Transurban Group Stapled Securities (TRAUF) Q2 2024 Earnings Call Transcript

Transurban Group Stapled Securities (OTCPK:TRAUF) Q2 2024 Results Conference Call February 7, 2024 6:00 PM ET

Company Participants

Michelle Jablko – CEO

Henry Byrne – CFO

Conference Call Participants

Anthony Longo – JPMorgan

Justin Barratt – CLSA

Ian Myles – Macquarie

Anthony Moulder – Jefferies

Andre Fromyhr – UBS

Owen Birrell – RBC

Cameron McDonald – E&P

Rob Koh – Morgan Stanley

Michelle Jablko

Thank you, and good morning, everyone, and thank you for joining us at Transurban’s 2024 half year results briefing. Our roads and offices sit on the lands of many First Nations people. So I’d like to acknowledge the traditional owners of the land and recognize their connection to land, waters and the community. I’m pleased to be joined today by our CFO, Henry Byrne, and together, we’ll take you through the presentation that we lodged with the ASX this morning. Today’s presentation should take about 25 minutes, and then we’ll have time for questions.

Well, today is my sixth results announcement at Transurban, and I’ve now been in the CEO role since late October. I’ve been out meeting with many of our stakeholders and spent time with our people across all markets. We have great foundations and a lot of opportunity ahead. And over the past 3 to 4 months, I’ve been very focused on 3 things. Firstly, maintaining our momentum, we achieved traffic growth across all markets as our cities continue to grow, and we’ve been very diligent on our costs.

This improved EBITDA margins by 110 basis points to 74%. Secondly, I’ve been making sure we’re set up to take advantage of our growth opportunities. This is a business with attractive underlying drivers. It starts with a very strong population growth expected in our home markets over the next 20 years. We believe that we can continue to help our cities grow as long as we provide and demonstrate clear value to our customers and partners.

And that’s why my third area of focus has been the expectations of our customers, our government partners and the community. This means engaging better with our government partners, delivering travel time savings and safety benefits and continually enhancing the value we offer our customers. It also means looking for ways to add value as new mobility trends emerge, like the automated truck trials we’ve been working on here in Melbourne. If we do all of this well, we’ll continue to deliver for you, our investors, and set ourselves up for long-term sustainable growth. It’s been fantastic to see our people energized by this too, and by the opportunities ahead.

They really haven’t skipped a beat. Let me now move on to our financial highlights. Traffic growth and the structure of our contracts across all markets translated into strong revenue growth with proportional toll revenue up 6.3%. This was a good outcome considering some of the construction going on in Sydney and Melbourne, which will ultimately boost traffic when it’s completed. Our diligent focus on costs meant that the majority of the benefit flowed through to EBITDA, with proportional EBITDA up to a new high of $1.3 billion.

We again managed our finance costs very well, with our cost of debt broadly stable. This supported our first half distribution of AUD 0.30 per security. And today, we reaffirmed our full year distribution guidance of AUD 0.62 per security. That is around 7% growth on FY ’23. If you move now to Slide 6, you can see that traffic grew in all markets.

Total trips averaged AUD 2.5 million a day, up 2% half- on-half. In Brisbane, traffic continued to benefit from recent net migration into the state. Brisbane’s population is up by around 9% in the past 5 years, with traffic on our roads up more than 14% over the same period. And in North America, traffic growth was particularly strong. Average daily traffic increased by 5.3% on our roads, supported by the return to office trend and the opening of the Fredericksburg Extension.

Dynamic toll prices in North America also increased, highlighting that customers see good value in our express lanes. As expected, we saw some disruption in Sydney and Melbourne because of new infrastructure being built to support those cities. Having said that, Sydney saw its highest half-year yet. WestConnex is performing well, with the M4.-M8 link and the Rozelle Interchange coming online. And heavy vehicle traffic was up slightly, notwithstanding some lower container volumes at the ports.

And so a solid overall result, given network activity in Sydney and Melbourne. On the next 2 slides, we take a deeper look at demographics and macroeconomic trends. We know that population growth is the #1 factor driving traffic growth. In the next 20 years, populations in Melbourne, Sydney and Brisbane should increase by between 25% and 40%. And if we add in our North American markets, this means an extra 6.2 million people living, working and commuting in the cities where we operate.

Over the same period, GDP per capita and employment are expected to grow significantly. All of this drives demand for transport services. It will ultimately mean more traffic on our roads and increasing demand for new transport infrastructure. You can see the value that roads like ours deliver if you turn to Slide 8. In North Sydney, more than 60% of people live within 5 kilometers of our roads and are saving time as a result.

That figure is growing every day. Our commercial customers also benefit. We saw on the traffic slide earlier that large vehicles account for almost AUD 400,000 average trips per day. Breaking road freight has historically kept pace with or outpaced population growth. From time-to-time, there may be some short-term variability in freight numbers, but structurally it’s a clear trend.

Freight movements in Australia are expected to grow by around 65% by 2050 as demand for goods increases and people continue to embrace online shopping. If you want more detail on the long-term trends driving traffic growth, read our latest Transurban Insights report on our website. As we see it, the need for infrastructure will be significant. And so for us, it’s about providing and demonstrating continued value so that we’re part of that growth. Key to this is the value our customers experience driving on our roads.

Based on extensive research, we know that the main reason people choose to make around 2.5 million trips on our roads every day is because of the time savings. We also know that, transparency is important to our customers. They want to compare the cost to the value of time saved. Last half, we worked with Google to provide greater transparency in our Australian markets, showing the estimated cost of a trip in Google Maps, further empowers our customers to make informed travel choices. And we’ll continue to grow our offer for customers, including through our Linked Customer Rewards program, where benefits include savings on petrol, car washing and car rental.

In fact, we just signed up a new partner, Booking.com, this week. Early signs are positive and our program resonates with customers. Over the past few months, the number of people signed up to receive our offers has tripled. Our commitment to value is reflected in a 24-point improvement in our Net Promoter Score since FY ’19. We want to build on this, continuing to improve the value to our customers.

Now, delivering on our existing projects is also critical. So, turning to our markets now, and we’ve achieved some major milestones in recent months. In Melbourne, the Westgate Tunnel project is really taking shape. Workers are now installing thousands of meters of electrical and safety systems in the completed tunnels. We’ve also made really good progress with the elevated connections into the Port of Melbourne, CityLink and the City.

In North Sydney, the Rozelle Interchange was opened by the New South Wales Government and delivered to Transurban as operator. That marked the completion of the WestConnex project, a major piece of infrastructure for Sydney. Since opening, drivers using the Rozelle Interchange as part of WestConnex have seen their travel times from Parramatta to the city reduced by around 33%. There have been some well-publicized challenges on nearby surface roads since the Interchange opened, which is understandably frustrating for those drivers.

We’ve been focused on supporting the New South Wales Government in any way we can.

The Government has worked quickly to modify surface roads in the local area, including lane changes on the city WestLink, additional signage and lane markings, and completion of bus priority infrastructure. To complement the Government’s solutions, we’ve taken steps to enhance driver awareness by installing additional signage along with updates on our website and Linkt app.

Over on the other side of Sydney, we commenced work on our M7-M12 integration project, which is on track to open in 2026. We’ve also had positive engagement with the New South Wales Government on the independent toll review, and we’ll continue to engage as the process continues over the coming year. We’ll work with Government to find outcomes that will be both positive for Sydney and supportive of our long-term investments.

Both the Government and the Review Chair have reiterated publicly that existing contracts are binding. Looking now at Brisbane, I previously highlighted the significant growth occurring in the city. The Olympics are now only 8 years away, and there’s never been a greater need for transport infrastructure. So, we’re working hard with government to finalize potential solutions that enhance existing roads and allow the city’s transport network to meet demand. And in North America, the new Fredericksburg Extension opened in August, with further entries and exits open in December.

The project saves drivers up to 35 minutes on their evening commute. Construction is also progressing well on our 495 Northern Extension project. This enhancement is almost 30% complete and will extend the 495 Express Lanes by 4 kilometers north in one of the most congested areas in the state. That project opens to traffic in 2025. So, with strong population growth and our focus on delivering value for our stakeholders, our pipeline of opportunities is significant.

This includes everything from asset enhancements to potential new projects and acquisitions. In November, we signed development framework agreements with the Virginia Department of Transportation to explore the potential to add more off-peak lane capacity on the 95 Express Lanes. We’ve previously talked about other areas in North America that suit our strategic growth agenda, and this is something we’ll continue to monitor. As always, we’ll take a disciplined approach to any opportunities, both strategically and financially.

And touching on EastLink in Melbourne, we’re closely watching the sale process, including recent reports speculating that only a minority interest may be for sale.

We remain focused on long-term growth opportunities in Victoria and our partnership with the Victorian Government. We’ll carefully consider our options in this context. In the meantime, we have plenty of opportunities to get on with. I’ll now hand over to Henry to take us through the financial results.

Henry Byrne

Thanks Michelle. Good morning everyone. It’s great to be here today in my new capacity as CFO. As some of you know, I’ve been with this business for more than 16 years, most recently, overseeing the Victorian business and strategy. And I’ve also worked with many of you over the years in the work I did in Investor Relations.

And so I’m really looking forward to reengaging with you in this new role. As Michelle’s outlined, there are significant opportunities in front of this business, and I’ll be working with a great team here to ensure we capture them. We’ve outlined our statutory results on Slide 15, but I’ll move through that to our proportional results, which as you know are our focus. The results we present today reflect our efforts to continue to position the business for long-term sustainable growth. From a financial perspective, that starts with ensuring we’re driving efficiencies and deploying capital where it will best deliver growth that creates value.

As Michelle mentioned, our total revenue is up 6.3%, and we’ve been disciplined on costs — can mean increases well below inflation, and that’s supported our increase in EBITDA, higher margins, and a strong free cash outcome. In addition, our funding strategy continues to position us well to pursue future opportunities, with more than $3 billion of corporate liquidity on our balance sheet.

Borrowing costs have also been contained in the higher interest rate environment, with our cost of debt rising by only 20 basis points. So, we’re managing our funding costs well and our balance sheet is strong, and that’s giving us the support we’ll need to deliver growth. On Slide 17, we’ve outlined a simplification that we’ve made to the way we report a portion of our other revenue.

It relates to the costs that we pass-through under our joint venture arrangements at no margin. So previously, we recognized these as both revenue and costs, which netted out to zero. Our revised approach is to treat the revenue as contract cost, which effectively lowers both the costs and the revenue. And that’s consistent with the way we already treat our consolidated assets, such as Transurban Queensland. So it’s really just about being consistent in how we treat these costs removing some noise.

Importantly, the new treatment has no impact on free cash. It’s EBITDA neutral, and we had similar margin improvement under both the old and the new treatment. For modeling purposes, you can find some additional information on Slide 27, including the historical disclosures. Looking at the results in more detail. We’ll start with free cash on Slide 18.

The headline results of 18.6% free cash growth for the period was very strong, and we’ve outlined the key drivers on the slide here.

Higher EBITDA delivered a free cash benefit of more than $90 million, a stable weighted average cost of debt, along with interest we received on cash balances, also contributing. As we flagged at the full year, the successful opening of the M4-M8 Link enabled us to release cash reserves from WestConnex, which were previously held for construction. And we currently expect these reserves to contribute roughly $0.04 per security to the full year distribution, half of which we’ve included in the interim distribution of $0.30 per security. Partially offsetting this were some timing impacts on distributions from 100% owned assets, and that should reverse in the second half.

And we’ve also held back some additional cash in North America to fund construction on Project NEXT. Pleasingly, of the 18.6% free cash growth for the period, the vast majority is attributable to the EBITDA improvements and finance cost benefits that I referred to a moment ago. Moving to the proportional results in more detail on Slide 19. You can see that excluding new assets, toll revenue increased by $106 million, driving the uplift in EBITDA.

As Michelle’s outlined, we saw increased traffic across all of our markets and toll escalations in Australia and high pricing on our North American roads. This period marked the first contributions from the final stages of WestConnex being the M4-M8 Link and the Rozelle Interchange. And as WestConnex matures over time, these new assets will deliver returns for years to come. Overall, increased revenue markedly outpaced the increases in cost helping us to our highest EBITDA margin since 2019 at 74.2%.

Turning to costs. The outcome here reflects our efforts to drive efficiencies across the business and set a solid foundation for future growth. We continued our cost increase to — sorry, we contained our cost increase to well below inflation at 1.7% for the period, including limiting our maintenance and operational cost increase to only $2 million. This was partly a result of some specific initiatives, including improvements to our major maintenance processes and supplier contract reviews. But importantly, this is a reflection of the interrogation of costs that we’re undertaking right across the business.

We saw some cost increases related to traffic volume and new assets. However, these have a related revenue benefit. Our strategic growth spend for the half was lower, but this was largely due to timing. And as Michelle flagged, we have a number of growth opportunities that we continue to pursue. That means we do expect some costs to be weighted to the second half, particularly the annualization of new asset costs and some timing around development spend.

But despite this, we’re on track to do better than our previous guidance of around 6% cost growth for the year. And I’d stress that we remain focused on driving efficiencies across the business.

The chart in the center of Slide 21 illustrates the importance of controlling our net finance costs alongside our operational spend, given that they represent more than 40% of our cash costs. On the right side, you can see that our active management of the debt book has meant that our weighted average cost of debt has remained relatively stable at 4.3%, and this is despite raising or refinancing $2.3 billion of debt. Over the last 18 months, we’ve seen a rise of only 40 basis points, whereas the RBA cash rate has risen 350 basis points.

And this is a result of our debt tenor and our highly edged book, which have been critical to stability and predictability of our funding costs. So, overall, this has been a very pleasing outcome, particularly in the current macro environment.

Finally, turning to Slide 22 to look at funding and liquidity in more detail. We’re very comfortable with the refinancing task ahead as we look out over the next couple of years. We have no further facilities maturing in the current financial year, and the Treasury team have well progressed on activities to execute the refinancing strategy for FY ’25. We continue to see good demand in debt capital markets, with signs of moderating inflation playing into the interest rate outlook.

Turning to the balance sheet. We have approximately $2.6 billion in liquidity headroom, over and above the $2 billion we need for our existing construction projects. So to summarize, the performance of our business over the past 6 months demonstrates the strength of Transurban. It’s a story of continued growth, cost control and margin expansion. Importantly, our funding position remains strong as we evaluate the opportunities in front of us. I’ll leave it there and I’ll now hand back to Michelle for some concluding comments.

Michelle Jablko

Thanks, Henry. So to wrap up, we’re well positioned to sustain this momentum as we move into our next phase of growth. I’m really excited about the opportunities that lie ahead. We know our growth is underpinned by the value we deliver for all of our stakeholders. I’m focused on strengthening these connections, demonstrating our support to our government partners and our value to customers.

I’m also focused on continuing to optimize our core and grow value for our investors, all with a highly engaged workforce and the trust of our partners. Thank you for your time today. We look forward to seeing you at our Investor Day on the 6th of May. There we can talk more about our plans to grow the business and create long-term sustainable value. But let me now open up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Anthony Longo from JPMorgan.

Anthony Longo

Just appreciate your early comments on daily traffic across the network and Sydney in particular. But just looking across most of those assets, ADT was actually down in that December quarter. And I appreciate the commentary with respect to disruption, but how much of that is cannibalization trends or impacts from that construction? And what are you seeing post year-end on that front?

Michelle Jablko

Yes. So maybe I’ll start and Henry can add in as well. So in Sydney, there’s a couple of things going on. So yes, there’s disruption from the construction that’s taking pace, and some of that’s on some of our city assets, but also we’re starting to — we’ve just started construction on the M7-M12, so we’re seeing a bit there. But we also have with new assets coming online.

So with WestConnex, both Stage 3a, the M4 Link and the Rozelle Interchange coming online.

We’re seeing some diversion from some assets to new assets. And so you’ve got both of those things happening. In the last quarter, there was a little bit softer container volume in the port as well. I think it’s at the margin, but a little bit, and a little bit of weather. But it really is a combination of the disruption and then just movement between assets, which is why I think you’ve got to look at Sydney as a whole.

Anthony Longo

Absolutely. And then I guess, looking at that port data as well. So with the heavy vehicle traffic that looked like that was softer in the quarter. I mean since the resolution of some of that industrial action, is that starting to improve now heading into the second half?

Michelle Jablko

Yes. If I take Sydney as an example, yes, it was probably a bit softer in October, November and then picked up in December. So, yes. But as I kind of spoke about earlier, with freight, you’ve got to take quite a long-term view of it. And structurally, it’s a very, very strong trend.

You might just get some movements around the mean.

Anthony Longo

That’s fantastic. And sorry, last one for me. Just with respect to the capital release, I know you’ve got $1.2 billion over the second half of ’24 and ’25, and clearly, at the Board’s discretion. But in light of the growth opportunities that you do have out there and the existing liquidity, how should we be thinking about that?

Michelle Jablko

Do you want to go?

Henry Byrne

Yes, I’ll jump in. Yes. Look, we’ve been very clear in saying that they match off quite well presently against the funding commitments we’ve got across the projects, particularly the committed projects. And so we’re quite comfortable. And if we look beyond the current window, so we’ve guided you out to the next 18 months, we obviously will see further capital release opportunities there, but we can’t be specific on that point.

And I think we’d expect that they would, to some extent, match off against future development opportunities, but ultimately, that will be at the discretion of the discussion with the Board as well.

Anthony Longo

Okay, great, and congratulations on the result.

Operator

Your next question comes from Justin Barratt from CLSA.

Justin Barratt

Look, really keen to sort of get you to talk a little bit more to Queensland and I appreciate your, I guess, a little bit more disclosure and discussion around Queensland. But you clearly note that there’s been an increase in population there, a lot of current road infrastructure projects and future potential infrastructure projects in and around Brisbane. But I just wanted to see if we could sort of discuss a little bit more, I guess, what that development in and around the city means for your current assets and current projects and further inorganic opportunities that those may present as well?

Michelle Jablko

Yes. So if I – give me a go and then if I don’t get your question exactly right, you can clarify. But as I look at Brisbane, there’s existing congestion in particularly on the Logan today, where we know there needs to be a solution for and we’re working quite hard with government and the gateway as well. We’re just working with government on trying to finalize things and how they might be phased, et cetera. Beyond that, Brisbane probably has the strongest population growth across all our markets, if you take a 20-year view.

So call it, 40% growth over the next 20 years. So we think there’ll be lots of other opportunities, because Brisbane itself is growing, like both in terms of people, but spreading as well. Did that answer your question, Justin?

Justin Barratt

Yes. I guess then what about the sort of the infrastructure projects in and around your roads as well that will most likely feed into your assets as well?

Michelle Jablko

Yes. There are a few that the government’s looking at in Brisbane that we’re talking to them about, but they’re sort of in quite early phases in how they’re looking at them, but we take all of that into account. And if there are ways we can help, we will. But we’re just — we’re working through that.

Justin Barratt

Yes, not a worry. And then just really curious, I think it’s one of the first times you’ve mentioned sort of opportunities in new regions in North America for a while. I was just wondering if you could expand on that again a little bit further, if that’s possible?

Michelle Jablko

Yes. Look, it’s something I think we’ve mentioned quite a lot of times in the past. And so that hasn’t really changed. The sorts of markets we look at are the sorts of markets where we think they match our strategy, the right sort of demographics, the right sort of support for our kind of infrastructure as part of the solution. We look always at whether we bring something.

So there have been some that we’ve looked at in the past that we’ve stepped away from, like Atlanta, because it didn’t quite much strategically.

And then we look at the financials and whether we’ve got the capacity to do it. But we think there’ll be opportunity in some of the markets we’ve spoken to you about before potentially. You just never know exactly when that opportunity might come up.

Operator

Your next question comes from Ian Myles from Macquarie.

Ian Myles

Firstly, can you give us a bit more color around how much of the traffic impact for road works is still having that initial impact versus we should see some annualization of those road work effects?

Michelle Jablko

Yes. There is a bit. So the M7 in particular, because we only really construction, particularly on the M7 piece, really only start towards the end of the half, so the M7 in particular. And the others, it’s probably continuation. So Melbourne is probably a continuation and then the impact of the Warringah works is probably continuation.

Ian Myles

In sort of that continuation, should we still be thinking negative decline on an annual basis? Or has it become more neutral that there’s that initial avoidance of the area, and thereafter, the system can sort of stay flat or slightly grow?

Michelle Jablko

Do you want to go, Henry?

Henry Byrne

Yes. Well, I think firstly, Ian, it’s a confluence of factors. So if you look at Melbourne as the example here, construction in recent years has probably been a little more than we were expecting. And as Michelle said, we’re kind of — we expect that to continue out to the end of the project. But then we are also thinking about the broader recovery of the network there as well.

So a confidence of those factors is playing out. When that road opens, we expect that you would see a fairly rapid restoration of volumes there. So the drivers will respond to the value proposition of a restored network. And so we would expect it will work its way up pretty quickly.

Michelle Jablko

But over the next 6 months, or sort of next 6 to 12 months, we should expect.

Henry Byrne

More disruption.

Michelle Jablko

Yes, a bit more.

Ian Myles

Okay. On your dividend, you highlighted you’re getting $0.02 from a capital return. On the full year basis, and when you’re providing that $0.62 guidance, is that still under the assumption you’re going to be 100% funding it from the cash flow to the assets that are relying on capital returns?

Michelle Jablko

Yes. It’s — so you go, Henry?

Henry Byrne

All I was going to say is we’ve been clear in saying that we are still factoring the $0.02 in at this point. But we’ll look at it. You can see we called out in the breakdown of free cash that we’ve got some timing issues that have come through in this half. There’s about $0.01 of distributions from the subs that didn’t come through. There was a couple of cents that we held back in equity contributions into North America as well.

So there are those factors which play into it. But at this point, we are thinking the $0.02 will go into the full year.

Michelle Jablko

I mean, it is always a question for the Board. But we do recognize there’s a little bit of noise around some of those timing things Henry spoke about. So we’re just giving that some thought as well, Ian.

Ian Myles

Okay. Maybe I missed it. In your presentation, you didn’t talk about the I-495 Southern section. I think it’s the Woodrow Wilson Bridge. And I was curious, because Birrell was talking about that. Have you made a decision on that?

Michelle Jablko

So it’s in our list of opportunities. The department is doing a feasibility study at the moment and looking into environmental and other issues like that. But very much, it’s on our list of opportunities.

Operator

Your next question comes from Anthony Moulder from Jefferies.

Anthony Moulder

If I can start with Melbourne. I think the Melbourne traffic seemed to be slipping relative to that recovery. I appreciate you’ve talked to some of that construction. But is that within your expectations that Melbourne should have been recovering a bit stronger than what it’s proven to recover to this point?

Michelle Jablko

So I think with Melbourne, a lot of it really is about the disruption of the works. The city — sort of city traffic, so traffic coming to the city probably got a little bit better. So it is on a recovery path. It’s not back, but we can debate on timing of that. But it continues to get better sort of every 6 or 9 months.

So it really is about the disruption. Freight did well in Melbourne again, particularly light commercial vehicles. So, yes, I put it mostly down to construction works.

Henry Byrne

And I think maybe just adding to that, it’s important to stress we do see a pathway to continued growth in the market there, particularly when we look out beyond the West Gate as well.

Anthony Moulder

The fix — you mentioned a fix for the Rozelle Interchange that obviously transport to New South Wales and the New South Wales government are working on. Any of those fixes that you could foresee, will that impact your profitability of that interchange as your traffic comes through that?

Michelle Jablko

At this stage, the sorts of things we’re working on, no. We’re just trying to help and support the government in any way we can. And the things you will have seen us do is like help improving some of the signage where we can in the tunnels, communication with customers, and working with government, because, as you know, the traffic is all connected, and working with government to explore things that can help. But at this stage, no.

Anthony Moulder

So there’s nothing that which suggests you would have to give up some of your dedicated roads to help the New South Wales government fix that mess at Rozelle?

Michelle Jablko

Look, it’s really hard to go into hypotheticals. We continue to kind of work with the government and we’ll explore options as we go, but no, not at this stage, Anthony.

Anthony Moulder

Okay. And just if I can finish on EastLink, you mentioned there was some change to what the vendors would potentially be selling now, a less than majority stake. Doesn’t that — wouldn’t you rule yourselves out of getting anything less than a majority stake on EastLink?

Michelle Jablko

Yes. So we just — there’s a bit to — that continues to evolve on that. And I’m just commenting on reports that have been out there in the media. As you know, the value we bring and the value we think we would bring is through operating, as we tend to do in all of our assets, but we have to watch it evolve.

Operator

Your next question comes from Andre Fromyhr from UBS.

Andre Fromyhr

I just wanted to ask about the cost experience that you’ve reported today, in particular, the fact that your guidance that you’ve previously given for the year, I think, was 6% growth, that’s now reduced to a range of 4% to 6%, but that’s off the back of 1.7% for the first half. So maybe you can talk about a bit more about what’s going to see that cost growth come back higher in the second half. But then more broadly, I’m interested in how much opportunity there is in the margin. You commented that it’s still below FY ’19 levels and whether or not sort of a multiyear story?

Henry Byrne

Yes, I’ll jump in. So I think maybe the sort of overarching comment is that we are very focused on costs within the business and really from the perspective of continuing to drive efficiencies, and we think there’s probably further opportunities there. So we’ve given that range. But obviously, we’re looking to push up against it, I guess. And then in terms of the breakdown of why you will see a little bit of weighting to the second half, there’s obviously volume-related elements and then there’s a little bit of annualization of some of the costs coming through on the new assets, which will play through to the second half.

And then you’ve seen us call out development costs as an area where we will probably against the prior comparable period for the past — or for the 6 months to December 31, we were lower. But Michelle has flagged a number of opportunities we’re looking at. And obviously, it will depend on how those play out, which is why we’ve given a little bit of a range that you might see come through in the second half if we’re upping our activity in some of those — around some of those opportunities. The arithmetic around the change, Andre, when you actually break it down the actual numbers, the target number is not that different. And it’s really just to do with the denominator coming down as well.

So we can talk you through that offline. But I understand your point, it looks a little interesting when we’re coming off a 1.7% base, but I’ve worked through that with the team and the targets are roughly the same.

Andre Fromyhr

Okay. I was also just fascinated to know in the presentation, you made a comment around further kind of opportunities to participate in traffic trends, such as the driverless trucks, et cetera. Do you have any sense of — or at the moment, could you say, how much investment

you’d be willing to make in those sort of adjacent projects?

Michelle Jablko

So maybe I’ll start. It’s Henry’s project, because he was doing it from before this, so he can add. At the moment, it’s small. It’s in the early stages, and we’re doing the work on it. We do think it’s a really important trend.

We think it’ll add huge value to our roads, our customers. If it takes off, and I think there’s a view out there that freight will happen in terms of automation before cars. So we think there’s opportunity, but it’s a bit early to say. We’re very disciplined in how we weigh things up, and we just have to look at it as our work evolves. I don’t know, Henry, if you want to add?

Henry Byrne

Yes, and I think it’s important to stress, it’s very small dollars in the context of our business at the moment, and we’re probably getting outsized impact for that spend. So for anyone who’s sort of looking at the reports, particularly around the automated freight venture, we’re part of one of the consortiums, really, that’s leading some of the activities globally in that space.

We’re working with a Silicon Valley company. We’ve got some big OEM partners on board as well, and we are making some very good progress, and we’re doing it for quite small dollars. If we did decide at a point in the future with the endorsement of the Board and the investors to deploy more capital to that space, I think it would be a conversation that we would flag well with the market, and we’re certainly not at that point yet.

Andre Fromyhr

Great. And maybe just 1 final one from me. I just want to go back on the point you made, Henry, about the timing impacts to the free cash flow. So in one of the more detailed slides, it identifies $78 million sort of negative timing impacts, but there is a comment in the pack around most of that reversing in the second half. I mean, is that — could we expect to see something in the order of $150 million swing if you’re adding it back in first half versus second half?

And then maybe the expansion of this idea, like timing impacts have shown up a few times in the last few years, and I just wonder if you’re having discussions internally about whether or not the basis of your free cash flow definition and how you sort of determine distributions would consider smoothing through those timing effects?

Michelle Jablko

Yes, Andre, maybe I’ll take your second question first and then Henry can answer the first one. We are mindful of those timing swings, particularly as more and more of our business has been weighted to joint ventures. You post the sale, the 50% sale of Chesapeake and the second transaction in relation to WestConnex. So it’s something we’re mindful of. It’s something we’re thinking about and talking to the Board about. So we’ll come back and talk, if there’s more to say there, but I’ll get Henry to answer the other question.

Henry Byrne

Yes, so just on the details, we called out the $87 million associated with the timing impacts. There’s a bit of working capital, which I think everyone will be familiar with. And then we’ve got a little bit of timing around the distributions from the subs, but really that’s more in the order of a cent when you look at the result for the half. So that will unwind. We will see that come through in the second half.

The timing around the equity contributions we’re making in North America, that’s not something at this point that I would be encouraging people to include in their numbers, and there’s probably a couple of cents in that. So I certainly wouldn’t be guiding anyone towards a $150 million swing into the second half. There will be a kind of marginal swing, probably more around the timing of distributions into the subs and then working capital will be what it will be.

Operator

Your next question comes from Owen Birrell from RBC.

Owen Birrell

I just wanted to, I guess, draw a little bit more out on the comment around the new regions in North America. Yes, you have sort of previously sort of highlighted particular regions, but I just want to get a sense on the nature of the assets that you’re looking at, whether they are existing brownfields, existing concessions that you’re looking to buy into, or whether they’re greenfield in nature?

Michelle Jablko

Yes, it always depends, Owen. Like, it’s really hard to — the opportunities actually can span all. It is harder to go greenfield in a new market unless you’ve got partners in that market. So potentially, if you’re doing it with others, but it’s a little bit harder without. And we think there’ll potentially be brownfield opportunities, but you just don’t know exactly when they’re going to come up.

Owen Birrell

And are there assets out there that you’re currently looking at, or is it just really you’re opening your eyes now and, purveying the land to see what is available?

Michelle Jablko

There are always things we’re looking at, so I don’t think this is new from that perspective, but we are sharpening our focus and we can talk about that a bit more as we go forward.

Owen Birrell

And, can I just — 1 final question, just looking at Montreal. 12 months ago, you sold down into that asset, noting that the new arrangements could lead to new opportunities in that market. I’m just wondering, has anything come through and should we be expecting anything in the near term?

Michelle Jablko

Yes. CDPQ has been a fantastic partner in Montreal. They’re a great partner in Sydney as well, but it’s going really well in Montreal. And they’re — the connection and relationship into the government in Montreal has been really strong. And so, yes, I think, you can never guarantee on these things, but we’re making very positive progress there.

Operator

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

Cameron McDonald

Just an extension to those questions about the offshore opportunities and also Anthony’s question earlier about East Lincoln and potential minority stake sort of for sale. Can we also sort of just touch on — there’s been press reports that the Northwest Parkway in Denver is potentially for sale or a stake in that is potentially for sale as well. Denver’s been a market you’ve highlighted previously. But would you rule out, categorically rule out a non-operating minority stake in Denver?

Michelle Jablko

So, we like Denver. It’s a good market. It’s got good demographics, et cetera. You’ve got to look at every opportunity on its own merits, so it’s premature to answer that. But I keep coming back to how we assess our opportunities.

We look at whether there’s strategic merit but also whether we think there’s value we can add, you know, in the near-term and over time. And so that’s how we’ll assess that market as we will other markets. It’s a bit premature to comment on an individual asset.

Cameron McDonald

Yes, I suppose it’s more of the strategic question that, there’s potentially no pathway to a controlling or operating stake, if a minority stake is being sold by any party, regardless of whatever the asset actually is.

Michelle Jablko

So, most of the time, I would say we would, as I spoke about in the earlier answer, the ability to operate is how we create value. And so that would be one of the key things we’d look at. But, again, you’ve got to look at every opportunity on its face.

Cameron McDonald

No, that’s great. And just a question for Henry on the operating costs that you talked about on the slide, which is a pretty impressive reduction in terms of the — it’s like $2 million worth of proportional cost movement on maintenance and operations. How much of that is actually timing related given the impact of lower traffic on COVID or because of COVID and, the opportunity that you potentially took to undertake maintenance during a low traffic environment that you’re now benefiting from that’s really only a once-off or a limited time benefit?

Henry Byrne

Yes, we certainly don’t see that portion as a one-off. And look, we’ve called out a couple of examples here around the work we’re doing around our approach to maintenance and then really it’s sort of a, a benefit we saw come through from our approach to how we’re managing some of the contracts and consolidating those, particularly in the tech space where the spend a little bigger. So you tend to see some larger number come through. But the reality is there’s work going on right across the business camps. You’ve heard Michelle and myself talk to the fact that, it’s a real focus area for us.

So these are a couple of call-outs in the context of probably a broader kind of effort that’s going on across the business, which is really what would give us confidence to say that that’s a number we think we can do. And that’s something we can probably hold onto as we look forward more, or at least we’re certainly going to be focused on it. The volume-related piece really then comes through more to the right. So that sort of how the costs that escalate, to process more transactions, collections, even down to things like postage on things we have to mail out to customers and things like that, that’s the kind of more the volume-related stuff associated with traffic. So I think when we look forward, again, to go to where the costs may move a little bit, you’ll see some annualization come through, which isn’t in this, which will increase in the second half, and that’s on the new assets.

The volume piece will also continue, and then there may be some incremental developments to spend depending on how our efforts go in that space.

Operator

[Operator Instructions] Your next question comes from Rob Koh from Morgan Stanley.

Rob Koh

Congratulations on the result. My first question is probably one I usually ask more in the modeling camp. Are you able to just maybe update us on how much cash interest is going out that’s being capitalized for things like Westgate Tunnel and the like?

Michelle Jablko

We’ll hand that to Henry.

Henry Byrne

Yes. So at the moment, I think we had a number of circa $80 million that came through in the half, and it is capitalized interest is predominantly Westgate. It might have been just a little bit less than that. It was $67 million, that I look at the notes. So that is Westgate, and Westgate is predominantly where our capitalized interest comes through.

So I think the key is that that will continue as we look out through the completion of the construction efforts on that, and then it will revert into — it won’t capitalize from that point forward. So we’ll see that drop in.

Rob Koh

Yes. Okay. And with the group interest rate or effective interest rate around the 4.3% for the Aussie dollar debt, is that the right kind of order of magnitude for the rate on that $67 million-ish of interest in the half?

Henry Byrne

Yes, I think so. I think that would be a fair assumption. Looking out, Rob.

Rob Koh

Yes. Okay. Cool. And then just next question, I’m looking at the analyst notes page. Thank you very much for all the disclosures and also the restatement of the reclassification.

Kudos to you and your team for giving us that level of detail. Just one thing I noticed, the new analyst notes slide doesn’t say LCT amortization anymore. Is there been a change in LCT amortization?

Henry Byrne

No, there hasn’t at this point in time, but it is something we’re looking at. So we’ve taken it off there just while we consider our options on that.

Rob Koh

Okay. All right. No dramas. And then my last question. Thank you for the increased guidance on cost reductions there.

Can you maybe talk to any of the key buckets that you’re interrogating in this exercise beyond the ones you already have? Is there any opportunity with, say, like call center and AI and things like that?

Michelle Jablko

Can I just start and then Henry can talk to the work? I mean, we think about our business, we still very much want to grow the business. So a big part of it’s about prioritization of costs. Yes, technology can help in some ways and AI, but there are a whole lot of types of efficiencies we’re looking at, which I’ll get Henry to talk through.

Henry Byrne

Yes, it’s quite broad-based. So as I was saying to Cam earlier, we’ve called out a couple of areas here which stand out when you look at what really is a broad-based suite of activities across the business. And I think going forward you’re not just going to see us talk to operations and maintenance or technology costs. At the moment, it is — it’s something we’re focused on really around the immediate efficiencies within the business. And there’s a program of work going on, very actively within the finance team and the broader business to achieve that.

And I think then if we look out beyond that, as time passes, we’ll consider the more structural opportunities that might emerge. But we’re not at that point yet. We’re really just looking into the various cost buckets and seeing how we can drive immediate efficiency at this point.

Rob Koh

I see. Great. That’s very helpful.

Operator

There are no further questions at this time. I’ll now hand back to Ms. Jablko for closing remarks.

Henry Byrne

Excellent. Well, thank you very much to everyone for joining us. If you’ve got further questions, the IR team’s available, or myself and Henry by the IR team, if anything’s needed. So thank you very much and look forward to seeing you all again soon.

Operator

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