Edited Transcript of AIA.NZ earnings conference call or presentation 19-Feb-20 10:00pm GMT

So turning to Page 6, just a little bit looking ahead, and Phil will touch on guidance in a minute, but naturally, like everyone, we are very focused on the coronavirus impact and how that is unfolding. Obviously, not really showing up in our first half results but something we’re looking ahead to. And look, frankly, it is evolving. We are tracking the information like everyone else to try to understand how it is unfolding. There is going to be an impact on our business and we are sort of assessing what that looks like.

We have, obviously, looked back to past events like SARS and others in the past. I think there’s no question that this is different to that, and it just reflects the influence and impact of the Chinese economy globally as well as on our country and our travel markets. So this has got some time to work through. But we have tried to judge, and we’ll talk about that shortly, the impact on to here.

I mean longer term, we still have that overall confidence in our longer-term prospects and our markets have traditionally remained very resilient to that. And what will be interesting to see is, as this issue works its way through, how the various markets respond. And we’re certainly starting to see this with our government putting more stimulus into the international tourism marketing with a new fund. Certainly, other markets like the Singapore government tipping in a huge amount of money into their tourism market stimulation and obviously waiting to see what the Chinese government does in response to try and get their economy going again. So we’re monitoring this really, really closely. And we have seen an impact on, obviously, travel to Mainland China. And we’ll need to work our way through that later.

The other big theme for this period is that the very big investment program that’s underway. Lots of projects in the ground now and going and it’s really pleasing to see that, that’s starting to get the diggers into the ground. There’s some highlights there about expansion and renewal around our airfield stands, taxiways and renewal works. Got our Northern road network, which travelers to Auckland can see every day as they come through. We’ve announced today, and we’ll touch on this later, the new international arrivals project as well as the formation of a construction alliance for the build of the new Domestic Jet Hub. And our commercial property business continues to go fast with our hotel build and others. So a really historic period, I think, of investment and growth in critical assets for the future.

But before I go into more detail, I’m going to hand to Phil just to update on outlook and guidance and then turn in detail to our financial results. So Phil, over to you.

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Phil Neutze, Auckland International Airport Limited – CFO [3]

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Thanks, Adrian. And for the eagle-eyed out there, you might notice that this is the first time I’ve ever started with guidance. So it’s a little bit different this year. Naturally, listeners will be particularly interested in how we’re expecting things to shape up for the full financial year, given the coronavirus outbreak. So let’s start with our guidance then I’ll get on to the interim results. So this updated guidance is based on our knowledge and expectations as of today. We will update, if necessary, if actual outcomes differ materially from our current assumptions.

So turning now to Slide 8. First, I want to emphasize that COVID-19 impact on underlying profit is uncertain. Our current forecast is approximately a $10 million after-tax impact in the second half of FY ’20 and that’s over both aeronautical and Till 2 revenues. And that assumes increasing impacts over March and April and then a gradual recovery over May and June. Prior to the coronavirus outbreak, our guidance would have been unchanged for the full year, but we now expect FY ’20 underlying profit to be between $260 million and $270 million for the full year. I think it’s also important to reconfirm to our investors that our dividend policy is unchanged, and this has informed our $0.11 per share dividend for the first half.

Looking at our high level COVID-19 assumptions. We see the greatest impact being on passengers direct to and from China from February 2020. And as I mentioned, a gradual recovery over May and June. We see a lower, albeit, still significant reduction impacts from other countries that were previously transiting through China and we expect other Asian direct routes to be down, too, but to a lesser extent. And there will be some flow to New Zealand domestic travel. So looking at CapEx guidance. We continue to expect total CapEx in FY ’20 of between $450 million and $550 million for the year. And we see total commissioned CapEx for PSE3 to be on track versus our original forecast.

So let’s now turn to the financial results for the first half. We’re now on Page 10. Starting with the aeronautical revenue. We had reductions this half, reflecting — resetting our target return for PSE3 to 6.62% from the start of FY ’20 onwards. And that lowered overall revenue growth to 1.1% for the half year. Given the slowing revenue growth that we’ve been expecting this year, we’ve been working hard on OpEx discipline and our first half OpEx growth for FY ’20 fell to 2.1%, that’s versus 13.6% in the prior corresponding period and 6.3% for the full 2019 financial year. Underlying profit after tax was up a bit stronger than EBITDAFI at 2.2% versus pcp, and that was assisted by lower interest expense.

So looking at revenues now in more detail on Slide 11. There was a 5.4% reduction in aeronautical — sorry, airfield income and that’s landing and aircraft parking charges. That was impacted in roughly equal proportions by our aero price reductions as well as reduced MCTOW. The 2.4% reduction in passenger charges, on the other hand, was dominated by the aeronautical price reductions from the start of this year. And — however, these aeronautical revenue reductions were more than offset by solid Till 2 revenue growth versus pcp and that was across retail, car parking and investment property. So retail income increased by 2.5%, parking revenue grew by 4.3% and nearly 60% of the $2.6 million property rental increase was driven by rent reviews on existing properties and the remainder was from new properties added to the portfolio.

Turning to Page 12. Our international passenger numbers, excluding transits, were down very slightly on pcp and that mainly reflected the exit of AirAsia X and Hong Kong Airlines services during FY ’19, partly offset by some growth elsewhere. Domestic passenger numbers fell more significantly than international this half and that reflected, as Adrian touched on, Jetstar’s regional exit in November 2019 and Air New Zealand’s capacity reductions on domestic routes. Transits increased slightly for the period as explained on this slide.

Looking at aircraft movements and MCTOW on Slide 13. Both of these measures declined by more than the passenger numbers and that implied higher load factors and airline profitability on both domestic and international services versus pcp. And the greater fall in international MCTOW than aircraft movements and international reflected AirAsia X’s canceled Tasman services being backfilled by smaller aircraft from Air New Zealand, Virgin and Qantas.

On Slide 14. So asset management, maintenance and airport operations continues to be our biggest cost growth category. Roughly 1/4 of the $3.9 million growth versus pcp in this cost category reflected increased activity in revenue-generating Till 2 businesses, for example, Valet parking and Park & Ride. And the remainder was driven by additional aeronautical operations and maintenance costs.

Rates and insurance costs increased by $1 million, reflecting valuation uplifts that was across entire property portfolio, particularly the international terminal following the completion of the outbound processing retail capacity enhancements as well as investment property developments. And these increases were offset somewhat by a $2 million reduction in consultancy and legal costs versus pcp. So overall, we had growth in OpEx significantly down on previous periods at 2.1% versus 13.6% pcp. And finally, interest expense fell 13.5%, reflecting lower average rates and higher capitalized interest.

Turning now to Slide 15. So Queensland Airport delivered another strong contribution to our underlying profit, up nearly 30% versus pcp. And that was all on the strong international pax growth of 17.1%. Our Novotel hotel joint venture with Tainui also delivered a strong underlying profit contribution for the half year. It was up 9.5%, and we were very pleased to see a lift in both occupancy and average room rate versus the first half of FY ’19, given the growth in hotel room supply in the Auckland market over the last 12 months. In fact, we did much better than the overall Auckland market in this regard. So I’ll be handing back to Adrian shortly to talk to Auckland Airport’s progress against our 4 key strategic themes. But first, a quick look at CapEx and funding on Slide 16 and 17.

So the chart on Slide 16 shows that aeronautical and investment property CapEx for the first half of FY ’20 was almost identical to our full year CapEx in those categories for FY ’19. And total CapEx was up 74% on pcp. We remain comfortable that our full year CapEx will fall within our reconfirmed guidance of between $450 million and $550 million. And we’ve refined our approach to risk adjusting our detailed bottom-up CapEx forecast for deliverability and this approach informs our longer-term CapEx projections. So key aeronautical projects underway in earnest in H1 FY ’20 are described on this slide. So that includes getting started on the new Northern stands and taxiways, the international arrivals expansion and the design of the new domestic jet terminal. And as I mentioned before, we still expect commissioned aero CapEx during PSE3 to be broadly on track with our original pricing forecast.

So finally for me, turning to Slide 17. This slide summarizes our borrowing portfolio as at 31st of December 2019 and summarizes our key credit metrics, all of which are strong. The dividend reinvestment plan will remain in place for the interim dividend at 2.5% discount to market price. And Auckland Airport remains committed to its A- long-term corporate credit rating from Standard & Poor’s and our dividend policy of paying circa 100% of underlying impact. We do have a large CapEx program to deliver over the next few years, and we’ll likely be launching domestic fixed rate bonds and/or an Australian bond over the next 3 months to partly fund it.

So back to Adrian now.

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Adrian Littlewood, Auckland International Airport Limited – CEO [4]

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Thanks, Phil. So I’m just going to touch on a bit of detail around various parts of our activities. I’ll start with travel and trade markets on Page 19. So as we touched on before, we’ve actually — looking at our business and comparing capacity development against passengers in that top left-hand corner, you can really see the impact of capacity dropping back but actually passengers holding up. And in fact, we’re now really comfortably above 80% loads on our analysis across both domestic and international. And that does give us some real comfort around the strength of the underlying markets. I think any time year-to-year, you can get impacts from various things and certainly, as Phil touched on before, we’ve had some impacts from aircraft issues. Obviously, the 787 issue — engine issue continues. But also the 737 MAX issue globally is understood to have an impact, and that’s really where airlines are redeploying potentially wide-body planes on to, say, domestic or short-haul flying to fill the gap of the 737 MAXs that are on the ground.

So look, it may be that if and when that issue is resolved that new capacity comes back into the market, that will be something that we would be targeting and going after. Looking at the different routes, though. If we’re looking around the world, the Middle East has actually had some good performance there. Capacity ticking up, but passenger is even stronger.

North Asia was affected by the Hong Kong riots and changes there and so that did see a bit of an impact from there. We think Japan is a little bit underserved and probably could do better if more capacity was there. China, we talked about before as, obviously, in the first half, pre-coronavirus, dropping back from a capacity point of view. But actually, the key message is that the direct service passengers are actually growing quite healthily.

Southeast Asia has been going really well. Singapore is performing incredibly well, and we continue to see opportunity in markets like the Philippines, India and other areas. North America is another one. Obviously, it didn’t really see the benefit of some of the new announcements in this half. They will show up over the coming halves and towards the back end of this calendar year with markets like Vancouver, New York and Dallas coming onboard. So really pleasing to get those announcements from New Zealand and American.

Just turning to Page 20. I just wanted to dive a bit deeper into the China market and some of the other dynamics going on. And just bear in mind, these are all pre-coronavirus numbers. But on that left-hand side, if we look at the nationality perspective from China, one of the headlines has been around New Zealand tourism market has been the decline of the growth rate of the China market, the decline of that market. It’s really important to understand that, that’s — that reflects actually what’s going on in indirect travel. Actually, direct travel to New Zealand by Chinese nationals is actually up about — was up about 5.5 million in the period, and that reflects that transition to premium mono-destination travelers coming on the direct services. That, to me, is actually an evolution and a maturing of our tourism market for that sector, that market actually in line with what we want. People who are coming, spending more time here, getting around our country.

That you can also see across on the right-hand side there in the Australian market with the changing shape of the Australian market with the first freedom carriers like Emirates withdrawing from the market. Jetstar and — sorry, Qantas and Air New Zealand — sorry, Virgin and Air New Zealand separating out in that market changing. So we’ve seen that connecting via Australia declining and actually more point-to-point traffic there.

And then if I go to the bottom right, the domestic underlying demand we do think remains solid. I think the economy remains in pretty good shape, good underlying growth. And I guess, we would track that by saying if you look at the capacity in the market, obviously, that’s been declining, fewer seats being flown. But actually, passenger volumes have held up a bit better than that. So that’s just, obviously, growing load factors and suggests underlying demand is actually in pretty good shape. I do have to caveat that, that’s all pre-coronavirus.

Just in that context, Page 21, again, just paints that broader picture. Our business has been through various, both global and local events. And while we might have had a bounce or a short blip for a period, actually the underlying markets are strong. And I actually think if I look longer term or even medium term, the underlying drivers remain solid with that growth in the middle class, one flight away from us so I think our tourism product remaining strong also.

Right. Turning to Page 22, and this is a — it’s a complicated story to tell. But the real story here is around the core investment and major infrastructure here. So we are investing significant money, as Phil said, in big infrastructure assets for the long-term growth. And we’re really pleased to get now — have 4 of our main 8 anchor projects into construction, and we’ll touch on that more in a minute.

So across the current domestic terminal works and Northern stands and taxiways and new international arrivals and our transport network, those are all in the ground and going and that several other — of those 8 anchor projects are very close to diggers in the ground as well. So really pleased that we are keeping that machine turning.

So I’ll go into a bit more detail on each one of those projects on Page 23. Northern stands and taxiways, it’s about 6, I think, rugby fields worth of space, 250,000 square meters, $350 million-plus. That’s well underway now, and we’re planning to bring that into operation in stages. Taxiways operational 2020, remote stands late ’21.

Travelers to Auckland Airport can see the roading network upgrade, which, as a reminder, is the future transport system to enable the future integrated terminal. That’s well underway, tracking really well. Team is doing a great job of keeping the traffic flowing while that is ongoing. Planned to be fully operational by mid ’21 and that will also enable public transport connectivity and a bit of walking and cycling experience for travelers with dedicated mass transit lanes for buses getting connectivity all the way through.

Not on this list of our 8 anchor projects is our Southern network, which is also getting a big upgrade. And so we turned the site on our joint project with NZTA and Auckland Transport to do a mass transit lane connection all the way to the mainline train station that is being upgraded at Puhinui so which, for the first time, we’ll have a really integrated public transport service to the south of our city and down to the CBD. So that’s a very exciting project. We continue to — on item 3 there, continue to work on our domestic terminal. We’ve expanded the security area there and have upgraded the retail there, so that’s going well.

On item 4 and really one of the announcements today out of our results was the — getting the diggers in the ground on the international arrivals project, something we’ve been working on for some time through an ECI process with Hawkins as main contractor, working very closely with the border agency. So enabling works actually started last year. We are about to break into vertical construction. And this will be a complete upgrade of the arrivals experience for international travelers to our country, a brand-new border processing experience and a brand-new public arrivals area there.

There’s a couple of visuals there on the right-hand side. It’s a great video for those Aucklanders who are keen to see what that looks like, but that will be a really dramatic upgrade. And passengers will exit that area out onto a new plaza between the 2 hotels, the new one, Pullman, we are building with Tainui. So that whole experience will be a big change as well as an integrated transport connection area right adjacent to that. So some big changes for customers coming through, and we’re planning to have that completed in late ’23.

The other big news, in a similar vein, is on the Domestic Jet Hub. So has been a challenging project, there’s no question about it. And I think it’s just the fact that when you are connecting in big new infrastructure into existing operations in a brownfield site, there is a lot of complexity. We had a lot of issues to resolve: how did that connection happen, what was the passenger experience, the connectivity we’re trying to achieve, what services and infrastructure did we have to relocate, what operations did we have to relocate to make that happen. So we’ve been infected in enabling works process for some time now. Our fuel line upgrade system that is ongoing right now is underway in line with this design. But the big news here is that we have now progressed the design to the point we’re able to form a construction alliance arrangement with 2 preeminent builders in New Zealand, the Dana Group and the Fletcher Construction, but also bringing the engineering design team from Mott MacDonald into this alliance with us. So that’s an alliance model, sort of in line with where the government construction accord had been focusing on, which brings that risk-sharing in together, brings the supply chain power of those 2 organizations with us with joint accountability. And I think for a project of this complexity, scale and size, it’s appropriate and realistic for the New Zealand market.

So we are really pinning our ears back on that one. And construction specifically on that project will start in late 2020, and we’re targeting the first stage for completion in 2023. Passengers, naturally, will see that benefit of being able to directly connect into one facility between Domestic Jet and our international services.

Turning on to Page 26 on the other balance of our major anchor projects. Northern runway, again, continued excellent progress on the design and planning work on that. We’ve now completed the notice of requirement, the planning permissions for that and have secured that for the full length runway. The concept design work has been progressing really well actually and some excellent work by our team on the civil engineering and design work on that front. And obviously, we are still doing the work on the timing of that, the specific timing of that and that work is continuing and we’re planning to make some announcements and updating on timing later this year.

Number seven, our multistory car park and new transport interchange hub. Again, excellent progress on the design of that. Negotiations are ongoing around construction. We’ve actually isolated the site in the last few weeks and created a different passenger pathway so we can get into that project. And that will obviously connect them with the new Domestic Jet Hub. You’ve obviously got to have the transport interchange to go with the terminal. That is well underway and looking to make some announcements, hopefully, later this year around construction commencement, but we’re targeting a completion around 2022. And lastly, we continue to work on our cargo precinct and working on the feasibility and design of those options for the future.

But look, these are just 8 of hundreds of different projects that are interconnected. In any other year, those other projects would feature on our list here, things like our fuel pipeline upgrade, a very big and complex project that’s well underway and going. But we’ve got just hundreds of projects underway and connected in.

Right. Turning to our commercial property business on Page 27. Look, the team is still running really hard and fast and doing a great job. We’re continuing to turn out high-quality development, class-leading assets in the industrial and commercial sector, and it’s showing up in results. We continue to lift our annualized rent roll now up to $105 million on an annualized basis. Occupancy is strong, our WALT is lengthening and we still got 200-plus hectares to develop.

We also are continuing our speculative program, continuing to bring in the multi-use or dedicated facilities where we see them, but we’re also getting great recontracting from existing tenants like DHL and Hellman and that continues to go really well. And obviously, listeners to this call will also remember that we’ve got 2 hotels under development, a Mercure 4-star hotel, which is tracking really well, in fact; and then in the 5-star Pullman hotel outside the front door of the terminal in partnership with Tainui Group Holdings. Both are tracking to plan and budget.

Page 28, just talking about our terminal and operations. We continued to work hard on our capacity and effectiveness. We’ve rolled out some new services around automated border processes with pre-security gates. We continued to roll out our precheck and check-in kiosks and starting to spread that around our precinct, stepping out of the terminal itself into Novotel hotel and Park & Ride, so people can check in before they arrive physically to the terminal. And we’re continuing to upgrade different areas around passenger amenity.

In the broader experience, we continued to work with FSIC to bring some innovation around different passenger pathways with the family lane and the prepared passenger lane to try and speed up their process and also expanded some of their processing areas. And continued to invest in the technology to help people plan for their journey. So launched our home-to-gate feature on our app, a big upgrade to our online services, which also allows people to see processing times for the border security, aviation security and the like so they can plan their journey.

Continue to work on this for the future. We’re looking at automatic backdrops now and other real-time reporting for our partners, so they can help optimize the whole airport system for efficiency and a better customer experience.

Page 29, just quickly touching on our consumer business. Retail has continued to perform well despite the moderating passenger growth. Completed a lot of those projects in the terminal and international. As I said before, we’ve had that good uplift in spend rates and actually quite pleasing performance in terms of sales in our core categories with Duty Free PSR up 7% across the period.

The online and multi-channel work continues to grow as we learn that business and test out new ideas. Transactions are growing 55% in the second half compared to the prior period. And we’ve launched our WeChat mall and we’re testing out different direct shipments to China angles and there are some interesting ideas in there. We’re the first airport, I think, to bring both WeChat Pay and Alipay functionality into 1 payment window for airports globally. So that’s a — it’s a great feature and something that we know our customers are looking for. And our domestic terminals continue to lift with our food and beverage upgrades.

On transport, Page 30, again, some moves and changes there with new capacity coming in, both in self-park and valet. Valet has gone very strongly, and we have been using that as a method just to upgrade people to give them a better experience but also to manage capacity a bit more. And that’s led to a strong lift in valet growth. And we’ve got some big new capacity coming on with a new Park & Ride south facility, the ground has broken on that. I didn’t mention that earlier. It’s about 3,200 car parks coming on in late 2020, which will coincide and it’s working in with the NZTA 20B project. That will also be available also for construction staff as well, as well as the multilevel car park outside the front door of the terminal I mentioned before.

Finally, just talking to our people and our place in the world. Look, really pleasing from a customer experience point of view to see some of the upgrades that have already come through really showing up in customer satisfaction scores. So our survey scores have really been performing well despite some of the disruption, and I think people are starting to see the benefits of the upgrades. So that’s great to see that flow through, some higher results there as well as some of those core metrics that people care around, around baggage reclaim time, busing movements dropping down and improving there.

From a safety and sustainability point of view, we are committed to that. We continue and have for many, many years focused on our place in the world and how we can minimize our impact through our program, and we’re applying those building standards as we go through. But really pleasing to see the focus on safety coming through. it’s going to be critical for us through this project phase that we’re in around having this focus on safety. So great to see a decrease, such a big decrease, in recordable injury rate but also the increase in reporting.

And then, finally, we truly believe in the opportunity that a multibillion-dollar program can offer to this part of South Auckland. And so Ara, which is our jobs and skills hub, in partnership with the government, is really still paying really big dividends. And we are hosting many jobs exposed to put local people into local jobs and it’s something we’re really committed to.

So with that, I’ll pause there. And I know that’s a lot. We are very busy as you can pick up. Lots going on, but it’s a really exciting time for us at the airport. And happy to turn now to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Andy Bowley from Forsyth Barr.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division – Head of Research [2]

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I’ve got a couple of questions. And the first, around the development pipeline and specifically around the northern runway. You made reference to reviewing the timing of the northern runway in your presentation, but no reference to the runway land charge. Can you — so I guess, in that context, can you give us a probability of you imposing the runway land charge from 1st of July this year?

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Phil Neutze, Auckland International Airport Limited – CFO [3]

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Yes. So in terms of timing, we’re working that through on our board strategy day in April, and again, looking for a Board decision in May. So that decision isn’t yet made. I think as we have discussed with a few investors, analysts over the last few months, the likelihood of that kicking off the runway land charge from FY ’21, as we previously expected, is clearly diminishing. And we would expect that the timing of the runway itself commissioning is going to be somewhere in the early 2030s rather than 2028 that we’ve been talking about previously.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division – Head of Research [4]

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Great. So the second question, and again, reference to the presentation, I recognize you don’t have a crystal ball, but what do you think the potential impact on non-China passengers could be from coronavirus? And I guess how much do you expect non-Chinese Asian routes to be down as a result, recognizing things could deteriorate from here, but you made no specific reference to non-Chinese Asian routes in the presentation. Could you elaborate a little bit more?

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Phil Neutze, Auckland International Airport Limited – CFO [5]

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Yes. Don’t really want to get into the detailed assumptions there, Andy. The reality is we really don’t know any more than anybody else does on how the coronavirus is going to pan out. It’s fair to say that we are seeing very little, if any, contagion on other international destinations other than Asia. And it’s almost exclusively on direct flights to China at present as well as through traffic transiting through China. We are expecting that there will be some material impact on other Asian ports, but that all rolls up into our $10 million after-tax impact. The reality is on those individual assumptions will be wrong individually on all of them. But we do believe that, that $10 million impact is a very sound estimate based on current information.

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Andrew James Bowley, Forsyth Barr Group Ltd., Research Division – Head of Research [6]

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Yes. So just digging down into that. So Adrian mentioned Singapore in terms of Singapore government increasing investment in the tourism sector. See, this week, the Singapore Airlines started cutting back capacity. What are other airlines saying to you about the demand outlook in terms of what they can see in their bookings?

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Adrian Littlewood, Auckland International Airport Limited – CEO [7]

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I think, Andy, there’s no question they’re sort of saying the forwards are looking a little softer. And I think what they don’t know is potentially people are leaving their decision quite late in terms of whether they cancel an existing booking, and that’s why it’s really hard to tell and even hard for them to judge. So our best guess, as Phil said, is reflected on our numbers here. But I think we should expect it to be a bit lumpy over the next few months. So we just need to keep reading the data as it comes out.

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Operator [8]

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Your next question is from Wade Gardiner from Craigs Investment Partners.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [9]

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The first question is the $300 million pipeline for property development. I mean — I think that’s minimal as to what you’ve said in the past. But can you just give us an idea of what we’re going to see during FY ’20? And sort of how that $300 million gets spent over the preceding years?

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Phil Neutze, Auckland International Airport Limited – CFO [10]

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We’ll have to come back to you on any sort of detailed breakdown on that, Wade. But it’s fair to say — what we should say is that’s what we know at the moment. We do have an ambitious investment property growth strategy. So we’re looking at all sorts of opportunities at the moment, all of which have strong ROI potential. All of them a long way off board approval at this stage. But I think big picture, if things go according to the prospective opportunities, you should see the run rate increase going forward from the past.

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Adrian Littlewood, Auckland International Airport Limited – CEO [11]

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And Wade, just to note that the — that $300 million is excluding the Pullman hotel.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [12]

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Okay. Just drilling down a little bit into the cost lines. Can you give a bit of color on the professional services in your other — the other line for costs, and therefore, what we should expect from those in the second half?

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Phil Neutze, Auckland International Airport Limited – CFO [13]

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Big picture, we expect ongoing cost control, obviously. That’s the most immediate lever that we have in terms of the overall P&L outturn. So we would expect the full year outturn in total OpEx to be — the growth rate to decline a little bit from what you saw at the half year.

If you — in terms of what’s in other expenses, just bear with me a sec. We did have a couple of one-offs in the last period, which haven’t been repeated this period. So we had a bad debt in relation to one of our international terminal retailers that’s exited as well as a small write-down on asset disposal to make way for our terminal exit road. So that won’t be repeated.

In other categories that fall in there are the likes of staff travel, and of course, that’s another area of focus for us at the moment.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [14]

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What about professional service fees, which was way lower this period?

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Phil Neutze, Auckland International Airport Limited – CFO [15]

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Yes. So we — I mean, you would have observed that we have been growing head count over the last probably at least 2 years. And there’s been a focus on building that institutional knowledge and expertise in housing more of what were previously outsourced. So again, strong controls here. The consultancy is across a whole range of factors. There’s dozens of things that we’ve had consultants assist us with. But as I mentioned, an ongoing focus going forward.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [16]

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Okay. So the sort of that close to $3 million per half is the more likely run rate going here rather than sort of the — sort of $4 million or $5 million that we’ve seen in the past?

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Phil Neutze, Auckland International Airport Limited – CFO [17]

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That’s our plan.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [18]

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Okay. Next question, just given the runway issues in the last couple of months, can you just give a bit of color on that? And I guess there’s a comfort that it’s being remediated and we’re not going to see it as an ongoing problem?

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Adrian Littlewood, Auckland International Airport Limited – CEO [19]

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Yes, Wade. Adrian here. Yes, look, absolutely. And so as we said yesterday, we’ve also had that just independently checked and reviewed just to have complete confidence in that. So we’re absolutely getting on with that. We have a standard process of pavement management that runs across the entire airfield. There are some areas that, as part of our asset replacement program, have been scheduled for works covering about 5% of the airfield runway area. And they are going to be programmed and going, and those have been notified to the airlines over time.

And so yes, that program of maintenance is, I can tell you, comprehensive and very robust and we’ll just need to work our way through the ongoing replacement program over time.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [20]

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Any reason why it occurred other than just bad luck or it wasn’t a case of delayed maintenance or anything like that?

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Adrian Littlewood, Auckland International Airport Limited – CEO [21]

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No. Actually, the review said that the recent unusually hot and dry weather we’ve had in Auckland was a contributor to a thermal expansion apparently, which sort of means it was a new thing that we were — hadn’t seen previously before. So that’s been a real focus the last couple of weeks in terms of the review to make sure that we are accounting for that in terms of our planning and our maintenance programs and that has all been put into place.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [22]

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Okay. And finally, for me, just — I know that you don’t necessarily want to — around the coronavirus, you don’t necessarily know what’s going to happen here. But can you just give a color around — I mean, you’ve put — you’ve clearly made some assumptions around what you’re expecting around visitors. But specifically, what have you assumed in terms of the Chinese visitor ban and when that ends?

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Adrian Littlewood, Auckland International Airport Limited – CEO [23]

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Well, I think just really roughly, right, so there’s no question impact heavily in February and March, drifting probably into April and a gradual recovery into May and June from there. I mean, let’s say, our best estimate at this stage and just to sort of remind everyone, we had 45 services probably expected at this time of the year. We’re now going to between 8 and 11, but it is a little bit variable. So — but we are really staying close to the Chinese airlines.

And look, one of the things we are discussing with them and actively is actually also air cargo because in terms of the recovery and the return, air cargo could come back quite quickly as supply chains are constrained in New Zealand. We know we stand to hear that a lot because the factories haven’t been turning in China. So people have urgent gaps to fill in their supply chains. We may see a big rush on air cargo, which could actually help those routes to slightly rebuild around passenger volumes as well. So that’s been a real topic of discussion in the last week or so with the carriers.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [24]

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Okay. So from that, it’s fair to say that your assumptions around the visitor ban is better in, call it, within the next couple of weeks?

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Adrian Littlewood, Auckland International Airport Limited – CEO [25]

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Look, we haven’t specifically gone to that. We’ll be focused on some rough — or high-level assumptions around how long an impact will last. But look, we would expect it to run for some time yet, but it will be very much dependent, I think, on, my judgment, is based on what our partners like Australia do. And I think you can get some sense that they are looking at it closely in that they shortened the review window from — the window from 14 days to 8. I think both governments, I know, are very, very mindful of the impact on the respective economies. So they’re watching it closely from a health point of view.

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Operator [26]

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Your next question is from Marcus Curley from UBS.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [27]

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Just a few. Could you talk a little bit about the domestic terminal project? I suppose — I take note that it’s now a $1 billion-plus project where I suppose, last time, we saw the CapEx estimate for it, it was around $700 million.

And could you also talk to the comments around staging? Yes, it looks like from the comments that this is now going to be delivered in phases. And so how much of the investment should we expect to turn up in the next control period?

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Phil Neutze, Auckland International Airport Limited – CFO [28]

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So yes, just starting with the numbers. So if you drill into our schedule ’18 from our original price-setting disclosure in 2017, there were 2 line items that covered the domestic terminal. So there’s one that was, I think, called something very close to domestic terminal and there was another one, both of them referred to Phase 5, which is our internal name for that project. The other category is stands and aprons. And in nominal dollars, each of them was $720 million and just under $300 million, which takes you to a bit over $1 billion. Now we can’t give you a specific number at the moment. We’re working through with our alliance on the target outturn cost and won’t be until we’ve completed that process that we’ll have a clearer view on the ultimate cost estimate.

On staging, what we — the way we plan our infrastructures after delivery to have forecast capacity for somewhere between 5 and 10 years, depending on the infrastructure we’re talking about. So with the domestic terminal completion in around about 2023, that’s going to cover our capacity needs until 2028.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [29]

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Sorry, can I just ask one further here. So is it right to assume that the $1 billion turns up in the PSE4 aeronautical CapEx? Or should we read into this, and I suppose I did read into your aeronautical report, that with negotiations with the airlines, you’ve decided to split this project into phases to make it more palatable, I suppose, in terms of the cost?

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Phil Neutze, Auckland International Airport Limited – CFO [30]

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Yes, yes. So the $1 billion-plus, that will be — the actual CapEx spend itself will be concentrated over late PSE3, early PSE4 and commissioned we’re targeting in calendar 2023. Any further CapEx will be outside of PSE4. So they’ll be beyond FY ’27.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [31]

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So yes, so the full $1 billion is still expected to turn up in the airport charges in PSE4?

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Phil Neutze, Auckland International Airport Limited – CFO [32]

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That’s right. Early in PSE4.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [33]

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And secondly, can you talk a little bit to the performances of your Duty Free operators? Obviously, last time they provided public statements. Both of them were unprofitable. Has there been any discussions? Do you have any visibility in terms of how they’re traveling at the moment, and your views around risks for them as the concession holders?

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Adrian Littlewood, Auckland International Airport Limited – CEO [34]

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So I think as we said last time, Marcus, mix — again, as I said previously, this sort of repeats, we were in the last contracting cycle. One is performing well and going in line with expectations. The other one’s still got some work to do in a few areas, but they’re working hard at that. There’s obviously global considerations for them in terms of their longer-term plans. But Duty Free actually performed very well on the period and so we’re very happy with how that performed.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [35]

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And can you remind us, obviously, the expansion was done in phases. When is the next review of the concessions for Duty Free?

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Phil Neutze, Auckland International Airport Limited – CFO [36]

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Yes. 2022, 2023.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [37]

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And then just, finally, so there’s a reasonable step-up in capitalized interest in the half, I suppose, if you’re annualizing that for the full year. I suppose it did surprise me a little given the modest amount of CapEx that’s being done. Could you just give a little bit of perspective around what’s happening there and what we should expect?

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Phil Neutze, Auckland International Airport Limited – CFO [38]

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Yes. And this is notoriously difficult to forecast. I imagine you share our pain on capitalized interest and depreciation. I think at the annual results announcement back in August, we guided an uplift in depreciation and interest for the full year of circa $10 million. We have had more capitalized interest. So delay in commissioning dates versus the budget that we worked that off. So we would expect those 2 categories together to be more like $5 million up in FY ’20 versus FY ’19.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [39]

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And is that just for capitalized interest? It sounds like an issue on timing that’s limited to this year? Or is that — does that expand in the future years?

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Phil Neutze, Auckland International Airport Limited – CFO [40]

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Sorry. Our forecast and our previous guidance related only to FY ’20, but we expect to have growing works under construction going forward over the next couple of years. So the level of capitalized interest should continue to increase.

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Operator [41]

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Your next question is from Adam Fleck from Morningstar.

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Adam Fleck, Morningstar Inc., Research Division – Director of Consumer Equity Research & Regional Director [42]

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As a follow-up on the Duty Free performance and the coronavirus impact. Obviously, retail had solid PSRs in the period, but a slowing in international — revenue per international passenger. So how much of that estimated $10 million in NPAT impact do you expect to come from retail? Is that a concern here in the near term?

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Phil Neutze, Auckland International Airport Limited – CFO [43]

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So the next big picture is roughly 2/3 aeronautical, 1/3 Till 2. And in that Till 2, it’s split across categories like our Strata Lounge, that’s our VIP lounge. That’s owned by Auckland Airport of airport retail. Yes, transport likes of car parking and taxis, Uber, et cetera. And for retail to the extent that we’re trading above MAG, that takes a little bit of a hit. But big picture, 2/3 aeronautical, 1/3 retail.

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Adam Fleck, Morningstar Inc., Research Division – Director of Consumer Equity Research & Regional Director [44]

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Okay. Great. That’s helpful context. And then just wanted to follow, up drilling down into Queenstown a little bit. Obviously, the strength we’ve seen there is impressive, particularly in the international traffic numbers. How do you balance in your discussions with them the share gain, it seems like they’re having on the trans-Tasman routes with the performance of travelers into Auckland specifically?

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Adrian Littlewood, Auckland International Airport Limited – CEO [45]

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Look, it is something we consider. But I guess our focus is on growing our markets. I think our share of total international markets has held pretty firm, maybe just dropped down a touch. So they are targeting particularly the Aussie market. A lot of the long-haul premium international travel markets connect through here. And that’s why I think they reasonably complement each other well as assets. So I think it can work quite well together. But they have their own independent board, and they have their own objectives that they’re going after.

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Operator [46]

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Your next question is from Suraj Nebhani from Citigroup.

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Suraj Nebhani, Citigroup Inc, Research Division – Assistant VP & Associate [47]

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Just a quick one. So the $10 million impact that was called out for the coronavirus, so that’s, call it, a 4% impact to FY ’20. But the guidance was downgraded by only 2% at the midpoint. So I’m just wondering what’s driving the underlying upgrade.

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Phil Neutze, Auckland International Airport Limited – CFO [48]

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Yes. I think we’ve just touched on that. So we’ve had a lower interest expense than what we originally guided on that explains most of that plus the upgrade.

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Suraj Nebhani, Citigroup Inc, Research Division – Assistant VP & Associate [49]

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Okay. So just thinking about that $10 million and you analyze that, that’s roughly 8% analyzed impact. So should we think of that as a base case estimate for like a go-forward basis if things don’t improve in the near term?

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Adrian Littlewood, Auckland International Airport Limited – CEO [50]

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Well, I think it will be too early to call that. I think we’ve really got to wait to see how things unfold. We’re still some way from the end of this financial year before we start to look at how that flows through to the next year.

And look, what we have seen, and I’m not suggesting this will happen, but in the following years after an event like this, you can see a reasonable bounce. So we’ll have to just wait to see how it unfolds for the balance of this year and how quickly markets return.

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Suraj Nebhani, Citigroup Inc, Research Division – Assistant VP & Associate [51]

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Okay. And just, finally, can you talk about traffic and what are you seeing year-to-date? Obviously, you haven’t released January data but just interested in some trends. Like how has the traffic been in January, for example?

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Adrian Littlewood, Auckland International Airport Limited – CEO [52]

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Yes. Look, obviously, flattish in this year and I’m just focused on international, flattish this year following several years of rapid growth. We’ve been around all our carriers in this half, speaking with them, focusing on the current routes, focusing on future. And look, I think, as I said in an earlier meeting with analysts that I was expecting a bit more neutral, maybe to negative in terms of the sentiment in the outlook. But actually, at that stage, the outlook is actually neutral to positive on a lot of our routes. So we’re actually able to engage with the carriers and sort of future-focused growth opportunities optimization, frequency gauge discussions, which I think is really pleasing. And look, towards the end of the year, we obviously saw the announcements around Dallas with American direct and New Zealand direct to New York.

So I would then also get back to the loads that we’re seeing across domestic and international. They are remaining very strong and very high. The airlines are doing a great job of filling the planes. But that also indicates that new capacity would be supported by underlying demand. So I think those are good prospects for the future. And I also remain optimistic about New Zealand’s tourism proposition. I think our offer of a welcoming culture, an open culture and a fantastic location is where the future tourism consumer is going. And good news is New Zealand has always been there. So I remain positive at the long-term outlook for tourism.

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Operator [53]

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Your next question is from Shane Solly from Harbour Asset Management.

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Shane Solly, Harbour Asset Management Limited – Director & Portfolio Manager [54]

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So apologies, but I just want to go back to $10 million. Can you break down how you arrived at $10 million for COVID, please?

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Phil Neutze, Auckland International Airport Limited – CFO [55]

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No. So we’re not going to go into detail on that, as I mentioned earlier. Any of our estimates, individually, will be wrong. Big picture, though, we thought it was important to give the market our central view on the hit to underlying profit. I guess, analysts can test your own assumptions and calibrate them against that $10 million probably what I’d advise. But as I mentioned, 2/3 aeronautical, 1/3 Till 2.

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Operator [56]

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There are no other questions as of the moment. Presenters, please continue.

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Adrian Littlewood, Auckland International Airport Limited – CEO [57]

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All right. Thanks, everyone, for joining us for the call and look forward to catching up with those of you we’re going to have direct conversations with. Have a great day. Thank you.