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Edited Transcript of CWY.AX earnings conference call or presentation 14-Aug-19 11:30pm GMT

Full Year 2019 Cleanaway Waste Management Ltd Earnings Call

Queensland Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Cleanaway Waste Management Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan J. Gill

Cleanaway Waste Management Limited - CFO

* Frank Sufferini

Cleanaway Waste Management Limited - Head of IR & Corporate Affairs

* Vikas Bansal

Cleanaway Waste Management Limited - CEO, MD & Executive Director

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Conference Call Participants

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* Cameron McDonald

Evans & Partners Pty. Ltd., Research Division - Head of Research

* Nathan Lead

Morgans Financial Limited, Research Division - Senior Analyst

* Paul Butler

Crédit Suisse AG, Research Division - Director

* Peter Steyn

Macquarie Research - Analyst

* Raju Ahmed

CCZ Equities Pty Limited, Research Division - Equities Analyst

* Russell J. Gill

JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand

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Presentation

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Frank Sufferini, Cleanaway Waste Management Limited - Head of IR & Corporate Affairs [1]

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Good morning, ladies and gentlemen. It's Frank Sufferini here, Head of Investor Relations and Corporate Affairs, and I'd like to welcome you to our FY '19 Results Conference Call. I sent out an email earlier to all the people that cover this stock, which had all the results presentation and the release of (inaudible) and hope that you've got that. And I'd now like to pass on to our CEO, Vik Bansal, who will start the presentation. Thanks, Vik.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [2]

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Thank you, Frank, and good morning, ladies and gentleman. We obviously appreciate you joining for this morning. As Frank said, before I go through the presentation, I take it that you have seen our ASX media release and that you have a copy of our presentation. I will also take it that you have read the disclaimer on Slide 2 of this pack.

And in that case, I'll ask you to please move to Slide 3: Agenda. I'll run through the safety and performance update, good performance segments -- good performance, segments' performance and recent small acquisition of ASP Healthcare. Brendan will cover the statutory impact reconciliation, balance sheet, cash flow, debt and the changes to the leasing accounting standards. I'll then settle back on capital expenditure and landfill remediation, followed by updates on enterprise initiatives, which includes the Toxfree integration, the Evolving Tonne, circular economy Footprint 2025 and ESG. I'll finish the presentation with our priorities for the coming year and FY '20 outlook before opening for questions.

So now moving to safety and environmental on Slide 4. As I've stated previously, our business faces daily operational and situational hazards. It is characteristics of not just the waste industry but most industrial logistic and infrastructure businesses. We have a responsibility to ensure all our employees and contractors go home safe and in the same condition they arrived for work. Our equipment, especially mobile assets, are in continuous interaction with the general population every day. We have seen changes in the risk profile on the road as people are distracted with their mobile phone usage and increased traffic in metro areas. This is becoming an issue for all public society. This challenge, of course, increases for Cleanaway with our growth as a business.

A key priority for us in FY '20 will be removing -- will be significantly improving driver attentiveness, while a further 8.1% decline in our TRIFR of 5.7-ish positive, I remain passionately unsatisfied with our safety performance and we have more work to do to reach our ultimate target of Goal Zero. I'll now run through the group financial performance on Slide 5.

Right, on Slide 5, our results once again reflect strong growth. Revenues, earnings and cash growth have all grown strongly this past year. I also refer to the quality of earning as a key indicator of whether we are improving the business. We are pleased to see an increase in our EBITDA margin over the past year, and our EBIT margin has also improved as we achieved greater capital efficiency across Cleanaway, reflecting our disciplined approach to capital allocation. Our underlying net profit after tax was up 43.1% and EPS 30.2%. We have also included NPATA on this slide, which an increase of 50% compared to previous year. Our cash metric this past year has also shown a strong upward trend. Operating cash flow has increased 58.6% and free cash flow up 76.4%. The strength of these results and the confidence in the future of Cleanaway has let us increase our final dividend. We have declared a final dividend of $0.019 per share, 35.7% up on the final dividend last year, combined with the initial dividend paid earlier this year. Total dividends year-on-year have increased by 42% to $0.0355 per share.

Asking you to go to Slide 6, please. It is important that we continue to grow organically as we integrate Toxfree and fit into Cleanaway. You will see, organically, revenue has grown 3.5% and EBITDA 10.7% in the second half versus the corresponding second half last year. What I briefed about in the second half comparison is the growth of 150 basis points in margin from 20.8% to 22.3% for the second half of FY '19. On a full year comparison, we have seen organic growth internally up 6.4%, EBITDA up 12.7% and margins up 120 basis points to 21.9%. Slides 7 and 8, these 2 slides are included to give you an indication of the improvements we had made in all our key financial measurements over the past 4 years. We have always maintained that a development-based company should deliver a demonstrable degree of operating leverage through the P&L. CAGR growth of 12.8% in revenue driving an 18.9% CAGR increase in EBITDA, which in turn drives CAGR growth of 25.4% in EBIT, 27% in NPAT and 25.3% in -- growth in EPS.

On Slide 8, the operational improvements we have made and our disciplined approach to cash has in turn driven an increase in shareholder return. The graphs are self-explanatory, of course. Strong free cash flow growth at a CAGR of 81.8%, dividend per share growth of 24%. It is also pleasing to see an increase in our return on invested capital. We are still at the midpoint of our journey and have lots of work to do to ensure Cleanaway delivers its full potential. All over Cleanaway, we're passionate and ambitious about achieving that potential.

I will now cover operational results in the following slides, so Slide 9. Most of you would be aware that back in November 2018, we announced a change in our operating segments. These segments post Toxfree integration now align to the new Cleanaway operating model and organizational structure. These slides provide a summary view of the performance for each of our new operating segments. I'll be covering each of them in detail in the following slides.

So on Slide 10 is Solid Waste Services business -- segment. This segment covers the collection, recovery and disposal of solid waste. The base stream includes putrescible in our household and recovered waste, core customer segments being municipals, commercial and industrial. And remember, 85% of customers in this segment are contracted. These waste streams are processed through our prized infrastructure assets, such as resource recovery and recycling facilities, waste transfer stations, energy conveyers and landfills. The increase in revenue of 23% contributed a 23.5% increase in EBITDA and 28.1% in group EBIT. In addition to the integration of Toxfree Solids' collections business between Northwest WA and Queensland, revenue and the earnings growth has also been driven by ramp-up of recent major contract wins as well as varying mix of volume and price increases across the East Coast.

As many of you would be aware, the China National Sword policy has had a significant impact on the waste industries globally. Volatility in the commodity supply chain has led to the increased sorting cost and related instability in commodity prices. These costs have to be borne by the market and the customer. We are currently working to passing these increases. Due to nature of our customers and our contracts and our long relationship, this will take a little time to flow through, but nevertheless it will happen and we absolutely believe that the consumers will have to pay for the sustainability agenda. As predicted, rogue B13 companies are finding it difficult as their business model comes under significant threat.

We have indicators from outside, while the China policy was one to create uncertainty in market and you are seeing an industry in a transition, we were convinced that it would be a significant opportunity for us. Our conviction hasn't changed. On top of that, we remain open for the prized-priced assets to acquire. You may recall that during our previous presentation on the first half results, I indicated our aim was to achieve a 27% to 27.5% EBITDA margin for this segment over the medium term. This has not changed and hence our continued focus remains on price and volume.

Moving on to Industrial & Waste Services segment on Slide 11. The Industrial & Waste Services segment provides a wide variety of services to the resources and the infrastructure market, such as drain cleaning, high-pressure cleaning and vacuum loading. Revenue is up to 84%, EBITDA up 146.6%, and EBIT up by 341.2% on back of the acquisition and the merger of Toxfree and Cleanaway (inaudible). This segment generated modest organic growth during the year after you take into consideration the completion of major Toxfree Wheatstone contract last year. As part of this integration, we are [streamlining] the organizational structure of this segment. This will lead to an improved customer focus and specialization of technical ability and assets. We are absolutely working hard to take advantage of expected future market growth in resources and in the infrastructure areas. Sales effectiveness backed by the cost discipline is now the next deliverable in this segment to get this to the target of mid- to high teens EBITDA, which we remain confident and eager to get.

Now moving on to Liquid Waste & Health Services segment on Slide 12. The Liquid Waste & Health Services segment covers 4 national strategic business units. At the core is bulk liquids waste services, technical environmental services, hydrocarbons and health service. The health services and technical environmental services business have performed well and continue to deliver, as expected, improved results. Hydrocarbons also had a very good year, mainly driven by production, efficiencies following recent plant upgrades, and improved oil price movement. We are seeing demand for the processing of new hazardous waste stream, such as (inaudible) increasing. Volume of bulk hazardous and nonhazardous liquids were down to flat compared to previous year. This business has been significantly restructured and resized, and I remain very confident that the new management will bring in the improvements which this business needs and achieves. The improvement in liquids will be the marquee for this segment to deliver 20% EBITDA margin and we remain focused and committed to making this happen.

Moving on to Slide 13. As we have said before, we have little doubt that the health services sectors of the waste management industry is growing and will continue to grow for some time to come. Our Daniels business has a strong position in provisional services in the hospital, medical and pathology part of the market. In March 2019, we also acquired a small healthcare product supplier called, ASP. ASP is a market leader in personal sharp disposal containers and holds the global patent on what we call FitPack, a personal sharps storage and disposal system. It is also a designer and manufacturer disposal sharps -- disposable sharps container, which complements the Daniels Sharpsmart reusable sharps container and I want to make a distinguish -- difference between disposable and reusable sharps container. Hence, it was important that we improve our ability to service our customer by having access to both. ASP also provides us with an onshore plastic manufacturing capacity in Australia, which I will cover a little later in the presentation. I'll now pass over to Brendan to cover these slides.

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Brendan J. Gill, Cleanaway Waste Management Limited - CFO [3]

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Thanks, Vik. The statutory profit after tax is $143.1 million, with 19.9% increase on last year. The underlying adjustment to both the EBITDA and the EBIT for the period totaled $23.2 million and comprised 4 adjustments. The first was a noncash charge of $9.1 million, mainly relating to the reduction in the risk-free discount rate applied to our remediation provisions for closed sites. This was brought about by the significant reductions in government bond rates during the year. It is important to note this charge is noncash and does not include any challenge to assume the cost to remediate our sites.

Next was a $2.2 million loss relating to the sale of the equity-accounted investments in Total Waste Management Proprietary Limited and Western Resource Recovery Propriety Limited. Our investment in the liquid waste businesses is no longer consistent with our operating model following the acquisition of Toxfree. During the year, we also incurred acquisition and integration cost of $16.6 million associated with the acquisition of businesses and the costs incurred to progress Toxfree integration. We remain on track to complete our integration of Toxfree by 30th of June 2020 and expect to underspend the original $35 million integration cost budget, while at the same time, reconfirming the delivery of synergy benefits. Vik will provide an update on the integration progress later in this presentation. These adjustments were partially offset by revaluation of land and buildings. We've reversed past impairments totaling $4.7 million.

Turning now to the balance sheet on Slide 15. Our balance sheet remained strong and we continue to maintain our culture of financial discipline. During the year, we funded acquisitions, invested in CapEx and increased dividends while also reducing the net debt. During the year, our rectification and remediation provisions increased by just over $18 million. This increase was mainly due to a reduction in the discount rate applied to expected future cash flows, together with an increase due to additional lines of service or new sales. These increases were partially offset by current year spend.

Turning now to the cash flow on Slide 16. As I have stated a number of times previously, we maintain a high level of fiscal discipline at Cleanaway and this is again evident in the cash flow performance this year. One of the pleasing aspects was the improvement in our free cash flow during the period, which was $206.4 million, an increase of 76.4% on last year. Our net cash from operating activities increased 58.6% on last year. I would like to point out that our tax paid was lower than normal as we received a once-off $25 million refund on the amended tax assessments we announced last year.

Our cash conversion rate, which is defined as the ratio of cash flow from operating activities to underlying EBITDA, continues to be strong at 98.2%. This result was achieved after absorbing additional receivables from our acquisitions and new contracts. Capital expenditure for the year was $192.5 million which was within our planned stated range of 85% to 90% of D&A. During the year, we also paid $44.2 million towards the purchase of businesses, which included the acquisition of the Cleanaway ResourceCo Refuse Derived Fuel facility in Sydney in November 2018 and ASP. Landfill rectification and remediation spending of $36 million was lower than planned due to timing issues, which will result in an increased spend in FY '20. Vik will elaborate on our forecast rectification and remediation spending later in this presentation.

Turning now to our debt on Slide 17. Our debt is well under control with a net debt-to-underlying EBITDA ratio of 1.4x, a level that provides us the flexibility we need in the future to fund selected earnings-accretive projects and acquisitions. Our strong cash flow performance during the period enabled us to increase the total dividend by 42% as well as finance the acquisitions mentioned earlier. Our gearing ratio, defined as net debt over net debt plus equity, is currently at a healthy 20.3%. Our average debt maturity is 3.8 years and we will explore opportunities to increase the maturity profile in the coming year.

Turning now to accounting standard changes on Slide 18. AASB 16 Leases will apply in FY' 20. This new standard requires us to recognize right-of-use assets, certain leases which were previously classified as operating leases. The primary right-of-use assets recognized will be leased properties. Some are only driver assets and operating leases of more than 12 months duration of specialized equipment.

On transition, we will recognize lease liabilities of approximately $300 million and right-of-use assets of approximately $285 million, with the difference taken to retained earnings. We expect adoption of the standard will result in an increase in EBITDA between $35 million and $45 million, depreciation between $30 million and $40 million and interest expense between $8 million and $12 million. Due to timing differences inherent in adoption of the modified retrospective transition approach, we expect that our FY '20 net profit after tax will be adversely impacted by between $2 million and $5 million. Over the medium term, you should expect it to revert to a smaller, normal impact to net profit after tax. It is important to note that the impact of any increase in liabilities from the accounting standard changes are specifically excluded in our bank covenant calculations.

I will now hand you back to Vik.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [4]

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Thank you, Brendan. I'm on Slide 19, ladies and gentlemen. As advised, our cash capital expenditure was right in the middle of that 85% to 90% of D&A and 9.1% of net revenue. Again, we utilized leasing finance for just under $48 million for government-related contracts. The standard capital expenditure spend levels in global waste management company is usually around 10% of net revenue and at a level that we believe is sustainable over the long term. We will use this percentage of net revenue as a metric for cash capital expenditure going forward.

Another key component of free cash flow is rectification and remediation and that is detailed on Slide 20. I'm glad to report that we are nearing the end of the legacy remediation spending that we experienced over the past 5 years. But spending in FY '20 will be higher at $55 million due to project timing, the average spend over the last 5 years will be just below the $45 million mark per annum, which was as expected and as forecasted by us 4 years ago. As you would appreciate, in the waste business, ongoing rectification and remediation of disturbed land is business as usual activity. If done on time and properly, our provision for remediation should reflect the future spending that is associated with operating the landfill.

So reaffirming that in next couple of years, we will go through business as usual for remediation. I can reconfirm that we will drive up majority of legacy issues by the end of FY '20. Spending on legacy and closed landfills reduces quite significantly from FY '21 to approximately $20 million per annum and then to a steady rate of approximately $10 million per annum thereafter. Needless to say, the sale of remaining closed landfills to interested parties under very strict conditions continues to be a live option.

I would now like to move to Toxfree integration on Slide 21. After 12 months of owning Toxfree, I can state without any hesitation that this acquisition has been good for Cleanaway, good for all our stakeholders and good for the industry in general. The integration of business has progressed well and I would run through this over the next few slides. We remain confident that the $35 million in synergies will be achieved. Our program for the realization of synergies is on track and is managed through 6 major categories as mentioned previously.

On to Slide 22. Having now finalized the enterprise operating model, the alignment of the strategic business units to waste streams and service offerings with assets is now close to completion. There are many examples of the changes that have been made, such as aligning assets between liquid business units and bulk liquids business unit and technical and environmental services business units to ensure that both will have scale within their respective waste streams. Another integration of the solids North Australia strategic business unit to better our service -- better service our customers in that region. We have also internalized the tradition of Cleanaway's medical waste service into the health unit. On go to market, the rebranding of Toxfree is well advanced, the pricing discipline and harmonization across the business is also well underway. In property and infrastructure, we have already amalgamated and closed several sites and continue to review further sites for some opportunities.

On Slide 23, procurement remains a natural opportunity. Major work is in progress in this category, with the benefits from the first tranche of contract negotiations being realized. There is little doubt that we cannot integrate multiple companies without common processes and systems, which provide clarity and agility. This work is underway as data centers have been consolidated and we have started our first steps towards the amalgamation of ERP, a key step to the future digitization of Cleanaway. As I've said previously and I'll reconfirm again, the work that we are doing on extraction of $35 million of synergy is well underway and according to plan.

Moving on to the Evolving Tonne on Slide 24. Firstly, let me say that our commitment to the optimization of waste value chain and extracting maximum value from what we call the Evolving Tonne has not changed. The Evolving Tonne is about ensuring that for every tonne of waste we pick up, we make sure it is profitable for collection, recover resources from it and we have a profitable treatment or disposal of residuals. With the China National Sword and increased focus of the society towards a circular economy, the concept of Evolving Tonne has further developed and we see a very good opportunities for Cleanaway. As part of Footprint 2025, we see an opportunity to invest further in the resource recovery value chain by moving downstream and participating in a circular economy. For example, instead of supplying (inaudible) of plastic bottles, we can go further downstream and capture most of the economic value by investing in the pelletization of that plastic. This removes any contamination concern from the waste stream as a larger acceptable market both domestic and international and is valued significantly more. The same can be said for cardboard and glass waste streams. We believe that not only these are investments -- these investments are accretive, they will also have positive benefit from the quality and price of product off -- based on resources of the plants. There are also the stories which customers like to participate in. These downstream commodities are easily tradable on a global scale and not at the mercy of fake supply chains. I'm not looking forward to -- I'm looking forward to reporting to you on this extension to our Footprint 2025 strategy in the future.

I would now like to move on to Slide 25. As I've presented earlier, the recently acquired healthcare company ASP has its own in-house plastic manufacturing capability in Australia. The Daniels Sharpsmart product is currently produced in China and we have made a decision to bring it on shore. We will utilize the (inaudible) plastic waste streams to collect locally to pelletize that material and use it to manufacture new sharps containers. This has a number of benefits, mainly better control over the commodity and pricing value chain, derisk commodity pricing, greater quality control and protection of our intellectual property, reduction of inventory and control of supply chain. A great example of circular economy, Evolving Tonne and a better economic value chain and growth for Cleanaway.

Now moving onto the progress of the Footprint 2025 strategy on Slide 26. Those of you that have followed Cleanaway over the past 4 years would be well aware of our Footprint 2025 strategy. This involves investment in highly prized waste infrastructure assets, effectively creating a defensive mode around the business. We have deliberately and thoughtfully recycled low-return and cash-consuming assets into high-return prized infrastructure assets. I won't go through all the projects we have undertaken, but as you can see, there has been no lack of seed investment in these highly prized assets across the country. I can also assure you this is not stopping. For the past 4 years, we have invested over $150 million to build these highly prized assets while remaining capital disciplined. These are all in addition to the Toxfree infrastructure assets acquired, and as I said before, the further development of these assets organically and inorganically continues.

On Slide 27, as a waste management company with a mission of making a sustainable future possible, environmental, social and governance or as ESG as it's called, is at the core of our business. It (inaudible). As announced earlier, by June 2020, we'll be providing a greatly enhanced line of sight of all ESG metrics. These will revolve around, what we call, PMAF, people, market, assets, finance and (inaudible). They were being aligned to the guidelines set by the UN's Sustainable Development Goals and Sustainability Accounting Standards Board's recommendations.

Turning on to Slide 21 (sic) [28], which is our priorities and outlook. Our priorities going forward are as follows: helping our [drivers] to maintain this traction and improve (inaudible); maintaining the improvement in all our businesses, especially growth and customer service; ramping up the Toxfree integration; and continuing our Footprint 2025 journey, including the enhanced value chain. And finally, on our outlook for FY '20. We absolutely expect all our segments to deliver earnings growth in FY '20 despite the outlook for the turning economic activity in Australia. In addition, the China National Sword policy has resulted in increased sorting cost and variability in pricing for recycled commodities. These impacts will have to be mitigated by the price increase, which, as I've mentioned before, are currently underway. Hence, excluding, and I emphasize, excluding the $35 million to $45 million positive impact to EBITDA of AASB 16, we expect underlying FY '20 EBITDA growth to moderate slightly from the current market expectations. Now I would like to open the lines for any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Paul Butler from Crédit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [2]

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Just a couple of questions on the solid waste business. I'm wondering what impact you're seeing at your landfill sites in Queensland, particularly in New Chum, where I think something -- what my understanding is potentially up to 1/3 of the volumes that you receive there are from interstates. Since the landfill levies come on in Queensland, have you seen any change in flows there?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [3]

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Two things, but yes, you're correct. We do not -- that is not an accurate statement that 1/3 of the volumes in New Chum are coming (inaudible). The second thing is as we've said before, (inaudible) we expect some of the volumes to go down, but we also expect that, that should be compensated with the price increases in New South Wales, that's number two. Number three, the way the levies are [maintained] right now and engaged with other in New South Wales and Queensland, we don't expect that the volume between New South Wales and Queensland will be [zero]. There will be arbitrages between the 2. It's still high enough for the people who are active still engaged in the stranded assets, there will be -- [it will be utilized]. So one item involved on that apart from the fact that we don't see the (inaudible).

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Paul Butler, Crédit Suisse AG, Research Division - Director [4]

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Okay. So the 1/3 numbers is not quite right. Is it higher or lower than that?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [5]

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Well, it's not accurate, so I [will leave it at that, yes?]

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Paul Butler, Crédit Suisse AG, Research Division - Director [6]

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Okay. And secondly, can you talk to us about what you're seeing in the contract renewal market in C&I? So I think in previous times we've discussed this. You've talked about getting the right balance of churn and price. I'm just wondering what you're seeing in terms of market conditions and the level of competition because we were hopeful that we were going to see an improvement in pricing conditions.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [7]

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Yes, a couple of things here. So you -- so let me talk -- tackle this question in (inaudible). One, there is no doubt that the second half of last year we definitely saw a drop in economic activity. Now that was the combination of number of working days. And if you actually -- there were 3 or 4 less working days last year than present year. [Including the fact that it] was the smallest working day here for a long time in Australia's working industry.

The second part was just -- second half [the Easter] holiday had very, very slow second half. Now we've been expecting that to be sitting up. We are definitely seeing some pick-up from June, July, August, but it is not (inaudible) to the first half. So there tends to be a little bit at this point where we see a little bit sort of what you -- how the economic activity is going. That is always directly related to how much price you can get. We cannot [know] the churn we're going to get. (inaudible) you can get. So those things are interrelated and generally when the economy [starts going], (inaudible) growth. If we get 3%, 4% growth, we are very, very good in that environment. We will get price increases and we can manage New Chum and the compressor unit. So that's one.

The second thing is we are in an ecosystem right now where we are absolutely working hard and pushing hard the impact of repartnering with the customers. In that case, we are not seeing [our contract] our churn going high but data push back from the customer around the price increase, and then we are managing that too. And that will result ultimately -- we remain absolutely committed and all good competitors will have to get their act together on this one at some point. It's that -- its market will have to pay for the price increase. The market will have to absorb the [increase of] sustainability sources coming through. And hence, as I said in my presentation, all that (inaudible) recycling place will have to be part of the marketplace in which you are seeing that unfold right now.

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Paul Butler, Crédit Suisse AG, Research Division - Director [8]

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Yes, okay. Can you just touch on the sensitivity to economic growth? Because I've sort of taken the view that you were somewhat in the interim economic conditions. I mean you get paid per collection of the bin regardless of how full it is or not.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [9]

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Yes, so let me explain (inaudible) -- I -- knowing very well the outlook statement will get some attention. So let me take this opportunity to explain a couple of things. So first, we are a good operating leverage business. In municipal customers, you're absolutely right, Paul, we get [papers]. From the C&I commercial built for customers and in different parts of the country, these will have a [multiple] on call business. If the volume and general activity goes down, then that growth also comes down. And in our business, that 3% or 4% top line can give us 10% EBITDA growth. A 1% market going soft, it can create deleverage so you can move some part of that quickly (inaudible) et cetera. But you still will have some impact of it going on. We are talking about on the asset sale. So -- and we have a long discussion about what is more [worth] more (inaudible). Essentially for us, more revenue, low single digits. That's what we're talking about here in a sense that the top line stops by -- slows down by 1%. We believe that there's going to be 2% impact on the bottom line. That's what we are talking about here. So I want to make sure we keep the perspective of what's on our [mix shift] and what we expect are coming. And we're still expecting to grow and grow [overall], so that has not changed.

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Paul Butler, Crédit Suisse AG, Research Division - Director [10]

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Okay. And then can I just ask on your plans to bring the Daniels Sharps container manufacturing in-house. What's -- how much investment do you need to put in to do that? And will the capacity that you build have -- sorry, the facility that you build have excess capacity above what you'll need for the Daniels business?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [11]

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Well, so remember, we bought ASP. We just have the manufacturing capacity, so remember that. We are now remodeling that footprint of that site. We are applying lead to it. We expect we might have to put 1 or 2 small [TMT] machines there, but ultimately what we expect is we'll have enough capacity service [the 15]. We will have all this -- some leverage to move up if it needs to move up. But bottom line, we'll get the infrastructure ready to servicing market now and servicing market in the next couple of years. Now if this goes (inaudible) next couple of years, remember we have infrastructure in place we can increase -- that becomes just moderating up and down. So that's not a big deal for us. So we are basically getting ready for a medium to long term in the health sector.

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Operator [12]

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Your next question comes from Peter Steyn from Macquarie.

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Peter Steyn, Macquarie Research - Analyst [13]

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Vik and Brendan, just a quick question re your outlook in China Swords, and Vik, you mentioned that it's about the rollover of contracts and your ability to reprice them on renewal or on review. Could you give us a sense of when these occur? So how much longer do we really have to continue worrying about China Sword impact and as it relates to the business performance?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [14]

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Sure, sure. Well, I think a couple of things here, Pete, is that, remember, we said our C&I contracts are anything from 1 to 3 years, right? These are not muni contracts. And you just have to manage them effectively in a sense that we don't increase the churn, but we also have to price on the market rate. So that's one. Two, the commodity price of -- the volatility issues in the commodities because of National Sword is actually not because of the demand. It is actually because of the instability in the markets where that is going.

So fundamentally, in the supply chain businesses, the third impact is as more and more players get out in market, you will see that price pressure come down. Not all players are disciplined to put the pricing in the marketplace. So you are always facing that pressure as well. So I absolutely believe now what we are seeing is kind of a -- the second half, the international channels drama getting unfolded. So you saw the first part in global volatility, global shock, people getting around what's going to happen.

Now what we're seeing is the growth we're seeing (inaudible) getting out of the business, getting out of the system. So I'm now actually -- I said it before, I'll say it again. We are now seeing the -- as I said, the second half and just hope of getting paid out. So I don't expect this to carry on for 1 or 2 years, and especially if you're building infrastructure assets downstream, there are (inaudible). So I think that's the best I can describe at this point.

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Peter Steyn, Macquarie Research - Analyst [15]

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Because I guess, the understanding that (inaudible) was that your pressure point is particular to Perth and [MRF] there and then perhaps a couple of limited ones dotted around the country. So I don't know whether that understanding from...

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [16]

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It's not -- Pete, can I just make -- I mean, MRF becomes what I call the consolidated point of the pain, if you want to call it that way, because that's where the material comes in and that's where -- but fundamentally, the discussions that have happened at the customer point. Most are just a consolidated base to take it up, but the idea here is what we are trying to educate the market and the customer is that the market will have to now pay rates which are directly related to the contamination of waste. What we are saying to the customer is, we will give you -- I'm just pointing it out hypothetically. If the landfill gets feed (inaudible) and your contamination is above 75%. And mister customer, you will have to pay $120 per tonne because chances are, that one landfill is pretty hard. If the contamination stay below 10%, we are happy to give you $8. We we'd be happy to pick it for $80 per tonne. We have now come so far to be in that -- last 12 to 18 months. There were operators who were giving customers money to pick up their waste. We are now paying them into the (inaudible). We now actually have to pay you. You don't have to pay for us, and it will be [related] to the contamination in your waste.

Now the consuls are getting it. Governments are getting it. I mean you are seeing that news all the time. But I -- as you can understand, as a company, we just have to make sure that these are long-standing relationships we have, and we have to maintain short term a couple of million dollars gain this year. We don't want to blow up millions of dollars of future earnings we could get from the market. So that's what we're talking about. And I was talking about this in, I said, the low single percentages.

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Peter Steyn, Macquarie Research - Analyst [17]

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Yes, perfect. I won't drive to that point. Vik, I mean, there's been a bunch of very interesting regulatory and industry developments in the last number of weeks. Could you give us your perspective on that and how you guys are positioning or are positioned to take advantage of some of those opportunities?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [18]

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Yes. Well, I think this is exactly what I was talking about, Pete, is that the idea here is to get these regulators to understand that the sustainability is going to cost money. And what, fundamentally, what the policies are now saying is that the whole concept of circular economy has to come home. Now for that to come home, companies like us will have to participate in downstream, which I've just mentioned in my presentation, which gives the enhanced value of that resource of material. That is very, very good for the waste sector. That's very good for the C&I. (inaudible) that's our core business. They are talking about product stewardship. It's on multiple waste streams, which is very good for us. Hydrocarbon is the easiest. All the product stewardship will benefit from that.

So I -- what we are seeing, as I said to you, as I said before, is that we are seeing the second half of this drama getting unfolded, where regulators are now saying, obviously, this is not going away (inaudible) is not a place. This is what the new world reality is. So now we're going to participate in that going forward. And we are very keen. We are absolutely ready to go. And one of the ideas presented in the slides is to give you all of you an update of what we are thinking. The other thing I will also say is that in an existing situation and the things that unfolding, and the industry structure is evolving very much in our favor long term, it is -- we don't budget for perfection in our business, obviously not because not everything goes fine. And I generally think in my opinion it is hard [job to advise] all our investors as well, that the market is changing and we don't want to be having some sense (inaudible) either. So that's the reason I'm putting the kind of outlook before. But again, I repeat again what I said before, we are still growing the business. We are still committed to grow the business quite nicely next year.

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Operator [19]

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Your next question comes from Cameron McDonald from Evans & Partners.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [20]

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Just a couple of sort of technical accounting questions. Do we think about -- how should we think about the first half and second half impact on AASB 16?

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Brendan J. Gill, Cleanaway Waste Management Limited - CFO [21]

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Brendan here. Thanks, Cameron. Let me start with AASB 16 given it relates to primarily leases of property. Most of those leases are in place today. They will obviously change throughout the year as we either buy properties or lease properties, but I think you should think of a fairly uniform split in each half.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [22]

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Okay. That's great. And can you -- I mean, you mentioned the China National Sword policy impacting -- what -- so I think you previously highlighted that, that last year it was a $6 million impact that you saw to the numbers. What do you think it was this year in numbers?

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Brendan J. Gill, Cleanaway Waste Management Limited - CFO [23]

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I think it will be probably slightly less than that, but I think that's probably the close enough number, $5 million to $6 million.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [24]

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And given that you're only sort of halfway through, should we be thinking about that has a similar impact into next year?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [25]

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Well, I think that's the reason what we have put in model shipment. That's exactly what we have put in average shipment for us because we said it's probably (inaudible). We try to go for the customers to make sure we get in front of the marketplace. So yes, I think that's a fair point.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [26]

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Okay. And then, I mean, you've sort of highlighted now an investment strategy into downstream processing, which looks to be a bit of a shift away. And I appreciate that in response to the changing regulatory environment. How do we think about the CapEx envelope with that sort of move into downstream processing? Does that still fit within your existing CapEx guidance sort of envelope as a policy?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [27]

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Absolutely. No change to that. These are not -- unlike the big moats of the landfill or the transfer stations, they are not that big investments. We have, for example, you're talking about sub-20s -- $10 million, $15 million investment. And so we are very confident it's within our CapEx envelope as we say. No change to our CapEx guideline and no change to our commitment on CapEx as a percentage of revenue.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [28]

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And that's not in -- that's -- so you are talking about processing there. It's not alternative to disposal. It's -- so it's not energy from waste. It's downstream processing.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [29]

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That is correct. And (inaudible) separate issue that's a project which we are working on as you all know. No. (inaudible) downstream for (inaudible). That is a separate project in itself.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [30]

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Yes, okay. And my last question is just relating to the proposal that you've put forward to take lithium tailings into your WA landfill. Can you just explain that a little bit? And is that -- given that there are 2 alternative WA incinerators sort of on the planning and in construction, can -- is there a risk around the earnings profile of that asset in WA if you don't get that lithium approval?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [31]

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No. So the post-collection assets are generally quite linked -- intertwined into where your customers are and where your site locations are. So where those waste energy plants are, they will probably take the channel waste. Our landfills on the south of Perth, they're long-term contract, lithium obviously helps. Of course, there's no question about that, that mitigates that if any of it exists. But no, I don't see that an earnings profile changing at all from there at all. But we always -- we have done tailings before for other miners. So this is part and parcel of our core business. This time, it just had a little bit more headline for the socialized (inaudible) fundamentally not changed (inaudible). We remain pretty confident and optimistic about WA.

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Operator [32]

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Your next question comes from Russell Gill from JPMorgan.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [33]

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Vik, just to clarify. I think it was an answer to earlier question. You're talking about second half coming off in terms of economic activity, seen a little bit of a recovery in July, August. Are you sort of calling out that volumes are lower on the PCP in July, August? Did I interpret that correctly?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [34]

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No. So what I was saying was in the second half of FY '19, although quality of earnings was good and even the margin was better, our revenue was down on first half, but that is a combination of lack of number of working days. We had little number of working days, plus the general economic activity was down. Then when you look at FY '20, on PCP basis, we are okay. I mean I can say we are ahead in July, August to last year. But what I saying was -- expecting it to pick up quite bullishly. But obviously, it didn't happen, so that's what I meant.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [35]

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Okay. I understand. On your solid waste margin, the target of the 27.5% EBITDA margins and to get there, are you comfortable with your current asset mix within your infrastructure across your business? Or does it require some investment in it to get to that margin -- or are the assets you got today, you still think you can get to that 27.5% EBITDA margin?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [36]

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Well, I think just the commodity -- as this whole China Swords thing gets played out and we get these price increases, that brings us to mid-26 [anywhere]. And after that, there is the (inaudible) landfill in Queensland, which we are keen to get if we can get one or convert a hole in the ground and plant. So that's the missing asset, but it does not depend on waste [management plant] of those assets. But we are talking about constant asset churn, not asset improvement. It does not require investment like this to get up to 27%, 27.5%, no.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [37]

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Great. Just on your CapEx, you were tracking it and you've always said that the most waste management companies globally track around that 10% of revenue, and you guys have been at 9%. Part of the reason it's making the Tox acquisition was an asset replacement, that a lot of assets that you would require replacing the day you could bring them onto your stream. You've now bumped that from 9% up to 10%. Should we take that into account that the reasons for FY '20 bump-up in CapEx is because these opportunities you're seeing from the current marketplace, that $10 million to $20 million downstream investment, is that the key driver or is there something else? (inaudible) couple of years or what -- is something else going on?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [38]

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No, nothing going on. We are still committed to below 10% first and we believe 10% is -- for example, the ASP investment to bring in onshore manufacturing of Sharpsmart, all of that stuff is within all the 10%. So no, nothing has changed from what we initially said. And as you said, all these downstream activities, we can easily do within our budget.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [39]

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Okay then, two other things. Just on the 2 acquisitions ResourceCo [IST], is a bit of capital deployed this year, and they contribute a loss in FY '19. Wondering if you could give some, I guess, some feeling, particularly, obviously, on the ResourceCo, the ramp-up of that facility and when we should be seeing that in terms of run rate, and therefore, the earnings contribution to the group.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [40]

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Yes. So I think we are expecting ResourceCo to start being effective in 2000 -- FY '20. FY '19 was a ramp-up and then (inaudible) customers there on our end. It takes one material and then the other material goes not necessarily as a waste but as a fuel to Southeast Asia. And it got caught up in the all of its base headline story. And then what happens is when it gets caught up, there will be something that's hold up. Finally, we got the approval, it was always right. Then through which we (inaudible) but it just delays all of that. Things of the ramp-up, it would have normally taken us 5 months, 6 months. It's now taken almost now 11 months. So we absolutely expect that to be accretive in FY '20. Also don't forget there's a big earn-out -- well, not big. As I said, equally an amount of earn-out for ResourceCo. So if they don't deliver, it will still be a very good acquisition for us because we don't have to do the second payment. So just keep in the back of mind as well. But we are expecting it to be fully operational FY '20.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [41]

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Yes. I think the remaining $25 million spread over 2 years, that payment, though, is it based on hitting EBITDA targets? Those targets you still think are achievable despite that 6-month delay?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [42]

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I think so in FY '21, but not in FY '20. So [we've budgeted] accordingly, simply because -- and again, I said before, [we do not expect perfection], everything doesn't go right, and there are a little bit of uncertainty. I just want to make sure I'm cautious of not assuming everything will go right. So I'm just being cautious, make sure we deliver what we promised.

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Russell J. Gill, JP Morgan Chase & Co, Research Division - Head of Emerging Companies for Australia and New Zealand [43]

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And just a final question. The discussions of court decree in Victoria where you've got a large landfill there's a lot of press reports about trucks with recycled material lying outside your landfill. Is it possible to quantify any near-term benefit you're getting from SKM bankruptcy and what landfill volumes you're seeing in Victoria in the last 6 weeks?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [44]

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So I mean, I have an -- so one of the things we have to be careful in the industry is in -- that's an interesting changeover. That -- not all the news is bad news -- so that is -- I haven't seen those materials. Yes, we have started to get some materials from some of the council, a number (inaudible) a couple of weeks ago and -- but I won't say material at this point. But there are negotiations on foot, and I will leave it at that.

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Operator [45]

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Your next question comes from Raju Ahmed from CCZ.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [46]

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Just a follow-up from the previous question around SKM. Given it's going into receivership, is that an asset portfolio you'd consider or even at least land that is [offered]?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [47]

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No, we will consider it fragile. We'll -- we will be -- yes, that will be on the table.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [48]

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Right. So is that a -- is that going to be a commitment over and above the 10% CapEx profile if it's something in the near term?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [49]

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Well, (inaudible) acquisitions much so is the -- yes, like ResourceCo [or SP], we will obviously tell you. So yes, so that will not be a CapEx at all, probably over and above the CapEx and be an acquisition. And yes, we will be very keen (inaudible) may develop.

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [50]

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Sure. Okay. The next question, again, slightly on the high level. Similar to the Tomra JV bottle collections in New South Wales. Are you seeing any emerging opportunity in the Victorian market?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [51]

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Well, yes. One week we hear it's coming, the second week, we hear it's not coming. So yes, this is going to be very active on all the (inaudible) all the schemes in all states, wherever they are working through, we're working with the general ministers. But these are, as you very well know, critical schemes and -- but I think if I were to certainly (inaudible), we'll have a CBS in my humble opinion. Timing, I can't tell you. But the answer is, yes, (inaudible).

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Raju Ahmed, CCZ Equities Pty Limited, Research Division - Equities Analyst [52]

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Sure, okay. And the last one, just looking at your results over the last couple of years. The leverage in the business is obviously increasing. I think that what is it before a couple of years ago, it was 4% growth, and revenue was 7% to 8% growth in EBITDA. Today, you're seeing a similar growth. Revenue is about 10%. Notwithstanding your EBITDA targets by individual segments, do you feel that, that 10% EBITDA growth and 4%, that's still got a long way to go?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [53]

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Yes, yes. I mean I think this business should -- I mean, we will, we should, we must deliver operating leverage even if the top line is down. So if 4 becomes 3, then we might have 8%. And I think this whole discussion about our kind of -- on our outlook statement is exactly about that. We are not walking away from operating leverage. In fact, we are very confident we'll deliver operating leverage. All we are saying is if the revenue was to come down by 1% because of price volume mix, we just want to make sure everybody understands. Operating leverage will be there rather than 10% growth on EBITDA. It could be 8% growth in EBITDA. That's what we're talking about here.

Just on outlook, we're not talking about this (inaudible) business is running fine. It's a revenue to EBITDA leverage that we are talking about.

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Operator [54]

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(Operator Instructions) Your next question comes from Nathan Lead from Morgans Financial.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [55]

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Two or three questions from me. So just first off, you talked about that 12.7% organic growth in EBITDA in FY '19. Could you carve out the Tox synergies component from that, please? And then separately, if you could have an estimate on just how much decline in recycling prices impacted that organic growth also.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [56]

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Well, as I said, we can't now, but to be honest, Nathan, I can't tell you when this stops. So this is -- you're talking about Slide 6 here, so the 12.7% year-on-year organic growth after taking Tox core business, I can't honestly break down with you what percent of the cost of the business or similar business. They are now -- it's one big omelet now. So I can't give you that, unfortunately. And as I said (inaudible)

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [57]

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Don't you have incentive target next to beat the $35 million?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [58]

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Yes. No, we do. But with the total $35 million, of course, we do, but the total number integration number. So we can pick up the integration activity that are covered differently, but it's a liquid business and test that we merge and the assets have gone into (inaudible). I can't penalize or incentivize GMs for the assets we didn't have 3 months ago. I would've ran that as a normal business unit, so I can't give you that. I actually don't have it because we don't (inaudible) business units and the integration is in progress, so 35%. So the second question you asked was the impact of commodity, as I said before, the kind of $5 million to $6 million.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [59]

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Okay. That's what you're referring to there? All right. Just capital management, the flavor the month at the moment, your balance sheet is obviously de-gearing. I think at least a month. It's going to de-gear it even more going into next year. Have you thought of that capital management initiatives or at least cranking up the dividend pay-out?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [60]

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Well, we just increased the dividend pay-out significantly but we have, although I understand, it's still not 51% of the payout ratio, I know Brendan has another comment on that, but let me just add something on that. I think in an existing environment where there are -- we absolutely believe that opportunities are going to happen, it will happen, and I'm actually quite confident of that. I think it's worthwhile not taking these steps on capital and doing decapitalizing, I think there's opportunities which are coming our way, which will give us very good return on those capitals. So I would caution us to -- Brendan and I have talked many times, and we've cautioned ourselves into be hasty on that because opportunities are definitely happening. (inaudible)

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Brendan J. Gill, Cleanaway Waste Management Limited - CFO [61]

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Well, Nathan, we've maintained discipline over the last 4 years. Vik talked about the rectification and remediation spend. We've talked about capital discipline as well. We've still got one more year of rectification and remediation spend. We have kept our payout ratio in that low 50s while we're doing that. And as Vik said, there's other opportunities as well. So we'll keep our powder dry for the moment and we'll consider all opportunities.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [62]

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Okay. Sounds good. And just a final one from me. Just a lot of that impairment testing that you've got there. So for your forward views there, obviously, you're expecting 5% EBITDA growth out of the soul of the business, that over 8% for the other 2 segments. Can you just sort of talk through what you think of the fundamental drivers there to get that sort of 5-year CAGRs coming through?

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Brendan J. Gill, Cleanaway Waste Management Limited - CFO [63]

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Yes, I can, Nathan. And we are underway, we've got still integration benefits to deliver over this coming year and also the flow of last year. So each year, as our year progresses, so we'll deliver the integration benefits this year while we locked -- that'll be baked into the base, so your CAGR actually goes down after that at least on flow-through. So obviously, you do get some pretty good numbers coming through there because of those integration benefits.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [64]

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Hence the reason I was asking about what the integration benefit was for this year.

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Brendan J. Gill, Cleanaway Waste Management Limited - CFO [65]

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I -- we understand that, Nathan.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [66]

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The total number is 75.

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Operator [67]

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Your next question comes from [Scott Ryall]from [Rima Equity Research]

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Unidentified Analyst, [68]

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Vik, I had a quick question on your commentary around pricing pass-throughs. I understand the commercial sector obviously is a sector that you'd be very used to dealing with and they would be very used to dealing with good price increases. And I guess councils can they -- are a little bit more complex, let's say, because you don't tend to have a whole lot of commercial people working at council. So I'm wondering, what do you do to help councils beyond educating them? That's -- they have to pay more for the sustainability initiatives? How do you help them think about how they might mitigate the additional costs that they are incurring? How do you work with your council customers to help them beyond just the price increase, please?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [69]

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Sure, sure. That's a good question. So we've got about 90-plus contracts around the country. And in a lot of those councils, we have education officers deployed who work as part of the council employment, although we pay for them. That's part of the contractual understanding we had with them. Based on this to constantly work with the councilors and the people within the councils to educate them what the contamination, the fees, the impact of contamination, et cetera.

Now I will be the first one to admit that so far, and I say that publicly within the company and outside is that, that has to now, and already had, has to mature from putting glossy flyers outside on our council in our vegetable market fairs and putting colors on little girls to really educating the councils about contamination. So we are absolutely -- those education officers are key for us. They are in the council, working with them and that's what we are doing. So that has really started to take some traction. So we've been readjusting their jobs.

The second thing also is don't forget, this public dialogue which is happening right now, help us quite a lot. The SKM trouble, the receivership in Victoria helps us a lot because what they don't want to be doing is the understanding that if you ask any council today in Victoria (inaudible) they would all understand that the contract they have with SKM was actually and practically untenable, commercially unfeasible, and it never would have happened in the first place. So that's why I say, I said before, is what you are seeing in the second half of this version is drama getting unfolded. So that process has already happened, both with the combination of the news, the SKM and the effect of the (inaudible) being untenable.

So the third thing which we also do, we do regular base products with our customers. So we will say to them, let's do this story, and we will check contamination. We did contamination approach for them. So we actually, generally, we believe or council believes the fact that somebody has sold out the (inaudible) that their job is done. But when we actually look into a couple of audits with them now, telling them look, you might think (inaudible) it's actually 80% contaminated. It's quite an eye opener for them. So we are fundamentally shifting again on that issue. Market report structures as well, but the dialogue is quite improved.

So I can tell you that from a year ago, that conversation is at least significantly more mature than what we had 1.5 years, 2 years ago. 2 years ago, with a strop in my hand and come back at the end of the contract. Now if you come and talk to us, what do we need to do to help? So I think that inevitability is now [going on there] as well.

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Operator [70]

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Your next question comes from Paul Butler from Crédit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [71]

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Just a couple of follow-up questions for me. Earlier on, you're saying that some of the C&I business is an on demand service. Could you just give us a sense of how much of it is regular scheduled and how much is on demand?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [72]

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So a majority of our customers is -- there are -- first of all, they're all contracted. As part of the contract, some of those contracts could be on mixed basis. So you say, for every month or every week, we're going to come on the vast majority of the customer. But they're the customer base who stays [over a certain term]. I'm happy to tie contract with you but rather than you coming and picking up every week, what I will do is I'll give you a call in the second half, simply because I want to be able to manage how I close my shop, open my shop and how I put my container out because I don't have enough space to keep my bin out, et cetera, et cetera. That's not a -- that big a number, but number enough that the pricing discussions become interesting and difficult even when we have to get there. So I don't have a number handy, Paul, but majority of them are scheduled and all of them are on contract, but there is a small portion, particularly some metro areas where they likely to keep it on call simply because they don't find enough space outside, below 50% [business] outside. So they even call, we collect within 24 hours. And they pay higher for it by the way. On call services are paid higher, but they're happy to have the flexibility they want to.

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Paul Butler, Crédit Suisse AG, Research Division - Director [73]

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And I mean, just to get a sense on the quantum. I mean is this something that could be closer to 10% or something closer to 40%?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [74]

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[Less than] 10%. 10%.

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Paul Butler, Crédit Suisse AG, Research Division - Director [75]

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10%, okay, okay. And then just on the opportunity that there may be in Victoria with the SKM insolvency. Are there -- the assets they have that potentially come up for sale are sort of -- I think the -- I can't remember the term you used, but you're sort of fitting into the category of your star or critical assets. Or are the...

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [76]

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Prize assets, yes.

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Paul Butler, Crédit Suisse AG, Research Division - Director [77]

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Prize assets, yes. Do they potentially fit into that category or is there sufficient capacity elsewhere in the Victorian market to -- in terms of sites, to take up the demand from SKM?

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [78]

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No. For us, it will definitely get into that category, Paul. And can I not comment anymore on that whether -- how much the asset fits in? I'll leave it at that question, so we can have -- but I think they are (inaudible) prize asset.

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Operator [79]

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Thank you. There are no further questions at this time. I'll now hand back to Mr. Bansal for closing remarks.

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Vikas Bansal, Cleanaway Waste Management Limited - CEO, MD & Executive Director [80]

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Thank you, again. Ladies and gentlemen, thanks again for your support. As always, we look forward to seeing you on the investor roadshow and look forward to having further discussions. As always, thank you again. Appreciate it.