided householders with an opportunity to present household hard waste for curbside collection, although this service is now suspended in a number of jurisdictions. From a clinical waste perspective, we're also benefiting from hotel quarantine and COVID-19 testing work. More than offsetting the gains have been the fall in cruise line services and quarantine work, while education, events and conferences either have not returned or is substantially subdued. There is also a significant down trading due to lower CBD and tourism-related activity, which impacted the SME segment. Container deposit schemes were largely unaffected during the year, but recent restrictions in Sydney have required the closure of Return and Earn kiosks. This has resulted in approximately 2.5 million containers per day no longer being presented and, therefore, not collected by our dedicated CDS fleet. Until the last month or so, we had expected the new financial year's headwinds and tailwinds due to COVID-19 to be similar to FY '21. There are, however, new challenges emerging, particularly in New South Wales. We are now seeing even more significant impacts across the container deposit scheme, construction, offices, tourism, retail and the SME segment more generally. To address the New South Wales headwinds, we have implemented cost mitigants, including overtime reduction, staff redeployment, minimizing discretionary spending, rerouting of fleet and parking up fleet. We will actively monitor the evolving situation to implement further responses as necessary. In Q4 FY '20, we were able to reduce excess leave balances as a cost mitigant, but this lever can only be pulled once. After implementation of these cost reduction measures, we expect the current restrictions will result in a negative impact to EBITDA of approximately $4 million per month. Moving now to segment performances. Solid Waste Services net revenue increased 7.5% or $103.5 million to around $1.5 billion. EBITDA increased 4.4% or $17.2 million to $405.5 million, and EBIT increased marginally to $213 million. Solid Waste Services benefited from full year contributions from statewide recycling and the VCRR businesses and initial contributions from Stawell landfill, Grasshopper and the Pinkenba recycling acquisitions. New municipal contracts, together with the WA regional CDS contract, national C&I customer account wins and increased volumes from the Metropolitan Waste and Resource Recovery Group in Melbourne, further benefited the segment. These were offset by lower post collections volumes at the Erskine Park inert landfill at Sydney. During the second half, a project to construct a mechanically stabilized earth wall to increase airspace was delayed, which impeded our ability to accept volumes. The project is expected to be completed in Q2 of FY '22 and will create an additional 400,000 cubic meters of airspace. Subject to completion of the transaction with Suez, the Kemps Creek landfill will provide us with a longer-term inert landfill solution for New South Wales. In addition, Western Australian volumes and prices at the Dardanup landfill were lower as municipal councils aggressively competed to fill their landfill airspace ahead of energy-from-waste facilities commencing operations in Perth in late 2022. Towards the end of the financial year, the Perth MRF rebuild was completed. At this early stage postcommissioning, I'm pleased to report that it's producing high-quality outputs well within customer specifications. Whilst EBITDA was up, our EBITDA margins declined 80 basis points across the year. This largely reflected a change in mix in our business with lower post collections volumes at the Erskine Park and Dardanup landfills, which are typically higher-margin businesses, offsetting strong growth in lower-margin municipal contracts and national C&I customer wins. Further analysis is included in the appendix to this presentation. Moving now to our IWS segment. Industrial & Waste Services reported EBITDA of $48 million, 4.6% higher than the prior corresponding period. The EBITDA margin was 110 basis points higher than the prior corresponding period, reflecting the successful execution of the strategy of exiting low-value work streams and delivering the first full year of reporting on a fully integrated basis. EBIT increased $1.2 million to $22.6 million, and EBIT margin increased 60 basis points to 7.4%. The IWS segment performed strongly and consolidated the quality of earnings delivered in previous years. It was particularly strong in the mining sector in Western Australia despite the challenges of COVID-19 and the labor shortages resulting from border closures. Building on its leading market position in the mining sector in WA, the segment also expanded its presence across the oil and gas and infrastructure markets. During the year, IWS renewed several key contracts, including South32, Eurobodalla Shire Council and BHP Olympic Dam. It also commenced its contract with Fortescue Metals Group. Most of these contracts have a 3-year tenor. We also secured contracts with the Southern Ports Authority and the Australian Submarine Corporation. IWS also undertook significant project activity with key customers through FY '21 with a positive outlook for similar work this year. Moving to the Liquid Waste & Health Services segment. Liquid Waste & Health Services reported steady revenue. The segment increased EBITDA by 3.5% to $110 million, and EBITDA margins increased 80 basis points to 21.5%. EBIT increased 5.1% to $67.6 million, and EBIT margins increased 70 basis points to 13.2%. While revenue was flat, the growth in profitability is evidence of the successful integration of the Toxfree liquids business with Cleanaway's. The Liquid Waste & Health segment comprises our Hydrocarbons business, our Health Services business and our Liquids and Technical Services business. In the Hydrocarbons business, the effects of COVID-19 lockdowns resulted in lower East Coast oil collection volumes. This was particularly the case in Victoria and Southeast Queensland. A temporary increase in product stewardship receipts in the first half for high-quality recycled base oil offset the lower first half benchmark oil commodity prices. The Health Services business realized higher earnings from COVID-19-related activity at aged care facilities, hotel quarantine and mass testing and vaccination centers. Fewer elective surgeries resulted in less medical waste, while the international border closures resulted in substantially lower quarantine work from airlines and cruise ships. During the year, the Health Services business upgraded both its incinerator and hammer mill in Melbourne, commenced the redevelopment of its Queensland site and commissioned a shredder to handle product destruction at its Sydney site. The Liquids and Technical Services business delivered higher earnings in FY '20. Pleasingly, this was achieved on a backdrop of lower volumes from tourist-heavy states and the hospitality sector more broadly. In addition, cruise ship volumes were nonexistent. During the year, we further developed our Dandenong site to handle asbestos contaminated soils and to deal with residual waste from the Tottenham chemical storage plant fire. The segment also benefited from the treatment of contaminated soils from the Parramatta Light Rail project and soil cleanup projects generally. Seasonally high rain events in New South Wales and Queensland resulted an increase in leachate volumes across the network. We continue to see increased regulatory controls and monitoring across all elements of dangerous goods storage and transport, composting and PFAS management. In principle, Cleanaway supports such initiatives and is well positioned to deliver customer solutions. Moving to our margin targets on the next slide. We've been making good progress towards the medium-term margin targets we set last year despite COVID-19 headwinds. The Industrial & Waste Services and Liquid Waste & Health Services segments are benefiting from well-managed integration of the Toxfree business and a clear focus on core business lines. In the Solid Waste Services segment, we grew both EBITDA and EBIT but not the margins. Lower volumes at Erskine Park and Dardanup landfills and a changing mix of customers from the Solid Waste Services segment contributed to lower EBITDA margin in FY '21. Whilst this change in mix did vary the margin, absolute profitability was enhanced with our success in winning new C&I and municipal contracts, albeit at lower margins than the landfill tonnes. In FY '22, Solid Waste Services margins will be adversely impacted by up to $10 million to $15 million lower EBITDA for the New Chum landfill, as previously disclosed. This is expected to be more than offset by the contribution of the Suez Sydney assets with the acquisition now expected to be completed around the middle of FY '22. I will discuss our digitization and process automation initiatives later in the presentation. These initiatives will contribute to increased margins over time. We remain committed to achieving and maintaining our medium-term target margins, noting there may be road bumps along the way. I will now hand over to Paul to take you through some of the financials in more detail.

Thanks, Brendan. The statutory profit after tax attributable to ordinary equity holders of $145.3 million was 29% higher than last year. The underlying adjustments to EBIT totaled $16 million but only a net $5.5 million at an NPAT level. $7 million related to the Perth MRF and Cleanaway having to incur higher costs from third parties to process recyclables as we honor the contractual commitment to our customers. $7.9 million related to acquisitions and integration of the businesses that Brendan discussed earlier and, in particular, the acquisition of the Suez Sydney assets. $4.3 million is related to CEO transition costs, and there are further details of these in the remuneration report. We also took an impairment charge of $4.5 million for the costs associated with our unsuccessful tender for the West Gate Tunnel project and $2.7 million write-off of assets damaged by fire at our Welshpool transfer station. Partially offsetting this was an adjustment related to employee entitlements and a change in the remediation provision discount rate, together, a $10.4 million benefit. So turning now to CapEx. We apply a disciplined approach to capital expenditure whilst, at the same time, pursuing value-accretive opportunities. Capital expenditure is higher than prior years and reflects the success we've had in securing new contracts not only in the muni space but also national C&I customers as well. Our continued success in winning government-related contracts has resulted in us utilizing increasing amounts of leasing to finance the related asset purchase. This will continue should we win further contracts. We use leasing finance to align our cash outflows to service the customers with the contracted inflows. This year, we've split out our growth CapEx from stay-in-business CapEx to provide you with a better understanding of the capital needs of the business. As you can see, stay-in-business CapEx is broadly in line with the prior year. Total growth CapEx includes new municipal contracts, the Western Australian container deposit scheme, resource recovery equipment and assets to service the new C&I customers and other contractual wins across our IWS and liquids business. Approximately $100 million of CapEx is eligible under the temporary instant asset write-off program. Total CapEx for FY '22 is planned to be below FY '21 with stay-in-business CapEx remaining at a similar level. Consistent with the increase in capital expenditure and factors that Brendan described earlier, we expect the FY '22 D&A to be approximately $290 million. The increases in tender success would increase CapEx and associated D&A, as will the Suez Sydney assets acquired around the middle of the year. Moving to focus on cash flow and balance sheet. Cleanaway continues to generate strong and consistent operating cash flow. In FY '21, operating cash flow increased $23 million to $424 million due to higher profitability and lower remediation costs, partially offset by the reversal of favorable prior period working capital movements. The cash conversion ratio still remains in excess of 100% and 102.4%. Our ongoing strong credit management has resulted in overdue debt continuing to fall, and we've seen no material increase in credit defaults caused by COVID-19. Our continued strong earnings and cash flows have provided directors with the confidence to increase dividend payments while remaining comfortably within our target payout range of 50% to 75% of underlying NPAT. With a well-capitalized balance sheet, we have ample capacity to support further accretive growth. So now turning to our capital structure. From a debt capital perspective, at year-end, the group had $930 million of headroom under our existing banking facilities. And at 1.61x levered, we remain well within the leverage covenant limit of less than 3x calculated on a pre-AASB 16 basis. We have significant headroom within our other banking covenants, and our next refinancing is not due until July 2023. During the year, we secured additional funding for the acquisition of the Suez Sydney assets. This comprised of $500 million 3-year committed debt facility under the group's syndicated facility agreement. Seven existing syndicate banks and 1 new bank are participating in the new facility. I'll now hand you back to Brendan.

Yes. Thanks, Paul. The existence and size of landfill levies impacts our landfill diversion investment decisions. The chart on this slide sets the scene in terms of where we have come from and where we are going to from a regulatory perspective. You can clearly see the step change in landfill levies over time. On the right-hand side of the page, we have outlined the key dates with respect to the waste export bans where previously, some rudimentary sorting and baling was sufficient to produce exportable commodities, the bar has been lifted significantly. It is the combination of rising levies, together with the export bans, that are driving the decisions to invest in both resource recovery and domestic value-adding processes. Cleanaway continues to proactively position its business to meet the opportunities and challenges posed by the export bans, including investing in glass beneficiation; plastic sorting, flaking and reprocessing; and investigating innovative technologies to process mixed paper. The next slide, on the value chain, highlights the opportunities that are emerging, and I'll outline in subsequent slides how we are continuing to capture those opportunities. Our strategy continues to guide our acquisitions and organic development activity. While it will continue to involve (sic) [ evolve ], it remains contemporary and fit for purpose. We continue to pursue and develop value-accretive opportunities across the waste value chain. In terms of collections, we're seeing a greater focus on source separation, whether it be through additional bins for FOGO and glass, the introduction of container deposit schemes or greater product stewardship across a wide range of products. We recently invested, with the support of the Clean Energy Finance Corporation, to develop and launch our Greenius online recycling education tool. It will be through education that we, as a society, will learn to be better recyclers and improve resource recovery rates. It is the choices we make as individuals that will ultimately determine how successful we are at growing the circular economy. Moving across the value chain, we see new markets and opportunities are emerging in the resource recovery resulting from overseas and domestic waste policies. The factors that are driving resource recovery are also incentivizing closed loop recycling, thereby creating domestic markets for activities that have previously been undertaken overseas. Cleanaway is an active participant in these growing markets. We will continue to seek opportunities to maximize resource recovery and, therefore, capture a greater portion of the growing diversion prize. The next big market to develop in the waste value chain will be energy from waste. Australia is a laggard in terms of the transition from putrescible landfills to energy from waste, but momentum is building. Two projects in Western Australia are under construction, and there are multiple project proposals across the eastern states. The speed and rate of change is being driven by several factors, including transparent and stable policy, diminishing landfill airspace and increasing waste levies. The transition will generate multibillion-dollar investment opportunities. It will also lower emissions as landfills produce methane, which is around 28x more potent a greenhouse gas than carbon dioxide. finally, greater resource recovery and energy from waste will inevitably result in some pressure on landfill volumes over time. However, we see landfill coexisting with energy from waste for the foreseeable future as capital city landfill capacity is reduced and populations grow. It is important to also note that not all waste can be economically recycled or incinerated. And therefore, landfills will continue to play an important role. The next slide looks at how we are positioning the business from a plastics perspective. A significant opportunity exists to generate value from recyclable polymers. Annually, there are almost 2 million tonnes of polymers consumed that are suitable for mechanical recycling. As domestic export bans are implemented, Australia will require 140,000 tonnes of domestic processing capacity to address the volumes that are currently being exported for reprocessing. We have already committed to a $45 million PET plastic pelletizing facility in Albury with our joint venture partners. Commissioning of the facility is expected in the next quarter. We have also entered another JV with Pact, and we have committed to developing a 20,000-tonne HDPE and PP pelletizing facility in Melbourne, for which Victoria and federal governments have awarded $3 million in grant funding. The WA and federal governments have also awarded $9.5 million in grant funding for a plastic flaking facility in Perth, for which we are currently finalizing a feasibility study. Regulatory changes and the opportunities that they create highlight the importance of being integrated throughout the value chain. As regulations and societal demand change, so too will value shift from one part of the value chain to another. Moving now to energy from waste. Our energy-from-waste project in Western Sydney continues on track and is currently being assessed by the New South Wales Department of Planning, Industry and Environment. The department will issue an assessment report in due course. And subject to approval, it will then go to the Independent Planning Commission, who are the determining authority. We are hopeful of a decision by the department by Q2 FY '22. We then expect the Independent Planning Commission process to complete in the following quarter, but I caution that we have no control over these time frames. Energy from waste has been identified specifically in the New South Wales government's waste strategy and is part of the solution for disposal of residual waste. The New South Wales energy-from-waste policy includes new rules that ensure projects meet and exceed world's best practice air quality standards and provide -- this provides greater clarity for our project, which has emission controls designed to exceptionally high standards. In Victoria, the draft energy-from-waste framework was released in June for consultation and is expected to be finalized around mid-2022. We plan to participate in energy from waste in Victoria and are progressing with site identification and due diligence. In Queensland, a targeted consultation was completed following the release of the government's energy-from-waste policy with a guideline proposed to be released shortly. We plan to develop an energy-from-waste facility in Southeast Queensland with site identification and due diligence having commenced. Moving to the next slide and a recap of the agreement we reached with Suez during the year. In April this year, we announced the agreement to acquire 5 transfer stations and 2 landfills in Sydney from Suez for $501 million. As this slide shows, the acquisition will deliver a complete post collection footprint solution for Cleanaway in Sydney. In calendar year 2020, the assets contributed $73 million EBITDA on a pro forma EBIT -- on a pro forma pre-AASB 16 basis. Based on current time lines, we expect the transaction to complete around the middle of FY '22. We are redeploying our proven integration playbook that we used for the successful Toxfree integration with the same Executive General Manager to lead the integration of the Suez assets. We commenced working on the integration several months ago, including some data analytics work that I will discuss shortly, and we remain on track to deliver against the expected completion date of around the middle of this financial year. The timing is, however, ultimately determined by the various regulatory bodies involved. Moving to the next slide and a quick update on digitization and data and analytics. We have been steadily progressing our digitization and data analytics initiatives. Digitization is separate to data analytics, but the latter is more powerful within a fully digitized environment. Digitization is a critical enabler to drive improvement in customer experience and employee satisfaction. It will enable us to realize significant efficiency gains and support organic growth and reduce customer churn. The data analytics focus is on margin expansion by uncovering customer, product and operational insights and creating a pricing and operating culture that is data-driven. We have commenced executing this through a series of targeted initiatives. One such initiative is the bin profitability program. We're drawing data from our routes, including bin sizes, weights and even labor costs, what route requires over time to ensure distance traveled is economic. Adjustments can then be made to improve profitability. An initial pilot in Melbourne gave us confidence that this program will drive improved margins, and we're looking to expand it into the rest of Victoria during the first half of this year. We look forward to updating you in February next year on the results of the initial rollout in Melbourne. The team is currently also focused on a route optimization initiative to support the integration of the Suez transfer stations and landfill assets within the collections business in New South Wales. Moving now to the priorities and outlook for FY '22. Priorities for the coming year include establishing ESG targets and improving performance across all measures; integrating the New South Wales landfills and transfer stations; commissioning the PET plastic pelletizing facility and further developing circular economy opportunities; progressing our post collections strategy, including advancement of our energy-from-waste projects; focusing on improving our quality of earnings through operational improvements, including data analytics initiatives; remaining responsive to the evolving COVID-19 impacts; and increasingly the available airspace at our New Chum and Erskine Park landfills. Heading into FY '22, there was a strong underlying momentum in the business, and we expected to grow our earnings had COVID-19-related impacts been broadly in line with FY '21. The duration and nature of the current New South Wales lockdowns and potential medium-term implications on economic activity is more severe than in FY '21. The diversification of our revenue streams and our ability to flex costs continue to provide a partial offset to these headwinds. However, under the current policy settings, restrictions in New South Wales are estimated as having approximately $4 million negative EBITDA impact per month, primarily as a result of the closure of the bulk of the New South Wales container deposit scheme, restrictions on construction activity and weakness in the C&I market. We will provide a trading update at our Annual General Meeting on the 22nd of October. [Operator Instructions] Operator, could you please open the lines for questions?

[Operator Instructions] Your first question comes from Russell Gill from JPMorgan.

It's going to be hard to limit myself to 2. But firstly, just on your guidance, you've opened the door here by, I guess, quantifying some impacts there. You've also quantified the New Chum negative impact. You've got the MRF, the Perth MRF, coming on this year. Can you possibly quantify what, I guess, the contribution from that would have been? And just to clarify, when you're talking about growth in the business, that would have been ex Suez and ex the COVID impacts that you would expect? And what sort of level of growth, is it similar sort of dynamic you would have expected in FY '21?

Yes. So Russell, good question, not surprising. Firstly, I'd say that we had very good momentum in the last few months of FY '21, really pleasing. The team were excited heading into FY '22 into July, and then things changed pretty quickly in New South Wales. At the time, we were expecting our FY '22 performance, we would grow on FY '21, assuming that we'd still have levels of COVID, similar impacts to FY '21. That's changed substantially, particularly on the container deposit scheme business in Sydney, where we have, between New South Wales and Wollongong, probably over 100 people engaged in collecting containers every day. As I said, there's 2.5 billion containers per day reduction in what's been collected. It's a core part of our business. You also mentioned the Perth MRF. So it's coming on. It's still ramp-up, and we're really pleased with the quality of what we're producing. We're still going to get the efficiency up. So it's not going to move the dialogue, but it certainly helps as we're getting the landfill in Sydney at Erskine Park up and running. That's our Erskine Park one, not the Suez one. So there's a few things coming on board that we're really happy about. And I think we'll be better placed, Russell, to come back in October at the AGM and give some better insights about what we're thinking for the year.

I mean, just -- also, on that with the COVID lockdown in Sydney, and you guys are burning $4 million a month relative to last year in cash, you highlighted C&I weakness in that space. Do you see an opportunity in this next 6 months on lockdown in New South Wales to gain share in that marketplace?

Yes. It's a good question, Russell. And we've certainly gone back and looked at a lot of our data. As I said, we're a data-driven organization and looked at what occurred in Victoria particularly over time. We certainly haven't let go of our sales force, and we've still got our sales force intact there. So there's certainly going to be opportunities. I mean, whenever you're a nimble and capable organization, there will always be opportunities. So we plan to be like that. And if our competitors are not so diligent, then that presents opportunities for us.

Okay. And then a second question, I'm just going to call you out here on your...

I thought you asked your second question, Russell.

No. No, that was a part B. The second question, on your -- I'm going to call you out here on your medium-term targets, which are basically the same, which were upgraded 12 months ago. But they are the same. Just your Solid Waste Services businesses at the $29 million to $29.5 million, you're now bringing on the Suez assets, the smaller deal, which had 40% EBITDA margins, which added almost 150 basis points on a pro forma basis on that division, yet your medium-term target remains the same. Can you just talk through that dynamic?

Yes. Look, that diagram is meant to be directional. And as we've said before, we've actually increased the targets once before. This is a bit like being a high jumper. Once you get over one bar, you raise it and you go to the next one. So let us get there first, Russell. We're not going to take just the free kick from the Suez assets. And as you know, there's challenges of EBITDA -- sorry, EBITDA, challenges at New Chum and Erskine Park landfills there. So we'll work through that. We'll get to those targets, and then we'll lift the bar again.

The next question is from Peter Steyn from Macquarie.

Just I'm going to ask a strategic question first just to change the tack a little bit. But energy from waste, you've outlined your intentions in Victoria and Queensland around site identification. Clearly, the market's not going to absorb too much capacity in each of those markets. So just curious whether you believe there's still an ability to have a first-mover advantage in both those markets and get your position before competitors do?

Yes. Look, very good question, Peter. Look, we are -- I think you have to remember, we are large owners of waste in those markets, in both Queensland and Melbourne, Southeast Queensland and Melbourne. And I think that's one thing people lose sight of sometimes. You need to have the raw material, just like any other manufacturing process, the raw material or feedstock. In this case, it happens to be waste. So we're well positioned there. So others need to acquire that. We'll obviously want to acquire more, but we have a very good set of collections facilities to start with. So I think we're well placed. We know how to do energy from waste. We've got an experienced team in Sydney now. Remember our joint venture partner, Macquarie, who came from Green Bank out of the U.K., very experienced in delivering energy-from-waste facilities. So we're certainly well placed for the future.

And then, sorry, I'm just going to labor the point around your $4 million. I just wanted to quickly clarify, has that got better? Because obviously, we had the construction shutdown in New South Wales that's probably trying to make its way back, to be fair. But has the impact got better? Or it has been -- is $4 million a fairly consistent number since the beginning of the lockdowns? And then is there any evolution likely? Do you see a pathway to, I mean, CDS coming back sooner than perhaps the lockdown ending?

Good question. So unfortunately, I guess I'm not a member of the New South Wales government and probably can't quite influence some of those outcomes. And also, it depends on how the numbers go on COVID infections each day. So I can't really quantify. What I can say, Pete, is that we'll pull all the levers. This will be short term. New South Wales will get through it. There may be -- whether construction comes back a couple of weeks earlier or container deposit scheme comes back a couple of weeks later, time will tell. But as an estimate, we wanted to call that out, be absolutely transparent that we've got big exposures here. We can't quite mitigate them all. It's about $4 million. And I think if you think that this will finish once we get vaccination rates in New South Wales up to, say, 70%, then when will that be. So I think, hopefully, it's short term, Peter. But -- and we'll see what happens, but a couple more months, I'm hoping, at worst.

Okay. So it's been pretty consistent around the $4 million mark since the effects of...

Yes. Look, we might see a bit coming back from construction and what happens with the -- particularly the LGAs that have been specific locked down much tighter than other areas and what happens in those particular areas, so whether they come back and the freedom of work and movements out of those areas. So there's quite a number of pieces to the puzzle.

The next question is from Jakob Cakarnis from Jarden Australia.

Just a question to start. Just on the second half, your revenue for the solid waste business grew 13%, but your EBITDA grew 6%. You've got a 27.1% EBITDA margin there. Can you just confirm whether or not there are any COVID impacts in that second half, specifically the fourth quarter? And then just on your $4 million a month in the same question, are you guys expecting a catch-up? Or is that demand disrupted moving forward, particularly for the CDS?

Yes. Jakob, first, if I can pick that one up. I think what we saw in terms of trading in the second half, in particular, we actually saw a really strong momentum in the May, June period in fact across all of the business but particularly the solids business. And I think what that really sort of demonstrated to us is that when you had, I guess, a return to a more normal type of COVID type of situation in terms of fewer restrictions, you can just see the business really coming back quite strongly. So certainly, May and June, we saw a very good trading. That was also, of course, supplemented, too, by some excellent wins in terms of the C&I business, national accounts. Again, I think we've called out in the pack wins with people like ALDI and Spotlight, and they were certainly kicking in, in that final quarter of the year. Whilst it's excellent business to win, it is typically lower margin. And at the same time, we saw lower contributions, as Brendan called out, in those 2 key landfills in Dardanup and Erskine Park, which obviously typically are higher-margin businesses as well. So -- and I guess the commentary is spot on in the sense of saying that we had great momentum coming out of FY '21 and into '22, which has sort of been impacted a bit always exclusively in New South Wales. So we're still seeing good trading in spite of restrictions in VIC. We're still seeing good activity down here. So as I say, this is pretty much a localized issue with quite specific concerns around CDS and construction in New South Wales.

Yes. And I'll just add on, I think, Jakob, you asked what happens to the containers that aren't being picked up. Was that sort of the theme of your other part of your question?

That was part B of one, yes.

Yes. So the part B there, look, it's a very good question and one that we've asked our joint venture partner, TOMRA, to draw on their experience in other parts of the world where we have the Return and Earn -- where they have the Return and Earn kiosks and what's happening. And experience elsewhere in the world suggests that in some of the higher socioeconomic areas, the cans are just -- and bottles are going through the normal recycling bins and not going through the Return and Earn scheme. In some of the lower socioeconomic areas, people will save them up and hang on to them, and then they will actually come back into the system at some later stage. But we've got to wait and see how that pans out in the Sydney market.

That's good color. And then just my second question, just on the Suez acquisition. You've said that there's $77 million of pro forma EBITDA. It mentions in the footnote that, that's based on volumes under Cleanaway's ownership. Can you confirm whether or not that $77 million of EBITDA includes any third-party volumes? And then part B of that, is there any seasonality in that business at all?

Part A, what we did to determine the pro forma EBITDA was take the current performance, the performance of that business for the calendar year 2020, take out the volumes from Suez themselves. They will now go to Veolia's landfills, we expect, and then take out -- and then add in Cleanaway volumes that were not going to Suez at that point in time because we'll want to internalize those volumes. Any third-party volumes that were already in there are still in those numbers. Those are the 2 big adjustments we made: Suez volumes out, Cleanaway volumes in. And you asked on seasonality, generally not -- no, it's -- waste comes in every day of the year and pretty consistent year round.

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

Just on the $4 million a month impact from New South Wales. Obviously, Victoria is also in lockdown, and the -- it's a stricter lockdown than what we've seen in New South Wales typically. You're not calling out anything from Victoria. Is that because the base effect that it's not worse than it was this time last year? Or can we get some color around the Victorian experience?

Yes. Good question, Cameron. A couple of things there to draw attention. So in the Victorian lockdowns, they've never really taken out construction. There's been a few changes to behavior on construction sites from time to time. But construction is still, by and large, continued, whereas construction was, particularly I think it's in the back end of July, early August, was severely impacted by much more stringent closures in New South Wales. Also finding the difference with New South Wales is this ability to move freely and what happens between one local government area and another. That's putting challenges on workforces. Businesses are shutting down more frequently, cases of COVID and getting workers. And the other one big difference is container deposit scheme. As I said, we've got over 100 people employed directly and indirectly to pick up containers every day. As I said, there's 2.5 million containers approximately between Wollongong and Newcastle that are not being picked up at the moment. That's a lot of containers when you consider that they're not crushed. So we did a lot of trucks to run around picking those up. There's a lot there. There's variable costs that we can cut down by redeploying drivers, but there's profit that you obviously don't replace, and there's fixed cost as well. And that's the big difference with Melbourne. And also to say, Melbourne seemed to -- while the smaller SME markets are probably more affected, as we see here in Melbourne, the restaurants and the like and the smaller end of town, the retail, but the bigger end of town, the construction keeps going. The major enterprises keep running by and large. And as you said, it's no different to what we were doing last year.

Okay. That's great. And just to confirm just on the guidance around growth. Are you assuming that you do get the approval for the New Chum extension in that sort of underlying guidance? Or -- and also, what's the assumption around the volume outlook for Dardanup, given that you've sort of lost volumes there, and you've got energy from waste starting up? But -- and the councils have signed up to send volumes to those energy-from-waste facilities.

Yes. So a couple of things there. So even with New Chum, we won't -- at best, we might get a decision later this financial year on New Chum. But by the time it comes, then we have to get ready to put our [ hot waste ] process in place. So we're not assuming any extra volumes. We're assuming to take that $10 million to $15 million EBITDA hit this year. And even with that, we're expecting to grow our business year-on-year outside of the changes to COVID we are seeing coming through. That was where we were positioned prior to what we saw with recent COVID change time. That's one part of your question. The other part, so Dardanup landfill in WA, those -- so the waste-to-energy plants there I don't believe will come online this financial year. I think they come online in the back end of calendar '22. So we may see some changes there. We will see some changes in fights for volume, and we'll have to manage our processes accordingly. What we are seeing at the moment, though, is that some of the councils who are wanting to go there are trying to fill up their own landfills quickly now. So I think that pressure will be away from us. I think we'll see some of those disappear. Councils will no longer run landfills. So some of that remaining capacity, I think, will be closed down and be replaced by waste to energy. But certainly, there will be impacts, but we expect to still have a profitable landfill down there in Western Australia.

The next question is from Raju Ahmed from CCZ Equities.

Brendan and Paul, 2 questions from me. The first one, just going back to that $4 million hit per month. Can I just clarify that, that is a net number? And by net, I'm saying that you've got a hit less the adjustments to your cost that you had?

Correct. That's correct. So Raju, we've done a good job out there. So the New South Wales team have worked really hard in terms of identifying mitigants and cost-out, and the figure that you're seeing, the other $4 million, is a net figure.

What I was getting to was in the -- I think the first COVID impact, I think, what is it, March, April, May of 2020, you guys saw a shift in volumes to a certain extent from C&I to municipal. Are you expecting that this time? And if so, is that baked into that $4 million?

I'm not seeing it as much this time, Raju. I think last time, a bit over a year ago, we all saw the scenes on our -- on television there of the panic buying. So -- and what that resulted in was households having a lot of food at home and doing a lot of cooking at home. So we saw that ultimately. And then online shopping as well, filling up household rubbish bins, we saw that. We also saw huge demand from the supermarkets for increased emptying of the containers due to the volumes going through. So I'm not seeing that from the supermarkets this time around. The panic buying is not quite there. And also, there will be some extra volumes come out of curbside. But remember, it's Sydney curbside waste. So where we do have a collections contract, regardless of how much is in the bin, we just get paid to collect the bin. And where the volume, the weight has an impact is at the landfill, and we don't have a landfill that collects it in Sydney. So we won't get that benefit. And the other thing we're seeing this time around, I remember last time in lockdown in Melbourne, myself, Paul and everyone, on a weekend, you would do the cleanup at home and put the hard waste out on the curb to be collected, a lot of cleanup work. Cleanaway did very well out of that, as would all waste companies that had those contracts. What we're seeing now, though, is that is being suspended in many of the local government areas in New South Wales presumably for reasons that, that could be a possible area to transmit the virus. So we're not seeing that benefit this year as well. So there are quite a few changes that are happening, and that contributed to the $4 million.

Okay. The second question was around the Suez Sydney assets. There's really 2 parts to it. The first one was the post-AASB 16 $76 million in EBITDA that you've indicated. How would that be impacted if you were owning those assets right now?

How would that be impacted? That would be...

So would that be lower?

No. That would be -- the idea being that would be the number if we owned those assets now, there'll be some variances. But I think it was one of the earlier questions. That number was determined based on what Suez did in FY '20, remove -- then we remove the Suez volumes and assume they will then go to Veolia landfill and then added in Cleanaway's volumes as if -- because that's what we would do. We would internalize those volumes. So the difference then, Raju, is the work that I said we're doing on our routing in Sydney today to be ready to take ownership of those landfills so that we will have our routing already to be more efficient on where our trucks are going to and from, to deliver into our own landfills then at -- our own transfer station network and landfills in Sydney.