Atlas Arteria Limited (M82.F) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Atlas Arteria First Half 2025 Results Presentation. [Operator Instructions] Due to legal restrictions, we are only able to communicate directly with eligible security holders and investors with respect to their eligibility to invest in Atlas Arteria securities. Details in relation to the ownership restrictions that apply to the persons in the United States and other U.S. persons that are not qualified purchasers and qualified institutional buyers are set out on Atlas Arteria's website under U.S. ownership restrictions. Please refrain from asking questions in relation to our securities as we are legally restricted from answering those questions on this call. I would now like to hand the conference over to Mr. Hugh Wehby, Chief Executive Officer. Please go ahead.

Thank you, moderator, and good morning, everyone. It's really great to connect with you again today. I'm pleased to present Atlas Arteria's 2025 half year results alongside our CFO, David Collins. First up, I'll take you through some highlights for the half, then on to our plans to help generate long-term value with a particular focus on the opportunities we're pursuing in France Dulles Greenway. I'll then leave you in David's capable hands to talk you through our financial performance in a little more detail. And as usual, we'll take your questions at the end. But before I take you through the highlights, I want to briefly talk about our vision. At Atlas Arteria, our steer values and our strategic objectives continue to guide our decision-making every day. Sitting above these is our new vision statement. We clearly and confidently state our ambition and long-term value proposition to investors customers and the communities which we serve. The statement is partnering to deliver world-class road experiences. It's simple, but powerful and intention. Partnership essential to our success, whether it's with our co-investors, road management teams, government agencies are our local communities. Our partnerships give us flexibility to structure a diversified portfolio to capture both stable income and long-term growth and further to unlock opportunities we couldn't access on our own. The word delivers speaks to our high-performance and execution mindset. When we commit to do something, we do it. And we always tie back to our strategy and [indiscernible]. We use the ambitious class because through our operating businesses will always aim for the highest standard in safety, operations, technology and customer experience. And road experiences keeps our focus on the people using our roads and ensuring we offer seamless, safe, efficient and sustainable travel that importantly represents value for money. Jumping into the highlights now. We've achieved strong results against our strategic objectives, as you can see on the slide. Firstly, in terms of how we optimize the performance. We grew both proportional toll revenue and EBITDA by 8% and our free cash flow per security was up by 9%. David will walk you through our financial performance in more detail soon. But first, I want to share an example of how we have optimized performance at one of our assets. At Dulles Greenway, we installed LaneBlade technology on our maintenance vehicles, which allows for swift, hands-free clearing of roadway debris and broken down vehicles. This improves safety for our customers and minimizes overall traffic disruption on the Greenway, highlighting the customer experience and value proposition of our road. We've enhanced our competitive position through our strategic partnerships. For example, in France, we've partnered with Eiffage on the A412 and A154 which has strengthened our concession opportunities there. At Dulles Greenway, we're working to drive performance by continuing to pursue a new rate case application and proceeding with federal litigation, which seeks a variety of forms of relief not previously available to us at the Supreme Court of Virginia. In terms of managing our capital efficiently, we've maintained our distribution guidance of $0.40 per security for 2025. This is supported by growing free cash flows and the foreign exchange hedging program that David will explain for you. And finally, but very importantly, we continue to lead effectively with some important new appointments. In April, we welcomed Geraldine Leslie as our new Group Executive of People and Culture. She brings extensive experience in our field and will focus on embedding a strong safety culture across the corporate and each of our businesses. In the U.S., 2 new appointments will further bolster our operational excellence. At Chicago Skyway, Luis Tejerina took the reins as CEO, and we're well progressed through the CEO search at Dulles Greenway. We look forward to working with these new leaders and seeing the positive impact they make in their businesses. Moving now to what we're doing to continue driving business performance and growth to deliver long-term value for you, our investors. As you can see on the slide, we're thinking about this in 3 buckets. Looking at our existing portfolio, our biggest current priority is to unlock cash from Dulles Greenway. The Greenway is positioned in one of the fastest-growing and most affluent counties in the U.S. based on median household income. Once we get Dulles Greenway out of lockup and distributing cash, we are confident the business will be a valuable growth driver for Atlas Arteria for decades to come, but more on what we're doing at the Greenway shortly. Looking ahead to the upcoming French concession retenders, we'll continue to partner with Eiffage to ensure we're in the best possible position to participate. We're also expanding our focus in France beyond our existing concessions. For example, the associated growth opportunities we're pursuing with Eiffage, which I mentioned earlier. I've now been in the business for 9 months and have had the time to consider additional levers for potential growth. In this context, we have included the consideration of opportunities in OECD countries separate to our network. Importantly, we'll assess any potential investment based on yield investor value and portfolio composition. There is no intention to raise new equity to pursue such opportunities. And while this, of course, may change in the future, we will make sure to keep the market well informed. Instead, we are relying on the powerful combination of our existing portfolio, debt headroom, partnerships and capital-light options. Central to each value creation bucket on this slide is, in fact, consistent investment in high-quality and strategic partnerships. Looking ahead now specifically to the future opportunities in France. France's major motorway concessions is set to expire between 2031 and 2036. Ahead of this, the French government has been engaging with stakeholders to assess the future of its motorway sector. Most recently, the Transport Minister held a national conference attended by ministers, experts, public stakeholders and concessionaires. The report from the conference reaffirmed the importance of maintaining toll roads for France. It also recommended a refined concession-based model. These are encouraging confirmations for us. Our concessions at APRR and Aria are the last of the major concessions to expire in France, and these positions us strongly to consider the full range of opportunities. Looking at the time line on the bottom of the slide, the [indiscernible] concession is the first to expire in 2031. And so we expect the tendering process to start in the late 2020s. And of course, when it comes to the tendering processes, any bids we submit will be based on the regulatory and tax environment prevalent at the time. Until then, our medium-term focus is on maintaining our position in France. Our long-standing partnership with Eiffage [indiscernible]. We've worked very closely together over the years, combining our strengths. Their local knowledge and presence, together with our external perspective and expertise creates a relationship that delivers more than the sum of its parts. We have strong conviction that continued investment in French motorway concessions is fundamentally compelling with high-quality infrastructure assets in a developed and relatively stable market. While the political and regulatory environment can be complex, this is increasingly the case in most regions, and we are well positioned to navigate this. Regardless of how the tolling model evolves, we will continue to explore opportunities for long-term growth and success there. Turning now to the Dulles Greenway, where we continue to pursue our multifaceted strategy to unlock value from the business. We were, of course, disappointed with the Supreme Court of Virginia's decision on the rate case appeal. However, we continue in our preparation of a new rate case application, including 3 and completing 3 productive stakeholder working group sessions. Importantly, these have been held with full participation from the Virginia Department of Transportation, the Attorney General's office, Loudon County and staff from the State Corporation Commission. From these sessions, we have built mutual understanding around the traffic model and calibration process, and we have had open discussions about appropriate parameters and data inputs. We will use these important outcomes from the working session to inform our next rate case submission. Our federal litigation has also recommenced. Our complaint led is constitutional violations distinct from those decided by the Supreme Court and therefore, seek relief unavailable to Dulles Greenway in the Supreme Court of Virginia Appeal. In terms of the Greenway's operational performance, it continues to deliver strong traffic growth with a compound average growth rate of 8% since the first half of 2021. This provides a stronger platform to unlock cash from the Greenway and enhance the value it delivers for our investors. I'll now hand you over to David, who will walk you through our financial performance in detail.

Thanks, Hugh. I'm pleased to be here today to take you through Atlas Arteria financial results for the first half of 2025. We are very pleased with the performance of the business over the period. Proportional toll revenue and EBITDA both increased around 8%, driven by toll increases and beneficial movements in foreign exchange rates. While first half net profit after tax was 33% lower, this is due to the majority of the impact of the temporary supplemental tax or TST coming through in this half. And as a reminder, this tax is currently expected to apply to the 2025 fiscal year only. Centralized costs of $19.7 million remain in line with guidance for 2025, which is the $37 million to $41 million, excluding CEO transition costs. I will step through the cost in more detail shortly. Free cash flow per security was $0.194, up 9%. We paid a distribution of $0.20, noting that this distribution relates to performance in the second half of 2024. To recap, while our statutory net profit has been impacted by the TST imposed in France, the underlying momentum behind our businesses remain strong, driving growth in proportional earnings and free cash flow to support stable distributions. Turning over. As Hugh mentioned earlier, we have reaffirmed distribution guidance of $0.40 for 2025. This is despite the impact of the TST and we believe is a great outcome for security holders. We expect the full year distribution for 2025 to be above our policy range, 90% to 110% given the impact of the TST. I would also note that, as I mentioned earlier, there will be a timing difference in the payment of TST where free cash flow will be disproportionately impacted in the first half distribution period. So the payout ratio should be considered on a full year basis. We have also implemented an FX hedging program to protect against significant currency fluctuations on a portion of the expected euro distributions from our business. This program is on a rolling 12-month basis. To retain flexibility and efficiency of the program, we start with a lower level of coverage, which we then increase as the distribution date approaches. As we continue to focus on optimizing the performance of our businesses, we expect to be able to grow free cash flow to support distributions of at least $0.40 per security. Turning now to our proportional results. This slide shows continued solid growth in total revenue and EBITDA over the past 5 years, underpinned by traffic growth and inflation-linked tolls. Overall, strong traffic performance and toll increases drove revenue growth in this period. Traffic at APRR was 2.4% higher driven by light vehicles, reflecting the low unemployment levels across France. Heavy vehicle traffic was also up 0.7%. However, was subdued due to slightly weaker French and Spanish trade. At the Warnow Tunnel, traffic was flat. The positive impact from the public transport worker strike in March was offset by maintenance works between April and June. At Chicago Skyway, whilst traffic decreased 2.8% for the period toll revenue increased 3.4%. Light vehicle tolls increased 8.3% from 1 January 2025, which reduced traffic as anticipated. Heavy vehicle traffic saw unusual reductions in May and June. The timing of which appears to be in line with significant reductions in shipping and container volumes at the ports, particularly at the port of Long Beach in Los Angeles. Noting that West Coast container freight bound for the Midwest and East Coast is typically transported through Chicago. More recently, we have seen some improvement in the July shipping data. Positively, as Hugh mentioned earlier,, at Dulles Greenway, there was strong traffic growth of 8.2% as congestion continues to build on competing routes. The continued strong and stable growth in our proportional results demonstrates the strength of our diversified portfolio. Turning now to our cash flow waterfall. We think about our cash flow in 3 main buckets. Starting on the left are our distributions from APRR. Then there are our corporate cash flows, including distributions from our other businesses. And then on the right is our cash coming in and what we do with that. Currently, our cash flow is dominated by distributions received from APRR and the distributions we paid to security holders. This period, our free cash flow increased 9%. On a per security basis, this was $0.194. And with minimal reliance on cash on hand for our distribution paid, we maintain a robust cash position at 30 June 2025. On the next slide, our income statement shows our financial performance compared to the first half of 2024. Toll revenue, which represents the roll-up of revenue from Dulles Greenway and Warnow Tunnel businesses was up 11%, while business operations costs were up 10%. Earlier, Hugh outlined the multipronged strategy that we are taking at the Greenway. The related costs, which you can see here, are an investment we are making in the future of our business with potential for significant returns. Share of profit from our equity-accounted investments, which include APRR in Chicago Skyway, was down in the period, impacted by the French TST in the APRR business. This tax was enacted earlier this year and is applicable to 2025. Excluding the impact of the TST, NPAT grew 20%, a reflection of the strength of the underlying performance of the businesses in our portfolio. Turning now to our debt maturity profile. These charts show our debt maturity up to 2036. In our European businesses at the top, the maturity profile at APRR highlights its strong maturity dispersion over the next 10 years. APRR's strong capital structure and balance sheet capacity enables opportunities for future refinancing. Thus, recently, in May, APRR issued EUR 500 million of bonds maturing in January 2031. The with 73 basis points margin over mid-rate swaps and a coupon of 2.875%. The issuance was met with strong support and the successful transaction reflects continued confidence in the business and strengthens APRR's liquidity position. In the U.S., at Chicago Skyway, we have USD 437 million of debt maturing in 2026, which we are looking to refinance. Our work stream for this process is well underway. As Hugh outlined earlier, if interesting new opportunities arise, we will take a disciplined approach to considering them in accordance with our capital allocation framework. Our businesses are performing well, representing an inherent source of value, and the majority have strong investment-grade credit ratings. At this stage, we would not be looking to raise additional equity as we do not think this would represent good value for our security holders at the current security price. We would, of course, keep the market well informed if this position were to change. Overall, we maintain balance sheet and portfolio flexibility, which combined with our strong underlying business performance and robust free cash flow generation provides us financial flexibility. With that, I'll now hand back to Hugh to wrap up.

Thanks, David. So I set a clear path for our people with our new vision statement partnering to deliver world-class road experiences. This, along with our strategy, provides clear direction for us now and into the future. We're committed to continuing to deliver value for you, our investors, from our diverse portfolio. This means delivering strong and stable distributions supported by enhanced free cash flow. And we're also working hard to unlock inherent value in our business and leveraging the strength of our dynamic strategic partnerships to support the delivery of growth and longer-term success. Thanks very much for your ongoing support, and we'll now open the floor to questions. Over to you, moderator.

[Operator Instructions] Your first question today comes from Rob Koh from Morgan Stanley.

I guess I have lots of detailed questions about small OpEx items, but I think just to start with, can I ask maybe for a little bit more color on the pivot in the strategy to considering OECD opportunities without raising equity. If you could just maybe give us a bit more color on what kinds of things would be included in that consideration. And then also how you kind of view your ability to or your headroom for capital within the existing business, please.

Rob, and thanks for the questions. We might take the specific ones offline a bit later. But in reference to your question about the strategy, it's a reintroduction, I think, of that strategy. We have in the past of Atlas Arteria looked at the broader set of opportunities globally. And we thought it's the right time to consider growth again outside of the associated growth with our portfolio. Importantly, and as you point out, we have aviated that growth by saying we have no kind intention to raise equity. So the sources of value are primarily asset recycling, debt headroom, excess cash and capital-light options through partnerships or otherwise. We don't narrow down the opportunity set other than OECD countries and road-related investment. Importantly, we are not looking outside the road sector, and so we have narrowed it down. We are really being driven by that vision, which is partnering to deliver world-class road experiences. This is about roads. It's about stepping back into the growth phase, but it's about disciplined consideration, not about growth for growth's sake. So while I won't give specific numbers in terms of our capital, it is very disciplined and focused on cash flow accretion and delivering value in the long term for our investors, particularly beyond the expiry of some of our current concessions.

Your next question comes from Owen Birrell from RBC Capital Markets.

Let me just turn my attention to APRR, I guess. Just keen to get a sense as to how page is managing the concession as we get to at the moment, particularly with respect to, I guess, what's happening with SANEF. And SANEF, obviously, sort of managing their concessions to handover. Is Eiffage effectively moving to that model as well? And then on SANEF, if that does come back to market, would you be supportive of a bid for the SANEF concession?

Thanks, Owen, and, in terms of how the concession is being managed by APRR and Board, it is very consistent with how SANEF and other concessioners in France have approached it. We are obviously the last 2 major expiries in APRR and [indiscernible]. So we have a little bit more time to work through those processes, but the relationship between concession holders and the concession granter and the process to determine capital and asset condition at the end of the concessions from all accounts has been a very reasonable engagement, and we have commenced our earlier than other market participants. So we're very comfortable with how it's being approached with the way APRR is addressing it and how that fits in with the guidance we've given market, particularly around our CapEx to the end of the concession. In terms of the SANEF process and, in fact, all 7 concessions in their expiry, we haven't made a determination yet about which or how many concessions we are interested in or we'd bid for. We very much participated through APRR and Eiffage in the conference to determine the future structure of those concessions. We are supportive of the outcome looking at the concession model being retained and looking at private capital being utilized in the sector. We are very keen to participate in all that makes sense to our investors, but it is incredibly difficult to make a decision about what to be involved in price the finalization of the laws that will define how those concessions look. We don't have any principal objection to looking at each and all of those concessions, but we haven't made a decision on which ones yet.

Can I maybe just ask just a small follow-up. what is your sense of how the government is looking at future concessions at this point? Because we have very different views around the potential lengths of concession, where is like short and longer being used, but my sense is that short is actually quite long. Just if you can give us a sense of timing and duration of potential future concessions that you're sort of thinking at the moment?

Sure. I won't be able to answer specifically, but I'll do my best in noting that this is not defined in law yet. So the outcomes of the French conference on the future of Motorways, broadly speaking, I drop into 3 buckets. So number one, concession models with private capital were supported on an ongoing basis. Number two, would be shorter, to your point, not short, but shorter concession length, noting that the current concessions were very, very long, around 60 years. And the third was looking at the regulatory regime to something that could look more like other infrastructure-style arrangements, look at airports and other arrangements around the world, but not defined at this point in time. So you're right, the concession would need to still have quite a significant length to make sense for most private operators, but we don't yet have guidance something that it would be much shorter than the 60 years. In terms of the regulatory model, when we look around at both roads and in other infrastructure regulatory models, we're comfortable that as long as it's well defined and embedded in the concession structure that we can value and bid on the basis of any concession model. So we believe that it will be long enough and the regulation will be suitable at this point in time for us to be a participant, but it is hard for me to give definitive answers those yet.

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

Question for me just on that bidding process. What is the sort of the game theory that you're running through and on sort of whether or not everyone bids for everyone or whether there's an interloper that comes in? And secondly, how do we think about the costs that you will incur around that bidding process and the impact that will have?

Thanks, Cameron. To answer each of those questions separately. So firstly, it's early days. We -- given the last, we have the last 2 concessions expiring, we have some of the most flexibility with balance sheet and with consideration of the game theory. But I assume that most of the major players and new players will show up to some of those tenders. The reason I say it's early days, Cameron, is it's not necessarily the exact same 7 concessions that exist today either. So we do need to see where things play out, the size of individual concessions on offer and the process to actually understand the specifics of the game theory. But I do believe that being at the back end of the expiries gives us significant flexibility to be involved. In the full remit, if that's what we chose to do at the time. In terms of approach to better costs, we would see that as through our joint bidding vehicle being APRR and structure. So the costs and the balance sheet would be sustainable and manageable within the APRR business as opposed to needing to have injections from Eiffage or our other partners in math. So self-sustaining, let's say, bidding for those opportunities if we choose to be involved.

Okay. And then just on that, if you -- let's just say you do bid for one of the earlier, to your point about being at the back end, right? So let's just say you decide to put in for SANEF as an example that comes up early, is there anything stopping you from doing that within the APRR vehicle? Or would it need to be external to the APRR vehicle given that presumably, at that point, you've also then got to wind up APRR to either -- can it back or to sell it to -- or hand it over to the new ultimate owner?

Gentlemen. Sorry for the technical difficulty there. We have back you on the line.

Cameron, you were having a follow-up questions. So happy to hear it now. I lost you.

Yes. Sorry, yes. So I dropped out as well for some reason. Sorry, just going back to the -- to being at the front end versus the back end, is there anything stopping you within the structure for using the APRR structure to bid for SANEF early? Or would you need to do it in a new vehicle entity to say that APRR could be handed back presumably you're not going to be at long to concessions?

There's a few lenders to that question, Cameron. So number one, we already own 2 concessions being APRR in fact, on the A79 and possibly the A412 and ADELAC going forward. So we own actually 5 concessions at the moment. In terms of the ability to use the joint vehicle, we can. So the IP, the know-how, the management, some of the systems all sit within that structure, and we are confident that we can utilize that to bid. We are, obviously, as a business and APR specifically very disciplined about what it needs to hand back in 2035 and 2036. So we're ensuring that we can both retain our corporate structure but hand back the elements that we need to the state as and when those concessions expire. So we are -- we have started that process a year ago, and it is an ongoing disciplined effort to retain that through the bids to protect against the very risk that you are talking about.

Your next question comes from Anthony Moulder from Jefferies.

If I could focus on the APRR area reserves consolidation, this EUR 533 million. I just wanted to understand how available that is for return to shareholders and under what conditions you would consider with shareholders the return of those funds? Is it purely linked to another tax grab by the French government, which we won't know until the draft bill in October? Is that how you're thinking about the EUR 533 million? If not, why was that reserve consolidation taken at this particular point, please?