U.S. Markets open in 7 hrs 29 mins

Edited Transcript of DRX.L earnings conference call or presentation 24-Jul-19 8:00am GMT

Half Year 2019 Drax Group PLC Earnings Presentation

London Oct 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Drax Group PLC earnings conference call or presentation Wednesday, July 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew Robert Koss

Drax Group plc - Executive Director & CEO of Generation

* Andy Skelton

Drax Group plc - CFO & Director

* Dwight Daniel Willard Gardiner

Drax Group plc - Group CEO & Executive Director

* Jonathan Kini

Drax Group plc - Former CEO of Customers

================================================================================

Conference Call Participants

================================================================================

* Christopher Robert Laybutt

JP Morgan Chase & Co, Research Division - Research Analyst

* Dominic Charles Nash

Barclays Bank PLC, Research Division - Head of Utilities Research

* Duncan Scott

Deutsche Bank AG, Research Division - Research Analyst

* Iain Stewart Turner

Exane BNP Paribas, Research Division - Analyst of Utilities

* John Musk

RBC Capital Markets, LLC, Research Division - Analyst

* Mark Freshney

Crédit Suisse AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [1]

--------------------------------------------------------------------------------

Welcome, everybody. This is our half year results, 2019, and welcome everybody to a nice warm day. Climate change is happening. So just on in terms of the agenda, the normal sort of course, I'll introduce and talk about operations, and Andy will go through a financial review, and then we'll talk a little bit about our strategy.

I wanted to kick off with our purpose, which as you know is to enable a 0-carbon, lower-cost energy future. And our strategy, as in how we're going to do that, is to be the leading provider of power system support, to build a long-term future for biomass and to give customers control of their energy, and I'll talk through a lot of that during the course of the presentation.

But one point I wanted to make now is I think that the Climate Change Committee's report on how the U.K. would get to net 0, and then, again, the U.K. government's endorsement of that target, I think, is really quite important because it explicitly talk about a significant role for bioenergy, and I'll talk more about this in a bit -- in a minute. So as much as 10% of U.K. primary energy in 2050 coming from bioenergy and also a very specific role for BECCS, i.e., that in order to get to net 0, the Climate Change Committee believes that there will need to be about 50 million tonnes of negative emissions delivered by BECCS in the U.K. So I'll talk more about that as well.

So just to introduce, talk a little bit about our performance. So I think we've had a good half year. Our financial performance has been strong. EBITDA up 35% to GBP 138 million. Our dividend up by 12.5%. And again, as we said, our full year expectations for earnings remain unchanged. Our refinancing is proceeding well, and we are very much -- very confident of completing that by the end of the year. Operationally, again, we've had a good performance. We've almost doubled the value that we get from flexibility. Our Hydro and Gas assets are performing well and the integration there is also proceeding very much to plan.

It's been a challenging half year financially for the Customer business, but I'll talk about some of the underlying metrics driving that business, which are also, I think, in a good place.

In terms of strategy, again, as I mentioned, net 0 fully aligns with what we're trying to do. We see an important future for both biomass and for BECCS. And one of the key things we need to do in order to deliver that is to bring the costs of biomass power generation down, and I'm going to talk in a bit more detail about some of the things we're doing there. And the final point is, I'll talk about where we think the Capacity Market will be. And again, our expectation is that it will be reinstated.

So at Drax, we have been transforming the business, as you all know, in lots of different ways. But I think the most dramatic transformation that we have made has been in our carbon footprint. So since 2013, we've completely changed the mix of our business from effectively 90% sort of high-carbon generation, which was coal at the time, to 90% renewables and low-carbon today, so biomass and hydro. And as a result, our CO2 emissions have dramatically reduced from over 20 million tonnes of CO2 in 2013 to about 1 million tonnes in the first half of 2019, and the reductions are continuing. So we reduced our CO2 emissions by 50% year-on-year in the first half of the year. So we are, I think, legitimately Europe's largest decarbonization project.

So safety, sustainability, good governance are at the core of what we do. We continue to have very good safety performance, although we can always do better there. We have not had any serious incidents in the half year, but more slips, trips and falls than we would like, and we're working hard to reduce those. We're also launching a revised biomass sourcing policy in the coming weeks. And this is in response to recommendations from the Committee on Climate Change, and we'll build on our industry-leading sustainability policy. This follows guidance by leading scientists in the area of climate change and forestry and ensures that we can better demonstrate that we are reducing our carbon emissions. We're also establishing an independent advisory board of world-leading experts to guide us as we move forward.

In terms of the Capacity Market, again, a sort of short update. You all would have seen this, but again, the consultation process is very much complete. The U.K. government has responded to the European Commission, so the ball is very much in the European Commission's courts. Then our expectation is that the Capacity Market will be reinstated, and this is on the basis of our own views, but also very much in discussions with BEIS and based on where they think -- see things happening. Again, very much in line with where this Capacity Market was before. So payments being reinstated, the auctions being reinstated, and ultimately, continuing going forward. So our expectation is that, hopefully, it will happen before the end of September.

Turning to the operational review. The amount of power generated using biomass is broadly in line with where it was last year. Our generation is less than half of what we would expect to generate from biomass for the full year, as our generation was restricted in the first quarter by challenges that we and our third-party suppliers had with bad weather, largely in the southeast of the U.S. It was very wet, very difficult to get fiber into pellet mills and make pellets. That being said, our biomass earnings improved substantially this half year, due to better achieved power prices and lower delivered biomass costs. Because of the ROC cap system, we can deliver the expected generation as well as earnings for the full year, but with a greater proportion in the second half. And to do that, we need to run our plants well, as we have done in the past, and that includes completing a major outage on one of our ROC units.

Our Hydro and Gas assets are performing well, and I'll talk more about that on the next page. Coal generation was more than 85% lower than a year ago, as its economics have deteriorated. However, through effective trading, our earnings from coal, excluding the Capacity Market, were broadly in line with where they were last year. Again, we've almost doubled our value from flexibility, a lot of that is coming from our new assets, but our biomass assets have also performed well. And finally, we continue to have a strong forward contracted position.

Before getting into the financials on our Hydro and Gas assets, I wanted to emphasize that we found our new colleagues to be really excellent additions to our team. They're extremely professional. They have a very strong safety culture, and they're also very commercial. They really know how to drive value. So it is great to have them on board. So we're quite pleased with the financial performance here, so very much in line with the profit forecast that we made last year of achieving between GBP 90 million and GBP 110 million of EBITDA for the full year, again, on the assumption that the Capacity Market is back in place. In fact, if you look at what we earned in the first half, if you were to effectively include what we would have earned from the Capacity Market, we would have had GBP 59 million of EBITDA in the first half, so more than halfway to that target.

They're very much providing the system support that we had expected. And while gas has run less than it may have done the prior year, that's very much in line with what we had expected when we actually did the purchase and when -- because effectively, they were limited in terms of hours, given where they were in their inspection cycles. We will complete inspections this year and next year, and expect to be back running unrestrained or unconstrained after that.

As you might expect, we've done a lot of work on Damhead Creek 2, which was the project that we have to potentially build a new CCGT next to Damhead Creek, where that is today. That project is permitted. We expect to put that into the Capacity Market, and we think it has the potential to be a very attractive project.

In terms of the integration specifically, that is also going well, and I -- important not to think about this as maybe what I would call a typical integration. So this is not about reducing cost, as in we did not bring with the assets much of any of the support costs that one normally would bring given that this was a carve-out from ScottishPower. So really, what the integration was about is putting in place our own infrastructure to support those assets in our own systems. So we're now using our own -- fully using our own systems in terms of financial systems, procurement, et cetera. And the teams have done a great job getting those in place, and we expect to have all of the infrastructure, primarily the sort of the wide-area network infrastructure, in place by the end of the year.

Last point I wanted to make is I wanted to reiterate the portfolio benefits that we're seeing. We are providing system support across the country now with the attended benefits associated with that. And to give you 1 example, our new assets are providing a sort of low-cost back up internally for our own units, which is quite helpful.

I want to provide a bit more color on how our strategy to be the leading provider of power system support will create value. And we see that as happening in 2 ways. First we expect the National Grid will need to access more non-generation and ancillary services, such as inertia, reactive power, black start as the power system transitions to more wind and solar power and less large-scale thermal plant. For example, as more offshore wind is developed in Scotland, the system will need more reactive power to move that power to the south, where it would be needed. And again, our assets are very well positioned to deliver that.

BSUoS, the cost that National Grid pays for those services, is growing, as you can see from the chart, and we would expect that to continue. The second source of earnings will come from an increasingly volatile system. In that system, we will find opportunities in the balancing market to sell power at higher prices. We will also find opportunities to buy back positions that we have sold forward, if prices were to decline. So value from flexibility, which is shown there on the chart, is an internal metric that we use to measure our contribution to supporting the system, both from the services I mentioned above and also from volatility. And again, those earnings are growing strongly, both because of the ScottishPower acquisition, but also organically, as the system becomes more volatile and we provide more support.

So operationally, the first half was challenging for our wood pellet business as very wet weather, which I mentioned before, made it difficult for foresters to get fiber out of the forest. Production volumes were broadly in line year-on-year, but adverse weather impacted the number of pellets we were able to ship, and consequently, profitability was slightly below last year. Our plants are now producing well, and we expect to deliver a full year profitability in line with expectations.

We've been working on several cost reduction initiatives, several of which will come online in the second half of this year, and we've also approved capacity expansions of 350,000 tonnes, which, again, we'll be building in second half of this year into 2020 and 2021. I'll discuss the cost reduction initiatives as well as the expansions when I come back to talk about strategy in the second half of my presentation.

So in terms of Customers, also challenging first half. EBITDA was down from GBP 16 million in the first half of last year to GBP 9 million in the first half of this year. Andy will take you through the details of that as growth in meter points and value per megawatt hour as well as success managing our bad debts were outweighed by a reduction in usage, partly due to warm weather, as well as higher costs associated with repositioning the business.

While I'm not happy with the financial performance, I do believe the team is taking the right actions to create a stronger and more financially successful Customer business.

And just to give you a sense of some of the key things that we're doing: we're focusing on higher-value customers who deliver more GBP per megawatt hour, and this will ultimately allow us to deliver higher value; we're implementing best practice debt management across the business to bring levels of bad debt expense down; we're combining some of the teams across Opus and Haven to allow us to leverage capabilities across a larger customer base and ultimately, create operating leverage; and finally, we're putting in place next-generation systems as well as smart meters, so that we can deliver both a lower cost to serve, but also differentiated propositions for customers.

In terms of systems, a new ERP system for finance, procurement, financial reporting has been successfully implemented in our Haven business. We've also done a lot of work on our digital front end to improve our customer experience. And we have experienced challenges with putting in place a new customer care and billing platform. And as a result, we are pausing to consider the best way to move that forward at Haven and also separately exploring alternative solutions in the rest of the Customer business, right, including looking at cloud-based systems that are now becoming available. So the key for us here is we're going to take the time to ensure that the project is delivered properly with no disruption to our customers. And as such, we'd expect that to be rolled out over an extended time period.

I will turn it over to Andy for the finance.

--------------------------------------------------------------------------------

Andy Skelton, Drax Group plc - CFO & Director [2]

--------------------------------------------------------------------------------

Thanks, Will, and good morning, everyone. So starting with Slide 15 and the financial highlights. The adjusted EBITDA in the first half totaled GBP 138 million, which was an increase of 35% compared to the prior period, and it benefits from the inclusion of the acquired Hydro and Gas assets. Integration of those assets is progressing well and it's on track, and we've delivered GBP 36 million of adjusted EBITDA. It also contributed strongly to the value achieved from supporting the system, which is almost doubled in the period. The continued suspension of the Capacity Market had a negative impact on EBITDA of GBP 34 million. And of that, GBP 23 million relates to the Hydro and Gas assets. Consistent with the approach that we took in the fourth quarter of last year, we've not accrued revenue in Generation, but we have accrued all the costs in our Customers business.

As Will said, we continue to expect the Capacity Market will be reestablished during the second half of this year with retrospective payments for the period since it was suspended. We include this in our full year expectations, which remain unchanged and are consistent with current EBITDA consensus of GBP 410 million. We've resolved to pay an interim dividend of 6.4p per share at a cash cost of GBP 25 million, and we expect to announce a full year dividend of 15.9p per share. The interim and expected full year dividends represent a 12.5% increase. We believe that this level of dividend is sustainable through the business cycle, and we expect that it can increase further over time as our strategy delivers higher future levels of EBITDA on cash.

We continue to be very strongly cash generative, and net cash from operating activities of GBP 197 million in the period. Since the start of 2016, we've generated in excess of GBP 1 billion of net cash from operating activities. Our closing cash was GBP 244 million, and net debt totaled GBP 924 million. Subject to the reestablishment of the Capacity Market during the second half, we expect to achieve our target 2x net debt-to-adjusted-EBITDA ratio for 2019. Finally, the adjusted earnings per share of 2p are a 25% increase compared to the prior period.

So moving on to Slide 16. We'll look at the development of the adjusted EBITDA through the period. So starting with our Pellet Production business. As Will mentioned, high levels of rainfall in the U.S. Gulf restricted availability of low-cost material and the shipment of pellets out of the port at Baton Rouge. Production volumes were lower than anticipated, but actually broadly in line with the first half of 2018. So the reduction in volume shipped impacted adjusted EBITDA and it decreased GBP 2 million in the period. Our cost of sales in that business mainly consists of raw fiber procurement, transportation and processing. So continuing to deliver further improvements in the cost of producing pellets is a key area of focus and a significant opportunity for us to deliver further EBITDA improvements.

In the second half of the year, we expect higher production and shipped volumes and a reduction in costs will drive improvements in the profitability of that business in line with our expectation. And beyond this, we remain focused on opportunities to use a greater proportion of the cheapest wood residues and expand our production capacity.

So looking at Generation, the adjusted EBITDA of GBP 148 million increased GBP 60 million, and GBP 36 million of this, as I mentioned, relates to the Hydro and Gas assets. As we've already noted, we've not accrued any capacity payments. So this represents a GBP 6 million reduction compared to the first half of last year. So that leaves GBP 30 million of adjusted EBITDA increase, and that relates almost entirely to biomass generation. The volumes increased 2% despite the challenges of restricted supply, and that's a good performance, particularly considering that we completed 2 planned outages in the first half of the year.

The flexibility that the ROC scheme allows -- provides allows us to maximize generation across the 3 ROC units within an annual cap. So this will enable us to produce at higher levels in the second half of the year. This GBP 30 million increase also reflects indexation of the biomass subsidies, an increase in the average power price that we achieved and a slight improvement in our effective hedge rate. As Will mentioned, the broad -- the benefit of our broader generation base has been clearly evident in the period, with our hydro operations performing strongly in the provision of non-commodity-exposed system support services, and this represented over 2/3 of the earnings of that acquired portfolio in the period.

On our Customers business, the adjusted EBITDA reduced GBP 7 million, and I'll cover that performance in more detail on the next slide. So looking at the costs in core services, which increased GBP 9 million. In part, this reflects the expanded size of the group, post the acquisition of the Hydro and Gas assets. Additionally, we incurred some onetime third-party costs to implement a new organization structure that we believe will help us to execute our strategy more efficiently. Costs associated with implementing working capital initiatives also increased, and we invested more, developing innovation across the group: for example, expanding our biomass fuel envelope, BECCS technologies and giving the customers control of their energy. In the absence of the onetime third-party costs in the second half of the year, we expect the run rate of core service costs will reduce.

So looking at the bridge for the Customers business, as I noted, the adjusted EBITDA in the period of GBP 9 million reduced GBP 7 million compared to the first half of 2018. So whilst profitability of our Customers business was weak, a number of the underlying metrics are robust, and we continue to believe that there's a significant opportunity for improved performance and earnings in future years. To deliver this, we must continue to grow our gross profit, manage our bad debt as a percentage of revenue, create operating leverage and capitalize on opportunities that exist in a smart-enabled world.

So looking at gross profit, there's 3 things that I'd like to highlight. Firstly, we continue to grow market share with an increase in customer meters of 2%. Secondly, as Will mentioned, we increased the value achieved per megawatt hour, but the benefits of these were offset by a 12% decrease in volume, which reflects the mild winter weather and the increased focus on value achieved in management of credit risk. We expect that these are broad trends that will continue and that they will result in additional gross profit over time.

Looking at bad debt expense. We've maintained positive progress in the last 18 months in reducing our bad debt as a percentage of revenue. The GBP 13 million expense in the period is similar to the second half of last year, and it's GBP 5 million lower than the first half of 2018. In the period, we benefited from a GBP 3 million credit for resolution of some legacy balances. And in the first half of last year, there was a GBP 3 million one-off expense in respect to the SME business. We continue to focus on managing bad debt, starting with the customer acquisition process and continuing all through the debt cycle. We involve third-party collection services where appropriate, and we've increased our use of credit insurance to manage this exposure. We also have access to attractively priced nonrecourse receivables facilities.

So finally, looking at the GBP 10 million increase in operating expenses. So during the period, we incurred GBP 4 million of restructuring and integration costs, and these are included in the adjusted operating expenses. In the first half of 2018, GBP 1 million of these costs was treated as exceptional. These costs primarily relate to the combination of our Haven and Opus businesses. We're making good progress, and we believe that this will help drive alignment of decision-making, effective market segmentation and delivery of operational efficiencies. We also incurred GBP 5 million in supporting the development of next-generation systems and the rollout of smart meters. This represents an increase of GBP 2 million compared to the first half of last year and these costs support our aim of increasing operating leverage as the business continues to grow. So taken together, they account for GBP 6 million of the GBP 10 million increase.

As Will mentioned, the new ERP system has been successfully implemented in Haven, and we have experienced some challenges and delays in relation to the implementation of the new customer care and billing system. We'll take the time to ensure the project's delivered properly with no disruption to our customers. And as such, we expect that, that project will roll out over an extended time horizon. The increase in operating costs in the last box in the period reflects expansion of our cost base to manage increasing customer numbers. So this is the area where we look to address as we grow the customer numbers, and you see the increase in the meters. We have this offsetting operating cost and growth. So the investment in these systems and then the restructuring is to create that operating leverage. And once these systems are in place, we believe we'll be able to scale our operations more efficiently.

So moving on to the next slide, I'm looking at net debt. So when you adjust for the outflow in respect of the acquisition of the Hydro and Gas assets, you get a pro forma net debt at the start of the period of just over GBP 1 billion. Achievement of the net debt of GBP 924 million at the end of the period was helped by working capital and other inflows of GBP 88 million. And if we break that down, the working capital accounts for around GBP 35 million of that. And there's a number of offsetting impacts: firstly, an outflow from an increase in the number of ROCs of GBP 96 million, and that's in line with normal seasonal flows, where we build up ROCs through the first half of the year, and we sell the excess ROCs to third parties in the second half of the year. We also had an outflow from an increase in inventory of GBP 65 million, and this reflects the actions we've taken to secure biomass supplies ahead of the higher expected generation in the second half of the year. It's mitigated in part by an increase in payables in respect to those inventories. Then there's an inflow for a decrease in receivables of GBP 80 million. This also reflects seasonal trends. June sales are always lower than December, but it also reflects the use of a ROC factoring facility in the period. There was GBP 46 million was drawn at the end of the half.

An inflow from an increase of payables of GBP 116 million also includes increased use of payment facilities that help us leverage scale and efficiencies in transaction processing, and also the negotiation of improved payment terms with some key suppliers. So the other part of the GBP 88 million working capital and other primarily relates to a cost-effective release of cash by re-basing certain foreign currency exchange contracts that were hedge accounted. So this had no impact on our FX position or on our EBITDA.

We're continuing to target a net debt-to-adjusted-EBITDA ratio of around 2x at the end of 2019, subject to the reestablishment of the Capacity Market. In the event that the Capacity Market is not reestablished in the second half of the year, achievement of this 2x leverage target will be delayed until 2020.

So on Slide 19, looking at capital expenditure. In the first half of the year, it totaled GBP 60 million, and we expect the expenditure for the full year will be at the top end of our previously stated guidance of GBP 170 million to GBP 190 million. If we look at the constituent parts, our expectation for maintenance spend continues to be around GBP 50 million. Moving forward, as we include the Hydro and Gas assets, we expect this will average GBP 50 million to GBP 60 million. In respect of the acquired Hydro and Gas assets, we expect expenditure for the year of between GBP 30 million and GBP 35 million. This includes an interim inspection outage at Shoreham, which will enable it to return to service for the more valuable winter period, and we're continuing to look at further enhancements to this asset. The enhancement spend of GBP 40 million includes investments in biomass cost reduction, including the new railway spur at LaSalle, which was commissioned in May and which we expect will significantly reduce transportation costs. It also includes the first of a 3-unit, 3 high-pressure turbine upgrade program with Siemens, where we know that modest improvements to efficiency will deliver a fast payback.

Lastly, it includes the investment that Customers is making in the next-generation systems. On strategic investments, the GBP 45 million to GBP 55 million includes development of options for new gas generation. We have 3 OCGTs with planning approval, and we've begun some site preparatory work in respect to the coal-to-gas conversion at the power station, and we expect to receive planning approval for this during this year. The OCGT and Damhead Creek 2 projects remain subject to obtaining a Capacity Market contract at the right level in a future auction.

Strategic investments also includes further expansion of our biomass supply chain. As Will noted, we've recently approved expanding our 3 sites: LaSalle, Morehouse and Amite, by a combined 350,000 tonnes over the next 2 years. The total investment is around GBP 50 million, and we expect that the work will commence this year and around GBP 10 million of that cost will be incurred in the period, and we will manage that within our existing CapEx expectations.

So moving on to Slide 20. Over the last 2 years, we've greatly improved our access to capital while we've maintained a strong balance sheet to support our strategy. With the acquisition of the Hydro and Gas assets, the quality of our expanded portfolio helps mitigate business risk. It delivers high-quality earnings, and it supports strong cash generation. As a result, we believe that we can access a much wider range of funding options. As previously announced in May, we issued an additional $200 million tap of the existing fixed-rate, November-25-dated U.S. bonds, and that was swapped back into sterling on issuance at an effective rate of around 5%.

We're pleased with the progress that we're making with refinancing the GBP 400 million balance outstanding of the acquisition bridge, and we continue to expect that we'll complete that process during 2019. Our strong credit rating allows cheap access to credit. It's supportive of our trading strategy, and it remains robust to low points in the commodity cycle. So I'd reiterate that we remain on track to achieve the 2x net debt-to-adjusted-EBITDA ratio by the end of 2019, subject to restatement of the Capacity Market.

So finally, on Slide 21, on the capacity payments. So capacity payments for the Generation business, including the newly acquired assets, are expected to be GBP 68 million for the year, GBP 34 million in each half. As part of the acquisition of Hydro and Gas assets, we did agree a risk-sharing mechanism with Iberdrola, which could compensate up to GBP 26 million in the event that the Capacity Market was not reestablished and payments weren't received and a gross profit floor is passed.

In this scenario, while the net cash impact of no capacity payments would be GBP 42 million, the risk-sharing mechanism will be treated as an adjustment to purchase price, so the maximum EBITDA impact would be the full GBP 68 million. Until the market is restated, we'll continue to defer revenue recognition in Generation and continue to accrue all the costs in Customers. In the event that the market's not reinstated, there may be some offsetting benefit associated with lower costs in the Customer business. So to be clear, our adjusted EBITDA expectations for 2019 are based on normal operation of the Capacity Market.

With that, I'll hand back to Will.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Andy. So I wanted to just update a little bit on our strategy. So I think the place I wanted to start is, if we think about -- of our purpose is to enable the 0-carbon, lower-cost energy future. I guess the key question or one of the key questions is, what is the system within which we expect to operate, and I think that over the last few years has become increasingly clear. And I think the IPCC report earlier this year and the Climate Change Committee report also started to lay out a road map, again, that sort of lays out what it might look like. So in the U.K., I think it will be a system that is largely based on wind power and also some solar power, let's say, 75%, 80%, call those intermittent renewables. There also will be a significant portion of the system which will come from other forms of energy, which have to be low carbon and, ultimately, by 2050, 0 carbon. So biomass, again, has an important role to play, as I mentioned before. Hydro energy, gas for a while until we get to unabated gas in some form, whether that's with CCS or potentially with hydrogen.

So as we lay out that system, I think the role also for Drax within that becomes increasingly clear on how can we use renewable biomass, how do we use flexible generation to support the system, and how can we give customers more control of their energy. And final point to make, I think is important, is that, that system will be much bigger in my view than it is today as we electrify more things to allow us to decarbonize other sectors of the economy.

So just a quick sort of thought on biomass. I wanted to sort of specifically mention what was just said in the Climate Change Committee report, effectively saying that 10% of the system ultimately in the U.K. in 2050 would come from bio-energy. That's their view. Equally, that BECCS will play a key role, that as much as 50 million tonnes of CO2 would have to be captured in order to hit that net 0 target in 2050. And so fundamentally, again, there is a key role for Drax to play. Now a lot of things have to fall into place. But again, there's a -- I think there's a great opportunity for Drax sort of in that world, right?

And within that, I wanted to also make -- sort of reiterate the 3 key points about biomass, which I think are the important reasons why it is a key part of the future system. So the first one is that biomass does support a healthy forest by giving forest owners better economics on their land and on their forests. Effectively, that enables forests to continue growing. And again, the forest cover in the U.S. southeast, which is where we get a lot of our pellets from, is double the size of what it was in 1950. So that process is absolutely happening. Second point is, it obviously -- it is a source of low-carbon residues, et cetera. So again, it gives us a guaranteed source of low-cost material. It saves us on processing costs because that material doesn't need to be -- a lot of it doesn't need to dried, none of it needs to be chipped, for example. And we also don't -- effectively, don't pay the transportation costs associated with that. So there -- when they're buying the fiber in from the forest, effectively, they're paying the cost of bringing that on site. And that facility is now up and running, and we are getting fiber from them now.

And the third thing, again, is more -- a bit more esoteric. It is -- at Baton Rouge, the port of Baton Rouge has agreed to build a chambering yard, which effectively is a place where you can sort of get railcars to sit so actually they can manage now 80-car trains instead of 45-car trains. And again, the cost per pellet comes down as a result of all of that, right? So effectively, what we're saying is that the effective cost reduction on a per megawatt hour basis -- and I think we want to move to GBP from megawatt hours, the metric that we use across all these things, to give people more sort of standard way of thinking about these costs. And again, for the 450,000 tonnes associated with sort of these projects, it would reduce the costs on those by about GBP 10 per megawatt hour. The other way to think about it is, if we're operating at full capacity for a year, that's about GBP 10 million of savings per year. So I think it's a good example of what we're doing to reduce costs on logistics, on processing and on feedstock.

The other thing I mentioned before is that we are -- our Board has recently approved a significant capacity expansion: 350,000 tonnes across LaSalle, Amite and Morehouse, the 3 pellet plants that we have in the U.S. As Andy mentioned, we will be investing GBP 50 million this year and next. It will give us increased capacity, give us increased -- and what we're doing is effectively putting more pellet mills in, putting more hammermills to increase efficiency through the dryer. We're putting the ability to take more dry shavings, right? So with this increased capacity, effectively, it will be up to 1.85 million tonnes of overall capacity, which is about 25% or maybe a bit more than 25% of our own current requirement. And again, the cost savings associated with this relative to our average is about GBP 20 per megawatt hour. So again, across that 350,000 tonnes. So again, one of the things I think is important as we think about this is, we're doing -- we'll be doing almost 2 million of our own tonnes, the other 5 million we get from third parties. We're bringing our own cost down. And again, as we report today, you'll see that as increased earnings in our pellet mills. The other contracts, we tend to have long-term fixed-price or rising contracts, so you'll see -- the way I think about this is that, to the extent we can show we can bring the costs down over time, it's a leading indicator of what we think will happen over time as we increase the amount of self-supply in our portfolio.

So again, if I was to give you that in terms of a GBP million per year, it's about GBP 15 million per year, if we're out running at capacity relative to our average cost today. Third thing I was going to mention is that we are doing a high-pressure turbine upgrade at the power station. So to the extent that we increase the efficiency of power station, again, that fundamentally reduces the amount of biomass that we need to use and the cost per megawatt hour improves, right? So -- but making this investment of about GBP 40 million across units 1, 2 and 3 over the outages in the next several years. And with that, we think we can deliver, again, about a GBP 1 per megawatt hour reduction in cost. But again, this is across 3 units. So this is almost all -- or large -- most of our existing production. Or if you think about it again in GBP per year, it's about GBP 10 million to GBP 15 million cost reduction per year. So those are sort of 3 examples of some of the things that we're doing now.

Longer term, we'll look at working with our suppliers on how we can lower the costs of their contracts. And again, we're looking at alternative fuels as another way to lower costs. And then, we'll talk more about that probably at our Capital Markets Day. But I guess, in short, I think these are just a couple of examples, and I think we're making good progress.

So BECCS, again, I wanted to just update where this -- the whole project stands. And I think, again, it's a very important project strategically for us in terms of embedding biomass in the system. So what we're doing, we're exploring low-cost capture technologies, as you know. And again, our part of this process is, we will be capturing CO2 at the power station. And by the end of the year, we hope to confirm both the efficacy of the technologies, but as well as the costs of delivering those technologies at scale.

The second thing we're doing is we're working with 2 partners, with Equinor and National Grid, to develop a 0-carbon cluster in the Humber. So the government wants to create clusters for CCS, so effectively, you can sort of optimize the value of the infrastructure that's required, and our aim is to be one of the first clusters in the U.K.

To be clear, the structure of the industry as it's developing, and this is starting to become clear, is that the CO2 emitters will be responsible for capturing their own CO2. And then a different company, in this case, probably National Grid, develop the pipeline for the transport, and then Equinor probably the partner for the storage.

The third part of the process is, we are working actively with the government as they work through the development of the appropriate regulatory regime, which should be in place, again, we think next year. The consultations on CCS that the government issued on Monday are very much in line with our thinking about how the system potentially should develop to enable an investable regulatory framework for CCS in the U.K. So it's still a long way to go. Another piece of this that we are working on is some way of incentivizing negative emissions quite explicitly, and we would expect that to again happen sort of as we move into the 2020s, and we expect to be very much involved with the government working on that, with a goal of having something up and running in the mid-'20s.

So a quick word on how our gas projects fit into the overall vision. Again, our view, as I think many peoples' is, is that the system in the U.K. will require gas to support the system through 2050, and that will include building some new, large-scale, more efficient gas plant. Our current forecast is that there might be between 7 and 10 gigawatts of new gas capacity being required. And again, we have multiple projects that we think can provide this. We have 2 attractive combined-cycle projects, one at Drax, the other one at Damhead Creek, as well as the 4 open cycles that we've talked about before. So assuming that they're all permitted by the time the auctions happen next year, we would expect to put those all into the auctions. But again, we'll only proceed if we have attractive capacity contracts. And let it be said that contracts have not been attractive so far.

So we've done a lot in the first half of the year. I think we've had strong earnings, cash flow and dividend growth. We've made good progress on our refinancing, and we are delivering strategic initiatives that will bring the cost of pellets down.

Now that being said, there's still a lot to do in the second half. We need strong operational performance across the business, generation and pellets. We need improvement in performance in the Customer business, and we expect to deliver all of those things. We also expect the Capacity Market to be reinstated. And in that context, we continue to expect to deliver financial performance in line with the market expectation.

Thank you. And with that, I'll go over to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [1]

--------------------------------------------------------------------------------

Mark.

--------------------------------------------------------------------------------

Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Mark Freshney from Crédit Suisse. I have 2 sets of questions. Firstly, a question for JK. On the drop in volumes in your business, can you talk about a couple of features we've been hearing about? Firstly, whether the billing system issues have impacted your ability to retain customers? And just secondly, given you've got a couple of big competitors looking to build a corporate PPA business at very low margins, whether that's taking the volume away? And just secondly, a question for Andy Skelton, just on the refinancing of the acquisition bridge, GBP 400 million. I'm sure you want to play your cards close to your chest, but can you give us a flavor of what kind of options or solutions could be in place? Would you go out and do another high-yield bond for GBP 400 million? Or would you look at convertible or some other option?

--------------------------------------------------------------------------------

Jonathan Kini, Drax Group plc - Former CEO of Customers [3]

--------------------------------------------------------------------------------

Okay. So thanks, Mark. So if I take the first question. So one of the sort of situations we're in is both of our current billing systems are actually performing very well. So when we take on new business, we're able to take on that business, just not as cost effectively as we want to. So in terms of the system delays, that has not had any impact on both on acquisition, as you've seen from our growth and also on retention. There were a couple of large customers at very, very low margins that due to our focus now on value, we lost in the first half, and then balance that with the weather discussion that Will had before is the majority of the reason for the drop in volumes. In terms of the sort of PPA market, we are serving very well the smaller PPAs and renewables, and we have one of the largest market shares for that. And so at this stage, we can offer very attractive options for the large customers.

--------------------------------------------------------------------------------

Andy Skelton, Drax Group plc - CFO & Director [4]

--------------------------------------------------------------------------------

Yes, I mean on the refinancing, I think I said that with the acquisition of the new assets, we believe that we have now access to a more diverse range of funding options. I mean, we've been looking at things like private placement infrastructure loans in the U.K. When we look at it, we'll make sure that we have a balance, both on the sort of maturities of the debt and the different sources of funding. So we've also looked at some other shorter-term types of funding, but all within a sort of a balance of GBP 1 billion of overall debt. But the U.K. private placement infrastructure, I think, is something that's really opened up to us now as a result of that acquisition. So that would be an example of an area that we're looking at. I wouldn't expect to be issuing any more high-yield bonds.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [5]

--------------------------------------------------------------------------------

John.

--------------------------------------------------------------------------------

John Musk, RBC Capital Markets, LLC, Research Division - Analyst [6]

--------------------------------------------------------------------------------

It's John Musk from RBC. 2 questions from me. Firstly, on the gas assets from ScottishPower. The output there of 1.4 terawatt hours, I think, in ScottishPower ownership last year, same period, was closer to 4 terawatt hours. You've talked a little bit about planned outages that would have impacted that. But are there any longer-term concerns on load factors on those plants? What are the dynamics you're seeing there in the market? And then secondly, on the dividend, yes, despite what is a relatively stretched balance sheet, you're working to get to your 2x, and the uncertainty on the Capacity Market, you've gone for another 12.5% increase, so is that the new norm we should be expecting going forward?

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [7]

--------------------------------------------------------------------------------

Andy, do you want to take the first one? I'll take the second one.

--------------------------------------------------------------------------------

Andy Skelton, Drax Group plc - CFO & Director [8]

--------------------------------------------------------------------------------

Yes, I'll take the gas question. So I think as Will referred to in the presentation, when we acquired the ScottishPower assets, particularly the gas assets, we were aware that they were -- the inspections -- the major inspections have been pushed back. And therefore, we knew that, one, we had some CapEx coming up where we need to do the inspections, and we're doing those this year and next year. And two, that meant more restricted hours in the running up, going into those inspections. So this was entirely planned. We knew what we were taking on. And as Will said, once those assets have had their major inspections, we expect them to be running very well and probably more so than they were previously. The one area we have had is, Shoreham had an issue. We had an issue on the compressor at the end of the turbine. That's been off since February. But again, we're doing the inspection in September. That should be back for the winter, and we have actually secured an option to do a high-efficiency upgrade on that plant. So I think our expectations for gas, I mean, as Will said, they are very flexible assets. We're running Rye House today. So our least efficient gas plant is running today because it's very hot. The interconnectors are flowing outwards and there's a need for flexible assets on the system. So we see the value of those gas assets, and we expect them to be running into the future.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [9]

--------------------------------------------------------------------------------

So on the dividends, probably I -- maybe just go back to where we are in the overall sort of capital allocation policy. So as we said, we want to have a sustainable and growing dividend in the context of having a balance sheet with a target leverage of 2x net debt to EBITDA while we invest in the business. And to the extent there's excess capital, we would look at potentially returning that. I would say that the focus for this year is, clearly, we're focused on getting down to that 2x net debt to EBITDA. And as Andy has said, on the assumption that the Capacity Market is back, we would expect to be able to do that by the end of the year. We have some quite attractive investment options. So we are investing in the business. In terms of the dividend, I think the 12.5% is absolutely very consistent with that sort of sustainable and growing idea. Clearly, there's a -- relative to, for example, where we would have been at the Capital Markets Day, when we announced those longer-term targets, I guess now almost 3 years ago, the -- we have added the earnings from ScottishPower, so there is significantly bigger earnings base. Same time, some of the points we mentioned, uncertainty about the Capacity Market, et cetera, we felt that in around the 12.5% was a good balance, reflecting what we thought very much was achievable given what's out there in the marketplace. And we'll -- again, when we come into looking at that question in a year from now, we'll sort of make the same assessment or we'll make another assessment, and we'll see where that comes out. So I would not say that it's the new normal, it will be something we look at every year.

Dominic.

--------------------------------------------------------------------------------

Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [10]

--------------------------------------------------------------------------------

Yes, it's Dominic Nash from Barclays. Please, sort of 3 quite quick questions. Firstly, on the flexibility number of GBP 69 million in the first half. How much of that's come from Kraken itself, please? Secondly, can you just remind me how you account for the cash that the retail takes in from the Capacity Market? And is that part of your net debt number? And then finally, just have you had a chance to read the BEIS retail review consultation document that came out, I think, a couple of days ago? And what your thoughts are on that and opportunities and threats to Drax?

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [11]

--------------------------------------------------------------------------------

So maybe what if I -- I'll ask Andy maybe to look at the flexibility one. Then maybe I'll ask Andy S to look at the retail sort of accounting question, and I'm going to -- I'm sure it's unfair to ask JK...

--------------------------------------------------------------------------------

Jonathan Kini, Drax Group plc - Former CEO of Customers [12]

--------------------------------------------------------------------------------

No, I think I can make a comment [broadly], not on the report itself.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [13]

--------------------------------------------------------------------------------

To make a comment on the BEIS.

So maybe Andy Koss on the flexibility.

--------------------------------------------------------------------------------

Andrew Robert Koss, Drax Group plc - Executive Director & CEO of Generation [14]

--------------------------------------------------------------------------------

Yes. So it's a -- Kraken earnings were about 1/3 of the flexibility number that we've put out there.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [15]

--------------------------------------------------------------------------------

Andy?

--------------------------------------------------------------------------------

Andy Skelton, Drax Group plc - CFO & Director [16]

--------------------------------------------------------------------------------

Yes. So on the Capacity Market payments, so if you think about the impact on our net debt at the half year, Capacity Markets broadly neutral, in that we've got GBP 41 million of cash that we've not received if you include Q4 last year and the first half of this year. But we've collected GBP 35-plus million from customers that we've not had to remit over. So the cash impact in the net debt at half year of the 2 is broadly neutral. The point on the 2x leverage and the importance of it being reestablished is more on what the EBITDA number is, because clearly 2x consensus of GBP 410 million is different than 2x GBP 410 million minus Capacity Market income for the year. So it's less the cash impact of not receiving and more the EBITDA base.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [17]

--------------------------------------------------------------------------------

Does that cover the question you were talking about there?

--------------------------------------------------------------------------------

Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [18]

--------------------------------------------------------------------------------

Yes, it does.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [19]

--------------------------------------------------------------------------------

JK?

--------------------------------------------------------------------------------

Jonathan Kini, Drax Group plc - Former CEO of Customers [20]

--------------------------------------------------------------------------------

I'm just wondering whether we should answer a question on -- is it to do with the Ofgem investigation into our micro businesses, is that what...

--------------------------------------------------------------------------------

Dominic Charles Nash, Barclays Bank PLC, Research Division - Head of Utilities Research [21]

--------------------------------------------------------------------------------

Well, kind of that as well because they wrapped up that as well, didn't they?

--------------------------------------------------------------------------------

Jonathan Kini, Drax Group plc - Former CEO of Customers [22]

--------------------------------------------------------------------------------

I mean on that specifically, because that's been -- we've been speaking to the regulators quite for a while on that, is fundamentally as a challenger brand, we are keen that competition is constantly looked at, and we were pleased that a sensible time period has been left whilst the CMA findings were put in place, which obviously we've been heavily involved in. And we think it's now a sensible time, so 3 years after that now, to look at that segment again. So clearly, we'll be working closely, as we do already, with our good relationship with the regulator to discuss that and unlock opportunities there for ourselves.

--------------------------------------------------------------------------------

Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [23]

--------------------------------------------------------------------------------

It's Iain Turner from Exane. Can I ask a bit about the biomass sustainability policy that you highlighted you're going to have another look at? I mean you've obviously got a set of critics, I think, probably who -- whatever you do won't be enough. But can you just talk about the kind of areas where you think there might be room for you to move in that, and what would the implications of that be?

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [24]

--------------------------------------------------------------------------------

Sure. In the -- let me -- maybe I'll zoom out a little bit. Because I think what's -- my own view on this is that the -- so far, the sort of the debate about biomass has not really been in the mainstream of the discussion around sort of between NGOs, ourselves, et cetera. It's been relatively for a small group of people engaged in the topic, right? And the -- again, I think some of the people who are opposed, I would say they've got relatively extreme views, would be my own view on that. Now obviously, they're very much entitled to have those, so that's no problem. And I'm always happy to engage in that debate with them, right? As people like IPCC and Climate Change Committee, et cetera, and others, start talking about bioenergy as being a critical part of the system for the long term, then actually, the whole topic becomes, I think -- will become a much more, sort of -- the debate will become much more mainstream, right? And so one of the things we're doing, for example, one of the reasons why we are putting in place this independent advisory board is that we are going to be engaging, I think, more -- with more sort of mainstream NGOs, if you will, who will start taking up this debate in a more significant way. And I think that we look forward to that because I think we have a very good set of arguments, right? The other thing that I think will happen is that as sort of -- the whole sort of debate around sort of BECCS, or the whole logic behind BECCS being attractive is that it's negative emissions, right? In order for -- and that's very consistent with the way carbon accounting is done now, et cetera. So the carbon -- the biomass generation effectively, broadly neutral. And then if you're capturing the CO2, it becomes negative, right? But the logic behind that is effectively that the -- more carbon is being captured in the forest than effectively you're emitting. So you need to -- so the key thing we're looking towards now is actually being able to actually evidence more our carbon impact in the forest, right? And how is what we are doing actually supporting a healthy and growing forest? So that's really the focus of attention now. I know I very much passionately believe that actually that is what happens, right? I mean, a forest -- the biggest risks around deforestation, in many ways, are not that people are using them commercially and managing the plantation, farming them in ways that actually -- they get value from them, so they replant, right? The biggest risk in forestry is that it's converted to another use so it actually has no trees at all, right? And that's -- and so having a very clear sustainability policy that supports healthy forests is what we're look -- what we're moving to.

Chris.

--------------------------------------------------------------------------------

Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [25]

--------------------------------------------------------------------------------

Chris Laybutt, JPMorgan. One question, quickly. Could I follow-up on the dividend question? Are we right in thinking that if the Capacity Market comes back, then you'll revisit the dividend question, and it will go up, is that the idea? So that's question number one. And question number two, ancillary services revenue is up from GBP 9 million to GBP 31 million in your accounts. Is that comparing like with like, so -- because they're restated accounts, but does that include the new assets or not? So I guess what I'm asking is, is ancillary services revenue up year-on-year for the new group?

--------------------------------------------------------------------------------

Andy Skelton, Drax Group plc - CFO & Director [26]

--------------------------------------------------------------------------------

I can answer that quickly. When it refers to restated numbers, it's to do with the adoption of IFRS 16, the leasing standard. So it's not about inclusion of the acquired assets in the comparatives, so that is a like-for-like.

--------------------------------------------------------------------------------

Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [27]

--------------------------------------------------------------------------------

So that's something, yes -- so most of the increase is from the new assets?

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [28]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Okay. Do we have a number for last year that we can compare to?

--------------------------------------------------------------------------------

Andy Skelton, Drax Group plc - CFO & Director [30]

--------------------------------------------------------------------------------

I don't know if we have one.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [31]

--------------------------------------------------------------------------------

We can get you one.

--------------------------------------------------------------------------------

Andy Skelton, Drax Group plc - CFO & Director [32]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Christopher Robert Laybutt, JP Morgan Chase & Co, Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

Do we know whether it's up or down?

--------------------------------------------------------------------------------

Jonathan Kini, Drax Group plc - Former CEO of Customers [34]

--------------------------------------------------------------------------------

I would say it's broadly in line, maybe slightly up for the first half. Yes.

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [35]

--------------------------------------------------------------------------------

Coming on your first one, dividend. So I think the best way to answer that question is that the way the Board looks at the question in terms of the approach we take today is when we get to the half year, we'll look at sort of where we see the sort of future cash flows of the business, et cetera, look at sort of risk, et cetera, opportunities, and we'll set the base dividend in a way that we are comfortable is sustainable and growing. And the next time we will do that will be June of next year, right? So I mean, you should assume that, given the way we -- given what we are publicly saying about our expectations for the Capacity Market that, that would be built into our thinking. The other thing I would say is that the other thing that we -- as you know, the other thing that we do is at the end of the year, we'll look at whether there's excess capital and we would, again, do that again in February of next year. I think the likelihood of there being excess capital that might be returned is quite low, given the fact that we are just very much focused on hitting that leverage target, right?

Any other questions? Actually, heat has beaten everybody into submission.

--------------------------------------------------------------------------------

Duncan Scott, Deutsche Bank AG, Research Division - Research Analyst [36]

--------------------------------------------------------------------------------

Duncan Scott from Deutsche. I want to ask about this biomass cost saving of this sort of GBP 20 a megawatt hour. Is the sort of technology there? Is that something you could retrofit to existing capacity? Or -- and if so, is that something you're looking to doing?

--------------------------------------------------------------------------------

Dwight Daniel Willard Gardiner, Drax Group plc - Group CEO & Executive Director [37]

--------------------------------------------------------------------------------

Yes. So the -- probably the biggest -- well, there are multiple different ways of doing it, but in the new expansions, most of this is because we're losing -- using lower-cost residues effectively, and we're enabling -- increasing the capacity to do more of that, right? So in terms of what we have in place now, a lot of that uses trees from the forest, and then we do the full cycle of chipping and drying and pelletizing, et cetera, right? So that, effectively, technology is there, and that probably will stay in place. As we think about more expansion, so we have -- we're looking at sort of potentially building new pellet plants. They would actually be much more focused on just using the residues, right? And then -- so the technology is probably more -- I think better to think about this as, do we have -- we're working on plans that say, new pellet mill, probably smaller than the 500,000 tonnes that actually would hit the target that we're after. That's where the technology will come into play.

Okay. We will be available for conversations for a while. So thanks very much for coming.