Atlas Arteria Limited (ALX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Atlas Arteria H1 2021 Results Presentation Conference Call [Operator Instructions] I would now like to hand the conference over to Mr. Graeme Bevans, Chief Executive Officer. Thank you. Please go ahead.

Thank you, operator, and good morning, everyone. I'd like to thank you all for joining Atlas Arteria's First Half 2021 Results Call. I'm joined today on this call by Nadine Lennie, our CFO. I'd like to acknowledge and pay respect to the indigenous people who are the traditional custodians of the lands on which we meet today and across all the lands on which our businesses operate. I also pay my respects to elders past, present and emerging. Today, I will outline the key highlights of the half, with Nadine providing a summary of the key financial measures. Following that, I will provide an overview of our strategy, our opportunity sets and our key priorities. Moving to Slide 4. We have continued to deliver against our strategy with our team demonstrating strong commitment and focus in achieving continued success in developing our businesses. Our operating environment is showing positive signs of continued recovery. Although in this environment, cautious optimism seems appropriate. The resilience of our businesses comes through on Slide 5. Traffic seasonally adjusted across our businesses increased by 10% to 15% in June compared to January with heavy vehicle traffic for the half consistent with 2019. We completed over $250 million in capital projects across our businesses with 3 major improvement projects in France completed during or shortly after the half and now open to traffic. We also made some important progress on our strategic objectives. Completing the Warnow capital's restructure, allowing distributions to flow and a significant improvement in value. At Dulles Greenway, we achieved an increase in tolls for the majority of our traffic of 5.3%, giving an overall average increase in tolls across the day of 4.5% in June. In combination, all of this has allowed us to provide guidance of $0.155 for the first half of '21. Moving to the financial overview on Slide 6. During the first 4 months of the half, we had COVID lockdowns in Europe, and significant constraints in Virginia. In that context, we achieved a 20.5% increase in EBITDA from 2020 or 15.7% below 2019. You can see on Slide 7, the French and German mobility data, which shows the significant recovery in traffic following the relaxation of lockdowns from May. Recent data since 30 June shows the normal increase in recreational traffic with the summer holidays and consequent reduction in workplace traffic. This has included the return of intra-European holiday traffic which has assisted to achieve higher traffic volumes. Importantly, in the EU, France and Germany have shown a strong commitment to vaccination, particularly in France, where greater incentives and in some industries compulsory vaccination have been implemented. Importantly, the percentages shown here are the total population, not the eligible population result which is often quoted in Australian data. The equivalent in Australia today would be 43% first dose, 24% fully on a full population basis. So as you can see, Europe is incredibly well advanced in vaccination relative to Australia. Warnow traffic, as you can see on Slide 9, was constrained by lockdowns in the first half. [indiscernible] is now well underway with post 30 June traffic returning to near 2019 levels. On Slide 10, Dulles Greenway traffic continued to recover through the half, tracking the gradually increasing workplace mobility, as shown in the graph on this slide. With schools closed for most of the last year, vaccinations of high schools are ramping up in Loudoun County for the new school year with an aim of returning to in-class learning. If history is any guide, physical attendance at schools, together with the encouragement of businesses for the employees to return to the office should result in further improvement in our traffic. [indiscernible] on Slide 11. During the half, we've continued our capital programs with over $250 million in expenditure. 3 enhancement projects at APRR are now completed and others, including the West End project at Dulles Greenway are well underway. Moving on to Slide 12. We've continued to advance our sustainability priorities. These are safety, people, customers and community, and the environment. We are working towards having clear sustainability targets in place by the end of '21 based on these established priorities. On Slide 13, by way of example, we are showing the rollout of high or very high-power electric vehicle charging stations at our service areas across our French network. As at 30th of June, we had installed charging stations at 51% of our service areas. And by the end of '22, we'll have installed charging stations at all service areas. This program is now supported by funding directly from the French government, which is committed to deploy 100,000 new charging points throughout the country by the end of 2021. I will now hand over to Nadine who will take you through the financial performance for the half.

Thanks, Graeme. Let's turn to Slide 15. And this is the Atlas Arteria income statement. Excluding notable items, which are really the nonoperational or nonrecurring items. As you can see there, our financial performance has nearly returned to 2019 pre-COVID levels, and the primary driver of this was the performance of APRR, which was substantially better than what it was in the first half of last year. And that's despite the strict lockdowns that were in place that Graeme just talked about. We also owned, of course, the 31% stack for the full half, this half, whereas our average holding for the last curve was around 29%, and that's because we acquired the additional 6% in March last year. The other thing that impacted the performance of APRR just coming through our income statement was the strengthening of the Aussie dollar versus the euro. But performance actually would have been better overall than 2019 if the exchange rate was the same as what it was in half 1 last year. As a reminder, the performance of APRR comes through the share of profit from associates line. So of the 73% increase you can see there, around 50% was from the underlying performance of APRR, and I'll touch on that in the next slide; 22% was from the ownership change that I just talked about; 14% was associated with the accounting adjustments, just as you move through that holding structure. And these were offset by around a 13% reduction in value from the exchange rate issue. There are probably 3 other factors which also led to our financial performance. First of all, the reduction in finance costs with the removal of the holding company debt that we did last year and the reduction in debt as a result of our capital restructure at Warnow tunnel. Secondly is the reduction in amortization on the tolling concession at the Dulles Greenway with, of course, the impairments that have come through in the last couple of years. And you can see there that there's around 23% reduction in that cost line. Good news, after this half, there's no impairment for the period. Third thing was the significant appreciation also of the Aussie dollar versus the U.S. dollar. So I think from memory that strengthened from around 0.65 average to around 0.77 in the first half of this year. So the performance of the Greenway has obviously been impacted on translation. Now that impacts various different line items as we pull the Greenway results into the consolidated account. But in our overall sense, it's probably only made, say, around a $3 million difference. So it's not material in a total sense, just on an individual line item basis. And in terms of the notable items for this last half, you can see there a $49.9 million expense, which is an accounting adjustment relating to the capital restructure at Warnow Tunnel. It represents the removal of fair value adjustments that were allocated to the legacy debt when Atlas Arteria purchased its final 30% stake in 2018. The capital restructure actually brings forward, I think, as we spoke about in February, the probability of us receiving cash flows. So this accounting adjustment has been somewhat offset by, you can see, a $34.9 million recognition of unused tax losses. Now they weren't recognized previously because there was limited probability of their use in the medium term. Just as a reminder, the [ $49 million, $34 million ] are accounting adjustments only. And the real value as a result of the capital restructure is in the substantial increase in the unrealized value of the business which we get from the lower gearing, and of course bringing forward those cash flows, as I just mentioned. While I'm on this slide, I will highlight the corporate costs, as I'm sure some of you have seen. They have increased by 11% half-on-half, but we do expect that, that number for the year could be up to that $30 million level. Consistent with what we highlighted in February, in the second half, we will have the full impact of the uplift in insurance costs and the people and traffic capability. Now I mentioned the improved performance of APRR. So let's move on then to Slide 16 and talk about that. [indiscernible] revenue increased primarily as the result of traffic. It's worthwhile noting that the comparative period is a little unusual. You'd expect with toll increases that revenue would increase by more than that 19% which traffic increased by. But as you would have seen back on Slide 8, as referenced by Graeme, the toll mix has changed. So with the increase in traffic period-on-period coming primarily from light vehicle traffic, and light vehicles can average around 1/3 of the tolls paid by heavy vehicles, we're just not seeing the compounding uplift that you might have otherwise expected. Interestingly, we've also had a slight change in average toll mix in the heavy vehicle category as well leading through that. In terms of operating costs, the primary drivers behind the increase, there are variable costs, of course, which increase or decrease in line with traffic. So given the traffic has gone up, toll collection costs, [ TAT ] taxes, they all go up as well. There was also a $2.4 million increase in the Eiffage management fee further with 6 months of that fee this year versus 4 months for last year. No real change in the actual fee on annual basis of [indiscernible]. We also had some higher winter maintenance costs coming through there. These are partially offset with a $5 million reduction in the CET taxes. You may remember that the CET tax calculation changed last year. So effectively, there's now a 2% rather than a 3% cap on the net operating revenue. Just running up the performance of APRR. You can see a small reduction in finance costs from lower debt balances. And in terms of the increase in provisions, it's really just bringing this back in line with what you might expect to see, minimal changes to construction indexes and no change to the discount factor from December. [indiscernible] than what we have historically were the composition of the various cost and tax line item for APRR in our Investor Reference Pack. I'm sorry, [indiscernible] that you're interested, I encourage you to go and have a look at that, and this is also released to the ASX this morning. If you move to Slide 17, we'll just continue on and perhaps around our CapEx performance for APRR. APRR continues to deliver on different capital commitments as required under the concession. As we mentioned at the half year of FUM delays on projects due to COVID restrictions. However, post all of the shutdowns last year, work has really continued on with all the various safety arrangements in place. And there's been no significant change to our CapEx guidance. Rounding out the performance of APRR. Just ending on the financial position. Let's move on to Slide 18. As I mentioned earlier, there's reductions in net debt. The balance sheet of APRR really just gets stronger. At the moment that remains rated A- by S&P and Fitch. You can see that net debt at both APRR and Eiffarie sit around that $8 billion -- sorry, EUR 8 billion mark at 30 June, and that's down around, I think, 300 million since 30 June last year and around 100 million since December. And look, with the continued reductions in net debt, there is obviously a growing capacity for debt within the structure, which, if opportunities do become available, then APRR has significant and growing capacity to fund. [indiscernible] in commercial paper to be refinanced in half 2. And some of you might have noticed that the amount outstanding commercial paper at 30 June was slightly less than what you might have seen in December and prior June. The commercial paper program is still really is in play. The market is strongly supportive of APRR, paper is still being issued at negative interest rates. It is a cash management tool, however, for the outstanding to ebb and flow during the year. First, APRR. So now let's turn on to Slide 19, and we'll move on to Warnow Tunnel. Due to the law of small numbers, the EBITDA reduced by 12.5% compared to last -- half 1 last year, but the operating cost increase, as you can see, was small. But really, the important story here is following the capital restructure at Warnow Tunnel, which we completed in March, we have now received our distribution of EUR 2.5 million. Might seem small, but it is consistent with our expectations and is in line with the guidance we provided in February, adjusted, of course, for the relative traffic numbers. And it really just shows the value an appropriate financial structure, and we're really pleased that we were able to deliver on that strategic objective. Now to move to the U.S. and the Greenway, which is on Slide 20. As you can see here, despite the lower traffic numbers, operating revenue was 2% higher for the period, which reflects the 5.3% increase in off-peak tolls, which we managed to secure and were implemented in May. And you can see the growth in off-peak versus peak traffic coming through the numbers there from what Graeme was talking about on Slide 10. Importantly, given the financial results, liquidity within the business is still strong with nearly $200 million of cash available in the business across its various reserves. Even if we saw no growth in EBITDA for the next 10 halves, so effectively, half 1 EBITDA for the next 10 halves, we'd still be able to cover the debt service fall. Now this is a little bit of a silly calculation, particularly conservative given traffic has been recovering as Graeme mentioned. So for half 1, it was down 40% compared with 2019 [ versus ] 30 June is only down 30%. So all other things being equal, that trend continuing, cash is not something, today, which is playing on my mind. Looking at Slide 21. Given the economic environment, we thought it would be helpful to show how the business is exposed to inflation and interest rates. As you can see, unit revenues or toll prices are highly correlated to inflation. Each of the APRR businesses and ADELAC have their toll prices explicitly linked to inflation via the concession agreements. Warnow Tunnel also has toll indexation outlined in its concession agreement. And given historic traffic, tolls can actually index at greater than inflation. Dulles Greenway had [ its own ] regime with a previous CPI-style legislation. Now it's regulated. And we have provided more details around all of this on Slide 42. But over the next 2 years, toll price increases in off-peak traffic meant that average tolls are still likely to increase at greater than CPI. So look, overall, strong explicit and implicit revenue linked to inflation. [indiscernible] margins as well, a rising inflationary environment also creates a really strong multiplier effect across the business in terms of value. Just looking at interest rates, as you can see there, the significant majority of debt across the businesses is fixed with long duration. As you can see, there's one with exposure to increases in interest rates. Coming back then to the Atlas Arteria corporate business. And before I hand back to Graeme, I'll just quickly touch on our cash flow waterfall. As you all know, our cash flow has historically been driven by APRR. But very pleased, as I mentioned before, that we've now received our first distribution from Warnow Tunnel. You will see this in our cash flow for half 2. In half 1, APRR was our only material source of cash flow. So we've done it a few times now, but I might just step you through the cash flow. There are a couple of things that are worthwhile pointing out. The consolidated APRR profit for the second half of 2020 was EUR 356 million, and you can reference that through to our Investor Reference Pack. So starting on the left-hand side of this slide, Atlas Arteria's pro forma share of this is EUR 111 million. The APRR company net profit after tax, which drives the size of our distribution was EUR 100 million, as you can see there. If you remove the financing costs, such as associated with the debt facility, Eiffaire [ net ] taxes, et cetera, you're left with EUR 98.1 million, which Atlas Arteria received from MAF2 in March. Converted to Aussie dollars, you get the AUD 151 million. From a head office perspective during the first half, we also received $700,000 in management fees from Warnow Tunnel. This is not a distribution, it's just management fees associated with transfer pricing arrangements. [indiscernible] Macquarie fees. The corporate cost investment cash flows, which gets us to $128.5 million net operating cash inflow. So we had $193 million cash on the balance sheet at 31 December. So adding to that balance, the cash we used for the capital structure at Warnow Tunnel, the distribution we had in April. We closed the half with AUD 133 million equivalent. Just a couple of comments regarding distributions and cash to close out from me. In terms of future guidance beyond the upcoming distribution, there is no change to the policy position that we've had for the last 12 months. Distributions from APRR and now Warnow Tunnel will form the basis of Atlas Arteria's distributions in the near term. So in half 2, you should see a very similar waterfall to what you see here. But of course, we'll have that distribution from Warnow Tunnel added in here as well. I've talked about how we view that cash before. And I suppose, again, for the moment, nothing's changed. We want to make sure that at a corporate level, we maintain adequate liquidity to protect against risk while also supporting the immediate needs of the business. As we've also said before, we don't intend to get cash on the balance sheet that cannot be used to create value for security holders. And we're still holding cash, for example, for the possibility of a restructure of the [ Greenway ]. In terms of gearing, we don't have any holding company debt currently. So we also have flexibility to support growth from that perspective. And as we said before, holding company debt could be a feature as we go forward, but it's just very important that we have the right structure so that we can support underlying growth also from the businesses, for example, at APRR. Back to Graeme, who will go through our growth priorities and outlook.

Thanks, Nadine. Our well-established strategic framework continues to drive our actions within the business, both at an operational level and with an eye to the long term. During the half, we successfully restructured Warnow to become a business which is now contributing, as Nadine described, cash flow towards our distributions. This was achieved with a small contribution of equity and a 25-year debt facility at a very low interest rate of 2.07% for 75% of the outstanding debt. Payback of the equity contribution is expected to be fast, and the value of the business has been significantly enhanced. We achieved an increase in toll charges at Dulles Greenway through '22 to 5.3% for '21 with a further increase of 5% in '22 on off-peak tolls. This has increased the average tolls by around 4.5% in the month of June. We continue to develop a long-term pathway to increase the value proposition for all stakeholders at Greenway, with the hope of enabling legislation in the early '22 legislative session. Moving to Slide 25 in France. We've seen traffic recovering as high vaccination levels support increased mobility and travel through implementation of the EU Health Pass System. What we are noticing on our traffic patterns through July and August is the arrival as a lot more traffic coming out of the Netherlands and Belgium, which has helped to increase the traffic well beyond what we achieved in 2019 and 2020, with levels for the summer up over 5% above those levels. Heavy vehicle traffic has performed extremely well over the half, and was down only 1% on 2019. Intra-European HV traffic to and from Spain and the rest of Europe, along with the Italian-French trade transit through our network, increases in cross-border HV traffic, particularly from Spain, is compensated for a negative GDP result of minus 3.9% over the past 2 years in France. We've been actively engaging on the EUR 3.4 billion of road improvement opportunities outlined in the French government's 2018 infrastructure agenda, and we continue to work with government at all levels in France to identify opportunities in the road transport networks of our regions. And we can provide innovative solutions for the benefit of all stakeholders. Our solutions are focused on developing a highly effective transport network that assess all levels of government in France to meet both their ESG and budgetary objectives. Moving to the U.S. on Slide 26. We are well positioned to benefit from the return-to-office and school trends, which are evident in the Greater Washington area. We continue to work with stakeholders to develop a sound basis to restructure the DG business. Our objective is to achieve legislative change to provide distance-based tolling and other changes that result in the structure that benefits all stakeholders, and provides a mutually sustainable business moving forward. General elections to be held in November will be hard force at the governor level without a clear favorite at this point in time. In closing, I'd like to sincerely thank all of our employees around the world who have demonstrated exceptional commitment to our operations and the successful implementation of our strategies in what continues to be an extremely difficult working environment. Our continuing priority is to pursue opportunities in each of our key businesses to create increasing sustainable cash flows by lengthening our average concession life to create long-term value for our security holders. We have continued to deliver against our strategy, focusing on the things we can control, working with our stakeholders to change the things we don't control, while maintaining focus on our ESG principles. This will not change. There are positive signs of a continuing recovery in traffic in our markets, and that gives us reason to be cautiously optimistic. With that, I'll return to the operator to allow any questions you may have.

[Operator Instructions] Your first question is from Rob Koh from MS.

Yes. I just wanted to drill a little bit into the debt headroom at the APRR level, and how we should think about that. I mean there's plenty of room to covenant. But I guess is the A- rating, the constraint there? And what are the metrics that roughly we could think about for debt headroom, please?

Sure. So perhaps I'll take that one as a starting point. So there is plenty of room, as you know, Rob, within the A- rating for APRR to borrow significantly more money, and we're talking in billions of dollars. The rating agencies don't tend to -- and I think we've talked about this before, they don't tend to look at things on a year-by-year perspective. But they tend to look at things over the medium to long term. So where is the situation with APRR, where at some point in the short to medium term, without any other changes, it might be upgraded from A-. So it is not being managed for the purposes of a rating. The capital structure is being managed for, at the moment, best value and to be able to balance that sort of appropriate repayment profile against expected cash flows coming through the business. So I think it will depend on the opportunity that comes up. But certainly, there is plenty of capacity, both within the rating, and the way in which the rating agencies think about this. And the shareholders are not committed or particularly focused on a rating per se. We're focused on having the right capital structure for the longevity of the business.

Okay. Great. That makes sense. And then if I move to the Dulles Greenway, and you mentioned you're still working on the potential capital restructuring options there. Is there anything like legislative or operational that's a precondition of that so that you have to get that out of the way before you could pull the trigger on a capital restructure?

Rob, our focus is to achieve a legislative change, would give the optimal outcome. And so that's our key focus. And as we stated last year, we endeavored to get legislation through, it passed the lower house very convincingly. And then got warehoused in the Senate. And we've been continuing to discuss the opportunity with both VDOT, the Secretary's office, and the members of the legislature. And we continue to engage with the local community, including Loudoun County. So we're working intensively on this, and we'll continue to do so through the election cycle, and then we'll be dealing with the new members and incoming governor and secretary when we know the outcomes of the election.

Okay. Cool. Yes, that makes sense. I guess I'm just trying to -- obviously, there's a lot of work gone into the capital structure of the Dulles Greenway. I was just kind of wondering if there's any kind of actions you can take, which are independent of those, given that the policy process is outside your control, like I don't know if it's possible to buy some of the zero bond -- zero coupons in the market and use them as security to borrow money or anything like that?

There are options along those lines, but our priority and greatest value creation for our security holders is to achieve the objective I described.

Your next question is from Ian Myles from Macquarie.

I've got a really simple question. You invested $1 million in other investments in your corporate cash flow. Just sort of wondering what it was? Is it the start of something new?

Sure, Ian. So that is primarily -- well, there's a meter thing, I suppose. From a head office perspective, a few of the bits and pieces that we talked about in February in terms of new stuff coming on board, but also the investment in staff in particular around solutions on the Greenway.

Your next question is from Mollie Urquhart from Barrenjoey.

Just on the traffic at APRR, you've shown a really pleasing recovery of the European summer of over 5% above 2019 levels. Could you talk to how you're viewing traffic on that asset going forward? How much of that strength is pent-up travel demand versus true recovery? Any comments on trends you're seeing that you'd like to talk to going forward?