Transurban Group

Thank you for standing by and welcome to the Transurban Group Half Year 2023 Results Call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer section. If you wish to ask a question, you will need to press the star key followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr. Scott Charlton, CEO. Please go ahead.

Great. Thank you and welcome and good morning, everyone. And thank you for joining us at Transurban's result briefing for the first half of FY23. And I think actually I have some family and friends joining because of the announcements today. So thank you for supporting me. Today I'm joined by our CFO, Michelle Jabko. And together we will take you through the presentation we've launched with the ASX this morning. And there's quite a lot of good news. Also on the call is our investor relations team, who is, as always, will be happy to follow up with you if you have any questions. Today's presentation should take about 40 to 45 minutes, and then we'll allow time for questions, and hopefully we'll get around to seeing some of you or most of you over the next few weeks. Now, as many of you know, our roads and offices sit on the lands of many of the First Nations people, so I'd like to acknowledge the traditional owners as the original custodians of the land, recognizing their connection to the land and to the waters and community. And our recent opening of the West Connects M4M8 link and you'll see that on the first page of our results cover, was a great opportunity to highlight our long-term partnership with the indigenous organization, the Kari Foundation, whose singers performed an acknowledgment of country as part of the opening. It was an inspiring performance, and if you get a chance, I really would encourage you to look at that performance on our website, the WestConnex website, that is. Now, before we get started in the results, many of you will have likely seen the ASX release that came out this morning as well, announcing that this will be my final year at Transurban. And after 11 years and with the business in great shape and we are gaining significant momentum, now is the right time to transition the business to the next CEO and for me to pursue new opportunities. I'm obviously incredibly proud of what we have collectively achieved over the last 11 years, including the caliber of the executive team, who are in turn supported by a deep depth of dedicated and talented employees. I'd personally like to thank everyone at Transurban and our partners who have made the last 11 years the most fulfilling of my career to date. And of course, I would also like to thank our security holders for all your faith and support over the years, and I really look forward to catching up with many of you during the coming year. This transition will allow plenty of time for an orderly transition, And there are quite a few things that I still want to see through over the next year, including completion of the excavation of the Westgate Tunnel project, the East Link opportunity, commencement of work on the M7-M12 interchange project, and a few other near-term strategic priorities. So with that being said and getting that out of the way, today is really about our first half results. And you will see that the business, again, is in an excellent position today. to capitalize on our growth agenda. So I'll kick off now to the highlights slide, which is page four in the investor pack. We have a lot of records this half, which is great. So we've achieved record traffic results for the period. And our average daily traffic in November exceeded two and a half million trips per day for the first time. And we had freight volumes for the half up around 4% on our previous record. We also achieved a record revenue result for the half with proportional revenue up 43% year on year and our group EBITDA margin at its highest level since pre-COVID at around 72%. So what this shows to us and what it's demonstrating is that our customers are seeing substantial value in utilizing our assets as we move past COVID and into a new period of growth. And on a project front, we opened our final stage of WestConnex, the M4-M8 link, last month. We opened that ahead of schedule and on budget. We also expect to receive all final approvals for the M7-M12 integration project immediately, and we will commence construction shortly. And in Melbourne, we have made excellent progress on the Westgate Tunnel, with more than 90% of the tunneling excavation now complete. These results and many more of our delivered initiatives, both over the last year and some that have taken now five or six years to come to fruition, have allowed us to upgrade our distribution guidance to 57 cents per security. Moving to that slide, our upgraded distribution guidance of the 57 cents per security is four cents above the guidance we gave at the full year and represents an almost 40% increase on the FY22 distributions. Again, we continue to see record traffic performance in Sydney. In fact, it was two weeks ago, a week and a half ago, the M4 recorded over 200,000 trips in one day for the first time, partly thanks to the Red Hot Chili Peppers concert, but we'll take it. And we've also had record traffic in Brisbane. We see continued strength in freight and an uplift in airport traffic around the country, as well as ongoing improvement in Melbourne, including more people returning to the office. And this increased certainty around traffic performance across all our markets, and particularly the outperformance in Brisbane and Sydney, were a couple of the key factors supporting the board's decision to upgrade guidance and the major reason for the expected increase in EBITDA. And I think just a bit more color on that. Clearly, when we gave guidance toward the end of last year, we still had work from home, if you could, in Victoria. It was our first guidance coming out of COVID, wet weather events in Sydney. We had a lot of volatility and a lot of uncertainty there. providing the original guidance. But obviously, this increased distribution highlights really what has become the structural strength of the business in a variable economic environment and the critical nature of our assets. And again, we point out the strength of our assets, particularly being located in growing urban environments. Now, turning to our investment proposition, there's nothing new here. I'll quickly go through this, but just a reminder that We now have 22 high-quality assets in five markets with increasing volumes of traffic, and a pipeline of development opportunities to drive medium- and long-term distribution growth in all of our markets. Our inflation-linked toll escalations, debt hedging, and active balance sheet management provide near-term interest rate protection, but not only that, EBITDA benefits in the near-term and medium-term. We're balancing growth in distributions and investment in our development pipeline, and this will allow us to create create long-term value for all of our stakeholders while continuing to grow our distributions. So slide seven, now this is nothing new and something we've been speaking about for quite some time now as we've come into this interest rate environment. And again, it's about our inflation-linked toll escalations coupled with our hedging profile. And again, as we've said, this should and does provide a net benefit in the near term. Now, as you can see from the chart, we're starting to see that actually to come through We'll continue to see further benefit in the second half as some of the higher CPI numbers recorded are incorporated into our base toll prices. This, of course, then will compound over the full life of the assets, remembering that in some cases it can take up to 18 months for the CPI numbers to flow through to some of our escalations. Conversely, our exposure to short-term spikes in interest rates is minimized by our high rate of hedging, with the cash rate likely to reduce as inflationary pressures will ease over the next few years. Coming back to our key driver, obviously, of the result, is that traffic is at record levels for the group for the half. Brisbane and Sydney, as well as the 95 express lanes in the U.S., all reached record levels in the period. Melbourne continues to show improvement, and large vehicle traffic remains strong and reached a record level in the first quarter of the period. The results were particularly pleasing given the major weather-related impacts in all of our Australian markets over the period, including floods in Melbourne and Sydney. And in Sydney as well, these record traffic numbers were achieved as well if you exclude the impact of the newer assets, NorthConnex, the M8, and the M5 East. And in the U.S., the 95 Express Lanes, which is our longest toll road asset, continues to perform well, mainly as a result of the additional trips from the 395 extension, as well as weekend and interstate travel. One of the things we always like to include when we do our presentation is obviously a survey of our data and what's happening in the traffic and some of the insights that we use when we consider the business. And this is some of that data here on this next chart shows the ongoing strength of freight traffic and travels around the cities. And that travel and freight more than offsets the slower recovery that we're seeing in airport and some of the CBD related trips. We all know that airport passenger numbers are increasing, and we're seeing a gradual improvement in airport-related corridors. We're also seeing CBD traffic continue to improve despite some of the recovery in public transport numbers. Again, our most recent research from January shows that respondents continue to prefer private transport over public transport. Now, of course, and it's a very topical topic, a very high topic, The moment the cost of living remains an issue for many of our customers and the country at large. And while large expenses, including groceries, electricity, and mortgage repayments, are greater concerns for most people, we understand the importance of providing support for our customers experiencing financial hardship. And our Link Assistant program continues to provide support for those customers. But I would like to remind everyone that in relation to tolls, More than 80% of our Australian customers spend less than $10 on average a week, and tolls represent approximately only around 1% of the average Australian monthly household expenditure. And again, as we look at our traffic insights and what's happening, we see this play out in Sydney with record traffic numbers that show that people clearly see value that the toll roads offer there. And over the past 20 years, Transurban has invested more than $25 billion in major road projects in Sydney, which has contributed to more efficient and reliable movement around the city. And during this last half, customers have saved more than 200,000 hours in travel time every workday by using our toll roads compared to the alternative. And in New South Wales, we've long recognized that harmonizing and improving the efficiency of the tolling regime would make using the roads simpler and easier to understand. as well as it has the potential to improve traffic flows and increase safety across the whole of the Sydney Road network. So, of course, we're very excited about the potential opportunity to engage with the New South Wales government over the coming election, sorry, after the coming election about meaningful toll reform on the other side. Now we'll get into some of the asset portfolio and project pipeline updates. We have the normal market slides in the appendices that you've normally seen, but we just have so much going on. We've done so much over the last We've decided just to hit the highlights and the market slides and appendices and happy to take any questions on those. So the M4-M8 link completion, hopefully some of you in Sydney would have the opportunity to drive through what is now Australia's longest underground motorway. And it's an amazing piece of infrastructure. And this 22 kilometers of tunnels, again, offer substantial benefits for the Sydney motorist. Not just the motorists, but now the surrounding communities who we appreciate have been through years of construction pain, but now they'll get the benefits of the road as well. And opening the M4M8 on January the 20th was a defining moment for Transurban and our Sydney Transport partners. And this does mark the final stage of our part of the delivery of the project, which with just the government-related Roselle interchange to come. I do want to point out that the project was delivered ahead of schedule and on budget, which was a tremendous achievement for the team, particularly given the challenging environment over the past couple of years. I do want to point out as well that all three stages have been delivered in line or ahead of our schedule and budgets that we determined at acquisition. It's now early days for the M4, M8 traffic, but so far the numbers are in line with our original forecast. So we're very pleased that people are already seeing the benefits. So again, I'd like to thank the 12,000 people who worked on the project. And again, I think to those overall, which is close to 40,000 people who contributed to the WestConnex project overall. And the benefits of the consolidated WestConnex will continue to grow because this provides the central transport connection for a number of other major government road projects. And you'll see the map on the screen that shows there's still five major roads worth around $10 billion connecting to WestConnex. These are all being done by the government, and they're all scheduled to be open over the next six years and contribute to the traffic growth and the utilization of WestConnex. But just to show you the scale of the project and what's being delivered, we're going to do a little bit something different. Instead of me just talking about it, we're just going to run a quick video that shows the benefits that WestConnex creates for Sydney. Thanks for that. It's an amazing project. I think when I was there at the ribbon-cutting, I think somebody referred to a comment that the Premier had made I think a couple years earlier, and I think he reinforced it, that he thought WestConnex would be a tourist attraction. I think for us infrastructure nerds, it certainly is a tourist attraction. I'm not sure for everyone, but certainly for us in infrastructure, it's an amazing piece of infrastructure and something that we're extremely proud of. Moving to slide 13. Sorry. and the Westgate Tunnel Project update. Again, it's making excellent progress. We're now around 90% of the way through the tunneling. We've taken a lot of risk out of the project now and very pleased how it's proceeding. We expect that the excavation of the twin tunnels to be complete by mid-year, with the breakthrough on the inbound tunnel in the next few weeks, so I can't wait to be there to watch that big piece of concrete fall through the TBM poket's head up the other side. So I'm It's a very exciting time, and we've achieved a number of milestones on other sections of the project, including completing the structural frame of the bridge over the river in just seven months, and 14 of 18 new lane kilometers on the Westgate Freeway. Go back to that number. There are going to be 18 new lanes or 18 lanes, but 14 of those lanes have been completed, and all existing bridges have been widened and strengthened. Again, this is another project that offers substantial benefits for motorists and the freight sector in terms of safer, faster, and more reliable travel. So we'll go from Sydney to Melbourne and back to Sydney, and we'll talk about that we've received the final. So we're waiting to receive the final approvals, regulatory approvals, to widen the M7 and create an interchange with the government's M12 motorway after we receive the Stage 3 approval from the government in December. And those final regulatory approvals are imminent, and financial close should be here in the next couple of weeks, and we'll start construction soon. The project scope includes around 26 kilometers of widening works, including two additional lanes to the M7, and is expected to be complete by the opening of the new Western City Airport in 2026. Funding for the approximately $1.7 billion project includes a just over three-year concession extension, and Transurban's contribution of the 50% of the Northwestern Roads Group funding is roughly about $600 million, half of which will be through debt that's raised at the project level and half of it will be equity provided by the group through other capital sources. Moving on to the greater Washington area. In the U.S., work is continuing to progress well on our express lanes extension projects, and we now expect to open the Fredericksburg extension by Q3 2023. So that's now six months earlier than we had been recently forecasting. This extension extends the 95 express lines by 16 kilometers and will provide faster and easier access to major employment bases, including the Marine Corps base at Quantico, supporting 28,000 workers. And during the period, we also reached the final step of the environmental route review process for the Maryland express lanes, and we look forward to working with the new administration in Maryland. And the government and the transport secretary there have just been recently inaugurated. and will be working with the new team and administration to determine their strategic priorities and timing for this important project. If I move to the next slide, we're very excited today that we have also entered into an agreement to partner with CDBQ through the sale of 50 percent of our A25 asset in Montreal. And for most of you know, we've had a relationship now with CDBQ since we did the second tranche of WestConnex. They've been a fantastic partner. and we're very pleased to be strengthening and deepening that partnership in their hometown of Montreal. For those of you who don't know much about CDBQ, they're one of the world's largest institutional infrastructure investors, and this agreement gives us a strategically aligned partner who brings valuable local capability. Again, we're very pleased to have them on board, and we look forward to working together to pursue potential development opportunities in and around the A25. And Montreal continues to be well aligned to our investment criteria, having consistent population growth, stable economic environment, and historically it has been one of Canada's most congested regions. So we'll jump now from Montreal to Melbourne. We're sort of moving around the map pretty quick and back and forth. But in Melbourne, investors in the city's only other toll road, Eastlink, are reported to be looking to sell down their interest in this asset. Now, look, we're not yet aware of actually the percentage of interest on offer or any details around the potential sale process. However, clearly as a Melbourne-based business for more than two decades in our hometown and where we were born, this is a market we know and understand comprehensively on every level, from operations to traffic forecasting and beyond. So should that asset come up for sale, we are obviously very well positioned to participate in a near-term opportunity. But always with any of our acquisitions, we would take a disciplined approach in the best interest of our security holders. But besides these projects that we've delivered or the larger ones that are presenting themselves, we still have a long-term project pipeline where you can see a range of opportunities. These include potential enhancements to our own assets as well as possible acquisitions and greenfield projects. So there's no lack of opportunity for growth. It's just about maintaining discipline and making sure we take the best of creating the opportunities. These will continue to give us options to grow the distribution and add value, we believe, for decades to come. Now, before I hand over to Michelle, I'd like to highlight an automated truck trial that we conducted on CityLink late last year. And I don't know if some of you saw this, but actually for us, this is, again, and for infrastructure nerds, this is a pretty big deal. And the trial was the first of its kind in Australia. And this is going to help us prepare for the ways roads and on-road technology will be utilized. And this will have the potential to increase our asset utilization and significantly improve safety and community impacts over the next decade. The trial also builds on our experience of running other trials of connected and automated vehicles in all of our Australian cities. Again, by just showing you the picture, it's hard to explain. So we're going to try this again and we're going to do a, short video to show the truck in action. So as you can see from that video, it's a very exciting project for us and we think for the trucking community. And it highlights how our work with technology partners is keeping us, we believe, at the cutting edge of some of the road transport technology and better utilization of our assets. So with that, I will now hand over to Michelle to run through the financials.

Thanks, Scott. And good morning, everyone. It's great to be here. As Scott just outlined, a combination of strong traffic performance, embedded inflation-linked toll escalations and a well-managed balance sheet showed the strength of our business model and provided great outcomes across the board. You can see some of the key metrics here on slide 22. Traffic of 2.4 million average trips per day for the half was the highest on record, as our urban assets continued to help people move around the cities in our core markets. This, combined with inflation benefits, increased proportional toll revenue by 43%. Proportional EBITDA grew by 54% as margins expanded nearly six percentage points. Funding costs were stable, despite higher interest rates, And the strength of our balance sheet also continues to provide flexibility for near-term growth opportunities. All of this supported the board's decision to lift our FY23 distribution guidance to $0.57 per security. I'll now take you through some of the detail. So starting with the 84% increase in free cash on slide 23. Record EBITDA and well-managed funding costs underpinned $845 million in underlying free cash for the half. Our first half distribution of 26.5 cents per security was 104% covered by underlying free cash. You can see strong free cash generation coming through both our fully owned assets in Melbourne and Sydney and from our joint ventures, where the investment that we've made over time is coming through in the form of record distributions back to the business, excluding capital releases. With stable funding costs, most of the EBITDA uplift across our markets went straight to free cash. So in other words, a 35% increase in traffic translated into an 84% increase in free cash given inflation benefits, 72% EBITDA margins and stable funding costs. If you now move to slide 24, this shows in a bit more detail how strong revenue growth led to the 54% increase in EBITDA of $1.2 billion. Like-for-like toll revenue was up $437 million and around 80% of revenue growth across the group was due to higher traffic on our roads. We also had the benefit of higher inflation, which has started to come through. This forms a new revenue base for future years. Toll escalations can also lag inflation and so recently announced inflation is still to flow through on a number of assets. Costs for the half were higher, as we spoke about at the full year, due to our new assets, higher traffic, and our continued investment in our business. I'll cover this in more detail on the next slide. Higher revenue more than offset these additional costs and our EBITDA margin increased to 71.8%, moving towards more normal levels. So if I take us now to cost details on slide 25. Volume-related costs were higher as traffic on our roads and our proportional ownership in WestConnex increased. These costs are more than offset by the additional revenue we received. The numbers you can see on the slide are first half to first half and already include some cost increases that incurred in the second half of last year. This half, we've also seen some inflationary impacts including CPI linked maintenance contracts, but these were also more than offset by additional revenue. We invested more in early stage development spend, which we take to OPEX, but is ultimately included in the economics of new projects. For the full year, we still anticipate cost growth to be higher than the 11% cost growth we had in FY22. Full-year costs will partially depend on decisions we make regarding our strategic growth projects. If I step back and consider costs overall, this has been a period of considered investment as we set up the business for continued success. However, we remain focused on managing cost inflation and maximising value from our investments. If you move to slide 26, I've included an outline of why we make this investment in strategic growth. Our historic investment in development has resulted in additional EBITDA of more than $600 million and more than $1.3 billion of additional free cash over the past three years. We've also maintained our weighted average concession life at an average of 28 years for the last decade, demonstrating the sustainability of our business model over time. While new assets and projects clearly have a cost, making this investment up front in high quality assets in our core markets allows us to continue to grow the business and realise value over the long term. On average, we would normally spend around $20 to $30 million per year in early stage development OPEX, which we consider as part of the overall cost of the projects we deliver. As we flagged at the full year, We expect that this year the number will be higher, potentially up to around $50 million. And we're more than just a collection of concessions. We take a long-term view of the value of our business, and we make targeted investments that set us apart, help make us a partner of choice, and support long-term growth and sustainability. We've set out some examples here on slide 27. We invest in enhancing outcomes for our customers with 392,000 hours saved by our customers every workday and 97% of our customers choosing to interact with us through digital channels. We invest in road safety research with the results providing insights that help protect drivers on our roads and also on the wider networks. Serious road crashes on our roads have reduced by 12% over the past five years And recent data-led improvements to lane design and signage on CityLink in Melbourne reduced rear-end crashes by 75%. Technology investments have also enabled real-time monitoring and response on our roads, again, all setting up our business for long-term success. Moving now to funding on slide 28, our balance sheet is in good shape, and there are two key benefits of this. we've set up the business for the higher interest rate environment. We've continued to manage the balance sheet well with 97% hedging and an average maturity of around seven years. We've completed the majority of our FY23 refinancing and we've kept finance costs stable as the cost of new debt was largely the same as the cost of debt maturing. And if you turn to the next slide, you can see here that most of our existing debt is not due to be refinanced until post-FY26. Now, of course, we'll see the impact of rising rates over time, but decisions we've made to set up the balance sheet well mean that this will largely depend on rates at the time of refinancing. And in the meantime, we'll see revenue benefits from inflation, with almost all of the revenue base escalating each year. The second benefit of our strong balance sheet management is that we're well placed to fund our committed projects. We've got $3.6 billion in corporate liquidity today. We've previously flagged that we expect to receive around $1.9 billion in capital releases between FY23 and FY25. This expectation has not changed, although the nature of these may change if more efficient, as we've noted on the slide. And including the proceeds from the A25 partnership agreement we announced today, this gives us in total $5.9 billion in corporate liquidity overall. This compares to committed capex of $3.4 billion, which covers the Westgate Tunnel project, the Fredericksburg and Northern Extension projects in Virginia, and the M7 widening and M12 interchange project recently announced in Sydney. So our balance sheet position and our through the cycle approach should help support distribution growth and has given us the flexibility to continue to invest in our business for the long term. Before I finish my presentation, I just want to point out that we've included some additional analyst notes in the back of the pack to assist with modelling of the impact of new assets, tax and debt amortisation over the coming years. These start on slide 34. Thank you all very much for your time today. And I'll now hand back to Scott.