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Edited Transcript of MQA.AX earnings conference call or presentation 28-Feb-19 12:00am GMT

Full Year 2018 Atlas Arteria Group Earnings Call

NSW Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Atlas Arteria Group earnings conference call or presentation Thursday, February 28, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bodie ter Kuile

Atlas Arteria Limited - Former CFO

* Graeme Bevans

* James Hooke

Atlas Arteria Limited - Former CEO

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Conference Call Participants

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* Ian Myles

Macquarie Research - Analyst

* Michael Morrison

Deutsche Bank AG, Research Division - Research Analyst

* Nathan Lead

Morgans Financial Limited, Research Division - Senior Analyst

* Owen Birrell

Goldman Sachs Group Inc., Research Division - Metals and Mining Company 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 full year results briefing. (Operator Instructions)

I would now like to hand the conference over to Mr. James Hooke, CEO. Please go ahead.

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James Hooke, Atlas Arteria Limited - Former CEO [2]

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Good morning, everyone. Welcome to Atlas Arteria's Full Year 2018 Results Presentation. Joining me is our Chief Financial Officer, Bodie ter Kuile; as well as ALX' CEO Elect, Graeme Bevans. I will commence today's presentation with a summary of our results for the full year ended 31 December 2018. Bodie will then present ALX financial results, following which I will return to discuss the performance of each of our assets. Graeme Bevans will conclude today's presentation with an update on the progress of internalization. And there will then be an opportunity to ask questions at the conclusion of the call.

As usual, I would ask that you pay attention to the important disclaimer and notices on Slides 2 and 3 and any restrictions that may apply to your particular jurisdiction.

Our performance and highlights for the 2018 financial year are summarized on Slide 6 of the presentation. During the year, ALX delivered a statutory profit of AUD 59.9 million as well as positive portfolio performance with 1.5% traffic growth, 4.1% revenue growth and 4.8% EBITDA growth when compared to the prior period.

In June 2018, we refinanced and upsized the APRR acquisition debt facility on more favorable terms. The proceeds from the EUR 200 million upsizing were predominantly used to repay the more expensive Dulles Greenway acquisition facility. At the asset level, APRR continued to replace maturing debt at lower cost with extended maturities during the year.

The end of June also marked the expiry of the EUR 3.2 billion in legacy interest rate swaps at Eiffarie. Expiry of these swaps is anticipated to provide approximately EUR 150 million of annual pretax interest saving to APRR.

Overall, for 2018, ALX' portfolio-wide average cost of debt was reduced. In September 2018, ALX also completed the acquisition of the remaining 30% interest in the Warnow Tunnel in Rostock, Germany, taking ALX' total interests in that asset to 100%.

We're pleased today to reaffirm our 2019 distribution guidance of $0.30 per security, a 25% increase on ALX' 2018 distribution.

Slide 7 shows the traffic data that we published a few weeks ago in late January. Overall, ALX' portfolio traffic grew 1.5% compared to 2017. Traffic growth at our European roads was partially offset by weaker performance in the U.S.

During the first half of the year, APRR's traffic benefited from industrial action in the French rail sector from April to June of last year and a weeklong pilot strike at Air France. Both events temporarily drove additional traffic onto the APRR network. However, the positive performance during the first half was partially offset by the outbreak of the Gilets Jaunes or "Yellow Vests" protests during the fourth quarter, which had a disruptive impact on traffic.

And as previously disclosed, traffic at the Dulles Greenway continued to be negatively impacted by improvements to the surrounding network, although these impacts moderated in late 2018. In addition to this, weather and partial government shutdowns at the beginning and end of 2018 also impacted traffic.

Moving to Slide 8. ALX continued to progress capital projects at our portfolio businesses. In addition to APRR finalizing a EUR 187 million capital investment plan with the French State, we continued to pursue a number of initiatives at the Dulles Greenway to optimize operations and improve traffic flow. Meanwhile, we continue to review the capital structure at each individual asset and across the portfolio to optimize their respective balance sheets. ALX' portfolio is currently geared at 6.3x net debt to EBITDA compared with 6.5x net debt to EBITDA in 2017. And the average cost of debt for 2018 was 3.4%, down from 4% in 2017.

I'll now hand over to our CFO, Bodie ter Kuile, to provide an update on ALX' financial performance for 2018.

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Bodie ter Kuile, Atlas Arteria Limited - Former CFO [3]

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Thanks, James. And good morning, everyone. You will recall that the presentation of ALX' statutory results changed significantly last year following the acquisition of Dulles Greenway in May 2017. The annualization impact has also improved as the year to 31st December 2018 now incorporates the full 12 months of the Dulles Greenway results as opposed to the 7 months in the prior year. So you'll see a number of line items growing year-on-year as we see this impact coming through.

In addition, following the acquisition of the remaining 30% stake of Warnow Tunnel in September 2018, we now also consolidate the full results of this asset. The accounting steps followed on the acquisition of Warnow were the same as those followed when we acquired the additional stake in Dulles Greenway last year, i.e., a deemed sale of our existing interest in this case, a 70% stake in Warnow and a subsequent consolidation of the 100% subsidiary. This resulted in a purchase price allocation exercise, bringing the assets and liabilities onto the balance sheet at fair value in a line-by-line basis.

When we look at the table on Page 10, we can see how these changes flow through the P&L. As James mentioned earlier, the profit attributable to security holders in 2018 is $59.9 million, which you will note is lower than the $519 million recorded last year. This variance is materially explained by the $376 million step-up gain recognized in 2017 following the consolidation of Dulles Greenway. And now in 2018, we get the full year impact of Dulles Greenway's results, the amortization of intangibles as well as the recognition of ALX' final performance fee expense.

If we look at the line items, we can see this a bit more clearly. In the ALX corporate column for 2018, the total revenue and other income item of $14.5 million includes the $13.5 million from the step-up gain following the consolidation of Warnow. In 2017, when you look across the page, that line totaled $473 million, which includes the much more material gain from Dulles Greenway of $376 million.

Share of profits from associates has increased from $188 million to $246 million and reflects the increased investment in APRR made in October last year but also due to FX and growth in APRR net earnings.

The performance fee expense of $70 million was determined in accordance with and due to the renegotiated management agreements. The fee recognized included a new fee generated by the performance of ALX share price for the 12 months to June 2018 of $54.7 million and $16 million relating to fees deferred from the previous years. In total, our performance fees of $115.7 million, which included the previously accrued fees generated in 2016, were paid to Macquarie in 2018, of which, $25 million was paid in cash and $90 million used to subscribe for new ALX securities.

Other operating expenses have increased due to the annualization of Dulles Greenway operating costs, but more materially due to the full 12 months of amortization of the Dulles Greenway intangible, which increased from $36.5 million in the year to $60 million this year.

Finance costs have increased partly again by the annualization impact of Dulles Greenway and consolidation of Warnow and partly by the acquisition debt used to step up the investments in APRR and Dulles Greenway last year.

Moving to the balance sheet, on Slide 11. You will also notice the impact of the new consolidation. Warnow Tunnel's assets and liabilities have been brought onto the ALX balance sheet line by line. The most material items are the total concession assets and the noncurrent liabilities, which represent Warnow's existing debt package. ALX' cash position has increased over the course of the year from $123 million to $186 million, the growth materially reflecting the cash position at corporate level, which I will cover on the next slide.

The increase in value and investments in associates is primarily FX-driven. The impact of the depreciation of the Aussie dollar has meant an increase in carrying value of $90 million. The increase in current liabilities -- noncurrent liabilities represents the corporate asset finance facility, which has been upsized during the prior period as well as the FX interest impact of Dulles Greenway.

In Slide 12, we present ALX' corporate cash flow movements for the year. We received 2 distributions from APRR over the course of the year of EUR 64.3 million and EUR 89.7 million. The management fees paid reflect the increase in market capitalization, and the performance fee represents the cash element used to pay and settle ALX' performance fee liabilities to the manager. As I mentioned, the other $90 million that was due to the manager was used to subscribe for additional ALX securities. There are no more performance fees outstanding.

The increase in the corporate facility was used to repay the Dulles Greenway acquisition facility. The net results of these cash flows allowed distributions of $0.12 per security to be paid in April and September. The total distributions for the year equated to the $162.4 million.

ALX' closing available cash balance at 31 December was $89.6 million. And once we've paid the December base management fee, on a pro forma basis, the current cash balance is approximately $80.5 million.

Moving now to Slide 13. I'm pleased to repeat the distribution guidance provided earlier that we intend to increase our payouts to $0.30 per annum per security. This is up from the $0.24 per security paid this year. The increase reflects the continued positive performance of [at] APRR and foreign exchange rate movements. This represents a 25% increase on the 2018 distributions paid and will be fully funded through the distributions from APRR.

As usual, this guidance is subject to a number of events outside our control and are shown here on this slide and which security holders should be aware of. We are also giving first half guidance of $0.15 per security with the expectation to clear in late March and late payments by mid-April. As you can see on this slide, we expect to receive approximately EUR 77 million from our investments in APRR during March to fund this distribution.

And with that, I'll hand back to James for the asset review.

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James Hooke, Atlas Arteria Limited - Former CEO [4]

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Thank you, Bodie. Moving on to the performance of our individual assets, starting on Slide 15 with APRR's result. Traffic performance in the first half of the year, which was up 4.6%, benefited from the strike activities, while disruption caused by the French "Yellow Vests" protests negatively impacted traffic performance and revenue collections in late 2018, ensuring that traffic growth in the second half of 2018 was essentially flat. APRR's traffic figures in 2019 will have some noise in them, as APRR cycles through comparisons to both the H1 strike impact and the "Yellow Vests" impact in H2.

Overall, APRR delivered 2.2% traffic growth during the year and recorded 24 billion kilometers traveled on the network. It also delivered a 4.7% revenue growth, reflecting increased traffic volumes and toll increases implemented during February of 2018. 2018 EBITDA grew by 5.6%, having grown by 5.5% in 2017.

We've also provided a breakdown of light and heavy vehicle traffic performance. Light vehicle traffic increased 1.7%, while heavy vehicle traffic increased 4.7%.

Moving to Slide 17 (sic) Slide 16. While light vehicle traffic has historically been correlated to consumer discretionary macroeconomic indicators such as housing disposable income and tourism, heavy vehicle traffic has been more correlated to trade and French business activity, as the graphs show. And it is heavy vehicles that have performed more strongly in recent years.

Moving to Slide 17. During 2018, APRR's revenue and EBITDA growth continued to be underpinned by traffic growth, toll increases and a favorable traffic mix. Headcount of APRR was down again in 2018. EBITDA margin improved from 73.2% to 73.8% during 2018 and has grown progressively over the last 5 years.

Slide 18 shows our usual slide of APRR EBITDA against French GDP. This EBITDA performance continued into 2018, notwithstanding somewhat slower French growth. French GDP growth was slightly weaker in 2018 due to the trade factors in addition to industrial actions and the "Yellow Vests" protests during the year.

Moving to Slide 17 (sic) Slide 19. APRR saw another year of record traffic with 24.3 billion kilometers traveled on the APRR network. Now that's the first time more than 24 billion kilometers have been traveled in a year. Pleasingly, this record volume was accompanied by a 97% customer satisfaction rate.

As we announced in October last year, APRR reached final agreement with the French State in relation to a EUR 187 million state capital investment plan. As some of our investors remember, the original size of the plan was estimated to be EUR 222 million but was scaled back to EUR 187 million following regulatory reviews. Approximately 10% of this project will be funded by local authorities. The plan consists of 12 investment projects, including construction of new motorway exchanges in addition to environmental protection developments and customer service areas.

The "Yellow Vests" protests changed the political landscape in France in the last quarter of 2018, which impacted our business. For instance, during December 2018, the French Prime Minister and French Senate raised the potential review or postponement of previously legislated tax cuts to help fund the policy concessions made to the "Yellow Vests." The current 2019 corporate tax rate is 31%, and a revision of this tax rate back to the 2018 level of 33.3% would have a negative impact on APRR's cash flows. Similarly, following discussions with the French State, APRR and other French motorways agreed to expand the existing program of frequent traveler discounts. Users who travel more than 10 return trips per month for a designated journey will be eligible to receive a discount of up to 30% on headline tolls.

On Slide 20, during the year, APRR continued to make investments into growing and improving the existing network. An additional 5.5 kilometers were added to the APRR network as part of the management contract agreed with the French State. In total, 50 kilometers of motorway network has been added to APRR since 2015. We've also provided updated CapEx guidance on the slide to reflect the finalization of the aforementioned 2018 state capital investment plan and higher forecasts driven by expanded project scopes and higher project costs.

Moving to Slide 21. The APRR Group continued to reduce its cost of debt over 2018 with an overall decrease in the APRR Group net interest expense of EUR 123 million or 35% compared with the prior year. Maturing debt continued to be replaced with lower-cost borrowings, including EUR 1 billion of bonds issued at an average all-in cost of approximately 1.5%. This represents a continuation of APRR's program of reducing its borrowing costs. Over the last 3 years, APRR has refinanced EUR 4 billion of maturing debt. Overall, APRR remains well placed to continue accessing debt to pursue growth expansion initiatives where possible or appropriate.

As shown on Slide 22, APRR has an extended debt maturity profile with balance sheet liquidity of EUR 2.7 billion. APRR is currently levered at 4.4x net debt to EBITDA, excluding the MIBL facility, and 5.2x, including the MIBL facility.

Slides 23 and 24 show the performance of ADELAC and Warnow, respectively.

Moving on to Dulles Greenway, on Slide 25. During 2018, traffic at the Dulles Greenway continued to be impacted by ongoing upgrades to competing 3 routes in the corridor, and overall, traffic decreasing 4.5% compared to the prior period. This result is consistent with the guidance provided to the market in early 2018 despite the additional impact of partial government shutdowns and weather effects throughout the year. The traffic decline has in turn impacted revenue and EBITDA performance, which declined by 1.4% and 1.5%, respectively.

On Slide 26, in addition to the changes to the competing network, Greenway traffic was also adversely impacted by weather events throughout the year. The region experienced heavy snow conditions during the first quarter, Hurricane Florence during the third quarter and a record year of rainfall across 2018. The Dulles Corridor received 66.7 inches of rainfall in 2018 versus a historical average of 41.5 inches.

As the Dulles Greenway is a commuter road, which connects into Washington, D.C., the federal government shutdowns at the beginning and the end of 2018 also had significant impacts on traffic performance. As an illustration of the impact of the shutdown, from 1 January through 25 January 2019, which was the end of the shutdown, traffic was down by approximately 4.6%. In comparison, in the month before the shutdown, traffic was only down by 0.5%. And after the shutdown, traffic was actually up year-on-year until a snow dump on 20 February 2019 saw Greenway receive 0.5 foot of snow as a result of the minus 40-degree polar vortex that swept through the U.S. This had a significant adverse impact on traffic.

So traffic results for the first quarter of 2019 for Dulles Greenway will have a lot of noise in them given the government shutdown, the polar vortex and the timing of Easter and Passover. We may not have a clear view of 2019 traffic at Dulles Greenway until well into the second quarter.

Slide 27 summarizes the Dulles Greenway financial performance for the period. While revenue was impacted by traffic decline in the period, the impact was partially offset by toll increases in March 2018. Operating expenses and overall EBITDA margin has remained relatively stable at 81.3%.

As shown on Slide 28, during the year, Greenway reconfigured lanes at the mainline toll plaza to provide congestion relief during the morning peak. As previously flagged to the market, we've been working on a congestion relief project at the Eastern end of the Greenway, which aims to increase eastbound capacity by 50% from 2 to 3 lanes on the connector where the Greenway merges into the Dulles Toll Road, known locally as the DTR. Phase 1 of the project commenced during December last year. Phase 2 continues to be subject to final approval from the local airport authority.

As we referenced in recent ASX releases, during 2018, Greenway actively engaged with local stakeholders, including elected representatives, to establish a future toll path beyond 2020. But an agreement has not yet been reached. Notwithstanding this, Greenway will continue to be able to increase tolls at the current legislated toll rates through to January 2020. A toll increase has been filed with the Virginia State Corporation Commission, or the SCC, for the year of 2019. Post-January 2020, toll increases will be set by application to the SCC, who will determine the toll rates according to the criteria as set out in the legislation that was used by them since the road's inception to January of 2013. We anticipate that the Greenway will lodge its 2020 toll application with the SCC during the 2019 calendar year.

Slide 29 illustrates Greenway's current debt structure. Debt is fixed rate and committed until the concession ends in 2056 with no refinancing requirement. As security holders are aware, Dulles Greenway is currently in distribution lockup, and excess cash generated builds up within the business.

Cash flows from the Greenway are subject to 2 distribution lockup tests: a 1-year lockup test or the MCR; and a 3-year lockup test or the ACR. As we indicated in the fourth quarter traffic release at the end of 2018, the Dulles Greenway passed the 3-year lockup test but as expected, did not pass the 1-year lockup test. To pass the 2019 1-year lockup test, Greenway's net toll revenues need to reach approximately $76 million compared with $73.4 million for 2018. To continue to pass the 2019 3-year lockup test, net toll revenues less net transfers to the operating reserve and CapEx reserves need to reach approximately USD 70 million compared to USD 73 million for 2018.

Obviously, the outcome of both tests will be subject to multiple factors such as traffic, including weather and government shutdowns, operating costs and average effective toll increases. In addition, the 3-year lockup test or the ACR test will be subject to net transfers to the improvement fund during 2019.

And with that, I'll now hand over to Graeme Bevans to provide an update on internalization.

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Graeme Bevans, [5]

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Thank you, James. Good morning, everyone. On May 15 last year, security holders voted to approve internalization of the management of ALX. And we're pleased to advise that we are progressing well towards achieving this. We are now at this stage where we have a checklist of tasks that need to be complete before we internalize when they are complete and the board is comfortable we will proceed. We will definitely be ready to internalize by the 15th of May.

Our permanent offices on Flinders Lane in Melbourne are well established, and we look forward to welcoming those who come to visit. We've also set up an office and established our operations group in Luxembourg so we are close to our European assets. I am proud of the highly experienced team that we have established, and we are working extremely well together to position the group for the future.

Our team and Macquarie continue to work closely together to ensure a smooth transition. The development and implementation of everything that needs to be done is well underway. In terms of some detail, migration of historic accounting data is nearly complete. Our internal systems and processes are very well developed. We're actively engaged on key business strategies, and we are working closely with key stakeholders on all fronts.

The annualized operating cost for the new internalized management structure will be in the range of $15 million to $20 million per annum, in line with the guidance provided in the explanatory memorandum, which supported last year's AGM.

By way of recap, I started with ALX in May last year and was joined by Nadine Lennie as CFO Elect in July. Since then, we've appointed as Vincent Portal-Barrault as Chief Operating Officer Elect and Clayton McCormack as General Counsel and Company Secretary Elect. Both Vincent and Clayton commenced in their roles in December. This means our executive team is now complete. The team is currently supported by 16 people. We're still recruiting for some junior positions.

I would like to introduce you to the incoming management team. I've had a long history of working within the infrastructure investment sector, both in Australia and offshore, and a particular interest is the establishment of 2 significant infrastructure businesses globally. I was Head of Infrastructure at Canada Pension Plan Investment Board for 4 years, where I built the infrastructure business and team, and they were voted the world's #1 institutional investor 2 years running whilst I was there. Before that, I did the same for IFM, when they decided to go into direct investment from funds and plough investment and was also Head of Infrastructure Investments.

As I said, Nadine joined us in July following a distinguished career of over 20 years, largely within the infrastructure sector. Her most recent roles were CFO of Afterpay and Australian Pacific Airports, the owner of Melbourne Airport, both of which are highly relevant to the role she is performing here. She's very quickly proven to be a highly valuable member of the team.

Vincent came to ALX from Macquarie in France, where he was working for 11 years. He most recently worked for the infrastructure and rail assets team and was in that role for the past 6 years. Vincent brings with him an exceptional knowledge of the APRR business and strong relationships with both the APRR and Eiffage management teams, which will be very valuable to us as we move into a standalone management team. Vincent is based in Luxembourg and will lead the business operations for ALX.

Clayton joins ALX with over 20 years' experience as a legal adviser and corporate executive. He most recently spent 10 years with ASX-listed BlueScope Steel as their Company Secretary. Clayton brings strong capital markets, debt funding and transaction-related experience in Australia, the U.S. and Europe. He will also be a highly valuable member of the team as we move forward.

We also have a range of other senior people, most of whom are well settled into their new roles. We are very pleased to have recently recruited Arnim Berger. He joined our operational management team in Luxembourg, and he will be a key member of that team, having joined us from Vinci, where he has worked across Europe for the past 10 years. Vinci, of course, is Europe's largest toll road owner and operator.

Michael Coutts joined us from the investment banking division of Crédit Suisse. He's responsible for our corporate finance, financial analysis generally and treasury. He has significant experience in the infrastructure sector and understands our assets very well.

Kylie Ramsden has joined us as Head of Investor Relations. She comes to us with 20 years' experience in finance and IR. She has worked at Charter Hall Group, Westfield and Macquarie. She will be an important contact for you all going forward.

Ryan Reynolds manages our traffic forecasting and previously operated in a similar role with Melbourne Airport. Just a clarification, it is not the Hollywood version, but we still think he's a superstar.

Emma Stepcic joined the team in August last year as our financial controller. She comes to us from a financial controller role at Schlumberger, one of the top oil and gas firms globally, and before that was with Deloitte. Her career has taken her to some fantastic places, including Dubai, Kuala Lumpur and Botswana, and we feel privileged to have welcomed her back home to Melbourne.

On the next slide, we have a photo taken in the foyer of our new office in Flinders Lane in Melbourne of the team, including Vincent and [Arnim], who are currently visiting from our Luxembourg office.

I thought it's important to recap on the transition management arrangement ALX has in place with Macquarie. Macquarie will continue to provide the full suite of services required to manage ALX until we internalize. Should the board decide that ALX is ready to transition earlier than 15 May, the management agreement will then be terminated. Macquarie will, of course, continue to earn their base management fee until 15th of May 2019 in terms of the agreement.

As outlined to shareholders as part of the AGM last year, Macquarie continues to provide general support services as agreed post internalization through to 31 December this year under our Transition Services Agreement.

I think it's very important to talk a little bit about strategy. But I do not want to take away from James and the work his team are doing. Our vision is to enhance the economic and environmental efficiency of communities through the ownership and operation of safe and efficient transport solutions. This is supported by a set of core values.

To deliver this vision, we currently had a 3-point plan set against the overriding objective to maximize long-term security holder value. They include internalization of management, managing and optimizing the current portfolio and growth. We've talked a lot already about our first target, which is to complete the transition. Managing the portfolio will involve actively working to simplify and streamline current business structures, a disciplined approach to capital management and active operational management. We want to continue to deliver growth in cash distributions. We also want to grow the security holder value. And on this front, there is no change to the existing strategy.

Perhaps, I will end by saying that we are very much looking forward to assuming the management role and look forward to delivering value for security holders into the future.

I will now turn the call back to James.

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James Hooke, Atlas Arteria Limited - Former CEO [6]

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Thank you, Graeme. And thank you to all of you who've dialed into the call this morning. I'll now hand over the question -- the call to the operator to open our lines for 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 today comes from Simon Mitchell from UBS.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [2]

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Take it to Slide 13. So you're expecting $123 million roughly as the cash receipt from MAF. And then if we take off that corporate costs, which I understand are a bit messy this year because of the transition from Macquarie management, but if we take some off for that and some off for interest, you're effectively, it looks to me, probably not fully covering the dividend with cash flow coming out the business. How do you think about that for the full year this year in the context of your guidance and also, I guess, longer-term view on that?

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James Hooke, Atlas Arteria Limited - Former CEO [3]

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Yes. So I think -- Simon, thanks for your question. I think the first thing we'd say is that the guidance that we've given is solely as it relates to 2019, and we're not providing guidance beyond that. I think if you look at Slide 13 though, which I think we've said that depending on the exchange rate with the euro when we get that EUR 77.3 million distribution, we think that will be roughly AUD 122.8 million, of which we're distributing AUD 102.5 million on a half basis. So that says essentially we're retaining AUD 20 million. To Graeme's point earlier, I think the guidance on a go-forward basis is that the operating costs of the corporate entity will be in the $15 million to $20 million range. And so if we're not in the first half of the year alone, we're distributing $20 million. I think on a go-forward basis, when you annualize that for the second half, and these numbers won't always be identical, I think that says that on a normalized basis, we're sort of more than covering the distribution. And in fact, sort of evidence of that is that the cash position we kind of expect to grow. I think beyond that -- so I think the numbers will kind of bear that out, but they're obviously subject to how operations go in the second half of the year. And then sort of beyond that, I don't think ALX has provided forward-looking distribution guidance beyond the year in which we're currently operated previously and as, I guess, the outgoing management don't intend to change that policy now.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [4]

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Just to clarify that, James, you mentioned the $15 million to $20 million of corporate cost. But if we also add to that the corporate-level debt instrument and we also add to that the ongoing MAF management fee, then you're actually not covering the distribution fully.

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James Hooke, Atlas Arteria Limited - Former CEO [5]

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I think you'll find that we are -- I mean, the issue is without giving full guidance on what the second half distribution for APRR is, I think we are covering that.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [6]

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Okay. And Graeme, perhaps if you are able to give an update on any discussions with Eiffage and Macquarie on the MAF structure.

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Graeme Bevans, [7]

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The discussions are continuing, productive, but we have nothing to report. And as you would expect, it's a binary outcome. And so the first we will report on this is when an agreement has been reached.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [8]

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Okay. And we should still think of the amortizing debt within Eiffarie as a decision that's made in conjunction with all after any outcome to a restructured MAF?

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Graeme Bevans, [9]

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I would expect so.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [10]

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Okay. And just last question from me, if I could. Just on the tax rate, the French tax rate. It sounds like there's a risk of the government walking that back. When do we actually -- I mean, is there a point in time here where we would get more visibility on that? And how should we think about APRR provisioning for tax and when that could potentially not flow through as we're expecting in the distribution?

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James Hooke, Atlas Arteria Limited - Former CEO [11]

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Sure. So I think all that's happened to date is speculation in France on the basis of what the government's reaction will need to be in light of the concessions made to the "Yellow Vests" demonstrators. And I think in light of that, that's something that the French government and political process will work through during this year. Different alternatives have been touted, including putting a 1-year halt on the rate of decline of French taxes or pushing out the rate of that decline. So that's not fully clear yet. I think in the materials that we've provided, we've given a sensitivity analysis in relation to that on Page 19. I think you can see as to what the impact of just a reversion to last year's corporate tax rate would be. And I think if you looked at that from an APRR perspective, if that were what it was, then obviously, any change would not be as preferable to no change. But I don't think that, that sequence at this point from what's being discussed looks material. But obviously, that will resolve its way and play its way out during the year.

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Operator [12]

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The next question comes from Rob Koh from Morgan Stanley.

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Robert Koh, Morgan Stanley, Research Division - VP [13]

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Can I ask about the, I guess, volume discounts that have been agreed at the APRR for the travelers doing more than 10 return trips a month? Are you able to give us some color on how many of those people there are?

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James Hooke, Atlas Arteria Limited - Former CEO [14]

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Yes. So I think it's important to note that APRR already had in place, prior to this, a set of discounts for people based on volume or different measures of frequency that led to a certain range of discounts. So in this sense, this was additive to an existing scheme that was already in place at APRR. Different toll road operators in France had different versions of that, and some didn't have any. So I think for APRR, this was sort of additive to what was already in place. And I think the only sort of quantification of that, that I've seen to date was on the Eiffage. On the Eiffage earnings call, they mentioned a figure that sort of 7,000 people had subscribed to that to date. It's something that people have to actively sign up for. So on a user baseage, that was the number had subscribed to date. And obviously, we've sort of informed the market when and how that was sort of implemented. And so that's where it's at as of today.

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Robert Koh, Morgan Stanley, Research Division - VP [15]

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Okay, great. I'll try and incorporate that in my model. Right, moving to the Dulles. So just a question about the cash on the balance sheet. So that's gone up from USD 183 million to USD 203.8 million. Does the amount that needs to be reserved for the debt facilities, does that change year-on-year?

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James Hooke, Atlas Arteria Limited - Former CEO [16]

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So there's a couple of things for reserving. There's reserve requirements that need to be put in place for future CapEx projects, which I would guess fall into 2 buckets. One is ongoing maintenance CapEx, and the second is special projects. And so you will have seen during the year, we reserved an amount for the DTR Connector progress. And then in terms of the debt service amount, yes, that does and it takes into -- that's all reserve. So the $200 million includes all those reserves on the balance sheet. In terms of the number that you may be seeking to get, it's sort of what's the sort of amount of cash that's there that's not reserved for projects that is essentially locked up restricted cash. That has grown to $40 million this year. It would have grown by an amount larger than that, but we took $17 million out of the incremental amount to provide for the DTR Connector program.

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Robert Koh, Morgan Stanley, Research Division - VP [17]

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Okay, cool. Yes, that was the number I was looking for. I should have just asked directly. Now when we think about that $40-ish million in the hypothetical scenario if the road were to come out of lockup, should we be anticipating that whatever that number is, currently $40 million, gets distributed in one hit? Or how should we be thinking about it?

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James Hooke, Atlas Arteria Limited - Former CEO [18]

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So to date, we just haven't provided any guidance on that. I think there's a sort of sequential step that needs to happen here. The first is to pass the 1- and the 3-year lockup tests. And then once they've been passed, that's a decision that the company will have open to it and will turn its mind to the communication of that at that event.

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Robert Koh, Morgan Stanley, Research Division - VP [19]

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Yes, yes, that's fair enough. So if I can ask some slightly personal questions and tell me to get lost if I've crossed the line. But I guess, Mr. Hooke, this is your last result call for Atlas Arteria, and thank you for everything you've done. I just want to ask a question about Macquarie's policies. Are you allowed to work for like MAF2 or MAF after this?

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James Hooke, Atlas Arteria Limited - Former CEO [20]

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So I'm not allowed to -- going to comment. This is an Atlas call. The only thing I'll say about myself is on -- but you had me nervous there in terms of personal questions. I was on the edge of my seat, and I suspect my wife was as well. But I do, under the management services agreement or the Transition Services Agreement that Atlas Arteria signed with Macquarie, have ongoing obligations to Atlas through to December 31 of 2019, and that's a publicly available document as to what those obligations are and sort of working with Graeme and Nadine on how best we're going to work together until the end of the calendar year.

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Robert Koh, Morgan Stanley, Research Division - VP [21]

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I wasn't going to go any further than that. Last question from me for Mr. Bevans. I guess you have a good balancing act there in your new team with some continuity from Macquarie and lots of new, fresh eyes with great experience. And just wondering if you could give us some color on how you're -- for the people that you are approaching from Macquarie, how you're managing any potential conflicts. So do they have to keep their Macquarie stock in escrow, that kind of thing?

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Graeme Bevans, [22]

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So the context is that we have employed one individual, being Vincent from Macquarie. We haven't put any constraints on his Macquarie stock. We don't see any materiality in what happens at ALX relative to Macquarie's performance. We're a [minimal] by comparison. So no, there's no restriction on the stock. Obviously, we are not expecting Vincent and nor would he be prepared to cross the line on confidential information relating to Macquarie. But there's a lot of information that he has in relation to the assets, which is a continuation from our point of view that positions us well in the context of continuing to run the business post internalization, and should we be successful in unwinding the MAF arrangements, similarly positions us extremely well for the ongoing management of MAF directly.

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Operator [23]

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The next question comes from Ian Myles from Macquarie Group.

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Ian Myles, Macquarie Research - Analyst [24]

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Just a quick one, a couple of quick questions. APRR, when is the ALX management team being appointed to the board?

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James Hooke, Atlas Arteria Limited - Former CEO [25]

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So I think in relation to the internalization time frames, as Graeme went through, internalization under the agreement occurs on the 15th of May unless earlier determined by the Board of Atlas. And then in relation to steps subsequent to that, we haven't provided any guidance at this point in time.

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Ian Myles, Macquarie Research - Analyst [26]

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So does that lead me to believe that there's a point -- there's a period of time when ALX won't have any direct representation on the board.

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Graeme Bevans, [27]

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I think that is probably an incorrect assumption. It comes down to the governance arrangements. We need to maintain -- as Macquarie manages that investment, we have the right to appoint some directors to those entities. But we also need to maintain a balance of Macquarie dominance on those boards. So there's some balancing to do, but they will be part of the internalization process. And there will not be a period at which ALX is not represented within the Eiffarie group.

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Ian Myles, Macquarie Research - Analyst [28]

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Within the Eiffarie group, okay. Very trivial one. Warnow actually paid some money to you of $200,000. Not a lot of money. But is that sustainable? Or is that just a one-off sort of transaction-based issue?

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James Hooke, Atlas Arteria Limited - Former CEO [29]

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So the Warnow payment on the -- this year relates to essentially the board members who are -- who sit on Warnow. There is a recuperation. But essentially, you should think of that amount that is on the cash flow as essentially advisory fee expense recovery -- not advisory fees but fees to advisers that were being expense-recovered, and they were paid through ALX as an intermediary rather than a sort of distributable cash.

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Operator [30]

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The next question comes from Michael Morrison from Deutsche Bank.

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Michael Morrison, Deutsche Bank AG, Research Division - Research Analyst [31]

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The debt metrics and I'm assuming the net income for APRR's would be up substantially, and the debt metrics have improved. So would you consider capital releases going forward from the business notwithstanding the restructuring potential? I mean, is that something that's being -- would be considered with the other shareholders?

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James Hooke, Atlas Arteria Limited - Former CEO [32]

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So I think in relation to the balance sheet at APRR, you're right. The debt metrics have all improved and have improved it, I guess, in a couple of regards. One is they've improved because the cost of debt has come down, and secondly, as the earnings of the business go up and there is a sort of net income constraint on distributions there, you see the balance sheet in a good position. I think in relation to what happens going forward with the APRR balance sheet, the question will be one for the APRR shareholders to decide what's the best way of optimizing that. Clearly, APRR has -- with a high investment-grade rating, sort of A- stable outlook, has access to capital. And that could be used to fund expansion opportunities or growth opportunities within the business, if they were both appropriate and accretive and the shareholders supported them. So I do think there is optionality in relation to that. And then in relation specifically to the amortizing facility at the Eiffarie level, I think as Graeme has previously mentioned, the sort of resolution of that is going to be tied up in a set of broader discussions that obviously occur as part of the MAF negotiations.

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Michael Morrison, Deutsche Bank AG, Research Division - Research Analyst [33]

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Okay. And could you give us a little more color on what's been happening in France? So have -- so the risk of further demonstrations is gone now? Is that what you're saying? Just how are you seeing the traffic over the last couple of weeks?

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James Hooke, Atlas Arteria Limited - Former CEO [34]

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So I think in relation to the "Yellow Vests" protests, the "Yellow Vests" protests continue but with smaller numbers on weekends than had been the case in December. I think if you look at the traffic that we're seeing during 2019 to date, as Eiffage said on their call overnight, you're seeing that heavy vehicle momentum that we had seen with the figures through 2018 continues and that there is strength in heavy vehicle traffic. The light vehicle traffic in the first quarter is going to face a bit of noise, and so it could be down year-on-year for light vehicles in the first quarter. And that will be a function of a couple of things. One is the fact that the snow season or the ski season last year in France was particularly strong, which impacted sort of the tourism numbers. The second is that you also have a degree of impact, though not a huge amount, from the "Yellow Vests" today. And the third, which is probably sort of one and three are probably the most significant, which will be the timing of Easter, which will fall in the second quarter in 2019 versus 2018. And while that doesn't have a significant impact on the heavy vehicles, it has an impact on the lighter vehicles. So you've got -- you'll have noise there in the first quarter. But I think the momentum that had been seen in terms of heavy vehicles continues. And I don't think whilst the "Yellow Vests" protests continue at this point, it's not a substantial part of the Q1 2019 story.

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Operator [35]

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The next question comes from Paul Butler from Credit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [36]

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Can I just ask -- the Phase 1 decongestion works that you've got on the Eastern end of Dulles Greenway, I think you started those in December. Is that having an impact on traffic levels on that road? And when do those works complete?

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James Hooke, Atlas Arteria Limited - Former CEO [37]

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Yes. So we expect those works to be complete later in 2019. But to date, there's been no impact on traffic from those. And we're obviously hopeful that, that will continue. I think the impact on the traffic in 2019 has been weather and government shutdown related. And the nature of improvements is just not -- and the DTR toll increase is just not -- the works we're doing there haven't created a disruption.

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Paul Butler, Crédit Suisse AG, Research Division - Director [38]

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Okay. And where are you up to with addressing the congestion issues at the Western end?

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James Hooke, Atlas Arteria Limited - Former CEO [39]

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Yes. So there's a number of projects that we continue to look at there and have discussions. The Western end has a longer lead time because essentially, the congestion changes that we need to look at there predominately actually relate to other people's roads, not our own. Graeme and I have had a number of trips to Virginia in 2018 and 2019 to explore those options. And we continue to explore those options and work and the management team does there with the stakeholders in Virginia. But there's no definitive proposal on that as of yet.

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Operator [40]

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The next question comes from Owen Birrell from Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [41]

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A quick question for Graeme, just looking forward. Just looking at APRR and the simplification of the MAF corporate structure there, I'm just wondering, are you in a hurry to internalize that structure? And I'm just wondering, do you see any benefit from deferring this given the amount of operational risk that APRR is facing over the next sort of 12 to 18 months? And I'm highlighting here just sort of things like the protest risks, the regulatory risks and even the execution risk on the development over the next 2 or 3 years. I mean, is there any hurry to want to do that now? Aren't you better off sort of standing back and waiting?

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Graeme Bevans, [42]

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I think the answer to that is that there's no perfect time to do anything in this world. But when you have parties who are willing to engage and negotiate is the time to execute these types of transactions. Time can move on, and you'll end up in a position where a situation may not be achievable. So in that context, if we're in a situation of having the parties willing to discuss and negotiate, then we should take advantage of that. And secondly, in terms of those issues, we would have pretty good outline of the tax positions before we get to a point of finalizing a price with MAF2, I would hope.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [43]

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So I guess you're saying that this risk is elevated today, so that presents the opportunity to step in because over the long term, they won't be elevated. Is that what you're saying?

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Graeme Bevans, [44]

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It's not that issue so much as the fact that if you've got Macquarie willing to negotiate stepping away from the management agreement, if you have Eiffage willing to engage on adjusting the shareholders' agreement to accommodate that and our fellow partners in MAF are interested in doing a deal, then we should take advantage of that. That's my point.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [45]

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Okay. And look, just looking at Dulles now, the discussion around distance-based pricing popped up again in December and then subsequently went away. I'm just wondering if you can just give us a sense of what's happening on that front, pros and cons. It's always generally been seen as a bit of a con, so I'm just wondering how you're viewing that distance-based pricing discussion.

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Graeme Bevans, [46]

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It's one of the largest issues that the region has with the road. It's not the only one. And as part of an overarching solution, it's part of the mix of any negotiations we have with the respective governments.

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Operator [47]

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The next question comes from Nathan Lead from Morgans Financial.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [48]

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First up for me, APRR. Is there any major projects out there around the corner that could see negotiation that ended up with a concession loss extension?

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James Hooke, Atlas Arteria Limited - Former CEO [49]

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So I don't -- in terms of major projects, I think there'd be 2 answers I'd have. One is Eiffage, APRR consortium are looking at the RCEA road privatization, and that has a longer concession duration than the current APRR concession. The second is there has been discussion in France around a stimulatory program around potential expenditure to improve motorways around large cities. And in return for that, some concession extension. There's no specific proposal that's out there at the moment. But that still remains part of the calculus that the French transport department and the French government are looking at. When and if they bring that forward as a specific proposal, I can't give guidance on the timing, but it is still part of the policy mix.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [50]

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Yes, okay. Second question from me. Slide 22, when I look at that maturity stack there, I mean obviously, there's 2 spots available, 2023, 2029. Concession expires 2035. Can we be sort of thinking that you'll be looking for the refinancing to sort of swap within those empty spots there, the '23 and '29? Or is it thinking to push it out further? Can you maybe just have a bit of a chat on that front?

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James Hooke, Atlas Arteria Limited - Former CEO [51]

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I think the answer on that is there's another tranche of debt that I think is refinance-able this year. Exactly which one of those slots or beyond it goes to will, I think, end up being a combination of what's the right profile for the debt structure but also where are the opportunities to get the most efficient pricing in the market. There are certain times when there is more advantageous pricing on that debt depending on the specific tenor that you're looking at because often different either insurers or investors have different liabilities and time length that they're looking to fill at that point in time. So I think the -- there's good optionality if you look at those slots. And at the time that APRR comes to do that, the APRR board will weigh all of that up as to sort of what's the best path through on all of that.

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Operator [52]

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That does conclude the question-and-answer session. I will now hand the conference back to Mr. Hooke for closing remarks.

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James Hooke, Atlas Arteria Limited - Former CEO [53]

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Thank you, Graeme and Bodie. Do you have anything else that you wanted to add to what's been said during the Q&A already? Okay. Once again, ladies and gentlemen, thank you for taking the time again this morning and for your ongoing support of Atlas Arteria. I want to thank the management team who have worked extremely hard in the end-of-year results preparation and to facilitate internalization. We look forward to speaking with you in the coming days. Thank you and good morning.