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

Thank you for standing by, and welcome to the Cleanaway FY '23 Full 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, operator, and good morning, everybody. And thank you for joining us on the call and the webcast this morning to cover our FY '23 performance, our outlook for FY '24, and excitingly, our new midterm financial ambition. Firstly, I'd 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 on the call today is Paul Binfield, our CFO; and Richie Farrell, our Head of Investor Relations. The plan is I'm going to take you through our highlights for the period and the good progress that we have been making. 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 and the outlook for FY '24. This will then be followed by a discussion of our midterm financial ambition and then we'll open the lines for questions. I'm going to take the disclaimer on Slide 2 as read and I'm going to turn to Slide 4. Let me begin by saying that it's once again a sincere privilege to report on behalf of the more than 7,500 strong Cleanaway team, our performance and our progress for FY '23. I'm pleased to report that on an underlying basis, net revenue, EBIT and NPAT were a lot higher than the prior year, with higher revenue delivered across all 3 of our segments. Underlying EBIT of $302.2 million was 17.5% higher than FY '22 and in line with guidance. The actions we have taken to address the headwinds during the year resulted in $163.9 million underlying EBIT in the second half. Pleasingly, that was $25.6 million or 18.5% higher than the first half, with continuing strong momentum flowing into FY '24. We have embedded safety and the environment as foundations of Cleanaway, and that is showing in our results. On safety, with TRIFR reducing by 11.9% from 4.2 to 3.7, and on the environment, where we had 67% fewer regulatory direction notices compared to FY '22. Our voluntary turnover is still higher than where we wanted to be at 21.5%, which is in part due to the tight labor market and the high levels of vacancies we had earlier in the year. That said, our successful recruitment process outsourcing program and our women's driver academies have helped in tackling labor vacancies, and together with the easing labor market, we expect further improvement in FY '24. I'm excited to report that our efforts to increase female participation across the organization was a further highlight, with a 200 basis point or 9.6% improvement to 22.8% over the course of the year, and we have clear plans to improve this further again in FY '24. From a strategic perspective, our IWS oil and gas strategy is developing well, and that was evidenced by the significant contracts we secured with Santos and ExxonMobil during the year. Through our new Container Deposit Scheme vertical, we are busy rolling out its Victorian CDS footprint, ready for November 1, having successfully tendered for the Western Metro and regional zones. We've been leveraging the recently acquired GRL business to accelerate our Organics blueprint nationally, and our landfill gas capture program is delivering financial and environmental benefits with our methane reduction for the year ahead of the 2030 reduction target. In early FY '24, we completed the acquisition of Australian Eco Oils, which will provide us with a good platform to develop our renewable fuel strategy and to further aid our decarbonization and that of our customers. I'll now give you an update on progress on labor, health services and the Queensland business. So on Slide 5, we are seeing positive trends in vacancy rates and labor efficiency and productivity from the extensive range of initiatives that we actioned throughout the year. These actions have resulted in vacancies today being about 40% lower than back in October last year, adjusted for unfilled growth roles such as what we're doing at the moment for the VIC CDS. With retention being the focus now, we have ongoing initiatives in place across onboarding, closing our enterprise agreement backlog and our cultural refresh, and we feel very confident that this vacancy trend will continue. On our Health Services business, we've installed our new autoclave units replacing our hammer mill in Victoria, and we're recovering the higher cost of autoclave processing through higher prices. Disappointingly, the recovery in the Health Services business is lagging from a timing perspective only, with a full reset of the entire Health Services business performance well underway. The Queensland network is now set up to operate without New Chum landfill. And today, the Queensland business has stabilized and is focused on driving productivity and efficiency initiatives. With a new management team and replacement fleet in place following the floods of early '22, we are making really pleasing progress and we're seeing that business performing and improving exactly in line with our plans. Now I'm going to pass over to Paul for the financials.

Thank you, Mark. 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 are going to be against the prior corresponding period. So net revenue of $2.97 billion was 13.9% higher with higher revenues across all segments, driven primarily by recent acquisitions, contractual price increases and underlying organic growth. This was partially offset by lower commodity-related revenue, primarily cardboard or OCC. Underlying EBIT of $302.2 million was 17.5% or $45.1 million higher. This reflected the organic growth across most of the business, the contributions from SRN and GRL and the benefits of significantly improved landfill gas capture. [ GMS ] was partially offset by the key headwinds that Mark talked to as well as the higher depreciation and amortization. Net finance costs increased by $43.1 million to $96.1 million due to higher interest rates. The higher net finance expense largely eroded the operating profit increase, resulting in underlying NPAT of $148.6 million, being 2.5% higher than the prior corresponding period. NPATA was $160.1 million. Adjusting for minorities, the NPAT attributable to ordinary equity holders was $146.7 million. EPS was 4.3% lower at $0.066, reflecting the higher number of shares on issue following the equity raise at the beginning of the financial year. Pleasingly, net operating cash flow was $481.8 million, up $15.5 million from the prior period. The cash conversion ratio was very strong at 98.3%. Now, adjusting for the cash flow associated with underlying adjustments, net operating cash flow would have increased by $54.5 million to $570.3 million. At year-end, the group had $504 million of headroom under committed debt facilities with a net refinancing not due until December 2024. And the group remains comfortably within its banking covenants and has a leverage ratio of 1.89x at year-end. Directors declared a final dividend of $0.0245 per share, taking the full year dividend to $0.049 per share in line with the PCP. So moving on, on the next couple of slides, we've bridged EBIT from FY '22 to FY '23 and then from the first half of FY '23 to the second half. The latter really highlights the building momentum that you'll see in the second half of the year. So starting with FY '22 to FY '23, where underlying EBIT increased 17.5% or $45.1 million. Similar to when we discussed the first half performance back in February, we can see the improved or initial contributions from most businesses being partially offset by the headwinds from Queensland and Health Services business units and a lower OCC contribution related to the first half. Moving across the bridge, GRL made an initial contribution in line with expectations. Commodity prices partially recovered over the period with lower rebates in the second half, restoring margins. And Mark has already spoken to the Queensland and Health Services business performance. The balance of the Solid Waste Services business benefited from a full year of SRN, contractual price increases, new customers and the commodity and carbon credit benefits from the landfill gas capture program. The remaining businesses being liquid, Hydro and IWS, all performed well in the context of ongoing inflationary pressures. As previously disclosed, we added capability to stabilize the core and deliver our blueprint, which has added to corporate costs. So moving to the next slide, where we can see FY '23 second half, underlying EBIT increased from $138.3 million to $163.9 million, representing an 18.5% or $25.6 million increase. So again, moving across the bridge, we can see the extra 2-month contribution from GRL. Next, we see the impact of lower commodity rebates in the second half, leading to a recovery in margin versus the prior half. We are also seeing continued performance improvements in the Queensland business following initiatives that we've implemented. The balance of the Solid Waste Services business benefited from organic growth, contractual price increases and the benefit of higher landfill gas capture. In the Health Services business, half-on-half performance is lagging due to additional costs incurred in the second half in Sydney due to driver shortages and also interstate and third-party treatment costs due to a planned replacement of the Sydney Autoclave during May to July of this year, also seasonally lower cruise ship volumes and additional costs incurred as the Victoria Autoclave commenced commissioning and early operations. The liquids, hydro and IWS businesses showed continued progress as market conditions improved, all benefiting from more project-related work together with the commencement of the new IWS contract. So we carry great momentum from the second half into our new financial year. The next slide bridges our statutory to underlying profit for the year. We've had some significant underlying adjustments this year, which we previously flagged. We spoke about the return of disposal costs in Health Services following the loss of the hammer mill at the half year, and they continued while the autoclaves were being commissioned. This was partially offset by associated insurance recoveries to date with further insurance recoveries expected that we will take below the line. The costs associated with IT transformation project relates to CustomerConnect. So when we announced that project, we indicated a capital cost of approximately $100 million, and that's not changed. The final design, however, will see us utilizing software-as-a-service in the solution. And accounting standards require us to treat that portion as an expense. So the $100 million total project cost, you should expect to see about $50 million adjusted from underlying earnings over the course of the rollout. The final SRN integration and stamp duty costs and GRL acquisition and integration costs were also adjusted from the underlying result. The New Chum rectification provision and assets write-off were together the most significant adjustments, and I'll cover them in the next slide. As you're aware from previous disclosures, we are awaiting works approval from Ipswich City Council to complete construction of the final landfill cell at New Chum, Cell 3B. The rectification of that cell is complex and remains ongoing until we complete the construction. The water table remains above the cell floor with groundwater management ongoing while waiting works approval. Once we get that approval, more intensive ground water work is required to commence cell construction as we will need to work below the water table. We've also been transporting leachate off-site for treatment, and this will continue until we have commissioned a lower cost on-site leachate treatment plant solution. In June, we estimated the additional rectification cost will be in the order of $40 million. And following further work, we now expect this to be closer to $62 million. However, this does include some contingency, so we expect that this should be adequate to close out this matter. In June, we also advised the market that the court appeal for the height extension was ultimately unsuccessful. We're not pursuing further appeal, and hence, we've taken a write-off in full of the remaining New Chum assets, booking a $74 million expense in line with our previous disclosure. So I'll now move to Slide 11 on CapEx. Our first half CapEx was around $200 million, and we indicated at that time that it would be likely to be about the same amount in the second half. We ended up a bit over that with both maintenance CapEx and growth CapEx around 1/3 higher than the prior year. Mark will speak to CapEx again when we come to our midterm financial ambition. But suffice to say, we do believe that the step-up in maintenance CapEx is required to keep the business operating on a more sustainable footing. From a growth CapEx perspective, so that element of CapEx which is entirely discretionary, we continue to take a disciplined approach to making our investment decisions. During the year, we've made investments in several key and exciting initiatives that form part of the delivery of Blueprint 2030 and include capital expenditure on the HDPE and PP plastic pelletizing facility and the second PET plastic pelletizing facility, both of them in Victoria; the IWS-led Santos total waste management contract, our Western Sydney MRF; start of the rollout of the Victorian CDS network; and the acquisition of the Queensland Energy-from-Waste site. Our CustomerConnect project is also progressing well, and as I mentioned earlier, there's both a CapEx and OpEx element to the overall $100 million project cost. We expect our D&A for FY '24 to be in the range of $380 million to $400 million with the primary driver being the increased landfill amortization rate and depreciation of new assets related to new contracts that we've won. So passing back to Mark to take you through the segment results.

All right. Thanks, Paul. And I'm on Slide 12, which is that transition slide into the segment review. And if you study that slide, you might have noticed that we've reorganized our strategic business units within the Solid Waste Services segment. So what you should know there is having established verticals for construction and demolition activity and container deposit schemes, we took the opportunity to consolidate and streamline our smaller SBU, which was South Australia and Tasmania, under the WA/NT and Victorian SBU, respectively. Moving to Slide 13. Solid Waste Services net revenue increased 15% or $273.1 million, benefiting from a full year contribution from SRN, price increases and increases in most landfill volumes and higher landfill gas capture. Growth in revenue was partially offset by lower OCC prices, and no waste was accepted at the New Chum landfill. Pleasingly, we expanded underlying EBIT margins by 80 basis points to 13.3%, with underlying EBIT increasing 22.1% to $278.1 million. Higher revenue was partially offset by the impact of general inflationary environment on operating costs and a greater use of overtime and subcontractors as we tackled the elevated vacancies during the year. Now importantly, as described by Tracey Boyes during our June strategy session, as the numbers of vacancies reduced during the second half of the year, the Solids team installed a visual performance system across the business to continuously improve the value drivers, including labor productivity. And that has set us up really well coming into FY '24. Depreciation and amortization costs reflected the increased SRN and GRL contributions and a larger fleet. We completed and integrated the acquisition of GRL on 31 August '22. That facility process is approximately 220,000 tonnes per annum of Sydney's red bin putrescible waste, delivering 30% landfill diversion. During the period, the GRL team undertook 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 Food Organics and Garden Organics processing opportunity. Really excitingly, during the year, we won a few municipal FOGO contracts that will commence in FY '25 and be processed at GRL. The TOMRA Cleanaway joint venture was appointed as the network operator for the western metro and regional zones of the Victorian Container Deposit Scheme. The joint venture is expecting to process 500 million containers per annum once it ramps up to the initial target capacity. Moving to Slide 14 and Liquid Waste & Health Services. Here revenue increased 10.9% to $610.6 million, while underlying EBIT decreased 7.9% to $48.8 million. The performance of the Health Services business weighed on the segment performance. Excluding Health Services, the segment expanded EBIT margins by 40 basis points versus the prior corresponding period. The LTS business realized 11.9% higher revenue than the PCP, predominantly due to a number of high-value projects secured during the period. The business managed increases in freight and labor costs through a combination of minimizing use of third-party contractors and contractual price increases. Hydrocarbons, which is one of our most circular businesses, increased revenue 16.6%, benefiting from favorable gross collections price and volume mix and higher Cleanaway Equipment Services revenue. The growth in revenue was partially offset by higher natural gas and diesel input costs and higher freight and labor costs. As a result, Hydrocarbons underlying EBIT grew 8.1% to $16.1 million. The Health Services business revenue was largely flat on the PCP, benefiting from increases in revenue from biosecurity and cruise ships following the rebound of the travel sector. This was offset by volume losses from lower network capacity and lower clinical waste from hotel quarantine, hospital and vaccination clinics and aged care centers. The challenges I spoke of earlier resulted in significant lower EBIT. In March '23, we received Vic EPA approval for the business' 2 autoclave units, which have now been safely installed. I am pleased to report that they have reached initial target production rates with several initiatives underway to exceed these rates and further increase throughput. If we move to IWS now, where revenue increased 14.4% or $47.2 million to $375.8 million, driven by significant project activity across key contracts. The segment performed well in challenging external market circumstances with underlying EBIT increasing by $6.6 million to $26.5 million. During the year, IWS realized a 92% renewal rate for available contract extensions. And just to give you an idea of the strategic growth we saw, new contracts signed in FY '23 represent almost 3x the annual value of contracts signed in FY '22. The segment continues to deliver organic growth from its existing client base through contract renewals and increasing the scope of services plus new business, with the outlook for sustainable growth over the next few years supported by a very healthy pipeline of work. This pipeline continues to be developed and balanced across the key sectors as the portfolio shifts from a historical general resources sector bias to a greater share of the oil and gas sector. During the year, IWS secured significant contracts in the oil and gas sector with Santos and ExxonMobil. The Exxon contract was followed by an earlier contract to undertake decommissioning tank cleaning work at ExxonMobil's Altona plant and the Santos contract spans WA, NT, Queensland and South Australia, evidencing IWS' national capability. In addition, Cleanaway successfully tendered for the Snowy 2.0 contract with a further opportunity to extend the contract in the future. I'm going to move to Slide 16 on landfill gas capture and greenhouse gas emissions. This is a fairly self-explanatory slide, so I won't dwell on it, other than to highlight the great progress that we've been making. We have safely drilled more than 250 wells. We've delivered 15% improved gas capture efficiency and we've reduced actual greenhouse gas emissions by 8% on a like-for-like basis. If I move to Slide 17, which is the outlook for FY '24. Now there is a key word when we talk about FY '24, and that word is momentum, because we have strong momentum and good stability in the business as we head into FY '24. In addition, we are expecting the impact of inflation and high interest rates to taper off over the year. Operational excellence has been embedded across the business. This is important because it's symbolic of Blueprint 2030 coming to life. Additionally, with good progress being made across our key headwinds, we are seeing improving operating efficiency emerging. We expect earnings growth to continue in FY '24 driven by further operational efficiency improvements, including through data and analytics and our fleet optimization blueprints; revenue growth as we continue to recoup higher costs through our different price levers; organic growth in each segment; the contribution from the Victorian CDS; a partial recovery of the Health Services business; and the full year contribution from contracts secured by the IWS segment in FY '23. And we will provide a trading update at our AGM on the 20th of October this year. All right. Let's get into Slide 19 and the midterm ambition that we are setting out today. Starting with the financial metrics and the headline. We have set an FY '26 EBIT ambition of greater than $450 million. This ambition comes from a bottom-up build of the range of initiatives and opportunities that we have line of sight to. We then risk adjusted the total opportunity, knowing that while we will work hard to deliver more, some might not come through in terms of timing or value. The next part that I'm going to say is actually really important because it speaks to our ambition and it speaks to confidence. We are aligning the executive long-term incentives, which are both EPS, CAGR and ROIC to the greater than $450 million ambition with 50% vesting at the $450 million level. For incentives to fully vest, we will need to deliver on more of the initiatives and opportunities within the 3-year period and achieve a significantly higher EBIT. I will touch on the CapEx assumptions aligned to the ambition and that we have mapped to the blueprint aligned priorities on the scorecard in a moment. We will maintain an investment-grade credit profile through the period, and we will continue our dividend policy of 50% to 75% of underlying NPAT. Our ambition is built around what we've labeled internally our must achieve. So, let's walk through our must achieve, starting with the foundations. On people, we will deliver a cultural shift by embedding our new values and behaviors, leading to improved engagement and employee retention. Michele Mauger took you through this back at the June Strategy Day. We know our people are the lifeblood of our organization, so it's critical that we get this part right. On safety, we will execute our detailed 5-year strategy that Dave spoke to back in June. And this will lead to lower injury frequency and severity and fewer significant process safety-related incidents. And on the environment, we will aim to have no significant environmental incidents, and we will continue to reduce our carbon footprint in line with our stated targets. We believe that there is a significant prize in getting our foundations right from lower recruitment and turnover costs and lower workers' compensation claims, to lower insurance premiums, outage costs, fewer notices and other costs. We are doing that work now, and it will pay off in time. But the exact timing is challenging to predict. And for that reason, we have not factored this into the greater than $450 million ambition. Moving to the top of the scorecard. These are our blueprint aligned priorities. This is not an exhaustive list in terms of what will deliver the ambition. They are, however, our priorities today. And as we action and deliver them, you should expect them -- to see them drop off the list and be replaced with new priorities. And pleasingly, there should be nothing surprising on this list. Over the last 18 months, we have taken you on the blueprint journey, with deep dives on the types of activities that each of the blueprints is focused on. And like I said earlier, importantly, operational excellence is now embedded in our SBUs, and we expect to deliver group-wide efficiency and productivity improvements. Alex Smith took you through the continued success of the data analytics program in June, and we're seeing significant earnings coming from that. You will recall the lighthouse branch work that we spoke about during the operational excellence deep dive session. This is where we set up all similar types of assets or facilities to share learning and aggressively implement best practice across similar assets or operations of Cleanaway Waste. As illustrated by the recent tender wins that I called out earlier, our customers are increasingly recognizing our improved capability and performance and strong alignment with their sustainability goals. We will continue to tender and win new contracts, which will drive further investment in our core infrastructure. The monetization of our landfill gas capture program will be important in delivering both to shareholders and the environment. And CustomerConnect, although not delivering financially until the back end of the ambition period is critical to our strategy and our customer value proposition. As excited as we are about what's included in the ambition and the fact that most initiatives are capital light, we are equally excited about the opportunities that sit outside of it. We have no doubt that significant strategic infrastructure growth opportunities will present themselves over the course of the ambition term. We will seize the value accretive ones and add their contribution on top of our stated ambition. As we stand here today, we don't control the timing of those, so we've not made assumptions about the potential contribution of such opportunities. In terms of how we see the scorecard working as we move forward. Firstly, as you would expect, most things are green today. From a foundation's perspective, most of the key metrics are aligned to the short-term incentive scheme. So through that, we will report back on how we are progressing. We will also report on relevant non-financial measures that drive these, including, but not limited to things such as injuries, employee engagement scores, regulator direction notices and gas capture efficiency. And we'll use these metrics to evidence our degree of progress and scoring. With respect to the priorities, as I mentioned earlier, we expect to report against this list and tick them off as we deliver on the initiative or we resolve a headwind. We will identify the appropriate metric or value driver that illustrates the level of progress and report back on that. The way to think about it is the overall financial scorecard should remain on track if we deliver on our priorities, and the reported financial outcomes each period will be evidence of that progress. Let's move to Slide 20. When we built up our financial ambition, we examined in-depth the various types of CapEx the business needs. Growth CapEx is only one of the potential uses of our excess cash flow within our capital allocation framework. We do not have a fixed or target amount, but we feel that around $150 million per annum or 1/3 of our total CapEx is the right amount on average. Importantly, we don't distinguish between assets purchased out of cash flow and assets purchased through finance leasing. They are simply different funding solutions. And to be really clear, in the unlikely event that we don't have attractive opportunities to pursue then capital won't be allocated. Equally, we are not going to put an artificial constraint on it and pass on accretive growth opportunities. We will ultimately spend within our means and always assess the opportunities relative to a return of capital to shareholders. If you refer back to the mapping of CapEx on the scorecard page, you can see there are reasonable portions of this expected annual spend spoken for through projects such as CustomerConnect, landfill gas monetization, our Western Sydney MRF, the Vic CDS, the FOGO transition, together with the pipeline of the IWS business has developed, growing opportunities to process more complex waste streams in the Oil & Gas business and a growing collections business. We are not anticipating any material growth CapEx for energy from waste in this time frame. Moving now to maintenance CapEx, which comprises HS&E, stay in business and sell development CapEx. Now looking at our historical maintenance CapEx, this has been running at about 65% of D&A on average over the last 5 years. That is simply unsustainably low, and I'll explain why. We believe 75% is required to keep our assets operating safely and reliably. We are Australia's leading waste management and resource recovery business. Our regulators look to us to meet or exceed the standard, and it becomes very visible when we don't. It is central to our social license to operate and our customers expect this of us also. The capital expenditure attributable to landfill gas capture, which is separate from the growth CapEx associated with anything beyond the flare has also increased as we ramp up our gas capture efficiency. From a staying business CapEx perspective, we are seeing inflation is driving up equipment and material costs. Our operations are also growing, creating a natural demand for more sustaining CapEx. The step-up in cell development CapEx is consistent with what we said earlier as a confluence of factors has resulted in a requirement to develop further airspace at most of our landfills. But further to that, we're also seeing higher labor and material costs to develop that airspace. We will seek to recover this through the price we charge at the gate. A key point in relation to cell development is that the airspace is amortized on a unit basis as it is consumed. But simply, there is a limited ability to sweat that asset harder. Once the airspace is gone, it is amortized and it needs to be replaced with new airspace that requires new CapEx. We've also spoken in the past about the transition from landfills to more resource recovery. As the transition occurs, we expect to see a gradual slowing of volumes into landfill, and this will result in an associated reduction in amortization and landfill cell development CapEx. The total CapEx inflow, however, will likely remain about the same as we invest further into infrastructure to sort, process and recycle the recovered resources. The key takeaway I want you to be left with here is that through our actions and investment, we are creating a safer, compliant, more reliable, growing and sustainably profitable Cleanaway. That's it in terms of the formal presentation. And in a moment, I'm going ask the operator to open the lines for questions. Just in terms of the process and assure everybody gets an opportunity to ask a question, the operator will try and limit you to one question. We'll try to get through as many as we can and come back around for supplementary questions if time permits, and I do recognize it's a busy day for a lot of you. For those on the webcast, please send in your questions, and we'll address as many of those as possible too. So operator, with that can you open the line for questions, please?

[Operator Instructions] Your first question comes from Peter Steyn from Macquarie.

If I may, just on your ambition, appreciating that it's a bottom-up process and then risk adjusted. Could you give us a sense of how you've thought about the economic environment within which you'll be delivering that ambition over the next 3 years? Presumably, that's played into your risk adjustment. But really just keen to understand how you stratified that in coming up with the target.

Yes. I guess in terms of our thought process on this, I guess, we see a relative level of volatility in the economy in the sense that we're seeing potentially heading into more difficult times. We're certainly looking at a prior experience in terms of how the business has performed through those times. And I guess we believe that we've got a good degree of robustness there. In terms of key factors like interest rates, we basically assume we're pretty much at the top of the increasing cycle. But again, I assume that those rates will stay relatively stable during the ambition period as well. So we've tried to reflect the fact that we are probably heading into a more difficult time economically albeit we also see inflation abating somewhat. And we also do see the labor market probably loosening up somewhat too, as we progress through that ambition period. Does that help, Pete?

Your next question comes from Russell Gill from JPMorgan.

It's hard to be limited to one. But just focusing on the Solid Waste Services division and that second half result. Firstly, on the revenue side, revenue came off in the second half. I appreciate there's 3 less trading days. But if you could also give some commentary around that because I would have thought some pricing would have rolled through as well? And then the exit margin, so the margin is up a lot in that second half. And should we be using that, I guess, exit as a run rate guide running into '24?

Russell, I guess what you saw as the year played out. You saw the first half was pretty tough in terms of OCC in the first half. Clearly, that recovered into the second half, which helped the margin expansion in that regard. Some of the landfill gas activity also basically improved in the second half as we saw a bit of a lift in acute pricing going into that period. We're also very thoughtful to around our landfills, particularly our New South Wales and Kemps Creek landfill in particular. So again, the focus, as you've heard us talk many times with the team is around EBIT, not EBITDA, and therefore, basically making sure that we maximize the return from that landfill as opposed to maximizing EBITDA was again a real focus, and that helped drive margins. And again, you heard Mark talk about the improving vacancy situation as we went through the year. And the focus really switched from first half, which was all about getting bums on seats, getting people in the door. The switch to the second half was really about retention and it was about improving productivity and efficiency at those sites, again. So you expect to see a degree of margin uplift coming through due to that.

Also the extra couple of months of GRL in the first...

Yes, that's also true. Yes, you had 6 months of GRL in the second half and 4 in the first.

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

Can I just ask about -- Mark, you mentioned the step-up in CapEx. You've also said you anticipate sort of a stabilization in the interest rate environment. How do we think about the net interest exposure into FY '24, given sort of the run rate at $51 million in the second half? And just in particular, interested around how we factor in the discount unwind impact on that net interest number. Presumably, with interest rates not anticipated to move as much as they have in the last 12 months that there should be less of an impact on that front?

Yes, you're right. So essentially, with the stabilization of interest rates, I guess, at a higher level, you would expect to see the non-cash component, the unwind components stabilize. Clearly, in terms of the cash interest rate, we started the year at relatively low levels and increase during the year. And obviously, our expectation is we're probably going to be looking at that higher level for the duration of '24. So there will be a bit of a step up in cash interest you'd expect to see going into '24. I think we provided you sort of some details on later slides.

Your next question comes from Jakob Cakarnis from Jarden Australia.

Just wondering if you could talk to the pricing environment in Solid Waste Services, particularly around customer acceptance of high prices and then may be their competitive response, please?

Sure. So I mean, I think the first thing about that is obviously with the [ leading ] contracts in the national accounts, we put through the contracted price increases. So there is not much customer response there because they contracted and the contraction price increases and that's the basic raise and fall that we're talking about at length of the 3-year or so. In the SME segment which is obviously quite large in that C&I market were through double-digit increases into that segment. We've tended to do that if you think about it because other price increases lag, we've tended to put those through quite proactively and quite regularly so that we can sort of get that revenue up in line with costs going up. And that's been generally pretty well accepted. I think also what we're doing probably in a more sophisticated way now is the data analytics program is really sort of paying dividends in that we know how and where to put those price increases through. We know the customers that we want to keep. We also know the customers that we're okay to lose as well. So we're really sort of dealing with that tail end as well quite aggressively. In terms of competitive landscape, it hasn't changed much. It continues to be the same players each were they're different strengths and target areas. But I think certainly, at the large end of town in that sort of sustainability Pioneer Group, we're definitely seeing that group of customers really wanting to get aligned with us around what can we do together as they go on their sustainability-led circular journey. So the strategy is really paying off in that sort of area, particularly.

Your next question comes from Nathan Lead from Morgans.

Just a quick question, I suppose, in terms of the impairment testing note within the accounts. I understand that sort of aligns with your financial ambitions for FY '26, even though it's a 5-year forecast versus the 3-year. But I suppose just within that note, there's not the corporate cost element. So I was just wondering what you're thinking that that's going to happen to that line item over the next sort of 3 to 5 years within the P&L?

I guess, firstly, Nathan, thanks very much for having a close to the impairment note in the accounts, probably one of the few that have, so that's great. In terms of our approach there, again, recognize clearly impairment testing has probably a more conservative lens and clearly, the standards will basically influence what we can and can't include in terms of that future financial forecasting. Essentially, we've taken -- we've been consistent between the midterm ambition and that impairment testing model for the first 3 years as a consistent but not the same. In terms of corporate costs, we basically assume the relatively modestly increase those sort of CPI thereabouts for that 5-year period.

Your next question comes from Reinhardt van der Walt from Bank of America.

Just conscious that we've got the FY '26 aspirations now, but still no quantitative FY '24 guidance. Can you just maybe give us a sense for what the key sort of uncertainties are that's holding you back from giving us that quantitative number now as opposed to in October? And maybe put it in a different way, what's the main question that you want to have answered by October in order to give us that guidance?

Well, yes. So there's no question to be answered. We know exactly what we're aiming for FY '24. I mean I think the way I think about it is in FY '23, we provided quantitative guidance. The reason we did that is this time last year, we were raising $400 million of equity to fund the GRL acquisition. And there was significant moving parts because of the health business and Queensland and Labor and whatever. So we want to give the market some clarity on what they were investing against, which was approximately 300 number, which we delivered. We hadn't previously necessarily given quantitative guidance. So now we ramp forward to where we are today, and we've given you midterm ambition of north of $450 million, just picture if we gave you FY '24 and then you had FY '26 ambition then everybody be starting to draw a straight line and it's not a straight line. And it's not even necessarily we are not -- we are saying the midterm ambition is 450 and our internal ambition is well north of that. And so that's why we haven't given quantitative guidance for '24. So there's no questions that we need to answer. There's nothing going on. There's no silly business. It's just we've decided not to give quantitative guidance in '24, and we won't be giving it necessarily in October at this stage.

Your next question comes from Amit Kanwatia from Jefferies.

Just got a question on EBIT margin. If I look at your EBIT margin in the second half, that's at 11%, which is a significant improvement from 9.4% in the first half. I mean you've highlighted strong business momentum heading into fiscal '24. Maybe if you can give us a sense of how should we be thinking about first half '24 margins related to second half '23, please?

Yes, a bit of a go through. So second half '23 margins were obviously impacted by OCC recovery. So that was a key difference between first half and second half. And I think we went through that journey with you explaining about what happened in the first half of '23 versus the second half recovery. Obviously, also had sort of landfill gas capture ramping up during the course of the year. In terms of sort of EBIT margins, we're not providing EBIT margin guidance or targets. We're providing an absolute EBIT ambition. In terms of the -- we talked about the 10.2% versus 12% back in whenever it was earlier this year in May. That was really illustrative to say, just remember, we're saying margins were at 10.2% at the time on the group level. The underlying margin, we thought if you could recover the 3 businesses would be sort of 12%. And we're just really trying to give you clarity that we understood that underlying margin of where it could be and we would take that into account when we set the midterm ambition, which is what we have. So to answer your question, you should expect to see EBIT margins improve over the course of the period of midterm ambition. And my view would be that will be well above that 12% level to hit the north of $450 million.

Your next question comes from Owen Birrell from RBC.

Just a quick question on Energy from Waste. I notice you didn't put any clear slides in the deck. I'm wondering if you can give us an update on how that's progressing, any particular thing around the, I guess, the CapEx requirements that you've previously guided to?

Yes. So I mean, we didn't put anything because nothing really had changed. And I guess we spoke about it at length in June when we were out together at Perry Rose, that's sort of like the latest information. We're continuing to develop the capital light options to execute those projects at the time and place where it makes sense and when customers will pay the return that we need to invest in. I mean that's sort of the bottom line. But again, in terms of they're not, yes, no major capital assumed in the midterm targets and there's no benefit from Energy from Waste in the midterm target. We would expect to spend a couple of million dollars of CapEx over the course of the years ahead, just getting those capital-light options ready.

Your next question comes from Rob Koh from MS.

I've joined the call a bit late, so I do apologize if I'm asking a question that you've covered. And I wanted to -- well, I only got one question and I thought I'd ask it in 8 parts, but I'll do it -- you've had some wins in the oil and gas industry. If you could just give us a bit more color. Are those maybe growth projects where you're taking waste from construction? Or are they decommissioning projects? Or are they a bit of both?

So the way I think about it, Rob, if you take Santos as an example, we've won -- using the IWS business as the spear tip, we've won the Santos sort of national business. The only piece -- and I say that just slightly careful, if you want to caveat it. The only thing we're not doing is we're not doing the waste services to Santos in the Northern Territory because they do that with an indigenous company and that's [indiscernible]. So we're not doing that. But we're doing everything else for them across the country where IWS takes a lead and then but it does involve liquids and it does involve Solid Waste Services at IWS leaves it out. And if you remember what we're trying to do, we're trying to get on the Oil and Gas sector, and we're trying to use that to get on the oil and gas decommissioning vector. So we hope that by being part of their business on a day-to-day basis, then we'll be naturally the partner to help them on the decommissioning side as that starts to evolve. And that's generally how it happens because you sort of expand by those contracts. Similar story for ExxonMobil, I guess, on a more limited scale so it's got a limit a more limited onshore footprint.

Your next question comes from Matt Ryan from Barrenjoey.

I just had a question on labor availability. I think you've talked about that improving over the course of the year. So can you just sort of paint the profile of how that might change over this year and whether you think you'll be back, I guess, to normal or some type of normal by the end of the year?

Yes, sure. So I think the number that you sort of have in your head, remember the peak September-October last year, was sort of a number like 950 vacancies and it was going up. And that was sort of the high point. Today, that same number would be sort of 400, 450. The reason why we say it's a range is because what we've got also is some vacancies associated with growth, where you take, for example, big CDS and we might be recruiting 50 or 60 drivers. And so they're new roles, and so they're not really replacements, so they're not part of that sort of underlying vacancy issue that we've had. I think traditionally, what we aim to have is because we clamp numbers in Cleanaway in terms of overall number of roles and people, you can never go above the number. And so, you'll always be [ blocked ] because there always be turnover. And so we'd expect to have sort of a normal would be 300 to 350. And so we're sort of 100, 150 off that level now. So we're expecting to see if we can get that to recover over time. And then obviously, that will be a more steady to date. But we're not -- we're spending less time on that now and more time on labor productivity, retention and sort of culture refresh.

Your next question comes from Scott Ryall from Rimor Equity Research.

My question is around Slide 16, the landfill gas capture. And I was wondering if you could just be a bit more specific about the financial benefits that you saw from landfill gas capture over the time. I notice a comment there around maximizing value by selling domestic credits and acquiring international credits, which sounds like just an arbitrage or trading strategy to me. Is that where the financial benefits have come in from selling ACCUs, please? And are all your comments around the landfill gas capture that you control as opposed to Lucas heights, please?

So when we talk about landfill gas capture gas, we talked about all our facilities that we that we control. What I'd say on that Slide 16 is and we need to be really clear that we -- our focus is on reducing our actual physical emissions, and that's the blue line on that graph. Then with having met what we wanted to do there, we then maximize the benefits of the environment, we then go and maximize the benefit for shareholders. And so we're finding that benefit -- that point between we maximize the environment, then we'll go and maximize shareholders. And so what we're saying there is we sold ACCU and then we bought back some equivalent international carbon credits on land that were landfill gas capture, very high-quality credits, and we pocketed that differential, where, for example, you might see ACCUs at sort of $35-ish a tonne and then we're buying them back at sort of $10 a tonne. But they're the same type of ACCU, very high-quality landfill gas capture. They're cheaper because they're done in a different setting to the ones that we -- obviously, we've created in Australia.

Just to be clear, too, Scott. Clearly, as Mark said, the focus here is about reducing the emissions. So you've seen really significant step-up in terms of activity around drilling additional wells, wells that are offline, giving it back online, again, getting ring mains in place. So that's where the focus is. And that's where, frankly, to quite a bit of a step-up in CapEx has gone as well. And what you've seen is getting a return on that investment has been the ability to generate additional ACCUs that we've sold on the market. So we've not actively traded per se. We're not taking positions. We're simply trading those ACCUs that we basically generated...

To end up in a net position, which is directly back on our line that we want to be on.

I will now hand back the call to the speakers to handle the webcast questions.

All right. Richie, any webcast questions?

We have one webcast question. What is the hurdle rate of return on gross CapEx?

Paul?

Yes. So the baseline hurdle rate that we have is post tax of around the 12% mark. But essentially, that does vary, and it varies in a couple of reasons. So firstly, it depends on the opportunity set that we've got ahead of us. So again, if we've got lots of great projects with higher returns than that then essentially a 12% project won't meet the mark. We also to have regard to the risk associated with certain elements of CapEx deployment as well. So again, we want to want to be in a situation if there is a great project, which is low risk, it may have a lower return on the 12%, and that could well be an attractive project us to undertake. So we actually want a portfolio of projects that are on the go that reflect different risk return characteristics across the spectrum.

Okay. So operator, there's just a few more questions in the queue. We might go back around a second time I think [indiscernible].

Your next question comes from Peter Steyn from Macquarie.

Actually, very much a related question. And perhaps I just want to get your sense, Mark, on you said $150 million in growth CapEx felt like the right number. Is that sort of embedded in your ambition and you've essentially built a curve of returns associated with those investments into the ambition?

Yes. That's exactly the right way to think about it. The way I think about the ambition is you can sort of break that -- you can break that $150 million EBIT uplift in the 3 parts. Sort of 1/3 of it is just what you said there. If you invest $150 million a year for 3 years, you generate sort of $50 million of incremental EBIT. There's another 50 coming from the recovery of the 3 businesses, and there's another sort of 50-odd coming from operational excellence, getting delivered, that's how you should think about the very basic building blocks of the 450. That said, I would just say, remember, it's greater than 450 and we're gunning for more than that.

Your next question comes from Amit Kanwatia from Jefferies.

If I can just ask on the industrial waste services business, and you've highlighted good contract wins. You've commented that the contract wins up 3x in fiscal '23 on fiscal '22. Can you give us a sense of the CapEx for those contracts that's going to be deployed over the next 12 months?

You got that, Paul?

Yes. So at the key point is that CapEx has been built into the guidance we've given you in terms of expectations for future CapEx going forward. I guess the key thing if you think about how this business works, essentially, we are basically hiring staff and acquiring capital to provide an industrial service to the client base and off the back of that, generating a strong margin, strong return. So I don't really want to give you a specific CapEx figure simply because there are 3 other projects on the go to that might well come to pass and happy to talk about those as they come through.

All right. Operator, I think we're going to call it a day given the time.

There are no further questions at this time. I will now hand back to Mr. Schubert for closing remarks.

All right. Well, thanks, everyone, for your time this morning. Obviously, I know it's busy for each of you, and we look forward to catching up with most of you during the course of the next couple of weeks. So thanks again. Talk soon.

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