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

Thank you for standing by, and welcome to the Cleanaway Market Briefing. Today's call will comprise of 2 parts: the FY '22 full year results for the year ended 30 June 2022, and the acquisition of GRL and equity raising. [Operator Instructions]. I will now hand you over to your host, Mark Schubert. Please go ahead.

Good morning, everybody, and thank you for joining us on the call this morning. Firstly, I would like to begin by acknowledging the traditional owners of the lands on which we meet today and pay my respects to elders past, present and emerging. As you will notice from our release to the ASX this morning, we will be covering the FY '22 financial results, the equity raise and the GRL transaction on the call this morning. We will start with the FY '22 full year performance and follow that with the acquisition of GRL and the associated raising. As usual, we will commence with some prepared remarks and then do Q&A. Given the full agenda, we will need to stick to a tight schedule. So when it comes to questions, I will limit you to 1 initially so that most people get an opportunity to ask a question. Obviously, there will be further opportunities during the day and over the course of the road show to ask further questions. Joining me on the call today is Paul Binfield, our CFO; Frank Lintvelt, our EGM of Strategy and M&A; and Richie Farrell, our Head of Investor Relations. In terms of the agenda of the results today, I'll take you through the highlights for the year. Paul will provide you with further details on the group financials, then I'll walk you through the performance of each of our operating segments. This will be followed by a brief progress update on the execution of BluePrint 2030 strategy, including our new greenhouse gas reduction targets. I'll finish the presentation with the outlook for FY '23. So if we turn to Slide 4. Let me start by saying that it is a privilege to report on behalf of the nearly 7,000 strong Cleanaway team our financial, operational and strategic performance and progress for the financial year ended June -- 30th of June 2022. From a financial performance perspective, we delivered strong revenue growth across all segments and continued to generate strong net operating cash flow. Net revenue grew by 18.4% or around $400 million, which was very pleasing. The drivers of the revenue growth can be grouped into 3 areas: firstly, about half is related to the general recovery in the solid waste services activity, including price rises, the full year contribution of the Perth MRF and increased contributions from recently won top collections and post-collections contracts; secondly, about 1/3 is related to the SRN acquisition, which was a 28-week contribution of around $127 million; and finally, the balance was predominantly made up of higher commodity prices and a higher contribution from our other segments, including substantial COVID-related volumes in the health services business and project work in LTS and IWS. We continue to recover cost increases through contractual mechanisms, and towards the end of the year, implemented a fuel surcharge for SME customers to further address the impact of high fuel prices. From an EBITDA perspective, we reported an increase of 8.7% or $46.5 million to $581.6 million. With disciplined working capital management, this translated into a strong net operating cash flow, which was up almost 10% with effectively a 100% cash conversion rate. The Sydney Resource Network acquisition was completed on the 18th of December 2021, and the contribution for the 28 weeks was ahead of our expectations. We see a clear pathway for further margin expansion and still aiming to deliver the previously disclosed medium-term segment EBITDA margin targets. Factors that support this ambition include a post-COVID operating environment, especially in our health business, the successful delivery of our BluePrint, in particular, our operating efficiency through data and analytics and the digitization of the customer experience, the possible height extension appeal at New Chum and the acquisition of GRL that we announced today. At the same time, we'll be working to improve our capital efficiency and deliver superior shareholder returns. From an operational perspective, we enhanced our leadership team and now have new capability to support our growth agenda. We established the first group of Lighthouse Branches that I referred to in the first half, which we're using to identify and pilot value drivers for our business. Our team and business displayed remarkable resilience through significant operational challenges, including the pandemic, floods and loss of significant infrastructure. We have now met the commitment we made last year and set challenging yet credible greenhouse gas reduction targets for 2030 and 2050, with long-term incentives to be aligned to interim targets. From a strategic perspective, our BluePrint 2030 strategy implementation is well underway. As you will have noted from our June strategy deep dive, it is very detailed and supported by rigorous execution management. We have continued to build out those platform businesses that will deliver a step change in our growth. During the year, we redefined protecting our people and protecting the environment as 2 foundations upon which Cleanaway operates. Defining these foundations rather than priorities is both deliberate and important. This ensures our frontline teams do not need to choose to think between competing priorities and instead, our foundations are always first. Our foundations are central to our purpose of making a sustainable future possible together. We also added dedicated carbon, sustainability, core process and continuous improvement capabilities to the business. Some of our key financial outcomes are highlighted on the right of the slide and Paul will take them -- take you through them in more detail shortly. If we turn to Slide 5, where I'd like to spend a moment to talk about people, culture and the environment. When it comes to safety, it is regrettable that in a year where safety has had such an intense focus, the lagging indicators at this point. Tragically, there were 3 fatalities either involving our vehicles or at our sites during the year. While it was determined that the company was not a fault in any of the incidents, it does not take away from the loss and distress that we felt. Our total recordable injury frequency rate for the year increased from 3.6 to 4.2. This represented 83 instances where one of our teammates went home injured. As a leadership team and the broader Cleanaway team, we are not satisfied with our performance, and we'll continue to work intensively on our short, medium and long-term improvement plans. From an environment perspective, it was pleasing to have significantly reduced the number of environmental enforcement notices, which reflects the shift and intense focus that we now have on protecting the environment through strong environmental controls. We do recognize the concerns raised by the community regarding flood-related offsite odour at New Chum, and the team has been working tirelessly in close consultation with the regulator to minimize community impacts. From a female participation level, we made a step change during the year, but we still have much more to do. We now have substantially greater representation of the executive and leadership level, and we are starting to move the needle relative to prior periods from an entire organization level. We've already graduated 20 women from our Women's Driver Academy and have line of sight to quadrupling this number through FY '23 and driving more flexible work practices to enable us. It was very pleasing that we further improved employee engagement levels in what was a really challenging year from an operational perspective, while still delivering critical services to our customers and the community. That really represents the Cleanaway spirit that our team demonstrated day in, day out. As we reset our culture during FY '23, we plan to develop new values and behaviors that underpin a culture that supports our strategy. From an environment perspective, it was also pleasing to have significantly reduced the number of environmental enforcement notices, which obviously reflects the shift and intense focus that we now have. I'll now pass over to Paul to discuss the financial performance from a group perspective.

Thank you, Mark. So turning to Slide 6, we'll unpack the P&L full year. Mark spoke to the key revenue variances, so I won't repeat them. Higher net revenue in the Solid Waste Services segment contributed significantly to the EBITDA result. However, this was partially offset by the significant diesel price increase that occurred through the course of the year and, in particular, in the second half. As planned, a New Chum landfill also setted much less volume than the prior corresponding period, while awaiting the outcome of the height extension application review. This was compounded by the flooding and the landfill, which resulted in the site being closed for the majority of the second half. Mark will provide you further detail on the stance of New Chum at the moment. Across all segments, there are challenges associated with general labor availability. An increase in vacant roles resulted in an increase of use of more expensive labor and overtime, while frontline management and supervisors have also had to step in to meet operational requirements. This resulted in some service failures and undoubtedly some revenue leakage and ultimately adversely affected operational leverage. The increase in COVID community infection rates in the second half of the year had a compounding effect be incurred both pandemically costs and covered the related work with more expensive temporary labor higher. To address this, we've been actively developing initiatives to improve labor availability, including developing and rolling out women's driver academists of heavy vehicles in yellow gear, converting labor higher staff to permanent employees targeting offshore recruitment skill positions and capturing labor efficiencies through optimization and other initiatives. We also deployed a devoted external recruitment support team to assist in filling vacant roles. As I argued in the first half, our services business experienced operating inefficiencies as a result of the substantial increase in COVID-related clinical waste volumes. This was further compounded by the loss of key processing infrastructure in early 2022, resulting in higher working costs. The floods in Queensland resulted in the temporary closure of the New Chum landfill and the loss of both fleet and property. The remediation and rectification costs and the write-off of lost assets was taken below the line but the business had to secure alternative disposal pathways for waste collected. Not only that was more expensive, but the operational inefficiencies that the team restructured operations to work around capacity constraints resulting from the loss of fleet. From a margin perspective, it was a similar story to the first half of the year, and there were 4 primary drivers of the decline in margin. Firstly, higher fuel costs had a direct impact on margin, although there were somewhat recovered from price adjustments to SME customers, together with the introduction of fuel surcharge on the 1st of May, which lessened the margin compression. Secondly, the health services business continued to work tirelessly to meet the needs of major customers there in the front line of managing the pandemic such as public hospitals, COVID testing centers and quarantine hotels servicing those high volume but lower margin customers came with significant inefficiency in that business, compounded by the loss of a piece of critical clinical waste processing equipment. This led to temporary but higher operating costs. It also came at the expense of deferring our regular service to high-margin customers, thereby adversely affecting the margin mix. Thirdly, and as discussed at the half year results, strong commodity prices resulted in higher rebates to customers, but we also had to absorb the higher freight costs due to global shipping constraints. And hence, whilst higher prices have generated higher profit, the margin has indeed been eroded. And finally, we've been bringing in targeted new capabilities throughout the organization to execute our strategy and deliver the step change in growth and value that we're looking to achieve. In FY '22, we incurred an additional $4 million in corporate costs, consistent with the previous guidance of the annualized cost of this capability was going to be approximately $15 million. Moving now to Slide 7, where we explain the pricing and contractual mechanisms that protect our bottom line in the current inflationary environment. We generate our revenue from 3 broad categories of customers in our Solid Waste Services business, municipal, national and mid-market accounts and SME customers. In the muni, national and mid-market segments, we typically have specific rise and fall clauses that specifically capture the labor and the fleet operating costs and allow us to pass through cost increases based on specific defined indices. We also have a general CPI pass-through that largely covered the other elements of our operating costs. While the contracts are all different, generally, the customers have at least annual price resets. For SME customers, price adjustment can be more flexible. And as such, with these customers, we seek to recover cost increases closer to the time that they are incurred. Whilst we have strong contractual inflationary protection, as seen in FY '22, our ability to pass through cost increases is lagged, and this will result in temporary margin compression. Furthermore, to the extent of the general cost increases are higher or lower than the CPI index that will also be reflected in achieved margin outcomes. So looking at our cost base in a bit more detail, there are 4 key categories of costs. First, labor is clearly a large proportion of our total costs. And as such, it has a specific labor index that is typically referenced in our contracts and used to determine price adjustments for our larger customers. While this provides a strong base of inflation protection, the index does not capture specific operating circumstances. So to the extent that labor availability issues result in the use of more temporary labor and over time, this will create additional cost pressures and this is something that we're actively managing. As discussed earlier, we have several initiatives in place to maximize participation. The second category is disposal cost and levies which represent over 30% of the total cost base. These costs can be passed through to customers on a cost incurred basis with most of our contracts having clauses aligned from immediate passthrough government levies or out-of-cycle increase in gain rates. The third category groups, lots of smaller subcategories such as property, freight and cartage, repairs and maintenance and head office costs. And generally speaking, these and agri will largely track general inflation. Finally, we have fuel, which we have called out separately. We have a specific fuel index in our contracts that is passed through to our larger customers. And in response to the sharp and rapid increases, we also implemented a fuel surcharge to the segment of our customer base that can be flexibly repriced. So moving to Slide 9. Statutory profit after tax attributable to ordinary shareholders of $78.9 million was 46% lower than the prior corresponding period. The underlying adjustments to EBIT totaled $87.8 million and a net $64.4 million of NPAT. We called out the costs related to the acquisition and integration, predominantly our GLR acquisition, the CEO transition and restructuring projects and the New South Wales Energy from waste loan right down in the first half. The bigger costs in the second half related to New Chum remediation and rectification costs associated with the flat damage and also additional costs in health services associated with the alternative disposal pathways following the home and health failure and the write-off of damaged equipment. So turning to cash flow. Cleanaway continues to generate strong and consistent operating cash flow. Operating cash flow for the year increased by $42 million to $466 million due to higher profitability and lower tax payments. This was partially offset by higher interest payments and underlying adjustments. The cash conversion ratio of almost 100% reflected good working capital management. Our ongoing strong credit management has resulted in overdue debt is continuing to fall, and we've seen no material increase in credit defaults. Directors increased the final dividend of $0.0245 per share while remaining comfortably within our target payout ratio of 50% to 75% of underlying NPAT. We continue to take a disciplined approach to making our investment decisions. The split between stay in business and growth CapEx helps us to make more focused allocations of capital. Total growth CapEx included capital related to new municipal contracts. The acquisition of the site more or low for the Melbourne Energy from Waste Development and assets to service new contractual wins across our IWS and liquids business. We expect that FY '23 D&A will be approximately $360 million to $370 million, excluding the GRL acquisition. The driver of the increase in D&A relates to a full year contribution from SRN which the majority relates to the amortization of airspace and customer contracts valued as part of the acquisition accounting. We will need to complete the acquisition accounting and purchase price allocation in relation to GRL transaction. However, our high-level expectation is that FY '23 D&A for GRL will be approximately $4 million. We also expect a step up in growth CapEx in FY '23 to fund the BluePrint 2030 growth projects and also landfill cell development activity. From a debt capital perspective, at the end of June, the group had $454 million of headroom under committed debt facilities. As previously advised, we fully debt funded the acquisition of the Sydney Resource Network for a $500 million 3-year committed debt facility. While our pro forma leverage increased to 2.25x, we remain well within our covenants and our next refinancing is not due until July '24. So I'll pass it back to Mark for a review of the segments.

All right. Thanks, Paul. And before I begin, I do want to draw your attention to the addition of the CDS business unit as a new SBU within the Solid Waste Services segment, and this really acknowledges the growing role of container deposit schemes nationally and within our business and the importance of joint venture relationships that we are part of in participating in those schemes. So moving now to the review of the Solid Waste Services segment. Solid Waste Services net revenue increased 23.2% or $342 million to $1.82 billion. EBITDA increased 15.8% or $64 million to $469 million, and EBIT increased 6.9% or $14.8 million to $228 million. Solid Waste Services benefited from an initial contribution from the Sydney Resource Network assets, new mini collection and post-question contracts, higher commodity prices and a full year contribution from the Perth MRF. This was partially offset by the impacts of COVID lockdowns, in particular, in New South Wales, contributions from flood-affected regions, lower volumes into New Chum landfill and the higher operating costs discussed earlier. EBITDA increased 15.8%, while EBITDA margins decreased 170 basis points across the year, with the margin decline reflecting several factors, including higher fuel prices, lower commodity margins and higher COVID-related labor costs. During the year, the team successfully tendered for the Bayside, Eurobodalla, City of Clarence, Hobart recycling and City of Vincent municipal contracts. The TOMRA Cleanaway joint venture was awarded an extension to the New South Wales CDS contract until late 2026. Cleanaway was also awarded the Supplier Service Champion of the Year by Coles for supporting its landfill diversion goal. As you are aware, the significant flood events have damaged cell at New Chum landfill during the year, resulted in a decision to temporarily close the landfill until rectification work is completed. We have incurred $38.8 million of expenses and provisions in FY '22, in line with our previous disclosure, and we continue to expect the site to remain closed during FY '23. Rectification works are well underway, and we are progressing with our project plan. We have installed stormwater dams continuing to dose the residual water body with chemicals whilst tankering off-site and are about to commence installing more landfill gas capture infrastructure and remediate the sale. Moving to Slide 14. We completed the acquisition of the Sydney Resource Network from Suez on the 18th of December 2021, and our team quickly onboarded our new 100 employees. The integration team worked tirelessly over the first few days post acquisition to ensure a seamless customer transition. This has been completed with a full operational handover to the New South Wales business occurring in February. Pleasingly, the assets contribute $127.5 million in revenue and $57.7 million in EBITDA during the period. We are also benefiting from the enhanced operating leverage through the expanded footprint and route optimization, and we expect to extract further synergies through leveraging the network, the licenses and the land to accelerate the progress of our organics and C&D blueprints in New South Wales. Moving to the Liquid Waste and Health Services, where revenue increased 7.4% to $550.5 million, while EBITDA decreased 12.5% to $96.2 million. Consequently, EBITDA margins decreased 400 basis points to 17.5%. EBIT decreased 21.6% to $53 million, and EBIT margins decreased 360 basis points to 9.6%. From an EBITDA perspective, the hydrocarbons business performed in line with the prior year. Revenue increased 7%, benefiting from the higher post collection volumes and prices and higher Cleanaway Equipment Services revenue from increased machine sales and growth in servicing activity. The Health Services business revenue increased by 12%. This was largely attributable to increase clinical and general waste at health care facilities because of that pandemic and an increase in biosecurity waste as borders reopened. EBITDA decreased 36%, reflecting the higher costs that Paul described earlier. The second half was particularly impacted by 2 incidents that resulted in damage and loss of waste processing equipment. Customer contaminated clinical waste led to the damage and loss of the Hammermill in Victoria. As a result, we decided to eliminate the risk associated with mechanical processing of incompatible waste and are installing watercourse. Until the watercourse come online in first half of FY '23, we will continue to use alternative disposal pathways, which are expected to cost $2 million to $3 million a month. We will exclude these costs from the underlying FY '23 results. COVID care, personnel protective equipment has now been reclassified from clinical to general waste in multiple jurisdictions, leading to a meaningful reduction in volumes, and we have improved efficiency and flow through of clinical waste infrastructure. The Liquids & Technical Services business realized 9% higher revenue and 6% higher EBITDA than the prior period, predominantly due to a strong recovery in Queensland and significant work on the Tottenham and Kaniva and Parramatta Light Rail projects. This was partially offset by increased cost of disposal in New South Wales, capacity constraints due to labor availability and higher fuel and labor costs. We are exploring opportunities to treat more complex waste streams and working collaboratively with clients on potential future issues and how we can support them. Turning to Industrial & Waste Services. IWS reported EBITDA of $47.2 million, 1.7% lower than FY '21. EBITDA margin of 14.4% was 130 basis points lower than FY '21, and the segment performed well in challenging external market circumstances. The compression in EBITDA margin reflected higher unit labor costs and costs to cover pandemically, high fuel costs and fewer high-margin infrastructure projects in various states, which were delayed due to COVID. This was partially offset by a strong performance in the Western Australia and South Australia and Northern Territory markets that were less affected by COVID during the year. During the year, IWS resigned available contract extensions with a 100% renewal rate and progressively improved its new business win rate. Indigenous participation is an increasingly important consideration for Tier 1 resource companies who are looking to ensure their efforts in this area results in direct financial benefits to indigenous people and businesses. The Pilbara Environmental Services joint venture between Cleanaway and King Kira Group will be well placed to participate in the next wave of industrial service contracts starting in Northwest WA. IWS continues to deliver organic growth from its existing client base plus new business across the regions with the outlook for sustainable growth over the next few years, supported by a healthy pipeline of work. This pipeline continues to be developed and balanced across the key segments in which we operate. We expect to see our segment portfolio shift from a historical mining segment bias to a greater share of the oil and gas segment, given the current activity in that sector, with several material opportunities being tendered and awarded during FY '23. Moving to BluePrint 2030 and I do appreciate that this is a very busy slide. In some ways, it is symbolic of the year that we have had. While operationally, this year, we have faced many challenges as we serve our customers today, our teams across Cleanaway have also been busy executing our blueprints to build our business of tomorrow. I don't propose to dwell on this slide for long, other than to say that our growing pipeline of opportunities fit certainly within our value creation growth framework. We continue to build out our platform businesses and have unlocked strategic opportunities within our footprint and network to accelerate the growth of our new platforms. A good example of this in the organic space with the announcement of today, the GRL acquisition. As I'll be talking to you about that in detail very shortly, I'll just say that it is a highly strategic acquisition that creates huge optionality for our growing New South Wales business unit. Turning to greenhouse gas emissions. As a player in the waste sector, we are in 2 different greenhouse gases, global methane and carbon dioxide. These gases have different impacts on the climate due to their resistant time in the atmosphere and molecular structure. Our methane emissions are distributed across 10 active and closed landfill sites. Emissions from our fleet is the bulk of our CO2 emissions, followed by emissions from electricity use and combustion of natural gas at our facilities. When expressed in CO2 equivalent terms, our emissions consist of approximately 78% methane and 22% CO2 emissions. We have set 2030 and 2050 targets for both CO2 and methane that are low to no overshoot, but are consistent with low to no overshoot 1.5-degree scenarios in the IPCC's 2022 Sixth Assessment Report and aligned to CO2 and CH4 targets that emerged on COP 26. As I mentioned earlier, we believe that these are credible and ambitious targets. Importantly, we have identified a suite of initiatives that will support our journey towards delivering those reduction targets, and I do look forward to discussing those in more detail at our next strategy deep dive session. We move now to the outlook. FY '23 earnings are expected to be higher than FY '22 due to a full year contribution from SRN, underlying growth and BluePrint 2030 initiatives. We expect FY '23 underlying EBITDA to be in the range of $630 million to $670 million. Based on current operating conditions and a balanced assessment of the opportunities and the risks, the business is tracking towards the midpoint of this range. This excludes the $21 million of annualized EBITDA contribution from the GRL acquisition. The material factors that can influence the outcome our volumes into post-collection assets and labor availability. Guidance assumes no material change to prevailing market and economic conditions. Depreciation and amortization, excluding GRL is expected to be $360 million to $370 million, and we will host the second of our strategy deep dives with investors in November. We have yet set on the precise date in time, but we will notify you in due course. In closing on this part of the presentation, I want to reflect again on BluePrint 2030 and the value we are seeking to create for shareholders. The market is in transition, and we are positioning the Cleanaway business to be in the driver seat to provide high circularity, low-carbon solutions for customers' waste streams. The optionality that we create and the choices we make today will lay the foundations for our success. We have a clear vision of how the transition will occur. Our extensive footprint and strong network means that we are well positioned and can adapt to the pace of the transition. As an early mover, we will capture the opportunity to further enhance our customer solutions by developing and securing the most strategic sites and facilities. And I will talk to you about how we are doing this in New South Wales through the GRL transition. That concludes the FY '22 financial part of the call. So we're now going to move on to the transaction and the equity raise announced this morning. And I'll pause for a minute just so that everyone has time to switch back and access the relevant materials for this part of the call, and I'll give you about 15 seconds or so to do that. All right. So moving on. Today, we are launching an equity raising, comprising a $350 million placement and a $50 million share purchase plan. We're also announcing the acquisition of a 100% interest in Global Renewables Holding Proprietary Limited, otherwise known as GRL, for $168.5 million. The equity raising proceeds will provide increased balance sheet capacity to directly fund additional BluePrint 2030 growth opportunities, including this acquisition. While we are very excited about this acquisition, we are equally excited about the short- and medium-term opportunities that are in the pipeline. We have been progressing several large tender opportunities with outcomes expected in the coming 6 to 12 months. We are also excited about the options and opportunities that this acquisition unlocks for our broader organics blueprint and our construction demolition waste blueprint. With these opportunities, we have clear line of sight to deploying the capital raise today. The acquisition of GRL represents an important step in the acceleration of our BluePrint 2030 strategy and, in particular, our organics blueprint. The site facility provides a strategic location and infrastructure to enhance our broader network and customer offering today and into the future as we position ourselves to capture the growing share -- our share of the growing FOGO market opportunity. Our market release and investor presentation was lodged with the ASX this morning, and I'll be speaking to that presentation this morning. Please note the disclaimer at the start of the presentation, which I'll take as read. So I'm moving to Slide 6. Turning to the agenda. Given the limited time this morning, we plan to discuss some select slides only to allow sufficient time for questions. I will cover the transaction overview, how the acquisition fits with the BluePrint 2030 strategy and how the equity raise provides the necessary balance sheet capacity to further fund blueprint opportunities. Frank will provide a more detailed overview of the GRL business, the market context and how the facility specifically ties into our organics blueprint. And Paul will cover the elements of the equity rating, sources and uses of proceeds and pro forma financial statements. I'll then make some concluding remarks followed by Q&A. Turning to Slide 8, the transaction overview. To provide some context, I want to briefly touch on our BluePrint 2030 strategy and reiterate what we have outlined before. So through our strategy, we will create a competitive advantage and creates significant value by extending and integrating our assets and capabilities to address Australia's increasingly complex waste needs. We will do this in the most sustainable way as possible with exceptional customer experience and powered by the passion of the workforce. BluePrint 2030 will build on our existing platform and be supported by 3 strategic pillars, namely strategic infrastructure growth, sustainable customer solutions and operational excellence. This transaction is acutely aligned to our strategy and helps to unlock and advance several blueprints beyond our organics blueprint. Today's announcement of the acquisition of GRL for $168.5 million represents good value based on the current $21.4 million per annum pro forma EBITDA, the future earnings potential and the strategic optionality and benefits that the acquisition creates. GRL is a licensed reverse erosion in vessel composting that today is used to process 20% of Sydney's red bin household waste, where the organic component is composted to render it inert. In the future, as councils transition, the facility will be used to process source separated food and organics. The facility is located at Eastern Creek in Western Sydney and is operated by a highly experienced team with deep organic processing experience. It has consistently delivered strong EBITDA and cash flow. It delivers 30% landfill diversion and better carbon outcomes for mixed waste and is ideally positioned to capture the organic processing opportunity that will come with a transition to a mandated FOGO bin offering in New South Wales. Cleanaway is the exclusive feedstock provider to the facility, and with a well-advanced organic strategy is the logical owner of the facility. We can immediately internalize volumes and carefully plan the enhancement of the facility with a modest investment to enclose the maturation area in preparation for FOGO feedstock processing. The same team that integrated the Sydney Resource Network and tox-free are ready to undertake the integration of GRL, and we will follow our successful playbook and expect it to be a seamless integration. Moving to Slide 9. Under our organic strategy, we will operate 2 strategically located enclosed organic facilities to service the Sydney region. In addition to GRL, we plan to develop enclosed FOGO composting infrastructure at our existing Lucas Heights garden organics composting site. With those facilities providing substantial processing capacity, there is potential over time to repurpose and redevelop the existing mixed waste and organics processing facility at the inert Kemps Creek landfill into a construction and demolition resource recovery facilities. The additional balance sheet capacity following the equity raise also means we are well placed to fund a number of attractive and well-progressed tender opportunities. In terms of financial impact, we know when acquiring the SRN assets that we also acquired the GRL contract, which was unfavorable because of the gate fee payments to GRL exceed the receipts and the count of contracts. The effect of this transaction will be to eliminate the unfavorable contract provision that we made at the time of the SRN transaction, whilst also acquiring the incremental EBITDA generated by GRL. On a stand-alone basis, the GRL acquisition generates attractive EPS accretion and a double-digit IRR, including the capital investment associated with the future enclosure of the maturation area. Including the impact of the placement, the acquisition is expected to be 3.7% EPS accretive with further EPS accretion to come from deploying new balance sheet capacity towards further blueprint growth projects, targeting a double-digit IRR. Following the placement and acquisition, Cleanaway's leverage ratio is expected to be 1.86x, providing appropriate balance sheet capacity to fund additional growth opportunities while maintaining a strong group credit profile. As discussed previously, investment in energy from waste facilities will be considered separately, and we will have appropriate capital structures to match their cash flow profile and their risk. The next slide, Slide 10 really summarizes and highlights why GRL is such a compelling transaction for Cleanaway. The acquisition really accelerates our organic blueprint by providing high circularity, low-carbon solutions for household putrescible waste today and lead FOGOs into a leading position to offer in secure FOGO waste contracts as customers transition to the solution. We are acquiring GRL as an established EBA licensed composting platform with a highly capable and experienced management team. This will allow us to hit the ground running and capture a large emerging organic opportunity underpinned by the New South Wales government policy. Cleanaway is the logical owner of GRL being the exclusive provider of waste of the facility. We also have deep existing relationships with surrounding councils, which we will develop further and support them in the transition to FOGO. In the meantime, we can immediately internalize existing volume and acquire an attractive pro forma EBITDA of $21.4 million per annum. The facility with existing relevant EPA licenses would be difficult to replicate on a greenfield basis in a similarly strategic location that could service the Sydney market. Owning the facility together with the planned Lucas Heights FOGO facility will allow Cleanaway to leverage its leading transfer station network to capture and grow it in the organic market share. Moving to Slide 11. At our investor briefing back in June, we outlined the detailed blueprint that sit underneath the BluePrint 2030 strategy, and we talked about how the strategic pillars could build upon each other to create shareholder value. Today's transaction and equity raise is a really great example of that and so far as it not only delivers on a stand-alone basis, but it unlocks value and creates optionality across a range of blueprints and pillars. The GRL facility itself sits within the strategic infrastructure growth pillar and organic blueprint. It also unlocks opportunity in the C&D blueprint through the potential redevelopment of our Kemps Creek mixed waste treatment facility into a C&D resource recovery facility, thereby co-locating inert waste processing with an inert landfill. Similarly, Lucas Heights is a putrescible landfill is better suited for colocating a FOGO facility and immediately benefits from the existing garden organics volumes that are currently processed there. The ownership of the GRL facility creates flexibility around the transition time line for Lucas Heights. As the FOGO market develops and the volumes increase, we will be well positioned to capture the market opportunities across our network. The enhanced balance sheet capacity from the equity raise and GRL earnings will support core infrastructure investments, should we be successful in a number of attractive and well-progressed tender opportunities that will require upfront investments and deliver attractive returns, including container deposit schemes, large-scale material resource, recovery facilities and potential value chain extension infrastructure. We have had significant success in large municipal and government awarded contracts in recent years with our reputation and experience being a key differentiator. Each of these blueprints directly linked to sustainable customer solutions with high circularity and low carbon outcomes. The equity raising, which brings our performance net debt to EBITDA to 1.86x, combined with the strong cash flow generation of our business provides us with appropriate funding capacity to invest in the exciting growth opportunities expected in the medium term as outlined in our BluePrint strategy. The incremental proceeds from the equity raise will initially be used to reduce net debt before they are redeployed into value-accretive investments in accordance with our capital allocation framework. As was discussed during the strategic infrastructure deep dive in June, funding of our energy from waste projects will be evaluated separately in due course, taking into consideration the nature of these assets and the cash flows as well as the strong lender appetite. I'm now going to pass over to Frank to provide a bit of a refresher on the broader FOGO opportunity from a market and regulatory context.

Thanks, Mark, and good morning, everybody. I'm on Slide 14. We know that customer demand and government policy are driving shift to greater resource recovery and diversion from landfill. Credit store separation will support higher resource recovery and food & garden organics are the next phase in the transition. Across Australia, we're starting to see various FOGO and food waste regulations coming into play with aggressive targets being set for the next 5 to 10 years. Under New South Wales policy, they've recently introduced mandatory household FOGO collections by 2030 and mandatory commercial and industrial food waste collections for certain sectors by 2025. The regulatory and policy changes that we're seeing to some degree in all states will significantly increase the need for FOGO processing infrastructure to meet the growing demand. Now as the market transitions towards higher rates of food in organic waste feedstock, the existing infrastructure will become less suitable. Currently, most organics are processed at open windrow composting facilities which are outdoors and had limited our controls. These open windrow facilities are less suited to the more odorless FOGO feedstock, particularly in or near metropolitan areas. Instead, the industry is likely to move towards the development of in-vessel composting facilities which are enclosed and can, therefore, have more effective auto controls. Moving to Slide 15. Organics is the fastest-growing blueprint category as more and more cancels move to source-separated organics collections. In our organic strategy, we will target food and garden organics, and we will develop a vertically integrated business comprising collections, processing and product sales with feedstock volumes sourced from a combination of long-term cancel contracts and C&I customers. The organics growth opportunity is significant with 2 key factors driving growth. Firstly, we see a step change in volume growth in an already sizable market. Current recycling rates are relatively low and they are expected to increase over the coming years as mandated FOGO targets are implemented and as customers seek to improve resource -- improved resource recovery outcomes. The improved source separation is expected to see overall organic market volumes in Sydney double to over 700,000 tonnes once all FOGOs -- once all cancels have transitioned to FOGO. The second driver is price growth. Much of today's volume is garden organics, which attracts relatively low rates compared to when this garden organics is mixed with food organics, which requires a shift to more advanced and higher cost processing technologies. These 2 factors, volume and price growth, presents an attractive opportunity for Cleanaway, and the acquisition of GRL puts us at the forefront of this opportunity. Cleanaway, including GRL, currently processes and disposals of over 600,000 tonnes of addressable and garden waste from 15 Sydney cancels and we estimate that these cancels will generate around 350,000 tonnes of FOGO after the transition. We will be looking to offer these existing customers as well as other councils are FOGO services when they transition. The size of the overall market opportunity, combined with our existing relationships and our leading transfer station network will support our planned investment in FOGO and Lucas Heights as well as the GRL facility. Moving to Slide 16. The map on the left-hand side of this page illustrates how Cleanaway's infrastructure network will provide comprehensive coverage across waste types in the most important or in the important Sydney markets. The acquisition of GRL combined with the planned development of a new organic facility as Lucas Heights and our leading transportation network provides us with a cost-effective integrated organic solutions for our customers. The acquisition complements our existing post collections network of landfills, a new MRF under construction for municipal recycling and plans for C&D resource recovery at Kemps Creek. Turning to Slide 18. We've touched on most of this already, so I'll keep this brief. The location map and picture of the facility on the bottom right of the page should give you a good sense of the scale of the facility and its strategic location in the context of the Sydney market. Jumping to Slide 19, where we have provided some background in the New South Wales policy and with GRL does. The change in EPA policy from 2018 has meant that the compost from GRL, which comes from red bin household waste can no longer be used in land applications. Notwithstanding the change in policy, this facility still delivers around 30% landfill diversion and better carbon outcomes compared to household waste directly sent to landfills. As previously discussed, the new South Wales policy, households and certainty in our businesses will be offered FOGO being collection by 2030 and with GRL's existing licensed live scale infrastructure ideally suited to meet the expected market demand. Moving to Slide 20, which provides an overview of the infrastructure and processes at the GRL facility. The facility's current license then allows for the processing of organic waste, although the infrastructure currently compose the organics fraction in the mixed waste stream, the process is equally capable of composting source-separated FOGO. The process is largely the same with less presorting as that is done at the source. As you can see on this slide, the launch maturation area is currently located outdoors on Level 4, and this is something we plan to enclose in the future, which will require $40 million to $45 million capital investment including a few other outlets. Turning to Slide 21. The chart on this slide highlights the consistency of the historical EBITDA contribution of the GRL business. Looking at FY '22, you can see that GRL is expected to contribute a pro forma EBITDA of approximately $21.4 million per annum which reflects GRL's reported EBITDA of $28.6 million and 2 adjustments. First is in relation to the unfavorable GRL contract we acquired as part of the SRN acquisition as was disclosed at the time of the announcement. We currently do not book losses on this contract as we raised the related provision in our accounts as part of the SRN purchase price allocation. This provision is unbind on consolidation with GRL, which brings the losses of approximately $5.9 million back into our accounts. The second reduction of $1.4 million is to normalize the process volumes to align with the license capacity. Further information on the pro forma financial statements and related adjustments is included on Slide 25 and 26. I'll now hand over to Paul to talk to the capital raising.

Thank you, Frank. So in terms of the offsite and structure, it is a fully underwritten placement to eligible institutional investors to raise approximately $350 million. We expect to issue approximately 140 million new fully paid ordinary shares at the underwritten fixed price, representing approximately 6.8% of Cleanaway's ordinary shares on issue. We will be launching the non-underwritten share purchase plan to eligible shareholders expected to raise up to $50 million. The underwritten fixed price of $2.50 per new share represents a 7.7% discount to the last closing price of $2.71 per new share on the 18th of August and an 8.1% discount to the 5-day VWAP of $2.72, again, on the 18th of August. In terms of ranking, new shares issued further placements in the SPP will rank equally with existing Cleanaway shares from their respective issue dates and will be entitled to the distribution of the year ended 30 June 2022. Under the share purchase plan, eligible Cleanaway shareholders with a registered address in New Zealand and Australia will be invited to apply for up to $30,000 of new shares free of any brokerage, commission and transaction costs. The SPP offer price will be at a lower replacement price and the 5-day VWAP prior to the SPP closing. The SPP is expected to raise up to $50 million. Here, Cleanaway retained the right to accept oversubscriptions or to scale back applications in whole or in part as absolute discretion, and that may result in the SPP raising more or less than the $50 million. So now moving to the sources and use of proceeds. I'll start by noting that this slide excludes any impact of the SPP since it's not underwritten. The placement provides significant balance sheet capacity to fund additional growth opportunities, though the proceeds will initially be used to pay down debt before being deployed on future growth initiatives, as Mark has already outlined earlier in the presentation. Cleanaway is committed to maintaining a strong group credit profile and a disciplined approach to deploying further capital. Pro forma statements on Slides 25 and 26, provide you with a little bit more detail and are pretty much self-explanatory, so I won't provide you any more detail on this call. And Slide 27 includes details on the timetable. So just handing back to Mark for some concluding comments.

All right. So thanks, Paul. And so maybe I'll try to summarize sort of what you've heard in that last presentation in the 5 key takeaways from today's announcement. The first is that the equity raise provides significant balance sheet capacity to fund additional growth opportunities to deliver BluePrint 2030, starting with the acquisition of a 100% interest in GRL for $168.5 million. Secondly, the acquisition accelerates Cleanaway's BluePrint 2030 organic strategy by providing high circularity, low-carbon solutions for red bin mixed waste today, and FOGO being the organic waste as customers transition to this solution. Third, Cleanaway is the logical owner of GRL as the exclusive contracted provider of waste to the facility until 2032, which is, in turn, underpinned by Cleanaway's contracts with surrounding councils. Fourth, the transaction and placement is EPS accretive on a pro forma FY '22 basis becoming more accretive over time as new capital is deployed for growth projects with attractive risk-adjusted returns. While the acquisition, including the expected capital investment is expected to deliver a double-digit IRR. And finally, Cleanaway is committed to maintaining a strong group credit profile and a disciplined approach to deploying capital. That concludes the prepared remarks today, and I'm sure you all have lots of questions. So if the operator could please open the line.

[Operator Instructions] Your first question comes from Rob Koh from Morgan Stanley.

Congratulations on the GRL transaction. So my question is in relation to just how your decarbonization targets will work. Just want to understand how you will be treating acquisitions within the reduction target. Do you rebase the numbers that you're reducing from? Or do you include the abatement from acquisitions towards your target? If you could please give us some thoughts on them.

Yes. Thanks, Rob, and I appreciate the good question. So I think, obviously, it's an existing asset. And so generally, with existing assets you look to rebaseline. And that generally makes sense. And then we'll work on the complete emissions and reduce them as such to generally be a rebaseline for acquisitions that have existed.

Your next question comes from Russell Gill from JPMorgan.

I'll hold myself to the 1 question as per the guidance. And the topic it is your -- it won't be multiple parts. The topic that you did today is the cap raising. I mean it's clear, you're the logical owner of GRL with that contract, it's 5.5% accretive on a fully equity funded basis. So pretty accretive for the group. I just want to understand the logic of the extra $200-odd million raised at an 8% discount. You got significant debt capacity, no refinancing for almost 2 years. Just seems a pretty expensive way, I guess, to fund yourself of next sort of one, unless there's some really big projects that you're seeing coming down the pike in maybe the next 6 months. Just talk through why that big discount for that capacity is an urgency thing that you need. It just seems a bit strange given the nature of this accretive acquisition and, I guess, where the business is positioned right now as opposed to raising when these projects come due and assessed by the market at that point in time?

Thank you, Russell. That's a lot of questions. In terms of the capital raise, I guess, just we do not view this as being an over raise. So if we're looking at the situation whereby we were simply looking to acquire GRL, I think that, as you said, I think we would feel comfortable that we have adequate capability to probably fund the majority of that transaction. The fact is we're sitting here today and we're looking at opportunities that are coming our way, both in terms of competitive tender scenarios, which they are competitive. There is a significant number of them out there at the moment. We're not incumbents to any of those. And we're looking at those and again, see the significant opportunity for us in terms of deployment of capital into valuable accretive projects. The other element and as Mark has outlined, we're working on BluePrint 2030 now for almost 12 months, as we presented back in June in terms of the strategic infrastructure pillar. There are a significant number of opportunities that we can see ahead of us where in the relatively short term, so I'm talking a 12- to 18-month window here, that we can see specific projects again in which we can deploy capital. And Mark outlined a couple of those today being obviously the potential for FOGO plants at Lucas Heights and also the redevelopment at Kemps Creek in terms of C&D.

Your next question comes from Peter Steyn from Macquarie.

I may just focus a little bit on your outlook commentary in particular, your expectations around costs, Mark. The cost breakdown was useful. But I guess if you strip out the impact of levies, fuel still plays a very big, obviosuly labor does too. Are you expecting in your guidance, any reduction in diesel prices and perhaps some softening or up there in terms of labor cost expectations. And I just want to try and calibrate that well, please.

Yes. So we're not expecting -- when we say that $630 million, $670 million range, we're not expecting to see fuel decline and pocket the fuel -- the fuel difference on the decline. I think what we call out on that slide, Peter, is sort of 2 factors that drive the range sort of between the sort of top and the bottom, and they are sort of labor availability. And that's really because we've got a significant number of vacancies today. We've got really strong plans to address that. But it's really around how that goes, and whether we continue to be able to cover it with temp labor and that sort of thing. And then, of course, the other 1 is post collection assets volume, which obviously we've got to be post collection set of assets and how does volume drive through those will sort of swing us around the midpoint. But obviously, again, we've got strong plans on that as well.

Yes. If I may, a very quick follow up. So on the view that there's a reasonable contribution on yearly contracts if diesel prices were to come down, is there a sort of payback mechanism because you've only called out surcharges on your SME book, not on the larger one. So I'm just curious how that could play out?

Well, I mean, sort of -- yes, the SME fuel surcharge are sort of updated on a monthly basis. So you can imagine how that works. I think the other -- the muni and the national accounts on those larger contracts obviously, have at least an annual price set with a fuel surcharge tied to the specific location where the fuel fitted from. And obviously, they'll rise as when they look back on what the fuel price was over the period, and they'll obviously fall as well. But obviously, what we'll be looking for is that those fuel prices into those contracts increase reflective of what we incurred during FY '22, so that we get some of that catch-up in.

So it's entirely symmetrical, Peter. So the extent to which fuel prices is -- continues to go up, then we basically have the capability with the index to increase price further. In the situation where the price comes down. Again, clearly, the -- sort of the fuel price comes down. Again, obviously, our price will come down accordingly. But in the intervening period, there is no clawback mechanism. So in the intervening period, we will benefit from the fact that there may be lower fuel prices.

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

Mark and Paul, can I just ask if you have to look at your guidance of $640 million to $670 million, obviously, the SRN assets have shot the lights out at sort of nearly 58%. What's embedded in your guidance for FY '23 for those SRN assets, given that the original sort of assumption that you were working towards? Was it you lose 1/3 of the volume?

Yes, sure. I guess we have not provided sort of specific guidance in terms of expectations for SRN into '23, so those assets are now sort of fully integrated within our New South Wales business. I guess a couple of callouts in terms of the FY '22 result for SRN, firstly, obviously, it is a 28-week period, it just straight 6 months. And again, I think it's important to recognize that -- if you look through that period sort of March, April, May, when there was significant flooding in rainfall in the Sydney Basin, our Lucas Heights landfill was 1 that benefited quite significantly simply because other landfills were closed because of land and flood disruption. So again, I think it's fair to say that we had a bit of a benefit -- a one-off benefit in the second half of '22 because of that.

Okay. That's great. And can I just very quickly ask just a modeling question with the GRL acquisition? What division are you going to put that into? Is it solid waste? Or is it industrial?

Yes. No, no. It's Solid Waste Services and will go into the New South Wales segment.

Your next question comes from Jakob Cakarnis from Jarden Australia.

Mark, Paul. Just a question on GRL, please. So you've said $21.4 million of EBITDA. Just wondering what you see, moving forward for the solid waste business in the integration? And then just secondly to that, just the Kemps Creek redevelopment into B&D waste. Just noting that you're very close by to Bingo's Eastern Creek facility. How do you think you'll compete with them moving forward as that rolls across, please?

Yes. Thanks for that. So in terms of the first part on the synergies, this is not about cost synergies. So the earnings that were highlighted here is the earnings we expect to generate. What it is about is the synergies with the broader network in terms of the transit station, but also, as you highlighted, the -- how it frees up Kemps Creek for C&D, so the broader network synergies. On the second part of your question, look, it's located in Western City. We're seeing very significant growth in that area and the need for more recycling infrastructure in that area. So we see the location being strategic outstanding competitors in the area, but also, in particular, the colocation with landfill is highly beneficial.

Your next question comes from Lee Power from UBS.

Can you just talk, Mark, a little bit more around the labor availability? Like is it getting better, worse? And then maybe just digging a little bit more into your comments about what you're actually doing to solve it? Not necessarily from the cost side, and I get the pass-through, but just around broader disruption to the knowledge base?

Yes. No worries. So I think it's not a secret, vacancies in Cleanaway stay about 800 vacancies on a sort of a workforce of around 7,000. That number is not as alarming it might sound because typically, we'd have 300, 350 vacancies under normal circumstances, so the difference is the sort of 400-ish. Most of that, so 3/4 of that vacancy would be sitting sort of in sort of frontline roles. That's being covered with temporary labor over time, sort of supervision getting in on the tools, that sort of thing. That's how bridging. And it's also obviously impacting slightly on service levels as well. So that's how it's playing out. In terms of what we're doing about it, obviously, we've got a significant sort of outsourcing of our recruitment going on. So we've boosted recruitment activity and we've got hundreds of roles in market, which is not what we've had before. And we're start to see that sort of curve things over the next month or so. The other thing that we're doing is some sort of standing we are looking at hiring in specialists capability from overseas. So for example, think diesel mechanics, that sort of thing. And then closer to home, I think we say -- we've said in the pack that we've conducted we're just into our third Women's Driver Academy. So each of those academies is 10, we've done 2 in Victoria, 1 in New South Wales. It's 2, 3 or 4, 5 on the New South Wales one. And from there, you take 10 women who don't have a heavy rigid license and we take them all the way through to, obviously, drivers in our fleet and a real car drive of drivers, and that's proved hugely successful generally oversubscribed. And then also, we expect to do about 8 of those by the end of the financial year. As you think about us sort of 100-odd drivers by the end of FY '23. And then we're also shifting that to yellow gear. So a yellow gear is our big sort of earth moving equipment that we use the landfills and transfer stage. We're doing a yellow gear women's academy as well. So we're just really trying to think about the issue differently and source labor from different parts of the market rather than just sort of competing for drivers in the normal channels.

And then just the first part of that question, that 800, is that -- how did that trend through the period? Is it increasing? Or is it kind of stabilized?

I think it's kind of stabilizing. It's kind of plateaued. It sort of ramped up over the last 12, and then it's kind of sitting in that 750, 800 and it's been there for a while. So I wouldn't say it's getting worse, but we now need to -- I think now starting to sort of drive it back the other way.

The next question comes from Amit Kanwatia from Jefferies.

If I can just ask on the GRL acquisition and I understand the facility at present to 20,000 tonnes. That's a mixed red bin facility, and you're talking to additional investment as well as transition to FOGO on this. Can you talk to the earnings upside if you to put off that? And secondly, I think you're also talking to Lucas Heights investment into similar facility. What's the kind of capacity you are looking at Lucas Heights?

You want to take that Frank.

Yes. So in relation to the transition to FOGO with the incremental CapEx, so that is just to improve what's there today and enable it for that future FOGO waste stream. In terms of the earnings, we expect the existing earnings to be fairly reflective of the longer-term potential at a FOGO facility. In terms of the size of the Lucas Heights facility, we'll finalize the business plans in relation to that and provide more updates on that. But it's fair to say we'll look at the overall Sydney network and cover parts of Sydney through the facility in the Southeast and part than in the West. So we'll provide further details on that in due course.

Your next question comes from Nathan Lead from Morgans.

Just I suppose a couple of related questions about use of proceeds. So just first up, I suppose, the capital comes in, you kind of use it just to pay off floating rate debt and therefore, remove the interest rate exposure on that floating rate debt? And then secondly, you mentioned the potential developments at Kemps Creek and Lucas Heights. Can you sort of talk through what sort of CapEx is required for that? And what sort of incremental earnings could actually come out of that?

You want to deal with the interest?

Yes, sure. Certainly, right the sense the aim will be any excess cash will be used to pay down something like that in the short term, correct.