NSW Mar 24, 2020 (Thomson StreetEvents) — Edited Transcript of Atlas Arteria Group earnings conference call or presentation Thursday, February 27, 2020 at 12:00:00am GMT
* Simon A. Mitchell
UBS Investment Bank, Research Division – MD and Head of Research for Australia and New Zealand
Thank you for standing by, and welcome to the Atlas Arteria 2019 Full Year Results Conference Call. (Operator Instructions)
I would now like to hand the conference over to Mr. Graeme Bevans, Chief Executive Officer. Please go ahead.
Thank you, operator, and good morning, everyone. I’d like to thank you all for joining us this morning, and we are pleased to present Atlas Arteria’s 2019 full year results. 2019 was a big year for Atlas Arteria. We started by successfully internalizing management on 1 April, and we finished the year with a successful capital raise to support the APRR transaction, which will see us become completely independent from Macquarie. In this presentation, we will take you through the financial performance and the operational background that has driven the results as well as what to expect from 2020.
Moving to Slide 4 in today’s agenda, we will start by presenting the key highlights for 2019. I’ll then hand over to Nadine Lennie, our CFO, for a discussion on key financial matters. I’ll then talk through our operational progress during 2019 and close with an overview of our strategy and the outlook for the remainder of the year. An opportunity to ask questions will then be provided.
Turning to Slide 6. As we start, I want to take this opportunity to thank the terrific team we have in place that has worked tirelessly and passionately over the past year to deliver such strong results and real transformation for our shareholders. Through their efforts, we have successfully built a new organization in a short space of time, grown shareholder value, reduced costs and delivered on important strategic objectives. On 1 January last year, Atlas Arteria was managed by Macquarie. On 1 April, the new internal management team took over operations. And by removing Macquarie as manager of Atlas Arteria, management costs have reduced from $114 million in ’18 to $47 million in ’19, and that’s including all the fees paid to Macquarie each year as well as corporate head office costs. On 20th of November 2019, Atlas Arteria executed agreement to acquire a further 6.14% in APRR, thus increasing our total interest to 31%.
Our market capitalization grew by $2.6 billion during the year, ending at nearly $6.9 billion, which includes the $1.35 billion capital raised in November. We’re very pleased to announce today that we’ll be increasing our distribution guidance for second half 2019 and first half 2020 by a further 6% from that announced in November. This will mean distribution payments in 2020 will be 20% higher than those paid last year. We also launched a rate case for Dulles Greenway, the final outcome which was anticipated to be received during 2020.
As we know, culture is critical to the success of any business. Since commencing the internalization journey, it has been the key focus for both myself and the Board. We’ve developed a strong corporate culture through the implementation of our vision and value, which has laid the foundation for our growth ahead. Underpinned by the strength of our team, our businesses and our vision and value, we are firmly focused on delivering a sustainable and profitable future. We have developed a considered strategy for growth, which I believe will continue to unlock value for our shareholders and other stakeholders moving forward.
Turning to Slide 7. Overall, weighted average group traffic was up 0.7% for the year, with revenue up by 2.5%, and we reported weighted average proportion of EBITDA of $923 million, up 3.1% for the year. Performance was underpinned by APRR, which has continued to perform well, increasing traffic by just over 1% for the year. Nadine will talk more about the financial results.
Moving on to Slide 8. As I mentioned previously, we completed a successful $1.35 billion capital raise in November last year to support completion of the APRR transaction. New, simplified shareholder arrangements were negotiated, removing all historic call options, and all remaining management agreements with Macquarie were terminated, providing us with direct governance. Transaction was subject to antitrust clearance from the European Commission and foreign investment control clearance from the French Ministry of the Economy (sic) [French Ministry for the Economy and Finance]. We’re very pleased that the approvals were received earlier than anticipated in mid-February, and completion is now expected to occur next week, hopefully, a birthday present for me.
As part of this transaction, it was agreed to refinance the Eiffarie debt to defer near-term amortization obligations and bring forward incremental cash flow. This transaction was completed last week, and we will talk shortly about what this means as part of our capital management strategy. I wish to recap on the benefits of this transaction because it is a game changer for us. Not only does it increase our position in APRR, it gives us direct governance and oversight of our total investment and finalizes the removal of Macquarie. This means we will be a truly independent toll road owner and operator moving forward. And the transaction is immediately cash flow and value accretive.
As outlined on Slide 9, I previously noted, we’re very pleased today to announce an increase in our distribution guidance of $0.02 per security to be split between the second half 2019 distribution and the first half 2020 distribution. This represents an increase of 6% on previous guidance provided at the time of our capital raise in November and a 20% total increase on dividends paid in 2019. The guidance is, of course, subject to future business performance, foreign exchange movements and other factors. In determining the appropriate level of distributions to pay to our shareholders, management and the Board take into consideration a number of factors, consistent with our capital management strategy that Nadine will discuss later in the presentation.
The Eiffarie refinance is providing us with additional free cash flow, and we’ve chosen to pass on a portion of this to our shareholders at this time. The remaining free cash flow will be applied towards other capital management initiatives with a longer-term goal of improving sustainable distribution growth over time.
Turning to Slide 10, as we discussed, we’ve been very focused on establishing our vision and value. Sustainability is a part of this, and it is an important milestone. But last year, we developed our own ESG framework with targets specific to our business based on feedback from key stakeholders and our staff. We wanted to ensure that we had an ESG framework that was tailored to our business and focused on a small number of important issues that will add value to our shareholders over the longer term.
Our new ESG framework is focused on 4 clear priorities. Safety will, of course, continue to be our #1 focus. We want our team members and customers to be safe at work and when using our road. And this is fundamental to everything we do. The framework will focus on customer and community engagement, ensuring we connect communities through safe and faster transport options, improving the workplace for our people by fostering an engaged, collaborative and diverse workplace, and of course, minimizing our environmental impact for environmental stewardship. Our new ESG framework will be enabled by our core business fundamentals of governance, culture, sustainable growth, technology and innovation.
On Slide 11, we have provided examples of some of the great outcomes we achieved in 2019 against the 4 priorities of our ESG framework. As I mentioned, we are very focused on safety throughout our network, with many initiatives taking place in 2019. We are, however, extremely disappointed that at APRR, we had a death at a subcontractor-controlled construction site during the year. And we are working through updated action planning with the contractor involved, and this becomes a key component of our direct engagement and governance at APRR. Become actively involved in occupational health and safety and fire control is going to become extremely important.
With that, I’d like to now hand over to Nadine to discuss our financial performance for 2019.
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Nadine Lennie, Atlas Arteria Limited – CFO [3]
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Thank you, Graeme.
On Slide 13, we’ve presented our income statement for the year, and we’ve also presented an adjusted statement to show you what we think normalized earnings would look like, which is essentially the statutory earnings, adjusting for abnormal or special items that we don’t expect to be part of the cost base after the end of this current year. And as we did at the half, we called these notable items. So the profit without these notable items essentially reflects the repeatable or just the repeating financial line items. And on a normalized basis, we saw a net profit after tax of $178.2 million, which was up 9% from 2018. And this is a very strong result.
And I’ll just touch on a few items, which contributed to the normalized results as well as some of the notable items. The toll revenue increased by 19%, reflecting the consolidation of Warnow and $9 million in currency impacts, which offset weaker performance from the Greenway. Other revenue, which, in historic periods has been quite low, has been impacted this period by accounting adjustments, which is the IFRIC 12 adjustments. And these relate to the Greenway and the Dulles Toll Road Connector project. And these are the East End work that Graeme will talk about, where we spent $16.6 million in this year. And this is the largest driver for the uplift in this line item as it was in the half year results.
Moving then down the income statement and to costs. The business operations line reflects primarily the operating costs of the Greenway and Warnow. The 44% increase here reflects the same $16.6 million IFRIC 12 adjustment that I just spoke about, around $2 million in currency impacts and then the consolidation of Warnow. Our corporate costs of $18.6 million for the year reflect the ongoing costs associated with the general management of the Atlas Arteria business and excludes any of the Macquarie fees and specific costs associated with internalization. And we’ve shown internalization costs for the period below the line, which you can see there was a $2.3 million, all of which were reported in the first half results.
We’ve split the Macquarie fees to show the MAF management fees separately. These are still shown above the line as they are part of the cost base up until closing of the APRR transaction. And as Graeme mentioned, this transaction is expected to close next week. In addition, there will be replacement cost. And as we spoke about in November, all in, as you think about 2020, it’s appropriate to speak about some of this quantum as part of the ongoing cost side. So as Graeme mentioned at the start, if you add the corporate costs then on the Macquarie fees, for 2019, we’ve saved $67 million in management costs.
So just moving down the income statement, again, to look at a couple of the notable items. At June 30, the Boards of ATLIX and ATLAX decided to take an impairment of USD 115 million across their respective Dulles Greenway holding, and there was no further impairment to this at December. So the difference between what you see in the half year results in Australian dollar terms and what you see here, which is the $165.4 million is just foreign exchange differences.
As part of the APRR transaction, we executed a currency hedge contingent on the completion date for the transaction. So just accounting for this contract, we saw the $5.3 million you can see there as an expense reported at the year-end. And the tax effect then for these notable items, you can clearly see the link between what we think about in a more normalized sense of performance and the statutory results.
Moving on to APRR. And on Slide 14, we’ve outlined the performance of APRR for 2019. APRR contributed nearly 86% of our proportional revenue and continues to underpin our cash flow. Unusually strong performance in the first half of 2018 meant a 1% fall in traffic for the first half. However, a better comparison period and a strong fourth quarter for last year led to a 1% increase in traffic for the full year. Revenue increased by 2.9%, also off the back of toll increases, and continued focus on operating efficiencies saw the 3.6% increase in EBITDA that you can see there.
It’s worth just touching on the substantial reduction in the net interest expense. For gross debt, and that’s across the structure, including all of the Eiffarie debt, has increased by EUR 466 million. But with increased cash balances, net debt actually decreased by around EUR 250 million. The debt program’s also been supported by substantial commercial paper programs, negative yield to maturity, and we’ll talk about that in a minute.
Just as a reminder, the 7% cost of Eiffarie debt in 2018 reflects the last period before the expiry of the EUR 3.2 billion in interest rate hedges that were put in place before the debt reductions have happened in 2012 and ’15. So the average cost of debt across APRR was 1.5% for 2019 and 0.9% for Eiffarie. And all in, it was around 1.4% across the structure.
So moving on then to talk about the APRR capital structure, which we’ve outlined on Slide 15. S&P reaffirmed its A- credit rating for APRR in November 18 and Fitch reaffirmed its A- rating in December last year and again in February following the refinancing. And APRR, clearly, still has sufficient balance sheet flexibility for capital growth.
Now there have been some changes to the balance sheet since December, and I’ll just quickly talk you through those changes, which we’ve also presented in the chart on the left-hand side of that slide. We’ve shown on the chart in the dark blue dotted line, you can see there above 2020, the repayments that occurred in January this year. As we recently announced, APRR successfully issued EUR 500 million of bonds in early January this year, with a negative yield to maturity and maturity date in 2023. And as you can see, there’s EUR 500 million blocked due to refinancing now in 2023. In terms of remaining refinancing for 2020, this is primarily the current short-term revolving commercial paper program, which at year-end was out to EUR 1.2 billion.
Shifting focus perhaps to Eiffarie. We were very pleased to announce the refinance of the Eiffarie debt last week, deferring amortization to 2023. As you can see with the green dotted-line bars in the chart, the amortization profile has changed from the EUR 150 million in 2020 and that EUR 160 million in 2021 to the electric blue bar. The refinance is currently shown as occurring in 2025, but there are 2 1-year extensions. I’m just noting although extended, the previous facility was refinanced at the 5-year mark.
Turning now to the Greenway. As outlined on Slide 16, given the traffic performance at the Greenway, we did not meet the 1-year lock-up test in 2019. However, as a result of a review of the capital and maintenance plans, we were able to reduce the estimated CapEx spend for ’19 and ’20, and we did pass the 3-year lock-up test. And as you can see from the chart on the lower part of the slide, passing the 1-year lock-up test becomes easier this year and the next year as the debt service requirements are lower. So the Greenway will require around that USD 72 million to USD 73 million of net toll revenue this year to pass the 1-year lock-up test. But there will be no toll increases this year. But traffic will really be an important driver of our ability to pass this test as will, obviously, continued cost control. There is USD 79.3 million of locked-up cash within the Greenway that would be available for outside period but for the lock-up test not being passed. And we’ll shortly talk about our capital management plan.
Talking now about cash flow. Our cash flow is currently sourced from our investment in APRR. The cash flow waterfall on Slide 17 illustrates again the flow of cash as it is calculated from the numbers that you would see in the consolidated financial statements for APRR. We developed this waterfall for our previous results presentation, just to assist everyone understand how cash moves from the operating businesses to the shareholders, and we had some really good feedback. So I’ve included it again here to reflect the movement in cash since June. Just to note, these numbers do not include any impact of cash from or as the result of the capital raise, so purely having a look at what’s coming from the operating business.
As you will be aware, dividend distributions from French companies are restricted to the company net profit after tax. Importantly, this is company net profit after tax and not the consolidated position. So if we start on the left-hand side, with the APRR consolidated NPAT for June 30, it was EUR 448 million, and this can be seen in the half year accounts. If you take 25% of this, you get the EUR 112 million that we’ve reported there. APRR subsidiaries have to pay their accounts under French GAAP, which does include a variety of different accounting adjustments, including IFRIC 12, which I mentioned earlier. In addition, until 2023, there is this permanent difference between the consolidated and individual NPAT flows of around EUR 40 million per half. So if you pool all of these adjustments together, you take 25% of it, you get the EUR 19.3 million removal of consolidated adjustments, which is the second block in gray. Once these are removed, APRR company NPAT is EUR 370.8 million, of which 25% is the EUR 92.7 million, which then becomes the cash that flows through the holding structure.
As you can see, there are financing costs that come out of that with the Eiffarie debt, some tax and other minor costs and then we convert the remaining EUR 71.3 million to Aussie dollars, which gives us the AUD 114.8 million in Atlas Arteria distribution from MAF2, and that’s the first one after the line. We received AUD 300,000 in management fees from Warnow, then we take out the MIBL financing payments, Macquarie’s management fees, corporate costs and various other true-ups. This then shows our net cash inflow for the half, excluding, as I mentioned, the capital raise, and the net cash inflow was the $86.3 million that you can see there.
Reflecting performance in the first half, we paid $102.5 million in distributions during the second half of this year to give us then our final closing cash balance from an Atlas Arteria head office perspective. Now if you’re trying to reconcile numbers from the annual financial statements, just as a reminder, these cash flows that I walked through are second half cash flows only. So for those of you who are keen, you can track the first half numbers, which we’ve provided in the presentation in the last half, with the numbers in this chart and that will give you the annual cash flow, and you’ll see these in the Investor Reference Pack on Page 6.
Turning then to Slide 18, which is our capital management strategy. The refinance of the Eiffarie debt will bring forward cash flows to Atlas Arteria over the next few years. As we’ve said, the Greenway is also in cash lock-up because it needs to pass these 2 financing tests. If it passes the 1-year lock-up test at the end of the year, cash will be available to distribute in 2021.
So how do we think about the way in which we use all the additional cash flows, either within the business or a distribution through our shareholders? And as we’ve said previously, in considering the level of future distributions, we’re focused on building a business that creates sustainable, growing distributions over time. And we want to ensure strength in our underlying businesses, really support the sustainable distribution growth that we’re talking about. We do not manage the business to a specific year-on-year distribution growth target. So when these additional cash events arise, as you’d expect us to, we’ll consider the most appropriate use of that cash.
So just talking about the 3 points that we really use to consider that. Firstly, the Board wants to ensure — or the Board want to ensure that the company maintains adequate liquidity to protect against financial risks while also supporting the immediate needs of the business. And as we’ve talked about quite a bit, we intend to keep at least 12 months coverage on the balance sheet to cover costs and interest obligations. Secondly, appropriate gearing is important. In order to create sustainable distributions and reduce risk, it would be preferable if Dulles and Warnow provided sustainable distribution flows. We also have the MIBL facility, which over time, needs to be considered in light of the new amortization profile at Eiffarie and any future growth at APRR. Thirdly, maintaining capacity for balanced funding over time from various different markets, including debt and equity funding, is important so that we have flexibility for using the right capital to support our growth. We do not intend to keep cash on the balance sheet that cannot be used efficiently to manage liquidity or create value for shareholders. So again, it’s sustainable distribution growth over time that is our focus.
An example of how we bring all of this together has been the refinancing of the Eiffarie debt, and management has provided guidance of an additional $0.02 per security for distributions to be paid in 2020. I think this demonstrates our intention to strike that balance between distribution growth and long-term sustainability.
I’ll now hand back to Graeme, who will walk through our operational update, growth strategy and outlook.
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [4]
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Thank you, Nadine.
Turning to Slide 20. Like all businesses, Atlas Arteria’s results and growth are delivered through providing value to our customers. In our case, we offer superior experience traveling on our roads compared with congested or speed-limited alternative travel routes. As you will see on the slides that follow, we are very focused on continually improving our businesses to enhance the experience and benefits for our customers.
We will now look at APRR in more detail on Slide 21. As many of you know, this is an expansive network across the southeast of France. As can be seen on the chart on the right-hand side of this slide, APRR provides customers with excellent value for money on a per kilometer basis compared with other French toll roads. Of course, ADELAC appears relatively high on this scale because nearly 23% of ADELAC’s total trip length is tunnels and viaducts, and it’s effectively a commuter route in built-up areas.
Turning to Slide 22, we show the longer-term trends in APRR light vehicle and heavy vehicle traffic. Light vehicle traffic grew this year at just over 1%, which was a positive result given the very strong 2018 traffic performance we’ve already mentioned. Heavy vehicle traffic continued to grow through 2019, although more in line with historic trends. The fourth quarter was adversely affected by the involvement of truck drivers in the strike against proposed French government pension reform. The APRR network continues to benefit from the strong underlying fundamentals, driven by French household income and French manufacturing growth trends.
Turning to Slide 23. By increasing customer satisfaction with improved communication by variable message signs, electric charging stations, Wi-Fi at rest stops and the provision of carpool parking to lower overall environmental impact, APRR has continued to create value for all stakeholders. An overall focus on efficiency continues to improve congestion and customer satisfaction, which has also led to improved margins. A number of examples on the slide touch on some of these initiatives, such as automation of toll collection and increased number of customers using electronic toll tags. The RCEA project is expected to be free-flow tolling and will set the stage for improvements across the network in the future.
As you can see from Slide 24, APRR has received approval from the regulators in France regarding the RCEA project, and we expect the Council of State to review and revert with a final approval during the first quarter of 2020. RCEA will take around 2.5 years to build and as I mentioned, will be the first free-flow tolling concession in France, laying the ground for customer experience improvements across the APRR network. During the year, APRR completed a number of projects, some of which are outlined on this slide. There are also a number of projects due to be completed over the coming years, notably, the completion of the road widening between Clermont-Ferrand to Le Crest in mid-2021, enhancing the overall experience and safety of our customers.
Turning to the Greenway on Slide 25. The Greenway remains the fundamental part of the network in Loudoun County. However, the surrounding free road network continues to expand and is yet to stabilize. Loudoun County has a pro-growth economic development strategy, including promoting mixed use of low-, medium- and high-density developments along the corridor. We’re seeing further residential and commercial property developments along our road. This remains a good long-term story for the future of the Greenway business. While on a stand-alone basis, the Greenway may seem costly, as you can see on a per mile basis, it offers very good value for customers. Having said that, we believe the regime of distance-based tolling will provide better value for our customers overall in the long term.
Turning to Slide 26. Traffic for the year was a little disappointing. Overall traffic was lower than 2018 by 2.9%, with total revenue down by 1.2%. There were a number of factors leading to this outcome, including price rises on the DTR, the road which we connect, and surrounding network improvements during the year. As mentioned at our half year results, the operational review of the Greenway established a series of business improvement initiatives that we’ve been implementing during the second half, and we’ll continue to work on in 2020. It, however, remains a challenging business.
The toll setting regime at the Greenway expired on 1st of January 2020. We launched our rate case with the regulator in December, seeking peak toll increases of 6% to 7% per annum and off-peak increases of 5% to 6% per annum. The regulator, being the SEC, works through a process to determine the final tolling fee we expect to take effect from 1 January ’21, and run through to the end of ’25. The SEC is currently working through their process, and we anticipate an outcome at the end of the year.
The search for a new CEO for the Greenway is progressing well with a very strong short list of candidates in place. And we hope to make an announcement of the selected candidate then shortly.
Turning to Slide 27. We’re undertaking several different projects at both ends of the Greenway to ease congestion during peak hours. This is being undertaken to improve the overall customer experience. At the eastern end, the first phase DTR Connector project was completed during the second half of 2019. And phase 2 has started with completion expected by the end of the year. This has already shown improvements in traffic flow.
At the western end of the Greenway, we started the work to alleviate the afternoon peak congestion where the Greenway merges on to the Leesburg Bypass. We have 2 projects being implemented: reconfiguring the Greenway off-ramp and widening the Leesburg Bypass. We’ve now started these works across 2 separate projects over the next 2 years.
Finally, on Slide 28, the Warnow Tunnel in Germany has continued its strong traffic growth due to the road work on completing new routes during the year. Once road works are completed, we expect longer-term traffic growth to return to historic levels. Despite its strong financial performance, excess cash from this business continues to be used to reduce debt. We are continuing to examine the opportunity to better manage this.
Moving on to the outlook for Atlas Arteria. It is the start of a new era for us and shortly, we will be independent. Slide 30 outlines our high-level approach to creating value for our shareholders. Our strategy for creating value is clear: We set out to streamline the current structure, adopt a disciplined capital management approach to build sustainable distribution, undertake active operational management, lengthen our weighted average concession life, and diversify and manage risk. In 2019, we built a new corporate team, managed the seamless transfer of management arrangements and delivered strong underlying performance. We secured arrangements to increase Atlas Arteria’s interest in APRR and become a truly independent group, ending all management agreements with Macquarie.
We now turn our attention to other strategic priorities of lengthening our average concession life and diversifying our risks while continuing to add value through active management of our businesses. We will focus on diversifying risk through endeavoring to create sustainable distribution from all of our businesses.
Moving on to Slide 31. Our approach to investment opportunities and the criteria for these have not changed. Having a rigorous and disciplined approach to investment opportunities allows us to ensure that we’re looking after shareholders and creating long-term value. We have recruited a well credentialed team with strong experience in considering the merits of each opportunity, be it traffic forecasting, operations and maintenance or finance. As I said in August, this is an approach that has been front of mind for the whole leadership team. Our strong valuation discipline was demonstrated in the APRR transaction, where we took our time to ensure we achieved an outcome that was accretive to our shareholders.
Moving on to Slide 32. As you would expect, we run across many opportunities to broaden and diversify our portfolio of businesses from time to time, but any new opportunity must absolutely meet our strategic objectives. Our preference is to expand upon our existing platform with opportunities to grow within the existing businesses, for example, the RCEA project in France which is expected to have a capital cost of around EUR 600 million. We also continue to look at opportunities to expand our portfolio in geographies that make sense to us. Many cities around the world are highly congested, which provides us with the opportunities for global investments. There are governments engaging with private investors in privatization discussions, and there are also asset-recycling opportunities.
Turning to Slide 33. We have achieved a lot in the short space of time. With our great team and strong businesses, we continue to grow our revenues and deliver long-term value. We are focused on a broad range of activities across our businesses, some of which we have outlined today. These activities are focused on improving the quality of earnings, distribution and overall value enhancements of our businesses.
I would like to touch briefly on a matter that is relevant to all businesses operating globally at the present. That’s the coronavirus. The situation is obviously evolving, and we have been monitoring it closely. If we think about APRR, with 2,300 kilometers of roads, the material risk is any sort of regional shutdowns or quarantine arrangements that may prevent people traveling within France. On the other hand, it may simply be that people choose to drive rather than using public transport options, so this could increase traffic. Of course, there are many permutations in the trends. If the virus were to spread to the U.S., the biggest risk for us would be significant parts of the workforce working from home given the commuter nature of our roads there.
Obviously, the full impact of this virus will be unknown for some time. However, given the exposure to APRR, we believe the impact on our business will be more reflective of the general economic activity and more defensive than many other sectors. We will continue to monitor the situation and update the market as more information becomes available. Importantly, we have the liquidity to absorb a significant disruption to our roads as a consequence of the potential effects of coronavirus.
In conclusion, Atlas Arteria offers exposure to stable G7 GDP growth with long-term linkage to inflation. It continues to be an exciting time for our business with total shareholder return last year of 32% and a 20% increase in distribution forecast to be paid in 2020. The team is looking forward to continuing to evolve the business from the strong foundations we have built, and we’ll continue to focus on adding value for our shareholders into the future.
With that, I’d like to hand back to the operator to allow analysts and investors to ask any questions you may have.
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Questions and Answers
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Operator [1]
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(Operator Instructions) The first question comes from Rob Koh with Morgan Stanley.
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Robert Koh, Morgan Stanley, Research Division – VP [2]
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So I just — and Graeme, thank you for your comments on COVID-19, obviously very sensitive and developing. I just want to be clear: So your guidance statement for this year, does that explicitly exclude any kind of estimate of impact on your road networks?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [3]
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Yes. It’s an unknown, so we can’t forecast on effective returns.
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Robert Koh, Morgan Stanley, Research Division – VP [4]
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Okay. And could you possibly comment on the network’s linkage to Italy, I guess, where things are a little more serious?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [5]
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I mean obviously we do have traffic that comes through the Mont Blanc Tunnel and connects in with us or through Switzerland. The point I would make is that, when you look at origination and destination of traffic, there are many peers of which Italy is but one.
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Robert Koh, Morgan Stanley, Research Division – VP [6]
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Yes, understood. All right, if I can ask a question still in the European region. It’s possibly more of an accounting-style question for Nadine. Just thinking about the provisions in the APRR P&L and understand the change in that year-on-year is a function of accounting and the discount factor. But could you perhaps just give us a sense, over time, will that provision number be increasing or decreasing over time? Just to help with our model calibration, I suppose.
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Nadine Lennie, Atlas Arteria Limited – CFO [7]
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Yes. Look, Rob, I think it’s really hard for me to make a prediction on that front. So I think the best thing to do is have a look at — I mean you understand how the provision process works, and what I was trying to do in flatlining some of the expectations around CapEx going through the P&L. So I think that’s really all that we can say.
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Robert Koh, Morgan Stanley, Research Division – VP [8]
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Okay. All right. And then moving to Virginia. And I guess there’s a thinking about the overall toll burden on motorists, which I see as one of the kind of SCC criteria for the toll increase application and with more toll roads — more roads around that D.C. area being tolled. Can you give us a sense of how you think about that overall toll burden? And if you can, how the SCC thinks about it?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [9]
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So the SCC’s role is to treat us as a regulated business, and so it does not consider overall toll burden. There may be submissions made in that context, but that’s not the fundamental basis on which our toll applications are taken.
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Robert Koh, Morgan Stanley, Research Division – VP [10]
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Okay, no worries. Sounds good. And then as I recall, there were separate discussions in relation to the toll escalation agreement or outlook beyond this kind of reset period with VDOT and various other members of the government there. Is there any update on that front?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [11]
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Rob, we’ll make this your last question, if you don’t mind.
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Robert Koh, Morgan Stanley, Research Division – VP [12]
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Sure.
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [13]
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The issue with VDOT is, given we are formed under legislation, there’s a continual political discussion and debate. We announced in late 2018 a concept for distance-based tolling. We continue our dialogue at various levels of both the VDOT, Loudoun County and the representatives in the senate and representatives on potential solutions. Obviously, if we get to a point of evolution of those to something substantive and implementable, we will obviously make an announcement at that point in time.
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Operator [14]
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(Operator Instructions) The next question comes from Ian Myles from Macquarie.
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Ian Myles, Macquarie Research – Analyst [15]
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Just want to touch base on your sustainable dividend comments. You talked about de-gearing Greenway and Warnow and addressing MIBL’s amortization. Can you maybe give some color how that’s value accretive in a world where a lot of the debt is fixed rate and that you, yes, you don’t tend to get out of fixed-rate debt to discounts?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [16]
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So it’s — that would be a simplistic analysis of what we are trying to achieve. Obviously, our focus is on creating sustainable increase in distribution and value accretion to investors. And that’s the fundamental basis on which we will assess any deleveraging opportunity or restructuring opportunities.
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Ian Myles, Macquarie Research – Analyst [17]
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And in the case of Greenway, how far progressed? Because that was one way — you’ve talked quite extensively in the past about looking at that.
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [18]
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So we have a range of options on the table, which we’re working through. We have a fairly clear perspective of the direction we’re going in. And when we execute that, obviously, we’ll announce to the market.
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Operator [19]
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The next question comes from Simon Mitchell with UBS Investment Bank.
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Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia and New Zealand [20]
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Just on Dulles Greenway, given the importance of traffic to hitting that MCR ratio, can you just touch on year-to-date performance and just how you’re thinking about traffic this year?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [21]
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So as you know, Simon, we issue quarterly traffic numbers, which will be in mid- to late April. And that will be the first point at which we guide on traffic for this year.
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Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia and New Zealand [22]
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But I guess, given there was a quarterly — there was a decline in the last quarter of last year, do you have any — do you now expect that those declines have eased or stopped? Or you just can’t comment at all.
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Nadine Lennie, Atlas Arteria Limited – CFO [23]
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So look, I think if you have a look at the comparison to 2019, we’re starting to step into an easier comparison period. So if you — what was reported there is that you’d — we think that Dulles would need — Dulles Toll Road would need to have around $72.3 million in net toll revenues for this year to pass that test. We don’t have a toll increase, as we’ve said. So last year, we had $72.8 million. So what we kind of want to see is traffic about the same to last year.
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Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia and New Zealand [24]
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Okay. That’s helpful. And then just my second question, on the dividend cash flow stream from APRR, the table on Page 6 of the Investor Reference Pack. So if we look at — the numbers you have provided for the second half dividend from APRR is an EUR 11 million consolidation adjustment line. And that’s down, well, it’s changed significantly, from the first half of EUR 77 million and is quite volatile if you look over previous years. Can you just touch on what’s driving that significant change? And how we should be thinking about that going forward?
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Nadine Lennie, Atlas Arteria Limited – CFO [25]
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Well, so we would tend to think about that on an annual basis, as opposed to a half year basis, just because there are many adjustments that you would put through the consolidated accounts on an annual basis rather than each half. The material item to note is that we have this EUR 40 million, EUR 80 million per annum structural difference between the company NPAT and the consolidated NPAT. And that will continue until the end of 2023. Then there are sort of a range of other IFRS accounting adjustments that you would put through, of which the IFRIC 12, which I’ve talked about in the construction piece, is part of that. So again just thinking about on an annual rather than a semi-annual basis, I think, will be helpful.
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Simon A. Mitchell, UBS Investment Bank, Research Division – MD and Head of Research for Australia and New Zealand [26]
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Okay, but I think, if you look at the 2018 annual number, that was significantly different to the annual number for 2019.
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Nadine Lennie, Atlas Arteria Limited – CFO [27]
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Yes, it is, just because of the accounting adjustments that will flow through, of which there are many. So it is difficult to sit here and provide guidance around what that should look like going forward, which is why I’m suggesting you just have a look at the most material aspect, which is the EUR 80 million structural adjustments.
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Operator [28]
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The next question comes from Owen Birrell with Goldman Sachs.
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Owen Birrell, Goldman Sachs Group Inc., Research Division – Metals and Mining Company Analyst [29]
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Okay. Just firstly, just to follow up on Simon’s question around, I guess, the traffic on Dulles Greenway. Dulles Toll Road downstream obviously has increased their tolls by quite a significant amount, which obviously is impacting the flow of traffic through Dulles Greenway. Can you tell us when those toll increases were introduced during the year? And then secondly, the construction impact within Dulles Toll Road, when that first really started to emerge? And how long do you expect that construction impact to continue for?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [30]
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Yes. So the increase in toll, which was quite significant, came in on 1st of January ’19. As you said, it has had a significant effect on their traffic well beyond the negative effect on our traffic. So we weren’t as affected as they were by their increase in 2019, and I think the information is pretty publicly available. So I think that’s where it is. I think the next increase is a few years off, as proposed, and we’ll see how that evolves. It is [vital] to the region politically, and so we’ll see how it all works through. The railway line is still under completion, and that’s pretty pivotal to what happens there.
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Owen Birrell, Goldman Sachs Group Inc., Research Division – Metals and Mining Company Analyst [31]
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And I guess, a second question for me on — you mentioned the opportunity for possible network extensions or acquisitions. I’m just trying to balance up that comment with Nadine’s comment about not wanting to sit on cash. Is that suggesting that, if you are to find opportunities down the track, you will have to raise capital to undertake those? Or is there another option there?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [32]
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I think there are 2 elements to that. Within APRR, as we are doing with RCEA, there is significant opportunity to grow, opportunities within that business. So that’s with a solid A- rating, probably tending closer to A rating. There’s good opportunities for releveraging and internally funding projects of reasonable scale. To the extent that there are other opportunities, then clearly we would need to come to the market and explain what we were doing, the value we see arising from that and raise capital accordingly. We’re not proposing to hold capital to fund acquisitions.
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Operator [33]
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The next question comes from Paul Butler with Crédit Suisse.
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Paul Butler, Crédit Suisse AG, Research Division – Director [34]
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I just wonder if I could continue on that theme around your objective of lengthening the tenure of the average concession life. Can you just remind us, with the RCEA project, is there a concession extension expected with that? And sort of what’s the potential extension?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [35]
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So RCEA is a stand-alone project. It’s its own concession which went to public tender, and that’s a concession for greater than 40 years. So it stands alone aside from APRR but from the APRR and AREA networks. So it’s separate. So effectively, we’re using APRR as a holding entity to build other road opportunities within France.
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Paul Butler, Crédit Suisse AG, Research Division – Director [36]
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Okay. And can you just give us a bit more detail about how you sort of intend to go about lengthening the average tenure? I mean obviously, there’s this project, there’s potential assets that you could acquire.
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [37]
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Look, as we’ve — I said in my speech, we are focused on being very disciplined in our approach to investment, whether it’s opportunities within the portfolio or related to the portfolio companies that we — businesses that we own and other opportunities we’re approached regularly on, but we apply the filters we’ve described to assessing any opportunity. It has to be accretive to our investors, has to not negatively affect our distribution flows, and it needs to extend our average concession life. So that’s how we’re focused.
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Paul Butler, Crédit Suisse AG, Research Division – Director [38]
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Okay. And what geographies would you consider? I mean, would you consider any of the geographies that are listed on that chart on Page 32 of the presentation?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [39]
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So I think that was there just by way of example. We’ve stated quite clearly we are focused on OECD A-rated sovereigns or better is our very broad screen, and so anything in that category is potentially an opportunity for us. Obviously, geographies that are proximate to our existing operations in Europe, U.S. and Australia would be the focus.
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Operator [40]
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(Operator Instructions) The next question comes from Nathan Lead with Morgans Financial.
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Nathan Lead, Morgans Financial Limited, Research Division – Senior Analyst [41]
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Just first up, just after a little bit more intel, I suppose, on the RCEA project just for a modeling perspective. Can you maybe touch on stuff like length of construction period, tolling structure, et cetera?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [42]
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The length of concession, as I said, is greater than 40 years. As we said, the construction cost is around EUR 600 million, and the construction time frame is 2.5 years. APRR will take over the existing road on the 18th of March, and so operations are commencing imminently. Tolling will start on the completion of the widening.
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Nathan Lead, Morgans Financial Limited, Research Division – Senior Analyst [43]
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Can you give us an idea of what sort of average toll would be on the road?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [44]
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No, not at this stage.
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Nathan Lead, Morgans Financial Limited, Research Division – Senior Analyst [45]
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Okay, all right. Second question for me is you talked about the desire to lengthen the average concession terms. I’m assuming that require a big lick of growth CapEx to do that. And you talked about your willingness to re-lever AP’s balance sheet. Could you talk about maybe how much sort of funding capacity you think you have on that balance sheet even after allowing for the RCEA funding?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [46]
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I think what I’d say is most of the things we are looking at in terms of APRR can be funded within its capabilities as we see the horizon at this point in time. Anything outside that would mean coming back to the market and raising capital as we did, so the project to acquire the remaining Macquarie stakes in APRR and we amend the contractual arrangements with Eiffage and Macquarie.
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Operator [47]
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The next question comes from James Nevin with RBC.
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James Nevin, RBC Capital Markets, Research Division – Analyst [48]
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Yes, so I just wanted to pick up on your comments on potential for distance-based tolling at Dulles Greenway. It sounds maybe are you considering like more distance-based tolling? I think originally, based on my understanding, you’re offering sort of limited distance-based tolling over short distances like 2 to 3 miles. Has there been a change in your mind around that, offering distance-based tolling over the full stretch of the roads? And that will provide better value to maybe customers and maybe encourage more traffic growth there.
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [49]
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James, it’s sort of a work in progress, but I think the foundation starting point is what we put out to the market in 2018. And so relative to that, anything we look at needs to be at least neutral to our investments.
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James Nevin, RBC Capital Markets, Research Division – Analyst [50]
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Okay. And then just trying to understand then at APRR, that there’s a significant kind of CapEx profile over the next few years. And then on top of that, then when RCEA starts to get funded, it looks like potentially like the net debt at APRR will potentially be increasing. Just wondering how you look at that. Would there be any impact on distributions payable from APRR due to that?
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Nadine Lennie, Atlas Arteria Limited – CFO [51]
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Well, obviously the distributions that come out of APRR are dependent on the cash flow that it has available, which changes over the 17 years of the remaining concession life. But there is no intent that we’re aware of at the moment to change the distribution policy around paying out the NPAT capability. There is still — depending on how the credit metrics work and what type of credit rating that APRR and the Eiffarie structure decides to manage to on an ongoing basis, there is still quite a lot of capability within that to be able to raise cash. But the distributions that come out reflects the net profit performance of the business.
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James Nevin, RBC Capital Markets, Research Division – Analyst [52]
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Okay, yes. If I could just ask, please, just one more on the CapEx. I think the split of CapEx at APRR between maintenance and growth, like a significant investment in growth over the last few years, I think maybe over EUR 1 billion. Should you expect — should we expect that to come through in potential like increase in traffic? Like that there’s additional lane kilometers being added there. Are — is that reflected in the — incremental to the toll price that’s come through the last few years?
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [53]
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So effectively all the projects were part of a package of work which were agreed with the state. And those were worked through, agreed. And the consequence was there was a combination, in return for undertaking those works, which are nearing completion in the next few years, of — a combination of concession extension and increase in toll beyond the 70% of inflation. So this is how the concession has extended over many, many years, but every now and then, there’s sort of a review of the road and its capacities and where the constraints are in the network. And there’s a negotiation and discussion with the state, which usually involves some combination of CapEx, compensation through concession extension and toll increase beyond the 70% standard increase. It’s a sort of a regular part of the relationship.
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Operator [54]
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The last question comes from Adrian Atkins with Morningstar.
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Adrian Atkins, Morningstar Inc., Research Division – Senior Equity Analyst [55]
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Graeme and Nadine, I’m just wondering about the coronavirus and if you’ve seen any impact on APRR traffic in recent weeks.
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [56]
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No, we haven’t, I don’t think.
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Nadine Lennie, Atlas Arteria Limited – CFO [57]
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No. In fact, Eiffage on their call, commented that traffic has been performing well since year-end as a result of the continued impacts of the strikes as well as what I understand is quite a strong ski season over there.
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Operator [58]
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Thank you. That does conclude the question-and-answer session. I’ll now hand back to Mr. Bevans for closing remarks.
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Graeme Francis Bevans, Atlas Arteria Limited – MD, CEO & Director [59]
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We’d like to thank everyone for their support of Atlas Arteria over the last year. The analysts and investors were very supportive of the capital raise in November. It’s obviously been very successful, and grateful for your support. And we will be very focused this year to continue to deliver performance in line with your expectations.
Thank you.