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

Thank you for standing by. And welcome to the Cleanaway FY '23 Half Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Schubert, Managing Director and CEO. Please go ahead.

Thank you, and good morning, everybody. Thanks for joining the call this morning to cover our first half FY '23 financial performance. Firstly, I would like to begin by acknowledging the Traditional Owners of the many lands on which we meet today and pay my respects to Elders past, present and emerging. Joining me again today on the call is Paul Binfield, our CFO; and Richie Farrell, our Head of Investor Relations. In terms of the agenda for the results presentation today, I will take you through our highlights for the period. Paul will provide you with further details on the group financials, and then I'll walk you through the performance of each of the operating segments. We'll then follow this with a brief progress update on the execution of our BluePrint 2030 strategy, and then I'll finish the presentation with the outlook for the remainder of FY '23. I'm going to take the disclaimer on Slide 2 as read and turn to Slide 4. Let me start by saying that it is once again a privilege to report on behalf of the more than 7,000 strong Cleanaway team, our financial, operational and strategic performance and progress for the first half of fiscal '23. In terms of the highlights for the half, on an underlying basis, revenue, EBITDA and EBIT were all up strongly, and Paul will take you through each of the drivers in a bit more detail. But very briefly, each of the segments reported revenue growth, reflecting new assets, organic growth and contractual price increases. A full period contribution from SRN and an initial 4-month contribution from GRL were partially offset by a significant drop in OCC prices. We also had the drag from New Chum being closed and some challenges in the health services business. Labor availability and efficiency were a further headwind. Pleasingly, we had EBIT growth across all segments versus the second half of FY '22, which really highlights the momentum that we are taking into the second half of the year. We continue to recover cost increases through our contractual mechanisms with a rolling lag effect on margins, infill inflation tapers. At an NPAT level, our underlying performance was down 12.3% to $66.9 million, and that was largely due to higher net financing costs. Net operating cash flow was 9% lower than the prior corresponding period, reflecting the higher underlying EBITDA, offset by new New Chum rectification works, higher waste disposal costs related to the hammer mill loss, higher interest paid and increased working capital. The directors declared a $0.0245 per share interim unfranked dividend, in line with the prior corresponding period. Operationally, we are continuing to embed safety in the environment as foundations in the business. We worked hard and focused our efforts on serving our customers using available labor, whilst building momentum in addressing job vacancies. Very pleasingly, our IWS team secured significant contracts with Santos and ExxonMobil, and it continues to grow its pipeline of opportunities. BluePrint 2030 is progressing well. We continue to build our growth platforms and we're making steady progress on our operational excellence blueprint. Our landfill gas capture program is delivering both financial and environmental benefits, and we continue to develop and roll out core processes. We had very strong support for the equity raise in August, and I do thank our investors for their continued support. We acquired the GRL organics facility, and I am happy to report that the business is performing in line with expectations. We are also starting to deploy the capital across a number of projects, including the new IWS contract and the Western Sydney MRF with further projects and contracts in the pipeline. Moving to Slide 5, where I'd like to spend a moment talking about our people, our culture and the environment. Over the last 6 months, we have embedded new HSE capability, and our team has rapidly developed an HSE strategy and intensive improvement road map. Our lagging safety indicators are not where we want them to be, with our TRIFR at 31 December at 4.7 compared to 4.2, 6 months earlier. Our improved reporting now provides a richer dataset with deeper learning, which in turn enables a less reactive approach and an ability to tune our strategies and processes and improve our controls. We've also worked hard to mitigate the risks to HSE performance from increased vacancies and turnover and we have focused on bridging critical vacancies and prioritizing hiring into those roles. Our core process development is also progressing well with our first 2 pilots, almost complete on management of change and managed contractors. These are 2 key safety-related core processes, which will be rolled out Cleanaway wide over the next 6 months or so. These processes are important because they provide a consistent approach to manage these risks to assure the control and deliver a platform for continuous improvement across Cleanaway. With the proliferation of lithium-ion batteries and other noncompatible waste ending up in waste rooms, fires are a key and increasing risk across the waste and recycling industry. To keep our people, the environment and assets safe, we are progressively upgrading our facilities with both rapid detection and response equipment. In the interim, we have implemented controls, including the provision of portable fire monitors at 36 higher-risk sites and trained our teams in their deployment. Like on HSE, we have installed new capability to ensure we evolve our culture and grow our capabilities to deliver BluePrint 2030. Our people strategy is designed to embed reinforcing mechanics that will support a Cleanaway culture where our 300 branches are at the center of our company with capable leaders with local ownership, care, connection and a view well beyond today. At the same time, we are focused on ensuring we build a strong talent pipeline with successes identified for all business critical roles to support the growth embedded within BluePrint 2030. Pleasingly, our female participation at all levels of the company has steadily improved over the last 18 months, ensuring that our teams and our leaders are representative of the communities we serve. I do look forward to continuing this trend and also extending this focus to ensure that every single person in Cleanaway can be themselves and bring their best each day. Now, before I pass over to Paul, I am saddened to report that earlier this month, we had a tragic incident at one of our Sydney landfills. As a team, we are struggling to reconcile safety as our foundation and this tragic incident. We are supporting the relevant authorities with their investigation and supporting our people that have been affected and working every day to keep each other safe. Our thoughts with the family and friends of the deceased at this very difficult time. With that, I'll pass over to Paul.

Thank you, Mark, and good morning, everyone. So turning to Slide 6, we'll unpack the P&L from a group perspective. Unless otherwise specified all the comparisons that are referred to against the prior corresponding period. So net revenue of $1.47 billion was 19.6% higher with higher revenue across all segments, primarily driven by our recent acquisitions, contractual price increases and a general recovery in economic conditions, partially offset by the lower commodity-related revenue, primarily cardboard or OCC. Underlying EBITDA of $322.2 million was 17.7% higher, reflecting the full contribution from SRN and initial contribution from GRL together with a stronger contribution from most [ landfills ]. This was partially offset by the lower OCC prices and the residual effect of the Queensland floods, higher labor costs, energy and fuel costs and also the network inefficiencies in the Health Services business resulting from the loss of the hammer mill. Underlying EBIT of $138.3 million was 6.5% higher with a higher EBITDA being partially offset by increased amortization from the full period contribution of SRN. So EBITDA and EBIT margin compressed by 40 basis points and 120 basis points, respectively, reflecting the impact of lower OCC prices and the previously flagged higher corporate costs and insurance. On the next 2 slides, we've bridged EBIT versus prior corresponding period and EBIT versus the immediate prior half, so the second half of FY '22. So turning to Slide 7. On this slide, we're bridging the first half performance of '22 with the first half of '23. So here, we can see the improved or initial contributions from most businesses being partially offset by the headwinds from the Queensland and Health Services business units and the lower commodity prices. Underlying EBIT increased by 6.5% or $8.4 million to $138.3 million. SRN delivered a full period contribution versus the 2 weeks, whilst GRL made an initial 4-month contribution. OCC prices were significantly lower in this half. New Chum was operating in the first half of last year, so the direct impact of its closure, together with the lingering impacts to the Queensland network affected the performance in the half. The balance, the solid waste services business benefited from high collections and landfill volumes and contractual price increases, which were partially eroded by the persistence inflation and labor availability and efficiency. Back in August, we covered in detail network inefficiencies in the Health Services business resulting from the hammer mill loss, and you can see that impact reflected in the bridge. The remaining business units being liquids, hydro and IWS performed well in the context of ongoing inflationary pressures. As previously disclosed, we did add capability to stabilize the core and deliver our BluePrint and that has added to corporate costs. So moving to Slide 8, where we're bridging from the second half of '22 to the first half of '23. This really is a key slide because here we can see that for the most part, the business is performing well and building really good momentum. And as inflation and labor availability normalize, we should start to see margins expand. So half-on-half, we can see an $11.1 million or 8.7% EBIT improvement. The initial 4-month contribution from GRL is in line with our expectations. We can also see here the significant impact of the lower carbon prices in the first half of this year. So prices troughed in November and we've seen a steady increase since then. Together with labor availability and inflationary pressures, the Queensland network has been challenged by the temporary closure of New Chum and operating with a makeshift fleet because of the floods of last year. The Solid Waste Services segment has benefited from contractual price increases, a growing customer base and favorable land for volumes across most sites. The Health Services business unit still has some significant challenges, but we are starting to see it recover as COVID-related volumes have eased. Network inefficiencies will remain low, whilst we bet in the new autoclaves in this half. The LTS, Hydro and IWS businesses show continued progress as market conditions have improved. So you can see that we enter the second half of this year with really good momentum. So I'll now unpack the key performance headwinds to give you a deeper understanding of the issues and how we're addressing them. And I'll start with the commodities on Slide 9. We aim to mitigate risk associated with commodity prices through rebates paid to customers that are tied to indices. Most of our commodity volume comprise of cardboard or OCC, with only approximately 100,000 tonnes or about 1/4 of the total cardboard volume, not linked to a rebate mechanism. For that volume, which typically sells into the market at the prevailing market price. Due to the timing difference between when we sell commodities and when we set the rebate rate for the customer, typically with a quarterly lag, the margin can expand and contract in discrete periods if the index moves dramatically between quarters. However, through the cycle, the rebate mechanism does a good job of mitigating price risk. So in the first half, high European energy prices contributed to more than a 40% decline in the Asian OCC Index due to European volumes being diverted to Asia for processing. This gave rise to a significant price decline in the first half. However, we expect some margin recovery in the second half from both higher pricing and also a lower rebate as well. So moving to Slide 10 and labor availability. During the period, we incurred more overtime and more expensive labor hire to supplement our general workforce, leading to higher costs and hence, lower margins. Back in August, we talked to you about an elevated level of vacancies. And since then, we've been making good progress filling these roles. Regressively, the higher vacancy levels and the associated suboptimal operating environment also make employee retention more challenging. We've implemented several near-term and short-term strategies to address the challenges. These include having supervisors backfilling labor gaps, the commencement of the recruitment process outsourcing program, the continued success of the women's driver category through which we already recruited and trained 92 new women drivers. We're also in the process of establishing a Runner to Driver Academy and establishing branch-level labor value drivers to track and improve daily performance, particularly as vacancy rates decline. And more broadly, our culture and values to imagination is well underway. We see a substantial opportunity whereby improving employee retention will reduce vacancies, lower recruitment effort and costs and improve engagement and productivity. So by tackling this issue, we can deliver significant operational and financial improvements. Turning now to the Queensland Solids and the Health Services businesses. As you're aware, both business units endured ongoing challenges from FY '22. However, we have performance restoration plans in place and we're making good progress. We understood substantial rectification works at New Chum in preparation for the current wet season. And that cell will act as a storm water retention basin during this time. We will continue the necessary rectification works with the potential reopening subject to an ongoing process with the Queensland Department of Environmental and Science. Separately, we are waiting a decision in relation to the height rise approval. The fleet replacement program for the approximately 40 trucks that we lost this time last year is almost complete and this should resolve some of the availability and repair and maintenance challenges associated with operating with a makeshift fleet. The loss of internalization resulting from the New Chum closure also meant operating a change business model. And this, together with the fleet challenges has led to significant network inefficiency. There is focused work underway to stabilize the business unit with additional resources in place. And we've also made a significant leadership change as well, including the appointment of a new GM to set the business up for ongoing success. Now in terms of Health Services, we've continued to experience network and labor efficiency challenges from the hammer mill loss. And we are continuing to incur around a net $3 million per month in incremental alternative treatment and disposal costs. And as we've previously flagged, we've taken these costs below the line and will continue to do so until the autoclaves come online in Q4 '23. With COVID volumes reducing, we can see a clearer pathway forward for the business unit and in particular, an ability to tackle the cost inefficiencies and return to better servicing our higher-margin customers and ultimately returning the business to stronger profitability. So turning to cash flow. Excluding the impact of cash flows associated with underlying adjustments, net operating cash flow would have been $257.9 million, so up $22.7 million from the prior period. The cash conversion ratio of 92.4% remained strong, with a decrease a reflection of the higher debts associated with the significantly higher revenue in this half. Directors declared an interim dividend of $0.0245 per share, and Cleanaway's participation in the Commonwealth Government's Instant Asset Write-Off Scheme will impact the company's ability to frank dividends in '23 and '24 as we previously announced. So turning to capital expenditure. 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 a more focused allocation of capital. Total growth CapEx includes several key initiatives, which form part of the delivery of BluePrint 2030 and include capital related to the 2 Victorian plastic pelletizing facilities, energy from waste development in both Queensland and Victoria, delivering the CustomerConnect project and construction for the Western Sydney Materials Recovery facility. The step-up in cell development CapEx is consistent with our prior indications as a confluence of factors has resulted in a requirement to develop further airspace at most of our landfills. And we expect the FY '23 D&A will be approximately $370 million, including the GRL acquisition. The primary driver of the increase in D&A relates to the full year contribution from SRN, with the majority relating to the amortization of airspace valued as part of the acquisition accounting. Moving now to Slide 14. And the key point here is that the balance sheet is strong and well positioned for growth. At period-end, the group had $555 million of headroom under committed debt facilities and our leverage ratio was 1.94x net debt to EBITDA, in part reflecting the equity raising in August. The group remains comfortable with its banking covenant limits and our next refinancing is not due until July '24. From a finance cost perspective, we are impacted by higher interest costs due to the floating rate component of our debt. First half total net finance costs increased $22.5 million to $45.4 million. And with further interest rate rises expected, we now expect FY '23 total net finance cost to be approximately $95 million, which includes about $28 million in non-cash finance costs. The step-up in non-cash finance costs is due to unwinding of a high remediation provision at higher interest rates. So I'll now pass you back to Mark to take you through review of the segments.

All right. Thanks, Paul. And I'm now on Slide 16, which is Solid Waste Services, where net revenue increased 24.4% or $203.6 million to $1.038 billion. Underlying EBITDA increased 28.1% or $58.8 million to $267.9 million, and underlying EBIT increased 16.4% or $17.5 million to $124.5 million. The key positive drivers as previously discussed, were SRN, GRL, organic growth and contractual price increases and this was partially offset by lower OCC prices, higher labor costs and continued upward pressure on fuel prices, together with the challenges in the Queensland business that Paul just mentioned. Labor costs were higher due to greater use of overtime and subcontractors, resulting from the tight labor market, absenteeism and elevated job vacancies. And we commenced the groundwork on the Western Sydney MRF with the facility expected to be operational towards the end of FY '24. Moving now to Slide 17. We completed the acquisition of GRL for $167 million on 31 August, 2022, and it was immediately accretive to earnings. GRL operates a facility that processes approximately 220,000 tonnes per year of Sydney's red-bin putrescible waste. The asset is strategically located and is currently delivering a high circularity low-carbon solution that diverts more than 30% of the tonnes that are processed from landfill. GRL contributed $6.8 million of EBIT during the initial 4-month period of ownership. Importantly, during this period, the operational team at GRL undertook a FOGO or Food Organics and Garden Organics trials at the facility with further analysis underway to determine the optimal transition plan for the facility as it prepares to capture the emerging Sydney FOGO opportunity. Moving now to Slide 18, where Liquid Waste & Health Services revenue increased 10.1% to $306.1 million. Underlying EBITDA decreased 9.6% to $48.3 million, and underlying EBIT decreased $15.6 million to $26.6 million. Underlying EBITDA and EBIT margins decreased 340 basis points and 260 basis points, respectively, to 15.8% and 8.7% compared to the prior corresponding period. But importantly, they improved by 10 basis points and 80 basis points, respectively, compared with the immediate prior half. The Liquids and Technical Services business or LTS, realized strong revenue growth with positive momentum across the business, particularly in Victoria and Queensland. Price increases were implemented to reflect increasing input costs and the return of cruise lines and hospitality has resulted in growth across both oily water and grease trap volumes. Higher cost due to labor availability and higher equipment repair and maintenance costs, together with less infrastructure-related project work resulted in a slightly lower EBITDA. From an underlying EBITDA perspective, the Hydrocarbons business performed broadly in line with the prior corresponding period. Strong revenue growth resulted from higher post collection volumes and prices and growth in equipment servicing, and this was offset by higher natural gas and diesel input costs and higher freight and labor costs. As expected, the Health Services business revenue was lower than the prior corresponding period due to lower COVID-related clinical waste from hotel quarantine, hospital and vaccination clinics as well as aged care centers. And this was partially offset by higher revenue from biosecurity and cruise ships as the travel sector rebounded. Network inefficiencies resulting from the loss of the hammer mill, processing facility in Victoria due to a fire in June '22, together with higher gas, labor and diesel costs resulted in significantly lower EBITDA. Pleasingly, we recently received Draft EPA approval for our Victorian autoclaves, a replacement solution for the hammer mill and they are expected to be operational by Q4 this FY. By the end of the period, there was a significant reduction in the volume of COVID-related waste and this is important because it will reduce the impact on the network and allow for improved operational efficiency. Moving now to Slide 19, which is Industrial and Waste Services, where we saw increased revenue, underlying EBITDA and underlying EBIT, which increased by 11.8%, 7.6% and 17%, respectively. Revenue was $182.6 million, with strong performance across all regions, driven by increased activity with existing customers and new contract wins. EBITDA of $25.4 million reflected strong contract management, increased activity at existing sites, new contracts and negotiated price increases to somewhat offset cost pressures. Persistent cost inflation compressed EBITDA margins. Compared with half 1 FY '22, underlying EBIT increased by $1.8 million to $12.4 million, and underlying EBIT margin expanded 20 basis points to 6.7%, reflecting a broadly steady depreciation and amortization expenses. The IWS segment continued to deliver strong customer re-sign and win road and our strategy to increase presence in the oil and gas sector is proving to be successful with significant contracts with Santos and ExxonMobil secured during the period. We also extended a contract with BHP at Olympic Dam and successfully tendered for a Snowy 2.0 contract with a further opportunity to extend the contract in the future. Moving on to Blueprint 2030 progress, and we are conscious here at Cleanaway that today is a busy reporting day. So I'm only going to be brief, I make some brief comments on the next few slides because some of the content was covered in our strategy sessions last year and I'll refer you back to those comments for further detail. I'm sure you'll agree that we've made significant progress over the last 12 months on multiple strategic fronts. We've refreshed our strategy and developed detailed plans for each of our 14 blueprints. We've installed new capability to deliver the blueprints and embedded strategy execution, operating reviews into our existing performance cadence. We have been laying the foundations and improving the business under each of our strategic pillars. So first, turning to Sustainable Customer Solutions on Slide 21. And this is new. On this slide, we present our concept of circularity. We've taken away the well-known concept of waste hierarchy and reimagined it to become the Cleanaway Circularity hierarchy. This recognizes that different recycling solutions can have different circularity and carbon outcomes. And so when looking at circularity in Cleanaway, we set ourselves 3 tasks. First, we need to be able to give meaning to high circularity in the context of offering solutions to customers. Secondly, we needed to develop a simple approach that can be used across the business to assess our business, customer solutions and investment opportunities against an expanded waste hierarchy, which recognizes degrees of circularity. And finally, we need to reflect the desirability of supporting domestic than international circular economies over down cycle. Next is Strategic Infrastructure Growth, where we are developing platform businesses for the future. Our energy from waste development is progressing well. In Victoria, we have commenced the planning approval process. And in this half, we plan to apply for both our planning permit and development license. In Queensland, we acquired a site in Bromelton at the end of 2022. The site has a good corridor to the Brisbane and the Gold Coast markets, while being in an area dedicated to industrial developments. From a construction demolition business perspective, we remain confident of being able to carve out a value proposition that is appealing to customers. And from an organic perspective, we've been leveraging the GRL platform. It allows us to give partners and customers in other regions direct exposure to an operating asset, thereby creating momentum and installing them with confidence in the technology. Landfill optimization is a key blueprint with several initiatives underway, including landfill gas capture, which was a real success story over the period where we delivered 15% capture efficiency improvement across the network. Moving to Slide 23, which really showcases what circularity means to us and how we have strategically partnered to deliver best-in-class and innovative solutions while effectively managing risk. Through our joint venture with Pact, Asahi and Coca-Cola, we are delivering a second leading domestic bottle-to-bottle PET solution in Melbourne. In a separate joint venture with Pact on HDPE and polypropylene plastic, we will deliver a similar solution for those polymers. Together, these projects will mechanically recycle 76,000 tons of plastic each year. From a soft plastics perspective, our cross-value chain partnership with Qenos brings together the unique capabilities of Australia's only domestic manufacturer of polyethylene plastics and as Australia's leading collections and recycling business. Cleanaway will look to partner with councils and commercial customers, to collect the plastics and invest in new infrastructure to process these materials into a form that is suitable for advanced processing. Qenos and Cleanaway propose to jointly invest in the advanced recycling technology, that will convert the plastic into feedstock and produce new plastic by pyrolysis. To fully close the loop within Australia, Qenos would also invest in further upgrades to its existing plants to convert this recycled feedstock into a fully circular polyethylene, that can then be used to remanufacture the very same packaging, and this technology is already operating at commercial scale overseas. In our November deep dive on operational excellence, we told you that it was going to drive margin improvement and that we expected more than $30 million of incremental EBIT to come from it by FY '25, '26, and we are continuing to make good progress on these blueprints in pursuit of that goal, with recent progress milestones outlined in this slide. Now turning to the outlook. Consistent with prior expectations, FY '23 underlying EBITDA including GRL is expected to be approximately $670 million. To get there, compared with the first half, the second half assumes similar post collections volumes, a partial recovery in OCC margin, both through recovering the rebate lag and price recovery. We expect a general margin improvement through contractual price increases, with the Victorian Autoclaves successfully commissioned in Q4 and further improvement in labor availability and efficiency and we also assume no material change to prevailing market and economic conditions. We expect depreciation and amortization to be approximately $370 million, which should result in EBIT of approximately $300 million. In terms of near term operational priorities, our focus will be on executing our HSE strategy and improvement roadmap, managing labor in terms of vacancies, retention and efficiency, and executing our performance restoration plans in Queensland and the Health Services business. We will also be focused on recovering margin through contractual price increases that reflect the increase in costs that we've been absorbing. And we continue to focus on near-term margin expansion opportunities available for landfill optimization and the data and analytics tools. That's it in terms of a formal presentation this morning. Thank you for your time today. Looking forward to catching up with many of you over the coming weeks. And I'll now open up the lines for questions.

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

A couple of questions. I just wanted to delve a bit further into the margin that you're seeing in the Solid Waste Services business. On Slide 8, where you referenced there, I guess the second half result into this first half result. I guess there's some big moving parts around GRL that's pretty much all margin, commodities it's all margin, and then the uplift in the landfill. Can you just talk through, I guess, what you're seeing outside of those large one-off movements underlying in the margin -- underlying margins in Solid Waste Services? And then I guess the trajectory into the second half of the year into '24, where some of those headwinds around diesel costs, labor inefficiencies and the like start becoming, I guess, tailwinds for the business?

Yes, I think Russell, you're on Slide 8, which is the second bridge, if I'm not mistaken, which is the right one to look at, I think it's the really important slide in the pack, because it does show the momentum. So I guess to answer your question, what we're saying is, as we flow through into the next half, we will see obviously the commodities start to come back. You'll start to see that recovery reverse, and that's because prices switched from downward trajectory and sort of a negative impact of the lag to a positive impact of the lag and a margin, again, being the commodity as well as a higher outright price on the bid that doesn't have a rebate attached. I think what we're also going to see on labor is we're starting to see now that situation across Cleanaway, where rather than sort of all locations being short labor, we've now go to switch to some locations are still short, some roles, but we've got some sites that are actually not worried about vacancies anymore, now it's about making that available labor efficient. And so that is all then about getting off the expensive labor hire to subcontractors and making that efficient. So we should see that start to unwind. And of course you remember that's not that expensive cost of labor, which could be sort of a couple of million dollars a month, is obviously not recovered through contractual mechanics, because that just assumes a deep level of overtime. Obviously, inflation, as inflation starts to taper, obviously, that'll help, because we won't have this continued lag effect, particularly on the muni contracts and the large national ones, which tend to be the annual price increase. And then really what I think the other 2 big ones are Queensland and Health. Obviously, Queensland will see improved network efficiency from having 40 more reliable trucks and 40 sort of makeshift fleet, and sort of the new business model that doesn't have a disposal pathway at New Chum starting to become the norm underpinned by that reliable fleet. And then really the other one is the health business, where over Q4, we're expecting to start up those autoclaves and then rapidly then with a much better position around overall ability to process clinical waste versus the supply of clinical waste, that being much more, I guess, overcapacity to process that, rather than what we've had structural, for literally almost the last 2.5 years of under capacity, then we'll be in a great position then to make the health business be efficient business and switch it from sort of our lowest margin business in Cleanaway back to the highest margin business. And we should be able to...

And just on that, just to clarify, Mark. If we're looking, I guess, forward you called out, I guess, favorable landfill volumes in the period. Is that just based on because GRL and commodities, I guess, is straight margins? Trying to get a feel for what's going on in the underlying business regarding recovery in volumes. In the landfill uplift that you saw in SRN, is that I guess just in line with the recovery in the market, or did you see some market share gains going in that part of the dynamic as well?

So I mean what we saw in SRN was we've seen 2 things. We've seen volumes being maintained because -- and so that's really across all landfills, not just the SRN months, we've had higher volumes and then obviously, yes, we've also done some changes of work around price and making sure that we're getting adequately returned for the value of that airspace on a competitive basis. And also the other thing we haven't seen is -- we haven't talked about this before with you that we haven't seen any sort of shift of volume away from SRN with -- we all are internalizing that volume. That volume has been pretty sticky.

Okay. And then just combined with that, a final question, because it looks to me that the revenue number was incredibly strong. Previously you've tried to steer the market away from focusing on EBITDA margins and just focus, I guess, on gross EBIT on capital employed, which I fully appreciate. The work that -- you've additional customers you've won and work you've won there, are you seeing that, I guess, lower EBITDA margin, and therefore, I guess, as we roll forward, you'll get the higher gross EBIT over the capital employed, or is it done at similar, I guess, proxy EBITDA margins in a more normalized operating environment?

You got that, Paul?

Yes. I think, Russell, if we look at the PC environment, I think the real shift in the business away from EBITDA margins to EBIT margins has really focused the teams in terms of -- just the long-term value of the airspace. So we've seen them taking a very considered approach in terms of looking to react to market conditions and adjust price accordingly. So again, reflecting the fact that the airspace is obviously finite and therefore very valuable, and because they are measured on EBIT, they're not out there just trying to get volumes at any price, which is really encouraging. In terms of the collections space, we do see revenue has been strong through the half, good momentum, and therefore again the focus for the teams there -- is actually focusing on outright returns. So again we're not out there chasing EBITDA margins. In terms of I guess the outcomes, as Mark really went into some detail with you, our #1 operational focus here is labor, and really being focused on getting those vacancies down and then having got labor in-situ and simply focusing on improving the efficiency and productivity at a branch level, and it is very much a branch-by-branch situation. Does that help?

Yes. Perfect. And just a final question before I let others have a go, is just on that labor front. There is obviously a lot more news flow at the moment regarding strike activity across your workforce. Can you just give an update on, I guess, the multiple EBAs that you're running and I guess how they're running through? Obviously, you got those vacancies out there, but what you're, I guess, seeing across inflation and whether you're through the bulk of those EBA negotiations.

Yes, I'd say we're not through the bulk of them and I'd sort of remind what I've said in the past, so we've got a significant number of EBAs, sort of circa 100-ish type EBAs. During the COVID period, a number of those EBAs sort of -- were sort of just kicked down the road. And now, what we're doing is we're working on those. And so I think basis of the number that we're working on, the sort of the amount of industrial action that we are seeing, is not entirely unusual, and obviously, it's well within the employees' rights to take protective action. That's what we are seeing a little bit of. And so yes, I wouldn't read into it too much there. And I guess what I would say, we are looking -- with those EBAs that we are renegotiating to pay competitively. And in some cases what that involves, is sort of a higher first year payment in order to catch up from that lag and then sort of a competitive series of increases overtime.

Your next question comes from Peter Steyn with Macquarie.

Just to follow up on the SRN volumes, Mark. How much longer do you realistically expect to get the extra volumes that you expected to be internalized?

I think -- the same answer as [Indiscernible] which is we don't plan on having them forever. And so therefore, we've got lots of other plans as to how to keep Kemps Creek and Lucas Heights running at where we think is the right level, and sort of getting the airspace value equation work. That said, we also think that it is not a simple exercise to divert those volumes down to Goldburn, which is what we all would need to do, just in terms of the sheer logistics to do the trains, the railway, all that sort of jazz. And so we think they are quite sticky at the moment.

Yes. And as a tangential question, what do you -- what are you seeing in municipal solid waste and C&I around competitive intensity, as a more general question? And I think the 2 are probably a bit related?

Yes. I think the truth would be I think, everybody is struggling to serve customers really well, I think would be the first comment I would make. So often when we think we've struggled to serve customers, we hear stories of what our competitors are struggling with. That said, we're not concerned -- when I'm saying increased churn or anything like that. I think it has been a relatively quiet period for Muni. We haven't seen there has been a lot of Muni contracts sort of come up and be worked on. There's a few more in the sort of mix now. So it's been relatively quiet, but there's no real change on the competitive dynamics side of things.

Yes. Mark, that's useful color. And then just on leverage, the little bit of an extension of the question. As much as you're seeing some of your branches getting on top of the situation, one gets the sense that, any heavy vehicle environment is under an enormous amount of pressure. Do you not worry about an ongoing level of churn, and therefore a complexity in holding onto staff for the foreseeable future?

Absolutely. We do. And I think -- Paul is not stating it. You can all do the math on the slide on labor that Paul presented, which you can see what the underlying churn [indiscernible] of people where voluntary turnover for us is sitting at around the 20% level, which is 1 in 5 Cleanaway people leave each year. What I've been talking about with the team internally, which is not a secret, which is it's really hard to build a high performance team if 1 in 5 of us leave the team each year. And what we're going to do as leaders is create a culture where people don't want to leave and get that back to -- or not back to but down to sort of more like a 10% to 12%, 13% type level. And to be honest, that would be new territory for Cleanaway. There's no doubt here that I can see backwards in history, where it's ever been like that. It's more been at these levels, and it only got down to sort of 15% during the COVID years. So we've got quite a bit of work to do on that, but we are, Peter, I gave you some clues in what I've said, we are very much heading towards an inverted organization where it is -- the centerpiece of the organization is the 300 branches. We are currently just starting training those 300 branch managers to lead in safety, and obviously to build their leadership skills, and our job is going to be to equip them with the skills, but also to create a branch-led culture where people want to stay because they are proud of the work they do and the support that those branches give the local community. And that's really what we're trying to create, but that's going to take a period of time.

So in relation to your expectation that this challenge recedes and margins are improved, are you taking fairly conservative base assumptions on churn into the second half, and then perhaps into FY '24 around these things, or are you sort of thinking about it as base case scenarios?

No. We're not pretending we're going to fix that one, that would be dreaming. We kind of assume, churn will stick where it is and -- but we have increased our ability to hire. But we've talked about before, we've got a group of [indiscernible] people embedded in the organization, who like Cleanaway recruiting, which sort of really increases our ability to hire and that's what's dragging the numbers down, the vacancies. And then from there, what we're really focused on is with those vacancies coming down, making sure then, Paul said the words, value drivers at a branch level. That really means knowing how you manage labor on a day, and how you really know that you've optimized that labor profile against the work that you need to do, and that's what where we are sort of installing Cleanaway. And it's not surprising we need to install it, because we've lost a lot of leaders who knew how to do that in the past. And now we're just really putting that -- putting it in a very visual and transparent way, rolling it up and down, so we can all see it, and support those leaders in what they need to do each day, to do a good job on labor efficiency.

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

Just going back to New Chum, what contribution range do you think that contributes in FY '24 with or without the height extension, please?

Okay. So like Paul said, what we're thinking happens is that there's 2 parts to this. One, there's the Cell 3B, which if you look closely at that picture in the deck on Slide 11, that is Cell 3B. That's the stormwater retention basin. That's where we had the smell issues last year after the flood, and batch it in stormwater mode. And so what we're talking to the Department of Environment and Science about, is raising the level of the floor of that cell to be above the ground water level. We've got to do that at some point, regardless. That's a very small waste cell when we do that, and that will -- it's like 50,000 cubes...

That's 200,000.

About 200,000 cubes of airspace, not a lot, and we need to fill it quite rapidly when we -- if we do, do that. But again we need DES' permission to actually do that and that's the one where we're talking about what the conditions will be around the license to do that, and that'll happen or it won't. And again it's not very material. And that will happen in sort of between in that dry season period between, I don't know, April and October. Then the other one is the high rise, and we're still waiting for the high rise decision. And like I think I've said to you before, you get a high-rise decision and either way there may be an appeal and so in which case therefore, it ends up back in the same high rise that it has been for a while. And so we're not assuming a lot in terms of New Chum going into FY '24, just because of the fact that, one, it's dependent on what we agree with DES and it's a small volume anyway. The other one is not really within our control with the high-rise application. Our focus in Queensland is making that business sufficient without New Chum, and really optimizing that business with a different network model, more analogous to what we had in Sydney before we bought the SRN assets.

Okay. And can we get an update on the Victorian CDS program to the best that you can, and also an update on where you are sitting with the proposed energy-from-waste projects, please?

Sure. We're not going to say much on Vic CDS, because we can't. But I guess that there is something in any case. And we're in the hands of what the government decides to say and do in that space, so apologies we can't say too much there. In terms of energy-from-waste, if I point you back to the energy-from-waste slide, which is, I'm going to find it, Slide 22. So we're obviously got the site out of Woolworths, which is sort of Northern Melbourne on the way out as you drive from Melbourne to Sydney. What needs to happen there is 3 approvals that are required before you can commence construction of an energy-from-waste facility. We're going to submit 2 of 3 of those. The third one, which is all about the cap allocation, so I think I've explained before, Victorian government's got a really nice system when you think around, sort of like I said, are they going to allow a million tonnes of energy-from-waste to be developed, you apply for an allocation on the cap, which means it's a meritorious scheme, and we'll work through that process. I think that's going to take the next 12 months to work through that process, because the department that's administering is relatively new. But in the meantime, we are going to put in our planning permits and our development license. Now the planning permit is the one that minister issues, and development license is one that EPA puts in. So again the takeaway from all this, is we want to get ourselves in a position to take FID on energy-from-waste in Victoria in calendar '25 -- I'm sorry, calendar '24 and that's what we're working towards. Queensland, we bought a site out of Bromelton. Really happy with that site, a great location there sort of West of the Goldie, but south of Brisbane. So it's really nice to pick up those 2 sort of high demographic areas. And it's sort of in a special heavy industrial zone that the Queensland government has put together for exactly industries like this, and that's important both from sort of a planning perspective and development perspective, but also from a precinct perspective of what will sit around it. So again, lots of progress going on there. And again, I would say that Queensland is logically sort of 6 to 12 months behind Victoria just based on, now we have to do a location-specific work on that site.

Your next question comes from Owen Birrell with RBC.

Look, I just wanted to ask a question around the GRL acquisition. Just wondering whether the early stages of your integration, whether there has been anything that surprised you to the upside or the downside? And then just looking forward, have you determined how far downstream you expect to take that FOGO processing opportunity? And then just a final question, also just does this present any opportunities beyond New South Wales that you've seen so far?

Yes. So no change in sort of -- in terms of what we expected, but we had high expectations, let me say, and I think they delivered on those. And in fact -- the fact that within months they're doing the trial themselves. And really not asking permission to do the trials, just getting on with it is awesome. That just shows the sort of autonomy of that team and the business mindset. The second part was around what -- we're obviously using that GRL, the technology, we're learning a lot from that. We do really like that technology and the fact that it's sort of indoors FOGO processing as opposed to open window. And we think that that, over time, will definitely become the go-to style of technology and obviously therefore there's lots of opportunities to leverage that team and their deep experience, because that team has worked on that site for between sort of 15 years to 20 years, and live with it, started it up, ironed it out and optimized it. And so a great opportunity to leverage that, both the technology, but also you can show customers what it could look like in the future. And was there a third part that I missed?

[ Downstreaming ] opportunity.

And then how far downstream will we go. I think it's a good question in the sense that you need to secure an offtake market for organics. We're very thoughtful about how far we would go. I don't think you'll see Cleanaway selling composted bunnings, probably that's not going to happen. But we will be looking to create a high value product for which there are multiple customers and multiple offtakes.

Thank you for that. Can I just ask a second question? You mentioned around the voluntary turnover of 1 in 5. What are the main, sort of, I guess, cultural things that you're going to change within the business, or you are looking to change, to try and, I guess, cement the desire to stay with Cleanaway?

Yes. So again, it's not a new thing, this. So I guess what we are doing, which is very different to the past, is this whole idea of branch-led. So rather than being top down, it's more bottom up. And if you -- what we see in some locations where we've got a very strong branch-led culture with capable leaders, a real sense of local ownership and real investment in the local site and the local community, and a real pride in the work that we do, we see very low turnover. And so that's really what we need to create. I think the other thing that's going on, just as a little bit of insight, is that we are seeing -- when we say 1 in 5 leave each year, it's really centered around that first year experience as well. And so what we're finding is, because we've got this elevated number of vacancies, therefore the experience of a new person who joins Cleanaway in the first year, is perhaps not as good as it could be, because there's vacancies and everybody's scrambling to get the work done, and so therefore we see elevated sort of twice that level of churn in the first year. And so as the vacancies come down, we'll see that improve, as well as the cultural work that will take a little bit of time to install.

Your next question comes from Jake Cakarnis with Jarden.

Can I just ask on the net finance costs you've guided to $95 million for FY '23. Can you just talk about what's happening there? Maybe some of the fixed versus floating whether or not you're taking some of the hedging through the net interest line, just given where the net debt position has ended up in the half?

Yes, sure. So I guess important to recognize in the $95 million guidance that we've given you, about $28 million now, so about 1/3 of that is non-cash and it's simply the unwind of the discount on the remediation provisions as non-cash. In terms of the cash-related finance expense, if you look at the underlying net debt, approximately, it varies, but between roughly about 1/4 and 1/3 of our debt book is fixed. That's through leases and also fixed-rate loan with CFC, the balance is floating. Now, we certainly have a sort of refinancing activity that we need to undertake in the next 12 months, and clearly as we work through that, that fixed float decision will have CPP to [ deferral ], give us a chance to change those ratios, if we think that's the right thing to do at the time.

Thanks for that, Paul. Just one final one, just, Mark, just within the Solid Waste Services business, can you just remind us again if the contractual clauses of what you have passed through on? I know May last year you said you're introducing the SME fuel surcharge. Just wondering how we've ended up in a position where EBITDA margins have come down, just noting obviously the pressure that you have on labor. And maybe you can talk through the pricing dynamics, and how the reset or the indexation will flow through the second half, please?

Yes, sure. So I think what we said last time in that same slide, was throughout, I think about a couple of different ways. So if you take out muni contracts and our large national accounts and those sorts of customers, they generally get reset either quarterly or annually. It's the larger contracts, the national accounts that tend to be annual, and it's the muni ones that tend to be more like quarterly. And they reset with 3 indices, where you end up having fuel against the terminal gate price in that location, labor against the wage index in that location, and then CPI for everything else. That covers sort of other costs, so that's how it happens. It's contractual in the sense that, as we renew the contracts, it just kind of occurs each quarter or half or year. And, of course, you can imagine where it hurts, is the ones where that lag is a year, and the timing of that is sort of like it hasn't reset yet and it's picking up some index from sort of a year ago. So we would expect that to wash through. I think what I'd say just, your question was around Solid Waste Services. So I think the key thing just to have in mind is, most of the Solid Waste Services degradation is OCC, and that is temporary. And you can see -- we can see it already in sort of January and into February, we can see that reset, that rebate because, for example, when Paul and I look at January results, it's picking up that next quarter, because of a quarterly lag. And of course finally again, it's a rising price environment where the rebate is lower than the actual price, and so therefore this is a positive margin, which is what we didn't experience in the previous 2 quarters.

Your next question comes from Lee Power with UBS.

I mean, there's obviously a few moving parts as we look into the second half and the assumptions for full-year guidance. Can you just give us an idea of where those 5 things that you've outlined are tracking versus your expectation in the third quarter, given where you're kind of 2 months in now and what that means they need to do in the fourth quarter?

Yes, Sure. So we'll go back to the -- I think you're saying sort of guidance -- a little bit. And the 5 things for the second half assumes -- I assume there's 6 things there or is it the 5 down the bottom? Which one did you want?

Whichever you think is the biggest ones that we should be thinking of?

Well, I think in terms of first half or the second half [indiscernible]. There's similar posed questions volumes, I mean that's just really talking about the fact that our landfills in particular needs to sort of perform in a similar way to the first half, and of course, I think that's not hard to imagine. We put it in there, because they are big drivers of earnings, and if things start to swing around like we saw at New Chum, even though it was on a decline back in this time last year, then that does have an impact. Partial recovery in OCC margin where we can already see it, and you guys can see -- you can track resi index, so you can pretty much see what's going on. And so we don't expect the full recovery, but we do expect a partial one and you can see some of the forward numbers as well. Margin improvement through contractual price increases, well, that should be well within our control, right, because we know what -- we've got contracts with contractual price pass-through, and we've got plans as to what we're going to do with the ones where we can be more dynamic. And again we're not going to talk about sort of dynamic pricing here, but we've got plans. Labor availability inefficiency. Like I said, you can see -- I think we've given you the clue that it's dropping -- at the moment it seems to be dropping about 20 or 30 vacancies a month. That's the sort of inroads that we're making, which is awesome. And so we're starting to see that switch now to managing labor efficiency rather than just needing to serve customers with the available labor. And of course I hope that answered Pete's question, I was really talking about how we're doing that. The autoclaves, the good news there is we've got the draft approval, and we've been really waiting for that for a number of weeks, so that's really good. It's not like we haven't been preparing. The autoclaves have actually been sort of installed without staying somewhere else, and now we're just picking them up and moving them into that location. And then there are no material changes, just really a cover all. So I think should be like -- we've got good confidence and that's why, therefore, we make the approximately 670 [indiscernible].

Okay. And then just on the labor availability piece. I mean in terms of the roles that you filled in the first half, and you're talking to that 20%, 30% a month, like what percentage of them labor hire versus a traditional employee?

So this is actual employees. It won't be the labor hire number so much. They will be predominantly frontline teams. They'll be very much drivers and operators and frontline supervisors that we're focused on. Our real focus is less about filling sort of professional vacancies and more about filling our branch teams as a priority.

Okay, thanks. And then maybe a final one, just on your operational excellence slide and digitization, like how important is it that you get labor efficiency back to kind of a normalized level to hit those targets, or do you think the digitization fleet optimization, all those things are kind of independent of getting efficiency back to normal?

I think at this point, they're independent. Really some of this is about giving people the tools, so we can use the available labor more efficiently, such as the digitization of workshops, make sure our mechanics are spending their time on the tools, not on filling out a piece of paper. And so I think it -- to answer your question, it doesn't require the vacancies to be filled, to get the benefit.

We're just going to have to wrap it up there now. We've got another caller coming up. But we'll speak to most of you at 2 o'clock later on today. Sorry about that, guys.

That does conclude our conference for today. Thank you for participating. You may now disconnect.