U.S. Markets open in 4 hrs 51 mins

Edited Transcript of SKS.L earnings conference call or presentation 7-Nov-19 9:30am GMT

Half Year 2019 Renewi PLC Earnings Call

Bourne End Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Renewi PLC earnings conference call or presentation Thursday, November 7, 2019 at 9:30:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Otto de Bont

Renewi plc - CEO & Director

* Toby Woolrych

Renewi plc - CFO & Director

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

Conference Call Participants

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

* Andrew Shepherd-Barron

Peel Hunt LLP, Research Division - Analyst

* Kellie McAvoy

Investec Bank plc, Research Division - Research Analyst

* Toby Russell Thorrington

Edison Investment Research Limited - Analyst

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

Presentation

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

Otto de Bont, Renewi plc - CEO & Director [1]

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

Well, good morning, everyone. And welcome to our interim presentation this morning. Also for the people on the webcast, thanks for joining over the phone. This morning, I will be giving you some highlights from our first half performance, then Toby will take over and go into a bit more detail around our financial performance in the first half and also gives you a bit of an outlook on the second half. And then I'll come back and talk more about the market strategy and how we plan to move forward in the midterm. So with that and with the disclaimer, let's get started.

When I started in this position 7 months ago, one of my main objectives was to increase the financial strength of Renewi. And we presented some actions that we would take 7 months ago as well, and I hope today to show you how we have been making progress on executing on those actions.

So first of all, we have had a solid trading first half. Looking across all our divisions, we have done well. And specifically in our commercial division, which is 2/3 of our revenue and more of our EBIT, we have shown a 13% EBIT increase year-over-year after increases last year and the year before. So continuous improvements in that division. On ATM, we are continuing to make progress as well. Our waterside business, as well as our Pyro, has continued to run well. And as you all know, we're working hard to resume the production of our thermally treated soil. But more importantly, also, we have made good progress in terms of increasing our capacity in production to make building materials, which I'll talk more about that in a moment.

Then, of course, one of our main objectives is to deleverage the business. And as you've seen, we have been able to successfully sell Reym, our Canadian business, generating EUR 118 million in cash in this year and next. And then on synergies, we are in the third year of our integration, and I'll show you some details for those there. We have made continued good progress and are heading for our target of $40 million and on top, we're launching a program called Renewi 2.0, which I briefly talked about last time, which, again, will be similar in shape and timing.

And I think also important to mention is that we have worked hard to strengthen our management team, and we have been able to get 4 new hires in the business, which really creates a strong management team in the industry.

So let me provide some color on some of those key points. First, on the divestments. A year ago, we announced that we would simplify our portfolio and divestment activities that would not fit at the heart of our waste to product strategy and that strategy being executed in Western Europe. So we put our Canadian business for sale, and we put our industrial cleaning business for sale, Reym. And as you have seen, we have been able to complete the transactions over the summer, have closed on the Canadian business in September and on the Reym basis in October, getting the cash proceeds in for over $100 million -- EUR 100 million and we'll expect another EUR 17 million in the coming year.

Now the most important piece of this is reducing our leverage and we'll reduce our year-end debt by about 20%.

Now another challenging target that we set ourselves was to solve the situation at Derby. It's one of the large municipal sites and the only one which we had not fully covered in previous discussions. Now for some of you less familiar with the situation in Derby, this was a site where, together with Interserve, we built a new gasification plant.

Interserve was responsible for construction and commissioning of this plant and then Renewi would operate this plant for the next 25 years. However, Interserve has been unable to commission the plant, despite the fact that it was 2 years or more than it delayed. And with the city councils, they have then decided to terminate this agreement in August. Now we had anticipated this termination, and we basically took the loss for this project already in March before we started the new year.

However, the good news now is that we have been able to renegotiate with the city councils and have signed up service contracts for the next 2 years, which allows us to make profits at very limited risk, which is putting us in a much better position than we were earlier this year when Derby was still a significant potential risk. So with the divestitures behind us, with the risk of the Derby contract also under control, we are in a much better position.

This puts us to our next challenge, which is ATM. Now at ATM, that company remains at the center of our waste to product strategy as we're taking contaminated soil, we're turning it into clean soil and now we are also turning clean soil into its components: sands, gravel and filler. And we believe longer term, that this is the way forward for ATM, as these building materials can be reused in cement and asphalt production, creating a circular solution with adding value in the value chain, more so even than just producing thermally treated soil. So where are we in converting the ATM facility into a production facility for building materials? On the left side of this chart, you can see some of the time milestones that we've hit and the ones that we plan to hit over the next months.

It all started in December 2017 when we acquired neighboring lands from MvO, and we upgraded our gravel washing and sorting facility there.

Then we continued in March of this year to install a pilot sieve in our production line to be able to split the thermally treated soil into sands, gravel and filler.

October, last month, after 6 months of successful pilot production, we then scaled up and decided to install a very large sieve that basically allows us to produce the full capacity of the thermally treated soil and convert it into these building materials.

Now we're currently busy to ensure that the capacity is not only in the production line, but also we're able logistically to handle these large volumes of building materials. So we're building additional silos to store the filler, but also building additional transportation lines to ensure that as we produce larger and larger volumes, we can handle these types of volumes automated.

And if you look at our timeline, we expect that next fiscal year, we will be fully up and running with our capacity as we have built the infrastructure in place. But before that, we will start scaling up and producing building materials.

I'm also happy to confirm that we have signed our first contracts with customers. For gravel, we have signed a contract for 100 tonnes a year and for sand and filler, we have been able to secure contracts as well. And we do expect that we will continue to increase those volumes as we move forward over the next months.

Now we're currently still testing the sand, gravel and filler to make sure that we meet specifications and the higher specification we can reach, the better prices we can ask in the market for these building materials. We expect to get these specifications finalized at the beginning of next year, which again will allow us to further increase production.

However, this does not mean that we've given up on selling thermally treated soil itself. With the last 2 years, we have come a long way in terms of making progress on this as well. As you may remember, at that time, TGG was put on hold. Since then, we have done extensive testing after we decide how to test and what to test with the regulators. And the ultimate conclusion of all this work is that our current stock does not contain any substances at levels which prevent its use in industrial applications.

We also received confirmation from IL&T that we are on the right path, and we do expect that we get some release of selling TGG in the market in the next months. And we are in parallel already dealing with the local regulators because we know that will be the next step to ensure that we align a project where TGG can be used in certain specific applications.

So next to our strategy to ramp up our production on building materials, we also do expect that we will be able to start selling TGG in the market, provided it will be in some specific applications and probably not to the same extent as what it was a few years ago. But still important to be able to have the parallel path in our ATM production.

Moving on then to another important point that we'd like to make before we turn it to the financials. I thought it was important to let you know that we've worked hard to strengthen the Renewi management team.

The backfilled the MD position for the Netherlands, which was open since I moved to the CEO position. So that's a big help for me. And also, we have been able to backfill a newly created position, MD of ATM with a guy -- an executive from the chemical industry. This is after we departed Reym and split the business into 2. And also in our back office functions, HR and IT, we have been able to recruit 2 talented and very experienced persons from blue-chip companies that will help us to continue our journey, strengthening Renewi and building the organization as we grow in the future. Let me hand it over to Toby, who will talk more about financials and give you some detail on the first half and then the second half outlook.

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

Toby Woolrych, Renewi plc - CFO & Director [2]

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

Thank you, Otto. And good morning, everyone. Good morning to those on the call as well, thank you for dialing in.

So the first half of the year has a number of moving pieces in it. Like many companies, we are working at how best to present the impact of IFRS 16 to you and of course, we also have 2 discontinued businesses. But what you'll have seen throughout the results, both in the RNS and in this presentation, we show a separate column for -- to restate the numbers back under IAS '17 to give you the comparatives. We also show in Page 11 of the RNS and in the appendices of this report, a line-by-line reconciliation showing the impact of removing the discontinued items from our results. Revenue from total operations was up 3% at EUR 926 million and across the piece, division performance was in line with our expectations.

We'll come on to that in a couple of moments. The underlying EBIT from total operations was up 3% like-for-like, at EUR 46.3 million, so IAS 17 basis, up to EUR 50.9 million on a reported basis, if you include the positive impact of IFRS 16.

Now within that, you have the impact on the disposed businesses. Once you announce something as asset held for sale, then you suspend the depreciation, and that was EUR 6.9 million in the first half.

Interest costs increased by EUR 6.3 million, as expected, around half of that is IFRS 16 and around half of that is because we had higher leverage in the first half of this year compared to the prior period.

Exceptional costs, we'll come back to later. They were largely as expected and as previously announced, they led to a statutory loss before tax.

If we look at the cash flow, we had a strong cash flow performance. Again, will come from this later. And underlying free cash flow of 129%, good working capital, tight CapEx. The first money is 56 -- EUR 57 million received on the disposals received on 30th of September.

Net debt reduced, leverage reduced and we refinanced the Belgian retail bonds from -- a better rate. What that leads through to is the underlying EPS from total operations was down 7%, EUR 0.029 share. And the interim dividend is at 0.45p per share, which reflects the previously announced intention to maintain a total dividend for the year we're in at 1.45p. So if we turn now to commercial waste Netherlands and commercial waste base generally, revenue was up 5%, underlying EBIT, up 13%, and an improvement in margins across the piece.

And if we look at the Netherlands, we achieved this with volumes actually down 3%. Now the primary driver of that is the construction market, appears to have slowed a bit. That was something we indicated we expected before. And also, we'll come back to some specific causes of that later. And also, the loss of some secondary disposer volumes, other waste companies bringing their volumes to us in the face of the significant price rises we put through. And the overall company is showing some signs of a macro slowdown and recyclate prices remain weak, and they're down 15% on prior year in both paper and in ferrous, which wasn't particularly pleased, actually, that the EBIT is up 14%. The net margin is up by 60 basis points to 7.3%, showing that our synergies and our net pricing gains are reading through and this is a division that had a pro forma margin on the day we merged, 3 -- 2.5 years ago of 2.5% and it's now over 7% and still rising and has been doing so consistently through the period.

Return on assets increased as well, 260 basis points to 19.6%, and again IFRS 16 reduces that slightly to 18%, still strongly accretive. And the unplanned shutdown of AEB, which we referred to in our summer trading statement, was well-managed and has not had, as you can see, significant impact on our results. We have taken a credit provision against some outstanding costs. If we turn to Belgium, the revenue is up 6%, the earnings up 11%, similar market conditions to the Netherlands in terms of slightly slower volumes and lower recyclate income.

As previously guided, the closure of the Cetem landfill has place, which was a further headwind on margins, which again shows that the underlying EBIT growth of 11% and the margin growth is pleasing.

Turning to Hazardous Waste. So this Hazardous Waste division contains both ATM and Reym for the first 6 months. If we look at ATM, this is a business where we had given guidance is going to be around about breakeven to a small loss for the year.

We're performing as we expected, maybe slightly better. Revenues were down 11%, because last year, we were producing soil at 50%, in the first half of this year in the 20% to 30% range, but there was a good performance on the waterside, which actually matched the strong prior year performance, and the Pyrolysis line, the Pyro line performed as expected. If you look at Reym, clearly this leaves the business on 31 -- or left the business on 31st of October 2019. These results include both the profit for the first 6 months, but also that EUR 5 million benefit from the suspension of depreciation, but the underlying guidance rate here has -- I'd say we performed as we expected.

We turn to Monostreams. Again, broadly as expected in the first half. Revenues were down 2%, underlying EBIT was down 16%. Falling metal prices impact Coolrec quickly, business that takes WEEE products from its fridges or electronic devices, quite high metal content in there. But behind that Coolrec's showing good progress in restructuring. We've exited Germany on time at slightly lower costs than expected, and we've also stripped out certain other nonperforming product lines to simplify that business.

Mineralz had lower profits due to the previously announced legislative changes and slightly lower project volumes. Orgaworld and Maltha both performing well, both on track and Maltha recovering nicely.

We turn now to the Municipal division. In the U.K., we are still seeing underlying operational and financial improvements in most of the contracts, particularly in ELWA and BDR, which is good to see. And reported underlying EBIT for the first half was in line with our expectations. It is, of course, a loss because in the first half last year, there were some one-off benefits, which we reported at the time, and Derby was reported as a profitable contract in the first half of last year. And of course, it was an owners' contract, so it is 0 in the accounts in this year. But the Derby contract, as Otto said, was terminated as expected and has now been replaced since the beginning of August with a profitable continuity services contract. And we would just like to note, and it's again reported in sizable length in the risk section of the RNS, that there is a risk of ELWA, ELWA exports, [RDS] to the Netherlands and Dutch government has indicated that it may impose an incinerate tax on imports as it does on its domestic waste from first of January.

That has not yet been enacted. But were it to be so, then there would be a potential risk for up to EUR 4 million per year at ELWA until such time as we could redirect those wastes to non-Dutch territories. And in Canada, the sale completed on September 30, and there was some residual performance from it in discontinued line until that time. So let's turn to non-trading and exceptional items. They totaled EUR 60.2 million, 90% of that relates to disposals and it is almost all in non-cash. If we look at the discontinued operations, that is Canada in disposal, we have chosen not to recognize the contingent payments that we're hoping to deliver over the next 12 months.

And then there's a further impairment in Reym, which is equivalent to the one announced in the RNS in September with the addition of this asset held for sale movement in depreciation between the 31 of March and the date of closing, in September, mainly noncash movements. In terms of the merger costs, they are actually reducing, and so less than half of what they were a year ago. Clearly the merger integration projects are completing and expenditure is coming down there, in line with our expectation. And the other items on hand include that EUR 3 million for the AEB as a credit provision and EUR 2 million relating to logistics for ATM. So still having to ship and store soil off-site pending resumption of the market.

So turning now to the cash flow. It was a strong cash flow performance, 102% free cash flow conversion on IFRS 16, 129% under IAS 17. We had a good working capital performance, and that's due to the timing of certain payables, but also that would efficiency of our invoice financing.

If you look net replacement CapEx, that was also very well controlled at 68% of depreciation. You can see in line of IFRS 16 replacement CapEx, that's expenditure on new trucks. In line with our ongoing program to rejuvenate our fleet and bring it back into line, reducing operating costs, clearly being -- affecting the operating leases to cash flow on the IFRS 16, as it goes out over the 6 years. Interest costs are higher, as I touched on earlier. The growth CapEx is the Maasvlakte and Ottawa projects, now both complete. You can see the receipt on Canada in acquisitions and disposals, are offset by 2 small EUR 2 million investments in each -- Rotie and RetourMatras. The dividends, as announced in March, and I touched on it earlier, and the spend on the U.K. municipal contracts as expected and other contains the ATM provision of costs and the provision, it all depends in the U.K. pension scheme.

So what does this mean for our funding? Here, you can see our normal funding chart. From a liquidity perspective, clearly, we received up to EUR 118 million in proceeds, half of which was received by 30 September. As of today, we've now received over EUR 100 million of that EUR 118 million, which reduces our core net debt to EUR 514 million at year end -- at half year. And the cash was clearly high at the period end because we only received the cash on kind of on the last day. So we had not yet redeployed it.

And the liquidity, when we've moved all these pieces around, EUR 256 million is higher than we require. So what we've done in terms of the facilities is we repaid the EUR 100 million retail bond. We reissued or issued a EUR 75 million green retail bond, meaning all our borrowings are now green.

As you can see, 123 basis points better pricing. And we've also taken the opportunity to reduce the term loan by EUR 55 million as of just a few days ago. And these 2 changes will actually reduce our interest costs going forward by an annualized EUR 2 million per annum.

And the leverage ratio quickly coming down from 3.06 at the half year -- sorry, last year-end to 2.88 at the half year. And while the board's intention remains completely unchanged to bring the leverage down towards 2 in a steady way as the business recovers, we have actually extended the covenant of 3.5x through to December 2021 to just address any concerns that investors might have about the shape and timing of the ATM recurrence. But the trajectory, as we believe it, the lower leverage from here remains unchanged. And you can see the drivers of that on the next slide. If you look at this first half year, the cost of exceptional items drove leverage up, offset by the trading and by the sale of Canada. Looking forward, we're going to have a little bit more working capital, some of that working capital in first half will outflow in the second, and slightly higher CapEx rate. But then what's set against that will be underlying growth in trading, the sale of Reym, the recovery of ATM and Renewi 2.0, which will bring us down towards our target.

Just to wrap up the secondary listing. We've got -- majority of our activity is now in the Benelux region, of course. As a brand in the U.K., we're quite hard to see, but if you come to Belgium or the Netherlands, you can't miss us. Our Euronext Amsterdam listing will increase our visibility further, we think it can give us further access to shareholders in our core Benelux market. That should drive additional volume and liquidity across both markets and extend research coverage. So we intend to carry out our secondary listing on Euronext in early 2020.

And in terms of full year guidance for this year, IFRS 16 as previously briefed, the EUR 40 million cost synergy as previously briefed, interest costs beginning to reduce in the second half for a variety of reasons, some of which I've touched on. Exceptional costs will be as planned. I previously briefed in terms of integration, a little bit more ATM soil logistics and that point on Reym in October. We'll just -- now drop the loss on sale, all talked about.

As we've touched on the Otto slide, the JV for the ATM Building Materials has ended, which means that any investment and indeed, future profits will now be fully consolidated in our results. Our CapEx will be about EUR 95 million for the full year. That includes around EUR 5 million potential expenditure on the ATM investment and full year underlying tax rate of 24.5%.

And with which, I'm very happy to hand back to Otto to talk about the future.

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

Otto de Bont, Renewi plc - CEO & Director [3]

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

Thanks, Toby. Yes, let's take a quick look at our markets, and how they are developing as we go. So first, we see both challenges and opportunities in the short-term and more importantly, on the longer term, we see much more opportunities than challenges. First, if you look at the short term, we talked about some of the challenges we see. Mainly, if you look at GDP and also potential impact from Brexit, we already experienced some, but in reality, it might get a little bit worse. We have to see what happens over the next months.

We talked about recyclate pricing, which are at a record low since 5 years, mainly for paper, wood and also metal and we do not expect really in the second half that this will come back. So we are assuming right now that these prices will stay at this low level. And then we talked about C&D market, specifically in the Netherlands, the regulators have announced some specific regulation around nitrogen deposition and also about PFAS, which is sometimes in soil.

And that means that a lot of construction company sites today in the Netherlands are on hold, waiting for relief from the government on being able to resume construction. And in some ways, that obviously also affect our C&D business. That's why you see that, that business is down a few more percent than our overall business that is more or less flattish.

If you look at the import tax that Toby talked about, it's not just import tax, also the Dutch government is applying export tax on waste, to make sure that it is not used as a way out of paying taxes within the Netherlands. But again, both are affecting us. In some ways, it's actually good because it increases the room we have to recycle our products. But at the same time, as we are also importing tax from -- sorry, waste from Belgium and the U.K., it short-term could affect us. And as Toby said, we're looking at ways to move that waste to other countries to avoid the Dutch importation tax.

However, the good news is that on the short term we also see opportunities. The markets continue to be tight, which means us being 1 of the major players in the market as we see continued opportunity to pass on costs to the market. And in some ways, even further increase our margins as we go forward. Also, we see a continued increased demand for our service, not only collecting waste and treating the waste, but also helping customers to reduce their CO2 footprint. And for the very large customers, they have their own departments that are working on this. And a lot of our customer base is small to mid-sized customers, and they are now confronted with the same challenges that the large companies have in showing how they're able to reduce their CO2 footprint in the future, and we can help get them there with our services.

And then last, the market continues to evolve, we see continuous increase of technology being used in the treatment of waste to create secondary materials at high quality. And that makes it more and more difficult for the smaller players to stay in this market. And today, it's still 70% of the market is covered by small to midsize players. And Renewi gets approached often by small players to see if we have interest in acquiring some of those companies. And obviously, with our short-term focus we have right now, we are focusing to make sure we strengthen our own company, but as time progresses, and we are getting into better financial position, we see opportunities there to also grow our business inorganically.

Now if you look at the longer term, we do think this GDP slowdown might be there for a while. But some of the other concerns we have, we don't think will get worse, in fact, might get better. And then in terms of opportunities, we continue to see that our governments are ambitious, they continue to come with new ideas to further drive the circular economy. And some of the main discussions are currently around the CO2 taxation, which could help us tremendously because, again, if you tax it -- put tax on incinerating waste then you not only have an incineration tax but then also a CO2 tax, which simply increases the space we have to recycle products and sell it as secondary materials in the market. Also, they keep pushing for higher usage of secondary materials. As you may recall from my previous presentation, the target is that by 2030, 50% of all raw materials used in the Netherlands should be used from secondary source.

Now with all the discussion around climate, including this week, it is something that also consumers are asking more and more about the issues that they see and look more for opportunity to buy products made from recycled materials. Corporates are responding, accelerating circle agenda. And what we also see is that more and more, we are approached by big name companies, including from the chemical industry, from the energy industry to help them to convert part of their raw materials to biobased raw materials or recycled materials that we could provide, and I'll show you some examples of that in the next slides. And then as I said before, the technology continues to advance, and Renewi is at the forefront of the advancements, making sure that we use the latest and best technology to sort and treat our waste as we go forward. So as we're in this changing market, we believe our waste to product strategy perfectly suits this as we see a rapidly changing environment. Now as we -- sorry, as we look at our strategy, I showed this chart around our vision in May for the first time. It was further refinement on the strategy that we started when created Renewi. We want to be the leading waste to product company in the market and more specifically, we want to do it by recycling more products. And also, we will do it in some of the world's most advanced circular economies, which you could say Western Europe certainly is, and within that, the Benelux is part of the countries that are leading these efforts. Now we want to focus on recycling, and we think we are at the forefront using new technology. We are also active, if you look at the value chain, anywhere from collection all the way to selling these secondary raw materials. But although we will remain active in collection, we believe our strength will be in the sorting and production of these raw materials, and that's where we will invest in. The secondary materials can be recycled, like, for instance, clean gas -- glass cullets used in the glass industry or plastic plates used for plastic part production, wood chips, paper. But it can also be biofuels. And over the last months, we have been involved in several discussions and projects that would create an interest, for instance, for pellets that are made from burnable waste, that we can dial into to a higher calorific value than what we have been doing previously, replacing some traditional fossil fuels, but also green gas from our digesters, is increasing more and more interest from some of the larger chemical companies.

Now if you look at our strategy, it's built on 4 pillars. I talked already about the collection, leveraging our scale and also supporting our customers in the transition to a circular economy. The second pillar is related to increasing investment in treatment capacity and using new technologies. The third pillar is related to the opportunity that we see in terms of our scale and digitization and to simplify our business as we move forward. And we've taken some steps already, as we've shown in terms of divesting, and we will continue to look at our business to see how we can further streamline and simplify it.

And lastly, we also look at our portfolio as we move forward, not just looking at divestitures that we have already done, but also looking at emerging technologies. And as you have read probably, we have acquired or taking an interest in 2 smaller companies, one on the food waste and the other one on mattress recycling that we believe are important for our future product portfolio. So I will show you a few examples of some of those emerging technologies and how we are investing. And then I will talk a little bit more about the progress we have made on integration and how we embark on Renewi 2.0.

So the first example, this was discussed already. In ATM, we're adding sorting steps in our production to produce building materials. And so we are basically involved in 3 steps of the supply chain, the only thing we do not do, we don't collect the soil at the building site. Other companies bring it to our site, but then in green, we show what we do. The second example is on mattress recycling. Until very recently, most mattresses in the Benelux are sent to an incinerator. They're shredded and then sent to an incinerator. Obviously, it's not a very environmental friendly solution. And that's why Renewi have teamed up with IKEA and also with a small company that had developed a fully automated way to recycle mattresses and sort it into its components, basically metal, foam and textile. Renewi now is involved in collection, but it's also involved in the sorting and treatment and the sales of these raw materials. And we are planning to add capacity to this venture by building 2 more sites over the next years, basically allowing for a total of 1.2 million mattresses that can be recycled in the Netherlands, on top we are looking at expanding in Belgium and beyond that, together with IKEA, where this can take us any further. Because this issue is not just a Benelux issue. It is an issue across Europe.

Now let's take a look at 2 other examples where we work in partnership with large blue-chip companies. The first one is plastics to oil to plastics. We collect high volumes of mixed plastic waste and when we can, we mechanically recycle this. But when you have not monostreams or 1 type of plastics, so you have a lot of mixed and also contaminated plastics, then that option is not working and that's where chemical recycling comes in place. We recently decided to invest in a plastic formulation line which will clean, sort and size plastic waste to a stream that will be used by a partner in the chemical industry to produce naphtha. In turn that naphtha will then be taken by a thermoplastics producer to polymerize into thermoplastics. In the whole footprint, you can talk about the new thermoplastics being built from bio-based naphtha and at the end, these are basically biobased plastics that are having certain quality. Most importantly, this reduces the CO2 footprint in the chain, and that is the reason why there is so much interest for this solution.

And the second example on the right is an example where we are using torrefied waste woods that will replace coal in steel mills. We're working closely with a large steel producer to reduce our CO2 footprint. We will collect the waste, we'll sort it, bring it to specification so that it can then be torrefied and used in their production.

Again, 2 examples where we are working on pilot scale, and you have to think here pilot scale is about 20,000 tonnes to 30,000 tonnes per year. But obviously, when successful, the opportunity for scaling this further into the European market is going to be tremendous. It will be a profound change to the waste industry because large waste streams today will convert into more raw material streams for production moving forward.

Now with that, and those examples, let me turn to the last pages, which are around 2 -- sorry, first integration. I show this page because we are coming to the third year of our integration. We have made great progress. Most of the work on the route optimization, where we optimize routes and take out trucks and drivers has been done. We are finishing some of the site consolidation, but most of the work there also has been done. We see procurement savings reading through because of the scale that we have as Renewi now and also in terms of management consolidation, which we did all the way at the beginning of this project, we continue to see the savings from there. So as you look at the savings that we did do in the first year, we exceeded the targets and did EUR 15 million, in the second year we hit EUR 30 million and we're well on our way now to hit the EUR 40 million target. The main focus of this integration has been within divisions.

What you'll talk about next -- what I'll talk about next, is what we're doing in the coming new program that we announced for the next 3 years, called Renewi 2.0, which is not focused just within divisions but also across all divisions, as we're trying to further simplify our business. Simplification of our business is in simplification of our processes, but also simplification of our service offering and the simplification of our organizational structure. We want to go to one way of working where possible and only differentiate from that when it adds value to our customers.

This requires to also modernize our IT systems and to simplify them. We have 3 objectives in mind with this program. First, we want to reduce costs mainly in SG&A over time and make us more competitive. We want to increase customer satisfaction by reducing the amount of complaints that we still have with all our not yet fully automated processes. But also make sure that the interaction with our small to midsize customers becomes a lot easier and also becomes more automated by using Internet technologies. And third, we want to build a platform for growth so that as we build on new acquisitions in the future or we go outside of the Benelux because of our already pretty significant market share, that we can bolt on these acquisitions to a solid and future-proof platform.

So Renewi 2.0 is a 3-year program and it has 3 phases, as you can see on the right. First, we are in the middle of the first phase, where we have been working together with some outside consultants to define the blueprint of our company. The next phase, which is part of the beginning of the execution will start in January. And as we continue, we expect this program, depending on the changes that we make will take 2, 3 years, very similar to our integration program.

Early next year, we'll define exactly what milestones we will hit and also how much savings that will generate year by year. But today, it's simply too early to give you that level of detail because we're still in the first phase, sort of refining the exact details of the program.

So with that, I would like to wrap it up and basically send you home with some key messages. First of all, trading was solid and the outlook for the year unchanged. I think, very important. Second, commercial divisions continue to do well, and we continue to see opportunity to further drive margin improvement as we have done for the last 2 years. The resumption of ATM remains our top priority. And after we've now done the divestments, this is the only top priority we have. The production of the building materials coming on stream but also making sure that we start being able to get the TGG back in the market, working closely with the regulators. Now deleveraging will continue as well, partly because we continue to execute on ATM resumption and also on driving our sales in our commercial business as well. But we will also continue to look for opportunities to further simplify our company. We've also continued to invest in new treatment technologies to produce the high-quality secondary materials and we will do it alone, like it again, but we will also do it in partnership, as I talked about, these large projects we do with the chemical industry partners or with the steel industry. And we will continue to execute on our integration this year and embark on Renewi 2.0 as we look forward. Thank you, and I'll open it up for questions.

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

Questions and Answers

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

Otto de Bont, Renewi plc - CEO & Director [1]

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

Andrew? You're the first.

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

Andrew Shepherd-Barron, Peel Hunt LLP, Research Division - Analyst [2]

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

Andrew Shepherd-Barron with Peel Hunt. 2 questions, if I may. The first on ATM, obviously, great, that you're making such progress. I think you had said on the slide that you actually thought you might have a higher return business, through soil rather than TGG if that's -- could you sort of quantify that or talk a little bit more about that? And the second question from me is on the impact of incineration tax in the Netherlands about exports? Can you talk more about the Belgian exports to the Netherlands, obviously the U.K. export is one thing?

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

Otto de Bont, Renewi plc - CEO & Director [3]

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

Yes. So on your first question, as you may know, today, when you sell thermally treated soil, you sell it at a negative price, right? You give it away and you sometimes pay some money with it to apply it in projects. Still because of the high price we ask for taking it in, the spread can make it a profitable business. When you look at, let's say, let's talk of the minus EUR 10 as a range. If you look at converting the thermally treated soil into sand, gravel and filler, then you talk about positive pricing, and you talked about pricing between EUR 4 and EUR 12 per tonne. And as we are increasing our quality and are able to meet more narrow specifications, that price can continue to go up. So basically, what you see is from minus 10 to, let's say, plus 10, there is a pretty significant delta that allows us to increase our margin at the same time, of course, we're investing to be able to convert these thermally treated soil into these building products. But overall, we do believe that it will be a positive impact on our margins. To be conservative, we have said that it will at least be the same margin as what we have been experiencing before.

The second question was around export tax. Today, that has already been in place for most I think since January 1, 2019. So in our current numbers, that is already included. The only specification that the Dutch government made is that -- it's not just on burnable waste that is taxes, but it is go beyond all waste, including hazardous waste. Now for Renewi itself, it has limited impact. Because a lot of the hazardous waste we actually incinerate ourselves at ATM and -- but the impact is there also for some of our colleagues or competitors in the market, that will be more affected than Renewi. So for us, it will be very limited impact, this export tax. Other questions?

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

Toby Russell Thorrington, Edison Investment Research Limited - Analyst [4]

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

Toby Thorrington from Edison. Just a couple of questions from me, please. Can you give us your take on the concentration of AEB impact on the local markets and how you see that playing out? A subquestion on that for Toby. Can you just confirm that the reported Netherlands profitability is on a best case scenario, i.e. you're assuming you're getting your additional costs back? Is that the way it's been reported?

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

Toby Woolrych, Renewi plc - CFO & Director [5]

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

In terms of the AEB, yes, the impact will be the Netherlands, most of the (inaudible) is cleaned and then the (inaudible) will be exceptional. I think that reflects the situation in the waste market for around 20 years. I mean there hasn't been an outage like this where a lot of the 2 big incinerators can get an unplanned shut down for nearly 6 months. So it's a pretty unusual event, but we're hoping to come out of it clean.

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

Otto de Bont, Renewi plc - CEO & Director [6]

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

If you actually look at our contractual position, we are well covered. There has been some discussion about AEB's future in terms of what would happen. And as you probably know from delays at the (inaudible) we share 100% owner of AEB has put the business up for sale. So we'll have to see how and what happens over the next months. The good news is that they were in discussion a few months ago about them potentially going bankrupt, and that situation has been resolved by the city stepping in and confirming that they will keep AEB alive until it is successfully placed in the market. And today, you were asking -- your first question was around AEB situation in general. They announced in June the day before they shut down that they would shut down but they didn't give (inaudible) anticipation, which created a pretty excited situation for at least the first 1.5 months because what had to happen was -- the (inaudible) market being the whole of the site anyway. The only way to free up capacity was to start limiting imports. But because some of these other incinerators had fixed contracts they could not just simply say, well we stop. So it had to be the government that had to come with the ruling that said we have to stop imports or reduce imports to ensure we can continue to incinerate that waste. Now whole situation is behind us. And in fact, AEB, who had indicated at the time they would come back in January, they have started up their lines over the last couple of weeks and continue to start-up and increase their capacity. So we do expect that the situation will be resolved over the next month and AEB at the end might be sold. It might also not be sold because the problems are kind of behind them. Does that answer your question?

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

Toby Russell Thorrington, Edison Investment Research Limited - Analyst [7]

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

Yes. I'll be cheeky, I have a couple others as well. I guess a high level sort of somewhere in the U.K., if you looked at your portfolio in terms of which businesses have performed weakly, which as they should be and where the tail and is where that should be picking up?

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

Toby Woolrych, Renewi plc - CFO & Director [8]

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

I refer you back to the results, which is actually -- was the underlying operating improvement. So particularly, ELWA and BDR both were -- or BDR and (inaudible) account for those owners' contracts, but performing within the provisions that we took 2 years ago, and Ottawa and Cumbria performing as expected. So nothing very significant prior to that.

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

Toby Russell Thorrington, Edison Investment Research Limited - Analyst [9]

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

That's all I'm getting. And just a final question on cost of debt. Toby, you put quite a lot of work into that, I think, in the last 12, 18 months or so, could you just tell us your average cost of core debt is now, please. What proportion takes them for what period?

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

Toby Woolrych, Renewi plc - CFO & Director [10]

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

I'll come back to your detailed ones off-line, and continue to -- it's been moving quite rapidly. It moved quite significantly up last year as the leverage went over 3x, which gives us a different margin price, our margin grid comes back down again. Now we're below 3x. And of course, we replaced the Belgian retail bond. So I mean, the initial guidance that you're seeing, the EUR 2 million annualized interest savings going forward.

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

Kellie McAvoy, Investec Bank plc, Research Division - Research Analyst [11]

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

Kellie McAvoy at Investec. A couple on ATM and a couple of other ones. The other ones are probably more straightforward. The Canada loan note, could you remind me how much it is and whether you still think it's possible to replace it with project financing and get some cash in through your door for that.

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

Toby Woolrych, Renewi plc - CFO & Director [12]

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

Sorry, which note?

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

Kellie McAvoy, Investec Bank plc, Research Division - Research Analyst [13]

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

The Canada loan note.

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

Toby Woolrych, Renewi plc - CFO & Director [14]

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

The Canada loan note.

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

Kellie McAvoy, Investec Bank plc, Research Division - Research Analyst [15]

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

Yes, the loan note in the municipal business that you sold that was effectively -- something that you were talking about replacing the project financing.

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

Otto de Bont, Renewi plc - CEO & Director [16]

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

Okay. So there's was a loan note in place. So what we've done is we've sold the business at one price level and it was a contingent payout by the buyers, assuming that they can then project finance and effectively increase the leverage of that. We see no reason why that can't be done. And of course, we've got a deep expertise in project financing through our U.K. and Canadian assets in the past. So we will work side-by-side with Convent Capital to help them secure that project financing.

It normally takes anything up to 12 months to get project financing done. But when it is, it depends a little bit on the shape and size of that project financing as to whether we get the full payout, but we see no reason why we can't.

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

Kellie McAvoy, Investec Bank plc, Research Division - Research Analyst [17]

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

And full payout would be?

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

Toby Woolrych, Renewi plc - CFO & Director [18]

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

So let me see, EUR 17 million -- so EUR 11 million, $17 million Canadian.

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

Kellie McAvoy, Investec Bank plc, Research Division - Research Analyst [19]

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

And then on ATM, appreciate, this might be asking you to get your crystal ball out a little bit. But I wondered if you had any indication as to how the process might work at a local level? Because I guess, if you get thumbed up at national level, then do the local regulators, have they given you an indication of whether they will sort of then either give you blanket okay for their region? Or they will give a blanket okay for specific applications? Or will they get it granular as to want to sign off every shipment that goes out the door?

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

Otto de Bont, Renewi plc - CEO & Director [20]

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

Well, it's somewhere in between. So the process hasn't changed from what it was before. So when IL&T says that in principle the opportunity can be applied, then the local government will look at -- authorities will look at it as prudent project and will give approval for a project. And the project can be 50,000 tonnes, it can be 400,000 tonnes. Depends on the size. But they will look at the location, they will look at what use, it will be used for and say it in the past. So we will be project by project, but because of the IL&T, in general relaxation of the (inaudible), it will mean that they will feel more comfortable approving these projects than they do today. So that's basically the difference. It will grow to where we were 2 years ago. But it will not be blanket approval of using it everywhere because the soil can be in certain industrial applications.

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

Kellie McAvoy, Investec Bank plc, Research Division - Research Analyst [21]

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

And any thoughts on how it might work from an accounting perspective, certainly for the first sort of 12 to 18 months? I guess, if you're paying people to take soil away, it's accrued in the creditor's line at the moment. So will the initial impact be purely a creditor unwind? Or will some of those approval gives the ability to start taking in more at the front-end that would benefit through to the profit line?

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

Otto de Bont, Renewi plc - CEO & Director [22]

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

You answered the question yourself. On one side, yes, if you start shipping soil at a negative price, you have a cash impact to negative. But at the same time, you create space to take in soil from the market, and that's where you are able to spend your production again. And that's, of course, for ATM the most important.

Today, we are producing at 20%, is what Toby alluded to. As soon as we create space and start shipping thermally treated soils and also convert it into building materials, we can start converting higher volumes of soil. And today in the Netherlands, it's a lot of contaminated soil waiting because the market, not just us, has been shut for 2 years. And which is also part of the reason why I think -- because we just kind pushing hard to get this (inaudible) because even large infrastructure projects probably because of itself are on hold because of this issue.

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

Toby Woolrych, Renewi plc - CFO & Director [23]

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

To your point, over a 2- to 3-year period, we have a net liability to unwind, but we would not -- are unwinding that liability and not starting up ATM. So once we get the green light, that allows the flow through to start, that will generate profits and cash, out of which a portion will be used to settle then bring down the soil stocks over time.

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

Otto de Bont, Renewi plc - CEO & Director [24]

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

Any further questions?

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

Toby Woolrych, Renewi plc - CFO & Director [25]

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

James.

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

Unidentified Analyst, [26]

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

James (inaudible) from (inaudible). A couple on ATM, surprisingly. Firstly, why did the -- why did you turn that to JV on the construction products side of things? And secondly, in the slides, you note sort of an additional EUR 10 million investment sort of September 2020 for additional sort of production capacity there. What other investment requirements do you have over the next year and, indeed, beyond that, apart from that EUR 10 million on the building products side of ATM?

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

Otto de Bont, Renewi plc - CEO & Director [27]

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

Yes. So the second question, the EUR 10 million is actually the full amount we need to build the whole infrastructure. We're doing it -- as you have seen, we're doing it part by part. So we have installed the large sieve. So we know that, that works and then we start building the infrastructure around it. But the EUR 10 million is the complete amount that is required to complete that project.

And on the joint venture, when the joint venture started, the idea was that the thermally treated soil would be moved over the fence to the joint venture and they were to start treating the thermally treated soil and split it into 3 components. As time progressed, we learned that it was much more efficient to do the split of the thermally treated soil in line because when the soil is treated, it's about 500 degrees. And rather than first cooling it down and then hitting it up again to split it more efficient to do it inline. So the investment that we have done on the sieve and some of these other components is within the TRI line that is already at ATM. And that really changed the prospect of the concept of the joint venture. Because it became much more of a sales joint venture than a treatment. And that's why we decided, also related to our anti-competition involved in the Netherlands to mitigate this by ending this joint venture.

The other part was because you do less in the joint venture it's not very profitable anymore in itself. So also for our joint venture partner, the interest became less. But I think what is most important and first, the main reason is that if you look at ATM and unlocking ATM long term, then this is the way forward, as I indicated. And having a joint venture on top of ATM together with a competitor makes that whole complex. And that's why also we are happy that we have been able to come to an agreement with our partner.

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

Toby Woolrych, Renewi plc - CFO & Director [28]

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

And just to confirm on the guidance, so this line was always going to cost us about EUR 15 million, now we think it will cost a bit less. But that was going to be -- go to the joint venture and third party financed with the bank financing into the JV? Now they've ended the JV, that CapEx clearly becomes part of our guidance. For our own numbers, it has an impact on leverage of [0.03x] over the coming year negative. Going forward should be strongly positive on leverage because the EBITDA now flows directly into our numbers.

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

Otto de Bont, Renewi plc - CEO & Director [29]

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

No further questions. I would like to thank you for your attention and look forward to provide you with further updates as we go forward. Thanks.

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

Operator [30]

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

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.