Thank you for standing by, and welcome to the Cleanaway FY24 half-year results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the Ask a Question box and click Submit. I would now like to hand the conference over to Mark Schubert, Managing Director and CEO. Please go ahead.
Thank you, and good morning everyone, and thank you for joining Cleanaway's financial results briefing for the first half of FY24 financial year. My name is Mark Schubert, CEO and Managing Director of Cleanaway. I'm joined by Paul Binfield, Cleanaway's CFO, and Josie Ashton, our new Head of Investor Relations. 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. I'm going to start with an overview of the financials and the progress we've made strengthening our foundations. Paul will then go through the financials in detail before handing back to me to walk you through the performance of the operating segments. I'll then provide an update on the strategy and our priorities for the rest of '24 before opening up for questions.
I'm going to take the disclaimer as read, and so please turn to slide 4. On behalf of the entire Cleanaway team, I am proud to report that we delivered a strong set of financials for the six months ended December 2023. We improved operating discipline, and we made significant strategic progress towards delivering Blueprint 2030. Across the group, we saw new business wins and growth from existing customers supported by operating discipline. This was complemented with the recovery in our Queensland solids business and the emerging recovery in health services. We delivered a 160 basis point increase in EBIT margin as a benefit of our branch-led productivity and efficiency initiatives improved performance. During the half, we launched our Vic CDS operations.
We mobilized to the IWS and Santos contract and accelerated our plan to transition the GRL FOGO plant, which has now been renamed Eastern Creek Organics, in order to meet our customer needs. Our landfill gas capture and monetization program is reducing our emissions, and our methane reduction is tracking 15% ahead of the planned 2024 target emissions trajectory. Our operating and strategic momentum continues to build, and we are on track to deliver our FY24 EBIT guidance of approximately AUD 350 million, as well as our firm mid-term financial ambition and scorecard, which Paul and I will talk to you about today. If we turn to our financials on slide 5, all of our key financial measures showed pleasing growth versus the prior corresponding period, reflecting the improving performance of our underlying business driven by our strategy and the actions taken to resolve recent headwinds.
Continuing on from the strong EBIT growth of the first half, underlying EBIT was AUD 173.9 million, up 25.7% on the PCP as a result of growth in our New South Wales and ACT solids business, CDS business, liquids, and IWS businesses, and the recovery in commodity prices, particularly the OCC price. Our operational excellence initiatives and our recovery plans are working, and that's as evidenced with the turnaround in Queensland solids and our health service business returning to profitability. Particularly pleasing was the expansion of our EBIT margin by 160 basis points and the 90 basis point increase in our ROIC. The increase in these measures highlights the benefit of our efforts to systematically empower, enable, and equip our frontline teams to make thousands of great decisions every single day and, in doing so, strive and deliver broad-based improvement.
The directors declared a AUD 0.0245 per share interim unfranked dividend in line with the prior corresponding period. Moving to the next slide. Two years ago, we made safety in the environment foundations rather than priorities, and that was for the simple reason that we never want our frontline teams to have to choose because the foundations always come first. As discussed at the strategy day at Perry Road in June last year, we are committed to the execution of our five-year HSE strategy and plan to drive progressive and sustainable change in this area. Our goal remains ensuring all Cleanaway team members keep each other safe. And even though our TRIFR for the period of 4 showed some improvement compared to the same time last year, we continue to focus on implementing our improvement roadmap.
We started our critical risk program in August to redefine high-consequence risks, including process safety, personal safety, and psychosocial risks, and the environment. In October 2023, we implemented a new HSE culture framework to further embed expected behaviors. We developed a 5-module HSE leadership program for all leaders called Stronger Together. To manage the increasing fire risk, we are progressively upgrading our facilities with rapid detection and response equipment. We invested AUD 6.3 million in the half, installing 78 fire monitors at 40 higher-risk sites. As you can see in the chart on the bottom right corner, we have seen an improvement in the number of environmental notices issued. Although it's worth noting, we do self-report, as was the case with 5 of the 14 notices for the period.
We are working hard to improve our environmental controls and compliance, and this is translating to improving and stronger working relationships with both local communities and regulators. Moving to slide 7, an update on our people foundation. During the half, we saw the benefit of a stabilized workforce translating into initial financial benefits. The strategies that we've discussed with you to reduce vacancies and turnover are working. Replacement vacancy levels have now returned to slightly above historical levels of 3-400 roles, and voluntary turnover has reduced significantly. Voluntary turnover for the 7 months ended 31 January 2024 was 17.6%, which is in line with our plan for the year. That said, we are now focusing on reducing our first-year voluntary turnover rate, which remains high.
So in addition to having stay conversations, improving our onboarding processes, and undertaking targeted site culture reviews, we will increase our support to those relatively new to their role to help them grow in proficiency and confidence. We have reached our target of at least 40% female leaders reporting to me, and we're getting close to our 40% target for female leaders reporting to the execs that report to me. However, we are behind target for female participation across the group. In addition to the successful Women's Driver Academy, we are looking at how we can make our shifts more flexible. In a step that we see as supporting both increased female participation as well as our cultural refresh, we rolled out our Respect@ Cleanaway program to all employees. And this will provide a foundation for a safe, inclusive, and high-performing culture that we're building.
With that in place, excitingly, we will launch our new values during the second half of FY24, where our focus will be on the self-reinforcing mechanics that bring them to life every day. For example, as part of our new values, we want our teams to pursue opportunities to improve and to deliver outstanding results with real ownership. To reinforce this ownership much deeper in the organization, we are introducing a leadership incentive plan for approximately 650 leaders who don't currently receive LTIs and will align them with the delivery of the stretch LTI achievement of AUD 500 million of EBIT in FY26. I'll now hand over to Paul for the financials.
Thank you, Mark. Turning to slide 9, we'll unpack the P&L from a group perspective. Unless otherwise specified, all the comparisons I refer to are going to be against the prior corresponding period. As Mark has outlined, this is a really pleasing result driven by strong underlying performance across all segments of the business. It's clear evidence of strategy delivering and the headwinds from prior periods resolving. Net revenue of almost AUD 1.6 billion was 7.9% higher, with higher revenue across all segments, primarily driven by contractual price increases and underlying organic growth. Underlying EBIT of almost AUD 174 million was 25.7% or AUD 35.6 million higher, and EBIT margin was 11%, up 160 basis points. This reflected organic growth across most of the business and the realization of branch-led productivity and efficiency initiatives across the group, including initial modest gains for the stabilization of labour.
Furthermore, we benefited from the restoration of earnings in the Queensland solids business and a strong performance from both New South Wales solids and also the national liquids businesses as well. So with the market for carbon, known as OCC, stabilizing, we're also benefiting from a recovery in the contribution from commodities. Depreciation and amortization expense, so D&A, is AUD 1.3 million lower, and that's been driven by the landfill amortization expense being AUD 5.9 million lower. The landfill airspace asset is amortized based on a fixed dollar amount per cubic meter. Hence, fewer cubic meters consumed in a period due to lower volumes and improved compaction results in a lower amortization expense. So Mark will discuss this more detail in the solids segment. Underlying net finance costs increased by AUD 11.5 million or 25.3% to AUD 56.9 million, largely attributable to higher interest rates, and that's in line with our prior guidance.
Despite the higher net finance expense, underlying NPAT for the period of AUD 82.7 million was almost 24% higher. Underlying EPS was 23.3% higher at AUD 0.037, and ROIC increased by 90 basis points to 5.3%. The group remains comfortably within its banking covenants and had a leverage ratio of 1.90 times at 31 December. Moving on to slide 10 and net operating cashflow. Pleasingly, net operating cashflow was AUD 229.6 million, up AUD 26.2 million from the PCP. The cash conversion ratio of 88.2% remains really solid. The cash outflows associated with underlying adjustments relate largely to payments made to the New Chum for the New Chum rectification, which was fully provided for last year, and also the Customer Connect project costs related to customization and configuration of cloud-based software. And hence, these costs cannot be capitalized. Directors declared an interim unfranked dividend of AUD 0.0245 per share.
Dividend franking will recommence with the final dividend payable in October as the group resumes tax payments in the first half of FY 2025. So moving on to CapEx and capital allocation. And I will spend a few minutes on this slide because I think this is of real interest to a broad group of investors. Our first half CapEx is just over AUD 230 million, and we remain on track for FY 2024 CapEx to be in the range of AUD 430 million-AUD 450 million. The split of CapEx for the period is broadly in line with the guidance that we've provided, with maintenance CapEx run rate being approximately 75% of D&A and our target of growth CapEx for the year, approximately AUD 150 million.
While the focus of HSE capital is typically maintaining regulatory and environmental compliance, in the first half, we spent capital on landfill gas infrastructure and fire suppression projects, both of which generate a financial return. So landfill gas infrastructure in the form of improved gas capture and the generation of ACCUs or carbon credits, which can be monetized, and fire suppression equipment in the form of less disruption caused by major fires, and ultimately, lower insurance premiums. Since the start of our Blueprint 2030 landfill gas program in July 2022, we've drilled and reconnected approximately 480 wells, and our monthly capture rate has increased by 66%. As Mark has mentioned, our methane reduction is currently tracking 15% of our FY24 target trajectory. Same business capital. Is that capital required to maintain existing revenue streams? So, for example, new trucks required on the rollover or renewal of existing customer contracts.
The incremental return on this capital is typically modest. While there is often no incremental revenue, a new truck will be more efficient, it'll be cheaper to run, and more reliable. Hence, we benefit from improved customer service. The investment in our fleet is significant, and we're in the early stages of further developing strategies to optimize returns from this critical asset. An important stay-in-business project that we've undertaken this half was the insourcing of the landfill operations at Kemps Creek. Replacing an external contractor with our own team and our own Yellow Gear. The financial driver behind this decision was the improvement in compaction at the site and hence optimizing the use of precious airspace. As you can start to see an amortization expense, that efficiency benefit is being delivered. Turning now to growth CapEx.
We continue to take a disciplined approach to making our investment decisions and seek ways to identify how we can improve our capital allocation process with the aim of optimizing returns. Our investments are diversified across a large number of projects, removing any significant concentrated project delivery risk. In the last half, we lifted the hurdle rate used to assess capital projects reflecting the higher interest rate environment and also reflective of the fact that we have more opportunities than capital. We also prioritize capital-light solutions to meet our customers' needs. We've strengthened the resourcing in our project delivery team to support the increase in the number of organic growth projects. And we're increasing the cadence of our post-investment review process to strengthen our learning culture. So during the period, we've deployed almost AUD 84 million of growth capital into the business.
This is a key source of earnings growth and one of the building blocks in meeting our midterm financial ambition. So on this slide, we've detailed for you the major growth capital projects for the year that form part of the delivery of Blueprint 2030. So just talking to a selection of these. The rollout of the Victorian CDS network has been completed, and that went into operation on the 1st of November. The IWS-led Santos Total Waste Management contract has also been mobilised in the period. So both of these projects will deliver modest earnings in the current year but a full run rate next year. Our Customer Connect project is also progressing well and is on budget and timetable. The first element of release one is going live this weekend.
As we previously explained, there is both a CapEx and an OpEx element to the over AUD 100 million project spend. The OpEx component, we've taken as an underlying adjustment given the scale and transformational nature of this project. Our Western Sydney MRF is a major project that's progressing well, and it's due to start commissioning phase this time next year. There'll be no material contribution from either of these projects until FY26. As previously discussed too, we're progressing the three energy from waste projects in a capital-light manner to create optionality. The primary focus of the current investment is on design and approvals for the projects. Passing you back to Mark to take you through the segment results.
All right. Thanks, Paul. Moving on to slide 13. Solid waste segment net revenue was up 5.2% on the PCP with EBIT up 27.7%. Looking at our solids EBIT drivers, growth was driven by New South Wales ACT solids and the turnaround in Queensland solids, which is tracking ahead of plan, and also growth in our CDS business. Price discipline was supported with cost discipline. The contribution from commodities is up when compared to this time last year as prices recovered and the OCC market stabilized. Landfill EBIT was higher than the PCP despite lower volumes, and I'll talk more to landfills on the next slide. Pleasingly, we saw the initial benefits of fewer job vacancies and improving voluntary turnover emerging in the form of improving efficiency metrics and customer service stats.
However, we acknowledge we still have work to do here, and I'll talk more about that I also shortly. EBIT growth for the period was tempered due to higher repair and maintenance costs driven by mechanic shortages and increased use of more expensive third-party mechanics and reduced activity in the construction industry impacting C&D collection volumes. I do wanna talk a little more about the New South Wales ACT solids performance because this is a great example of the combination of the strength in our underlying vertically integrated business where we saw growth in transfer station collections and organics volumes and the benefit of our branch-led operational excellence initiatives, which at the same time delivered increases in labour and network productivity. Our CDS business had a great half.
In the existing business outside the COVID period, December 2023 and January 2024 have been record months for the New South Wales CDS scheme. Queensland volumes are benefiting from the program expanding into wine and spirit bottles. We also successfully launched our vic CDS operations, which commenced on the 1st of November. It's pleasing to report that we are already seeing vic volumes tracking in line with expectations. In relation to our FOGO Blueprint, our customers are asking for this service to be available as soon as possible as they seek to meet the demands of their ratepayers and state government legislation requirements. In response to the increasing demand, we've accelerated the transition of our Eastern Creek organic site, which, as I said, is the new name for GRL, to get this capability in place during FY25.
Let's turn now to spend some time on the Queensland recovery and our landfill performance. The Queensland solids team have done a great job turning this business around following the weather-driven challenges of 2022. As mentioned, the restoration of the Queensland solids business has come through earlier than expected, and the business is now set up to operate without the New Chum landfill. The new Queensland solids management team, we're among the first to roll out visual management boards for their branches. And these have proven a great success and, of course, are now used across the group. The VMBs were instrumental in supporting the effectiveness of the branch-led data-driven operational efficiency initiatives, which have driven increased productivity, particularly in relation to labor, lower operating costs, and increased customer service. For example, SIFOT, or service in full on time, has increased to 99.3%, up from 97.6% in the previous half.
If we move on to a few insights on our landfill results. At a group level, while landfill volumes were down on PCP, EBIT was up as the respective management teams focused on balancing price and volume to optimize returns as well as delivering efficiency initiatives. Lower volume but a higher EBIT contribution from landfills is indicative of a more efficient use of our precious airspace through improved compaction and efficiency measures. This leads to a lower depreciation amortization expense and ultimately to lower CapEx on cell development in the future. Continued competition, particularly in vic at MRL, was met through a combination of site-specific strategies to optimize each site's performance and returns for the period and over time. These included pricing discipline, mix shift to higher margin waste codes, and improved efficiency measures around compaction and customer turnaround times.
We now move on to liquid waste and the health services segment where revenue increased 13.8% to AUD 348.2 million, while underlying EBIT increased 8.6% to AUD 28.9 million. Underlying EBIT was 8.3%, down 40 basis points from 88.7% on the PCP but up from 7.3% from second half FY23. This margin variation reflects the performance of the health services business that did not return to profitability until Q2 FY24. The LTS business, or liquid and technical services business, revenue grew 18% on PCP. The business benefited from a number of high-value projects secured during the period, including the ongoing delivery of its large-scale nickel site rehab project for BHP and continued work with government agencies, including the recycling of expired hand sanitizer.
On the 21st of August 2023, LTS completed the acquisition of Australian Eco Oils, which trades under the Scanline brand and which is delivering in line with the business case. LTS continues to build on its market-leading capabilities and growing reputation of being able to treat, reuse, and dispose of complex, hard-to-treat waste streams. During the half, LTS signed two key statewide household recycling community contracts and was awarded the stewardship of the national paint recycling program, Paintback, for the next four years. Health services returned to profitability in Q2 and is on track to deliver its targeted annualized run rate of AUD 15 million of EBIT in Q4 of financial of this financial year. The commissioning of our new autoclave at the end of FY2023 was an important milestone in the turnaround story, but it was only part of it.
The health services business has implemented a broad range of initiatives covering sales, pricing, customer service, route efficiency, and production efficiency in all states. It's their impact, combined with the new autoclaves, that we now expect this business to return to its pre-COVID profitability levels in the next financial year. Hydrocarbon revenue was up 5% on PCP while EBIT was marginally down. This was a good performance given the lower average oil price in the period. This was achieved by deliberately focusing on selling higher-margin, higher-quality base oil to domestic customers that offset the impact of the lower average oil price. Growth in Cleanaway Equipment Services revenue was driven by new customers and price increases. During the half, we continued to investigate options to further leverage the circular nature of the hydrocarbons business. Moving on to our third operating segment, which is industrial and waste services.
IWS revenue increased 15.3% to AUD 210.5 million, and underlying EBIT increased to AUD 15.6 million driven by new contract wins and increased activity with existing customers such as Santos and Viva Energy. Cost escalation clauses and rate card increases offset rising input costs, and a project management office was established to optimize project delivery and returns. This business has gone from strength to strength over the last two years and delivered on the strategy to increase the portion of its services to tier one oil and gas and resource companies. During the half, it mobilized to the national Santos contract and continued to have an impressive re-sign rate for existing customers and win rate with new ones. As they have grown and been focused on larger, higher-margin, higher-value tenders and renewals, they've also been managing their customer tail for the benefit of returns.
If we now move on to the strategy progress and outlook, you will have seen our strategic value creation staircase before, which shows how our strategic pillars come together to create value for shareholders. If we start with our existing footprint of prized infrastructure assets, which are naturally exposed to GDP-plus growth, we then apply our operational excellence initiatives like VMBs, value drivers, data analytics, and cultural improvements, which are aimed at margin expansion. We then add accretive infrastructure growth with recent examples being Eastern Creek Organics, Western Sydney MRF, vic CDS, or new contract win-related infrastructure. And then we integrate it together for customers, presenting our services and infrastructure in a high circularity, low-carbon way with great customer service. And this will in part be enabled by the investments that we're making through Customer Connect.
And then we believe that done well, this will be increasingly hard to replicate at scale. And therefore, over time, as customers seek high circularity and low-carbon solutions, our market share will grow. Now, to bring this to life even further, our FY26 EBIT growth ambition and improvement in ROI comes from the three same three sources. First, as a baseline of FY23 EBIT of AUD 302.2 million, approximately AUD 50 million will come from restoring performance of Queensland solids health and labor, at least AUD 50 million from operational excellence improvements, and approximately AUD 50 million from the incremental returns from growth projects between FY24 and FY26. And it's the operational excellence bucket where we see more opportunity and where we are aiming internally to deliver more than AUD 50 million EBIT.
If we turn to our progress, on this slide, we've summarized the three key restoration areas, which also form part of our FY26 ambition and scorecard. We've already walked through the turnaround in Queensland solids and how it's tracking ahead of expectations and updated you on the health services restoration, which is tracking in line with expectations and forecasts that deliver the annualized run rate of AUD 15 million of EBIT in Q4 of this financial year. Where we are tracking behind is in relation to labor. Like I said, we've reduced our vacancy levels, and we're seeing reduced overall turnover levels. We've also made good progress on closing out our backlog of enterprise agreements. However, we are seeing higher first-year voluntary turnover and, not surprisingly, in some areas, lower productivity from less experienced team members.
Given this comes after a period of rapid recruitment, we're increasing our support to those relatively new in their role to help them grow in proficiency. We're improving onboarding as well as conducting targeted stay conversations and site culture reviews. While we are seeing productivity improvement in the first half coming through in the results and through our value drivers on visual management boards at site levels, the level of historical turnover of our workforce means this is lagging behind where we'd like it to be. That said, the strength of our VMBs, however, means that our leaders can target the improvement activity and support to where it is most needed. Moving on to operational excellence initiatives. The development and deployment of our data analytics tools are an important part of the enabling of our frontline leaders to manage and improve their operational performance in real time.
I'm not going to spend too much time on this slide as we dived into the detail of this Blueprint initiative at our Perry Road Strategy Day in June last year. But as those of you who were there might recall, these tools are all about the actions they enable in our frontline. Listed on the slide are a sample of those tools which we're using in our branches today. Whether it's helping drive a conversation to manage customer profitability or supporting the management of overtime at any one of our 330-plus branches, providing leads to the sales team, or managing our owner drivers better, these four tools are indicative of how we're using data analytics to improve our margins by equipping leaders at all levels with easy access to real-time value drivers key for their business. Move to the next slide.
Cleanaway's mission is making a sustainable future possible together. When we talk to customers about sustainability, it boils down to circularity and carbon. Now, what we've put on this slide is five examples of how we're bringing high circularity and low carbon to life. Starting on the left on landfill gas, we've been focused on increasing landfill gas capture by drilling new wells and installing increased flare capacity. At the same time, we're investing in landfill gas monetisation, firstly through increasing our generation of renewable electricity and exploring options to sell renewable gas to our customers, particularly those with hard-to-abate operations. We've recently demonstrated the use of HVO 100 as a diesel substitute to decarbonise our fleet. Based on using Australian-used cooking oil as a feedstock, HVO 100 offers 91% fewer greenhouse gas emissions with no infrastructure modifications needed and minimal capital investment.
It's a scalable drop-in option for fleet decarbonisation and maintains both vehicle performance and payload. On energy from waste, we continue to progress, as Paul said, to capital-light long lead time activities so that we're ready when the market, regulatory, and approval settings support energy from waste facilities on the East Coast. We have been and continue to be cost disciplined in our approach to CapEx in relation to energy from waste, and we'll only deploy capital with a clear path to an appropriate rate of return. Turning to the right-hand side of the slide, together with our JV partners, Pact, Asahi, and Coca-Cola, we recently opened a new AUD 50 million facility in Victoria capable of recycling the equivalent of 1.6 billion PET plastic beverage bottles a year.
As discussed earlier, our CDS business continues to grow and plays an important role in the resource recovery supply chain. We move on to the next slide and bringing it all together. Let's look at how we're performing against our FY26 financial ambition and scorecard, which lists our must achieves by the end of FY26. Throughout the presentation, Paul and I have touched on how we are progressing on each of these elements and provided the insights underpinning the status of each initiative. Now, for most of them, it was pretty easy to score these initiatives as being on track. Where we had the greatest discussion and debate internally ended up being the two areas where we've marked ourselves behind target, and you've heard me talk to already.
The first being on our safety performance because while we're on track on the delivery of our plan, our lagging indicators, in this case, TRIFR, is behind plan. We have cross-checked the plan to the types of injuries and near misses we're seeing and still believe the plan's the right plan. The second being labor productivity because while we saw productivity improvements in the first half, the level of historical turnover of our workforce means this is behind where we'd like it to be. We have a plan to address this, and we expect further improvement in the coming period. Moving to the final slide. Momentum continues to be the right description for FY24, and this underscores our confidence in delivering our EBIT guidance of approximately AUD 350 million for the year. In terms of priority for the second half, we'll stay the course on executing our five-year HSE plan.
On labor, the focus is on first-year retention and productivity improvements. It is encouraging to see the system-wide benefits as we continue to embed site-level value drivers and connect those to the frontline by the use of visual management boards. Data analytics continues to enable and equip our leaders with real-time information to drive performance. Our business teams in solids are up and running. And if you recall, this aims to ensure that our state-based solids teams get the benefits of learning from each other and that we bring the best of the best from around Australia. For example, we have business teams covering C&L collections, our landfills, our MRFs, and our muni collections businesses. Clear financial targets for business teams have been set and are being tracked. We have a fantastic runway of short-term, mid-term, and long-term opportunities to grow.
Therefore, it's important that we continue to improve how we allocate capital, including capital-light options, how we then execute projects, and then really embed a learning culture where we learn from every project that we do. And with improved capability and clear plans, we expect improvement across all these areas. And to conclude, I am genuinely proud of the work our 7,500+ strong Cleanaway team do every day to serve our customers and communities around Australia. As well as delivering today, we have clear improvement plans to sustainably improve and strategically grow our business. Our Blueprint 2030 strategy has been translated into execution through our mid-term financial ambitions, where we remain on track to deliver an FY26 EBIT of more than AUD 450 million while improving ROIC. That's all the formal presentation for today. So what we might do, operator, is open the lines to questions.
Maybe I'll just ask the question asking the questions, whether you can just maybe go one question at a time and then try and get through everybody, and then we'll start again at the top for as long as time permits.
Thank you. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. If you wish to ask a question via the webcast, please type your question into the Ask a Question box and click Submit. The first phone question today comes from Jacob Cakarnis from Jarden, Australia. Please go ahead.
Morning, Mark. Morning, Paul. Mark, can I just get you to elaborate on the ongoing competition that you're seeing in solid waste?
Clearly, you guys have been well-disciplined on price, but I'm just wondering whether or not there's been some margin headwinds from those cost-to-serve components, so increasing their customer turnaround time and also some of those self-focused initiatives. And then, I guess, the second part of that is, is the competition that you're seeing more in the established post-collections operations, or is it also in tendering, p lease?
Yes. I think what I'd say is, generally, on the competition side, it's consistent with what we've said previously. I think if you dive into it, there's some pockets where there's heightened competition. I think MRL, which is the Melbourne Regional Landfill, biggest landfill in the southern hemisphere - obviously, we own it - there's five landfills in the Melbourne area, and that market is reasonably price-sensitive.
So therefore, we've been doing a lot of work on things like mix, getting our mix right, and turnaround times, costs with TARPs, that sort of thing, and also getting the benefits of increased energy production from MRL. I think in certain areas of C&I, we see some pockets of sort of heightened competition. Sometimes that competition actually doesn't even make sense. We look at it and go, "It's loss-leading style competition," where we're happy not to be part of it at that price. And if customers switch we know they'll switch back through either poor customer service or price being jacked up over time. And then on muni, I think we've certainly won more than we've lost. Really good example of that is around Vic Regional, where we've definitely won more than we've lost up in the sort of northern part of Victoria.
The final thing I'd just say on those sorts of things is, we are, as Cleanaway, we constrain ourselves capitally. And so therefore, we are super thoughtful about what the returns need to be on new business.
Thanks. And then just one for Paul. I'm interested that your commentary around the net interest guidance is that you're tracking to the guide. If I analyse the first half, I get a number closer to AUD 113 million for the full year, just noting that there was a November rate increase in there. Can I just get from you whether or not the initial AUD 110 million net interest guide did include an expectation for that rate increase, please?
I think we actually said at the time, Jake, it was AUD 110 million, assuming no further rate increases. So you're right. That was in October. Then there was a further rate increase in November.
So I think your sort of year of 113 seems about right.
Thank you.
Thank you. The next question comes from Matt Ryan from Barrenjoey. Please go ahead.
Oh, thank you. I just had a question on your medium-term ambition. I think you're suggesting that restoration should be worth about AUD 50 million in that bridge. So I was just wondering if there's a way to quantify how much of this will be achieved in the AUD 350 million guidance this year.
Yeah. I thought we might get that question, actually. So the way we're thinking about that is, we think sort of more than half will get delivered in the FY. So with the approximately AUD 350 million, you should assume more than half of that is headwind recovery.
That's great. I'll join the queue again.
Thank you.
Thank you. The next question comes from Arpeet Kanadia from Jefferies.
Please go ahead.
Hi, Mark, Paul. Just a question on your EBIT guidance. I mean, you've reaffirmed it at AUD 350 million. When I look at the implied second-half growth rate on the first half, that's only a couple of %. Maybe if you can talk to how are you seeing the environment. I mean, where is the slowness coming in second half relative to first half because it's only a couple of % growth rate for EBIT?
Yeah. So just maybe a few comments on second half versus first half. So first thing is, there's 3 fewer working days in the second half. And these numbers start to matter if you really get down into where are the single million dollars coming from. And so it's 126 days in the first half, 123 in the first half.
If you just do the math, that could be worth, say, AUD 4 million or AUD 5 million just there alone. We think revenue growth will be pretty similar to the first half. And then we think there'll be a modest increase in margin. And why do we say that? So it'll be things like, in the second half, health will be a profit rather than sort of break even. The CDS business will move from basically not making anything in the first half because it's got all its costs and ramp-up relative to the second half, where it'll be making money. And then ops excellence will continue to deliver. And the Santos, you'll get the full six months of that contract. So that's how we think about the sort of second half versus the first half. So nothing really surprising there, I don't think.
I guess, Arpeet, the guidance was approximately AUD 350 million. So we don't see AUD 350 million as a cap.
All right. Thank you. Join the queue.
Thank you. The next question comes from Peter Steyn from Macquarie. Please go ahead.
Hi, Mark and Paul. Thanks very much for your time and solid result. Well done. Just very quickly on operational excellence, Mark, some really definitive benefits coming through in New South Wales ACT and, I guess, to some extent, Queensland. Could you give us a bit of a sense of where you're at, perhaps in Victoria and then more nationally, perhaps some of the regions, in that roll-up process and what your expectations are for the improvements at a more national level?
Yeah. I think when we mentioned those businesses, it wasn't because the others weren't doing well as well.
It was just sort of I think New South Wales, for example, was a bit of a standout, particularly because they've got it's almost a one-of-everything business. They've got one of every part of the value chain, and it's all connected. I think on ops excellence, Pete, when we deploy VMBs, I mean, they're deployed absolutely nationally. I think you saw that when you came to Perry Road just as an example, which was a Victorian example, where we had the VMBs and value drivers for all the muni contracts as well as the C&I businesses all in operation. Similarly, I think what you should expect in solids is that the business team's best of the best starts to really ratchet in now. We've switched a bit of the, I think, sort of ops excellence improvement capability that we've got that has been working in the health business.
We've switched that into business teams to really turbocharge that. So we should start to see that really start to drive things on a national level across those four areas that I talked to earlier. Then similarly, data analytics. So the data analytics tools are broadly deployed. So they are deployed nationally, for example, all the way from WA to Tas. So again, we should see broad momentum improvement across all businesses. On the ops excellence, pretty good in the second half but also moving into next year as well.
Great. Thanks for that extra color, Mark. Appreciate it.
No worries.
Thank you. The next question comes from Lee Power from UBS. Please go ahead.
Morning, Mark. Morning, Paul. Just coming back to that muni contract tendering and competition, can you maybe talk about your assumed win rates versus historical?
Are you actually finding that FOGO offering or your kind of SIFOT improvement, is that actually driving a higher win rate, or do you think it will, given that level of interest, particularly around FOGO that you talked to?
I mean, definitely, we've seen the FOGO offering that we have in New South Wales is a we think it's a competitive advantage. We've probably got the number one FOGO facility going forward located right there at Eastern Creek. So it's a fantastic location and a fantastic facility. And we can progressively turn it on. As I think you know, we just split the hall and grow the FOGO and reduce the red bin. So I think that's been successful. We've won three contracts. We've got one starting, believe it or not, as early as July, calendar 2024. Just make sure we get it the right year.
And then that progressively ramps up over the following year with the two other contracts. So that's pretty exciting. I think in terms of muni, again, what I'd say is, we've won more than we've lost. And again, if it's a new contract, we are super thoughtful about the return that we need to earn on that because we have got capital projects and opportunities across the full spectrum of Cleanaway. And a muni contract needs to compete with other growth opportunities that we might have. And so I think Paul mentioned, we've increased our hurdle rates accordingly to really sort of make sure that it's the highest-returning portfolio of projects. Obviously, that needs to be tempered for a mix of risk versus return. And so we're very thoughtful on muni, how much of that we want to own going forward.
And it's not just an open checkbook style approach.
Okay. Thanks. I'll get back in the queue. Thank you.
Okay. No worries, mate.
Thank you. The next question comes from Owen Birrell from RBC. Please go ahead.
Yeah. Good morning, guys. Just a quick question on the Victorian CDS. You mentioned the full run rate coming in in FY 2025. You effectively come off a standing start in December. And I'm just wondering, at roughly what point do you think you'll hit that full operating run rate? Is that relying on third-party collections ramping up as well during the period? And I note that this earnings contribution is a combination of a number of JVs and so forth.
Wondering if you can, in aggregate, give us a sense of what the EBIT contribution will be to you in FY 2025 across all of those different JVs.
Yeah. So what I'd say there is so we started on November 1st. And the way it worked is, we had a limited time to get ready alongside the other operators. So then the expectation was you had a certain amount of equipment on the ground on November 1st. And then there's another milestone, which is August, I think, for you need to have your you need to have the rest of your vending machines and collection facilities ready to go. And we were ready at the start and we'll be ready for that one as well. I think what you should think is that we have overdelivered from the Vic CDS part, the Western Melbourne and Western Victoria part.
So if we've got 33% of the state, we're delivering way more than that in terms of our proportion of the collected bottles. And that's, I think, because of what we put on the ground but also the experience of the team in terms of operating it. Then in those early months, it's not that profitable. It'll ramp up on profitability as we go through, obviously, at the summer surge with volumes coming through. And then the steady state run rate, the way I would think about it with you might be simplistically to say, "Our business in Victoria will be about a third of the size of the overall the New South Wales business," just because a third of the state, it's about a third of the EBIT, will be the contribution. And we should expect that to start that sort of run rate in FY 2025.
Does anything, Paul?
Yeah. Oh, and just in terms of the structure too, just so you're clear how it works. Basically, TOMRA Cleanaway, joint venture, is responsible for operating the network. And it contracts Cleanaway to undertake that collection activity. The basic aim is that the way it typically works is the actual JV itself is fairly break even. So it doesn't generate much in the way of profits you'll see from our financials. So in terms of the profit from the scheme for Cleanaway, it basically appears 100% in our operating result. In terms of what drives that profitability and, I guess, the ramp-up, obviously, it's the number of collection points that are out. Then, as Mark mentioned, I think that the JV and obviously, Cleanaway is part of that. We've done a great job in terms of that rollout.
Still more to go, but we are on track in terms of expanding the network. Then it comes down to adoption by members of the public. So it comes down then to the state government and the operators actually out there advertising the scheme to get an increasing level of redemption going on. So as Mark said, I mean, in terms of we kicked off in November. November, December were loss-making. We made a small profit in December, sorry, in January. And we'll start to ramp up from there. And as Mark said, we'll be at full run rate come 1 July.
And is it fair to say that that's I guess you're talking about sort of a third of the overall New South Wales business. Does that include the PET and the HDPE, polypropylene processing facilities in that comment?
No. No. Completely separate.
So essentially, what happens then is that the JV collects those commodities, PET being one of them, and then sells those commodities on the open market. And one of the purchasers of those are the PET and the HDPE joint ventures.
I'm just wondering, are you able to give us some sense of what the contribution from those processing facilities will be, given that they are largely the only game in town in Victoria and you have spent AUD millions in developing those? We're just wondering, are you able to give us a sense of what the contribution will be?
Yeah. So I mean, unfortunately, they're not really the only game in town. There are other we certainly the biggest, the Albury plant and the Altona plant, are other biggest plants in Australia. But there is competition out there.
I think probably, again, if you look at the financials, we do break out what the financial performance is from those JVs. So Albury was functional for the full year, actually generated a small operating loss for the year, again, in terms of commissioning type of activity. And the Vic plant isn't fully operational just yet. It is in the midst of commissioning but will be very shortly.
Just finally, are you comfortable you're going to make a profit on those facilities? You said Albury wasn't running at a profit. Are you confident that these will?
Yeah. No. Absolutely. We are confident we'll make money out of those facilities.
Okay. Thanks.
Thank you. The next question comes from Russell Gill from JP Morgan. Please go ahead.
Hi, Russell.
To set up to operate in Queensland without it. Two things.
One, just in the expectation of reopening that facility and the earnings contribution and when that would flow through. And then secondly, just on cash flow relating to remediation, how much of that cash flow is still to come and the timing around that?
I'll hit the first part for you, and then I'll let Paul do the cash flow one. So where New Chum is today is obviously, it's closed. And there's a lot of work going on there to build the water treatment plant that we need to have in place to manage the groundwater while we do the construction activity of cell 3B. We won't start that construction until the dry season. Dry season nationally is sort of April-type timeframe. We will do six months of work, and then we will pause again for the wet season or summer 2024, 2025.
And then our plan would be to fill cell 3B during sort of that period, April to June 2025, with a small EBIT contribution. I think it's no different to what we said it was going to be in the past. And basically, that's where it'll go from. And that EBIT contribution is AUD 34 million something like that. It's a fairly small cell. But in terms of cash flow, Paul?
So in terms of rectification, you should assume a cell H2 will be probably in the region of about AUD 20 million-AUD 30 million in terms of rectification activity. As Mark said, we then have a short period of operating activity. And then we'll be going into sort of care and maintenance in the sense of we'll then pass it over to the remediation team.
In terms of the cash flow around the timing of that remediation spend, Russell, we're still working through it right now. So we're in the throes of working with our specialist in terms of cap design and cap timing. But the plan would be to have that capping completed over a 3-5-year type of window.
So just to clarify, Paul, we should expect AUD 20 million- AUD 30 million in second half 2024. And then, I guess, from a cash perspective, capex operating conditions from 2025 for the next 3-5 years is kind of high single-digit type number?
Again, probably best I'm not drawn on specific figures, Russell, because we haven't completed the design and sort of detailed engineering yet. But as soon as we get to that point, happy to share where we've got to.
Okay. Thanks, guys.
Thank you.
The next question comes from Cameron McDonald from E&P. Please go ahead.
Oh, good morning, guys. Can I just get a rundown on what's happening on landfills more broadly? And in particular, I've noticed some of the licensing approvals that people are pursuing. So it looks like Dardanup in WA as an example's had a license approval rejected. And historically, you've expected to see a diversion in Sydney down from the Suez assets. Where are you in that process? And obviously, the so-called crisis of landfill in Sydney, what's the approach around license approvals or height extensions there, please?
Yeah. Cool. Oh, where to start that? So I think maybe just on Dardanup. I'm not worried about Dardanup. Dardanup's just going through sort of normal sort of progressive approval type process. I wouldn't read too much into some of the stuff you read in the press.
It will sort itself out over time. On Sydney and Lucas Heights, I think if you look carefully at some of the figures, I think you'll see if you compare gross versus net revenue, you'll see you get an indicator of sort of how we're seeing volumes. So volumes are down, but EBIT is looking good. And that's because we're very focused on EBIT these days rather than EBITDA. And we're very focused on margin that we're earning at our landfills. If you think about just I mean, a lot of your questions were around Lucas Heights. So just remember, so Lucas Heights landfill located, obviously, in Sydney, one of two landfills that sort of service the Sydney basin. And the other one's the Veolia one at Woodlawn. Veolia's facility is connected by train. I think you all know that and has logistics constraints to get down to it.
And so what you've been asking us for a while is, will Veolia internalize that volume? And what we've been saying is they haven't, but we expect that they will over time and that we're planning for them to do that. And so what we've been doing is we've been grabbing their customers. And rather than Veolia send us volume from their customers, we've been getting their customers directly. And so what happens then is Veolia has less of a constraint going down to Woodlawn. And so Veolia reduces their volume. So what we're seeing is an increased sort of volume from their customers being offset by them reducing their volumes to us, which is perfectly fine. But again, remember, Lucas Heights is a highly contracted landfill. So about 90% of the volumes are contracted. And that's kind of how it works.
In terms of sort of approvals, so we are working on a couple of things around approvals. I mean, obviously, one thing we're working on is a Lucas Heights extension, which is really just extending it in the direction away from residents, which we think is the natural extension of that facility. We're working through the process of that both internally and externally. We'll keep you updated when there's something to say there. Of course, we're also exploring options for energy from waste to serve the Sydney region as well. What we think and what I'm on the record saying externally is what Sydney needs is multiple outlets. We think it needs Lucas Heights extended, but it also needs a non-Veolia energy from waste solution, one that has a different set of logistics to get to it. That's what we're working on.
Thank you.
The next question comes from Rob Coe from Morgan Stanley. Please go ahead.
Good morning. Can I just ask a little bit of a question on plastics and whether your result has any impact from the temporary lifting of the export bans? And then also, I guess, if that development maybe throw up any distressed opportunities in polymers or anything like that for you guys that you're happy to look at?
Yeah. No. Not really.
Yeah. So I mean, Rob, if you look at our commodities, the lion's share by a long, long way is OCC. So it's cardboard. A chunk of that stays in domestically. It's processed. And then there is some that is also taken up to the Asian mills as well. In terms of plastics, the most significant plastic, obviously, is PET.
That finds its way into the Albury Circular Plastics facility and very soon the Victorian one.
Okay. Cool. Maybe can I ask a follow-up question or a separate question, actually, on CDS ramp-up? Thanks for all the color you've given us. Just wondering, do you get the sense that as people discover the facilities, they then work out how to use them? So there might be a bit of usage growth from habituation? Or could there possibly have been a group of people like me, for example, who bottled up a huge amount just getting ready for the start?
Oh, there was definitely a surge at the beginning when people had been sleeping for six months under their house, piled it into the car, and took it down to the local location. I think so. There's definitely a ramp-up there.
I think there's also, as Paul mentioned, there's progressive discovery going on. It's still not well understood that this exists. I think there's a little bit of there's been certainly some frustration if you read the press closely around people rock up, and there's queue of five people. They just want to do it there and then. All they realize they have to download an app or something to make it and they didn't realize that. I think those things will also iron themselves out, and it will become easier to use. Then obviously, each of the proponents and I'll talk mainly to us. I mean, we'll obviously increase the number of sites and locations where people can do it, particularly in Western Melbourne and Western Victoria. People will become very accustomed to doing it and get into a pattern around that.
I think what we would say is we're really pleased with the startup. We're really pleased with the volumes. We think we have unfortunately, we can't actually share what our volumes are relative to everybody else. It's not something that they'd want us to say. What I will say is that we're delivering well over our fair share of the startup volumes. I think that's because of what we put on the ground and our experience doing that that we were able to translate from New South Wales.
Great. Thank you so much.
Thank you. The next question comes from Scott Ryall from Rimor Equity Research. Please go ahead.
Hi there. I might sneak in my two brief questions just in case the operator enforces your request, Mark. I'm wondering, the HVO 100, where you source that from? Who and what market, if that's all right?
Then the second question is just around 18 months ago, you did your capital raise. There was an overraise. You've been quite clear on the extra capital deployed in this half year. And you've said that your guidance excludes major M&A and major CapEx projects over AUD 50 million. So I guess my question there is it doesn't look to me like you've exhausted the capital from the overraise. So do you feel comfortable that you've got plenty of capital for, I guess, those sub-AUD 50 million organic growth opportunities that you've talked through today? That you've got plenty of capital there to put to work?
Yeah. I'll let Paul have a think about your second part. I'll hit the HVO 100 one. So the HVO 100 demonstration, that volume came from Neste, which is a Scandinavian company, the absolute leader in sort of renewable fuels.
It came in via Viva, our fuel partner. So it's sourced. So the source-based material for that HVO 100 was used cooking oil. So it is a used cooking oil blend that's been turned into HVO 100 and then returned to us. It wasn't physically our used cooking oil molecules, although it would be the same. And again, it's a demonstration. And very clearly, it's a demonstration, not a trial because you don't need to do a trial because, well, this is not there to learn anything apart from demonstrate the fact that this can be done and really feed that into the federal government's review and consultation paper on making HVO 100 a fuel that's legal for road use. And so we have a Section 13 exemption to use it on the road in our 2 trucks.
So I'll hand over to Paul now and I will not use the overraise words. I hope Paul's going to be quite firmer.
Scott, I think we said at the time what we could do was a chunk of that raise for GRL and the fact that we have visibility to other contracts that we could see coming our way and other CapEx opportunities we could see coming our way. And I guess what I can say now is that we're seeing those come through. So obviously, Santos, CDS, vic, two really good examples of where we're deploying that capital in good capital-returning investments. As I've said too, I think the challenge we have with capital is that we have too many good opportunities and not enough capital to meet it. So again, as we progress, you'll see more evidence of further growth CapEx coming through.
Thank you.
The next question comes from Reinhardt van der Walt from Bank of America. Please go ahead.
Good morning, guys. I just wanted to go back to the EBITDA bridge out to FY26, please, which is very helpful. Thank you. You called out that the stretch in the target is probably going to be in op excellence. Could you just give us a sense of what's in the AUD 50 million and what's not in the AUD 50 million if I look at those AUD 4 million that you've got on the op excellence slide?
Yes. So in terms of the EBIT guidance, as I say, if you look at all of those four examples that we've given in terms of op excellence, they would all be in there. So essentially, we have a program of something like 60 tools that we're deploying through the group.
We've simply given you an example of 4 of those that the branches are currently using. Obviously, we'll look to develop more. That's what's going to be taking us from the 450 to the 500.
Got it. Thanks.
Thank you. The next question comes from Nathan Lead from Morgans Financial. Please go ahead.
Hi, Mark and Paul. Thanks for your presentations. If I can take you to slide 29, I'd just appreciate just a bit of a steer in terms of where a couple of cash flow items are heading into second half 2024 and into 2025. So just that cash flow of underlying adjustments. Obviously, there was a pretty clean profit number this period, but a fairly chunky underlying on the cash. So just wondering where that's going.
And also just on the payments for rectification, remediation, and the other changes in the working capital there, if you can just sort of talk through where the trends are on those three items, please.
Yeah. Sure. So in terms of underlying adjustments, the primary drivers there are new term rectification and the Customer Connect project. Customer Connect, we basically said to you the total project cost would be about AUD 100 million. And the split between sort of SaaS and non-SaaS, so OpEx versus CapEx, would be roughly about 50/50. And that's spread over roughly about a three-year period, so 2024, 2025, then the tail dropping into 2026. In terms of new term rectification, total sort of cash outflow would be in the region of probably about AUD 50 million in the current year.
So we had about 13-15 in the first half, jumps to about 25-30 in the second half. That'll be largely complete. There'll be a little bit of that dropping into 2025, but not a huge amount. So if I move then down into rectification and remediation, the bottom line is we're looking at something like AUD 19 million. So this is ex-New Chum. We're looking at about somewhere between AUD 30 million and AUD 50 million for the next 2-3 years. And the key driver behind this is going to be in relation to the capping events at New Chum. So as I mentioned in my earlier response, we haven't yet landed the exact design of how that cap is going to look or even when we're going to start that capping process. But that probably is our main remediation event over the next sort of 3-5 years.
Again, as I say, when we get that capping design locked down, then obviously, we're happy to provide that guidance to the market. In terms of working capital, I mean, essentially, it's largely driven around growth. Again, you've got to recognize the fact, of course, you've got an element of levy in there as well. So you can't just look at net revenue. It has to be the gross revenue piece. But essentially, in terms of working capital, I mean, we're pretty working capital light as a business. DSO is well controlled. So DSO is largely around that sort of 44-45 days. We've not seen any significant shifts. We've not seen any really deterioration in terms of credit quality either. So again, that's been relatively stable. Does that sort of give you enough color there, Nathan?
Yeah. That's good. Thank you.
Very good.
All right.
Well, thanks, everyone. We're going to call it there because we know numbers are dropping off. But also, we've got another meeting at 1:00 P.M. with a few of you. So thank you for your time this morning. Thanks for those of you who just joined and listened in. Obviously, we'll look forward to chatting to you as we move around over the coming days and weeks. All right. Talk soon.