Transurban Group (TCL) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for an update on New South Wales toll reform and June traffic. We appreciate we're at the start of reporting season, and we have given you a lot of information at short notice. We're joined today by our CEO, Michelle Jablko; and our CFO, Henry Byrne, who will take you through the presentation that we lodged with the ASX this morning. Today's presentation should take around 15 minutes, and then we'll have plenty of time for questions. So I'll now hand you over to Michelle to get us started.

Thank you, Craig, and good morning to everyone. I'm very pleased to be speaking with you about New South Wales toll reform. From the outset of this process, the New South Wales government was clear about its objectives, and we've listened. We approach this as a long-term investor in Sydney. And we've worked constructively from day 1 to deliver cost of living relief and system reform for Sydney motorists. We know that agreements that only work for one side simply don't hold, and this one had to work for motorists, the state and the people whose investment built the roads. That's why it took time. The result is a pragmatic solution that delivers meaningful changes and improves the customer experience. The proposed M2 and M7 upgrade means we can ease traffic pressure in one of Sydney's most important growth corridors. And importantly, for you, our security holders, the outcome is value neutral and does not negatively impact near-term distributions. In essence, there are different equalization payments happening between concessions, but they net out to 0 with the government funding the proposed M2, M7 widenings. The next steps are for final documentation and a range of approvals to be completed. Today's milestone is the culmination of a huge amount of work from many people across numerous parties. And I want to thank each of them for their incredible efforts throughout this process. Before we go through the detail, I want to take a step back and remind you of what was involved. This was a highly complex process requiring a careful balance of 10 concessions, 11 assets and 8 distinct investors. Our job was to help find solutions that work for customers without breaking down the system that helped build these roads and to protect the $36 billion that Transurban and our partners have invested into Sydney over more than 2 decades. We also have different levels of congestion in different parts of the city, and motorists had to come first. So price is one thing, but the ability to move around Sydney efficiently is equally important. The solution needed to take all of this into account, and the outcome is a tailored approach. The reform recognize the unique characteristics of each road rather than applying a one-size-fits-all model. So we appreciate it took some time, but it was an iterative process, and it led to better outcomes for all parties. Let me now step through the key components, starting with the price changes for motorists. Tolls are coming down on 4 roads, the M7, the M2, the Lane Cove Tunnel and the Cross City Tunnel. The package proposes 2-way tolling on the Eastern distributor with each direction charged at 53% of the current one-way toll. The M7 toll cap will kick in at 18 kilometers instead of 20. There will be a new motorcycle class at half the standard car toll and a modest increase in truck tolls. Motorists will benefit from price changes on key routes as well as the toll cap. And the reason we could make these changes is that the value of our investment was protected, one made the other possible. These reforms translate into real savings, especially for drivers in Western Sydney. We know the average Sydney customer spends around $12.45 per week on tolls and the government's $60 weekly toll cap is in place for more frequent drivers. So these pricing changes are targeted at delivering meaningful savings where they matter most. Take a customer traveling from Kellyville to North Sydney. By 2029, they're expected to save around 9% a trip. While trips across the city will also come down, thanks to the reduction in Cross City Tunnel tolls. So these aren't theoretical savings. It's money back in the hip pocket for many households. When we talk about reform, we also have to think about Sydney's growth. That's why we're focusing on unlocking more capacity in the city's Northwest. The M7 and M2 are the lifeblood of this region, connecting some of the city's fastest-growing communities. I'm particularly excited about this proposed project that will enhance two of Sydney's busiest motorways. Once the final agreements are completed and the necessary approvals are in place, we'll be working alongside the New South Wales government to widen 17 kilometers of this corridor to improve traffic flow and provide more value for our customers. And importantly, motorists will receive the benefits of these upgrades without additional toll increases linked to the widening project. During this process, we heard loud and clear from Sydneysiders about what frustrates them most, things like fees and the confusion that comes from receiving multiple paper toll notices very late after the trip was taken. That's what got fixed first. We've moved away from paper notices to digital notifications and switched off late fees. And I'm pleased to say this all went live in July. This means we can now get in touch with customers earlier, helping them fix unpaid tolls before debt builds up. So this will make the system fairer and easier to navigate. I'm going to pass to Henry to take you through some of the detail around the various concession adjustments. Then we'll make some brief comments on June traffic and have plenty of time for questions.

Thanks, Michelle, and good morning, everyone. I'm going to talk to some of the specific concession adjustments that underpin the announcement today. And then after Michelle's wrap up, as Michelle just said, I'll come back and speak briefly to the traffic data we've also put out with this announcement. Firstly, on the New South Wales toll reform. As Michelle has noted, we've engaged constructively with the New South Wales government to achieve a broadly neutral outcome on both cash flow and a net present value basis with an appropriate adjustment for risk. This outcome is designed to maintain the integrity and value of our existing contractual agreements and provide investors confidence on a go-forward basis. Value and cash flow neutrality is achieved through 3 core elements. The first are price adjustments and associated traffic impacts. The second relates to equalization payments and associated funding and the third stems from a proposed new enhancement project of the M7 and M2 that Michelle just referenced. So let me step through these elements one by one in a little more detail. We're implementing pricing adjustments across 5 of our assets in the New South Wales portfolio, and these changes are expected to take effect at different times. The first changes are expected to come through in July 2027 for the M2 and Lane Cove Tunnel. The next changes on the Eastern Distributor and Cross City Tunnel will align with the Western Harbour Tunnel opening around 2028. And the final toll price changes on the M7 will be aligned with the M7-M2 and the timing of this will be dependent on the government approvals of the widening project, as previously mentioned. In terms of what changes will occur, the Eastern Distributor will introduce 2-way tolling at 53% of the status quo price, leading to an expected increase in aggregate average daily traffic in both directions and making it value positive. Hills M2 will see a 10% price decrease at the Main Toll Plaza and NorthConnex ramp, and these changes alongside the widening project are anticipated to improve traffic volumes. Upon the proposed widening of the M7-M2, Westlink M7 will reduce the toll cap by 10% and this change, alongside the benefit from the proposed widening project, will improve traffic volumes as well. Lane Cove Tunnel and Cross City Tunnel will have 10% and 20% price reductions, respectively, that are expected to improve volumes as well. And we've estimated the traffic impacts from the price changes on a risk-adjusted basis. And as a broad rule of thumb, we've observed historically that a 10% change in price should have around a 2% change in traffic. Finally, while they only represent a very small percentage of our customers, you'll see, on toll price multipliers, a new motorcycle category has been introduced at half the cost of a car. And the heavy vehicle multiplier is also being standardized at 3.15x across the majority of the portfolio. These price adjustments and expected changes to our traffic flow on a given asset create a delta to our status quo modeling. That delta is bridged through the asset equalization payments between the government and the relevant concessionaires, which will be paid over a 5-year period. These payments offset the net financial impacts of the price changes, traffic adjustments and enhanced traffic flow from projects like the proposed M7-M2 widening. We will assist the government in funding these equalization payments through the early payment of the M2 promissory notes and the Eastern distributor concession notes by settling them early. And so by settling them early, the government will gain immediate funds allowing it to make the equalization payments without using its own balance sheet. Finally, as Michelle mentioned, a proposed widening of the M7-M2, if approved, will be government funded. The project is expected to widen approximately 17 kilometers between Richmond Road and the Windsor Road Bridge, enhancing traffic flow through a heavily congested northern corridor that is expected to experience high population growth over the next couple of decades. Importantly, these arrangements in aggregate do not negatively impact near-term distributions. From a financial reporting perspective and to assist with the modeling, we intend for these equalization payments to form part of our free cash flow. And we've received positive initial engagement from credit ratings agencies and expect to finalize any required financier consents in the coming months. Operationally, the reform process also delivers tangible benefits. We anticipate savings from enforcement reforms, which offsets the toll notice administration fees that customers will no longer pay. Crucially, the net equalization payments for all assets effectively offset the value foregone from toll price and traffic changes with the proposed early repayment of promissory notes and concession notes assisting the government from a funding perspective. This value source helps protect taxpayers from funding the equalization payments while reaffirming a value neutral outcome for concessionaires on a risk-adjusted basis. Included in the equalization payments we're making is a $75 million contribution to support the monthly toll cap, the government has announced, and that's factored into our calculations to ensure value neutrality. I'll now hand back to Michelle for some final comments on the toll reform announcement.

Thanks, Henry. I just want to pause for a moment to reflect on the importance of today's milestone. We're really pleased to reach a solution that works for motorist, the government and for our security holders. We've also taken an opportunity today to provide you with a traffic update. As we've been in a period of macroeconomic and geopolitical uncertainty, we've been giving you more regular updates. And what I'm going to do is get Henry just to step through the details there, and then we'll go straight to questions.

We just wanted to call out a couple of things on the traffic data we put out with this release before we go to questions. So as outlined in our monthly traffic updates, uncertainty in the macroeconomic and geopolitical environment remains a feature of the operating landscape. June was a better month for traffic, and that trend has continued in July, but we're not reading too much into that yet. We saw in March and April, what can happen when people get nervous about fuel, particularly around its availability. And so with that in mind, we continue to monitor the macroeconomic environment, noting that there are renewed hostilities in the Middle East. The end of the fuel excise subsidy is also a factor we're watching closely. Positively, commercial vehicle traffic has remained resilient across our Australian markets, providing a degree of stability despite softer conditions in parts of the passenger vehicle segment. In North America, our assets continue to perform strongly. Traffic on the I-95 and the I-495 corridors increased by 2.6% and 10%, respectively, for FY '26, which reflects the ongoing strength of these markets and the value of our diversified portfolio. And obviously, the strong value proposition continues to support the pricing outcomes we've achieved in that market. We've also highlighted the West Gate Tunnel weekly traffic data in the material today and the trends observed on that asset. You can see average daily traffic on that asset since opening to June 30 was approximately 37,000 vehicles per day. And you can see on the chart here that, that's remained broadly flat for a number of months now. The M7 is a different story. Since the completion of the M7-M12 widening project, we've seen -- and the June data shows an 8.3% growth year-on-year, which is broadly consistent with our expectations of the uplift from that project. So there's some brief comments. I'll now hand back to the operator to moderate our Q&A section of the webcast.

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

Congratulations on what I can imagine is a really long deal for you all. I hope you're pleased. I guess my first question is around risk allocation on the M2-M7 widening, if it's delayed or if there's cost overrun. Is that all, I guess, for the state?

Rob, thank you. I would think of it in a very similar way to the M7-M12 widening that we just completed and opened. So we've got a pretty good template there, and we'll just work through it in a similar way.

Okay. And then I guess my next question, I guess, looking at completing the deal is financier consents. And I guess you've had a positive signing with the rating agencies. I think the biggest change in revenue mix is at the M1 where you'll be tolling both ways. Can you give us a sense of are you changing the debt amortization profile there? And what kind of -- maybe you could give us a steer on what kind of traffic elasticities you'd be thinking about there?

Yes, sure. I'll take that, Rob. So maybe if I start with the traffic elasticities, we've deliberately, again, guided everyone to a rule of thumb that we've used historically around the elasticities of demand that we see around price changes, and that's effectively to say for every 10% movement in price, you should see around a 2% movement in volume either way. And so then if you think about the Eastern distributor here, we're talking about effectively a halving of the price. It's a little bit over. We said 53% of status quo. But if you think about in broad terms, halving of price, you start to get the dimensions of the traffic volume increase that we would expect as a result of that. And indeed, that principle sort of broadly holds when you look across all the other price increases or adjustments that we've -- sorry, decreases, I should say, that we've announced on the other concessions. In terms of the Eastern distributor specifically, well, we've got concession buybacks on the Eastern distributor and promissory note buybacks on the M2. The ED, we'd expect to fund those with project level debt. So that will then be factored in. All adjustments to debt amortization on the Eastern Distributor need to be agreed with the state. There's an agreed amortization profile. And so that's a process that we'll go through. And then the Hills M2, the buyback there, we would expect to fund that given it's a 100% owned asset with corporate level debt. So that sort of gives you a sense of how we're thinking about the funding.

Okay. Just so that I understand, for the M1 where you're dropping [indiscernible] what is it, northbound tolls then we should just multiply that 20% kind of elasticity. I guess the other way where you're introducing a toll, is it the same kind of thinking?

Yes, Rob. And you can see that's why with the equalization payments on the Eastern distributor, there's essentially a net payment to the state, which reflects the increase in volume and the change in price.

Your next question comes from Justin Barratt from CLSA.

Just wanted to ask a couple of these arrangements rely on the opening of the Western Harbour Tunnel, which is [indiscernible] 2028. I just wanted to understand a little bit like Rob's question on the M7, where does the risk lie in the event that for any unforeseen circumstances, the Western Harbour Tunnel opening is delayed?

So it may -- if I sort of step back, it made sense for a number of the changes to happen around the same time as the Western Harbour Tunnel opening because it helps manage the traffic flow across the network. We've given you the dates for the price changes. I don't think it materially changes if the Western Harbour Tunnel is a bit earlier or a bit later.

Okay. Great. And then in relation to the widening of the M7 M2, I appreciate some of the timing that you've given us. But how should we think about the traffic impact, whether that be during the construction phase and then thereafter, how [indiscernible] on a normalized basis once it's completed?

Yes. Let me take that. So there's 2 dimensions around the traffic impacts that we're going to see on both the M2 and the M7. The first is the reaction to the pricing adjustments. And as I was just saying a moment ago, use the broad rule of thumb around demand elasticities there to gauge those. And then over and above that, there will be an incremental benefit from the widening. And what we would counsel you to look at is the previous examples of widenings where you've typically seen mid-single-digit declines during construction period. And then as we're observing currently on the M7 from the M7-M12 widening, you see that bounce back into a ramp-up period where you get the recovery against a depressed base, which can take you into the high single digit, low double digit for a brief period of time and ramp up and then dropping down into mid-single-digit profile as a sort of an actual increase to volume. And so that's a long way of saying, use the existing widenings that we have done on the corridors, including the most recent one as a rule of thumb for this one.

Your next question comes from Matt Ryan from Barrenjoey.

I'm interested in the way that you landed on the pricing adjustments for the [indiscernible] assets. And I guess just any metrics that you were looking at when deciding what adjustments needed to be made?

Thanks, Matt. So it was a very iterative process. It really -- it started with the independent review that was done and then we built on it and iterated. And what we worked through was we looked at various price adjustments across the network. We looked at the traffic implications of that, including some of them could cause congestion on the network, which wouldn't have been a good outcome. And the government had to weigh up the cost to taxpayers of those. The government also put in place a permanent weekly cap. So that had to be taken into account. And then we just worked through an iterative process to sort of get the balance right between motorists and taxpayers against the backdrop of protecting the value of the assets. So it very much was an iterative process looking at both traffic implications for motorists and price benefits for motorists.

And [indiscernible] to value neutral, are there any sort of mechanisms in place to protect you if that doesn't end up being the case? And can you talk about the equalization payments and whether there's any adjustment in those as time goes on? And I guess you realize whether that price elasticity assumption is correct or not?

So what we worked through, and I think Henry mentioned that the equalization payments were determined on a risk-adjusted basis because we were conscious that we were changing price for traffic in a number of instances. And so we took that into account, not dissimilar to the way we would on a road widening is the way I think about it.

Your next question comes from Anthony Moulder from Jefferies.

If I can go back to the M2-M7. Is this a new way that the government will progress widenings within your network? Is it something that you think will continue as far as them funding it, there been no price increase and no concession extension?

It's a bit hard to comment on hypotheticals into the future, Anthony. What I can say here is it worked in the context of the toll reform broader transaction. It made sense because by reducing pricing, whether that's on the M2 or the change in the M7 cap, we were changing congestion in that part of the network. And so that essentially brought forward the need for the widening and it made sense in the broader toll reform negotiation that, that would get funded in that way. I think future widenings will always be a question for government. I think what it does show is we're able to work together with government to find something that, as I said, works for motorists, works for taxpayers and is good for the investment as well.

Wouldn't you have preferred to have done that widening yourselves?

I think it all gets taken into account in the overall deal economics. So I don't think it ultimately makes a difference. We took into account not dissimilar things than we took into account on the M7-M12 widening. Yes. So I don't think it makes a difference, Anthony.

And just coming back to that question on -- I thought the reform wanted standardization that wanted simplicity as far as the pricing of the toll network. Obviously, that hasn't occurred, and it was difficult, I get from the outset to achieve that. But how did you land on these 5 roads that should get the discounts, whereas others don't?

Yes. Look, we worked through that. And I think as I mentioned, it was quite an iterative process that had to take into account the cost to taxpayers and the benefit to motorists. So that all had to be worked through. Different parts of the city are quite different in terms of congestion and maturity of assets. And so to try and come up with a standardized price across the whole network would have had negative consequences either for motorist or taxpayers. And so we essentially looked at it in terms of what I'd say is corridors and then individual assets. I do think quite a lot of things are simplified and standardized, whether that's the multipliers, whether that's the way where payments work and certainly, the 2-way tolling of the ED is matching what's happening on the government roads as well.

Yes. No, that's fair. And a quick question for Henry. Just how should we think about the timing in these cash flow payments? Is this more FY '27 that you have most of them? How much of this legs into '28, please?

No, you should think about the concession note -- promissory note buyback in 2028 and then our equalization payment then as well on the Eastern distributor and then the government's equalization payments to us, which follow happening over a 5-year period from 2028 to 2032.

Uniform over that period.

Yes, they're spread evenly over that -- sorry, we show you by concession. On Slide 10 of the deck, you can see the quantity for each concession and then it's spread evenly over that period.

Your next question comes from Owen Birrell from RBC.

I just -- I guess my 2 questions. Firstly, just on the -- this is a restructure of those 5 concession agreements. Is that correct as opposed to some sort of synthetic overlay?

Correct. Yes. The concession agreements essentially are being amended. Yes.

Okay. And in terms of the amendments to those concession agreements, so it's fair to say that the toll structure is going to be reduced, but there's an equalization payment that's going to be included within that agreement?

Yes. Yes, exactly.

And then finally, in terms of -- does that need any sort of parliamentary adjustment or something to go through parliament? Or is it literally just a commercial agreement between the current government and the concession holders?

It's a commercial agreement with a couple of caveats. So there's still some process to go, and there are a few approvals that need to be put in place. Henry spoke about financier approvals. There are planning approvals that will be needed for the widening and the 2-way tolling on the ED. So there are still some approvals to come, but it doesn't require parliamentary approval.

Okay. And just, I guess, a final one for me. Just on the Sydney Harbour Bridge and the Tunnels, those toll regimes are excluded from all of this restructuring. Is that correct?

They're a matter for government. So that's a separate matter. They're not part of our negotiation.

Okay. And just one final one for me. The repayment of the promissory notes, are you going to, I guess, raise some debt funding at the group level or elsewhere to fund those repayments?

Yes. As I was saying a moment ago, we'll fund -- we anticipate funding the Eastern distributor promissory notes at the asset level and also the equalization payment that we will make to the state for the value uplift there. And then for the Hills M2, which is obviously 100% owned, we would probably look to fund that or we will look to fund that at corporate level.

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

Just a couple of questions from me, if I can. Are there any tax implications around the early repayment of the concession notes? And then secondly, then how are the equalization payments actually treated? Are they treated as income or they're going to be treated as a capital payment?

Maybe I'll start and then Henry can jump in. To the extent there are any tax payments, they're taken into account in the value neutrality. And then in terms of the equalization payments, I think Henry mentioned that the payments from us to the government or from concessionaires to the government are essentially funded with debt at the start of 2028. And the equalization payments coming from the state to concessionaires will happen progressively over 5 years, and they will -- because they're compensating for price changes, they'll be taken as income.

Yes. And maybe the only thing I'd add is -- so we would expect to treat the payments to us, Cam, as free cash, but it will still be a discussion with our Board around how we then formulate the distribution. So that's a discussion that we yet to sort of have. And that will obviously be from 2028 onwards when we're looking at that incoming equalization payments to us.

But they're adjusting price changes down. So sort of net -- from a distribution perspective, we don't expect any negative impact.

No.

And then just on the M 2 -- sorry, why pay the earlier -- and I understand the repayment of the promissory notes of $600 million to help fund all of the other equalization payments, et cetera. But on the M2, why pay $500 million and then receive $400 million over a couple of years? Why not just make a $100 million payment upfront and then be done with it?

They're quite separate in terms of how the mechanics worked around them. And so it was just the way it all got put together, and it was the most efficient way for the state and effective for us.

Right. Okay. Okay. No problem. And then just in terms of West Gate Tunnel, you've said that it's now flat for the last 4 months. Is there any other comments you can make about what's impacting that, and what you think is actually stopping people from using it?

Maybe I'll add a couple -- I'll start with a couple of comments, Cam, and then Henry might add. So as we've been saying probably since February, the truck usage has been really positive and trucks are really seeing the value. Cars are taking a little longer. There's a little bit of a macro sitting over that. And also, I'd say travel patterns in Melbourne have changed over recent years and certainly since the project was devised. So it is taking longer for cars. Long term, we still see the growth in that part of Melbourne and the population growth, they will support the project over the longer term. But in the near term, it's taking a little bit of time. There is some work we're doing on things -- we continue to work on communication and signage and things like that, but it's just taking a bit longer for cars. I don't know, Henry, if you want to add anything?

The only thing I'd add is probably emphasize that point on the background growth is a factor that really has played into the car volumes that we've seen there, which have obviously been behind expectations and driven that kind of flat period that we've seen. The commercial vehicle use has been a real positive though. So at least that -- which we all know has a very strong value proposition with the connection of the port, and that has played out. So at the moment, it's sort of in part, it's a background network story for us there in Victoria, which has been accentuated on this new asset.

Okay. And then final question, just in terms of the 3.15x multiplier for trucks in New South Wales, have you engaged with the commercial transport players, et cetera, as part of this process? Because on average, that looks to be sort of a 5% uplift just straight off the bat on the multiplier before you start putting through the escalations over time. And then also, do those price reductions that you've spoken about, I'm assuming they apply to the trucks as well -- getting the reduction, but the multiplier kicks in not fully somewhat offset that.

Correct, Cam. I think that's the way to think about it. So the trucks will benefit from most of the savings. I mean if you take the M7 as an example, you've got currently the number of trucks that benefit from the cap would be sort of just a bit over 20%, and that's going to more than double to over 40% that will benefit from the cap. So there's going to be -- and that, as you know, is a very, very important freight route. So all of that got taken into account. The other thing I'd add is the reason for the multiplier increase is the government is proposing to use it for some -- to fund some benefits for the freight industry as well. And so again, all of that got taken into account.