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Edited Transcript of MQA.AX earnings conference call or presentation 29-Aug-19 1:00am GMT

Half Year 2019 Atlas Arteria Group Earnings Call

NSW Sep 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Atlas Arteria Group earnings conference call or presentation Thursday, August 29, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Graeme Francis Bevans

Atlas Arteria Limited - CEO & Director

* Nadine Lennie

Atlas Arteria Limited - CFO

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Conference Call Participants

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* Ian Myles

Macquarie Research - Analyst

* Nathan Lead

Morgans Financial Limited, Research Division - Senior Analyst

* Paul Butler

Crédit Suisse AG, Research Division - Director

* Robert Koh

Morgan Stanley, Research Division - VP

* Simon A. Mitchell

UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Atlas Arteria H1 2019 Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Graeme Bevans, Chief Executive Officer. Please go ahead.

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [2]

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Thank you, operator, and good morning, everyone. I'd like to thank you all for joining us this morning to discuss Atlas Arteria's First Half 2019 Financial Results. We believe it is a solid performance and it's a first set of results of our newly internalized management team. I look forward to providing you with details about our performance and progress in building Atlas Arteria since we took over management 5 short months ago. As we work through the presentation, you will see that we have included a lot of meaningful data. This is in line with 2 of our core values, engagement and transparency.

Moving to Slide 4 in today's agenda. We will start by providing the key highlights for the half. I will then hand over to Nadine Lennie, our Chief Financial Officer, for a discussion on key financial measurements. We will then move to operational progress and key priorities going forward. We will close with an overview of our strategy and the outlook for the remainder of this year. An opportunity to ask questions will then be provided.

Turning to Slide 6. As many of you would be aware, following ALX' termination of the management agreement with Macquarie on 31st of March this year, our new team took over as the internal management on (inaudible). We built a new organization in a short space of time while ensuring a smooth transfer of arrangements and continuity of operation. I'm particularly pleased about the talented people we've been able to procure for the team, combining a depth of both operational and financial capabilities, including hires from other leading toll road operators. With our experienced team operating the business, I believe we are well positioned to deliver an exciting future for Atlas Arteria.

We have been focusing on developing a strong corporate culture supported by our Board, founded on a set of principles that encourages teamwork and, as mentioned, transparency. As a team, we are committed to delivering sustainable value for our shareholders through a long-term and disciplined approach. The way the internal team has embraced these principles to create such a strong culture in a relatively short space of time is a great platform for the business and its future. As part of our culture, we have a continuing focus on improving the safety of our employees, contractors and customers in everything that we do. This includes developing the best safety practices and directly tying these into remuneration outcome. I will discuss safety and the work we are doing on this on the next slide.

In terms of key methods we will be addressing today, the operating performance of the Greenway relative to historical functions combined with the more conservative outlook for traffic growth has led the Board today to impair its value by $162.9 million. The business has not been performing as we would have liked, and we are proactively working on refocusing the business. We have developed a plan to sustainably improve the Greenway, and we'll talk about this later in the presentation.

APRR is performing strongly, with earnings and net profit continuing to increase. We see a good opportunity to simplify our APRR management arrangement. I know you're all keen to understand progress on these negotiations. The relationship between our various co-shareholders in APRR and Macquarie as our manager remain positive and constructive, and there is a platform for building a business case between us to achieve mutually beneficial outcomes.

Underpinned by the strength of our team, assets and business foundation, we are firmly focused on delivering a sustainable and profitable future for Atlas Arteria. We have developed a considered strategy for growth, which I believe will unlock further value for our shareholders and other stakeholders. I'd like now to move to our #1 priority, safety. Ensuring that our workers and customers go home safely each day is fundamental to everything we do.

As we see from Slide 7, at APRR, our safety performance was flat from the previous 6 months. APRR will continuously strive to improve safety. This includes rolling out new technology. Safety performance at the Greenway was excellent, and we are happy to report that there were no lost time accidents during the half. It was also pleasing to see that we had 0 serious motor accidents during the period.

At Warnow, although there was no serious accidents, unfortunately, we experienced our first workplace injury for our toll collectors within the tollbooth. We've since installed a new safety protocol to further mitigate against potential hazardous situations. Pleasingly, there were no major accidents in the half, reflecting Warnow's proactive approach to safety such as the installation of new road signs to prevent counter flow driving events.

Turning to Slide 8. I'm pleased to say that the overall results for the first half of 2019 was solid, particularly given the strong comparable period of APRR. Although group traffic was down by 1.1% on a weighted average, revenue was up 1.2%, reflecting the change in traffic mix and increase in tolls during the period. We also reported proportionate EBITDA of $450.2 million, up 1.6% from the first half last year.

Today, we will shortly talk about the financial results. As outlined on Slide 9 today, we are pleased to reaffirm our guidance for the $0.15 per share distribution for the first half of this year to be paid out in early October 2019, up 25% on the same period last year and consistent with the forecast previously provided. We also announced that our second half 2019 distribution is predicted to be $0.16 per security.

Our aim is to provide investors with distribution guidance for the full financial year. This is being done to align ALX' disclosures to our Australian peers and align our distribution information to our financial year-end so shareholders can see how their distribution returns better match our financial performance.

I should point out that our distribution guidance assumes no changes for the current APRR capital structure or the MAF advisory agreement. The guidance is also subject to future business performance, foreign exchange movements and other factors such as French taxes.

In considering the level of future distributions, we are focused on building a business that creates sustainable growing distributions over time. The Board also wants to ensure that the company maintains adequate liquidity to protect against financial risks while also supporting the immediate needs of the business.

I will now hand over to Nadine who will take us through our financial performance over the first half of 2019.

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Nadine Lennie, Atlas Arteria Limited - CFO [3]

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Thanks, Graeme. On Slide 11, we've presented our income statement for the half, and we've also presented an adjusted statement to show you what we think normalized earnings would look like adjusting for abnormal or special items that will not be part of the cost base after the end of this current year, and we've called these notable items.

For the normalized profit, which essentially reflects the repeatable or repeating financial line items, as you can see there is $88.2 million, which is a strong result. Now I'll just touch on a few items just to take you through our thinking. The toll revenue increased by 26%, and that reflects essentially flat performance from the Greenway, consolidation of Warnow and $5 million in currency impact.

Moving down, other revenue which in historic periods has been quite low has been impacted in this period by IFRIC 12 adjustments. And this, for us, relates to our investment in the Greenway and the Dulles Toll Road Connector project where we spent USD 6.6 million for the half, which translates to about AUD 9.4 million. And just for reference, the DTR Connector project is part of the east end work. And this $9.4 million was the largest driver for the uplift in this line item.

Moving then to costs. So the business operations line reflects the operating cost at Greenway and Warnow. The 86% increase here reflects the same $9.4 million that I just spoke about and then of course the consolidation of the Warnow costs.

Our corporate cost of $7.7 million for the half reflect the ongoing costs associated with just the general management of the Atlas Arteria business, and they exclude any of the Macquarie fees and one-off costs associated with internalization. And we've shown the internalization costs for the period below the line which you can see there, the $2.3 million.

Just by way of notice, for those tempted to just double the $7.7 million number for the full year, there was a ramp-up in staff costs through the half, and we've only had a full complement since April.

We've split the Macquarie fees so we're showing those that could be part of the ongoing cost structure from those that we know will not be part of the business after the end of this financial year. And these are shown as notable items below the line.

So if you have a look at the $16.2 million shown against the Macquarie fees below the line, they refer to the general ATLAX and ATLIX Macquarie management fees, which stopped on the 15th of May plus the $750,000 monthly transition fee that will finish on the 31st of December this year.

As Graeme mentioned earlier, the Boards of ATLIX and ATLAX have decided to take an impairment of $162.9 million across their respective Dulles Greenway holdings, and this reflects the translation of USD 115 million. With the upgrades to surrounding roads, traffic is taking longer to reflect the population and economic growth in the region, and the upgrowth have also added congestion to our road which has also affected traffic.

In the last 6 months, we've also seen the impact of the Dulles Toll Road toll increase on our own road. And just by way of some facts here, on the 1st of January, we saw the first toll increase at the DTR since 2014, which increased the maximum one-way toll for just a standard vehicle by more than 35%. This has had a 5% increase -- sorry, decrease in the DTR traffic and 84% of our traffic connecting to the DTR.

So importantly, this impairment is a noncash item, if you will note, but at a point in time, it's just not only at the 30th of June this year. We still see the Greenway as being a valuable part of our business, and Graeme will talk about our future plans in that respect later in the presentation.

Tax effecting for the notable items. You can clearly see the link between how we've determined our normalized performance and the statutory results.

We've provided you with Slide 12 to show the underlying performance of each business, removing the impacts of IFRIC 12. Perhaps it's worthwhile just touching on APRR and reminding that the unusually strong traffic performance in the first half of 2018, which has led to the half-on-half traffic underperformance that you can see there. And we have talked about previously that the 2018 performance was due to a French National Railways strike from April to June last year. So if you remove 2018 from the performance equation, traffic has increased 1.8% from half 1 2017. And that's per annum.

So APRR delivered increased revenue and EBITDA, and it is contributing nearly 85% of our revenue and continues to underpin our distribution. Just rounding out in Europe. ADELAC saw similar effects on traffic as APRR. Performance at ADELAC also suffered a little bit from the lower or small numbers, so some small changes in costs in percentage terms look high. Warnow continues to benefit from surrounding roadworks and closures, and it's performed very strongly.

Turning to Slide 13 and focusing back on APRR. In terms of its capital structure, that has, of course, reaffirmed its A- credit rating for APRR in November last year, and Fitch reaffirmed its ratings in June 2019. And APRR clearly has sufficient balance sheet flexibility for capital growth.

The cost of debt at APRR was 1.5% for the period, and Eiffarie, it was 0.9%. So this means the average cost of debt across them both is around 1.4%. And you can clearly see the impact of this rate reduction reflected in the 21% reduction in the net interest expense.

I'll just point out that the 13.2% 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 in 2012 and '15. There have been no changes to the Eiffarie debt facility or amiable corporate facility impact over the last 6 months.

We turn then to Dulles Greenway on Slide 14. Given the traffic performance of the Greenway and what I've talked about with respect to the impairments, we're unlikely to meet the 1-year lock up test this year. However, we remain optimistic that we will pass the 3-year lock up test.

And just looking at that, we estimate that the Greenway will require around a USD 72 million to USD 73 million net toll revenue to pass this test. And we've provided the net toll revenue numbers for you for the half, which are -- essentially the EBITDA is presented without any IFRIC 12 adjustments and less non-toll revenue.

I refer to the numbers for half 1, it does look crunched. But it is worth noting that the 3.91% toll increase only became effective mid-April. So we only saw 2.5-months' benefit of this in the first half, whereas we'll see the full 6-months' benefit in the second half.

In addition, the traffic in the first quarter was affected by the VA government shutdown, which was almost a month, and severe weather, which is unlikely to be replicated in the second half. So we'll be continuing to focus on cost controls and cash management activity.

Our cash flow is currently sourced from our investment in APRR. The cash flow waterfall we've provided on Slide 15 illustrates how the flow of cash is calculated from the numbers that you would see or are calculable from the financial statement for APRR. So we've developed this waterfall to assist everyone to understand how cash moves from the operating business through to our security-holders.

As you may be aware, dividend distributions from French companies are restricted to the company net profit after tax or NPAT. Importantly, this is company NPAT and not consolidated NPAT.

So if we start on the left-hand side, with the APRR consolidated NPAT for the 31 December 2018 half, it was EUR 409 million. That's a full year versus first half of EUR 420 million. If you take 25% of this, you get EUR 102 million.

APRR's subsidiaries prepare their statutory accounts under French GAAP, which don't include any of the IFRIC 12 adjustments. In addition, until 2023, there's a permanent difference between the consolidated and the individual NPAT flows of around EUR 40 million per half. So those adjustments all put together, we take 25% of those, and they're reflected in the EUR 7 million reduction before we get to the EUR 95.3 million company NPAT.

This is then the NPAT that flows through the structure. So as you can see, there are financing costs that come out of that with the Eiffarie debt and tax/other line across. And then we can convert the remaining EUR 77.2 million to Aussie dollars, which gets us to the $123.4 million, which are direct distributions from MAF 2.

Then we take out MIBL financing payments, Macquarie fees, corporate costs, and all the various true-ups. This then shows our net cash inflow from APRR for the half which was $89.3 million. Reflecting performance in the previous half, we paid $102.5 million distributions for the half.

I'll now hand back to Graeme who will work through the operational update, growth strategy and outlook.

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [4]

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Thanks, Nadine. Turning to Slide 17. Like all businesses, Atlas Arteria's results are delivered through providing value to our customers. In our case, we offer a superior experience traveling on our roads compared with congested or speed-limited alternative travel routes. Specifically, our value comes in the form of reduced travel time, rate of time certainty when traveling, reduced fuel consumption, safety benefits and lower carbon emission. You can see on this slide the value of time-saving alone that our network offers, an average saving of 120 minutes from Paris to Lyon.

We will now look at APRR in more detail on Slide 18. 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 in the Alps appears relatively high on this scale because nearly 23% of its total trip link is tunnels and viaducts.

Slide 19 shows the longer-term trends in APRR light traffic and heavy vehicle traffic. While first half was one of decreasing traffic for light vehicle, the long-term traffic performance remains resilient across business cycles.

We are continuing to see an overall growth in traffic in line with historic growth patterns. However, as we've mentioned, we tracked against very strong traffic numbers from half 1 last year due to strikes on the French Railways along with an Air France strike.

Economic conditions in Europe will continue to drive growth at APRR. Overall, we think there's a general correlation between French household income and growth in APRR light vehicle traffic.

For heavy vehicles, growth in French-manufactured goods can act as a reasonable proxy, and we're seeing close correlation in the past few years.

Turning to Slide 20. APRR continues to build on its operational efficiency. It increased automated toll collections to a further 0.3%, meaning that almost every toll collection is now automated at 99.6%. In addition, APRR has increased its number of customers using in-vehicle electronic toll tags to account for 60.7% of all collections. This leads to less congestion at toll points and helps improve the overall customer experience. This has all helped support a further reduction in headcount of 1.3% compared to first half of 2018.

We are working on introducing initiatives to further improve efficiency and increase the collection and analysis of valuable data, while also working to the key purpose of improving safety. We have provided examples on the slide which show us how we are creating faster travel time, reducing accidents as well as costs. By increasing customer satisfaction with up-to-date technology, high levels of safety and quick response vehicles in the case of vehicle issues, APRR is continuing to increase revenue and create value for all stakeholders.

As you can see from Slide 21, APRR has grown its network by adding 50 kilometers of road since 2015. And as mentioned, we were recently selected as part of the advice consortium for the development of the RCEA project, which is under final negotiation. This involves CapEx of EUR 600 million.

APRR continues to look for potential expansion projects and discussions will follow with the French government should opportunities arise. However, this will be dependent on what happens in French politics and the success of other privatization plans.

Over the last few months, APRR has been working on a number of projects, some of which are outlined on this slide. The business is close to finishing 3 intersection upgrades and completion of the road widening between Clermont-Ferrand to Le Crest, enhancing the overall experience and safety of our customers.

CapEx for the first half came in at EUR 232 million, higher than the first half of last year as APRR is coming to the tail end of the 2014-'18 stimulus package. At the same time, capital expenditures for the national motorway investment plan is starting to ramp up and is expected to peak sometime during the next couple of years as work begins on notable fronts to improve the network service.

Turning to the Greenway on Slide 22. Our toll road offers a cost-efficient solution for customers traveling in Northern Virginia to and from Washington, D.C. While on a stand-alone basis, the Greenway seems costly, as you can see, on a per-mile basis, it offers very good value for customers. The continued decline in traffic numbers over the last few years is disappointing, but part of our plans includes working on solutions to ease congestion and improve the customer experience as population grows.

We're seeing further residential and commercial property development along our roads, mostly targeted at the middle and upper income band. This should have a positive impact on the Greenway traffic in the medium to long term. As we've mentioned, our assessment of the Greenway is to identify potential opportunities for improvement in this business which is an operational priority.

Turning to Slide 23. As mentioned, our operational review of the Greenway is to establish a series of business improvement initiatives that we're currently implementing. A focus for us has been identifying new leadership skills that's needed to deliver our plan as well as other business and margin improvement initiatives.

We are pleased to advise that Pierce Homer, a former Secretary of Transport in Virginia, has joined the Board of Dulles Greenway earlier this month, and with his appointment, we are also in the process of recruiting a new CEO. The new leadership will focus on relationships with stakeholders and the community. We've already started this process. We've also commenced several cost reduction and efficiency initiatives, reviewing and updating our processes to optimize timing of upgrades and maintenance work.

As many of you know, the future of the toll fitting regime at the Greenway after the current legislation period expires on 1 January 2020, will be determined by the State Corporation Commission. We are continuing to develop our rate case for the tolls for 2020 and beyond. And we anticipate lodging that application with the commission later this year.

Turning to Slide 24. Congestion at both ends of the Greenway has adversely impacted traffic, and we are delivering projects to improve traffic flow and performance. At the eastern end, the DTR Connector project is well underway and will address morning peak congestion where the Greenway merges on to the DTR. We expect Phase 1 to be completed in late this year or early next year, depending on weather over winter. Phase 2 involves extending a lane along the Washington Airport Authorities property. And following the receipt of final planning permit, we expect that phase to be completed within 12 months.

At the western end of the Greenway, we've explored the best way to alleviate the afternoon peak congestion that the Greenway merges onto the Leesburg Bypass. We have 2 projects being implemented. In the short term, reconfiguring the Greenway off ramp and widening the Leesburg Bypass. We're conducting initial engineering work on reconfiguring the off ramp, which we can complete earlier than the Bypass changes, and that will give us some benefit. And we'll keep the market informed as developments progress. Both of these projects are being given consent to be designated as special improvement projects funded by locked-up cash, and therefore, not affecting our covenant.

Finally, on Slide 25, the Warnow Tunnel in Germany has continued its strong traffic growth, benefiting from constructions on alternative routes, and in part, due to the fundamental value we believe it provides to our customers. Customers using Warnow benefit from the fast and cost-efficient transport option across Rostock harbor.

Turning to our growth strategy. Slide 27 focuses on the importance we place on creating value for our shareholders. We are not just a passive investor in our businesses. We are a toll road owner and operator. And as such, we're actively and responsibly managing our businesses, focusing on initiatives that improve operational efficiency to enhance performance and growth. This includes, but are not limited to cost control, decongestion projects and leveraging technology to deliver better outcomes for our customers.

We focus on having the right capital structure and appropriate leverage in our businesses to maximize returns for our shareholders. We will consider accretive investment opportunities that have a strong strategic and financial investment base either within or complementary to the current businesses.

Organic growth in our existing businesses is supported by GDP-linked traffic volume and CPI-linked toll revenue. Overlaying this is capital investment programs to enhance the value of those businesses. Our objective is to develop the long-term value of the business through both capital and distribution growth as we continue to evolve our business to be cash generative.

Our vision is to enhance the economic and environmental efficiency of communities through the ownership and operation of safe and efficient transport solutions. By doing this, we aim to deliver growing distribution and enhance the value of our businesses for the benefit of our shareholders.

Moving on to Slide 28. I'm often asked about our approach to investment opportunity, and as mentioned moments ago, we are open to considering accretive investment. Part of creating value for shareholders is having a rigorous and disciplined approach to investment opportunity. This is an approach that has been front of mind for the whole leadership team over our many decades of experience successfully growing infrastructure portfolios.

These pillars of discipline apply across our investment opportunity, including, for example, any further investment in APRR. As you would expect, we are presented with opportunities to broaden and diversify our portfolio from time to time. But any new opportunity must absolutely meet our strategic objective. As mentioned, we have recruited a well-credentialed team with strong experience analyzing the merits of each opportunity, be it traffic forecasting, operations and maintenance or finance.

We are focused on achieving and maintaining investment-grade credit metrics for our business. Our approach to valuation is multi-disciplinary and rigorous. Within the organization, we have significant through-the-cycle experience and broad international experience. This provides a developed understanding of our competitive advantages in the industry and brings sound judgment when analyzing any potential opportunity.

Turning to Slide 29 and in closing. We have achieved a lot in a short space of time. With our great team and strong businesses, we continue to grow our revenue and deliver long-term traffic growth for APRR. We're 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.

This is an exciting time for Atlas Arteria. Your leadership team and I are looking forward to continuing to evolve the business together with the team and with our solid foundation to add value for our shareholders into the future.

With that, I'd like to hand it over 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) Your first question today comes from Paul Butler with Crédit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [2]

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I just had a question on the write-down you've taken on Dulles Greenway. Just wondering, to what extent is that colored by your view on how the toll increase is likely to develop under the State Corporate Commission process?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [3]

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Our view is that the likely outcome from a continuing State Commission increase process through the whole concession life would result in a higher outcome than the distance-based tolling proposal we put to the markets last year. We've taken a more conservative approach of looking at the distance-based tolling mechanism for incrementing toll.

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Paul Butler, Crédit Suisse AG, Research Division - Director [4]

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And that distance-based tolling regime, is that equivalent to the higher of 2.8 CPI or GDP?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [5]

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Yes. The equivalent of the legislation that's in place until 1 January 2020.

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Paul Butler, Crédit Suisse AG, Research Division - Director [6]

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Okay. And once you've made your submission to the SCC later this year, what's the time frame on which you expect a decision?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [7]

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So we're in the commission 10. The earliest we would expect it would be at around 12 months. It's dependent on their other workload and fitting into their timetable for the year.

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Paul Butler, Crédit Suisse AG, Research Division - Director [8]

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Okay. So that would then mean that you wouldn't have any toll increase until potentially the end of 2020? Am I understanding that correctly?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [9]

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That would be correct.

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Paul Butler, Crédit Suisse AG, Research Division - Director [10]

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Okay. And then just your comments about working with Macquarie in the management of your stake in APRR. I guess my interpretation of that is it doesn't sound like you think there is a near-term opportunity to simplify the ownership structure there. Is that a fair conclusion to reach?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [11]

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I think what we're trying to say is that there is active engagement. There are 4 or 5 parties involved in the discussion, all actively engaged. And we are working towards a solution. But as I've said previously, it's a binary outcome. We either reach a mutually agreeable conclusion with everyone or we don't. But we're actively working it and as soon as we have something to say, we'll immediately inform the market.

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Operator [12]

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Your next question comes from Ian Myles with Macquarie.

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Ian Myles, Macquarie Research - Analyst [13]

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Firstly, just a technical question. I think in the cash flow you provided for APRR from the dividend, you described MIBL interest and fees at AUD 5.4 million. I'm just a bit confused because you've hedged the base rate at 0.9%. A premium of 2.25 would imply sort of EUR 5.5 million. I was just wondering what the difference between those 2 numbers would be.

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Nadine Lennie, Atlas Arteria Limited - CFO [14]

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So just in terms of the MIBL interest and fees that can see there, yes, they're in Aussie dollars. They are just for the half.

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Ian Myles, Macquarie Research - Analyst [15]

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Yes. But I'm talking (inaudible) they're on a half basis.

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Nadine Lennie, Atlas Arteria Limited - CFO [16]

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And they're not hedged. So the MIBL debt is unhedged debt.

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Ian Myles, Macquarie Research - Analyst [17]

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So what's the swap which you talk about in the management discussion of 0.9% to EURIBOR?

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Nadine Lennie, Atlas Arteria Limited - CFO [18]

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So there is a cap -- an interest rate cap in place.

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Ian Myles, Macquarie Research - Analyst [19]

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It's a cap, not a swap?

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Nadine Lennie, Atlas Arteria Limited - CFO [20]

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Correct, yes.

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Ian Myles, Macquarie Research - Analyst [21]

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Okay. Okay. And if I just think about next half dividend, what's the dividend that APRR's declared for 2H or the 2H '19 period?

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Nadine Lennie, Atlas Arteria Limited - CFO [22]

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So we haven't received confirmation of that dividend yet, so we haven't made that public.

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Ian Myles, Macquarie Research - Analyst [23]

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Okay. On Greenway, the $1 million cost reduction -- firstly, what happened to your CFO -- or CEO? Did he resign or did you make a change?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [24]

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So we made a change. We felt that he was not providing value outside of the day-to-day operations of the business. We had a COO in place who was more than capable of doing that. We have a full-time person on the ground soon to be, too, working with management. And we took the view that we needed to move on. We needed to address costs, and so we decided to let him go. We've now focused on hiring a CEO with good communication capabilities, who is able to engage actively and proactively with the community and the political environment that we operate in to take us forward into what's been a passive response to any political engagement and turn it into a far more proactive relationship.

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Ian Myles, Macquarie Research - Analyst [25]

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Okay. And the $1 million cost reduction, that's quite chunky on a base of $8 million where probably nearly 4 or 5 is actually sort of fees paid to third parties like the police transaction costs, et cetera. Is that the sort of runway -- like you're looking at 25% cost reduction? And sort of how quickly can you actually enact that?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [26]

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I think you're using the wrong denominator, Ian. The costs are roughly around $15 million a year and the $1 million I'm talking about is on a full year basis.

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Ian Myles, Macquarie Research - Analyst [27]

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Okay. So yes, okay, $15 million on a full year. Okay. And can you get much of that out in the second half so to make this -- the test easier?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [28]

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We are focused on that.

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Ian Myles, Macquarie Research - Analyst [29]

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Got it. Got it. And on the Eiffarie debt refinancing, are we still in a situation where nothing is happening until the resolution of the MAF2 arrangement? Eiffage is holding firm to not refinance the debt early or remove the debt for you?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [30]

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It's part of the negotiation.

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Operator [31]

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Your next question comes from Simon Mitchell with UBS.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [32]

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First question for Nadine. Just following on from the earlier question around APRR dividend. I understand it's not declared yet. But if we apply the net profit number to that waterfall chart on Slide 15, should we expect a similar kind of relationship to the final number that is received by Atlas?

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Nadine Lennie, Atlas Arteria Limited - CFO [33]

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I think you can work through the same waterfall that we've provided there. The one piece which is variable obviously in any particular period is the IFRIC 12 adjustments that come through, which determine the difference between what you see on a consolidated basis versus what can actually be paid from the APRR company itself. But I think the best way to think about that for the moment is exactly the same way that we have shown it here.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [34]

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Okay. And then just on dividend. Graeme, are you able to give some comments on how the Board is thinking about the progression of the dividend? I mean, how do you kind of end up with 7% growth as being the right number for the first half of next year? Is it based off your expectation of underlying cash flow generation? Or are you solving for a desired growth rate relative to peers? Or are you solving for a reservation of cash?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [35]

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So our focus here is on maintaining sufficient headroom as we -- as Nadine mentioned. So we retained 1 year's operating requirement. That's sort of a defensive context, particularly as we have dented the MIBL levels. We think it's appropriate that we have sufficient cash reserves to meet 1 year's cash flow requirements of operating a holdco. So that's the governing issue.

The second is that we have a philosophy of maximizing returns to investors, and cash sitting on the balance sheet is not particularly accretive beyond the needs of the business to leave there. So providing the logical distributions to investors is what we're focused on.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [36]

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Okay. But the closing cash balance and -- that we're looking at now and in projections into next year would suggest that, that cash balance is going to increase. So it's well above what you'd require on a 1-year-forward basis. So I guess what I'm getting to is, is there an intention to reserve cash for some purpose?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [37]

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We have no current intention.

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Nadine Lennie, Atlas Arteria Limited - CFO [38]

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And I think when we have a look at our cash management, we've always got options as to how we'd best utilize that cash for shareholders, so whether it be through reduced debt, whether it be through reserve for other accretive situations that we're looking at or to return it to shareholders. And we'll work through that process each which time. But I mean as you know, our cash flow is determined by the operating performance of APRR and where we'll always be having a look at what we think the forward performance of that business is going to be.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [39]

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Okay. And then thirdly, disregarding the MAF performance fee, there was going to be an agreed valuation of APRR, I think, as at May '19 for determining the outcome of that performance fee. What was that valuation?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [40]

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We haven't landed on that yet. We're hoping we don't need to.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [41]

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Right. Okay. So is that just an agreement between the parties using particular defined metrics?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [42]

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No. Basically, an agreement between the parties and with some form of break process if we can't reach agreement.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [43]

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So in terms of break, you mean it's kind of a mediation process?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [44]

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That's correct.

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Operator [45]

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(Operator Instructions) Your next question comes from Rob Koh with Morgan Stanley.

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Robert Koh, Morgan Stanley, Research Division - VP [46]

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Can I ask a question about how you're seeing traffic in the last couple of months? I guess, our analysts took away from the Eiffage results, call it, they were perhaps a little more cautious about trucks this summer.

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [47]

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So the railway strike went through into early mid-July in terms of people's planning. I think it finished pretty much on 30 June. I remember I was traveling on 1st of July and had backup plans for car travel. So there was probably some softness. We had the heatwave in mid-July. So there's sort of metrics that are happening through that process.

We don't have anything to hand that sort of indicates what heavy traffic's likely to be doing other than monitoring GDP and French manufacturing as we've sort of described. The closest correlation to our traffic is -- on heavy vehicle is French manufacturing for the close correlation, and secondly, on light vehicle traffic it's household income.

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Robert Koh, Morgan Stanley, Research Division - VP [48]

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Yes. Okay. Great. So for the -- next question, just for the RCEA, I think it was mentioned EUR 600 million CapEx project there. Can you remind us how that's going to be funded within the structure?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [49]

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It will be funded by debt within APRR by leveraging effectively or use of cash. I think there is currently about $1 billion in cash on the balance sheet.

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Robert Koh, Morgan Stanley, Research Division - VP [50]

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All right, easy. Okay. Now the -- as I guess, move up the structure. At the MAF level, could you comment on any kind of possibility of a reduction? The ongoing management fee as the performance gets better, I guess, you could argue that some of the valuation uplift over time will be for the French checks, right? And Macquarie couldn't claim credit for that. And previously when MQA's valuation went up there were voluntary reductions of management fees. Is that an avenue worth pursuing?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [51]

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So the thing is a fixed-fee, so it's an absolute dollar amount per percent owned of MAF2. So the fee does not change at all. There's no inflation increment, no earnings increment or value increment.

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Robert Koh, Morgan Stanley, Research Division - VP [52]

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I see, okay. All right. I'll didn't remember that. I'd forgotten. All right. Now if I move to the DG, and I note in the report that the timesaving there is about 10 minutes for a $5.80 toll. I presume that's based on the current level of congestion. Have you got a sense of what the -- if I'm right there, what the potential timesaving upside might be with the plans that you're working on now?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [53]

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So the West End improvements, we expect to gain 11 minutes.

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Robert Koh, Morgan Stanley, Research Division - VP [54]

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Okay. So that would be quite a material step-change, yes?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [55]

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Yes. Absolutely. The really interesting thing, as we analyzed it, is that people make their decision on the likely worst-case travel time and so the bell curve for traveling on Dulles Greenway is much tighter than it is on 28 and 7. And so if you want to make sure of being home for Johnny's soccer practice, you will take the Greenway because it's plus or minus 10 minutes. If you take 28 and 7, it's plus or minus 14 -- or up 14 minutes. So certainly when you get there it drives your decision more than the timesaving itself.

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Robert Koh, Morgan Stanley, Research Division - VP [56]

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Okay. Makes sense, yes. Okay. And then just I guess potentially tied up with the SSC processes is that VDOT is also required to deliver a report under something called SGR 254. I'm just wondering if you can comment on how we should think about that when that report comes out.

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [57]

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This is a report that they've been asked to provide twice previously. Not much has changed, and in each previous analysis, they've determined that there's nothing that can be done. And it doesn't make sense to do an acquisition or anything else. We expect there's probably a similar outcome this time.

We are actively engaged with VDOT in discussing it. We recently met with the Secretary of Transport. We've met with senior leaders and transport people as well. So it's sort of something we are being quite proactive in participating in, and we'll continue to work with the government to see what can be done in sort of any way we can help. But obviously, not in any way that's detrimental to our investment.

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Robert Koh, Morgan Stanley, Research Division - VP [58]

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Yes. Of course. Okay. Great. And I guess final question I noted when you were talking about the philosophy of sustainability and adequate liquidity. I guess, could you update us on how you're thinking about liquidity and capacity at the holding company level? You've got the MIBL debt facility. Presumably, you could pay some of that down through various sources or you could increase it. Could you give us a sense of how your kind of order of preference of levers is there?

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Nadine Lennie, Atlas Arteria Limited - CFO [59]

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So look, I think, Rob, we're obviously actively considering what the best capital structure should be. At the moment, that MIBL facility, given the way in which the Eiffarie debt amortizes, provides good value for shareholders. But obviously, as we work through and arrangements may or may not be sorted through on the MAF situation, then we'll be having a look at what our optimum capital structure should look like.

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Operator [60]

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Your next question comes from Nathan Lead with Morgans Financial.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [61]

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Look, my first question relates to just both interest rates over in Europe. You've got about EUR 1 billion of cash sitting on the balance sheets over there. LIBOR is running at negative interest rates or negative rates. Are you getting positive returns on your cash? Or should we actually expect to see this as a face value that cash actually decline over time?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [62]

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So at the moment, we understand that Eiffage and APRR treasury are running that on a neutral position. So we are not currently rating that value. But it is an issue and it's sort of part of the discussions that we will have in relation to funding of RCEA. Is it logical to raise debt to do that when we've got $1 billion to be on the balance sheet? Or is it better to use some of those cash reserves to effectively fund RCEA? So we'll be working through that.

But it's a good point, and it's an unusual situation that we find ourselves in when we put money in the bank and you have to pay the bank to keep it.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [63]

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And I suppose leading on from that chat, too, is the risk-free rates over in France and Europe have negatives at the moment. Is that feeding into your thinking in terms of target equity returns on new projects or M&A activity?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [64]

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We normalize risk-free rates to inflation plus long-term premium to inflation of bonds as it's existed over time. So we tend to look through that current situation, which is coming through the issues of monetary quality. So we sort of always make an assumption that, that's not a permanent state.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [65]

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Okay. And just finally, maybe you can or can't make a comment on this. But MIF 2, I mean we've been expecting their exit to happen for quite some time now. Can you give us an update on -- if you can on the timing there?

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [66]

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Our understanding is that the MIF 2 investors agreed to an extension for Macquarie through another year. I think that was accompanied with an elimination of significant fees. And as we understand it, processes have started on a number of the remaining 4 assets in the portfolio to achieve sales within that timeframe. We can't comment specifically on MIF 2's investment in that.

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Operator [67]

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There are no further questions at this time. I'll now hand back to Mr. Bevans for closing remarks.

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Graeme Francis Bevans, Atlas Arteria Limited - CEO & Director [68]

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We'd like to thank everyone for participating in the call today.

As you've seen, it's a fairly solid result, with some recognition with DG on carrying value at a point in time. We are very focused on the business. We can see great opportunity to develop and grow and continue the solid performance that you've seen in the stock over the last few years.

And we look forward to working with you. Thank you.

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Operator [69]

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That does conclude our conference for today. Thank you for your participation. You may now disconnect.