Cleanaway Waste Management Limited (CWY) Earnings Call Transcript

Thank you for standing by, and welcome to the Cleanaway FY '25 Full Year Results. [Operator Instructions] I'd now like to hand the conference over to Mr. Mark Schubert, CEO and Managing Director.

Thanks, operator, and good morning, and welcome to everyone listening in today. Thanks for joining Cleanaway's financial results briefing for the 2025 financial year. My name is Mark Schubert, and I'm joined by Paul, who is Cleanaway's CFO; and Josie, Head of Investor Relations. Following the presentation, we will open the call for your questions. Moving on to Slide 3. I'd like to acknowledge the traditional owners of the lands on which we operate all around the country and pay our respects to elders past and present. I'm going to take the disclaimer as read and start on Slide 6. FY '25 was another year of delivery and progress. I am proud that our results demonstrate that at Cleanaway we do what we say. We delivered a strong financial performance and attractive returns to shareholders. This is evidenced by 3 years of consecutive -- 3 consecutive years of double-digit EBIT growth and in FY '25, 15.8% growth in EPS, a 20% increase in total dividends and a 50 basis point increase in ROIC. This is the sixth half where we have sustained our EBIT margin expansion with FY '25 margins expanding by 130 basis points. This demonstrates that our operational excellence program is delivering. Cleanaway is significantly stronger than it was 4 years ago. And this underpins our confidence to continue delivering sustainable, predictable earnings growth in FY '26 and beyond. 2 years ago, we set our midterm ambition. And today, I am pleased to confirm that we remain on track to deliver more than $450 million in underlying EBIT by FY '26, excluding acquisitions. Again, this is evidence that we do what we say. When we include the contributions from our recent acquisitions of Citywide and Contract Resources, FY '26 underlying EBIT is expected to be between $470 million and $500 million. This translates to mid-teens to low 20% year-on-year EBIT growth. Strategically, we are on track, having now delivered 3.5 years of disciplined execution against our Blueprint 2030 strategy. What I am excited about is that a lot of what we have been doing in this first phase of Blueprint 2030 is simply laying the foundations for the future. These are critical for transforming Cleanaway, creating a platform for delivering growth and extending our market leadership as Australia's largest total waste solutions provider. Turning now to Slide 7 and a summary of the financials. And let me just say this is one of my favorite slides. Our FY '25 financial results highlight the strength of our resilient and recurring revenue base and the benefits of our operational excellence program. Net revenue was up 3.4% to $3.3 billion compared to prior corresponding period, driven by volume and price growth in our largest segment, Solid Waste Services. Underlying EBIT was up 14.6% to $411.8 million versus the PCP. This was driven by double-digit EBIT growth in Solids and the Oils and Technical Services and Health Services segments. Importantly, Industrial Services finished the year in a stronger position than where it started. While challenging market conditions persisted throughout the year, this business has been streamlined and delivered positive EBIT growth in the fourth quarter. Group EBIT margin expanded by 130 basis points to a record 12.5% at year-end. This is up from 9.9% in FY '22 and again reflects the benefits of our operational excellence initiatives. These have been carefully designed and progressively rolled out over the past few years. Our branch-led operating model provides a landing zone for smarter working through data and analytics and coupled with the digitization of Cleanaway through CustomerConnect, we expect to continue driving margin expansion in the years ahead. Free cash flow was $270.2 million compared with $288.1 million in FY '24. The key point here and the one that Paul will explain further is that excluding the catch-up tax, free cash flow increased by 26.1% to $363.2 million. Underlying net profit after tax was up 16.1% to $198 million. For the third year in a row, we have delivered an improvement in ROIC, finishing the year at 6%, 150 basis points higher than it was at the end of FY '22. And our directors have declared a fully franked final dividend of $0.032 per share. This takes total dividends for the year to $0.06 per share, equivalent to a 68.2% payout ratio. I'll now turn to Slide 8 and health, safety and environment performance for the year. Our FY '25 safety performance reflects both the progress and the challenges of implementing our comprehensive 5-year HSE strategy. I am deeply disappointed to report that we experienced 3 fatalities in our operations during the period. On behalf of the Board and the management team, we extend our deepest sympathies to the families, the friends and the colleagues affected by these tragic events. The health, safety [Technical Difficulty] member of the Cleanaway team and our contractors is fundamental to how we operate, and these events weighed heavily on all of us. Following these tragic events, Cleanaway's Board, the executive team and safety leadership team worked together to embed the learnings of these incidents and review our HSE strategy and 5-year action plan. In addition to confirming that it is fundamentally sound, we identified opportunities to accelerate a number of initiatives, including the rollout of in-vehicle monitoring systems to promote safe driving and accelerate our fleet replacement program to ensure vehicles are equipped with modern safety systems. Our personal safety performance fell short of our expectations, especially in the context of the efforts and focus we have placed on improving our safety performance over the past 24 months. However, it is encouraging to see our second half safety performance showing an improvement on the first half, and I'm pleased to say this has continued into FY '26. Moving now to our environmental performance. Just like safety, our environmental performance is foundational to how we operate. Compared to last year, we saw a 30% reduction in the number of environmental notices received. Managing our fire risk continues to be a key focus, especially given the ongoing challenge of batteries and household waste. And our continued focus on fire risk reduction has led to a 62% drop in medium-sized fires, reflecting the impact of early detection and suppression. As reported back in February, we had a fire in our Christie Street site in St. Marys. The site's fire systems and evacuation protocols were critical in ensuring no injuries occurred. The financial impact is expected to be towards the lower end of the previously reported $20 million to $40 million range, net of insurance recoveries. We now move to Slide 9. Every day, working together with our customers, we recover resources and we protect the environment by providing safe and responsible waste management solutions. Our extensive 5-year people and culture strategy is fostering a more engaged, more inclusive and more stable workforce. Female participation at the group and operational level has improved for the fifth year in a row, and voluntary turnover is around record lows. Our recent engagement survey of 63% showed an improvement year-on-year, while highlighting inclusion at Cleanaway is real and strengthening. It was a big year for resource recovery capacity. We commissioned our Western Sydney Material Recovery Facility or MRF. We upgraded the maturation hall at our Eastern Creek organic site to enable FOGO processing, and we cemented our position as Australia's leading container deposit scheme operator alongside Tomra with the commencement of the Tasmanian CDS. We also expanded our ability to protect the environment through the provision of total waste solutions with the acquisition of Contract Resources, which positions us just where we want to be, so we can capture our share of the decommissioning, decontamination and remediation vector in both offshore and onshore oil and gas in Australia. To put our impact in context in just one of our SBUs, in Health Services, we safely managed 32,000 tonnes of hazardous healthcare waste and in so doing, protected the natural environment and surrounding communities. Our fourth pillar, reducing emissions continues to be an area where we are leading the waste industry. We've increased our methane capture rates at our landfills by approximately 31% compared to FY '22 and as a result reduced our combined greenhouse gas emissions by 13% since FY '22, and we remain on track to meet our 2030 emissions reduction targets. Moving to Slide 10, give you an update on our two strategic acquisitions, which collectively are expected to deliver approximately $30 million in EBIT in FY '26. Starting with the acquisition of Citywide's Waste & Recycling business for $110 million, which includes a 35-year lease over the Dynon Road Transfer Station in West Melbourne. As a reminder, this is Victoria's second largest transfer station and is located just 5 kilometers from the CBD, which is why this is about location. The transfer station efficiently connects the western corridor of Melbourne to MRL, complementing our position in the southeast with SEMTS. The acquisition is about creating the efficient and integrated collections and post-collections network we have been looking to establish in Melbourne for some time. In FY '26, Citywide's EBIT contribution is expected to be in the low single digits as we begin planning for the redevelopment of Dynon Road, which will effectively double its capacity and is expected to deliver capacity-led growth from FY '30 onwards. Through the realization of network efficiencies in the near term and capacity-led earnings growth in the medium term, Citywide showcases how we're delivering a platform for sustainable growth. Moving to Slide 11. 2.5 weeks ago, we welcomed the Contract Resources team to Cleanaway. What we have acquired in our view is the market-leading production-critical services provider to Tier 1 oil and gas operators. It has a growing earnings profile, EBIT margins significantly above those of our existing Industrial Services business and long-standing customer relationships, many spanning over a decade. Strategically, the business is an excellent fit and acts as a growth multiplier across the group. It does this by providing a platform for future growth by expanding our decommissioning, decontamination and remediation capabilities while also adding a new sales channel for our core Solids and Liquid Waste Services. The integration of our Industrial Services operations into Contract Resources will be transformative, elevating Industrial Services to Contract Resources best-in-class standards and unlocking new opportunities for scale, efficiency and customer value. Once the integration is complete, we expect to realize $12 million in annual cost synergies at full run rate in FY '28 with a back-end profile and only modest realization in FY '26. For FY '26, Contract Resources is expected to contribute around $25 million of EBIT for the 11 months of ownership. That's before synergies and after amortization of acquired customer intangibles of approximately $10 million. It has been a super busy few weeks, welcoming both the Citywide and Contract Resources teams to Cleanaway. There is lots of genuine excitement across the group, and it's great to see our teams already working together in the way that they are. And with that, I'll hand over to Paul to take you through the financials.

Thank you, Mark. So now turning to Slide 13 and starting with a summary of our financial performance for '25. As Mark mentioned, these results reflect another year of delivery and progress. Group net revenue of $3.3 billion, was up 3.4% on FY '24, underpinned by revenue growth in our largest segment, Solid Waste services of 6%, which was driven by a mix of volume, growth and pricing discipline across the collections and post-collections lines of business. Group net revenue was tempered by lower revenue from OTS as a result of network congestion caused by the fire at Christie Street as well as Industrial Services, which continue to face challenging operating conditions. After adjusting for significant items, the group delivered a strong underlying EBIT of $411.8 million, presenting another year of double-digit growth of 14.6%. EBIT growth reflects 130 basis point margin expansion, supported by strong solid performance, underpinned by the branch-led operating model and strong contributions from Health Services as well as higher-margin project work in the second half from OTS. Net finance costs were $121.5 million, which was at the lower end of our guidance. Our effective tax rate increased to 31.8%, and we expect this to reduce in FY '26 to between 30% and 31%. Underlying NPAT of $198 million, was up 16.1% with EPS of $0.088 per share, up 15.8%. Both measures reflect a substantial step-up in performance over the past 3 years, reflecting our efforts to strengthen the business and deliver sustainable growth. Against this strong increase in underlying NPAT, ROIC continued to improve, up another 50 basis points year-on-year, primarily driven by the capital-light operational efficiency initiatives, increasing profitability as well as the incremental returns from strategic growth investments. The balance sheet remains strong with a group leverage ratio of 1.85x at the end of '25. Post acquisitions, the group leverage ratio remains very comfortable at around 2.4x, and we continue to maintain a strong balance sheet and have a clear actionable path towards further deleveraging. So turning to Slide 14 for a quick overview of the underlying adjustments this year. Underlying adjustments in '25 were largely driven by the following three significant items. As we advised back in February, the cost of $23.2 million related to the fire at Christie Street, St Marys were taken below the line. These reflected cleanup costs of $7.8 million, additional cost of working of about $6 million, asset write-offs of $11 million, all partially offset by insurance recoveries of $1.6 million. Our expectation for FY '26 is that the insurance recoveries will largely offset incremental costs. There was a $16.9 million P&L loss recognized as a result of our divestment in ResourceCo and $5.7 million of acquisition and integration costs associated with Citywide and Contract Resources acquisitions. As previously flagged, there were IT transformation costs of $18.2 million, which are expected to be ongoing until the completion of CustomerConnect in FY '28. So turning now to Slide 15 and the group's cash performance. Free cash flow was $270.2 million compared with $288.1 million in '24 as a result of the catch-up tax payment related to FY '24 of $93 million following the end of the Commonwealth government's temporary instant asset write-off scheme. As seen back in February, the resumption of tax payments had a distortive effect on this year's cash flow and is expected to have a similar but smaller impact in FY '26 before normalizing in FY '27. In FY '25, the total tax paid of $115.4 million reflects $22.4 million of monthly tax installments for '25. That resumed in March of this year and $93 million of catch-up tax associated with '24. In FY '26, our total tax payments are expected to be between $145 million and $170 million. There will be some two components. The first is our regular FY '26 monthly tax installments, which are expected to be between $90 million and $110 million. The second will be a catch-up tax payment associated with FY '25. This is expected to be between $55 million and $60 million and will be paid in December 2025. Also this result is a one-off $15 million option fee paid to Boral, which secured access to land adjacent to the MRL site. This provides greater certainty for our MRL operations with more efficient air space and stronger prospects for approvals compared to the northern area of the site. There was a free cash flow benefit of $45.3 million due to the reduction in maintenance cash CapEx to $217.6 million, largely reflecting the strength in capital management discipline throughout the business. Net proceeds from the sale of PP&E were $30.6 million, reflecting our focus on exiting excess fleet and property. With a national network of branches enabling our broad range of services, we actively manage our property footprint. In FY '25, we sought efficiencies by combining businesses on shared sites and where possible, exiting excess property holdings. We would expect this program of property rationalization and sales to continue for a number of years. When considering what this means for '26 and '27, it's worth keeping in mind that for some of our noncore sites, given the historical use, these are complex deals and their timing is hard to predict. So turning to Slide 16, CapEx. It's pleasing to report that as we committed to back in May '24, we've stepped down our total capital expenditure envelope around $450 million in FY '24 to below $400 million in the current year. Total CapEx for '25 is $382 million, reflecting the benefit of the capital management disciplines that we're instilling across the business. During the year, we continue to fund our fleet replacement program and our investment in growth assets such as Western Sydney MRF, Eastern Creek Organics and other smaller projects such as TAS CDS and the Department of Defence contract. In FY '26, we expect total CapEx to be around $415 million, reflecting the continuation of our existing CapEx envelope of $400 million, which is inclusive of Citywide spending, plus another $15 million for Contract Resources. Looking ahead, with several major capital projects such as the MRF nearing completion, our focus is shifting towards accelerating the fleet replacement program. which is an important part of our broader fleet transformation. Fleet replacement represents a compelling opportunity offering a lower risk profile and attractive returns, driven by the benefits of newer vehicles, which include enhanced fuel efficiency, reduced repair and maintenance costs and importantly, the integration of advanced safety technologies. So turning to Slide 17. Net financing costs were $121.5 million for the year, an increase of approximately $6 million on the prior year, but at the lower end of our guidance. The higher finance costs primarily reflect marginally higher net debt during the period as well as the continuation of maturing leases being replaced with new leases at higher interest rates. These increases were partially offset by reductions in the RBA's cash rate. In FY '26, net finance costs are expected to be approximately $150 million, driven by the following factors. The increase in net financing costs reflects higher borrowings following 100% debt funding of both Citywide and Contract Resources completed in July of this year. So including the acquisition funding, our leverage ratio remains a very comfortable 2.4x. In May, we priced our second USPP notes issue following our inaugural issuance in 2019. Our banks have advised us that this is the tightest priced BBB or equivalent rated USPP transaction for any issuer since February '22. The new $510 million of USPP notes have an average maturity of 11 years, and we swapped the cash flows associated with them back to AUD. The notes will be funded next month and will be used to repay a lower cost with short-term bank loans. Similarly, maturing of Clean Energy Finance Corporation term loan facility, which is at a low fixed rate of interest will be refinanced into a new 7-year facility. Offsetting the increase in net financing costs are lower underlying base rates. Our interest rate forecast includes an assumption of one further 25 basis point rate cut from the -- by the RBA occurring in FY '26 and is in addition to the rate cut last week. So for context, every 25 basis point cut in RBA cash rate results in an annualized interest saving of approximately $3.5 million. So turning to Slide 18, just to finish a few words on dividends. The Board has declared a final dividend of $0.032 per share, bringing the total fully franked dividends for '25 to $0.06 per share, representing an increase of 20% year-on-year. The increase in dividend reflects the Board's confidence in the future prospects of the business given the strong momentum. We've also introduced a modest 1.5% discount on our existing dividend reinvestment plan as a proactive capital management tool given that we fully debt funded the acquisitions. I'll now hand you back to Mark to take you through the segments.

All right. Thanks, Paul. So we're now turning to the segment updates and starting with our largest segment, which is Solids, which delivered another strong result. We saw 6% revenue growth, which was driven by disciplined price management and volume growth. So a 12.8% increase in EBIT, driven by strong earnings growth in our resource recovery and Metro muni collections lines of businesses, and we saw steady results from C&I collections and landfills and transfer stations. After a 150 basis point increase in solid EBIT margin in FY '24, it was great to add a further 100 basis point increase in margin in FY '25, flowing from our Cleanaway operational excellence initiatives. This growth was achieved despite lackluster market conditions in recent years, underscoring the value we're unlocking by strengthening our foundations and focusing on what we can control. Our branch-led operating model is continuing to prove its value. It delivered labor efficiencies in the second half by giving local leaders greater ownership backed by consistent processes and data. Having been rolled out across 92% of branches as at 30 June, the rollout of the BOM across solids will be complete in the first quarter and embedded over FY '26, really setting us up to realize further benefits. Fleet transformation is also delivering. We've reduced fuel costs by renegotiating pricing, tightening governance and driving supplier compliance. At the same time, we're optimizing our ownership model and asset lifecycle. We're now expanding our focus to better manage our fleet repairs and maintenance costs. And with the fleet replacement programs -- program delivery starting this year, we'll see immediate gains in operational costs and safety across the network. Turning now to some additional detail on our collections line of businesses on Slide 21. Commercial and Industrial or C&I customer collections, combined with our regional muni operations account for around 45% of Solid's net revenue, and the results demonstrate the resilience of our diversified recurring revenue base. Metro and regional C&I collections net revenue grew by 3.4% as disciplined pricing drove 4.4% growth, which was partially offset by a 1% volume decline in metro markets. Overall the EBIT was stable as operational excellence initiatives, including a focus on route and lift efficiency and the completion of 15 SWOT programs offset the impact of softer market conditions, primarily in metro markets. We demonstrated strong customer retention, renewing major national contracts with the Coles Group and Hungry Jacks, and extending our contract with Spotlight Group and [ Collins Foods ] to name a few. We also saw improved customer churn and higher new business wins compared to last year. In FY '26, we expect pricing discipline to drive top line growth and BOM initiatives to lead to further margin expansion. If we stay in collections, but move to Metro Muni, where we saw revenue growth supported by the addition of new services in Queensland, including the Moreton Bay green bin rollout and organics contract. Double-digit EBIT growth was driven by stricter contract management, ensuring we're paid for the services we perform and that we're meeting customer KPIs as well as the realization of operational efficiencies through the branch-led operating model, particularly in New South Wales, where it was first adopted. We maintained our disciplined approach to tendering, only bidding for contracts that deliver sustainable returns, securing this line of business' contribution to earnings well beyond FY '25. If we turn to Slide 22 and shift to our post-collections operations. Our core landfill portfolio delivered 2.3% EBIT growth through a combination of pricing and higher volumes. If we run through the larger landfills, at our MRL, we benefited from project volumes in the second half. At Lucas Heights, pricing discipline, density management and tight cost control offset lower volumes. And at Kemps Creek, we saw continued competitive pressure in the construction and demolition market and felt the impact of a sluggish construction sector. Landfill gas and carbon revenue increased year-on-year, driven by additional landfill gas capture, which in turn generated additional ACCU sales and gas royalty revenue. The Lucas Heights capital-light joint venture contributed $5 million of EBIT. It will continue -- it will contribute an additional $5 million in FY '26 and a further $5 million in FY '27. Outside of the core landfill portfolio, New Chum reopened in late May. Its reopening was delayed by Cyclone Alfred, which resulted in higher-than-expected costs being incurred in FY '25. It is expected to close permanently in FY '26 as planned. As some of you might know, on the 1st of July 2025, Victoria increased their landfill levy by $40 a tonne. This is likely to prompt some customer movement across the market, which we expect to manage through proactive engagement, minimizing any impact in FY '26. Importantly, the levy increase is a clear signal from the Victorian government of their intent to create the conditions for energy from waste projects to be commercially viable, an outcome that will require further levy rises. We support this approach as we see a role for both landfills and energy from waste in meeting the state's long-term resource recovery and disposal needs. And finally, moving to the fourth line of business in our Solids segment, which is resource recovery, collectively accounting for 25% of the solids net revenue segment. These lines of businesses delivered strong EBIT growth, mainly driven by CDS and from our MRFs, driven by high yields, commodity volumes and pricing. CDS' EBIT growth was driven by Victoria with a full year contribution versus 8 months last year, the expansion of the program in Queensland to include wine and spirit bottles and the initial contribution from Tasmania, which commenced operations on the 1st of May. We now turn to Slide -- or Page 23 and the Oils and Technical Services and Health Services. And to avoid confusion, this used to be called Liquid Waste & Health Services. OTS was established in the second half of the year through the consolidation of our Liquid and Technical Services and Hydrocarbons businesses. Their combination leverages a shared customer base, and a complementary branch network, creating opportunities to optimize assets, drive operational efficiency and capture cost synergies with benefits expected from FY '26 onwards. OTS' Liquids-related business delivered strong first half revenue growth across all regions. However, momentum in the second half was tempered by network congestion in both New South Wales and Victoria following the Christie Street fire. EBIT growth for the year was supported by higher-margin project volumes in Queensland, increased decommissioning and emergency response activity and the successful commencement of the Department of Defence contract in both Queensland and Western Australia. OTS' Hydrocarbons-related business also delivered strong solid earnings growth. Increased oil collections from key customers and a shift towards higher-quality, higher-margin Group 2 base oil products helped offset lower base oil pricing. Health Services delivered EBIT ahead of its $15 million target, driven by strong results in Victoria and New South Wales and retention of the majority of the Health Service Victoria contract, albeit at reduced profitability. The 3-year transformation of Health Services has been a real success, showcasing how our data-enabled branch-led operating model drives sustained operational improvement, delivering earnings growth and improved customer outcomes. For example, on customer service, we saw an uplift in the Health businesses service in full and on time or SIFOT, from the mid-70 percentages in June '23 to the mid-90 percentages in June '25. Looking ahead, we expect the OTS merger to deliver cost synergies with the branch-led operating model to be rolled out across the business in FY '26. The network constraints associated with the Christie Street fire are expected to be resolved during the year. Turning now to Slide 24 and Industrial Services. In FY '25, we reshaped and repositioned Industrial Services against the backdrop of challenging market conditions. We think about our Industrial Services business through the lens of projects, metro and contracted revenue. The 6.4% net revenue decline reflected the impact on project revenue as customers deferred, delayed or canceled activity as well as our strategic decision to step away from unprofitable metro contracts. On the contracted revenue side, which represents about 60% of Industrial Services revenue, we continue to see stable earnings from these customers, which provided a degree of resilience through the period. So if we put that all together, Industrial Services EBIT was down 10.2% year-on-year, but second half performance improved as the benefits of the restructure came through. We delivered a Q4 EBIT run rate slightly below target due to the impact of Cyclone Alfred, but still ahead of Q4 FY '24. The restructure will deliver $10 million in annualized cost savings in FY '26 with $7 million realized in FY '25. Those savings have come from consolidating operating regions, streamlining the metro network and fleet and reducing headcount. As we enter FY '26, our Industrial Services business is more focused, particularly on Western Australia and ready to capture opportunities from its integration with Contract Resources, which importantly only does contract and associated project style work. Now turning to a few slides on strategic progress and outlook before we get into the questions. On Slide 25, I want to start with a recap on who we are and how we create value for shareholders. We are Australia's leading waste management company. We have the largest national network of integrated collections and post-collections waste assets, and we are a leading provider in every segment we operate in. Our price assets and national collection service serve a diversified base of customers and as evidenced today, generate a stable recurring revenue base that delivers predictable and growing earnings. The tailwinds are firmly in our favor. We grow as Australia grows with waste volumes growing in line with real GDP. Federal and state government policy is pushing harder on sustainability and self-sufficiency and community expectations are increasingly seeking better resource recovery and responsible disposal solutions. These are the markets where we lead and where we see significant opportunities ahead. Just as we've seen our North American peers do successfully, we are modernizing and transforming Cleanaway. We're digitizing core processes like the call to cash cycle through CustomerConnect. We're transitioning to a best-in-class fleet logistics model, and we're using data to make smarter, more profitable decisions and drive productivity. Through the branch operating model, we are systematically and sustainably lifting the performance of every branch with structured programs that build culture, capability and capacity. We see a not-too-distant future where the combination of our scale, our modernization initiatives and the branch operating model reduce our cost to serve and extend our market leadership. Our commitment to capital discipline was a core tenet behind our decision to evolve the business' focus from EBITDA to EBIT. Our approach to capital management is grounded in a disciplined and strategic intent. We've centralized CapEx processes, giving us tighter control over our spend, whilst a rigorous evaluation model anchored in risk-adjusted IRR hurdles is allocating capital where it creates the most value. And we've transformed our projects delivery capability on the ground, which has improved schedule, cost and safety outcomes. And we're deliberate in how we grow. M&A is used selectively only where it accelerates strategic objectives or it involves assets that cannot be replicated organically. At the same time, we favor capital-light solutions that enhance flexibility and returns such as the LMS landfill gas joint venture. Collectively, this discipline means we can keep investing in growth while delivering stronger returns to shareholders. And now to our FY '26 scorecard on Slide 26. As mentioned at the start of this presentation, we are on track to deliver on our midterm ambition of more than $450 million of EBIT in FY '26. I do want to explain what I see when I look at that scorecard on the screen because there's a lot to be proud of on the page. What I see and what I'm most excited about is the progress that we've made over the last 3 years to structurally and sustainably transform Cleanaway. And I don't use the word transform lightly. Items like building our data and analytics capability and scaling it, transforming our fleet and how we operate every part of it, digitizing the call-to-cash process or designing and installing the Cleanaway performance system that is our branch-led operating model is what I'm referring to when I use the word transform. Combined, this is about creating a stable platform that can deliver great customer service that unlocks the benefits of our scale and that drives our leading position forward. And now moving on to Slide 27, which is the final slide. For FY '26, we expect to deliver underlying EBIT of between $470 million and $500 million, which includes approximately $30 million from acquisitions. We often get asked the question around how to think about the factors that shape the lower and upper bounds of that range. So we thought it would be good to cover it now. So what I would say is, first, the underlying business is stable and performing. This is evidenced by today's results and the fact that we delivered in the middle of our FY '25 guidance range just as we said we would do. And we believe the base business in FY '26 will comfortably deliver greater than $450 million of EBIT. Secondly, our two acquisitions are looking good. We've had Citywide for 7 weeks and Contract Resources for 20 days. Both are performing in line with our expectations, expectations set during our extensive due diligence processes. Our FY '26 guidance range of $470 million to $500 million reflects a performance range of only plus or minus 3%. This narrow range reflects our focus on tightly controlling the controllables. The lower end of the range captures scenarios where a number of risks realize themselves, such as a significantly weaker economy when compared to the current lackluster one and where this is not able to be offset by the opportunities we're working on. Again, like last year and the year before, our plan is not to deliver the bottom of the range. We also think it's prudent to have a range that allows for upside and downside risks. But again, we are confident base business will deliver more than $450 million of EBIT. Alongside delivering on our midterm ambition, we will progress the integration of both Citywide and Contract Resources. This will be done in a disciplined and systematic way. I'm pleased to report that we have a number of the key leaders who successfully integrated the Suez and GRL assets, once again overseeing the integration of these two businesses. So before I hand over the call for questions, I want to finish with what I think the three key takeaways are from this result. Firstly, we have done what we said we would do. We've delivered FY '25 at $411.8 million. We're on track to deliver on the midterm ambition of greater than $450 million whilst continuously improving ROIC and the strategic acquisitions are on track and performing as expected. Secondly, we are transforming Cleanaway, creating a stable platform that can deliver great customer service that unlocks the benefits of our scale and that drives our leading position forward. So in many ways, this is just the beginning because this platform will power Cleanaway well beyond FY '26. And finally, this is a team effort. So to our now 10,000 Cleanaway teammates across Australia, the Middle East and New Zealand, a big thank you for making this result happen, and I'm looking forward to what happens next. And with that, I'll hand over for questions.

[Operator Instructions] Your first question today comes from Jakob Cakarnis from Jarden Australia.

Three from me, so we'll have to ask them in concert. So the first one, I'll direct at Mark. With the guidance range that you've given, I don't think it takes a genius to work out that at the low end, less the $30 million of EBIT contribution from M&A, you're actually trending or guiding below your $450 million ambition that you've emphatically reinforced. Can you just tell us why that would be the case? And then two for Paul, if I could. The operating cash conversion in FY '25, even if you adjust for the tax catch-up looks to be about 70%. Can you just talk to us what's going on there? Did some of the option costs flow through the operating cash flow line? And then just finally, on the net finance guidance, it looks like increasingly the noncash components are crowding out the cash components. So in FY '25, your noncash net finance costs were over 50% of the net finance cost. Could you just let me know what's going on with the lease roles, please? And anything I need to consider either on capitalized interest that comes out in '26 or anything on the provisioning, please?

I'm glad that you put those ones to Paul, not me. So I'll get the first one. I'm going to give you an answer, which pretty much already covered, but I'll go over it again. So the first point here, Jakob, is that the underlying Cleanaway business is performing strongly, and that's evidenced by the $411.8 million, exactly where we want it to be right in the midpoint of that $395 million to $425 million range. Second, the two acquisitions are looking good. Like I said at Citywide for 7 weeks, Contract Resource 20 days, and the performance is exactly as expected, and we love those two businesses. Like in previous years, we see the $470 million to $500 million guidance range more like plus or minus $15 million around the midpoint or plus or minus 3%. We think that, that's pretty narrow. The range reflects our focus on tightly controlling those controllables. Your question is about the lower end of the range. My answer is that it would require a number of the risks to realize themselves, such as a significantly weaker economy to the current lackluster one and you can form your own opinion whether you think that's likely or not. That's not able to then be offset by all the opportunity slate that we're working on. Again, it's not our plan, and it's not been our history either to deliver at the bottom end of the range. But we do think it's prudent to have a range. And so that's why that's the way we've set it in. Paul?

Yes. Thank you, Jakob. In terms of the free cash flow for the year, you're right, the option fee in relation to Boral accounting standards basically require us to sort of treat it as an operating amount, essentially, you could regard it almost being a degree of growth CapEx in nature, but that's simply what we're required to do. If you look at the other elements of free cash flow as well for the period. And clearly, you've similar benefits coming through in terms of maintenance CapEx being lower this year compared to last year, about $40 million. And again, clearly, our aim is to make sure that we maintain that. We're seeing some really good progress around just instilling better capital discipline through the group. So that's been pretty encouraging. Landfill remediation, another important line item in terms of free cash flow. I expect a similar sort of level certainly for '25 and '26 as we start to get very active around capping activity in the likes of MRL and New Chum once it's closed. Importantly, the cash flows -- outflows associated with New Chum rectification that you've seen in '24, in particular to [ the green ] '25, they obviously have ceased now, which is good news. So I guess perhaps finish off just with the one-offs clearly has been an issue in the past. I think the good news in terms of Christie Street, our expectation is that any additional expenses that we take below the line around additional cost of working, they'll be offset by the insurance recoveries that we expect during the year. So again, that should be a net wash. In terms of your comment on net finance expenses, if I just take you to Slide 17, the noncash component has been around the $30 million mark for the last 3 years. So again, not been any significant shift in that regard. And in terms of capitalized interest, I mean, there are some capitalized of deferred acquisition cost of debt, they're very modest. They'll come through frankly for the USPP over the next 15 years. So again, not have any material impact at all on their financial expense.

Your next question comes from Rob Koh from Morgan Stanley.

So apologies if you covered these questions during your [ preso. ] I did have to join a bit late. I do apologize. So my first question is in relation to the fatalities reported. And if you could give us any update on what the reflections and learnings are on those to the extent you can. My second question is in relation to the MERC announcement, this -- I think is that today? And if you could just remind us how Cleanaway is going to be approaching that waste-to-energy opportunity? And then just -- of course, the third question, with the Contract Resources, I think you said you've had it for 20 days. Can you maybe just give us a sense of what the pipeline of new contract opportunities is looking like?

All right. Thanks, Rob. So yes, I think you missed what I said on sort of the fidelities. I did open up with that. And obviously, just reiterate tragic events and obviously our sympathies with families, friends and colleagues that really has impacted us all. I'm not going to go through the individual nature of them. So I don't think that's kind of appropriate, but I'm happy to take shareholders through that in quite a lot of detail as we go through the coming weeks. I think we have completed -- we're 2 years into a 5-year plan around improving our HSE. A lot of the items there are foundational items, things like critical risks and critical controls, have rolled those out to 330 branches. And now we can make sure that we actually -- with those embedded, we get the benefits of those improved controls and improved assurance. We expect safety performance to improve. We can see our leading indicators improving. We're pleased with the second half '25 performance and the '26 year-to-date lagging indicators. If I move to the MERC announcement, so just to bring everybody up to speed, so it's kind of like what's happened at 10:30 today, which is kind of not particularly helpful in terms of timing. But the Victorian government announced that the allocation of the cap for energy from waste projects in Victoria. If you remember, the approach there was -- their approach was to have a cap that allowed for an orderly transition. The government would allocate that cap based on the merits of the component and the technology that effectively each of the parties was putting forward. Originally, the cap was going to be 1 million tonnes, and then there was a whole discussion that wasn't really enough. We thought the government should get rid of the cap completely. They decided to increase the total cap to 2.5 million tonnes, which is what happened. And then today, it got announced that Cleanaway got 760,000 tonnes per annum of capacity. So we are sort of one of the largest allocations. You could say, why did we apply for 760,000 tonnes? The answer to that is because larger twin line plants are more economic. In terms of the way the facility scale or the cost of running the facility scale with the volume. It's not dissimilar to what's been proposed in terms of volume for Maryvale, for Parkes, for the Gold Coast. It's similar to the global shift that we're seeing around larger twin line plants. And really, all we're doing now is we're continuing down our same process that we've talked to investors and analysts about in the past, which is the originator approach where we're going to originate these projects to ensure we get low-cost access that we need whilst then bringing in strategic partners to help bring those projects forward. CRs in the last 20 days of the pipeline -- well, we're pretty excited. We're pretty excited about the pipeline of opportunities that CRs has got. I mean interestingly, maybe just an observation, Rob. So CRs, when you speak to the team there, they don't even talk about DD&R because it's basically just work that they do for those existing counterparties. So they're already doing work with Chevron on what we would call DD&R, but for them, which is just project work. Similarly, they're doing work for Esso, which will become Woodside down in Gippsland, in which it all -- which looks like DD&R, but it's actually just project work for them. So we've got a real opportunity now as we bring together the combined scope and really get the synergies cracking as to how we attack that scope together.

Your next question comes from Lee Power from JPMorgan.

Mark, just like the upper end of the range is obviously quite tight as well. So I take your comments around the lower end being worst-case scenario. You're still tracking green against most of your Blueprint 2030 priorities. Like how do you think we think about growth beyond '26? Is anything changed around the level of EBIT that those kind of initiatives would contribute in your mind? So that's the first question. The second part of it is just on C&I volumes, like they're obviously down 1% the year pretty tough. When do you think that changes going forward? And then the third part for Paul is just around an updated interest rate sensitivity on the net finance cost guidance.

Yes, cool, thanks for those questions. So in terms of sort of growth beyond '26, what I would say is, the simple answer would be we're very excited about growth beyond '26. It's similar to what we've talked about before. So we would see the building blocks being GDP plus, so we grow as Australia grows. Then you layer in what will come through from that investment in strategic growth. So you're going to see the benefits of Contract Resources flow through. You'll start to see the benefits of Citywide flowing through. You'll start to see DD&R and our funnel of activities start to ramp in there. And then obviously, we'll get the margin expansion elements from the operational excellence piece. And I just -- I really want to land this point, so everybody understands what we're saying. I've tried to say like 4 or 5 times today, but I'll spell out again. So when you combine CustomerConnect, the digitization of Cleanaway from the call to the cash and you combine that with the branch operating model, and the scale and the control of those branches and their improvement and then you add data and analytics, then scale becomes an advantage. And so that's really what we're going after in that operational excellence space is getting that scale. And then you add to that on operational excellence, the benefits of things like transforming the fleet. You've seen us have a crack at fuel. We're right in the midst of R&M, so repairs and maintenance, and we're obviously right in the midst of fleet replacement. And then you add things like landfill gas monetization and things like that. And then there's a whole other suite of strategic items that we don't talk about because we don't want our competitors to hear about them that we're excited about for growth beyond '26. So I guess what I'm really saying is there's a lot to be excited about. In terms of C&I volume down, so I think just remember, we said that was sort of mainly metro C&I. And that's a similar story to the last couple of times we've chatted where we're saying interestingly like churn is down, new business is up, but what remains is what we see is down trading where customers because they're doing it a bit tough are saying or they're more focused on their costs are saying we'd like our bin collected a bit less frequently or we'd like a smaller bin. The thing with that is that's a trend that we're looking to turn around by being smarter, not working harder, where we can actually now use our data and analytics platform to -- and sales force to feed pricing engine, golden price through to -- throughout the sales force team and target that to fill the route density on those routes that we've lost a little bit of, and that's our attack there. So that's a really big focus in Cleanaway in the next 6, 12, 18 months. And then interest rate...

Yes, Lee, in terms of interest rates, every 25 basis point reduction is worth $3.5 million plus interest. It's an annualized $3.5 million. So clearly, we -- guidance we've given, we've assumed there will be one further rate cut. So if you believe there are more, then obviously, there's further upside in that regard.

Your next question comes from Amit Kanwatia from Jefferies.

Maybe just thinking about the guidance and thinking about the staircase for fiscal '26. And I mean, you are at $412 million of EBIT, '25, inclusive of acquisitions, you are at $440 million. So that's a starting point. And when I look at the last couple of years, I mean, you've delivered $50 million of improvement, EBIT, '25, '24. So maybe if you can speak to -- I mean you've spoken to the momentum in the business at the low point as well. But maybe if you can elaborate the swing factors at the top of the range? And how should we be thinking about your $50 million EBIT improvement delivery in the last 2 years versus what you've provided today? So that's question #1. Question #2 would be for Paul. And I mean you've spoken to the DD&R kind of opportunities in the market. But maybe if you can elaborate a bit more on the growth CapEx pipeline you are seeing over the next 12, 24 months, excluding DD&R. So that's question #2. And again, I mean, I just want to touch base on the finance cost as well. $150 million of guidance, I mean, the way I am thinking is there is at least $9 million benefit from the RBA rate cuts that's on '26 on '25. And then you've got $500 million of acquisitions, should add roughly $25 million, $30 million of higher net interest cost. I mean the end number still gets me to less than $150 million. So maybe if you can do a bridge in terms of the finance cost movements from '25 to '26, please?

I'll take the first one. I am glad Paul has got the second one. Once again, splitting these questions is working really well. So if we think about -- maybe just a couple of comments, I mean, just to remind you. So remember when we set the midterm ambition a few years ago, there was that restoration bucket of $50 million that was Queensland Health and Labor recovery. Our view would be that kind of like those buckets in '26 will be fully delivered. And so -- but they don't -- but like the rest of bucket, that $50 million of grant, that thing doesn't repeat itself. And you're left with the other two buckets that do continue to repeat. I think if you're thinking about how do you get to sort of like $412 million to up around the midpoint of the range, you've got three building blocks to do it. The first is you got to have your organic growth in there. That's things like the Western Sydney MRF flipping on and starting to deliver. It's the defence contract for the full year. It's the full year of CDS TAS. But just remember, it takes 18 months to start up that CDS operation properly or to ramp it up. So that's kind of sitting in that organic growth bucket. Then there's the ops excellence bucket. And that's things like you start with the branch operating model, the fleet work that we're doing, the first benefits flowing through from CustomerConnect, the OTS synergies between Hydro and LTS, another $5 million from LMS this year, that's kind of sitting in that ops excellence bucket. So you should definitely see some margin expansion coming in there. And then the third part will be the strategic acquisitions that Citywide and Contract Resources come in. And you get -- that sort of you -- puts you into that midpoint of the range. And then I think you say -- yes, your question started with what you have to believe to get to the top end? Well, it's just the acceleration of the ops excellence stuff. Again, that is the big bucket, and it's how hard and fast we can go.

Paul?

So in terms of growth CapEx, Amit, essentially, there is a shift in terms of our activity in this space. And you can see obviously, Western Sydney MRF largely completed in this year. FOGO at Eastern Creek will continue through '26 and complete in '26 as well obviously CustomerConnect, that will also continue through '26 as well into '27. Importantly, of course, one we're very excited about is Dynon Road Transfer Station redevelopment. Again, we'll start the planning in '26. Expectation, the majority of that spend will occur in '27 and probably '28. But I think a really important point to draw out now, we've mentioned it a few times in the call, but just to emphasize, we can really see the benefit through expediting the fleet replacement program. So essentially, we can see -- with the new technology coming in, we're seeing trucks that will actually deliver us really quite attractive returns at a lower risk. And hence, we are going to be committing probably a greater element of what we would almost call growth CapEx into fleet replacement as well. In terms of net finance costs, again, clearly, we have assumed that there will be one further rate cut from the RBA in the year. That's our assumption. If you believe there are going to be more, that can be something you can factor into your net finance cost estimates going forward. In terms of the refinancing activity we've done during the year, we are blessed in many ways by having long-term assets, whether they're actual building type assets, infrastructure style assets or whether it be customer contracts. One of the benefits of that means that we can also attract long-term debt from banks and other key providers. And we've taken the opportunity to do that during this year. So we've gone out into the market and issued our second USPP with maturities out to 15 years, fantastic deal. So the bank said it was the sharpest price deal for a BBB rated equivalent since Feb '22. So I think we were very pleased with the pricing that we got with that transaction. And it simply eliminates refinancing that's going into the future and obviously provides a key source of funding for the acquisitions that we've done as well. We also mentioned too, that the CEFC loan that you'll see sitting on the balance sheet due to mature, in fact, in August in this month. We're looking to extend that out for a further 7 years. And again, that was particularly low rate of interest around the 2% mark. We'll be refinancing that at more current rates. Again, they're floating, so they'll benefit from the rate cuts. Does that help, Amit?

Yes, useful.

Your next question comes from Owen Birrell from RBC.

I guess you have three questions from me. The first two will be around the guidance. Just in terms of what's included and what's not included. The first question for me is, I guess, the Department of Defence contract, you're pretty vague previously about what that might be worth. Just wondering if you can give us a sense as to the contribution that that's going to be making into FY '26. And i.e., is it now known? Second question is very much what are you assuming in terms of contract wins, not only in the DD&R space, but also landfill gas and so forth, whether there's anything in that guidance for potential wins or not? And just third question, I'm curious to get a sense as to the messaging that you're sending internally by putting out this guidance because you're essentially saying that to your internal managers that you're not going to get to your project 500 targets. And I'm just curious to see whether that -- what you think that's going to create a foot off the gas sort of dynamic internally in terms of people not getting paid their bonus.

Okay. Thanks, Owen. Well, I think in terms of guidance, what's included and what's not around Department of Defence. So I think obviously, we get the full year benefit of Department of Defence because remember, that contract started up in April, it was. So you should expect $2 million to $3 million of EBIT coming in from that this year, and that will be included, obviously, in the guidance. In terms of contract wins included, like I mean, what I'd say is we're not going to go through and say this is what we're assuming. I mean I guess what we're saying is there's no heroics in the contract wins. And we're having -- like I said, having churn, particularly in the C&I is lower than what we would expect or lower than previous times. We think new business is up. And I guess we're looking to really apply our intelligence and our data and analytics platform and get the benefits flowing through of CustomerConnect around really ensuring the productivity of our sales force. so I think that's going to be pretty exciting. I think in terms of sort of this messaging internally, we don't -- I think what I would say there is the top end of the range on guidance is $500 million. The internal team doesn't lack any motivation. Let me assure you of that. That figure, the Mission 500 was an internal light on the hill. It was designed to galvanize the entire organization against the courageous target. I come back to what I said before, which is we will deliver that greater than $450 million EBIT plus improving returns, and we're well on track to do that. When we deliver greater than $450 million, it will be 50% EBIT growth over 3 years. It will be an EPS CAGR of greater than 15%. And we see all that opportunity that would -- that $500 million opportunity is still there, and it will come.

Sorry, can I just confirm that the internal target, was that ex acquisitions? Or did that include acquisitions?

That was -- so the -- well, at the time, we didn't have any acquisitions. So it was clearly excluded, yes. But what we'll be focusing the team on is they'll look at that external target, and we'll focus them on the top end of the range. That's what we'll be doing, so -- but we haven't been able to do that again until we get through today because we need to match externally and internally, and we'll do that this afternoon. We got through the internal team on the call this...

And sorry, just on the contract opportunity. Can you give us a sense as to whether there are any major tenders coming out in DD&R?

There's always major tenders coming out in DD&R. I mean DD&R has one of the largest sort of funnels. I guess the challenge there is there's always a lot of discussion but the exact timing can move around. So it's hard to say what will be this year versus next year in terms of those large companies budgeting some of that work. And when these projects get rolled, they're not done in a single year. I mean they can be 5-, 6-, 7-, 8-year projects that you're involved in. The great thing is, I was talking to the CRs' team yesterday. So the CRs' team has embedded resources today in a large number of those Tier 1 oil and gas companies working on their first phases of their DD&R projects, which is all about how do you hydrocarbon free and clean those facilities. And then naturally, therefore, going to try and continue on those conversations. So we're in a really nice place. It's exactly what the sort of the leg in that we wanted.

Your next question comes from Cameron McDonald from E&P.