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

Welcome, ladies and gentlemen to the 2021 Annual General Meeting of Cleanaway Waste Management Limited. My name is Mark Chellew, and as Chairman of Cleanaway, I will be chairing the meeting today. I also introduce you to my fellow directors: Mark Schubert, Chief Executive Officer and Managing Director; and nonexecutive directors, Ray Smith, Ingrid Player, Samantha Hogg, Terry Sinclair, Philippe Etienne and Mike Harding. Our CFO, Paul Binfield; and General Counsel and company secretary, Dan Last, are also in attendance. The company's auditor, Ernst & Young, is represented by Brett Croft, a partner with the firm. As you are aware, in response to government restrictions and the potential health risks arising from the continuing COVID-19 pandemic, the Board determined to hold this year's Annual General Meeting virtually. We very much appreciate your understanding, and thank you for joining our virtual meeting. The Notice of Meeting dated the 17th September 2021 was made available to all shareholders. I propose to take the Notice of Meeting as read. Today's meeting is held online via the Lumi platform. This allows shareholders, proxies and guests to attend the meeting virtually. All attendees can listen to a live webcast of the meeting. In addition, shareholders and proxies can ask questions and vote. Should you experience any technical difficulties, a recording of the meeting will be made available on our website after the meeting. Questions. Shareholders were given the opportunity to ask questions in advance of the meeting, and we will endeavor to address any questions from shareholders as we can [indiscernible] meeting. Questions can also be [indiscernible] at any time during the meeting [indiscernible] Lumi platform. You do not need to wait [indiscernible] relevant item [indiscernible] question. You can begin [indiscernible] questions now. Questions will be aggregated and addressed by me at the end of all items of business. [Operator Instructions] When asking a question, please specify which item of business it relates to. For shareholders who wish to ask a verbal question, [indiscernible] question [indiscernible] is available on the Lumi platform. [Operator Instructions] We will ensure there is a reasonable opportunity for shareholders to ask questions and make comments at this meeting. However, there may not be time this morning to answer every question or comment. Questions will be moderated to avoid repetition and, if questions are particularly lengthy, may be summarized in the interest of time. Questions relate to the items of business under consideration at today's meeting. Voting. Voting will be conducted by way of a poll on all items of business. To 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. Select this icon -- selecting this icon will bring up a list of resolutions and present you with voting options. To cast your vote, simply select one of the options: for, against or abstain. There is no need to hit a submit or enter button as the vote is automatically recorded. You can, however, 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 the business. Please note that only shareholders, proxy advisers, proxy holders or authorized shareholder representatives may vote. The polling icon will soon appear. Please submit your votes at any time. I will 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 online meeting guide, which can be accessed within the Lumi platform and is attached to the Notice of Meeting available on your website. This guide includes a help line number to call should you require assistance during the meeting. The help line is 03-9415-4024 within Australia. Before we move to the formal part of the meeting, I'll first spend some time providing an overview of Cleanaway's past performance. After my address, Mark Schubert will provide an update on the company's business activities. I will then open the formal proceeding. So my address, the Chairman's address. It is with pride that I address shareholders once again as Chairman of Cleanaway Waste Management [indiscernible]. I am pleased to report, this year, your company made significant advance in executing our strategy while delivering a strong financial result. During the year, we strengthened our network of prized infrastructure assets, which are key to sustainably managing the waste generated across Australia and enabling the circular economy in line with our mission to make a sustainable future possible. We announced that we had entered into agreement with Suez to acquire 2 landfills and 5 transfer stations in Sydney with the transaction expected to be complete in the coming months. We have a strong pipeline of projects and initiatives that will further contribute to a circular economy and generate value for our shareholders that we'll continue to [indiscernible] full year 2022 and beyond. Notwithstanding the ongoing challenges presented by COVID-19, our underlying net profit after tax of $153.2 million was 2.1% higher than the prior year, translating to earnings of $0.073 per share. On a statutory basis, net profit after tax of $147.7 million was 31.2% higher than prior year. Net cash from operating activities increased by $22.9 million to $424.4 million compared to full year '20. Our capital expenditure of $339.8 million, including finance leases of $93.6 million, reflected our increased investment in growth assets and successful tenders for municipal contracts, together with sustaining our existing assets and operations. The business remains in a very strong financial health. During the year, we secured a 3-year $500 million committed debt facility to support the funding of the Suez assets. We have $930 million of undrawn debt facilities and an average debt maturity of 4.7 years as of the 30th of June 2021. Our net debt-to-EBITDA ratio of 1.61 as of the 30th of June 2021 is well inside our covenant. We will continue to monitor the market for earnings-accretive acquisition opportunities and remain disciplined in our capital allocation approach. Our strong financial performance and financial position enabled us to increase our dividend once again this year. Shareholders were paid a final fully franked dividend of $0.0235 per share, taking the total dividend for the year to $0.046 per share. This was a 12.2% increase on prior year and represented a payout ratio of 62.9%. During full year '21, we further expanded and enhanced our sustainability reporting, which will be increasing area of focus for Cleanaway. One of our key commitments this year is to identify the opportunities within the business to reduce our emissions. This will enable us to set credible interim targets that align with our reduced carbon emissions plan to the 2015 Paris Agreement goal. People and culture are central to the sustainability of our business, and safety remains a key priority for Cleanaway. In full year 2021, we achieved a 20% reduction -- 20% improvement in our total recordable injury frequency rate. Whilst this reduction is pleasing, we'll not be satisfied until we achieve our goal of zero harm. Over the course of this year, we improved our overall employee engagement, with our most recent survey in 2021 reflecting our highest level of engagement so far. We continued to address areas where there was a gender pay gap and have introduced a series of wellbeing programs for our employees as they continue to work through the impacts of COVID-19. Whilst we've made progress in relation to gender diversity, it is an area where we'll continue to focus as we have not met our expectations this year. In full year '22, we introduced a range of initiatives, including aligning executive pay to female participation targets to hold us accountable and to improve our performance in this area. Now I would like to talk about the management of your company. In January, the Board and Cleanaway's former CEO, Vik Bansal, reached a mutual agreement that it was the right time for Cleanaway to move forward under our new leadership. At that time, I took on the role of Executive Chairman, supported by Brendan Gill as Chief Operating Officer. I would like to take this opportunity to deeply thank Brendan, who was coaxed out of pending retirement to support the leadership transition. I think you will agree that Brendan has done an outstanding job. After a comprehensive search progress -- process, we were pleased to announce the appointment of Mark Schubert as Cleanaway's new Chief Executive Officer and Managing Director. Mark formally commenced on the role on the 30th August 2021. Mark brings a wealth of senior executive experience and has a proven ability to lead large and complex businesses. He is a strong, fit person with a great strategy and culture to join us at a time when we have great momentum as we enter a new and exciting phase in our growth journey. Mark joins Cleanaway from Origin Energy, where he has served as an Executive General Manager, Integrated Gas for the past 4 years. Prior to joining Origin in 2015, he held several senior positions during an 18-year international career with the Shell Group of companies. He has a strong track record of accomplishment in operating and transforming major assets, including world-class LNG projects and oil refineries. It is gratifying to be able to hand over leadership of a business that has delivered a strong financial performance as well as operational performance alongside our improved safety performance, better environmental outcomes and a more engaged workforce despite all the ongoing challenges of COVID-19. I would like to deeply thank the executive management team and all Cleanaway team members. Once again, they have responded efficiently and effectively to the various challenges that the business faced this year. During the year, we welcomed Ingrid Player to the Board of company, following the retirement of Emma Stein after 9 years' service. Ingrid has added to the depth of skills and experience on the Board and has made significant contributions since her appointment. Over the next year, we expect to continue the process of Board renewal with the appointment of another female director taking our female representation on the Board to over 30%. Ensuring appropriate diversity at the Board level, including by gender, will continue to be a key consideration in Board succession planning. I acknowledge my fellow Board members and sincerely thank them for all their efforts, commitment and counsel, which has been wisely received by myself over this past year. I look forward to working with them in the future as we continue to create value for you, our shareholders. I'll now hand over to Mark Schubert to address our shareholders for his first time.

Thank you, Mark. Good morning, everyone. It is an honor to address you for the first time as Cleanaway's Chief Executive Officer and Managing Director. Let me start by saying how excited I am to join Cleanaway. One of the most frequent questions that I've been asked since joining is around what attracted me to the role. For me, it starts with Cleanaway's mission of making a sustainable future possible. I am passionate about sustainability, and I see Cleanaway's purpose being to ensure we can extend the utilization of our natural resources for many years to come by improving circularity of our economy and to do that in a practical and tangible way for our customer. It is pleasing to join a company that has such a strong foundation in the circular economy and an appetite to continue to improve its sustainability credentials. The company has been very successful in developing and acquiring the right assets in the right locations to be able to carry out its mission and is well set up for the future. While, unfortunately, due to COVID-19-related travel restrictions, I've only so far had the opportunity to visit our sites and teams virtually, I've been impressed by their dedication, their passion and their commitment to our mission. I'm very keen to visit more of our sites and meet more of our team members in person as circumstances permit. I was very pleased to see Cleanaway has sustained its strong operational and financial performance despite the various challenges thrown up by the COVID-19 pandemic. That these outcomes were delivered alongside improved sustainability metrics is a testament to the strength of our strategy, our culture and teams across the business. So on behalf of the entire Cleanaway team, it is my pleasure to report to shareholders on the performance of your company over the past year. Net revenue increased 4.7% to $2.2 billion. Underlying EBITDA grew 3.8% to $531.5 million. EBIT rose 0.8% to $258.7 million. And underlying net profit after tax was up 2.1% to $153.2 million. Net cash from operating activities increased by $22.9 million to $424.4 million, and this resulted in a cash conversion ratio of 102.4%. Cleanaway is eligible to participate in the Commonwealth Government's instant asset write-off scheme, which is forecast to reduce tax payments made by the group in FY '22, '23 and '24. Cleanaway paid a fully franked final dividend in respect of FY '21. However, because of the lower tax payments resulting from the instant asset write-off scheme, Cleanaway does not expect to resume franking dividends fully until calendar year 2024. Each of our operating segments, Solid Waste Services, Industrial & Waste Services and Liquid Waste & Health Services, all reported higher EBITDA and EBIT compared to the prior corresponding period. [indiscernible] Solid Waste Services reported increase in net revenue, EBITDA and EBIT of 7.5%, 4.4% and 0.1%, respectively. Industrial & Waste Services reported increases in EBITDA and EBIT of 4.6% and 5.6%, respectively, with revenues 2.5% lower. Liquid Waste & Health Services segment reported increases in EBITDA and EBIT of 3.5% and 5.1%, respectively, with revenue marginally lower. In Solid Waste Services, net revenue increased 7.5% or $103.5 million to $1,476.3 million. EBITDA increased 4.4% or $17.2 million to $405.5 million, and EBIT increased $0.3 million to $213 million. Solid Waste Services benefited from full year contributions from state-wide recycling and the VCRR business and initial contributions from the Stawell landfill, Grasshopper Environmental and the Pinkenba Recycling acquisitions. We won several new municipal contracts and large national commercial and industrial customer accounts. The Western Australian regional container deposit scheme and increased postcollection volumes from the Metropolitan Waste and Resource Recovery Group contract in Melbourne also benefited the segment. Headwinds included lower postcollection contributions from the end-of-life Erskine Park inert landfill in Sydney and the Dardanup landfill in Perth. To a lesser extent, there were some impacts to the segment's performance from weather events and COVID-19-related restrictions. The mechanically stabilized earth wall currently under construction at the Erskine Park landfill is expected to be completed later this quarter. This will create 400,000 cubic meters of airspace. Subject to completion of the transaction with Suez, the Kemps Creek landfill will provide Cleanaway with a longer-term inert landfill solution for New South Wales. The Perth material recovery facility rebuild is now complete and was recommissioned towards the end of the 2021 fiscal year. In our Industrial & Waste Services segment, we reported EBITDA of $48 million, 4.6% higher than FY '20. EBIT increased by $1.2 million to $22.6 million. The IWS segment performed strongly, and this was particularly the case in the mining sector in the West Australian market. This was achieved despite the challenges of COVID-19 and the labor shortages arising from state and national border closures. Building on our leading market position in the mining sector in Western Australia, we are also expanding our platform for growth in this segment across the oil and gas and infrastructure markets. The segment experienced challenging business conditions in Queensland during the year, but we have developed a strong pipeline of activity in the region. Our focus is on major road and rail infrastructure projects, along with a plan for the oil and gas segment. Moving to Liquid Waste & Health Services segment. We reported steady revenue. The segment increased EBITDA by 3.5% to $110 million. EBIT increased 5.1% to $67.6 million. While revenue was flat, the growth in profitability is evidence of the successful integration of the Toxfree business within Cleanaway. In the Hydrocarbons business, the effects of COVID-19 lockdowns resulted in lower volumes for East Coast oil collections. 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 lower first half oil prices. The Health Services business realized higher earnings from COVID-19-related activity at aged care facilities, hotel quarantine locations and mass testing and vaccination centers. Fewer elective surgeries resulted in less medical waste, and 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. We commenced the redevelopment of our Queensland site and commissioned a shredder to handle product destruction at our Sydney site. The Liquids and Technical Services business delivered higher earnings than FY '20, notwithstanding lower volumes from the tourism-heavy states and the hospitality sector more broadly. During the year, we further developed our Dandenong site to handle asbestos-contaminated soils and to deal with residual waste in 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. Significant rain events in New South Wales and Queensland resulted in an increase in leachate volumes across the network. I would now like to update you about some exciting prospects that the Chairman touched on in his address. In anticipation of the completion of this transaction with Suez to acquire 2 landfills and 5 transfer stations in New South Wales, we have been undertaking detailed proprietary work for the integration of those assets. We expect the ACCC to complete its assessment shortly. Completion of the transaction is expected to occur in the next couple of months, subject to the completion of the Veolia acquisition of Suez occurring in that time. On completion of the transaction, we expect the assets to immediately contribute to our earnings. We recently announced that Coca-Cola Europacific Partners were joining our PET plastic pelletizing joint venture with Pact Group Holdings Limited and Asahi Beverages. The first plant in Albury, New South Wales is approaching completion, and the joint venture has plans to develop a second plant in the near future. These facilities will create a genuine, closed-loop recycling solution for the PET plastics we currently recover through our collections network. Separately, we have formed a joint venture with Pact Group Holdings Limited that will develop a HDPE and PP plastic pelletizing facility converting locally collected curbside materials into high-quality, food-grade recycled pellets. The facility will be located in Laverton, Victoria and will process the equivalent of over 500 million plastic milk bottles per annum. Our proposed energy-from-waste facility in Western Sydney hit a speed bump last month when the New South Wales government outlined a new energy-from-waste infrastructure plan, which restricted energy-from-waste activities from being undertaken within the Greater Sydney Basin. We continue to see energy-from-waste as a key plank in the transition to lower carbon and a more circular economy, and we remain committed to finding an opportunity to participate, including in the regional areas of New South Wales identified in the government's plan. We hope to have more to tell you about our energy-from-waste plans in the coming months. It is a fascinating time to join the waste management industry. From the outside, I've observed keenly the industry's transformation from long-standing provider of essential waste services to the community to an innovative industry responsible for developing new ways to collect, recover, reuse, reprocess and treat waste materials for our customers. Tackling climate change and advancing a circular economy are 2 essential and interrelated goals where I see a real and exciting opportunity to bring to life Cleanaway's mission. In doing so, we can deliver value for our customers, our shareholders, the community and the planet. I have 4 main priorities over the coming months: firstly, ensuring that everything we do at Cleanaway is done compliantly with the highest safety standards and protection of the environment; secondly, building our Cleanaway culture and ways of working to ensure every one of us can bring our best and be our best and that our culture is matched to the next stage of our growth journey together; the third is maximizing the potential of the existing business by delivering performance today and improving for tomorrow, including a laser focus on new value driver metrics in our businesses; finally, we are refreshing our Cleanaway strategy, building on the strong foundations already in place to ensure we are looking far enough into the future to ensure we are positioned to capture more than our share of the significant opportunities created by decarbonization, self-sufficiency and a circular economy. And I look forward to sharing more about our progress on these priorities in the future. Turning to the outlook. We have continued to see the impact of COVID-19 restrictions on our operational and financial performance. The previously disclosed estimated $4 million monthly EBITDA impact of the New South Wales lockdown were largely realized in the first 3 months of the year. The New South Wales container deposit scheme was partially reopened in September and was fully reopened by the start of October, which has partially mitigated the impact of COVID going forward. We are beginning to see a recovery in our trading in key markets as they emerge from the latest lockdowns, but we expect continuing impacts from COVID-19 in the medium term. As we follow the road map out of COVID-19 across each of the states, there is some uncertainty in relation to the rate at which our trading will recover to more normal levels. There is also the potential for further impacts of COVID-19, particularly in states that have not previously been affected. We will provide a further trading update with our half year results on the 17th of February next year, at which time, we will have a better understanding of the impacts of COVID on the business over the first half of the year and the contribution that the Suez assets will make to the business in the second half. With the impact of COVID-19 continuing to be felt, it is important that we focus on our people. And I would like to take this opportunity to thank our team members, particularly those on the front line, for their dedication, their commitment and their flexibility in safely serving our customers and our communities through all the challenges they continue to face this year. I would also like to echo Mark's thanks to Brendan. And I would like to thank the whole management team for the level of support they have given me as I settle into the new role. I would also like to extend my personal thanks to our Chairman, Mark Chellew, and the rest of the Board for the opportunity that they have given me and the trust that they have placed in me to lead this great company. I'm proud to join Cleanaway, and we'll work hard every day to deliver value for our customers, our people, you, our shareholders and to ensure we deliver our mission to make a sustainable future possible. I'll now pass back to Mark for the formal resolutions.

Thanks [indiscernible]. Thank you, Mark. Transcripts of both my address and that of the CEO and Managing Director, Mark Schubert, are available on our website and the ASX company announcement platform. Ladies and gentlemen, we will now continue with the formal business of the meeting. As you are aware from the Notice of Meeting, we have 5 items of business today. Items 2, 3, 4 and 5 require a vote. I confirm that I will vote all 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 Michael Hutchison of Computershare Investor Services as the returning officer. I will now move to the first item of business. Item 1, financial report. The first item of business is the receipt and consideration of the company's financial report for the year ending 30th of June 2021 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 at Ernst & Young, Cleanaway's auditors, relevant to the conduct of 2021 audit, the preparation and content of the auditor's report, the accounting policies adopted in preparing the financial statements and the independence of the auditor. All questions to the auditor should be, in the first instance, be addressed to me as Chairman, and if appropriate, I will ask Mark -- Mr. Croft to address the meeting. If you have any questions on this item, please submit them now if you have not already done so. As I stated earlier, questions will be addressed by me following the end of all items of business. I will now proceed with the resolutions to be considered. You'll be able to see the number of proxies received in respect of each resolution displayed on the screen. Item 2, adoption of remuneration report. Item 2 on the agenda is to consider the company's remuneration report for the year ending 30th of June 2021. The remuneration report is contained in the 2021 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 directors and closely related parties of these persons. I will now move to the next item. Item 3, election and reelection of directors. Items 3a and 3b relate to the election and reelection of directors, a [ separate ] resolution we put for each director. Item 3a relates to the reelection of Ray Smith. Ray retires in accordance with the company constitution and, being eligible, offers himself for reelection. The Board, in the absence of Ray, unanimously supports his reelection. Item 3b relates to the election of Ingrid Player as a director. Ingrid retires in accordance with the company's constitution and, being eligible, offers herself for reelection -- or for election, I should say, the first election. The Board, in the absence of Ingrid, unanimously supports her election. The Board has conducted the appropriate checks into Ingrid's background experience and is satisfied she is an appropriate person for election to the Board. I'll now move on to the next item of business, item 4, grant of performance rights to Mr. Mark Schubert. The next item of business relates to the granting of performance rights to the CEO and Managing Director, Mark Schubert, under long-term incentive plan. Item 4 of the Notice of Meeting seeks approval for the granting of 631,983 performance rights to Mr. Mark Schubert under the terms and conditions of Cleanaway's Long-term Incentive Plan, as set out in the exploratory statement to the Notice of Meeting. Item 5, renewal of proportional takeover provisions in constitution. Item 5 in the Notice of Meeting seeks approval for the renewal of the proportional takeover provisions, which are expiring on the 31st of October 2021. If this special resolution is approved, the revisions will apply for a further 3 years up until the 31st of October 2024. The directors consider that renewing the provisions will be an advantage to all shareholders as it provides the opportunity for shareholders to consider and vote any proportional takeover bid. We now come to the Q&A part of the meeting. If you have any questions on the item of business, please submit them now if you've not already done so. Richie, do you have questions submitted?

Yes, sir. [indiscernible]

After Mr. Bansal stepped down as CEO of the company, I undertook the role of Executive Chairman on a temporary basis. I accepted this position after extensive discussion with the Board. I accepted this position in order to support an orderly transition of leadership, which was particularly important given the status of our discussions with Suez in relation to the acquisition of their Sydney assets at the time. Two of our nonexecutive directors, Philippe Etienne and Terry Sinclair, also received fees for additional services over this period. Their fees relate to additional services provided in relation to the acquisition of Suez's postcollection assets and the company's energy-from-waste project, respectively. However, they will not apply into management positions in this time.

[indiscernible] the ASA was disappointed that the opportunity was lost during the installment of a new CEO, that the associated incentive metrics were not based on statutory figures. Would you please explain why this did not happen?

Cleanaway provides a detailed and transparent reconciliation of statutory to underlying EBITDA with its financial results. Over the years, this has adjusted for both positive and negative elements. The Board continues to believe that underlying financial measures provide a better representation of performance of the business through time.

[indiscernible] the hurdles and metrics that will apply to the STI granted to Mr. Schubert on his employment.

The STI is 35% nonfinancial and 65% financial. The nonfinancial metrics comprise safety, environment and overall female participation at 10% each and 5% for employee engagement. The financial metrics are EBIT, net revenue and return on invested capital with an EBIT gateway hurdle. We don't disclose prospective hurdles, but we describe the performance against the hurdles retrospectively. Richie, do you have any more questions submitted?

No further questions, Chairman.

If there are no more questions, ladies and gentlemen, that concludes our discussions on the items of business. Voting. In 1 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 time to finalize those votes. I'll be waiting 1 minute. [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. I now declare the meeting closed. Thank you for your attendance. Bye.