Thank you for standing by, welcome to the Cleanaway FY 2023 half year results. All participants are in 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 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. I would now like to hand the conference over to Mr. Mark Schubert, Managing Director and CEO. Please go ahead.
Thank you. Good morning, everybody. Thanks for joining the call this morning to cover our first half FY 2023 financial performance. Firstly, I would like to begin by acknowledging the traditional owners of the many lands on which we meet today, pay my respects to elders past, present, and emerging. Joining me again today on the call is Paul Binfield, our CFO, and Richie Farrell, our Head of Investor Relations. In terms of the agenda for the results presentation today, I will take you through our highlights for the period. Paul will provide you with further details on the group financials. I'll walk you through the performance of each of the operating segments. We'll follow this with a brief progress update on the execution of our Blueprint 2030 strategy. I'll finish the presentation with the outlook for the remainder of FY 2023.
I'm gonna take the disclaimer on slide two as read and turn to slide four. Let me start by saying that it is once again a privilege to report on behalf of the more than 7,000 strong Cleanaway team, our financial, operational, and strategic performance and progress for the first half of fiscal 2023. In terms of the highlights for the half, on an underlying basis, revenue, EBITDA and EBIT were all up strongly, Paul will take you through each of the drivers in a bit more details. Very briefly, each of the segments reported revenue growth, reflecting new assets, organic growth, and contractual price increases. A full period contribution from SRN and an initial four-month contribution from GRL were partially offset by a significant drop in OCC prices.
We also had the drag from New Chum being closed and some challenges in the health services business. Labor availability and efficiency were a further headwind. Pleasingly, we had EBIT growth across all segments versus the second half of FY 2022, which really highlights the momentum that we are taking into the second half of the year. We continue to recover cost increases through our contractual mechanisms with a rolling lag effect on margins until inflation tapers. At an impact level, our underlying performance was down 12.3% to AUD 66.9 million, and that was largely due to higher net financing costs. Net operating cash flow was 9% lower than the prior corresponding period, reflecting the higher underlying EBITDA offset by New Chum rectification works, higher waste disposal costs related to the hammer mill loss, higher interest paid and increased working capital.
The directors declared an AUD 0.0245 per share interim unfranked dividend in line with the prior corresponding period. Operationally, we are continuing to embed safety and the environment as foundations in the business. We worked hard and focused our efforts on serving our customers using available labor whilst building momentum in addressing job vacancies. Very pleasingly, our IWS team secured significant contracts with Santos and ExxonMobil, it continues to grow its pipeline of opportunities. Blueprint 2030 is progressing well. We continue to build our growth platforms, we're making steady progress on our operational excellence blueprints. Our landfill gas capture program is delivering both financial and environmental benefits, we continue to develop and roll out core processes. We had very strong support for the equity raise in August, I do thank our investors for their continued support.
We acquired the GRL organics facility. I am happy to report that the business is performing in line with expectations. We are also starting to deploy the capital across a number of projects, including the new IWS contracts and the Western Sydney MRF, with further projects and contracts in the pipeline. Moving to slide five, where I'd like to spend a moment talking about our people, our culture, and the environment. Over the last six months, we have embedded new HSE capability and our team has rapidly developed a HSE strategy and intensive improvement roadmap. Our lagging safety indicators are not where we want them to be. With our TRIFR at 31 December at 4.7, compared to 4.2, six months earlier.
Our improved reporting now provides a richer data set for deeper learning, which in turn enables a less reactive approach and an ability to tune our strategies and processes and improve our controls. We've also worked hard to mitigate the risks to HSE performance from increased vacancies and turnover. We have focused on bridging critical vacancies and prioritizing hiring into those roles. Our core process development is also progressing well with our first two pilots almost complete on management of change and managed contractors. These are two key safety-related core processes which will be rolled out Cleanaway-wide over the next six months or so. These processes are important because they provide a consistent approach to manage these risks, to assure the controls, deliver a platform for continuous improvement across Cleanaway.
With the proliferation of lithium-ion batteries and other non-compatible waste ending up in waste rooms, fires are a key and increasing risk across the waste and recycling industry. To keep our peoples-people, the environment and assets safe, we are progressively upgrading our facilities with both rapid detection and response equipment. In the interim, we have implemented controls, including the provision of portable fire monitors at 36 higher risk sites and trained our teams in their deployment. Like on HSE, we have installed new capability to ensure we evolve our culture and grow our capability to deliver Blueprint 2030. Our people strategy is designed to embed reinforcing mechanics that will support a Cleanaway culture where our 300 branches are at the center of our company. With capable leaders, with local ownership, care, connection, and a view well beyond today.
At the same time, we are focused on ensuring we build a strong talent pipeline with successes identified for all business critical roles to support the growth embedded within Blueprint 2030. Pleasingly, our female participation at all levels of the company has steadily improved over the last 18 months, ensuring that our teams and our leaders are representative of the communities we serve. I do look forward to continuing this trend and also extending this focus to ensure that every single person in Cleanaway can be themselves and bring their best each day. Now, before I pass over to Paul, I am saddened to report that earlier this month, we had a tragic incident at one of our Sydney landfills. As a team, we are struggling to reconcile safety as our foundation and this tragic incident.
We are supporting the relevant authorities with their investigation and supporting our people that have been affected and working every day to keep each other safe. Our thoughts with the family and friends of the deceased at this very difficult time. With that, I'll pass over to Paul.
Thank you, Mark. Good morning, everyone. Turning to slide six, we'll unpack the P&L from a group perspective. Unless otherwise specified, all the comparisons that are referred to are against the prior corresponding period. Net revenue of AUD 1.47 billion was 19.6% higher, with higher revenue across all segments, primarily driven by recent acquisitions, contractual price increases, and a general recovery in economic conditions, partially offset by the lower commodity-related revenue, primarily cardboard or OCC. Underlying EBITDA of AUD 322.2 million was 17.7% higher, reflecting the full contribution from SRN and initial contribution from GRL, together with a stronger contribution from most landfills.
This was partially offset by the lower OCC prices and the residual effects of the Queensland floods, higher labor costs, energy and fuel costs, and also the network inefficiencies in the health services business resulting from the loss of the hammer mill. Underlying EBIT of AUD 138.3 million was 6.5% higher, with a higher EBITDA being partially offset by increased amortization from the full period contribution of SRN. EBITDA and EBIT margin compressed by 40 and 120 basis points respectively, reflecting the impact of lower OCC prices and the previously flagged higher corporate costs and insurance. On the next two slides, we've bridged EBIT versus prior corresponding period and EBIT versus the immediate prior half, the second half FY 2022. Turning to slide seven.
On this slide, we're bridging the first half performance of 2022 with the first half of 2023. Here we can see the improved or initial contributions from most businesses being partially offset by the headwinds from the Queensland and health services business units and the lower commodity prices. Underlying EBIT increased by AUD 6.5 million or AUD 8.4 million to AUD 138.3 million. SRN delivered a full period contribution versus the two weeks, whilst GRL made an initial four-month contribution. OCC prices were significantly lower in this half. New Chum was operating in the first half of last year, so the direct impact of its closure, together with the lingering impacts to the Queensland network, affected the performance in the half.
The balance of the Solid Waste Services business benefited from high collections and landfill volumes and contractual price increases, which were partially eroded by the persistent inflation and labor availability and efficiency. Back in August, we covered in detail network inefficiencies in the health services business resulting from the hammer mill loss, and you can see that impact reflected in the bridge. The remaining business units, being liquids, hydro, and IWS, performed well in the context of ongoing inflationary pressures. As previously disclosed, we did add capability to stabilize the core and deliver our blueprints, and that has added to corporate costs. Moving to slide eight, where we're bridging from the second half of 2022 to the first half of 2023. This really is a key slide because here we can see that for the most part, the business is performing well and building really good momentum.
As inflation and labor availability normalize, we should start to see margins expand. Half- and- half, we can see an AUD 11.1 million or 8.7% EBIT improvement. The initial four-month contribution from GRL is in line with our expectations. We can also see here the significant impact of the lower cardboard prices in the first half of this year. Prices troughed in November, and we've seen a steady increase since then. Together with labor availability and inflationary pressures, the Queensland network has been challenged by the temporary closure of New Chum and operating with a makeshift fleet because of the floods of last year. The Solid Waste Services segment has benefited from contractual price increases, a growing customer base, and favorable landfill volumes across most sites.
The health services business unit still has some significant challenges, but we are starting to see it recover as COVID-related volumes have eased. Network inefficiencies will remain though, whilst we bed in the new autoclaves in this half. The LTS, hydro, and IWS businesses show continued progress as market conditions have improved. You can see that we enter the second half of this year with really good momentum. I'll now unpack the key performance headwinds to give you a deeper understanding of the issues and how we're addressing them. I'll start with the commodities on Slide nine. We aim to mitigate risk associated with commodity prices through rebates paid to customers that are tied to indices.
Most of our commodity volume comprises cardboard or OCC, with only approximately 100,000 tons or about a quarter of the total cardboard volume not linked to a rebate mechanism. For that volume, we typically sell it into the market at the prevailing market price. Due to the timing difference between when we sell commodities and when we set the rebate rate for the customer, typically with a quarterly lag, the margin can expand and contract in discrete periods if the index moves dramatically between quarters. However, through the cycle, the rebate mechanism does a good job of mitigating price risk. In the first half, high European energy prices contributed to more than a 40% decline in the Asian OCC index due to European volumes being diverted to Asia for processing. This gave rise to a significant price decline in the first half.
However, we expect some margin recovery in the second half from both higher pricing and also a lower rebate as well. Moving to Slide 10 on labor availability. During the period, we incurred more overtime and more expensive labor hire to supplement our general workforce, leading to higher costs and hence lower margins. Back in August, we told you about an elevated level of vacancies, and since then we've been making good progress filling these roles. Regrettably, the higher vacancy levels and the associated suboptimal operating environment also make employee retention more challenging. We've implemented several near-term and short-term strategies to address the challenges. These include having supervisors backfilling labor gaps, the commencement of the recruitment process outsourcing program, the continued success of the Women's Driver Academy, through which we've already recruited and trained 92 new women drivers.
We're also in the process of establishing a Runner to Driver Academy and establishing branch-level labor value drivers to track and improve daily performance, particularly as vacancy rates decline. More broadly, our culture and values reimagination is well underway. We see a substantial opportunity whereby improving employee retention will reduce vacancies, lower recruitment effort and costs, and improve engagements and productivity. By tackling this issue, we can deliver significant operational and financial improvements. Turning now to the Queensland Solids and the Health Services businesses. As you're aware, both business units endured ongoing challenges from FY 2022. However, we have performance restoration plans in place, and we're making good progress. We understood substantial rectification works at New Chum in preparation for the current wet season, and that cell will act as a stormwater retention basin during this time.
We will continue the necessary rectification works with the potential reopening subject to an ongoing process with the Queensland Department of Environment and Science. Separately, we are awaiting a decision in relation to the Hy-Rise approval. The fleet replacement program for the approximately 40 trucks that we lost this time last year is almost complete, and this should resolve some of the availability and repair and maintenance challenges associated with operating with a makeshift fleet. The loss of internalization resulting from the New Chum closure also meant operating a changed business model, and this together with the fleet challenges, has led to significant network inefficiency. There is focused work underway to stabilize the business unit with additional resources in place, and we've also made a significant leadership change as well, including the appointment of a new GM to set the business up for ongoing success.
In terms of health services, we've continued to experience network and labor efficiency challenges from the hammermill loss, and we are continuing to incur around a net AUD 3 million per month in incremental alternative treatment and disposal costs. As we previously flagged, we've taken these costs below the line and will continue to do so until the autoclaves come online in Q4 2023. With COVID volumes reducing, we can see a clearer pathway forward for the business unit and in particular, an ability to tackle the cost inefficiencies and return to better servicing our higher margin customers and ultimately returning the business to stronger profitability. Turning to cash flow, excluding the impact of cash flows associated with underlying adjustments, net operating cash flow would have been AUD 257.9 million, so up AUD 22.7 million from the prior period.
The cash conversion ratio of 92.4% remains strong with a decrease or reflection of the higher debtors associated with the significantly higher revenue in this half. Directors declared an interim dividend of AUD 0.0245 per share and Cleanaway's participation in the Commonwealth Government's Instant Asset Write-Off scheme will impact the company's ability to frank dividends in 2023 and 2024, as we've previously announced. Turning to capital expenditure. We continue to take a disciplined approach to making our investment decisions. The split between staying business and growth CapEx helps us to make a more focused allocation of capital.
Total growth CapEx includes several key initiatives which form part of the delivery of Blueprint 2030, and include capital related to the two Victorian plastic pelletizing facilities, our energy from waste developments in both Queensland and Victoria, delivering the CustomerConnect project, and construction of the Western Sydney Materials Recovery Facility. The step-up in cell development CapEx is consistent with our prior indications, as a confluence of factors has resulted in a requirement to develop further airspace at most of our landfills. We expect the FY 2023 D&A will be approximately AUD 370 million, including the GRL acquisition. The primary driver of the increase in D&A relates to the full year contribution from SRN, with the majority relating to the amortization of airspace valued as part of the acquisition accounting.
Moving now to slide 14, the key point here is that the balance sheet is strong and well-positioned for growth. At period end, the group had AUD 555 million of headroom under committed debt facilities, and our leverage ratio was 1.94x net debt to EBITDA, in part reflecting the equity raising in August. The group remains comfortably within its banking covenant limits, and our next refinancing is not due until July 2024. From a finance cost perspective, we are impacted by higher interest costs due to the floating rate component of our debt. First half total net finance costs increased AUD 22.5 million - AUD 45.4 million. With further interest rate rises expected, we now expect FY 2023 total net finance cost to be approximately AUD 95 million, which includes about AUD 28 million in non-cash finance costs.
The step-up in non-cash finance costs is due to unwinding of a high remediation provision at high interest rates. I'll now pass you back to Mark to take you through a review of the segments.
All right. Thanks, Paul. I'm now on slide 16, which is Solid Waste Services, where net revenue increased 24.4% or AUD 203.6 million - AUD 1.038 billion. Underlying EBITDA increased 28.1% or AUD 58.8 million - AUD 67.9 million. Underlying EBIT increased 16.4% or AUD 17.5 million - AUD 124.5 million. The key positive drivers, as previously discussed, were SRN, GRL, organic growth, and contractual price increases. This was partially offset by lower OCC prices, higher labor costs, and continued upward pressure on fuel prices, together with the challenges in the Queensland business that Paul just mentioned.
Labor costs were higher due to greater use of overtime and subcontractors, resulting from the tight labor market, absenteeism and elevated job vacancies. We commenced the groundworks on the Western Sydney MRF, with the facility expected to be operational towards the end of FY 2024. Moving now to slide 17. We completed the acquisition of GRL for AUD 167 million on 31 August 2022, and it was immediately accretive to earnings. GRL operates a facility that processes approximately 220,000 tons per year of Sydney's red bin putrescible waste. The asset is strategically located and is currently delivering a high circularity, low carbon solution that diverts more than 30% of the tons that it processes from landfill. GRL contributed AUD 6.8 million EBIT during the initial four-month period of ownership.
Importantly, during this period, the operational team at GRL undertook a FOGO or Food Organics and Garden Organics trial at the facility with further analysis underway to determine the optimal transition plan for the facility as it prepares to capture the emerging Sydney FOGO opportunity. Moving now to slide 18, where liquid waste and health services revenue increased 10.1% to AUD 306.1 million. Underlying EBITDA decreased 9.6% to AUD 48.3 million, underlying EBIT decreased AUD 15.6 million - AUD 26.6 million. Underlying EBITDA and EBIT margins decreased 340 and 260 basis points respectively to 15.8% and 8.7% compared to the prior corresponding period. Importantly, they improved by 10 and 80 basis points respectively compared with the immediate prior half.
The liquids and technical services business or LTS realized strong revenue growth with positive momentum across the business, particularly in Victoria and Queensland. Price increases were implemented to reflect increasing input costs and the return of cruise lines and hospitality has resulted in growth across both oily water and grease trap volumes. Higher costs due to labor availability and higher equipment repair and maintenance costs, together with less infrastructure-related project work, resulted in a slightly lower EBITDA. From an underlying EBITDA perspective, the hydrocarbons business performed broadly in line with the prior corresponding period. Strong revenue growth resulted from higher post-collection volumes and prices and growth in equipment servicing. This was offset by higher natural gas and diesel input costs, and higher freight and labor costs.
As expected, the health services business revenue was lower than the prior corresponding period. Due to lower COVID-related clinical waste from hotel quarantine, hospital and vaccination clinics as well as aged care centers. This was partially offset by higher revenue from biosecurity and cruise ships as the travel sector rebounded. Network inefficiencies resulting from the loss of the hammer mill processing facility in Victoria due to a fire in June 2022, together with higher gas, labor and diesel costs, resulted in significantly lower EBITDA. Pleasingly, we recently received draft EPA approval for our Victorian autoclaves, a replacement solution for the hammer mill, and they are expected to be operational by Q4 this FY. By the end of the period, there was a significant reduction in the volume of COVID-related waste.
This is important because it will reduce the impact on the network and allow for improved operational efficiency. Moving now to slide 19, which is industrial and waste services, where we saw increased revenue underlying EBITDA and underlying EBIT, which increased by 11.8, 7.6 and 17% respectively. Revenue was AUD 182.6 million, with strong performance across all regions, driven by increased activity with existing customers and new contract wins. EBITDA of AUD 25.4 million reflected strong contract management, increased activity at existing sites, new contracts and negotiated price increases to somewhat offset cost pressures. Persistent cost inflation compressed EBITDA margins. Compared with H1 FY 2022, underlying EBIT increased by AUD 1.8 million - AUD 12.4 million and underlying EBIT margin expanded 20 basis points to 6.7%, reflecting broadly steady depreciation and amortisation expenses.
The IWS segment continued to deliver strong customer resign and win rate. Our strategy to increase presence in the oil and gas sector is proving to be successful, with significant contracts with Santos and ExxonMobil secured during the period. We also extended a contract with BHP at Olympic Dam and successfully tendered for a Snowy 2.0 contract with a further opportunity to extend the contract in the future. Moving on to Blueprint 2030 progress. We are conscious here at Cleanaway that today is a busy reporting day. I am only going to be brief, make some brief comments on the next few slides because some of the content was covered in our strategy sessions last year, and I'll refer you back to those comments for further detail.
I'm sure you'll agree that we've made significant progress over the last 12 months on multiple strategic fronts. We've refreshed our strategy and developed detailed plans for each of our 14 blueprints. We've installed new capability to deliver the blueprints and embedded strategy execution operating reviews into our existing performance cadence. We have been laying the foundations and improving the business under each of our strategic pillars. First turning to sustainable customer solutions on slide 21. This is new. On this slide, we present our concept of circularity. We've taken away the well-known concept of waste hierarchy and reimagined it to become the Cleanaway circularity hierarchy. This recognizes that different recycling solutions can have different circularity and carbon outcomes. When looking at circularity in Cleanaway, we set ourselves three tasks.
First, we need to be able to give meaning to high circularity in the context of offering solutions to customers. Secondly, we needed to develop a simple approach that can be used across the business to assess our business customer solutions and investment opportunities against an expanded waste hierarchy which recognizes degrees of circularity. Finally, we need to reflect the desirability of supporting domestic, then international circular economies over down cycling. Next is strategic infrastructure growth, where we are developing platform businesses for the future. Our energy from waste development is progressing well. In Victoria, we have commenced the planning approval process. In this half, we plan to apply for both our planning permit and development license. In Queensland, we acquired a site in Bromelton at the end of 2022.
The site has a good corridor to the Brisbane and the Gold Coast markets while being in an area dedicated to industrial developments. From a construction demolition business perspective, we remain confident of being able to carve out a value proposition that is appealing to customers. From an organics perspective, we've been leveraging the GRL platform. It allows us to give partners and customers in other regions direct exposure to an operating asset, thereby creating momentum and instilling them with confidence in the technology. Landfill optimization is a key Blueprint with several initiatives underway, including landfill gas capture, which was a real success story over the period where we delivered 15% capture efficiency improvement across the network. Moving to slide 23, which really showcases what circularity means to us and how we've strategically partnered to deliver best in class and innovative solutions while effectively managing risk.
Through our joint venture with Pact Group, Asahi and Coca-Cola, we are delivering a second leading domestic bottle to bottle PET solution in Melbourne. In a separate joint venture with Pact Group on HDPE and polypropylene plastic, we will deliver a similar solution for those polymers. Together, these projects will mechanically recycle 76,000 tons of plastic each year. From a soft plastics perspective, our cross-value chain partnership with Qenos brings together the unique capabilities of Australia's only domestic manufacturer of polyethylene plastics and asks Australia's leading collections and recycling business. Cleanaway will look to partner with councils and commercial customers to collect the plastics and invest in new infrastructure to process these materials into a form that is suitable for advanced processing. Qenos and Cleanaway propose to jointly invest in the advanced recycling technology that will convert the plastic into feedstock and produce new plastic via pyrolysis.
To fully close the loop within Australia, Qenos would also invest in further upgrades to its existing plants to convert this recycled feedstock into a fully circular polyethylene that can then be used to remanufacture the very same packaging. This technology is already operating at commercial scale overseas. In our November deep dive on operational excellence, we told you that it was going to drive margin improvement and that we expected more than AUD 30 million incremental EBIT to come from it by FY 2025/2026. We are continuing to make good progress on these blueprints in pursuit of that goal, with recent progress milestones outlined in this slide. Now turning to the outlook. Consistent with prior expectations, FY 2023 underlying EBITDA, including GRL, is expected to be approximately AUD 670 million.
To get there, compared with the first half, the second half assumes similar post-collections volumes, a partial recovery in OCC margin, both through recovering the rebate lag and price recovery. We expect a general margin improvement through contractual price increases, that the Victorian autoclaves are successfully commissioned in Q4, and further improvement in labor availability and efficiency. We also assume no material change to prevailing market and economic conditions. We expect depreciation and amortization to be approximately AUD 370 million, which should result in EBIT of approximately AUD 300 million. In terms of near-term operational priorities, our focus will be on executing our HSE strategy and improvement roadmap, managing labor in terms of vacancies, retention and efficiency, and executing our performance restoration plans in Queensland and the health services business.
We will also be focused on recovering margin through contractual price increases that reflect the increasing costs that we've been absorbing. We continue to focus on near-term margin expansion opportunities available through landfill optimization and the data and analytics tools. That's it in terms of the formal presentation this morning. Thank you for your time today. Looking forward to catching up with many of you over the coming weeks. I'll now open up the lines for questions.
Thank you. If you wish to ask a question via the phone, you will need to press the star key followed by 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. Your first question comes from Russell Gill with JP Morgan.
Hi, guys. A couple of questions. I just wanted to delve a bit further into the margin that you're seeing in the Solid Waste Services business. If on slide eight, where you reference there, I guess, the second half result into this first half result, there's, I guess, some big moving parts around GRL that's pretty much all margin, commodities that's all margin, and then you're uplifting the landfill. Can you just talk through, I guess, what you're seeing outside of those large one-off movements on underlying margins in Solid Waste Services ? I guess the trajectory into the second half of the year into 2024, where some of those headwinds around diesel costs, labor inefficiencies alike start becoming, I guess, tailwinds for the business?
Yeah. I think, I think, Russell, you're on slide eight, which is the second bridge, if I'm not mistaken, which is the right one to look at. I think it's a really important slide in the pack, because it does show the momentum. I guess, you know, to answer your question, what we're saying is, as we flow through into the next, into the next half, we will see obviously the commodities start to come back. You'll start to see that recovery reverse, and that's because prices switch from downward trajectory and sort of a negative impact of the lag to a positive impact of the lag and a margin again being earned in commodities as well as a higher outright price on the bit that is, that doesn't have a rebate attached.
I think what we're also gonna see on labor is we're starting to see now a situation across Cleanaway where rather than sort of all locations being short labor, we've now got a switch to some locations are still short some roles, but we've got some sites that are actually not worried about vacancies anymore. Now it's about making the available labor efficient. That is all then about, you know, getting, you know, getting off the expensive labor hire, the subcontractors, and making that efficient. We should see that start to unwind. Of course, you remember, that's not. That expensive cost of labor, which could be sort of a couple of AUD million a month, is obviously not recovered through contractual mechanics because that just assumes a deemed level of overtime.
Obviously inflation, as inflation starts to taper, obviously that'll help because we won't have this continued lag effect, particularly on, you know, the muni contracts, and then, and the larger national ones, which tend to be, have the annual price increase. Really what I think the other two big ones are Queensland, and health. Obviously Queensland will see, you know, the improved network efficiency from having 40 more reliable trucks than 40 sort of a makeshift fleet. And sort of, you know, the new business model that doesn't have a disposal pathway, at New Chum starting to become the norm underpinned by that reliable fleet.
Really the other one is the health business where over Q4, we're expecting to start up those autoclaves, and then, you know, rapidly then with a much better position around overall ability to process clinical waste, versus the supply of clinical waste, that being much more, We'll have overcapacity to process that rather than what we've had structurally for literally almost the last two and a half years are under capacity. Then we'll be in a great position then to make the health business the efficient business and switch it from, you know, sort of our lowest margin business in Cleanaway back to the highest margin business. We should see that occur.
Just on that, just to clarify, Mark, if we're looking, I guess forward, you called out, I guess, favorable landfill volumes in the period. Is that just based on... Because, you know, GRL and commodities, I guess, is straight margin. Trying to get a feel for what's going on in the underlying business regarding recovery and volumes. In the landfill uplift that you saw in SRN, is that, I guess, just in line with the recovery in the market, or did you see some market share gains going in that, part of the dynamic as well?
I mean, what we saw in SRN was we've seen two things. We've seen volumes be maintained because that's really across all landfills, not just the SRN ones. We've had higher volumes. Obviously, you know, we've also, you know, done some changes of work around price and making sure that we're getting adequately returned for the value of that airspace on a competitive basis. Also the other thing we haven't seen is we haven't, you know, we've talked about this before, I know with you, that we haven't seen any sort of shift of volume away from SRN with Veolia internalizing that volume. That volume's been pretty sticky.
Okay. Just combined with that, a final question because it looks to me that the revenue number was incredibly strong. Previously, you've tried to steer the market away from focusing on EBITDA margins and just focus on, I guess, on gross EBIT on capital employed, which I fully appreciate. The work that the additional customers you've won and work you've won there, are you seeing that, I guess, lower EBITDA margin? Therefore, I guess, as we roll forward, you'll get the higher gross EBIT over the capital employed? Or has it done at similar, I guess, proxy EBITDA margins in a more normalized operating environment?
I got that, Paul.
Look, I think, Russell, if we look at the PC environment, I think the real shift in the business away from EBITDA margins to EBIT margins has really focused the teams in terms of just the long-term value of the airspace. We've seen them taking a very considered approach in terms of looking to react to market conditions and adjust price accordingly. Again, reflecting the fact that the airspace is obviously you know, finite and therefore very valuable. Because they're measured on EBIT, they're not out there just trying to get volumes in at any price, which is really encouraging. In terms of the collection space, as you say, revenue's been...
Revenue has been strong through the half, good momentum, and therefore again, the focus for the teams there is actually focusing on outright returns. Again, we're not out there chasing EBITDA margins. In terms of, I guess, you know, the outcomes, as Mark really went into some detail with you, our number one operational focus here is labor and really being focused on getting those vacancies down and then having got the labor in situ, then simply focusing on improving the efficiency and productivity at a branch level. It is very much a branch by branch situation. Does that help?
Yeah. Perfect. Just a final question before I let others have a go. Is just on that labor front, there's obviously a lot more news flow at the moment regarding strike activity across your workforce. Can you just give an update on, I guess, the multiple EBAs that you're running and I guess how they're running through? Obviously, you've got those vacancies out there, but what you're, I guess, seeing across inflation and whether you're through the bulk of those EBA negotiations.
I'd say we're not through the bulk of them, and I'd sort of remind what I've said in the past. We've got a significant number of EBAs, sort of circa 100-ish type EBAs. During the COVID period, a number of those EBAs were just kicked down the road. Now what we're doing is we're working on those. I think based on the number that we're working on, the sort of amount of industrialization that we're seeing is not entirely unusual. Obviously, you know, it's well within the employees' rights to take protective action, and that's what we're seeing a little bit of. Yeah, I wouldn't read into too much of that.
I guess what I would say is, you know, we are looking, you know, with those EBAs that we are renegotiating to pay competitively. In some cases what that involves is sort of, you know, a higher first year payment in order to catch up from that lag and then sort of, you know, a competitive series of increases over time.
Thanks, guys.
Cool. See ya.
Thank you, Russell.
Your next question comes from Peter Stein with Macquarie.
Hi, Mark. Thanks very much for the question. Just to follow up on the SRN volumes, Mark, how much longer do you realistically expect to get the extra volumes that you expected to be internalized?
I think the same answer as what I think we've said before, which is we don't, you know, we don't plan on having them forever, and so therefore, we've got lots of other plans as to how to keep, you know, Kemps Creek and those sites running, you know, at a, where we think is, you know, the right level and sort of getting the airspace value, equation worked. That said, we also think that it is not a simple exercise, to divert those volumes, down to Goulburn, which is what, you know, Veolia would need to do, just in terms of the sheer logistics to do that, the trains, the railway, all that sort of jazz. We think they're quite sticky just at the moment.
Yeah. Yeah. As a tangential question, what are you, what are you seeing in municipal solid waste and C&I around competitive intensity, as a more general question? I think the two are probably a bit related.
Yeah. Well, I think the truth would be, everybody is struggling to serve customers really well, I think would be the first comment I would make. Often when we think we've struggled to serve customers, we hear stories of what our competitors are struggling with. That said, we're not concerned. We're not seeing increased churn or anything like that. I think it has been a relatively quiet period for muni. There hasn't been a lot of muni contracts that have come up and be worked on. There's a few more in the sort of mix now. It's been relatively quiet, but there's no real change on the competitive dynamics side of things.
Yeah. Thanks, Mark. That's useful color. And then just on labor, just a little bit of an extension of the question, as much as you're seeing some of your branches getting on top of the situation, one gets the sense that any heavy vehicle environment is under an enormous amount of pressure. Do you not worry about an ongoing level of churn and therefore a complexity in holding on to staff for the foreseeable future?
Oh, absolutely we do. I think, you know, whilst not stating it, you can all do the maths on the slide on labor that Paul presented, which, you know, you can see what the underlying churn level is of people, where voluntary turnover for us is sitting at around the 20% level, which says, you know, one in five Cleanaway people leave each year. What I've been talking about with the team internally, which is not a secret, which is it's really hard to build a high-performance team if one in five of us leave the team each year.
What we've got to do as leaders is build, create a culture where people don't wanna leave and get that back to, or not back to, but down to sort of more like a 10% to 12-13% type level. To be honest, that would be new territory for Cleanaway. There's no dark year that I can see backwards in history where it's ever been like that. It's more been at these levels, and it only got down to sort of 15% during the COVID years. We've got quite a bit of work to do on that. We are, Pete, you know, I gave you some clues in what I said. You know, we are very much heading towards an inverted organization where it is the centerpiece of the organization is the 300 branches.
We are currently just starting training those 300 branch managers to lead in safety and obviously to build their leadership skills. Our job is gonna be to equip them with the skills, but also to create a branch-led culture where people wanna stay because they're proud of the work they do and the support that those branches give the local community. That's really what we're trying to create. That's gonna take a period of time.
In relation to your expectation that this challenge recedes and margins are improved, are you taking fairly conservative, base assumptions, on churn into the second half and then perhaps into FY 2024, around these things? Or, you know, are you sort of thinking about it as best case scenarios?
No, no. We're not, we're not pretending we're gonna fix that one. That would be dreaming. We kind of assume churn will sit where it is and, we've increased our ability to hire. We've talked about before, we've got a group of hired people embedded in the organization that look like Cleanaway recruiting, which sort of really increases our ability to hire, and that's what's dragging the numbers down, the vacancies. From there, you know, what we're really focused on is with those vacancies coming down, making sure that Paul said the words value drivers at a branch level. That really means knowing how you manage labor on a day and how you really know that you've optimized that labor profile against the work that you need to do.
That's what, you know, we are sort of installing Cleanaway wide. It's not surprising we need to install it because, you know, we've lost a lot of leaders who knew how to do that, in the past, and now we're just re-re-putting that in. Putting in a very visual and transparent way and rolling it up and down the org so we can all see it, and support those leaders in what they need to do each day to do a good job on labor efficiency.
Yeah. Thanks, Mike. Appreciate that extra color.
No worries.
I'll leave it there.
Thank you, mate.
Your next question comes from Cameron McDonald with E&P.
Hi, guys. Just going back to New Chum. What contribution or range do you think that contributes in FY 2024 with the, you know, with or without the height extension, please?
Okay. Like Paul said, you know, what we're thinking happens is that there's 2 parts to this. One, there's the cell 3B, which if you look closely at that picture that's in the slide, in the deck on slide 11, that is cell 3B. That's the stormwater retention basin. That's where we had the smell issues last year after the flood. That's it in stormwater mode. What we're talking to the Department of Environment and Science is, about is raising the level of the floor of that cell to be above the groundwater level. We've gotta do that at some point, as, you know, regardless. That's a very small, that's a very small waste cell when we do that.
That'll it's like, what is it, 50,000 cubes of air space in there?
That, that's AUD 200.
Sorry, 200,000 cubes of air space. Not a lot. We need to fill it quite rapidly when we if we do that. Again, we need DES's permission to actually do that, and that's the one where we're talking about what the conditions will be around the license to do that. That'll happen or it won't. Again, it's not very material. That will happen in sort of between, you know, in that dry season period between, I don't know, April and October. The other one is the Hy-Rise , and we're still waiting for the Hy-Rise decision.
Like I think I've said to you before, you know, you get a Hy-Rise decision, and either way, there may be an appeal, and so in which case, therefore, it ends up back in the same hiatus that it has been for a while. We're not assuming a lot in terms of New Chum going into FY 2024 just because of the, you know, the fact that one is dependent on what we agree with DES, and it's small volume anyway. The other one is not really within our control with the Hy-Rise application. Our focus in Queensland is making that business efficient without New Chum and really optimizing that business with a different network model, more analogous to what we had in Sydney before we bought the SRN assets.
Okay. Thank you. Can we get an update on the Victorian CDS program to the best that you can, and also an update on where you're sitting with the proposed energy from waste projects, please?
Sure. We're not gonna say much on CDS Vic because we can't. I guess that says something in any case. You know, we're in the hands of what the government decides to say and do in that space. Apologies, can't say too much there. In terms of energy from waste, if I point you back to the energy from waste slides, which is, you know, when I find it, slide 22. We've obviously got the site out at Wollert, which is in sort of northern Melbourne, on the way out as you drive from Melbourne to Sydney. What needs to happen there is there's three approvals that are required before you can commence construction of an energy from waste facility. We're gonna submit two of three of those.
The third one, which is all about the cap allocation. I think I've explained before, Victorian Government's got a really nice system, we think, around sort of like a. Although they're gonna allow 1 million tons of energy from waste to be developed, you apply for an allocation under the cap, which means it's a meritorious scheme. We'll work through that process. I think that's gonna take the next 12 months to work through that process because the department that's administering is relatively new. In the meantime, we are gonna put in our planning permit, and our development license. The planning permit is the one the minister issues, and the development license is the one that EPA puts in.
Again, the takeaway from all this is we want to get ourselves in a position to take FID on energy from waste in Victoria in calendar 25. Is that right? Calendar? No, sorry, calendar 24. That's what we're working towards. Queensland, we bought a site out at Bromelton. Really happy with that site. It's a great location there, sort of West of the Goldie, but South of Brisbane. It's really nice. Picks up those two, sort of high demographic areas. It's zoned for. It's sort of in this special heavy industrial zone that the Queensland Government has put together for exactly industries like this. That's important both from sort of a planning perspective and a development perspective, but also from a precinct perspective of what will sit around it.
Again, lots of progress going on there. Again, I would say that, you know, Queensland is logically sort of six to 12 months behind Victoria just based on, now we have to do the location-specific work on that site.
Okay, great. Thank you.
Your next question comes from Owen Birrell with RBC.
Hey, good morning, guys. Look, I just wanted to ask a question around the GRL acquisition. Just wondering whether, you know, the early stages of your integration, whether there's been anything that's just surprised you to the upside or the downside. Just looking forward, have you determined how far downstream you expect to take that FOGO processing opportunity? Look, just a final question also, just does this present any opportunities beyond New South Wales that you've seen so far?
No, no change in sort of, you know, in terms of what we expected, but we had high expectations, let me say, and I think they've delivered on those. In fact, you know, the fact that within months they're doing a trial themselves and, you know, really not asking permission to do the trial, just getting on with it is awesome. It just shows the sort of autonomy of that team and the business mindset. The second part was around what the, you know, we're obviously using that GRL, the technology. We're learning a lot from that. We do really like that technology and the fact that it's sort of, indoors FOGO processing as opposed to open window. We think that that, over time, will definitely become the go-to style of technology.
Obviously, therefore, there's lots of opportunities to leverage that team and their deep experience, 'cause that team has worked on that site for between sort of 15 and 20 years and lived with it, started it up, ironed it out and optimized it. So great opportunity to leverage that, both the technology, but also you can show customers what it could look like in the future. Was there a third part that I missed then?
The opportunity.
How far downstream will we go? I think that's a good question in the sense that you need to secure an offtake market for organics. We're very thoughtful about how far we would go. I don't think you'll see Cleanaway selling, you know, compost at Bunnings. That's not gonna happen. We will be looking to create a high value product for which there are multiple customers and multiple offtakes.
Thank you for that. Can I just ask a second question? You mentioned around the voluntary turnover of, you know, one in five . What are the main sort of, I guess, cultural things that you're gonna change within the business or you're looking to change to try and, I guess, cement the desire to stay with Cleanaway?
Yeah. Again, I'll just say it's not a new thing, this. I guess, you know, what we are doing, which is very different to the past, is this whole idea of branch led. Rather than being top down, it's more bottom up. You know, what we see in some locations where we've got a very strong branch led culture, with capable leaders, a real sense of local ownership, and, you know, a real investment in the local site and the local community and a real pride in the work that we do, we see very low turnover. That's really what we need to create.
I think the other thing that's going on, just as a little bit of insight, is that, we are seeing, you know, when we say one in five leaves each year, it's really centered around that first year experience as well. What we're finding is, because we've got this elevated number of vacancies, therefore the lived experience of a new person who joins Cleanaway in the first year is perhaps not as good as it could be because, you know, there's vacancies and everybody's, you know, scrambling to get the work done. Therefore, we see elevated, you know, sort of 2x that level of churn in the first year. As the vacancies come down, we'll see that improve as well as the cultural work that will take a little bit of time to install.
That's great. Thank you very much.
No worries.
Your next question comes from Jakob Cakarnis with Jarden.
Morning, Mark. Morning, Paul. Can I just ask on the net finance costs, you've guided to AUD 95 million for FY 2023. Can you just talk about what's happening there? Maybe some of the fixed versus floating, whether or not you're taking some of the hedging through the net interest line, just given where the net debt position has ended up in the half.
Yeah, sure. I guess it's important to recognize in the AUD 95 million guidance that we've given you, about AUD 28 million, so about a third of that is non-cash. That's simply the essentially the unwind of the discounts on the remediation provisions. That's non-cash. In terms of the cash related finance expense, if you look at the underlying net debt, approximately it varies, but between roughly about a quarter and a third of our debt book is fixed. That's through leases and also a fixed rate loan with CEFC. The balance is floating. We certainly have a bit of refinancing activity that we need to undertake in the next 12 months.
Clearly as we work through that fixed float, decision will absolutely be to the fore, and it'll give us a chance to change those ratios if we think that's the right thing to do at that time.
Thanks for that, Paul. Just one final one. Just Mark, just within the Solid Waste Services business, can you just remind us again of the contractual clauses of what you have passed through on? I know May last year, you said you were introducing the SME fuel surcharge. Just wondering how we've ended up in a position where EBITDA margins have come down, just noting obviously the pressure that you have on labor, and maybe you can talk through the pricing dynamics and how the reset or the indexation will flow through the second half, please.
Sure. I think, you know, what we said last time, there's that famous slide, was through our. You know, think about it a couple of different ways. If you take our muni contracts and our large national accounts. Those sorts of customers, they generally get reset either quarterly or annually. It's the larger contracts, the national accounts that tend to be annual, and it's the mini ones that tend to be more like quarterly. They reset with three indices, where you end up having fuel against the terminal gate price in that location, labor against the wage index in that location, and then CPI for everything else that covers sort of other costs. That's how it happens.
It's contractual in the sense it's written into the contract and it just kind of occurs each quarter or half or year. Of course, you can imagine where it hurts is the ones where that lag is a year and the timing of that is sort of like it hasn't reset yet, and it's picking up some index from sort of a year ago. We would expect, you know, that to wash through. I think what I'd say just, you know, your question was a bit around Solid Waste Services . I think the key thing just have in your mind is, you know, most of the Solid Waste Services degradation is OCC, and that is temporary. You know, we can see it already in sort of January and into February.
We can see that reset of that rebate because, for example, when Paul and I look at January results, it's picking up that next quarter, because of the quarterly lag. Of course, finally, again, it's a rising price environment where the rebate is lower than the actual price and so therefore there's a positive margin, which is what we didn't experience in the previous, in the pre-previous two quarters.
Thanks, guys.
Sure.
Your next question comes from Lee Power with UBS.
Hi, Mark. Hi, Paul. Thanks for that. This, I mean, there's obviously a few moving parts as we look into the second half and the assumptions for full year guidance. Can you just give us an idea of where those five things that you've outlined are tracking versus your expectation in the, in the third quarter, given we're kind of two months in now, and what that means they need to do in the fourth quarter? Thanks.
Yeah, sure. We'll go back to, I think you're saying Paul walked through the guidance slide a little bit. The 5 things that the second half assumes. I assume there's six things there, or is it the five down the bottom? Depends what you want.
Whichever you think are the biggest ones that we should be thinking of.
Well, I think in terms of the first half versus second half, it's at the top. Similar post-collection volumes, I mean, that's just really talking about the fact that our landfills, in particular, need to sort of perform in a similar way to the first half. Of course, you know, I think that's not hard to imagine. We put it in there because they are big drivers of earnings and if things start to swing around, like we saw at New Chum, you know, even though it was on a decline back in this time last year, so that does have an impact. Partial recovery in OCC margin, well, we can already see it.
You guys can see, you can track the RISI index, so you can pretty much see what's going on. We don't expect the full recovery, but we do expect a partial one. You can see some of the forward numbers as well. Margin improvement through contractual price increases. Well, you know, that should be well within our control, right? Because, we know what we've got contracts with contractual price pass-through, and we've got plans as to what we're gonna do with the ones where we can be more dynamic. Again, we're not gonna talk about sort of dynamic pricing here, but we've got plans. Labor availability and efficiency, like I said, you can see, I think we've given you the clue that, you know, it's dropping.
At the moment, it seems to be dropping about 20 or 30 vacancies a month. That's the sort of inroads that we're making, which is awesome. We're starting to see that switch now to managing labor efficiency rather than just needing to serve customers with the available labor. When I answered Pete's question, I was really talking about how we're doing that. The autoclave, the good news there is we've got the draft approval, we've been really waiting for that for, you know, a number of weeks. That's really good. It's not like we haven't been preparing. The autoclaves have actually been sort of installed without steam somewhere else and now we're just picking them up and moving them into that location.
The no material changes, just really a coverall. I think you should feel like, you know, we've got good confidence and that's why therefore we make the approximately AUD 670 statement.
Okay. Just on the labor availability piece, I mean, in terms of the roles that you filled in the, in the first half, and you're talking to that 20 or 30 a month, like, what percent of them are labor hire versus a traditional employee?
This is actual employees. It won't be, it won't be the labor hire numbers so much. They, they would be predominantly frontline teams. They'll be very much drivers and operators and frontline supervisors that we're focused on. Our, you know, our real focus is less about filling sort of professional vacancies and more about filling our branch teams as a priority.
Okay. Thanks. Then, maybe a final one. Just on your operational excellence slide and digitization, like, how important is it that you get labor efficiency back to a kind of a normalized level to hit those targets? Or do you think the digitization, fleet optimization, all those things are kind of independent of getting efficiency back on to normal?
I think at this point they're independent. really some of this is about giving people the tools so we can use the available labor more efficiency, more efficiently, such as, you know, the digitization of the workshops to make sure our mechanics are spending their time on the tools, not on filling out pieces of paper. I think, you know, it does... To answer your question, it doesn't require the vacancies to be filled to get the benefit.
Okay. Thank you.
Thank you. I think, ...
All right. We're just gonna have to wrap it up there now. I'm afraid we've got another call coming up. We speak to most of you at 2:00 P.M. later on today. Sorry about that, guys.
That does conclude our conference for today. Thank you for participating. You may now disconnect.