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Edited Transcript of BIFF.L earnings conference call or presentation 13-Nov-19 9:30am GMT

Half Year 2020 Biffa PLC Earnings Call

HIGH WYCOMBE Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Biffa PLC earnings conference call or presentation Wednesday, November 13, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Robert Mason Topham

Biffa plc - CEO & Executive Director

* Richard Neil Pike

Biffa plc - CFO & Director

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Conference Call Participants

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* Alexander Mees

JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research

* Andrew Shepherd-Barron

Peel Hunt LLP, Research Division - Analyst

* James Beard

Numis Securities Limited, Research Division - Analyst

* Robert John Plant

Panmure Gordon (UK) Limited, Research Division - Analyst

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Presentation

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [1]

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Okay, we're good. Okay, good morning, everybody. Thank you for joining us today for this, the announcement of Biffa's results for the half year, it's the end of September 2019. We'll follow the usual format. I'll give quick introduction from me before Richard, our CFO, takes us through the detail of the results before I come back up and give an update on our strategy and the execution of it, before we hand over to questions and answers at the end.

So we're pleased with the first half performance of the business. We've had a good first half delivering to our own targets. And our expectations for the full year are unchanged. In particular, our Collections business has continued in the delivery of its strategy around organic and inorganic growth. In our Resources & Energy business, we've been pleased with the progress we've made in our recycling business. And indeed, with the development of our PET plant, which is a big investment for us. We're also making good progress with our energy from waste development efforts across the business. So with that in mind, and given the fact that our leverage and our financial headroom remains very strong, we think we remain really well-positioned to exploit the numerous opportunities that are available to the group.

There are a few numbers along the bottom there. I won't go into the detail because Richard will be shortly taking us through them. But suffice it to say, a good suite of numbers across the board, be it the accelerated top line growth, strong growth in EPS, progression in our dividend and stable leverage. So a really good set of numbers, and we remain confident as we look forward to the rest of the year. So I'll now hand over to Richard to take us through the results.

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Richard Neil Pike, Biffa plc - CFO & Director [2]

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Okay. Thanks, Michael. So I mean as Michael said, we're really pleased, I think. And against sort of a pretty uncertain political backdrop, and as we read in the papers every day, undoubtedly a weakening economic environment, I think our business portfolio is standing up really well. So as you can see from the numbers, basically, we've got net revenue growth of 8.7%, and that was versus a 4% growth last year. If you read that down to underlying profit, our actual underlying profit is up 12%. And if you strip out the IFRS 16 benefit there, that's still a 9.1% bottom line improvement. So taking those together, really pleased with the business performance.

Then if you come down to profit after tax and EPS, we're actually up 19%. And if you -- again, if you stripped out the IFRS 16 impact, that would actually be 22%. Why is that? Well, if you remember, we refinanced the business at the end of March last year, and therefore, the benefits of the refinancing are feeding through to the bottom line.

So all of that putting us in good shape, gives us the confidence around continuing to pay a progressive dividend, and we're proposing an interim dividend of 7.5%.

Just coming on to the business performance. Again, I'm going to be a bit boring and say very similar things to what I've said the last 2 updates around Collections. So I&C, really strong again, just under 10% top line growth. And what's underpinning that? Well, basically, a significant part of that is to do with the acquisitions we acquired over the last 12 months. But in addition to that, we continue to actually drive forward in terms of key contract wins and having a really strong focus around customer retention. Michael will come back to that later in our slides in terms of both expanding on inorganic and organic growth.

In terms of Municipal, as we've previously flagged, that business is stable and continues to deliver stable performance. And in terms of Specialist Services, good progress there. But what I would point out is that top line growth is somewhat illusory. So the high PRN prices in the plastics market feeds through into our Biffpack business, which is our compliance business, and that's a pass-through business. So although the top line is up, that basically doesn't really impact our bottom line performance.

In terms of outlook for Collections, what I would say is you should expect more of the same. So pretty much across each of those categories, we're expecting similar performance into the second half.

In terms of Resources & Energy, obviously we have a number of moving parts, but the results can actually be explained relatively simply in that we've got really strong performance in our recycling business. And actually, most of the other areas are pretty stable. So to put a bit more color on that, behind our recycling, as you know, basically that business splits pretty much 50-50 between our MRF operations, our material recycling facilities, and our polymers business, our plastics recycling business. In terms of the MRFs, basically, performance improved because as we continue our strategy to derisk that business by increasing gate fees and reducing our quality exposure, basically that's feeding through. But also, if you remember last year, the first half of last year was still being impacted by the changes in China, so we had depressed commodity prices. And although prices haven't recovered to historic norms, you're getting a benefit of an increased recycler prices in those numbers, particularly in plastic bottle prices, which are particularly strong.

So coming on to the plastics recycling business, really strong across the board. So you've got a strong commercial environment. And to put that in context, recycled plastic prices have been trading at a premium to virgin prices for pretty much all of the last 6 months now. Over and above that, as I mentioned before, you've got strong PRN prices, and the business is also operating really strongly.

Coming on to organics. Again, we've got a number of moving parts in there. Basically, this business has been pretty stable, but has been impacted by some operational performance in 2 areas during the year. So in Poplars, we've actually planned to take the plant down for a couple of months. That means we're actually processing less food waste during the period and generating less energy. So that's in part of -- related to the performance. And then in our West Sussex business, we had a couple of mechanical breakdowns, which again, causes operational issues. But again, it causes us to produce less energy. So that's the factor that fed through into the top line and bottom line being down in that area. But they're one-off items. And as we've come through the half year, those businesses are now back and stabilized. All other areas of that portfolio are pretty much in line.

Inert, which is dominated by our landfill business, you can see very modest decline in our landfill volumes being offset by improved mix in terms of our prices. And in landfill gas, as you all know, we have year-on-year structural decline in the landfill gas yields. But again, that's being offset by the hedged prices that we put in place last year.

So if we come back and sort of say, "Well, what does that mean for the outlook in terms of the second half?" Again, actually, it's sort of pretty much the same. So in terms of recycling, we expect that strong performance to continue into the second half. The organics business, I mentioned, is now back on track. Landfill is pretty stable. In fact actually, we expect our volumes to slightly improve in the second half as a result of increased rail hub transference of volumes into the landfill sites. And in landfill gas, again, we see a pretty stable performance. But I should flag that, if you remember last year, the recycle -- so the ROC true-up mechanism that happens in October each year basically gave us a windfall benefit, which we flagged at the time we didn't expect to be repeating, and we don't expect it to repeat in this year.

Coming on to cash flow. Again, I'm pleased to say we've had some good performance here. Probably the first thing to say, because it affects a number of the items, is IFRS 16 basically impacts a number of these lines. So GBP 8.7 million of the EBITDA improvement is IFRS 16, and that's offset by increases in finance lease payments and interest costs. So it's noncash, basically, but it does affect a number of those reported items.

So if I focus more on the real cash drivers, pleased with our working capital management. Basically, you can see year-on-year progress. And actually, there's been some really strong performance in terms of getting our overdue debtors down across the last 12 months, and we've got an ongoing focus in that area. Our CapEx is up, but as you know, we're actually investing in the Seaham PET facility. So actually, that's driving the increase in CapEx. In all other areas, CapEx has been well managed.

The underlying finance lease payments are pretty flat. Interest, when you strip out IFRS 16, is actually GBP 1.3 million down. And as I touched on before, that's a result of the refinancing last year, and I'll come back to that on the next slide. And then in terms of pension payments, I just wanted to highlight that, that's a stable position. I think I mentioned that at the year-end, basically, we agreed the valuation for the next 3 years on the pensions at the end of the year. And that's basically meant a mean at around about GBP 4 million per year continuing to go into the pension over the next few years.

I'll just touch on purchase of own shares, because that's -- it's sort of a bit of a one-off. Because we're sort of 3 years post floatation, we've got a number of LTIP and Save As You Earn and other share-based bonus payments arising. We have funded those during this period. So that isn't indicative of an ongoing run rate of payments to purchase shares.

And the only other thing I wanted to mention on here, which is not a cash item in here, but just for going forward is that we continue to have a significant tax shelter. We've still got GBP 43 million of losses and tax writing down allowances, which will continue to keep our cash tax rate lower over the next few years.

So finally, on the detail, just to wrap up on the financing side of things. I've mentioned the refi, and you can see that in terms of GBP 1.1 million of P&L reduction in first half on first half. If you look at the finance leases, when you strip out IFRS 16 again, again, you can see a reduction. Because as you know, basically, we enter into finance, this is generally on about a 7-year term. So as old finance leases fall away at higher rates, and we bring on new finance leases to fund new vehicles, we're getting a mix benefit over time. The other areas are pretty flat. Things I just wanted to flag was we are actually currently now in the process of renegotiating the cost of our bonding lines and you'll see basically significant improvement there, feeding into the second half and next year.

And we've also basically hedged LIBOR in respect of GBP 200 million of our core borrowings. So we -- obviously, we can't hedge our margin, but in respect of the underlying interest rate, we've locked that in at 0.63% for the remainder of our RCF facility.

And looking at leverage, basically, you can see there that we've got just under GBP 140 million of increased leverage as a result of the IFRS 16 changes. If you strip that out, so you can look at things on a like-for-like basis, which is actually how we're measured under our banking facilities, we're actually stable at 2x net debt-to-EBITDA. And we've got significant available liquidity at the half year, with over GBP 100 million of undrawn facilities.

So summing up for me, basically, more of the same in the second half, continuing to see strong I&C performance, both in top line and margin improvement. Municipal will continue to remain stable. Now to the whole R&E portfolio, recycling will continue to be the standout area in terms of actually driving underlying performance, and that will offset the non-repeating ROC benefits in the second half. So overall, as Michael said, we're very confident about delivering against our expectations. And we'll do all of that and continue to invest in our strategic goals, whilst keeping our leverage in the 2 to 2.5x range we've previously mentioned. Thank you.

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [3]

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Thanks very much, Richard. Okay. So a good set of numbers, I'm sure you'll agree, across the board. If we now just turn our attention to our strategy and the delivery of that. This -- for those of you who attended our Capital Markets Day event on the 17th of September, you may remember this slide. This is a summary of, I guess, the vision we have for how we're going to develop this business over the coming years. And we're very confident and very excited about the prospects ahead of us. And we think that we can significantly strengthen and grow our business over the coming few years. Our strategic framework is on the left and has been unchanged since we listed the business, and it's centered around growing the market presence of the group, developing services and infrastructure to capture as much benefit from the waste that we control and optimizing the business through continuous investment in systems and processes. And we believe that this strategy that we've laid out, over the next few years, will establish us as a clear market leader in collections, delivering organic growth above the market, supported by over GBP 100 million invested in acquisitions. And those 2 things together will drive unparalleled -- the unparalleled scale will drive sector-leading margins. So a very clear vision for our Collections business and very confident in our ability to deliver it.

Alongside that, we will be building, and are building, a larger, more diversified and derisked Resources & Energy business. At the moment, we're very much focused around scaling up our polymer business, which we're going to grow over the coming years from roughly a GBP 40 million turnover business today to somewhere in the region of GBP 120 million to GBP 150 million in revenue. And we'll have the growing earnings from our energy from waste investments coming on stream once those facilities are built.

All of this strategy will give us an unrivaled leadership in sustainability. And I'll come to that later, but -- and I think it will be further supported in the coming years by the positive signs that have been made from proposed government legislation. So that's the vision for the business. You -- I guess you'd be surprised if it was changed from our Capital Markets Day less than 2 months ago, but I thought it'd be worth just reminding you of that -- of that position and our vision for us. Before we get into the execution of it, I thought it worth just spending a bit of time on the market dynamics that we see across the business that we have, and in particular, just across the 7 subsegments of our business.

Looking at Collections first and our I&C business, nothing's really changed, as Richard said, but I mean that in a very positive way. The I&C business doesn't -- isn't characterized by particularly strong growth in waste volumes, there's limited growth in volumes. But the complexity around the service offer and the expectations of our customers, we believe, plays so well to scale. And we see that in our ability to drive organic growth and from the margins we're able to enjoy. That for us is only going in one direction, and we think that, that is going to position us well as a leading operator in that space over the coming years. And it supports the compelling consolidation opportunity which we have. And those of you who have followed us will know that for some years now, it's been a big part of our strategy, and a big part of our allocation of discretionary capital is into synergistic acquisitions in the I&C business. We see no reason for that to change in the coming years.

Our Specialty Services element of Collections, which I appreciate it's something we've not reported on in the past, but I think it's worth having it separately identified and understood by the market because it's really the more bespoke niche services which we can provide predominantly into I&C customers, but outside of the more, I guess routine services that the I&C business provides. And we see, again, great growth opportunities there as our customers demand more and as legislation requires more of them. So again, we see good growth trajectory there.

Our Municipal business. We've said for the last couple of years now, this is not an easy business. We're not going to pretend it's anything other than that. But I would say it is -- for us, it is definitely stable. We are good at this business. We make money, we make cash flow from it, and it has stabilized. It had a difficult year, probably a very difficult couple of years in truth as its profits came down, but we're pleased with how our business has stabilized, how the team has responded to that. And as we look further out, the U.K.'s government strategy around resources and waste should be quite supportive of this business in the medium term as the requirement for local authorities to provide more services to households comes through. So we remain optimistic of its prospects in the long term. But to be clear, I think in the medium term, sort of shorter term, it's -- these prospects are more stable.

Turning to Resources & Energy. So in recycling, we believe we're very, very well positioned in our polymers business, where we're seeing very strong demand for the closed-loop, food-grade recycled plastic we make. To be clear, this is -- this is as good as you get. This is taking a particular type of packaging and making it back into a recycled raw material where it can be made back into that same packaging, whether that be plastic milk bottles, plastics drinks bottles, and there are other things, other plastic materials we're considering as well. The world has caught up, in a sense, and policy sentiment and societal sentiment is with us now on this. And I think it's now our time to really capture on the experience and -- that we've developed over the last decade, a really good opportunity there.

More broadly across recycling, the paper market remains pretty subdued. Prices remain low. They've actually drifted off a little bit in the last few weeks. For us, our focus in -- for the paper we control through our MRFs is twofold. Firstly, to make the best quality material we can; and secondly, to prioritize U.K. and European outlets for that material. But let's not underestimate the challenge there, though. The U.K. exports about 4 million tonnes of waste paper and cardboard. And I understand Europe as a whole exports about 8 million tonnes. So let's not pretend that overnight, we can just suddenly all recycle this material in the U.K. That will require a longer-term infrastructure development in pulping and packaging manufacturing in the U.K. and Europe, if that's to happen.

So quality is key. We remain absolutely focused on that, continuing to invest in it. But I should say that, I mean for us, we've been on a journey now for a while around derisking this business model. So we've got very, very clear rules of engagement with local authorities on the ways in which we'll contract with them. Commodity price has to be predominantly carried by the local authorities. It is ultimately the local authorities, the householders waste in the first place. And it's unrealistic for us as effectively an intermediate stage in a value chain to take on the commodity price risk. So as contracts renew, we move them to a more risk-transferred model. And now we're effectively, across that portfolio, have contracts we're 59% derisked. So every GBP 1 of material price, upwards or downwards, we're only feeling effectively 41p of it, and that's up from 52% a year ago. That will continue to go up as contracts renew and it will make that business less risky in the long run.

In organics, which is the predominant area of investment in the long term, should be around food waste treatment, which is anaerobic digestion. It also includes composting as well. But the food waste market remains overserved. There's too much money went into it and food waste collection volumes have not caught up. And they, in truth, have sort of stagnated at the moment. So it does remain overserved. Our assets in that space are -- they're contributing, but not at the levels we would hope. Really, this needs stimulus, and we were encouraged, as I said before, around the government's stated objectives around food waste in the market. So that just needs to come through. Until it does, I think we're in for a period of just relative stability and nothing more exciting than that, sadly.

In inerts, and as Richard said, it's dominated by our landfill offer. But the demand for the landfill disposal of this type of waste remains very stable. So landfill has been talked down by most people for a long time, and we've been making the case ever since we came to market that there is effectively a structurally stable component to landfill, which is for waste which is inert in nature, it's not harmful to the environment to landfill it, and actually, it's the only safe place to dispose of this material. Can't be recycled, can't be combusted to extract energy value, and therefore, it's the right solution. And it becomes an even better solution when that material is transported by rail, which gets trucks off the road. That's our focus. We've migrated this business now from one where inert waste was a miniscule percentage of inputs to now being 68% of its inputs, up from 65% a year ago. So when you see our landfill tonnage data over the years, what you're probably not seeing is that within that, there's this continuous mix change towards that structurally stable component of it. Alongside that, we, in the inerts division, we continue to invest in these relatively small investments around treatment solutions for contaminated soils and contaminated aggregates. And that just provides further financial contribution. It provides better solutions for our customers and helps further diversify what we do. And as I said, rail hubs remain a key part of what we do. So we transport waste from the center of Manchester, the center of Leeds into our rail-linked landfills back in Lincolnshire. And we will be opening up other rail hubs in the coming months and years.

So we've got a clear strategy in inerts. In some regards, it's a bit disappointing to see that out of all of that, that arrow remains flat, but that is effectively it's a mitigation strategy against the fact that there is some waste still going into a landfill, which structurally, in the long term, should not be. We're going to be very clear about that. That remaining 32% of inputs shouldn't be in landfill in the long run. It should be recycled or it should be sent for energy recovery. And that's the way we're positioning ourselves.

And that takes us on to landfill gas and energy from waste generally. So I mean landfill gas, as everybody knows, it's to some degree, a legacy asset, and it is a declining contributor over time. What I will say, though, is we've never been embarrassed by our landfill gas business. It's incredibly predictable in terms of the yield we get from it and also the way it is run. We're very, very strong operators in this space. We hedge our electricity price exposure over the coming sort of 12 to 24 months. So we've always got very strong visibility of guidance.

The only bit that we don't really have control about, which Richard mentioned, is the ROC buyout price, which is the surplus ROC price, which we can get from one year to next. And we'll give as good guidance as we can on that, but that is clearly outside of our control.

So landfill gas will decline steadily as it has been doing, but it continues to be a good business for us. Strategically, for us, clearly, the [yield] -- is energy from waste, which I'll come on to in a moment. And I guess nothing has changed from when we talked at our Capital Markets Day on previously, that there is a very clear proven capacity gap for infrastructure and there is good support for projects which are both well-located geographically, because this is -- these are regional markets, after all. And if they're well-financed and they're sponsored by the right type of players, of course, using proven technology, so those are the facilities that get built. And those are the ones that will then become good contributors of earnings over the ensuing years.

So that's how, I guess, we see the market. And I hope you would agree, given all of that, the headline at the top of the slide is true, that we think we have got a market that's supportive of our positioning, and it provides a great platform for investment and development into those chosen areas of focus.

So how are we getting on? Well, firstly, organic growth in Collections is a key part of what we do. I've long been a believer, we can't -- you can't just have an acquisition growth strategy for a business. I'm really proud of the fact that we continue to grow our Collections business organically. You'll see on the left some of the logos there of businesses, key customers that we've won in the last 6 months and some of the significant customers where we've extended long-standing relationships recently. So some big new names in I&C. You'll also see that we won the East Sussex waste partnership and mobilized that in our Municipal division in the first half. We're also focused always on add-on products and services. So we launched the Skoup service a few weeks ago, which is a -- it's actually as much a B2C offer as B2B really, but it's more for kind of unplanned waste, waste clearances. It's an add-on service outside of the kind of regular scheduled waste services. And that's made a good start.

On the right-hand side, it's just a bit of information around, I guess what we believe makes our I&C business so successful and so well-positioned for organic growth. I won't go into the detail of that, but you can see, whether that be the self-delivery by having that unrivaled national platform, the levels of customer service that we achieve, the value of the brand and what that stands for in the B2B community, strong pricing and the pricing is effectively supported by the route density we enjoy, the innovation that we can provide, in particular around information and traceability of waste, which is so important to our customers. And all of that, it wraps up to a really good, sustainable pedigree, which is obviously so important to our customers these days. So we think we're really well-positioned there and we can go -- continue to go from strength to strength in organic growth.

And we like to supplement that with inorganic growth, and we've been doing that successfully now for a number of years. So here's the report card for the last 6 months. This slide looks very similar every 6 months. It's got a table of deals we've done, and some dots on the map and make no apology for that. So you can see on the map, the red dots are all the deals we've done in the last 4 years and the dark blue dots are the ones that we've done in the last 7 or 8 months. So it -- we completed 2 in the first half, we completed another 2 deals in the last couple of months. So another good period. They're quite small deals, but they're very kind of easily digestible and they've been integrated pretty swiftly. We're happy with the progress we've made on the -- in the synergy delivery and integration on the prior year acquisitions, in particular, on SWR, which was the biggest deal we did last year, and you'll remember was completed just before the end of the financial year in March. It's still relatively early days. We're internalizing the volumes. It's a broker platform, is the SWR business. We're internalizing volumes where we can into the I&C network. We've done 2 waves of that already, and we'll be targeting to get to just over 1/3 of the volumes of the SWR business on our own wheels by the end of the year. And that obviously enables us to capture the kind of operating margin that's inherent in that work. So that's progressing well.

Weir was the other big deal we did last -- it was in the summer, about July, August last year. Effectively doubled the size of our Birmingham business. That's been a big undertaking to completely reroute the whole of the West Midlands region, changed service days, changed actually the service proposition to a lot of customers, all of that was done with extensive planning and implemented just at the beginning of November and has gone well so far.

And then final thing to say, as ever, the pipeline for acquisitions remains strong. There seems to be just a natural cadence really, where there are good regional businesses where the time becomes right for them to consider an exit. And then you often get smaller parts of bigger businesses where they're looking to just divest of some of these assets, which are maybe not core to what they're doing. So the I&C acquisition strategy, I guess remains very much alive and well.

Moving on to Resources & Energy. So the 2 big areas of capital allocation, I guess first is our PET bottle recycling facility. I talked a moment ago about, I guess the backdrop there, and Richard mentioned the strength of pricing and there is for this product. So I won't restate the case. There's lots of information in our Capital Markets Day deck, which is available on our website, should you be interested. But it's on track. It's on budget. We'll be starting to commission just before Christmas. We've got a 3-month commissioning period up to March, and then we would expect to be operational at the beginning of next financial year. Just to be clear, it is a 2-stage development. So the next financial year, we'll be making recycled flake and then we'll be investing in the compounding operation, which then about a year later, will take us into the full food-grade pellet material. So there's 2 stages of deployment and therefore, also profit growth. Some of the numbers are along the bottom there, just to give you a scale of what we're trying to achieve.

And a photo of the equipment, you'll see painted in Biffa red, and I understand some analysts were given a tour of the facility recently and got to meet some of the local management, and I gather came away sharing some of the enthusiasm for what we're looking to achieve there. So a great project, very excited about that.

Moving on to energy from waste development. So the 2 projects. Again, I won't go over -- a lot of this we've stated in the past, and again, there's a lot of detail in our Capital Markets presentation. Two great projects, one in Leicestershire, one near Ellesmere Port in North Cheshire. We've gone through pretty much all the stages we need to get to now around choosing engineering partners and the market assessment. And we're really now in the final straight. We're not there yet. The final sort of funding approvals and credit approvals are all happening now, but we're certainly in the final straight. And we'd expect to be reaching financial close in the coming months. On Protos specifically, you'll remember that we took the decision to reduce our stake down from 50% to 25%. So we've identified our chosen partner there and, again, are in final stages of agreeing that transaction to take place alongside the financial close. So good progress there. Great backdrop around the market need, and we're really excited about getting those sites into build, finally.

Now throughout all of what we're doing, I think we're really proud to be helping the U.K. to decarbonize. We are part of the green economy, the green industrial revolution that's happening in this country. And we're really proud to be doing our bit. Whether it be in making, creating the most efficient logistics operation that just drives down the carbon emissions and also the traffic and the congestion that's associated with waste collection. Again, this slide is something you may be familiar with. We showed it in our Capital Markets Day. So it isn't broken, so I'm not going to fix it. So there's some interesting stats there, like an 11% reduction in the distance per lift in our I&C business in the 4 years. That's the real evidence around the route densification and the consolidation of the market. The more we can do, the more efficient we become, and also the less harm we create to our -- to the environment in doing so. And now our investment in recycling energy from waste, so just moving waste up the hierarchy.

So the evidence is very clear. Food-grade plastic recycling, it's roughly a tonne for a tonne of carbon savings per tonne processed. It's very, very, very clearly environmentally beneficial. There's a really clear case around continuing to use plastic packaging in the right way. So plastic milk bottles is a great example. There is absolutely no case to move away from it. What it does need to be done is it needs to be managed properly. We've got to manage our litter. We've got to invest in waste management services, both for local authorities and for businesses. And as we've said recently in our position paper, we need to stop the export of waste plastic. If we can keep all our waste plastic in the U.K., then as a society, we know we're dealing with our own plastic, we've then got the knowhow, the capital and the technology to deal with it. So there's a great story there. We're well-positioned to help make all that happen. And as I said earlier, we're confident in some of the noises that have been made by government, or the government that was.

And then energy from waste, [that's cost], and of course, in the long run, we'd prefer energy from waste not to be needed. We'd prefer everything to be recycled, but we have to look at the reality, and we have to look at what is feasible, and we think that, that as a technology is the most proven stable technology that can deal with the problem. And again, I don't have the figures at hand, but the impact on emissions compared to landfill of waste is very, very clear.

And underpinning all that, we're very proud to be a good corporate citizen, a big employer, a big investor, a big payer of taxes, happy to be providing an essential service to the U.K. and doing the right thing.

So that's it for us, a really good half year performance, really proud of what we've achieved, continue our organic and inorganic growth, good quality of earnings improvement as well as we continue to sort of diversify and strengthen our business, strategic execution and full year expectations unchanged. And as I'm sure you'll agree, we think we're well-positioned for the future.

Okay. So we will now go to Q&A. We'll try and stick to the time-honored rule of 2 questions in 1 go, please, because we don't have very good memories. So James has got his hand up first.

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Questions and Answers

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James Beard, Numis Securities Limited, Research Division - Analyst [1]

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James Beard from Numis. I'm going to go with just 1 question, actually, to start. In terms of the I&C business, looking at it, it appears as though organic revenue growth in -- within the sort of core I&C Collections business specifically is flattish during H1. You've obviously mentioned some of the contract wins that you've had during the period. But just wondering if you can sort of touch on why sort of broad performance might have been flat there. Are you seeing increased stress amongst SMEs, for example, increased insolvencies there leading to higher churn rates? Or is there any other sort of touch points that are worth mentioning?

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [2]

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You're right that the organic growth in the core services is slower. That's right. It's probably, overall, yes, a little bit slower. No, I don't believe we've seen anything by way of stress. Richard, maybe you have other things to add, but I'm not sure in terms of insolvencies we've seen any increase at all. One thing that would have affected the top line would also be the commodity element of the I&C business, because whilst it's dominated by Collections revenues, we do, of course, sell commodities from the transfer stations that we've collected. But we also do take third-party inputs into those transfer stations and make a margin on bailing and selling those materials as well where we can. So they probably -- some of it could be related to that, but it's actually not so much core collection activity as where cardboard prices are softer, for example, it might be that we've just not -- we've taken in a bit less or that the nominal value of that cardboard's a bit lower. So that would have borne down on the revenue a tiny bit. These are really in the edges, though. To be honest, I don't think there's anything particularly discernible to conclude from it.

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Richard Neil Pike, Biffa plc - CFO & Director [3]

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And just building on it, James, the SME churn rate's still in the single figures. And actually, our corporate churn rate's been 0 in the first 6 months.

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [4]

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And the only other thing to add to the corporate point is SWR, our new star, is at 0 churn as well.

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Robert John Plant, Panmure Gordon (UK) Limited, Research Division - Analyst [5]

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It's Rob Plant from Panmure Gordon. In terms of the commodity risk, it's gone down to 41%. Feasibly, how low can it go?

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Richard Neil Pike, Biffa plc - CFO & Director [6]

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We're targeted to get to 20%, Robert. So if you -- in the period, you probably saw we renewed our contract with the North London Waste Authority. That's our largest contract, and we're pretty much renewing on a similar model to that each time we bid. So it's basically we have processing fees, plus a margin, in terms of gate fees, and 20% commodity risk to us, 80% to the local authority. And it'll take us a couple of years to get to that point.

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [7]

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I think it's only reasonable that the local authority sees that we have some skin in the game. I think for us to just earn a fee, then we wouldn't be aligned with them. So it's only right that we have some of that. But as Richard said, we don't -- we can't be dependent on that value commodity to make our profit. We know what trouble that's got the industry into in the past. So that feels like the right number.

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Alexander Mees, JP Morgan Chase & Co, Research Division - Head of UK Small and Mid Cap Research [8]

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It's Alex Mees from JPMorgan. I will go with the 2 then. Firstly, I just wonder if, Richard, can you strip out how much of that 25% growth in Specialist Services revenue was relating to the PRN pass-through and how much was underlying? And then secondly, could you just give some color on how you're feeling about the Dutch RDF import tax? What's happening there, what it could mean for you and how you might mitigate it?

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Richard Neil Pike, Biffa plc - CFO & Director [9]

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So if I take the first question, I'm sure Michael will take the second. About 3/4 of the Specialty Services revenue increase was due to the PRN pass-through in Biffpack.

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [10]

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On the Dutch tax, so the -- for those of you who are not aware, the Dutch government announced an intention to introduce a tax on the import of waste, refuse derived fuel. It's a tax that already is in place on domestic waste in the Netherlands and the proposal is to introduce it to imports. It's not been finally determined. We hear different news every day as to whether it will or won't be, it's clearly a possibility. We obviously export relatively sizable amounts of refuse derived fuel to the Netherlands. The reason we do that is because there isn't enough energy from waste infrastructure here. So yes, it's a risk to us. I think 2 things to say. Firstly, our -- it relates to our I&C business, where we have pricing flexibility. So if we get that cost headwind, we will be looking at customer prices. It'll be a market-related thing, and we will -- as we have done over the years, we will manage prices to make sure we can protect our margins. That'll be the first response.

And then the second thing to say is that to the extent it causes a more general squeeze on disposal in the market, the only place it can go is landfill. Now that's not great for anybody. And I mean you think about unintended consequence, if the Netherlands is introducing this tax to help save on emissions, they would only be exporting higher emissions to the U.K. for the short term. So we certainly, in our lobbying efforts, have urged them to think in that context. But if that is the case, our landfill business would benefit, both in terms of volume and probably in terms of pricing, so there's a degree of natural hedge there. So as we know more about it, we'll obviously talk about it. But we don't really -- we think we've got quite a degree of natural mitigation there. So we don't really see it as too much of a difficulty for us.

Who's next? Andrew.

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Andrew Shepherd-Barron, Peel Hunt LLP, Research Division - Analyst [11]

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Andrew Shepherd-Barron, Peel Hunt. A couple of questions, if I may. One is competitive behavior, which I know we asked at the CMD, but just sort of more broadly, are you seeing -- I know on the acquisition side, as I understand it, our French friends are still being quite restrained, but any signs of change there? Any signs that they are more or less committed to growing their business in the U.K.? And allied to that is the second one, of course, which is any further thoughts on where Pennon might end up with Viridor and which bits you might (inaudible)?

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [12]

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Interesting question. So look, I mean competitively, I don't think anything much has changed. I mean we have different competitors in different parts of our business. I mean in our I&C business, we'll have smaller local operators who are always aggressive, always competing tooth and nail, where there's nothing's changed there. The large operators, I think in general, their focus has remained more on their stated areas. So it's more about infrastructure development, probably with the exception of Veolia, who have got a very credible, quite significant collection business. Nothing much to say, really. And I'm obviously aware that SUEZ, at a corporate level, have announced a new strategy. I don't think there's any sign of it changing what they're doing here, certainly not yet, and certainly nothing that we know about. As for Pennon, I mean interesting, I mean clearly, they've got decisions to make, they've clearly got some valuable assets there. Yes, I don't know what more to say. We obviously watch it with interest. I don't really know which way they'll look to turn.

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Andrew Shepherd-Barron, Peel Hunt LLP, Research Division - Analyst [13]

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Just related to that, you service 95% of [post-paids], which is an interesting stat. Do you happen to have a view as to what Viridor might service? I should ask them.

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [14]

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They're quite small. I mean their I&C business is a -- it's never been what you'd call a kind of proper sort of platform. It's more being through acquisitions over time. So they're quite strong in regional areas. We'd estimate their I&C revenues to be around about GBP 100 million probably, so 1/6 the size of us, probably.

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Richard Neil Pike, Biffa plc - CFO & Director [15]

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If behind your question, Andrew, is how relevant is their collection business today, EfW. Trying to back solve it with imperfect data, we think that about 7% of their waste volumes into EfW is on their own wheels.

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Michael Robert Mason Topham, Biffa plc - CEO & Executive Director [16]

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Okay. Any more questions? No? Okay. Well, that concludes things. Thank you again for coming.