Transurban Group (TCL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Transurban Group Full Year '22 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Charlton, CEO. Please go ahead.

Great. Thank you, and thanks, everyone, for joining us for Transurban's 2022 full year results briefing. Today, I'm joined by our CFO, Michelle Jablko, and we'd like to take you through the presentation we've lodged with the ASX this morning; and also our Head of Investor Relations, Hannah Higgins, is on the call with us. And of course, her and the team will be available should you have follow-up questions over the next period of time. Hopefully, presentation is fairly short this morning, should take only about 20, 25 minutes, and then we'll have some time for questions. But before I start the formal part of the presentation, I would like to acknowledge the traditional owners of the land on which we're gathered today. And those of you that are in Sydney and do drive through WestConnex and through that, St. Peter's interchange, you may have noticed the artwork at the entry to the final stage of the WestConnex tunnel. It's been created by the Bidjigal artists, which are the traditional owners of the land in that area. And that our work is just one example of how we use our assets to demonstrate respect to the indigenous people and their ongoing connection to the land in our local communities. Okay. Now turning over to Slide 4, which is the highlights slide. So while traffic was broadly flat year-on-year, we were pleased to see traffic volumes grow as the year progressed. The fourth quarter saw traffic levels reaching a new all-time high and exceed pre-pandemic levels. This was a result of both new asset capacity and people returning to moving around our cities and including more travel to the airports. And in the current macro environment of rising inflation and interest rates, the business is well positioned with approximately 70% of our assets having total escalations linked to CPI or greater, which provides a built-in buffer, obviously, in this environment. Now in FY '22, proportional toll revenue grew by almost 6%, and free cash by approximately 20%. And around 98% of our debt book is fully hedged, which gives us low exposure to near-term interest rate increases, given the size of our book. And actually, during FY '22, we continue to strengthen the balance sheet, and we refinanced over $3.4 billion of debt at attractive rates. And actually, we lowered our average cost of debt, including the latest refinancing that was just done on WestConnex. We have an exciting pipeline of development opportunities and a strong balance sheet to fund those near-term opportunities as well. Now our FY '22 distribution of $0.41 per stapled security was 122% covered by free cash, including capital releases. This included a final distribution of $0.26 for the 6 months ended 30th of June, which we announced back in June. We do anticipate or forecast or expect our distribution for FY '23 will be $0.53 per security, which is approximately 30% higher than FY '22, reflecting both an uplift in traffic performance and the benefit of CPI-linked price escalations. And just for clarification, the underlying free cash flow, we expect, obviously, in FY '23 is higher than that of 2019. And we do anticipate, subject to market conditions, of approximately having $0.10 of capital release, $0.10 per share of capital releases on top of that as well to fund those opportunities that we'll discuss going forward. Turning quickly to Slide 5. That's just a recap of our strategy statement. You've seen that since, I think, Investor Day or the half day, highlights the 3 elements that are key to our long-term success, which is obviously listening and understanding what matters to all of our stakeholders, using that to create innovative road transport solutions and then ultimately becoming the partner of choice for both governments and our strategic partners. On Slide 6, we just wanted to remind everyone of Transurban's investment proposition, given we've been dealing with crisises (sic) [ crises ] and other things for a while, we thought it was good to go back to some of the basics. And by delivering on our strategy, our business has expanded into 5 markets. We've grown from 8 assets to a portfolio of 21, which are used by more than 2.4 million trips a day on our assets. Over the past decade, we've maintained an average concession life of more than 28 years through disciplined investment in new assets and enhancements, and currently, we have approximately 7 development projects in progress. As I talked about in the opening slide, our inflation-linked toll escalations and debt hedging position provide us and position us well in the near term for rising interest rates. Going forward, our experience in asset development, delivering operations will be supported by the continued investment we've made in data and technology, allowing us to continue to deliver innovative road transport solutions alongside our partners. And we are confident that these core fundamentals of our assets will support traffic growth over both the medium and long term, allowing us to deliver on our investment proposition, which is building that long-term value while balancing growing distribution payments to security holders and efficiently funding future opportunities. Now I know, again, on Slide 7, one of the major topics is the inflation and interest rates. And if we move to Slide 7, again, on how we are positioned in this macro environment and positioned well, as we said. We talked about some of this at the Investor Day. And again, our inflation-linked toll escalations coupled with our hedging profile, actually provide a net benefit in the near-term inflationary environment. We saw some benefit in this last financial year, but the majority of the benefit of the increases in the higher CPI numbers are -- that are now incorporated into our base toll prices will flow through in future years, including FY '23. And as the chart shows the benefit of a 1% increase in CPI is likely to be greater than the cost impact of 1% higher interest rates in the near term, given that, again, approximately 70% of our revenue is CPI-linked and that we've managed our debt book to give us a lower exposure to current market rates. And I think just a comment on the outlook. Obviously, there's some forecasts out there of inflation reaching the high 7s, I think, being made by the government forecast for the end of the year, but we have seen the long-term bond rates come off a bit. So hopefully, what we'll see is a short chart adjustment, and then we'll go back to long-term trends, but obviously, that embedded inflation will flow through long term into Transurban's revenue streams. Turning now to traffic. And as I mentioned earlier, we're seeing traffic growth in all our markets, and this chart clearly shows. And after extended periods of restrictions, particularly in Sydney and Melbourne early in this financial year, traffic levels have rebounded with 2.4 million trips a day in quarter 4, again, exceeding the same period in FY '19, and we're seeing that particularly continue on through into August. This is particularly evident on those assets connecting to the airports and some CBD-related activity. But as we said before, and if you look at some of our different reports and our mobility report and why people travel, which I'll talk about in a little bit, again, CBD is important, but that is not the majority of our travel. It's not CBD related. Large vehicle traffic continues to be steady across the year, in part due to the continued and growing e-commerce demand. Sydney's traffic performance did benefit from some of the new assets, including NorthConnex and M8 and M5 East, along with some of the broader economic recovery. Now Melbourne's traffic levels are starting to improve, and they improved in the second half with the Western Link supporting increased airport activity around that precinct. And Brisbane traffic growth has been steady, with positive trends in commuter and discretionary travel. In North America, we have also seen some improvement with traffic on the 95 Express Lanes in particular in Northern Virginia. And if you look at some of the pricing data and other data that we've released, we see both traffic and price strength in the express lanes, and the A25 in Canada exceeding FY '19 levels. We expect traffic to return to long-term growth trends over time. And while near-term traffic performance will remain sensitive to government restrictions to health issues, that, again, have the potential to restrict people moving around, but hopefully, we're past that period. Again, we had seen some of this come out to play in recent weeks. We did see some impacts from the Omicron variant and flu in July during the peak of winter, but overall traffic is holding up well, particularly given the additional impact of severe weather in Sydney in July. And again, as I said, signs in August are positive, and we're hitting all-time high numbers for further recovery. So a bit of insights into what we're seeing on the traffic. If I move to Slide 9, and some of our insights from our mobility trend research. Firstly, airport travel, and as anyone who's been to an airport recently can attest, people are certainly traveling again. International flights into Australia, again, have doubled since the start of '22 and are forecast again to double by December of this year. We've seen that in some of our airport-related corridors such as Western Link on CityLink. Again, as you can see, they're benefiting on the chart on the bottom of the left of this slide, which has an increase in traffic corresponding with the higher airport passenger volumes. In our most recent mobility trends research, we found that travel to the airport was the most common reason actually for using toll roads in Australia. Again, it's on a -- I guess, on an ad hoc basis when people need to go to the airport, but an interesting finding, again, from the research. We're also starting to see people form a degree of consistency in some of their working and travel habits. And as many of you would know, we've been conducting research since the start of the pandemic to understand changes in the way people are living, working and moving around our cities. And our latest research conducted between June and July surveyed more than 5,000 people across both our Australian and North American markets. This research showed most people are traveling to the workplace on an average at least 3 days a week, which is consistent with our previous findings. And the average applies equally to [ inner ] city workers and others. But I think that's important. A lot of people will talk about CBD office occupancy, but the majority of workers work outside of the CBD and around our roads and industrial precincts and other employment hubs around the city. Now in Australia, respondents say they expected to work an average of 1.7 days a week from home. That number varies from a lower Brisbane of 1.5 and a high of 2.1 in Canada, and that number has remained sort of fairly consistent from our previous findings. Our most recent findings indicate that there's been a significant increase in the availability of flexible work hours since the start of the pandemic, with more than 70% of Australia's respondents reporting having access to flexible start and finish times, which carries -- which compares to about 37% last year. This increased flexibility appears to be having an impact on the way people decide to travel to their workplace. As we have found, and we look on Slide 10 now, around 1 in 4 respondents say they have changed their primary mode of transport to get to work or study since the pandemic started. And for most people, that's meant switching to private vehicles over public transport. This chart shows a significant shift of up to 34 percentage points to private mode, depending on the city. And the preference for private vehicles have been playing out since the start of the pandemic, initially the result of public health measures. But it now appears that some people have changed their routines as a result of increased flexible working practices. Again, for example, someone who took the train or bus to work 5 days a week pre-pandemic, you may now choose to drive 3 days a week at a time that better suits their lifestyle. And you can find the full version of our latest mobility trends report on the Digital Insights hub on our website. And if we look at Slide 11, and another positive trend that followed us all the way through COVID and coming out of the other side is the e-commerce and online shopping. In Australia, 4 in every 5 households shopped online last year, and 93% plan to maintain or increase that habit this calendar year. Our assets provide crucial connectivity for vehicles traveling between these distribution centers, airports and ports. And in FY '22, around 128 million large vehicle trips were taken on our roads. And this slide shows in Sydney, for an example, the close proximity of our roads to parcel processing centers and the post codes with the highest levels of online shopping. The compelling -- if I move to Slide 12, then, to talk about some of our customer experience and the compelling value proposition of our roads is also evident in the growth of our customer base, which is more than quadrupled in the past decade to almost 9 million customers. Travel time savings are a key value driver. And in FY '22, even during the pandemic, customers saved approximately 325,000 hours each workday compared to alternative routes. And our recent mobility trends research found that nearly 50 respondents rated travel time reliability as the top factor when they make their transport choice. And we provide services such as our 24/7 incident response, which clear the majority of incidents within 15 minutes and helped keep our roads running smoothly. And this year, we also launched travel alerts on our linked app to share live information with our customers about disruptions on our roads. Interesting in Northern Virginia, safety was ranked as the most important factor in choosing a transport option in the recent research, and we continue to identify and implement initiatives to enhance our road safety. And on our roads this year, we achieved a road injury crash index of 3.78, which is close to the lowest we've ever achieved and significantly below our target. This index tracks the number of serious injury crashes per 100 million vehicle kilometers traveled on our roads. We give you some more data on Slide 13 to some of our customer base and our recent mobility trends research looking to why actually people use the toll roads. And you can see from the chart on the left, the reasons are very diverse. Only 14% of respondents use toll roads primarily for commuting, and the most frequent reason for choosing a road are airport or holiday-related, with 76% saying that toll roads provide a direct way to reach their destination. So most of our customers use toll roads infrequently, and that's reflected in our spending patterns with more than 80% of our Australian customers spending less than $10 on average a week on tolls. And tolls represent approximately 1% of the average Australian monthly household expenditure. Our research also showed that most people do not or only occasionally consider the price of petrol when they're actually going on short trips or commuting. This is something we've observed over the years and reflects the resilience of our assets despite significant fluctuations in fuel prices. We've provided an example of CityLink to show traffic recovery continuing despite rising fuel costs on that slide. However, we also recognize that rising costs, including petrol, do impact our customers, so we've encouraged our Linkt customers to take advantage of our fuel discounts offered through our partnership with Shell Coles Express. Now all up, our fuel discount program so far has saved customers more than $3 million. And this year, we've also added to our Linkt Assist program for people facing financial hardship by joining the One Stop One Story hub pilot program in Australia. And this is how allows customers to access hardship support for multiple essential services via a single point of contact. Just want to cover some of our ESG highlights, but we have our full corporate report and outlines to all our sustainability and ESG outcomes and I encourage you to look at that as well. But if I look at Slide 14, alongside our long-term target of net zero emissions, we are targeting a 50% reduction in Scope 1 and 2 emissions by 2030. This obviously represents mostly our fuel and electricity use. And despite the growth in our business, we remain on track to meet our target, and we've achieved a significant 46% reduction this year through the use of renewable electricity. 2/3 of our electricity needs are now being sourced from renewables, and we have renewable power agreements in place for all of our Australian markets, and we're exploring our different options for the Greater Washington Area. And whilst our customers' greenhouse gas emissions are not formally within our control, we acknowledge their impact on the environment. We have a number of activities underway to promote driving efficiently and to encourage the uptake of electric vehicles. Moving on to Slide 15 and just an update on our pipeline. This has been fairly consistent. You can see we have a range of opportunities from enhancements to our own assets, to acquisitions, potential acquisitions and large-scale greenfield projects. And the development opportunities span the next decade, and we'll assess each in our usually disciplined way. And obviously, if other opportunities present themselves within our strategy, we will consider those. However, in the near term, the projects are largely weighted toward enhancements or expansion projects on our existing assets. Now there's a lot of detail on the markets. I'll just make a couple of highlights in relation to Sydney on Slide 17. Again, we've included in each of our markets, traffic performance, travel time savings and key business activities throughout the year. And a few callouts, particularly in the development area. In Sydney, the M7-M12 integration delivery project, as we have discussed, has progressed to the third stage of the New South Wales government's unsolicited proposal project, and that's continuing to move forward. We've also made good construction progress on the M4-M5 Link in Sydney, which is a key connector for WestConnex and expect that to open early next year. And if I move to Slide 19 in Melbourne, during the year, we commenced tunneling on the West Gate Tunnel. The tunnels are now approximately 42% complete and tracking well. I was out there on Tuesday. It's an amazing site. Everything is just progressing at pace now and a lot of activity. And it's just going to transform the road network in Melbourne, just a fantastic project. Further updates on both of these projects -- sorry, WestConnex and West Gate have been provided in some of the supplementary information. In relation to Brisbane, population growth in Southeast Queensland is the highest of any region in Australia, again, providing a favorable backdrop for continued expansion and opportunities in Brisbane, and we continue to progress those discussions with the government partners that may alleviate existing congestion and also congestion associated with this population growth and preparing the city and the region for the Brisbane 2032 Olympics. In North America, construction has progressed and started on Project NEXT and progressing on FredEx, and we're pleased that our proposed enhancements to the 95 Express Lanes at Seminary Road and Opitz Boulevard have now reached financial close. And on the Maryland Express projects, there have been some delays to the final step of the environmental review process, meaning that we're currently working with the Maryland Department of Transportation on an updated time line to reach financial close on that project, and we continue to progress discussions with our client. But at this point, I'll now pass over to Michelle, who will talk through our financial results for the period. Over to you, Michelle.

Thanks, Scott, and good morning, everyone. As Scott has said, we think we're well set up to deliver distribution growth for security holders into the future. We're seeing traffic recovery, and we have embedded CPI-linked escalations across 68% of revenue as well as a strong balance sheet. Despite the impact of COVID restrictions in our biggest markets in the first half of last year, we saw a strong rebound in traffic in the second half, supported by our new assets, increased movement around the cities and a return to business and leisure travel, which resulted in traffic finishing only slightly behind the prior year. EBITDA grew year-on-year, benefiting from embedded price escalations and new assets. The strength of our current position gives us the confidence to continue to invest in our business, ensuring that we're in a good position to take advantage of our future growth opportunities, adding longer-term value and growing distributions for our security holders. Let me now take you through some of the detail. So I'll start with free cash and distribution outcomes on Slide 28. Our full year distribution of $0.41 per security was 122% covered by free cash and approximately 12% higher than in FY '21. Total free cash was $1.5 billion. This included $355 million in capital releases from WestConnex and NorthConnex during the year. Excluding capital releases, our free cash was around $1.2 billion, up 17.6% year-on-year. So we grew distributions for security holders and retained most of our capital releases to reinvest in our growth pipeline. The next slide provides an overview of our statutory result. The main difference between this year's statutory result and last year's was the one-off profit we recorded in FY '21 on the Transurban Chesapeake transaction. This was partly offset by noncash movements in derivative valuations. Moving now to our proportional results on Slide 30, which gives you a better sense of our underlying business trends. Proportional EBITDA was $1.9 billion, 3.5% higher than the prior year. Within this, like-for-like total revenue was up $103 million, despite average daily traffic being slightly lower for the year. This demonstrates CPI-linked or fixed price escalations in our Australian markets and improved pricing on our North American Express Lanes. We expect to see further CPI escalations come through in the near term, with March and June inflation announcements taking effect during the course of FY '23. Costs for the year were higher as we continue to invest in our business. We're confident that this was the right approach despite COVID impacts on traffic. I'll cover this in further detail on the next slide. We also benefited from new assets. Last year, we sold 50% of our Transurban Chesapeake assets using some of the funds from this transaction to acquire a larger share of WestConnex. We can see the benefit of these transactions coming through in our results, with new assets contributing $75 million to EBITDA. So EBITDA was up 3.5%, with future EBITDA likely to benefit from improved traffic, full year annualization of our greater interest in WestConnex and CPI benefits. If I take us now to costs on Slide 31. As I said, costs increased this year as we continued to invest in our business. Overall costs increased by 10.9%, consistent with comments we made at the first half. We split the cost increases on the slide to separate out accounting-related items and transaction costs, which contributed about 40% of the overall increase. The main driver here was the change in accounting requirements that reclassified spend that has traditionally been capitalized, such as cloud-based technology projects. Partly offsetting this was a net benefit from power purchase arrangements that we put in place for the majority of our Australian energy requirements. Excluding accounting and transaction cost impacts, we increased operational costs by 6.3%. This includes the rephasing of some future maintenance activities to earlier periods and higher insurance premiums. Importantly, we also continue to make focused investment in the business to support recent and future growth. This investment includes supporting the growth in assets we've had in recent years and areas like data analytics, cybersecurity, customer experience and more scalable and flexible tolling platforms. We believe this was the right approach, even through the pandemic, as it puts us in a better position to support future growth. If you move now to Slide 32. I've included some considerations as you think about costs into FY '23. And we do expect costs to increase again this year, but that should be more than offset by revenue from traffic growth, new assets and embedded price increases. Looking at the cost increases, there are 3 key reasons for this. Firstly, our operational costs will go up as we continue to invest in capabilities to support the future growth of the business. For example, this includes further investment in customer experience, tolling platforms and cyber security. More of this will go to OpEx instead of CapEx given the type of spend. Secondly, with traffic improving, we expect an increase in volume-related costs and we'll have a full year of costs associated with the additional ownership of WestConnex and the opening of Stage 3a. Volume-related costs and new assets are expected to add around 5% growth to the cost base in FY '23, again, more than offset by the corresponding revenue benefit. And thirdly, we have a number of potential development projects where we take cost to OpEx in the early stages. The cost here will ultimately depend on decisions that are made throughout the year. So our new assets and projects do add costs, making this investment now allows us to continue to grow the business and realize value over the longer term. Slide 33 shows our EBITDA margin outcome for the year. Margins at the group level were just under 69%, with these being impacted by government-mandated COVID restrictions in our 2 biggest markets. We can see the improvement in margins to over 71% in the second half as traffic in those markets improved. CityLink margins grew to 84% in the second half, and Sydney margins to 80%. The Brisbane margin was slightly lower in the second half due to higher maintenance provisions as a result of a decision to bring forward some planned maintenance activity. In North America, proportional margins improved as traffic and the average price on the express lanes improved, particularly on the 95 Express Lanes. The 50% sale of Transurban Chesapeake also benefited margins as the higher-margin A25 became a larger proportion of our North American earnings. Moving now to funding on Slide 34. Our balance sheet is in good shape. Firstly, as you can see, we're well set up for a high interest rate environment. We've been actively managing our portfolio with a through-the-cycle view, bringing forward refinancing activity and locking in pricing when rates were lower. We were able to reduce our average cost of debt slightly over the year, and almost all of our debt is hedged, providing protection from rate rises in the near term. Of course, we will eventually see the impact of rising rates, but this will happen slowly. And as Scott has said, in the meantime, we'll see revenue benefits from our inflation-linked toll escalations. The second call out on this slide is that we're well positioned to support future growth. We successfully completed the acquisition of an increased interest in WestConnex during the year. To fund this, we used around half of the proceeds we received last year on the sale of 50% of Transurban Chesapeake as well as new equity raised with strong support from our security holders. Using only around half of the Transurban Chesapeake proceeds has us well positioned to support future growth. We have a strong corporate liquidity position of $3.9 billion, or just under $3.1 billion after the final distribution is paid later this month. This, combined with future capital releases, sets us up well as we go forward. And you can see this in more detail if you move to Slide 35. Here, you can see that we're well placed to fund our committed project pipeline with additional liquidity headroom. We've previously flagged that we expected to receive around $2.3 billion in capital releases between FY '22 and FY '25. This expectation has not changed. So far, we've received $355 million of the $2.3 billion, with around $1.9 billion expected to come over the next 2 years. This gives us around $5 billion in corporate liquidity to fund our committed capital with around $2 billion of additional liquidity headroom. We've also provided some information on this slide on our upcoming refinancing, with most of the debt to be refinanced already above our average cost of debt. So our balance sheet position and our through-the-cycle approach should help support distribution growth and has given us the confidence to continue to invest in our business for the longer term. We know that near-term distribution growth is very important for our security holders. And on Slide 36, we set out our guidance that we expect our FY '23 distribution to be $0.53 per security, which is approximately 30% higher than FY '22. This is, of course, dependent on traffic continuing to recover throughout the year without significant unanticipated disruptions and subject to broader macroeconomic factors and the timing of distributions from subsidiaries. Similar to FY '22, we expect that the 2023 distribution will include a small component of capital releases to minimize the dilution from the WestConnex capital raising, and this has been factored into the guidance. So as I stand back from our financial performance for the year, our business is in good shape to support distribution growth and create long-term value for security holders. We expect distributions to be $0.53 per security in the coming year. Our prudent through-the-cycle balance sheet management and embedded CPI-linked price escalations position us well in a rising inflation and interest rate environment. And we've built a balance sheet that gives us the flexibility to support our capital commitments with additional liquidity headroom for further growth opportunities. Thank you, and I'll now hand back to Scott.

Great. Thanks, Michelle. Looking now to the future on Slide 39. You would also see that our Chair, Lindsay Maxsted, has said he will not stand for reelection at the upcoming AGM. Lindsay has now served on the Transurban board for more than 14 years. And over that time, that business has grown almost sevenfold, adding 14 new assets in the last decade and paying more than -- out more than $11 billion distributions to security holders. I know that Lindsay will be greatly missed by the executives and myself. I'd also like to welcome our new Chair, Craig Drummond, to the Transurban Chairmanship. He joined the Board in July last year. He's got very extensive experience in financial and regulated service industries, and you'll see some more detail on Craig's background, but I'm sure most people know Craig. I'm really looking forward to working with Craig as well as the Board and continue to execute on our existing Transurban strategy of delivering road transport solutions, again, that create long-term value for our stakeholders and growing our distributions. So just summarizing on the outlook page on 40. We've covered most of these points, but looking forward, our business is well set up to benefit from growth in traffic and inflation-linked toll escalations as we are protected from rise in near-term interest rates, and we have a robust balance sheet to allow us to continue to invest in sustainable growth for our business. And again, we're seeing that growth in traffic and over the last few months, reaching all-time highs for the Transurban Group, and we expect traffic to continue to recover, particularly coming into the summer and warmer months as we move out of this last phase or this current phase of Omicron. And as always, we will continue to balance this investment that we have with our growth and distribution for our security holders. And as we've talked about, the total distribution in FY '23 will be $0.53 or forecast to be $0.53 per share, which is, again, 30% higher than our FY '22 distribution. And then going back to what I said, just to make it clear, the underlying free cash flow is above that in 2019. And we still have, subject to market conditions, on top of that, approximately $0.10 per share in capital releases that we will use to put back into the business to create future growth and long-term value for our shareholders. So finally, I'd like to thank particularly the team at Transurban through another year that had its challenges, but we're sitting in a very good position at this point in time to take advantage of all the hard work over the last couple of years. And of course, I'd like to thank our security holders who supported us so much and for everyone who's attended the call today. And now we will open up to questions, please.

[Operator Instructions] Your first question comes from Justin Barratt from CLSA.

My first question just comes in relation to costs. I appreciate the commentary that costs should further increase into '23. But I was just wondering, is it still reasonable to expect some margin expansion across your different geographies and a group level on, I guess, sort of 2 half '22 levels?

I'll let -- Thanks, Justin, and thanks for the question. So I'll let Michelle answer that question. But we do anticipate an expansion over time, but go ahead.

Yes. So Justin, yes, we do. As we noted on the cost slide, there are some costs, particularly around early-stage development spend that we'll make decisions on during the year. But yes, we are expecting some margin expansion on the second half margin.

Yes. But it's an interesting thing as well. So we continue to invest and particularly in customer technology and other things that add cash flow and add benefit to the bottom line. They may not be at an 80% margin level, but they continue to add cash. So we'll do things that continue to create value and distributions. But we do expect, over the longer term, yes, margin expansion.

Fantastic. And then just appreciate the disclosure on Slide 44, your distributions from non-100% owned entities. Just wanted to try to make sure that I understand. So $97 million, I assume that that's some backdated distributions from, I guess, the COVID impact period. Is it fair to say that they will shrink quite considerably into FY '23? Or are you saying that the delayed 1 quarter Northwest Rose Group and the WestConnex, M4 -- M8/M5 East distributions can be expected into FY '23?

Justin, it's probably more the former. So the driver of the timing increases, as you say, was distributions that have not been paid out in the prior year, particularly Transurban Chesapeake. There were also -- there had also been some holdback of reserves and other things at WestConnex. And so you don't expect those to repeat in the coming year. There will be some small differences on some other assets, for example, the ED, we didn't pay out distributions in 2022, just given the COVID restrictions there, but we are expecting some return to distributions for the ED. But yes, I think your first premise was right, that timing difference should come down quite a bit.

Your next question comes from Andre Fromyhr from UBS.

Just maybe starting with the traffic and customer behavior. And I appreciate all the data that you've shared from the recent research that you performed. But I'd love to get your sense of -- to what extent we're still in a sort of recovery state on the path to a new normal of customer behavior. Or to what extent should we -- to interpret some things as structural changes? So for example, Melbourne still being down 7.5% in the fourth quarter versus pre-COVID. Does that feel like the new baseline? Or is there still recovery to play out.

Thanks, Andre. A good question. Look, we still think -- again, going back to long-term trend lines. So we still think there's some recovery to play out. And again, those cities that had longer lockdown periods, you see it's taking longer to recover. And for those of you who spend any time in the Melbourne CBD, you'll still see that there's recovery to be had there. Obviously, the airports aren't back to full operation or capacity. So we still think there's recovery. Again, as we've talked many times, there's long-term trends here about working at home, e-commerce and other things like that. And some of those are playing out. Again, we think all those long-term trend lines mean more kilometers being driven, but we -- there's still some recovery to be had. I mean you can see it, we're just -- if you go back just a few months to January, February, dealing with the latest round of Omicron and other things, particularly in Sydney. But -- and we still have the government in Victoria talking about if -- in certain instances, still, if you can work from home, work from home. Now that will reverse, obviously, over time. So yes, there's still some recovery to play out. The thing that's balancing out that is obviously the trend away from public transport. That will move back more toward public transport over time, but the same will occur that more people, we believe, will come back to the offices. And you can see on a regular basis now, certain large corporations talking about, I'm not sure the right word is mandating, but suggesting or looking to have their employees come back into the office. So again, partly, it's recovery, but being supported well in the short term through some of these other trends and move away from public transport.

Okay. My next question is probably about the capital releases. So I guess you've reiterated the overall size over the medium term with $1.9 billion remaining. And that scale of capital release has been sort of held in your guidance for some time. To what extent is that sensitive to the interest rate environment with the rates were lower, when you initially talked about that scale of capital release? Is there any sensitivity there?

I'll let Michelle answer, but when you have to deal with the treasury people, they're always very conservative. So -- but I'll let Michelle answer the question.

The reason we haven't changed our guidance on that, even as we've seen and we expect rates to go up is -- to Scott's point, we take a fairly conservative view when we set it. So we had some buffer in there and we -- yes, so we're still very comfortable.

But again, that even if you look at the long-term bond rates and where they've come off, the margins, liquidity, it still -- can still be a fairly attractive market. So at this point, we don't have concerns.

And we keep achieving them actually better than we...

Yes. We keep achieving it better than we [ had ] forecast. I mean the big underlying issue, Andre, is what will the traffic be doing at the time. So obviously, we're in a good position now with the recovery of cash flow. But if for some reason, something happens in relation to government restrictions -- but that doesn't look like that will be the case going forward.

Okay. And then just 1 slightly more detailed question on that and the role of the WestConnex capital releases in FY '23. To what extent have you sort of got an idea of the scale of those already? In which case, if the underlying free cash flow performance is better, you could be listing that -- you could distribute higher than the $0.53? Or does the opportunity to use the WestConnex releases provide a bit of a buffer for you to perform better, you use less capital releases, if you perform worse, you use a bit more. Like did you understand the dynamic I'm talking about?

Yes, yes, I completely understand the question. So first of all, I'll just make it clear, the Board has given the distribution guidance of $0.53. So that's the Board's guidance. But clearly, we'll see how the operations go during the year. And obviously, we hope we do better. And history in Transurban, other than market conditions outside of control, we've usually done at least a little bit better, so we hope to do better. The issue with the capital releases, as I said, we have, subject to market conditions, roughly around $0.10 per share of market releases. Michelle can talk about where they're likely to potentially come from. But that decision, at the end of the day, will come from the Board looking at the underlying performance of the company, what we've got to do in delivering the pipeline. But their guidance at this point is $0.53. But certainly, there's plenty of flexibility with the capital releases and other things for the Board to consider, but that will be something they do next year. So I don't know, Michelle, if you want to talk about where it's coming from with WestConnex or other.

Yes. I mean I think in the near term, it is more WestConnex, and then over time, there will be some more out of NorthConnex and also a little bit in Queensland and then Transurban Chesapeake over time. Scott, it's probably worth just going back to the distribution policy and the -- as we stated in the presentation, the way we think about the distribution right now is it's underlying free cash and then conscious of the WestConnex capital raising and the dilution. So we say we'll use a little bit of that to support the dilution. The reason it was set that way is you sort of look at the pipeline of opportunity we have and it makes sense to reinvest those capital releases into the business. If the capital releases end up being a bit more than that just becomes a question for the Board at the time.

Your next question comes from Owen Birrell from RBC.

I might just draw a little bit further on that distribution guidance. I mean, $0.53 looks like in simple terms, 2x what you delivered is the final or in the second half of '22. In terms of the distribution that you're getting from non-100% owned entities, it sounds like there's a bit of -- or quite a considerable degree of discretion by those entities to pay. Are there any particular assets where you expect the distribution to be significantly lower or softer than what you saw in the second half?

Again, I'll let Michelle answer, but there's not -- the discretion to pay, I mean, I appreciate that in your minds, it might have been a long time ago that COVID all this happened, but that was just a year ago that -- and particularly for Sydney and Omicron that Sydney traffic was looking terrible and the city was shut down. And then to Michelle's point, the timing of then the distributions follow behind that. So having to deal with those consequences. So there's no issue with getting the distributions out. It's just we have a fairly -- always, we have a fairly conservative capital and balance sheet management philosophy, but one thing is we have very strategically aligned partners as well who have their own reasons to distribute the cash as well. So I think very much aligned and no reason other than if it's a development opportunity to retain the cash, but we were in some pretty -- again, looking at potentially extraordinary circumstances. But I don't know if you want to comment on the timing.

Yes. So I think the discretion is more about the timing of it. So whether it's in '23 or gets pushed out if something changed the view. That's why we make the point in the presentation. In terms of what we're expecting from the different assets, you sort of a normal just performance-driven increases as traffic improves in some of them. But I mentioned in response to an earlier question that we won't expect the repeat of some of the timing benefits or -- particularly in Transurban Chesapeake, and there will be a small offset of that probably in the Eastern distributor.

Yes, going to ask on the Eastern distributor. The comment there about transitioning to paying tax and amortization payments, how much can we expect that Eastern distribution to be impacted by both of those [ systems ]?

Yes. So yes, we have started paying tax and amortizing it, and we didn't pay a distribution in -- we didn't pay distribution out of the ED in '22. You sort of expect in terms of total Transurban group, it's probably about $0.01 of our distribution, roughly.

Okay. And can I just ask a second question on the cost consideration? You gave -- you made a comment around early stage costs being expensed. Just wondering if you can give us an estimate of the kind of what sort of magnitude of early-stage costs you are expecting to expense or you're budgeting to expense in FY '23? And I guess how much can that deviate sort of high, low?

Yes. So it's -- talk about where it is. So there's the M7-M12 project, there's work, as Scott mentioned, in terms of Brisbane, and there's work going on in the U.S. around Maryland and some other projects, potential projects there. The reason we haven't given a number is it will depend on decisions made through the year. But it could be in the order of $30 million, $50 million, depending on the decisions.

Yes. And the other thing that's changed, Owen, a bit, as you would see with the development projects and some of the things over the last few years, the issue on getting to financial close, getting the right construction project, getting the right due diligence done, getting the right sort of structure done to make sure in this environment with this construction market and other things that we get the right outcome, so we don't have any issues going forward. It just takes more upfront cost. Now the value of these projects, the long-term creation, it's significant value to the company, but we're just having to spend a bit more in this current environment to make sure we get everything right.

Your next question comes from Paul Butler from Crédit Suisse.

Look, sorry to rehash things. But I just wanted to clarify, I wasn't 100% clear because I think, Scott, earlier in the presentation, you were talking about holding on to some of the capital for future projects. And I just wasn't clear whether you were talking about just hanging on to the capital from capital releases, excluding from WestConnex, or whether you were also including that -- some of the underlying cash flow from 100% owned assets?

No. It could potentially be some of both, but we would be able to make -- we would be able to show you where that's coming from. If for instance, we decided with the M7 that it's more efficient to use the existing cash to do the construction, but we would show you where that was and what capital would have come out. So we're just looking at how we most efficiently use the capital, Paul, but we'd still be paying out the free cash flow and plus the amount of, I guess, dilution for the WestConnex no matter what the case, as Michelle said. And then on top of that, like for this year, we've got another 20 -- or sorry, another $0.10 per share of capital releases to put back into the company. So that's what I was talking about. Sorry if that confused it a little bit.

Okay. And the $0.10, where's that coming from?

It's mostly -- I think, Michelle said, it's mostly WestConnex.