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

Thank you for standing by, and welcome to the Cleanaway FY '25 Half Year Results Conference Call and Webcast. [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, and thank you for joining Cleanaway's first half results briefing for the 2025 financial year. My name is Mark Schubert. I'm joined by Paul Binfield, our CFO; and Josie Ashton, our Head of Investor Relations. This morning, we're going to cover our strong financial results, our pleasing operational and strategic progress and conclude with some comments on the outlook. Cleanaway continues to demonstrate strong execution, consistent growth and a commitment to improving operational excellence. We are confident in our ability to deliver ongoing EBIT growth and margin expansion, and in so doing, create sustainable long-term value for our shareholders. Before I move on, I would like to acknowledge the traditional owners of the lands on which we operate all around the country and pay our respects to Elders past and present. I'm going to take the disclaimer as read, and please, therefore, turn to Slide 6. Our results for first half FY '25 highlight our disciplined approach to execution, operational excellence and financial performance. I am pleased to report that Cleanaway has delivered shareholders double-digit EBIT growth, sustainable margin expansion, EPS and DPS growth and improved ROIC. Net revenue grew by 4.6% compared to the prior corresponding period, reflecting the resilience of our business and the effectiveness of our pricing discipline. Underlying EBIT increased by 12.2% to $195.2 million, driven by the growth in Solid Waste Services and Liquid Waste & Health Services. This growth was moderated by Industrial & Waste Services, or IWS, which, as expected, continued to experience the challenging market conditions that emerged in the second half of FY '24 and persisted into the first half. Having rapidly restructured this business and taken the opportunity to further reposition its focus on Tier 1 resource contracts, this business is showing signs of recovery and is on track to return to its first half FY '24 earnings run rate in Q4 of this financial year. Our group EBIT margin expanded 80 basis points to 11.8% versus the pcp, and that's evidence that our operational excellence efforts are delivering tangible and sustainable financial benefits. Net operating cash flow was down 28.4% due to the resumption of tax payments. Net operating cash flow before the payment of tax was up 10.7%. Underlying net profit after tax and underlying EPS were up 13.7% and 13.5%, respectively, with our ROIC continuing to improve, up 40 basis points to 5.7%. Our Directors have declared a $0.028 per share dividend, fully franked, up from $0.0245 per share in the pcp. Pleasingly, we are on track towards delivering FY '25 underlying EBIT towards the midpoint of our $395 million and $425 million guidance range. This excludes the financial impact of the recent fire at St Marys, which I will come to shortly. The step-up in EBIT in the second half will be driven by strong growth in sales, a full half of our operational excellence benefits supporting further margin expansion, the $5 million contribution from the recently announced LMS joint venture and Industrial & Waste Services returning to its first half FY '24 earnings run rate in Q4 FY '25. Looking ahead to FY '26, we remain confident in delivering our midterm EBIT ambition of over $450 million while continuing to improve returns. The momentum within our business is strong. We're now moving beyond the design and implementation phase of our strategic initiatives and embedding them as the foundation of how we operate. We are progressively strengthening our ability to drive scale efficiencies across our branch network and national infrastructure. Now moving on to Slide 7, the health, safety and the environment. Now, before I talk about what is on this slide, I do want to pause and acknowledge a tragic accident that occurred last Friday, involving one of our Cleanaway equipment service drivers in Wingfield, South Australia. We sadly lost their life in a single vehicle incident. Any loss of life is simply heartbreaking. And on behalf of the entire Cleanaway team, I offer my deepest and heartfelt sympathy to our teammates' friends and family as well as to our Cleanaway team. I'd also like to thank those involved in the day responding to the accident. And obviously, we'll take all steps to learn from this tragic event. So this is why safety and the environment are the foundations of everything we do. We are 2 years into our 5-year HSE strategy, which is focused on risk prevention, capability build and cultural transformation. This year, we started reporting our serious injury frequency rate or SIFR, as an additional measure of safety performance aligned to good industry practice. This ensures we differentiate and prioritize our learning for serious injuries, because often the causes differ to lower severity recordable injuries. With an increase in serious injuries in first half FY '25, this metric is allowing us to respond quickly and pivot the plan as new data insights emerge. Our focus remains on critical risks, critical controls and assurance and on building leadership capability and on improving our approach to investigations and learning. If we shift to the environment, we continue to implement industry-leading processes to mitigate environmental risks and ensure compliance with our efforts reflected in record low environment notices for the first half of FY '25. The St Marys fire incident reinforces the importance of rigorous safety and environmental controls in our facilities. Most importantly, no one was injured and our team managed the fire water runoff. Initial assessments indicate that the recently installed fire pumps and hydrants contributed to reducing the severity of the fire. Following preliminary assessments, Cleanaway estimates that as a result of the fire, we will incur net costs in the range of $20 million to $40 million, assuming recovery of costs under the company's insurance policies. However, it will take some time to confirm the application of our insurances to the losses that will be incurred. The timing of the receipt of insurance recoveries is likely to occur beyond FY '25 and the financial impact of the fire will be treated as an underlying adjustment. So if we move now to Slide 8. The Cleanaway's purpose is making a sustainable future possible together. And it really does drive everything that we do. Our new 2024 sustainability framework brings this to life through 4 pillars. They are working together, recovering resources, protecting the environment and reducing emissions. It reflects our commitment to sustainability and how we help our customers safely and responsibly meet their waste and resource management challenges. We continue to evolve our culture and the way we work together to create a workplace where everyone feels they belong and takes pride in the essential work they do for local communities. Our branch-led operating model, which is our approach to connecting and enabling our 300-plus branches and 8,000-plus team members continues to gain momentum, driving enterprise standardization and efficiency and therefore, enabling decentralization. Voluntary turnover continues to decline and our efforts to improve onboarding and foster a culture of respect and inclusion are supporting the continuing decline in voluntary turnover of new starters in their first 12 months. We remain committed to creating opportunities for women in the waste management sector through our driver academies, our structured leadership programs, inclusive hiring practices and ongoing efforts to support and attract talent at all levels of the organization. Our scale and expertise continue to drive Australia's circular economy, particularly through resource recovery. In first half FY '25, we commenced commissioning of the Western Sydney MRF. We solidified our position as the leading CDS operator on the East Coast with the Tasmania CDS win, and we progressed our FOGO capacity expansion at Eastern Creek. Through our protecting the environment pillar, we are committed to responsible waste management and compliance, not only within our own operations, but also in supporting customers. A key example is our growing work with Tier 1 resource companies, assisting in the decommissioning, decontamination and remediation of retired assets, critical multiyear projects requiring specialist expertise. We also remain on track to meet our 2030 net emissions targets. During the half, we increased the volume of landfill gas captured at MRL, which not only reduced our emissions but also generated additional ACCU revenue, reinforcing our commitment to sustainable operations. And then right at the end of the half, in line with Blueprint 2030, we entered into a joint venture agreement with LMS Energy for landfill gas processing at Lucas Heights. It's a capital-light investment for Cleanaway. We bring the landfill gas and LMS bring the generation infrastructure. It will generate $5 million of EBIT in the second half and $10 million in FY '26. Beyond then, we expect the joint venture to generate approximately $15 million per annum, assuming ACCU and energy forward pricing. And with that, I'm going to hand over to Paul for the financial performance.

Thanks, Mark. So turning to Slide 10 where I'll provide you with a summary of the group's financial performance for the half. As Mark has highlighted, the group's strong and consistent underlying financial performance reflects the intense focus on margin expansion and executing against our Blueprint 2030 strategy. The group delivered net revenue of $1.66 billion, which was 4.6% higher compared with the first half of '24. The increase was driven by volume growth, contracted price increases and price discipline from the Solids business, new projects and higher volumes from Liquids & Technical Services and a strong contribution from Health Services following the restoration effort in 2024. This was partly offset by a decline in IWS due to lower volumes resulting from customer site closures and customers' deferral of non-critical maintenance activity. Underlying EBIT of $195.2 million was 12.2% higher compared with the pcp, continuing to outpace revenue growth and is showing the strong operating leverage of the business. EBIT growth has been driven by the continued delivery of operational excellence initiatives, resulting in margin expansion of 80 basis points. We expect the underlying EBIT margin to continue to improve in the second half with the accelerating realization of operational excellence benefits and the restructure of IWS now complete. Net finance costs of $58.9 million are stabilizing and largely reflect the impact of a higher benchmark interest rate compared with the same half in '24. Underlying NPAT of $94 million was 13.7% higher compared with the first half of '24, again, growing at a rate higher than the underlying EBIT. Underlying EPS of $0.042 per share increased in line with the underlying NPAT and return on invested capital, ROIC, has expanded by 40 basis points to 5.7%, reflecting the strong earnings growth and a higher average capital base. The balance sheet is strong with group leverage of 1.95x. As Mark has mentioned, these financial results continue our track record of delivering double-digit profitable growth and puts us on track to continue to deliver double-digit EBIT growth in the second… So turning to Slide 11. Net operating cash flow of $164.5 million was down compared to the first half of '24 due solely to the recommencement of tax payments following the end of the Commonwealth Government's temporary Instant Asset Write-Off Scheme. In the period, we paid $94.2 million in tax. On a like-for-like basis, excluding the tax paid, net operating cash flow was $258.7 million or 10.7% higher compared with the first half of '24, albeit this was partially driven by the phasing of CapEx. Our strong earnings growth, together with strong cash conversion enabled the Board to declare a fully franked interim dividend of $0.028 per share, 14.3% higher than the pcp. So turning to Slide 12 and CapEx. CapEx was $157.8 million for the half, almost $74 million lower than the first half of '24. The lower level of CapEx relative to our guidance of approximately $400 million for the full year is largely phasing and consistent with our guidance provided on August '24. However, it does continue to reflect a reduction of almost $50 million in CapEx relative to the prior year. In H2, we expect to be deploying growth CapEx of approximately $10 million to service the defense contract that we secured in December of last year. The major growth CapEx continues to be Western Sydney MRF currently in commissioning, Eastern Creek Organics, also on track and well progressed and CustomerConnect, the digitization of our core to cash cycle. We delivered Release 1 of CustomerConnect during the first half on time and on budget. We paused and we took the learnings from this phase and we reviewed our plans for Release 2, the core of which is the rollout of new fulfillment software to our frontline team. This resulted in the decision to invest a further 6 months in the rollout phase of Release 2 in order to better manage the change management risk of deploying the software to drivers on operations and admin staff across almost 200 locations. Due to the delay, the project cost has increased by approximately $30 million and the expected benefits will be deferred by 6 months. As a result, we now expect realizing the full year EBIT run rate of approximately $12 million in '28 rather than '27. Turning to Slide 13. For the full year, we now expect net financing costs to be between $120 million and $125 million, reduced from our initial guidance of approximately $130 million due to the timing of capital spending and improved working capital management. I'll quickly run through the drivers of 3 components of our net finance costs. The first component, net interest costs increased mainly due to higher average benchmark interest rates compared to the first half of '24. If you remember, the cash rate last increased 25 basis points in November '23. The second component is the interest expense on our leases, remembering that the interest rate on leases is fixed. This was higher due to higher rates on new and replacement leases. So as older leases roll off at lower rates, they've been replaced by new leases at the higher rates. The third component is a non-cash expense. It's the unwind of the discount on non-current provisions, principally our land for remediation provision, and this was lower in the current period. The quantum of the unwind will typically reduce in lower interest rate environment. Pleasingly, overall net finance costs are stabilizing the first half '25 net finance expense of $58.9 million, $2 million higher year-on-year, but importantly, largely flat half-on-half. I'll just pass you back to Mark to take you through segment performance.

All right. Thank you, Paul. Let's now turn to Slide 15 and to our largest segment, which is Solids. All right. The Solids revenue growth accelerated year-on-year coming in at 7% for the period versus the 5.2% revenue growth delivered this time last year. Growth was driven by higher volumes, contracted price escalation, pricing discipline and a full 6-month contribution from the CDS in Victoria. The outlook for the Solids segment is positive with the re-sign of national term contract with Coles, securing the work in WA and Queensland for Defense and winning the Tas CDS due to start on the 1st of May. EBIT grew by 11.4%, reflecting the growth in CDS, our Metro muni operations and operational efficiency benefits. Increased commodities and carbon volumes and higher OCC and ACCU prices also contributed. Stable earnings from landfills and our regional and organics operations provided further EBIT support. C&D delivered an improved contribution, albeit market conditions remain challenging. Overall segment growth was tempered by softer consumer activity, which impacted Metropolitan C&I operations. The Solids result is particularly pleasing, and it really is a great example of the effectiveness of our value creation staircase, which I'd like to walk you through for Solids. Firstly, our footprint delivered organic growth. Then our operational excellence initiatives supported a 60 basis point increase in EBIT margin. The result then benefited from our strategic infrastructure growth by, for example, the Vic CDS. And then we saw our integrated sustainable customer offering form the foundation of our defense contract win and the renewal of our national term contract with Coles. Moving into a little more detail on the operational performance of Solids. Let's look at our Collections business, where C&I delivered 5.6% revenue growth, of which price contributed 3/4 of that growth. While regional volumes were up on the pcp, Metro C&I volumes were impacted by softer consumer activity, which saw a shift towards lower-margin services such as rear-lift. Metro muni delivered revenue growth over and above that derived from contract mechanisms through the rollout of FOGO bins. We're also seeing, importantly, the initial benefits flowing through from the implementation of our branch-led operating model at our New South Wales muni branches in the previous half with an increase in margins. Moving to Slide 16. Landfill EBIT grew by 1.1%, and we continue to experience softness in volumes driven by market conditions in the C&I and C&D space and from landfill diversion activities such as FOGO. This was mitigated by strategic pricing, improved density and strong cost discipline. At MRL, volumes have stabilized and cost pressures have eased, and we anticipate volume growth in the second half of FY '25. At Lucas Heights, a new multi-council post-collections contract helped to offset the impact of a competitor internalizing volumes, while pricing discipline and density improvement at Kemps Creek partially mitigated volume declines. Our CDS operations achieved strong growth, driven by a combination of organic volume growth in Queensland and New South Wales and the benefit of our first full 6-month contribution from the Victorian scheme. As mentioned, C&D markets remain challenging, but this business continues to evolve and adapt. During the half, the team reduced costs, grew their revenue pipeline, closed the C&D site at Willawong, opened a resource recovery site in New South Wales and expanded resource recovery in South Australia and Victoria. The planned transition to FOGO processing at Eastern Creek for organics is progressing. The facility is now processing both FOGO and mixed waste. So as expected, capital works temporarily impacted processing during the first half of FY '25. In resource recovery, our material resource facilities or MRFs are seeing volumes grow in line with increased CDS volumes and fiber collections. Additionally, and importantly, our business teams are driving yield improvements by strengthening the recovery rates of commodities. Moving to Slide 17. The 60 basis point expansion in our Solids segment's EBIT margin demonstrates the tangible impact of our operational excellence initiative. Branch optimization is playing a key role, integrating multiple elements, including our SWOT teams and our branch-led operating model as shown on the slide. Our SWOT teams, along with our business teams and PIP programs are deployed to branches identified as operating below their potential. In first half FY '25, our SWOT deployments delivered an average EBIT margin expansion of 10 percentage points. By the end of FY '25, about 50% of our C&I collection branches identified as operating below their potential will have benefited from a SWOT program. We see our branch-led operating model as creating a platform right across Cleanaway on which to build sustained value creation, which is achieved through ensuring each branch has the right capacity, the right capability, the right culture and the right cadence in place. Branch operating model adoption is scaling rapidly. I'll talk through the adoption of the Health business shortly. But as an example, in Solids, 78% of the branches are now operating under the BOM, or the branch operating model cadence, up from 17% in December 2023 with the goal of being at 100% by June 2025 as we enter into our midterm ambition year. One of the branch operating model's key benefits has been the delivery of improvements in labor efficiency, such as what we've seen in our muni operations. However, there's still work to do in Metro C&I operations where softer consumer spending has altered service patterns, making labor management more challenging. And this is where the branch operating model plays a critical role. It equips our branches with the data-driven tools and capabilities to navigate an evolving environment with agility. By focusing on key value drivers such as shifts exceeding 10 hours, lifts per hour, lifts per kilometer and voluntary turnover, we can pinpoint areas for improvement and take swift and targeted action. Moving on to Slide 18 and our Liquid Waste & Health Services segment. Liquids & Technical Services, or LTS, revenue grew by 4.9% with EBIT up 4.4%, building on the strong momentum from FY '24. This growth reflects sustained demand for LTS' advanced technical expertise in delivering high-value and complex projects with particularly strong activity in New South Wales and Victoria during the half. Volume growth in Scanline, which is LTS' used cooking oil Collections business was offset by lower used cooking oil prices. Despite the current market conditions, we remain confident in the medium-term outlook for used cooking oil pricing, given its role as a feedstock for renewable diesel and sustainable aviation fuel. Hydrocarbons revenue was slightly lower, while EBIT increased by 12%, reflecting a favorable product mix shift towards increased sales of higher-margin, high-quality Group 2 base oils. EBIT growth was further reinforced by disciplined pricing and operational improvements, particularly in relation to transportation costs. During the half, we internally announced the integration of our LTS and Hydrocarbons businesses to leverage synergies across branch networks and customer bases, creating a stronger, more efficient business. A strategic review of the combined business is underway to optimize assets and operations with financial benefits expected in FY '26. Moving on to Slide 19 and Health Services. Health Services delivered 10% revenue growth, a significant uplift in EBIT and showcases how a disciplined, data-driven and branch-led approach can create sustained operational improvement and earnings growth. The turnaround in SIFOT, which is service in full and on time from the mid-70s to the mid-90s highlights the transformation of this business. The key driver of the turnaround has been enhanced data and reporting. SIFOT was once manually calculated and is now tracked daily, providing real-time insights. Previously, branches relied on end of month data, limiting responsiveness. Today, Health Services leverages analytics and near real-time reporting, enabling faster data-driven decisions for sustainable improvements. We've shifted from a branch model with limited customer profitability insights to one where the key metrics are clearly defined, tracked and acted upon. Branch managers now have the training and the tools to drive performance and customer value. But the most fundamental change has been cultural. Health Services has moved from a siloed, short-term EBITDA focus to a future-orientated mindset, balancing short- and long-term EBIT goals while improving asset sharing with Solids to enhance fleet efficiency through things like the use of bulk tank fuel, combined workshop maintenance efficiencies and the sharing of trucks. As a result, Health Services is on track to deliver more than $15 million of EBIT in FY '25, creating a stronger, more resilient and efficient business that will continue to drive long-term value. We move to Slide 20 and our IWS business. As mentioned, IWS continued to face challenging market conditions in line with the second half of FY '24. In response, we completed a restructure, delivering $10 million in annualized cost savings through headcount reductions, asset disposals and branch consolidations. This restructure also realigned East and West Coast operations, sharpening our focus on Tier 1 resource companies while shifting away from smaller metro-based ad hoc services. With the business reset, we are on track for IWS to return to its first half FY '24 earnings run rate in the fourth quarter of this financial year. Decommissioning, decontamination and remediation, or DDR, presents a multi-decade growth opportunity across mining, oil and gas and heavy industry. Our integrated capabilities, including Liquid and Solid Waste Services is driving increased tender invitations. During the half, we finalized our internal strategy and multiyear action plan to capitalize on this long-term opportunity. To finish, I'm on Slide 21. I'd like to take you through an update of our strategic progress and the outlook for the second half of the year. Turning to Slide 22 now with an update on our strategic progress. Starting with our value creation staircase. This articulates how we create recurring, sustainable growth for shareholders. Over the past 18 months, guided by our Blueprint 2030 strategy, we have delivered sustainable EBIT growth and EBIT margin expansion. With FY '26 only 4.5 months away, the exciting part is that we are only at the start of our value creation journey. If we take operational excellence, for example, as the initiatives implemented over the past 18 months become fully embedded, the impact will accelerate, driving lasting and structural improvements. Similarly, on strategic infrastructure growth, we will continue to selectively invest in accretive and strategic infrastructure. And finally, enabled by CustomerConnect with greater customer service and value for money pricing, we see our integrated at scale capabilities and offerings, providing a competitive advantage that will be hard to replicate. Turning to Slide 23. As our actions continue to show, Cleanaway today is about driving sustained improvements in earnings growth. Our operational efficiency initiatives are driving margin expansion through improving how we work, through developing solutions and pursuing opportunities. The realization of operational efficiency benefits is accelerating, underpinning our confidence in this program of work delivering more than $50 million in FY '26 and continuing to deliver sustained benefits in FY '27 and beyond. This table lists some of our key operational efficiency initiatives, their progress over the half and the indicative potential to deliver benefits over time. Having updated you on a few of those that already listed, I want to call out CustomerConnect and Fleet Transformation. The efficiency in customer service opportunities CustomerConnect will unlock have not diminished. And while the delay and increase in budget is disappointing, it's given us the opportunity to add extra steps into the change management process, which in addition to reducing deployment risk will support the realization of the expected benefits. Our Fleet Transformation program delivered meaningful benefits during the half through the renegotiation of our fuel contract, the optimization of our fuel spend and the implementation of our fleet ownership model through increased 3PL usage and the rightsizing of our asset base. This program will continue to deliver significant safety, financial and operational benefits. Over the next 6 months, our focus will be on continuing the implementation of our revised ownership model, advancing our in-cab technology and undertaking a significant review of R&M spend. At the back of the presentation are a number of case studies showcasing operational efficiency initiatives in order to provide more color on these projects. I encourage you to take a look at those slides as I help bring the initiatives to life. Move on to Slide 24 and the outlook. We remain focused on continuing to drive operational excellence in the business to deliver a strong finish to the year and lay the groundwork as we accelerate into the all-important midterm ambition year FY '26. The margin expansion delivered today is a clear demonstration of the underlying momentum in our strategy and the improving operating leverage of the business. Currently, we are tracking towards the midpoint of the range between $395 million and $425 million. The expected step-up in EBIT will be driven by growth in Solids, supported by growth in MRL volumes, the return of IWS to its first half FY '24 earnings run rate in the fourth quarter and a full half of operational excellence benefits from our Fleet Transformation business teams and SWOT programs and the $5 million contribution from the LMS joint venture. The EBIT guidance does not include the costs associated with the St Marys fire, where our initial estimate is between $20 million and $40 million, net of insurance recoveries. Net finance costs are now expected to be between $120 million and $125 million, down from the previous expectations of around $130 million. CapEx and our depreciation and amortization outlook remain unchanged. All right. Closing as we always do with our scorecard on Slide 25 and looking at the list of deliverables on the scorecard, it's pleasing to report our significant progress against so many of them. On safety and labor, while they both remain yellow in their status, this does not fully capture the progress achieved through their respective multiyear strategies. These initiatives are driving fundamental culture-based changes that will support lasting improvements in both areas. And of course, the change in CustomerConnect to yellow reflects the 6-month delay. Importantly, the financial metrics remain green, aligned with our confidence in our ability to maintain our trajectory as we continue to focus on safe and strong operational performance and service delivery, strategic infrastructure growth and delivering value to shareholders. Before Paul and I start taking questions, I do want to take the time to sincerely thank our employees for all their hard work, especially our frontline teams as they collectively have made these strong results happen. And with that, I'd like to hand over to the operator for questions.

[Operator Instructions] Your first question comes from Amit Kanwatia from Jefferies.

If I can just start with the first half '25 EBIT. I mean, the EBIT of $195 million, that is below kind of what market was expecting. Maybe I can appreciate if you can speak to what did not go well in the first half relative to your internal expectations for guidance to be at the midpoint now?

Yes. Amit, I think fair to say, we regard ourselves being pretty much firmly on track in terms of tracking to the midpoint of the guidance. In terms of the second half, we see quite a good step up. So we can see the additional income from the LMS joint venture that we called out before. IWS, we see returning to recovery. We won the defense contract, as you're aware. And also, too, you can see the operational efficiency benefits really accelerating in the second half. So in many ways, as far as we're concerned, we're on track.

I think there's always split there, too. It always looks like a staircase. It's never sort of flat to the split 50-50.

I mean, if I just think about that comment on the operating efficiency and then I mean, you've got a target for '26, which is $50 million to $100 million. What's the run rate at this point? And where do you think you are tracking for that target into fiscal '25 and then more so for '26 as well?

I don't think we're giving FY '26 guidance today. Probably do that in August, and then we'll really answer your question for you. But I think what we are saying is we're really confident of how FY '26 is shaping up, the momentum coming out of FY '25. If you think about some of the things that are going to happen as we go from where we land in '25 into '26, you're right to think it will be, firstly, the organic growth, the GDP plus growth that we've seen in previous years continuing on, followed by the ops excellence. In there, you've got LMS, CustomerConnect, branch optimization, fleet. Then into the growth capital benefits of that strategic infrastructure, that will be things like Defense, Western Sydney MRF will be running. FOGO will be in operations for the full year. DD&R will be making a contribution. And then we'll stitch it all together for customers and grab some market share as well. And that's how we see us flywheeling out of '25 and into '26.

And just last one. On the finance cost, I mean, you've given the guidance for fiscal '25. I think there's a comment in there on the cost unwind. Can you provide a sensitivity to the lower interest rates on that discount unwind? How should we be thinking about that?

Yes. In terms of falling interest rates, Amit, every 25 basis points is worth somewhere in the region of about $3 million for us in terms of cash interest. In terms of the unwind on the discount of the long-term non-current provisions, essentially, those rates are fixed semiannually. So there is actually no benefit in this half from that because we've set the rate for the half already. It's calculated based on government bond yield rates for the respective timing of those cash flows. So if you look forward to '26, you'll see us reset those rates. They'll almost certainly be lower, we would expect. And therefore, you'll see that unwind come down a bit further. It's very hard to quantify. In the sense it's not driven off the cash rate, it's driven off government bond yield rate. So you would expect in a lower interest rate environment that unwind will be less in quantum.

But we didn't update any numbers yesterday on that.

Yes, that's true.

So it's fair to think that it's a $3 million cash benefit every 25 basis points plus that benefit from that discount unwind, which is on top of the cash?

Yes, correct. And also too, as the lease book resets at progressively lower rates, again, so you'll get reduced interest rates from that component of interest rate as well. So that's what's taken the time to actually break that interest or the finance cost out so you can understand how the change in the rates will impact each of those components.

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

A couple of questions from me. Just in terms of the staircase that you referred to, Mark, are we right in thinking that Health in the first half would have been breakeven to maybe small single-digit contribution? And so you've then got the bulk of that earnings coming in the second half? And then what's the profile of that into FY '26? Is it sort of circa $20 million contribution if you're making $15 million this year?

No. I mean, Health is pretty much at the run rate where we want it to be right now, and it was in the first half. That's also why we ticked the box in the scorecard. So if you look at the scorecard, we ticked the box on, what was it? Completed the Health Services business transformation. So when we go from '25 into '26, I think the crux of your question, we see Health -- we don't see the step-up in the benefit of Health flowing through between '25 and '26, kind of just hold its current position.

So that assumes you did -- you completely restructured everything on the 1st of July for Health. So it's a full contribution effectively $7.5 million in the first half. Is that what you're telling us?

Yes, there and thereabouts. And I think that's consistent with -- if you remember -- I just can't remember there's so many of these that wind together. But if you remember, we were saying stuff like we expect to hit the Q4 run rate in Health that we want for FY '25. I know that feels a lot like what we're saying for IWS now, and that's true. But that was the comment. And we hit that run rate in last quarter of FY '24, and that provided a platform for the FY '25 run of Health. We don't break that out by itself in terms of profitability, but you're not far off the mark there.

And then just in terms of the Eastern Creek Organics, can you remind us, that was sort of $40 million worth of CapEx that was originally planned to be spent?

Yes, that's right.

And so what's the return profile we should be thinking about from that perspective as that ramps up?

So that project won't be complete until '26. So you'll start to see a progressive ramp-up during FY '26, and it won't be hitting its full contribution probably until the start of '27. So that project won't be completed, as I say, until well into '26.

And then can we get some sort of granularity around this Defense contract in terms of its scale and quantum?

Yes. Well, we'll tell you as much as we can. So it used to be a contract that Veolia had for the whole of Australia. Defense tended it out. We won Queensland and WA, which if you think about the map of Australia, Queensland and WA are the key states. For example, the evidence point for that is the upcoming defense exercise, Talisman Sabre, that is in Queensland, and it's in the second half of this FY. Paul said to you before, we'll spend about $10 million of CapEx to support that project and it starts in March this year. That's probably all I can really say, I think.

And so how long are you contracted for?

I don't think that number is out there. But -- yes, sort of, I would say it's a midterm contract, of course, rather than 5 years.

The nature of that contract, too, is there's underlying sort of services that were contracted to provide. But then one of the key things is that as Defense engage on specific exercises, so you have additional ad hoc work. And that's, obviously, really important in terms of profitability.

Final question for me, just in terms of the decommissioning stuff that you've spoken about. Is there any -- have you got all of the capability and equipment and infrastructure that's needed to support that? Or should we be thinking about additional CapEx? And secondly, my understanding is that Exxon actually put out some decommissioning -- initial decommissioning tenders at the back end of last year. Did you pick up any preliminary work off the back of them?

The way you should think about that is -- I'll answer the first part. So a lot of the work that we're doing at the moment where we've got 3 DD&R projects or sort of delivery projects underway at the moment. The sort of existing equipment is being used in those as we sort of learn and ramp up. I think it's very limited capital spend at the moment. I think in terms of, again, depending on the nature of the work that you win, there might be some limited capital investment to make that really efficient. But you do that where you could see line of sight to repeatable work of the same type. For example, if it's cleaning tubulars, you might sort of invest in some capability to do that. I think on the Exxon side, so there's a lot of tenders out there. And what we see is we are consistently approached by often the primary tenderer or a primary tender to subcontracting to provide certain services for them, almost the point of we're sitting behind all the tenderers as a tender, if you can imagine, for certain scopes. That I think I've said to you before, that's why in some areas, we're looking at that going, is there -- is that how we want to play? Or do we want to play more as the primary contractor and get in front of that? I mean, we think -- maybe just to give you sort of some view of the addressable sort of spend. We think if you take the onshore component of the offshore work in Australia and the onshore component of the onshore work, that's sort of $500 million of addressable revenue potential each year for as long as we can see forward. So it's quite an exciting space. We've got a really good strategy as to what we're going to do there.

Your next question comes from Lee Power from UBS.

I guess, a couple of people have had a crack at this question, but I'm going to try again. So if we think the $410 million of the midpoint of guidance, you kind of need another $20 million progression in addition to kind of what you already delivered in the first half. If we break that out, what do you think of that $20 million is just cycling what's already embedded in today? What of the $20 million is kind of new operational excellence initiatives? And what is just the market growth?

I might give you an unsatisfactory answer. But I'll answer it how I want to answer it and how I think about it. So the difference is $20 million, you're right. So it's the current run rate plus you add the LMS, we've given you that number. IWS makes a stronger contribution in the second half as it gets up to that Q4 '24 run rate. And you can -- we've actually given you that number. If you go and calculate it, so you can calculate IWS' contribution. Then you get the Defense contract comes in. It's a limited thing that starts in March. And then it's sort of this organic growth margin excellence, including landfill volume increases at MRL. So that's how we get the next $20 million. We're not really not worried about it because we can see line of sight to it from where we are today. And in fact, I think we really like the way the bus is accelerating into sort of this last half and the last quarter so that we're in that flywheel that I mentioned before, entering the lap that is FY '26.

Because it seems -- I mean, like I hear what you're saying, like you've mapped out a whole bunch of stuff and give us a lot of information. But then the guidance, like the boundaries of guidance kind of haven't changed. So I guess what I was trying to work out is that, is there something that you think in the second half of '25 that is less in your control that is potentially swinging and that's why you've kept the broader guidance and haven't narrowed it, albeit you obviously say you're tracking to the midpoint at the moment.

I think that is the key message that we have come out and we've been explicit in the sense of saying that we see ourselves tracking towards the midpoint. So we had the choice to reduce the range or do you be more specific, and we've chosen to be more specific.

Your next question comes from Russell Gill from JPMorgan.

A couple of questions. Firstly, just on the St Marys fire, the $20 million to $40 million range. Presumably, you booked that as a provision in the second half. Can you give us a sort of breakdown on, I guess, what sort of remediation, replacement cost relative versus the lost earnings impact? And then at what point will the operation be back to full earnings capability from a timing standpoint?

I'll say a few things and then Paul can get into the financial trends. But I think its early days is what I'd say. Obviously, we've got the investigation underway. The focus is on the cleanup, that sort of thing and really understanding the cleanup costs, both what we've done offsite but also on-site and also sort of the additional cost of work going forward. The way you should think about the $20 million and the $40 million is that you get to $20 million, which will really be the deductibles on the insurance. And the $40 million would be -- would reflect a conservative approach if the policy don't respond as expected. So that's how -- that's how we get the range that we do. Okay. Paul, do you want to talk through…

Yes. Let me answer that. I guess, in many ways, we're almost not ready to talk about this in the sense that results where you've come on us quicker than we would want in terms of having to give a range. So we look, for example, at the equipment that was at St Marys, it's got a book value of sort of $10 million, $12 million. We're insured for replacement cost. We haven't done the work yet to know how much of that equipment is salvageable, especially within the shed itself. The fire systems worked as we expected and essentially made sure that a lot of those assets were protected. So we don't yet have a clear view as to what that asset write-off would be, what replacement costs would be. But as Mark said, yes, in terms of the other sort of significant elements of the cost, the cleanup is largely complete off-site, but really is yet to start on-site because obviously, we've had to preserve the site for Comcare in terms of their investigation as well. So it is early days. It is very much -- just mostly the $20 million reflects the deductibles on the insurance policies. We expect them to respond. We don't have concerns there. The $40 million would be situations where we have just unexpected gaps in cover. So very early days, and obviously we'll keep the market updated as we progress through the work on that space. In terms of getting back to sort of full capacity. We probably won't return to that site for at least 6 months in terms of cleanup and remediation. But we have a number of other sites locally that we can basically deploy that work to and expect to probably be up and running again within that sort of hopefully 3 to 6-month type window.

So just from a lost earnings standpoint, you can, I guess, redeploy volumes. So there's not a, I guess, a net business interruption style cost that needs to be either covered by insurance or taken below the line?

I think there will be additional cost of working in the sense that there will simply be inefficiencies. Because, obviously, that site was set up specifically to deal with those waste streams. So we're going to be splitting that volume between probably at least 2 and possibly 3 or 4 sites. So -- and the equipment, which was bespoke for the work that was being undertaken, again, won't be so specialized. So there will be an increased cost of working in that sense.

And that dynamic is captured in that $20 million to $40 million?

Correct.

Secondly, just on -- if we think forward to FY '26, and you did talk a little about this, just how important the 2 dynamics are. One, the CustomerConnect delay, looked like it was expected to contribute a little bit of benefit in FY '26. Wondering if you could just call out what that potential benefit could have been? And then secondly, how important the macro is to actually hitting these medium-term targets and how much is within your control? Obviously, macro terms you might get some benefit to the net interest line, but you're guiding to the, I guess, the EBIT line. So just to get a feel for how much is within your control and how much is outside your control on the macro over the next 18 months?

Yes. Well, the answer to your question on the CustomerConnect is actually in the slide deck on Slide 30. We buried it right down the back for you, so you can find it. There's a -- if you look there, you'll see that profile. So it's $3 million in FY '26 versus the $5 million previously. You just see the whole thing sort of like shifting backwards by 6 months. So not too concerned with that. As I said in the sort of the voiceover, much preferred to do it in a really complete way with our drivers than sort of rush the change management or do it in an incomplete way and therefore, not land the benefits long-term. So that's that piece. I think on sort of the macro, I mean, I think obviously, if you say the macro is the GDP plus growth fees, well, obviously, we've got some exposure on the macro there in terms of the value creation staircase. I think what I would say though is, we're really pleased with, like, where the competitive landscape is at the moment in the first half of '25. We've re-signed Coles. We won the Defense contract. We won Tas CDS. We can see MRL volumes stabilizing in spite of that soft C&D. And like I said before, we expect volume in the MRL to increase in the second half, that's because we can see line of sight to it. We know what's going to come. And that's macro dependent to that volume increase. And then on the third part in terms of that competitive landscape, I mean, I think what we say there is, there's pockets of sort of competition -- increased competition, but it's largely rational the market at the moment. So -- and I made that comment, because I just feel like perhaps in the last session that we had this just kind of overplay this idea of we're only going after revenue. Well, we're going after contracts and EBIT and we're being successful in that.

I'm going to try this one. Just on the DRR, you've put out some, I guess, a bit more information. You've hinted that the internal teams have started to, I guess, budget and plan this. You've put out the $500 million, I guess, TAM revenue opportunity over a very, very long period of time. In terms of the capabilities in the organization on what you might need to add to the organization or what percentage of market share you think you could attain of that $500 million based on your current capabilities? Just if we can get some sizing around that? And in terms of its timing of when this stuff starts dropping over the next couple of years?

Yes. We're not in control of the timing, that's for sure. We have one of the longest funnels of opportunities that we have ever seen -- sort of, we have every project mapped in terms of timing and value and where we might play, which on Slide 32 is probably a good place to go to kind of help answer it. So on the left-hand side, you kind of -- you've got the addressable market, whether that's oil and gas or mine closure or sort of industrial, energy or Defense side. I think on the right-hand side, to answer your question around where are we kind of playing, and that is the value chain there on the right-hand side from -- at the top advisory and project management through to the bottom resource recovery. You can see we've graded out dismantling and demolition. That's not a capability we have today. I think our approach on that would be to use others for that piece. I think, otherwise, we've got a strong offering across certainly the advisory and project management piece, certainly hazardous waste treatment, remediation and resource recovery and on decom at the front end. I think, I've tried to split that sort of $500 million for you. So that's the onshore component of the offshore work and the onshore component which is obviously onshore in its own right. I think it's important also just to have in your mind that this is an integrated offering where you combine the capabilities of IWS, our Liquids team and our Solids team, and you get them working in a way together that we can then present something that others can't from end to end. And obviously, then just plug the gaps if there's a little piece that we can't do, that we need to subcontract. And like I've said before, also, we've got some fantastic sites with licenses to do some of this work. A lot of the work that we're planning on doing coming up is up in Karratha on our site there, where we've got fantastic licensed lot space. And that's certainly where those 3 projects will be occurring coming up.

And then just on that, the fact that you had to restructure the IWS business to, I guess, bring earnings back up in the near term to maintain this cadence of EBIT growth. I guess, that doesn't impact the ability of the future or to win this future work in -- this future work given you had to restructure those teams?

In fact, it goes the other way. In that it actually allows us to free up resources, both people and assets, to position IWS as a spear tip for Cleanaway into that DD&R space. So we're definitely of the view that we would prefer IWS to be servicing Tier 1 contracts, recurring revenue rather than fighting it out for ad hoc work in a metropolitan branch in Melbourne. And that's really what we've done. We've removed the FTE. We've got rid of the excess fleet. We've consolidated and closed the branches. We've got that $10 million run rate of that. And we're back on track with first half FY '24. And as you say, exactly as you say, that's provided the capability to now flow that most to the DD&R, which is really exciting.

Your next question comes from Peter Steyn from Macquarie.

Perhaps just wanting to chat to you a little bit about your commercial performance. You've obviously highlighted a couple of big contract wins. But perhaps you could give us a bit of a sense of in the nuts and bolts, how you're going with your ability to secure new work, renew current work, just getting a bit of a sense of your competitive position in light of some of the conversation before?

Yes. So I think that's fair enough. I think there's definitely new work in there. So if you take some of the new work, going to be things like -- sort of Defense win is new work. And what we've won in Defense is we -- our view is, we have to choose 2, that would have been the 2 states to choose. Just given the footprints with Defense, our capabilities in those locations, and sort of as Paul mentioned, the amount of ad hoc work that will come through those. So I think that's new work, that really does demonstrate the integrated offering. I mean, that's a full Cleanaway sort of service agreement. I think you take Tas CDS as another example, that is new work. That really does cement us as the #1 operator of CDS schemes in the country with now all of New South Wales, 2 of the zones in Victoria, and the whole of Tassie. Obviously, the role we're playing in Queensland on top of that. So I think that's new. I think the Coles re-signing is important. Coles is a really important customer for Cleanaway in terms of their scale, but also their sort of view about sustainability. And we're stronger as a company because of our relationship with them and other conversations that we have and sort of making each other better. So I think that's awesome and what we've also achieved on landfill diversion. I think them re-signing with us says they are pleased with what we do and want that to continue on all the company basis. So the whole of Cleanaway supports the whole of goals on a daily basis, which is great. And I think that kind of goes to -- those are good evidence points of the strategy into action, which is when you add that strategic infrastructure growth and that sort of OpEx and combined together with great customer service, then you get market share, both maintaining your existing business but also growing. So I think commercially, we're really happy with how it's looking and our ability to structure the whole of Cleanaway to these large contracts that want that cross-functional response. Does that answer your question?

Yes, broadly. I suppose I was also keen to just below these larger headline-grabbing contracts, just sort of a get a sense of how you're seeing your broader performance on the score?

Well, I think -- I mean, if you go to muni, and we're very thoughtful about muni. I think, we've talked about that before in these calls. I think the days just going after muni are over, and we very critically look at muni contracts, renewals, that sort of thing. And we screen those quite thoughtfully in a new muni contract in a location where we've already got a depot doesn't -- actually doesn't actually necessarily screen highly, particularly if that council is not sustainability focused. It's all about price. That's probably not where we're going to play. So we're very thoughtful about that. And we actually see a long, long funnel of growth CapEx opportunities that would have a higher return to shareholders than investing in 10-year muni contracts that are lower risk and lower returns. So we're very thoughtful about screening muni. So to that effect, you'd say so what? And I'd say, well, therefore, we've won some, and there's some that we've bid in a way that we've lost them, and we're happy with that. So we won't leave a council high and dry in terms of not bidding, but we'll certainly -- if we're less inclined to win it, then we'll put that through our pricing.

Bottom line, I suppose, is you're very comfortable with where your win rates are at. They're generally strategic and making financial sense and you're not feeling any fear from a competitive perspective in execution. I've taken from that.

Yes.

I think the other point, too, Peter is, you look at existing book and churn this year is actually down on the previous years. But we're actually seeing a lot more stability in our book as well. So I think, we mentioned in the voiceover some weakness in Metro C&I. And what we're seeing there basically is not loss of customers. It's simply customers that have less waste because they're typically facing the consumer with less cash in their pockets, hospitality and some of those sectors. And we're seeing them having fewer services. So we're not losing the customer. We're simply seeing the fact that customer is changing how they -- changing the waste generation that they have.

And while we're just talking about this, could you give us a bit of an update on where things are at just in terms of the inherent competitiveness of the Victorian markets. You've spoken about the performance of MRL specifically, but just that broader perspective, Mark, and how that's starting to play into your thinking on energy from waste?

Yes. I mean, I think if you think about the VIC Solids business, we've got VIC/Tas, so we got Tas as well. Probably we couldn't be more pleased with any SBU more than I would be with the VIC/Tas team in terms of the really strong turnaround that, that team has done on a full end-to-end basis of every part of the operation. They're doing -- I think I've said before in this call, they're doing a Health style business flowing through to costs [Technical Difficulty] and that sort of thing. So I think competitively, we're in a really nice place. We've got fantastic assets to offer customers on an end-to-end basis. We commented on -- yes, and with that, Peter, obviously, very [Technical Difficulty] sometimes we find a regional town where it might be hyper competitive for a period of time where another competitor will do a sales campaign. And that's just life. That stuff goes on every day of the week around the country somewhere, and our teams know how to respond to that. Victoria is really no different to anywhere else. I think MRL, we're definitely seeing costs stabilized. We see a lot of work we did to reduce costs, find different ways to do the same stuff smarter is coming through, really strong focus on funnel. Funnel of C&I customers, funnel of landfill customers, and they're working that hard, and that's having the benefits probably never been clearer for us how that funnel looks and how it comes towards us. And I would say that actually across Cleanaway, the amount of work being done around funneling of customers so we can manage them well on the way in and not miss out, is really having benefits. So how does that flow into energy from waste, I think energy from waste, not much has changed there. You noticed we didn't even mention it in the call. That's because not much has changed. We still see ourselves as the originators of these projects. We know our customers want low-cost access. We know we don't need 100% ownership to do that. We're just using origination to get the access we need at the appropriate time. It's very heavily policy and government driven, everything that's going on in that space. Things can just get delayed just because it's an election or whatever. I think the government in New South Wales -- sorry, government in Victoria announced the increase of the cap. Our view would be that's nice. It doesn't actually change anything because there's only a certain amount of muni waste that is going to need to go to an energy waste facility anyway, but it's been doubled. So this means there'll be more cap allocated. We're just working through long lead time approvals synced to policy and new developments. So I think you wouldn't be thinking Cleanaway is going to be doing any sort of FID on any EfW projects until 2027 and beyond. That's the kind of mindset that we got just given where the policy developments are.

Your next question comes from Owen Birrell from RBC.

Look, I just wanted to -- I guess, further to Lee's question around the guidance range. I know you sort of highlighted the fact that you've narrowed your focus to the midpoint of the range, but you haven't narrowed the guidance range itself. I'm just wanting to get a sense of where you see the downside risks coming from? What sort of drags are you seeing that will possibly see you miss that midpoint and towards the lower end of that range to the $395 million? What are you seeing in terms of inflationary pressures? And are there any major contracts that you see rolling off during this half that are at risk for not being renewed?

I mean just on the last part, and then I'll comment on first part. So I think on the last part, major contracts means, the major contracts they're not sort of major in the scheme of Cleanaway, not really, but these are major kind of -- these are Health Services Victoria, obviously, that's government pre-tendering the entire hospital system that tenders kind of closed and they're deciding and we'll find out sometime soon, hopefully. And that has somewhat of an impact on Health in the second half of the year. But again, it's kind of built into all the numbers that we've talked about today. So in the spirit of transparency, I'll answer it like that. I think in just terms of -- I know you guys are all going on about sort of narrowing the range and all that sort of thing. Maybe I'll say it this way and going to say before, but I'll say to you this way. I think also like -- we couldn't narrow the range, but I think my view would've been, it would've been a bit taken bit taken at this at the low end of the range, having them put $20 million to $40 million below the line. So that's one of the reasons why we didn't do it. So just maybe just understand that it would've looked like -- look over here, but don't worry about this over here. And that's just not who we are. So we just thought we'd leave it and allow you to focus your attention on the whole picture.

Your next question comes from Oscar Gee from CLSA.

Just on the operating cash flow, how should we think about the cash tax paid into the second half? Should we expect it to normalize into the second half? Or will that be more FY '26?

Yes. So the way it works is, having not paid tax for a number of years, we then had to do sort of a top-up for '24 in December, so December '24. And of course, the top-up was in fact the whole tax payments, the $93 million. So if you think you use that as a bit of a benchmark, that's roughly about $8 million a month, and we resume paying installments in the month of March. In the second half, you'd expect to see something in the region of about $30 million to $35 million of tax in the second half. And that will continue month by month into FY '26. We'll pay a top-up in '26 relating to the '25 year. So assuming the tax -- the total tax payment is roughly the same. You'll see probably another, say, $50 million to $60 million going out in December of next year. And then essentially, we are just simply back on track again in terms of simply $8 million a month, roughly, there and thereabouts as we go through. So this operating cash flow figure really heavily impacted by essentially an aberration in terms of the catch-up tax payment. And hence the fact we called it out and I guess, focused on the after-tax component. Does that make sense?

Yes. No, that's very helpful. And then just on the capital expenditure, you guided sort of last year to the $50 million reduction in your CapEx moving forward. It looks like you've made that meet that this year. Are you still confident you can meet that into FY '26 and beyond? Or are you expecting some step up?

Yes. I mean, I think the business is growing very, very strongly. But we think we can maintain that sort of CapEx envelope broadly in line with that approximately $400 million. So to a step-up in '26, we haven't finalized our CapEx budgets yet. But I guess, the key message is that you can be confident that we'll apply really stringent discipline to those capital decisions, and we're able to demonstrated that in this result. But we're not sitting here thinking that the $400 million for '25 is an aberration far from it. That's the sort of run rate you'd expect to see going forward.

And just one final one. You've spoken a bit about the performance at MRL. It looks like you guys are expecting it to be stronger into the second half. You flagged the performance improvement focus at the FY '24 result. Can you just provide a bit more detail on some of the initiatives you took there and how you're seeing that affect this half and the second half?

Yes. So I mean, I think it's a carry on of the things that we talked about before. So it's the -- it's thinking about how do we minimize the cost. That could be sort of how we organize ourselves and the team on the site. It could be around how we use tarps rather than daily cover. Tarps have all arrived. We've done sprays as well there rather than tarps. So even -- so we've got all the U.S. technology in and big strong focus on density. It's those sorts of things. I think also impacting that is fleet where we've really had a strong focus around how we use our fleet into MRL in terms of recontracting that work to be done by others, where it could be done on a higher return basis by people like that rather than us doing it ourselves and thus redeploying that into other capital projects. So all those sorts of things are ongoing. I think we can see also the expansion of waste codes. That work has really paid off. That things like, we say, expansion of waste codes, the example there is asbestos, for example, and we can see some increased volumes come of that waste stream coming in to be safely dealt with. So it's all the work that the team -- and the foundation the team has laid all coming to bear together alongside increased volumes.

And maybe if I can just ask one more. There's been some talk or -- some talk that the landfill levy in New South Wales may be increasing significantly. To the degree that, that happens, do you see any risk of losing volumes in New South Wales and potentially being diverted to other states?

No. Yes, that is against EPA policy to -- EPA has a written-down policy around the movement of waste outside of the metropolitan area. So basically, their policy is that if the waste is generated in the metropolitan area, then it needs to be disposed of in the metropolitan area. And if it's not, then the metropolitan levy applies. So they're well attuned to that. We watch that carefully as well, and we certainly notify them where we see any sort of customers trying to take the piece on that element.

Your next question comes from Jakob Cakarnis from Jarden Australia.

Just wanted to focus on Slide 6, where you say restoration to be complete in FY '25. If I then go and have a look at the accounts, specifically around the Solid Waste business, you've reported an underlying EBITDA margin that's flat on the prior year, and it looks like it's flat half-on-half in the second half. Am I right in understanding that a lot of the operational and productivity disruption within that Solid Waste business? And I guess, how much of that restoration is going to be realized run rate through FY '25 and the continuation into '26, please?

Yes. So if you look at the restoration topics that we called out, essentially, it was Queensland. We basically said that we completed in the '24 year. It's the Health business that basically, again, you'll see a green tick on the scorecard there. We're saying that's largely complete. And, obviously, flows through to the Liquid Waste & Health Services sector. And I guess the final one is labor, and labor, we've scored ourselves as being in yellow. So still on track or still in progress. So in terms of labor, obviously, the most significant labor force there is within the Solids business. I think we've done some really great work in terms of labor. So you've seen voluntary turnover come down really significantly down to 16.8% at December with the leading run rate of about 15%. That's turnover less than 12 months down to 32%. Vacancy is pretty much at record lows. Shifts greater than 10 hours again, coming right down. We've seen some really nice benefits come through in terms of muni. So we've seen some margin expansion in that business, largely driven by labor efficiencies. If there's one area, I guess, that we have a question mark or where we feel we haven't cracked the labor nut yet, and that is within the Metro C&I business in particular. You heard me talk to responding to Pete's question about volumes in Metro C&I, we're seeing that being a little bit softer. That's not loss of customer, that's simply the customer down trading. That does have an impact for us in terms of route density and therefore the branch team needs to be really quite agile in terms of how they schedule their labor and deal with routing. So that's where you see the branch, that operating model kick in and us providing tools to those branches to better able -- to help them to manage that labor challenge that they've got. So the only thing that we don't think we've completed yet in terms of restoration would be labor and that's labor within Solids and really quite narrowly within Metro C&I, and it's largely being driven by a route density issue and then the knock on impact labor productivity as opposed to anything else. But again, we can see a route there so to fix that challenge as well.

I think if anything the restoration defined as things [Technical Difficulty] and things like that as opposed to restoration as [Technical Difficulty] talked about another and something else out of the financials.

We're very sure of your comment about Solid EBIT margin being flat.

Yes. Okay. I'll change tack a little bit. In the original operating excellence, was the cost opportunity in the LTS and hydros business originally part of that package? Or is that incrementally announced today?

No. I think if you talk about ops excellence, ops excellence is a group-wide initiative. When we announced it, I must admit that wasn't something that we've considered at that time. But clearly, it falls into that same bracket as taking the existing asset base and working through how we can make it work more effectively and efficiently. So it certainly is an outcome of that form of thinking, albeit it wasn't envisioned at the time. And those sort of initiatives, Jakob, it really, really take us in the -- at least $50 million up towards $100 million in terms of ops excellence.

Yes. I suppose for others that are trying to bridge from what looks to be an exit rate in '25 to '26, something like that that's important to understand. But yes, I appreciate that.

Thank you.

Your next question comes from Samantha Edie from Morgan Stanley.

I just had a question on Slide 30 of the presser that details the speed bump in CustomerConnect. So just for modeling purposes, can you give us some detail on the $30 million cost increase in terms of the timing and also the CapEx? And is there some of the $30 million -- is that included in the EBIT impacts you detailed in that slide also?

Yes. No, it is. So essentially, the additional CapEx is roughly $30 million. Also, the additional spend is roughly $30 million. Probably half of that you should think as being capital in nature. The other half you should be regarded as being expense because it's related to SaaS software. In terms of timing, again, we expect to have the project complete within the first half of '27. And in terms of the capital spend, you should sort of view that as being a relatively even split over the remaining time period.

And then I've just got one other question. So fire risk has always been a part of waste management. So are you seeing that the risk of fires is increasing because, for example, batteries go into the waste streams. And then can you also talk to how you might work with the industry and regulators on reducing the problem and recovering the costs going into the future?

Yes. So what I'd say there is, we're definitely seeing more fires, but what we're seeing is the fires that we're having are lower severity. So if you look at that pie chart on the HSE slide, you'll notice that medium and large fire percentages dropped. I know that's sort of ironic to say at the same time as we had the St Marys fire, which is obviously classed as a large fire. I think -- well, I don't think any of us think at the moment that St Marys is related to battery at this point in time. That's certainly not the hypothesis, but that's the early days of the investigation. Most of the fires, we do have are due to batteries, however, and there's a lot of work going on amongst the industry to kind of like work on that. The issue we have on batteries is that the primary work that gets done is education of the community, to sort of explain to them why you don't put a battery in the bin. Education is a weak control because it's administrative by nature. Therefore, what we've had to focus on is spending sort of $20 million, $25 million, $30 million a year upgrading our fire systems so that we get early detection and automation of response. I think in the case of the St Marys fire, the fire system that had been installed recently was the fire system that was used to fight the fire. And if you look closely at the videos, you'll see a big red pump with everybody standing around it as it was running, supplying the hydrants that were then used with the fire monitors. And so that's the sort of equipment that we've been installing progressively, starting with our highest risk sites through to our lower risk sites with the idea being that we'll try and keep -- the fires will happen, but we'll try and keep the fires small.

And then just given that you've had a few of these incidents over the past few years, is there any impact on your ongoing insurance costs and deductibles?

Well, insurance costs and deductibles -- well, insurance costs, certainly, been coming down progressively over time. Because I think we've talked about on these calls in the past that we've gone from sort of -- when I joined, I think, 20 instances a year sort of thing where insurers were notified of a potentially insurable event to a number of years where we had 0. And that led to deductibles coming down. Obviously, now we've had this event, so we'll obviously expect to see some response from the insurance market around that. But obviously, part of that also will be determined by the work we do around the cause and really understanding the nature of the event.

Your next question comes from Nathan Lead from Morgans.

Nathan, it's Jo. Unfortunately, I've got to take Mark to do a little bit of -- he's got some prearranged media commitments. So just to let everyone know, Mark is going to drop off the call, but Paul can stay on and continue with questions.

Sorry about that.

I'll fire away then. So first up, MRL, that the comment was made on the call a number of times about how you're confident that volume is going to be increasing. Apologies if I missed the explanation there, but could you just talk us through why you got that view? I mean there was the comment about the asbestos increases, but is there anything else driving that?

We're just seeing a little bit of increased activity, Nathan. So we've, obviously, got a bit of a pipeline in terms of being able to see projects that we've either secured or are on the horizon. And that's giving us a degree of comfort that we can see that what has been a relatively steady decline in volumes over probably the last 3 halves, we've now seen that stabilize and turn, and we have an expectation that volumes will be higher in the second half.

MRL, is it still one of your highest EBITDA margin assets?

Yes, it would be. It would be.

Second question for me is, I'm just interested in the LFG monetization there. Was that tendered out? Or was it just a direct deal? Why did -- choose to outsource instead of doing it internally? And do you have other options or opportunities on that front?

Yes, great question. It absolutely was tendered. So we basically -- we looked at doing it ourselves. The fact is you're talking about just for Lucas Heights alone, the replacement engines would be probably in the region of about $50 million. So we looked at a situation where we would tender it out. LMS was a successful player. They came back with some really innovative thinking. They also too, Nathan, they -- this is all these guys do, so they really understand the situation well. They're expert in the field, and we felt they could bring some real value to the project. In terms of the profit split going forward, essentially, the way that you should think about this is that we contribute the landfill gas, they contribute the generation, infrastructure. And in terms of the profit split going forward, we both enjoy sort of a baseline of infra type returns, but any upside beyond that all goes to Cleanaway. So essentially, we've got a situation here where we significantly derisked the return. We've got greater expertise in place and it's a capital light solution. So we're sitting and thinking this is a really nice deal, frankly, for Cleanaway shareholders. In terms of other alternatives going forward or rather projects, importantly, the reason why the EBIT uplift for Lucas Heights was so significant is that those rights are currently owned by someone else. They revert to Cleanaway 1 Jan, '26. So with the other landfills, obviously, we own those rights already, albeit there are a number of situations where we think involving a third party such as LMS will help us improve the efficiency, allow us to potentially improve the returns and do it in a capital light manner. So again, I'll give you a specific example. We currently have 8 engines at MRL. We actually have the capacity to have a further 8 on site. We have enough gas for a further 8. That gas is currently being flared. So we do take value from the ACCUs, but we don't enjoy any of the upside in terms of electricity generation. So you can see a situation there where if you have someone such as an LMS come in and partner for those other 8 engines, again, you have the ability to generate additional profit through electricity generation. But you have to share it, of course.

Just my third one is, just can you give us an update on the Lucas Heights? I think it was life extension. Was it Lucas Heights or Kemps Creek?

Yes, it was Lucas Heights. Not a huge amount of -- there's a lot going on, on-site in a sense, lots of stakeholder engagement, planning and approval process well underway. In terms of like a solid milestone, there really is nothing I can give you. But this is a project that we're absolutely committed to. The state government are absolutely aware of the waste crisis that they've got emerging in New South Wales and are very supportive in terms of us pursuing that project.

Your next question comes from Nicole Penny from Rimor Equity Research.

Could we confirm on Slide 18 regarding the strategic review of Liquid Waste & Health for asset optimization appearing more than an internal focus? Is one of the potential outcomes perhaps more asset sales and divestments going forward?

No. I think the focus there, Nicole, is all about looking at the current footprint of those 2 businesses and simply seeing where it makes sense to combine activities, simply where we can do things more efficiently and more effectively. So no expectation of asset sales or divestment.

And then lastly, could we expand on Slide 23 regarding the landfill gas contribution and forecast, please, and confirm whether this assumes no change to carbon credit accounting from the current regulatory landscape?

Yes, that is correct.

There are no further questions at this time, and that does conclude our conference for today.

Thank you very much for your time and engaging and look forward to catching up with you over the next couple of weeks. Thank you very much.