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Edited Transcript of AIA.NZ earnings conference call or presentation 21-Feb-19 9:00pm GMT

Interim 2019 Auckland International Airport Ltd Earnings Call

Auckland Feb 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Auckland International Airport Ltd earnings conference call or presentation Thursday, February 21, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adrian Littlewood

Auckland International Airport Limited - CEO

* Phil Neutze

Auckland International Airport Limited - CFO

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Conference Call Participants

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* Adam Fleck

Morningstar Inc., Research Division - Director of Consumer Equity Research & Regional Director

* Andrew James Bowley

Forsyth Barr Group Ltd., Research Division - Head of Research

* Marcus Curley

UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research

* Paul Turnbull

First NZ Capital Limited, Research Division - Director of Equity Research

* Robert Koh

Morgan Stanley, Research Division - VP

* Wade Gardiner

Craigs Investment Partners Limited, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Auckland Airport Interim Results Analyst Presentation Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, the 22nd of February, 2019.

I would now like to hand the conference over to your first speaker today, Mr. Adrian Littlewood. Thank you. Please go ahead.

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Adrian Littlewood, Auckland International Airport Limited - CEO [2]

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Good morning, everyone, and welcome to the first half FY '19 results presentation. I'm joined by Phil Neutze, our CFO. And I will be referring to the presentation you're seeing this morning. I'll start out with some few highlights and I hand it to Phil for a detailed walk-through in some of the results. I'll come back to some of the commentary on the business and then we'll conclude guidance at the end. Let's look at another solid year for us, a half year for us, good top line growth, round about 11.5% in the period. Operating earnings, around 11% mark too. Obviously, underlying profit loss this period, at about 3%, naturally affected by some flow through from depreciation, interest charges and other things. But generally, a solid result, underpinned, obviously, by our passenger business, which continues to remain strong. Obviously, coming off some very strong growth in the prior few years, but around about passenger growth at 4% of --

(technical difficulty)

Million, and also some of the movement growth in aircraft, just a touch under that number at about 3% in the period.

Capital investments, you'll note down off a prior period as we cycle off the back of some of our big investment projects, deep in design on the next anchor projects. And we'll come back to talk about that more.

Turning to Page 5 of the presentation. Again, we've got a very resilient business and if I look right across our lines of business, still very strong performance and some pockets of excellent performance. Obviously, aeronautical, really driven by passenger growth, but aeronautical revenue up a touch, stronger than passenger growth at 5.8%. Retail had a stellar period, as signaled earlier, up almost 25% in the period, off the back of that big investment in the international terminal and some other pockets of growth performance, and you add 26 new stores, income per passenger up about almost 20% in the period to just under $20, and some (inaudible) rates growth at the international terminal.

Transport. Again, solid performance, just a touch under 5% up in the period, a little bit affected by some of the changes going on in our core capacity with new capacity coming on, but also new, other capacity being displaced as we build new car parks for the future.

And our investment property business has continued to be strong, up about $15 million in the period. Rent roll has continued to grow, and we'll touch on that a bit later. But some significant works under construction, over 100,000 square meters currently under way.

Hotel business is strong, maybe not as strong as in prior period, as those hotels have remained almost fully occupied, in some of the strongest hotels in the country, up about 3% in the period. And our investments in Queenstown has also continued with strong passenger growth in Queenstown as they grow into the future.

So a very, very pleasing performance across the business and characterized by some strong pockets. I will hand over to Phil now, who will take you through some of the detail in financials. Phil?

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

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Thanks, Adrian. So off to good start to the financial year. And I'll now provide a bit more color around the half year financial results. So let's turn first to Page 7.

As Adrian mentioned, revenue grew strongly in H1 FY '19 versus pcp, up 11.5%. And as we'll see shortly, this growth was dominated by strong retail income growth. Per our budget, and with profit guidance for the year, operating expenses rose a bit faster. Now the revenue this half and -- but as I'll on touch on a bit later, we expect full year OpEx growth to be well into single digits.

Interest and depreciation expense were up by $10.8 million in total for the half year and that reflected the recent step up on our CapEx and commission assets. Again, we expect this growth to moderate for the full year towards the bottom of our previous guidance of $15 million to $20 million [increase] for the year.

Looking now at revenue on Slide 8. Passenger charges rose modestly, broadly in line with passenger growth and airfield income grows slightly faster. This reflected increased longer-term aircraft parking on our stands this half. But the primary driver of increased H1 FY '19 revenues was higher in terminal retail income. So Duty Free was a big contributor and benefited from a full 6 months in the expanded departure space, plus solid performance from Aussie ports tax resales that are picked up by passengers in the Collection Point and strong Strata Lounge occupancy.

Investment property rental grew pleasingly at nearly 15% versus pcp. About 1/5 of it came from written reviews across the portfolios and the other 80% from 6 months of occupancy of Newport properties that were leased in the first half last year, plus new properties leased this half.

So let's look now at passenger growth for the half on Slide 9. So total international passengers, excluding transits rose 4.4% for the half. And interestingly, arrivals growth first half was quite a bit stronger than departures. And if you haven't [flagged] this is because we had really strong international departures in the first half of FY '18, cast your mind back, we had hordes of happy British Lions supporters headed home in July 2017.

Domestic passengers grew by 4% in the first half this financial year. And just a reminder, this was on top of surprisingly strong domestic pax growth in the full year to June 2018.

We did lose some international transits pax this half, with some direct services to South and North America from Melbourne, now skipping Auckland. But we also gained some direct international passengers, with load factors increasing on the Thames, San Diego receivers.

So let's move now to aircraft movements and MCTOW on Page 10. Actually, there's not really a lot I need to say about this data for this half, but big picture, with a little bit of noise, in the data. Both aircraft movements from MCTOW grew slightly slower than pax movement numbers, for both international and domestic services. So there is still some up-gauging of aircraft going on, but that's to a lesser extent than we saw over FY '16 to '18. So let's have a look now at expenses on Slide 11.

So this picture takes a little bit of explaining. So on first blush, it might appear at odds with the guidance that I gave back in August at the annual results announcement. Back then, I commented constantly on executive assigned percentage to OpEx growth, this is pcp, for the period, which was 7.6%, and I said their expected OpEx growth to fall back to roughly half this level in FY '19. These numbers might not represent that, but actually, we're broadly on track. Our total OpEx for H1 FY '19 of $93.5 million is actually down a bit on total OpEx for the second half of FY '18 of $95.6 million. That half was a big jump, and I explained why at the August results announcement. So while H1 FY '19 also looks like a big jump, this is pcp, OpEx is actually pretty close to budget and we expect full year total OpEx growth to moderate well into single digits. And the commentary on Slide 11 gives a bit more color for you. So on to associates on Page 12.

This is an interesting slide as well. It's actually not a typo on this page that our share of underlying profit from Queensland Airport and the Novotel Hotel were identical numbers, and so were the changes versus pcp. But the stories are a bit different. So Queenstown experienced strong passenger growth versus H1 FY '18, but domestic passengers up 2.5% and international up 6.7%. And the reasons for the weaker EBITDA growth and our weaker underlying profit growth here were that some one-off costs to develop the new master plan were expensed this half and interest and depreciation expenses increased owing to a recent loss in CapEx. And just FYI, they bought some fancy winter equipment to clear snow on the runway. This new op center and brought some material improvements.

So Novotel, on the other side flatlined this half, with circa 2% revenue growth, offset by increased expenses and that was mainly staff cost. And just a quick reminder that we sold our 24.6% of (inaudible) airports in March last year. And so now let's have a look at funding before I hand back to Adrian.

Total borrowings rose 4.3% this half versus pcp and then you [offset at] $2.1 billion, and we remain committed to both our A minus long-term corporate credit rating from Standard & Poor's, as well as our dividend policy of paying at 100% of underlying profit. And that means that approximately $100 million of our annual CapEx program will be funded from cash flow and that reflects our modern cash depreciation expense, all the rest will be funded by growth in our borrowings. But we have set the balance sheet up conservatively, to cope with this future borrowing increases, while the (inaudible) further debt, which is really the key limiting credit metric, that you have some payments that now sits at over 18%, and that compares with S&P's rolling 3-year average minimum of 11%. So back to Adrian now.

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

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Thanks, Phil. All right, just turning to Page 17, just get us little bit deeper on some of the strategic things for our business. As Phil touched on before, obviously, slightly moderated growth compared to several of our prior years. But continuing good stories in some of our key markets. But look across that, you can see a range of capacity in passenger mix and we've seen sort of various increases in loads and performance across routes.

So to take the Middle East now, we're now up to 43% of our European-based traffic, traveling through those hubs proving and providing important capacity through. Southeast Asia was obviously a stand out with some big lifting capacity and passengers and it really follows through on Manila services, the service with Emirates through to Bali and Singapore deepening its connections through to Auckland. North Asia, just had a bit of a bump late in the period with the addition of Taipei. So we'll obviously see that flowing through. And I'd also just call out North America, also very strong. U.S. travelers on those routes, up 7% on that period, and actually U.S. travelers overall, up about 8.5% if you include those coming via Australia. And obviously those, that market strengthened by the addition of Chicago route late last period -- late in the period, and also United planning to go year-round out of San Francisco at the end of the summer period.

Tasman's a bit of a feature in here. Obviously, we've had some changes with the Virgin, Air New Zealand change out, so that has taken some time to sizzle. And then it was also affected by some of the changes in the China market in the last sort of while -- we're seeing continued strong growth in direct to China mono-destination travel. Chinese nationals coming direct to New Zealand, up about 7% in the period. But via the Tasman, it's actually been a bit weaker as some of the capacity between China and Australia, dropping off and that flow through happening. That's probably reflecting the continued dynamic of high value mono-destination, free and independent travelers, as we call them, continuing to shift in the China market. So I think beneath that, the China market looks pretty strong and look, our general sentiment remains positive on tourism through to New Zealand for the longer term.

Just turning to Page 16. So what does that mean for our travel and trade markets? Well, I think this year is to look across the last 3 years and say, well, look, our market is much more diversified than it was a few years ago. We've now gone from 55 national and domestic destinations to 70 direct destinations served. So good strength in there. Good leap in airlines over that period and also a deepening of our market. So even if I take a market like North America, we haven't had a great increase in the number of destinations served, but certainly the number of airlines serving those destinations means we're able to tackle a much broader market than we were before.

We still also see that the New Zealand market remains strong and that has grown over time. So generally, we remain really comfortable with how our market is maturing. There will always be bumps and lumps along the way, particularly following periods of dramatic growth, where we think that dips is -- and reach is continuing to augur well for the longer term. We called out some markets like India, Malaysia and Thailand as small markets, but that are growing quite positively into the future. So those remain positive for the long term.

If I turn to our investment program. Well, in this period, we really sort of rounded out some of the really big projects that we've been having in our international terminal. So big international terminal refurb achieved practical completion in this month. It was a 36,000 square meters on its own, add Pier B extension in the period before that. Now 55,000 square meters total for terminal works, which still, I think 1.5x the international convention center. So it's been a huge piece of work, and I think we're -- yes, we're getting really positive feedback from customers about the benefits of that work and the overall experience that they are going through.

Our transport's also paid some big dividends. We've been through some pretty grunty projects in the last little while. The big landing and the section upgrade that's now being completed and the Nixon Road bypass, and we can immediately see some of those benefits flowing through. For example, we've seen I think, up to 85% of heavy vehicles are now transiting away and through that bypass, out of that core passenger flow through to the terminals and general transit traffic is also passing through this. So that's actually making a huge difference to the performance of the transport network. So some successful projects in the period.

Turning to Page 18 now. I really just wanted to give a quick overview in the next couple of pages on the big anchor projects that we've got under way. We are -- we think probably the largest privately funded capital infrastructure program in the country and some really big bits of kit that are under way. What we found in the last sort of period, let's go good hard and deep on the detail around process, function, design, demand, forecasting and sequencing on the projects. And it's just caused us some [consultation] the airline system rate sequence, some of those works in those projects to ensure that we've got capacity to deal with the changing shape of our aviation markets, our operations on the ground and the various big projects. And so what we've done is changed some of that sequence around taxi way stands and the like, to give us the headroom to enable us to build the program for the future.

So the 8 big projects you can see here, called out here really do represent the real foundation of the airport program over the next 5 and 10 years. And as far to go into a bit more detail, and these, you may want to refer back to this map to help you orientate where they are. The first one is obviously the new domestic jet facility. It's a big project, and we've been working very closely with the airlines on detail, design work on process, form and function. We continue to progress there. You know, it is a challenging project because we are opening up and testing, in some cases, processes and systems that have been in place for 50 years. So we're working through that. Some enabling work is already under way. So on the second half of this year, we'll be working the procurement model, quite important in our New Zealand construction market to get that finally balanced and we'll be nailing down the design, final work with the airlines, so we can get on with our detail design, and then [avian routes] of the FY '20.

On international arrivals, we passed through the concept design phase and have buried that with all the wide range of stakeholders involved and now have awarded the next phase of this detailed design that we're getting into now. So that work is now fully progressing. Just to orientate you on the price slide, that's the international arrivals area off the end of the sort of, I guess, the northern end of the current international terminal. We'll provide some significant new process and capacity. So that design work will continue, then we'll be into construction enabling works and in procurement and civils thereafter.

Our domestic, current domestic terminal rejuvenation work continues. Those works are live now. For those traveling through, you will see those. Obviously, a challenging environment to do works, but that work continues in a sequence of small projects, which we'll deal with. Things like food court expansion, reconfiguration, security processing area expansion and a range of other works along the way, (inaudible) installing the new regional lounge, toilets are getting upgraded, quite a wide range of works going on. That will continue as we work that through in the next sort of while, which will keep service standards and performance at the right level for customers during the other wider works.

On the other terminal element, which is our new cargo terminal. Huge amount of work in the last, sort of 18 months to consult with the industry around a new terminal capacity for the future. And just to give you some clarity on that. So if you turn back to Page 18, that new cargo terminal location has been thought of in the context of our northern taxiways and stands, which I'll come on to and also the headroom and capacity we can create right adjacent to the new domestic terminal. Under that label called domestic rejuvenation is our current cargo facility. That is really beachfront real estate, in a place that was priced 50 years ago, and is no longer really appropriate. And so -- our new cargo terminal location really relocates through a stage transition into a new facility, away from it's really core terminal passenger precinct and is enabled by the re-sequencing of the (inaudible) stands in the terminal, exit right system that we're putting in place. And we'll create really important headroom and capacity for construction staging and other works around that terminal interface in the future.

It's an important stage through there. We'll get into concept design on that in the next period, and really, we want to rip into that as soon as we can.

Turning now to airfield on Page 20. I talked about the northern taxiways and stands. So look, this has been a process of consultation with the airlines. Really, where we've gone and reassessed the stand planning and demand schedule in light of updated modeling and demand profiles, looking at stand layovers, the airfield efficiency of the system and we'll signal this part of, I think, light PSC3, early PSE4 works. Now the work there has, and the detailed work for the airlines has suggested that should come forward in our sequencing. So we've pulled that forward through agreement and that has led to detailed design being completed, tenders being issued and received, and we're just going now currently through the evaluation process. And again, we'll start into civil and enabling works. That is a very big piece of work. Probably one of the most significant airfield projects since the formation of the airport, and if you look at just roughly the very rough sort of spice allocation in that area, it's the north side of their international stand. It enables the taxiways to be developed and then is on the path of the future northern runway.

If I then go to northern runway, again, the work has been continuing at pace there. Tight-working group with airlines, airways, other stakeholders, large amount of engineering design work done. We've been doing a consenting process for the notice of requirement process going on. And so we're through that feasibility gate, and we're really now working on the timing work, which is quite a comprehensive modeling exercise going through that work. We'll then look at procurement strategy for -- it's a big bit of kit again, we're going to get that right. And at this stage, we're still forecasting earthworks construction due to start in FY '21, subject to the triggers that are being signaled before, and at FY '28 timing. I just would signal that, that is still subject to the review process that we have under way around the demand.

The next project is PUDO, which is our pick up and drop off acronym and our multilevel car park. Again, outside the front face of the terminal precinct. Concept design now complete. We've been doing the detail work around flows, traffic, all that detail that's now through there. We announced the prelim design and we want to get into enabling works out of that. A lot of pre-work has been done at design works, so we're now able to shift gears pretty quickly, and we'll get into that. And lastly, and really one of the key enablers of the future terminal system is what we call the Northern road network which critically includes the terminal exit road system. If you turn back to Page 18, you can see the yellow riding network we're talking about there. So the big part of that is that system we were able to enable the passenger flow, the one-way system and the mainline system to be enabled to support the future works, and as I've said, connects to cargo terminal and the likes of it. That work is now -- details almost being completed, procurement has been commenced, and then we'll be into award in the second half of this year, construction under way.

So a huge amount of work that's been going on, and some really positive progress on the big infrastructure works as part of the airport of the future program.

Now turning back to the other parts of the business, Page 21. Again, our property business has continued a really strong momentum. [Ridge link up,] up almost 15% in the period, some great projects completed with DSV and Sheppard Cycles, and you see, that which is a, was a speed build that was completed very quickly. But a really big lift in WALT, up about 46%, to just a touch under 10 years in the period and some great projects under way, we've got an [Airways] building, big, big development for Foodstuffs, another pre spec warehouse that's under way, another couple, sorry, underway in design, and it only gets a sort of a one line mention here, but our hotel projects are big on their own, and they're under way as well. So continuing to work through the Pullman Hotel development through procurement, we're taking quite a careful approach in the current construction market around our procurement approach and the design work and negotiations around Hotel 4, which is a re-spec of an existing building that is adjacent to our sort of office and hotel precinct up here. The construction all on track there.

Moving on through our third theme around fast, efficient and effective. Again, while we've got this big capital works programs under way, we haven't lost sight of the drive for innovation and efficiency. So in this first half of the period, we've continued to work on main runway efficiency. I said last time, we'd managed to give a commitment to lift effective headcount capacity for our runway from 42 to 45 movements. The team with airlines and airways are working towards 47 by first half '20, and we think we can get to 50 movements by 2022. That would remain as we are already, but make us one of the most efficient single runways in the world.

We've also done some great work, to continue the work around self-service and innovation in kiosks. We're now up to 70% of all international passengers are now using self-service kiosks in international terminal. Also added a lot of capacity in facilities around airfield, with the mobile airbridges, thus supporting our flexible busing service, 4,000 new braked trolleys, wayfinding and some investments in technology through our app and our Wi-Fi network. And we've actually launched, and we don't make much noise about this, but real time information on queue times at the airport and we've got some more innovation coming around that, we're actually starting to build on this concept of home-to-gate, how we do we guide passengers through things like traffic information, queue times, your gate location, so that people can plan their journey into the future. We're also succeeding that with some, we're looking at some trials around check-in to gate biometrics and other issues, other opportunities with our board of partners and the airlines. So it's an exciting work happening there.

Within the theme of fast, efficient and effective, I'd just turn to Page 23, just some reporting on super standards and performance. So we're seeing our lift, the top left chart there around service standards and performance, as some of the development work is playing through. Certainly in the international terminal, you can see that lifting, which is great to see. And we're seeing that also in the realtime feedback from our customers. And in fact, we're going to enable that realtime feedback to happen within the app so we can respond quickly to service incidents where they occur around the terminal.

We're also seeing an improvement on baggage time, which I think is important to keep in the context of passenger growth. So improving delivery times with growing passengers is always a good item. It's not the same where we had and I think in the terminal which did affect that number.

And busing has continued to decline as the gates are getting used more often, but even in that context, the busing performance has been excellent, with a combination of new buses and the mobile Aviramps.

Now turning to retail on Page 24 now, consumer business. Now retail had a really standout result in this period and this was, I think reasonably well-signaled. But almost 25% lift in income in the period and really off the back of the big investment program in a couple of years prior, around the international terminal. The 26 new retail outlets opening in the period, leading to passenger income, to passenger income lifting about 19%, almost 20% in that time. Got a wider range of choice, some great new luxury stores there which are really a whole new category for us. So we saw in terminal ret, international terminal sales up 10% and strong PSR growth, passengers spend rate growth in that period.

We're also seeing some really great off-airport performance, as Phil mentioned before from our Collection Point, and now Strata Lounge is continuing to go gangbusters as we brought in Virgin and other -- into that, and some of those luxury brands have really performed quite strongly in the period with that Collection Point sales.

I do want to call out our technology program. The mall is starting, is continuing to grow. We've got 4,000 SKUs on that site, we've added technology to that. That's actually gone very well, that only happened at the right of the end of the period. And selling very strongly through those well-known products like iPhones and iPads and the like. And then, that's a really important part of the future, I think, around giving customers certainty around stock availability, range for the future and allowing us to just detach from the constraints of the challenge of physical space, growth, retail sales and using the online channel for that. And I did want to just note that the team has done a great job in the last little while to stand up a WeChat mini store. A little example here, on the right-hand side. We have -- they've stood it up with the WeChat team, and now if you're booking a flight with some of our Chinese travel airline partners, you can get an immediate booking or offer to purchase through (inaudible) Mall, and we're now just starting to transact through that. The first purchase through that WeChat [missile] was a bee venom mask, for those who are interested.

Next page just gives you a little bit of a flavor of the new foot out in the retail stores. So big lift in quality and range of the airport. And I think these are good examples, really just explain them.

On Page 26, just continuing with the theme around consumer business, our parking business. That's continued to grow. Not quite as strong as in prior periods, up about 5% in the period. Affected by some of the moves and changes around our parking capacity. Valet has continued to grow really, really strongly. And we've been promoting that. But we've had new capacity with the demolition of one of the old cargo precinct buildings, we call Cargo Central, which has added, I think, about 700 bays. But obviously, we've also lost some during a construction period around the international long term car park, which you can see on the right, which is progressing through, and will complete in June 2019. And as I said earlier, we're progressed quite quickly through the design phase on that 3,000 multistory car park into the future, and looking at future options around parking and ride capacity into the long term.

On Page 27, we continue to work hard with our community to try and share the benefits of our multibillion-dollar investment program with our broader community. Lots of work going on there. I just did want to call out safety performance in the work with our people. So continuing to lift the safety observations, very comprehensive program right across our business and focusing on safety. So great to see that reported observations lifting in the period. Our employee recordable injury rate has continued to decline, just a touch up on the prior period, which we'll continue to focus on, and we continue to work very hard with all these subcontractors and contractors who work for us, to lift that reporting and visibility on safety in the period.

We've also done some pay equity reviews and late policy adjustments to make sure we've got a flexible and diverse workforce for the future and that's resulted in some changes. And we're continuing to work really hard on our Ara Jobs and Skills Hub, trying to create new opportunities for local people to get them to the many, many jobs that we have available for the future.

So look, a good period of -- and lots of exciting things on and lots to look forward to in the future. Just going to hand back to Phil to talk about some of the adjustments to aeronautical pricing and guidance for future. So Phil, over to you.

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

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Thanks, Adrian. So I'm sure there'll be a fair bit of interest in this element of today's release. So today, we completed a 3-year process. First, to consult with our major airlines and bands on all elements of our FY '18 to '22 aeronautical pricing decision and then for the commission to review our decision and for our Board to respond. The commission expressed broad support for our PSE3 pricing decision, other than our target return. And I believe that some of that was not fully justified. So today, we've decided to drop our target return to [another 0.21%] of the commission's New Zealand airport industry-wide benchmark work estimate, and that will lower our underlying profit by approximately $9.9 million per annum over FY '20, '21 and '22, versus the previous prices.

And we're now looking forward to turning our attention back on running the business and delivering the large aeronautical development program ahead of us.

Over to CapEx now, on Page 30. As Adrian's touched on a bit of this already, our capital expenditure is currently running quite a bit slower than we previously guided. And as Adrian mentioned, early design work is taking longer than we hoped for some complex aeronautical developments, especially the new domestic jets, so I'd see an expansion of international arrivals, but we are now building stronger in interim. And looking across the entire PSE3 aeronautical pricing period, we are still forecasting commission and having used pretty much the same value of new aeronautical infrastructure that we forecast when we originally set prices.

So let's segue into our updated guidance for the full FY '19 financial year on Page 31. So as you can see on this slide, we now expect total capital expenditure in FY '19 of between $280 million to $330 million. We expect underlying net profit after tax, excluding any fair value changes and other one-off items in FY '19 to be between $265 million and $275 million, and this guidance is subject to the disclaimers set out in the third bullet. So this concludes our formal presentation and Adrian and I are happy to respond to any questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Andy Bowley with Forsyth Barr.

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

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Congrats on a pretty good operational results. Now I've got a couple of questions to start off with. First of all, in terms of the outlook from a passenger point of view. We've seen several routes being exited in recent times, at least announced AirAsia X and Hong Kong Airlines, Emirates last year, et cetera. And you've only issued a profit warning last month highlighting clearly some of the stresses to the airline community at the moment. So where does this leave your route development activities? And can you give us a sense of what is in the pipeline and how that may translate to capacity growth over the next few years?

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Adrian Littlewood, Auckland International Airport Limited - CEO [3]

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Yes, Adrian here. So you're absolutely right to call out some of those things and I think we had expected some bumps to take place following a period of rapid growth that we had seen in the prior period. Look, I think, we still remain confident into the future. I think the [Air] New Zealand result, it's important to keep in mind that, I think, that had guided between 4% to 6% passenger growth. Certainly, we were at more at the fourth number. So I think that come back closer to where we were. I think, look, naturally there's a bit of softening in the market generally, as we're [electing] some of those big numbers in the prior period. But from a route development point of view and as you know we can't really go into detail because these are commercial and confidential conversations that we have. We still see opportunities. And we're still seeing big (inaudible) Markets. So I think I wouldn't -- maybe looking at brand new carriers, that's still part of the plan. But certainly, deepening of routes or markets, so U.S. markets classic. We remain waiting for the Qantas and American and antitrust immunity prices to work its way through and that might create some opportunities into the long term. Sydney signaled some interest in that previously. I think -- and there are other markets around -- Southeast Asia, we remain interested into the long term. So I still think there's plenty of opportunity for our country. Our team are active all the time and talking to airlines all the time. And I think our past performance has played out through that work. So broadly, we remain confident.

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

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Just in terms of the existing airlines, do you see -- while we've had a number of airlines announce those exits, are there any others out there that you think are kind of close to that kind of decision or do you think that kind of -- we've cycled that kind of decision and the kind of ongoing outlook from a pax or capacity growth point of view is positive rather than negative?

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Adrian Littlewood, Auckland International Airport Limited - CEO [5]

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I still expect that the outlook is positive. I think probably some of the candidates who were at risk I think have now made those decisions. And I think our testing with the airlines in our markets in the [Thames] just [look to] come back from a big tour around Asia. It still remains positive and if I call out the China direct example. So that's still been very strong and that mono-destination works, so -- and I think we remain an attractive destination, but even some of those emerging markets have been strong as well. So we're actually quite lucky with quite a diverse market and I think that's something we are focused on and will continue to work on. I don't sort of see any major changes from here on in, more settling I think, and our feedback from our airline partners still remains positive.

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

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So second question on retail income, we saw another really good step up in retail income. PSR's seeing its first meaningful increase in a number of years, up close to 6%, yet it's still well behind what you're extracting from the retail, just in terms of, say, retail income per pack. I recognize those off airport retail. We excuse those figures, but suspect that generally that the retailers in the international terminal are still well into MAGs. Can you just give us a flavor of the underlying performance of those retailers relative to your expectations going into the expansion and the way you are today?

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

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Look, I think, you're right and as we said before, at this stage of our development cycle, you do tend to have more exposure to minimum guarantee trading. And that's just natural. I think we need to really go another year before we'll see how they go. But look, I think we're seeing some pockets of really strong performance within both the Duty Free category and within other markets. But you got to remember that in some of our retailers who were new into the international terminal, they are setting up brand-new operations. The Emirates Leisure, Delaware North and others are new to Auckland. So that takes time to settle. And I certainly -- some of them have hit a few bumps with staff, exits and availability and training. So that will take time to settle. But we've been really pleased with the performance overall. Some good categories have had some strong growth, I'll call out cosmetics and skin care has had a stellar period. That links to space allocations and presentation in that area and electronics has had very strong periods, strong examples, and some really strong growth in some of the other categories around destination in terms of sales performance and luxury, which is basically brand-new to our airport. So I think we really tried to broaden the portfolio, but also, as Phil mentioned, off airport is growing for us and that includes things like the Collection Point activity. It's really a way for us to tap into markets and categories that might not justify a standalone retail store and with all the inherent challenges that come with it, but allows to test out new ideas and it certainly remains part of our future and in the period to date, certainly, our people have been strong.

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Operator [8]

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Your next question comes from the line of Paul Turnbull from First NZ Capital.

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Paul Turnbull, First NZ Capital Limited, Research Division - Director of Equity Research [9]

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Just to carry on the retail thing. Could you disclose what your PSR growth was for outbound international? You've obviously highlighted the 5.8 overall initial PSR, but what was it for the outbound terminal specifically?

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Adrian Littlewood, Auckland International Airport Limited - CEO [10]

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I don't think we've disclosed that separately as a breakdown, but I'm sure Phil and the team can pick up anymore color on it after.

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Paul Turnbull, First NZ Capital Limited, Research Division - Director of Equity Research [11]

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Sure. Okay. Next question. You've -- the shift of aircraft movements, sort of reads like it's more regulatory change, but that moving in time to 50 movements per hour. Does that influence the timing around the northern runway commissioning at all? Like for example, like you're calling out FY '28 still as a completion date. Is that based on 50 movements per hour?

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Adrian Littlewood, Auckland International Airport Limited - CEO [12]

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Look, it's all part of the mix. So I think our modeling is being re-updated at the moment through the northern runway project. Naturally, productivity on the main runway is important as part of that answer. Whether it changes the game entirely, don't know. At this stage, we're still running on 2028. But look -- and we haven't got to 50 yet either, I'd just point out. So that does require some changes in e-space management with airways and some other works. So I think we will be careful and prudent in that, but it is an important to the timing of the runway but we don't really have an update on that just yet.

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Paul Turnbull, First NZ Capital Limited, Research Division - Director of Equity Research [13]

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Could it potentially change against the trigger points for the (inaudible) to come in from FY '29?

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Adrian Littlewood, Auckland International Airport Limited - CEO [14]

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Well, possibly. Depending on the timing and the commission. The only thing I'd just point out is that the lead time for building something as large as the Northern Runway is long, particularly when you factor in earthworks seasons, building -- doing several through is (inaudible) is expensive and complicated. So part of our judgment and assessment on the lead times to building is also factoring in those kinds of things. So if you get some additional productivity of the main runway, it may buy you some time. It may not though materially change the construction time line.

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

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Just to tear into that, targeting 50 movements is a little bit stronger than when we first forecasted together for FY '28, but we are ahead in aircraft movements versus where we forecast. So based on all that today with the analysis there's nothing telling us that the delivery date is anything different than FY '28 we originally targeted.

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Paul Turnbull, First NZ Capital Limited, Research Division - Director of Equity Research [16]

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I guess that's quite domestic dependent, isn't it? And we've had a very strong start to domestic growth in the PSE3 period, at least. However, we're seeing trends start to moderate there. So ultimately that continued growth in domestic is going to be pretty important to maintaining that timeline I would have thought.

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Adrian Littlewood, Auckland International Airport Limited - CEO [17]

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Yes, absolutely.

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Paul Turnbull, First NZ Capital Limited, Research Division - Director of Equity Research [18]

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And final question for me. If you look at the regulatory return and acknowledging that changes in PSE3 are almost irrelevant to valuation and that flow from the airport. But when you think about the discount for passenger charges and the like, how do you factor, I guess, changes in your views around short to medium-term pax growth into your ultimate decision here? And I guess, what I'm asking is, if you start to see sort of negatively skewed uncertainty around the pax outlook versus your original expectations, are you factoring that into your assumptions here for the 6.6% targeted return?

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Phil Neutze, Auckland International Airport Limited - CFO [19]

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So Phil here. Good question, Paul. And the answer is that it's well agreed that when airport share prices that airports bear forecast risk and so there is OpEx risk, there's CapEx risk and demand risk benefit from the upside until the next reset, also share -- suffer the downside if there's a downside. But there's a whole bunch of factors that go into internal rate of return as we understand over the 5-year period. And yes, we are currently tracking lower pax than we forecast, and we are expecting to deliver the same value of commission assets over the period, although the timing of that is likely to be weighted towards the back end compared to the original forecast. So no, when we have reset prices, we've used all the same forecast that we used 1.5 years ago when we announced the pricing.

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Operator [20]

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Your next question comes from the line of Wade Gardiner from Craigs Investment Partners.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [21]

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A couple of questions. First one, just following up on what Paul was asking in terms of forecasting. So you've had some delays to your CapEx here, and you're still expecting the same within this regulatory period. But given the quite material delays or quite material change in what you've forecasted for this current year, are you comfortable that you can (inaudible) all in, and particularly with regard to actually contracted capacity and that some of it won't slip into PSE4 and therefore, how does that factor into the discount they will let you apply to your passage charging system?

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Adrian Littlewood, Auckland International Airport Limited - CEO [22]

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Wade, Adrian here. So just on the executability and construction stuff, we'll see back to those that walk through in terms of the projects. The re-sequencing that's been sort of aligned with the airlines really does see some big sort of horizontal works around airfield, taxiways, roads, et cetera, being re-sequenced forwards to provide the headroom capacity for the overall development program in stand demand. I think we've got good track record and once we get in the ground, those things tend to run pretty hard and fast and I think the market in New Zealand is actually -- has more capability in [depth] and civils than it does in vertical. So I think we remain comfortable absolutely with this and it's critical part of the enabling works. I think if you look at the broader vertical stuff, obviously, a lot of that other than the arrivals terminal extension, which we've actually taken care to design to avoid some of the integration complexities that we could have, should be a reasonably straightforward vertical construction. Naturally, the harder ones are around domestic terminal and the like, those aren't part of the commissioned and priced assets for PSE3 and were targeted to drop under the PSE4 period. So we've got a bit more time there and we are also thinking as you can appreciate quite deeply around the procurement methodology around those projects to allow for the realities of the New Zealand construction market and we're going as far to really test burn rates on projects just to really test capacity of the supply-side to make sure our assessments and timings are realistic based on that, because capital is available, it's just the capacity's industry to deliver that's one of the natural challenges that you're seeing right across New Zealand at the moment.

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Wade Gardiner, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [23]

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Okay. Other question. Can you just gave the color on visitation to The Mall and a bit of color on the spend rates, et cetera, that you're getting through that channel?

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Adrian Littlewood, Auckland International Airport Limited - CEO [24]

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No, I can't give you details in terms of visits just yet, but I do remember I think off the top of my head that certainly, ATVs, transaction values are quite significantly higher than our average. I think 25%, I have in the back of my head. So that's been quite, on Page 24, about 25% in the physical stores. I think that's partly because of the character of products on there that are attractive. Electronics are very popular obviously, with more lower margin for us. But we're quite keen to build the awareness of the mall and grow that. And obviously, one of the plans has always been to use the channels we have around parking and other channel access to try and build that up over time, our Strata Club work, and we are seeing good pull through from our Strata Club through conversion rates or open rates in terms of our direct marketing work. Look, it's still early days, right? This is a long-term play, not a short-term play. And we've got to keep building our disciplines around how we do that and we've brought in some really best-in-class stuff, I know the campaign manager, all kinds of different things to make sure that we've got a really modern sophisticated marketing machine to help fill that mall up. So no details on addressable market, but it's something for the future.

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Operator [25]

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Your next question comes from the line of Rob Koh from Morgan Stanley.

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Robert Koh, Morgan Stanley, Research Division - VP [26]

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Yes. I guess just bearing in mind that I'm a foreigner across the ditch here. Could I perhaps just ask about the 50 movements target for the runway? And if you give us some color on what kind of technical limiting factors there are?

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Adrian Littlewood, Auckland International Airport Limited - CEO [27]

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Sure. And Rob, Adrian here Rob. Just a reminder for our Australian listeners, we don't have any caps or controls like Sydney does in terms of the mix or gauge of planes or limits set by regulatory constructs, it's really up to us in the aviation industry to see what we can do. Look, in terms of the technical limits, there's some advice from our advisers has been New Zealand has an inherently conservative East based separation model in terms of how you plan and separate planes in the sky. And we've been looking to markets like Europe and how they manage air space to say look there are much more dynamic and more productive ways to manage air space and separation between planes. That allows you to get more movement on the ground. Other technical areas of this, how you group or separate small planes versus large planes. Obviously, you can -- if you've got a very standardized fleet of jets, you can actually push a lot more through than if you've got a mix of turbo props and jets. And there's other things like (inaudible) start or how we set up a taxiway systems to stack planes for takeoff. So both on the ground and in the air technical work that has to be done. And I think it's just a fact that because our country hasn't had to do this, hasn't had the same pressures that our East based managers have had, that it's time that demand has grown for us to take on some of those ideas. So quite a range of opportunity, I guess to try to get to that number.

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Robert Koh, Morgan Stanley, Research Division - VP [28]

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Great. And thanks for bringing up the Sydney embarrassing slot limitations. I appreciate that. If I could move to car parks. Are you able to provide some color on what kind of price differential you have for, say, online booking versus driver?

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Adrian Littlewood, Auckland International Airport Limited - CEO [29]

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Look, I can't give you that, Rob, off the top of my head. And it's a mixture, right? So we run multiple, multiple price points and campaigns all the time for the products. We've been using valets as sort of an upsell for us and we're restructuring our valet contract to make sure that we continue to benefit and the hard work on marketing we're getting. But look, in online book, you get a mix of people who are looking to buy secure premium locations as well as get deals. So I wouldn't think of it solely as a discount channel. It is -- we get a mix of full price, full rack rate, payments as well as people looking for sharp deals. So I don't have the number off the top of my head, but don't think of it as purely discounts here.

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Robert Koh, Morgan Stanley, Research Division - VP [30]

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No, I appreciate you got a range of products to help different customers, that's understood. Now if I can just ask a question about the WACC decision. I guess, looking at it, you kind of had a number -- you had a number you seem to have moved a little bit below the midpoint there. Can you maybe just give us some color on how the airport could look to outperform given the new target return? I guess, I'm presuming that this new voluntary reduction's been well socialized and is pretty much a done deal.

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Phil Neutze, Auckland International Airport Limited - CFO [31]

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Yes, Rob. Yes the decision has been made, and we've shared it with the airlines as well as with the regulator. And in terms of outperformance, that comes back to my earlier comment that you set your target prices based on the forecast inputs into the building block methodology merely before you announce prices, that's set a bit over 1.5 year ago. And the key areas where you can potentially outperform is in passenger and aircraft movements growth, if you are able to outperform those forecasts. At the moment, we're actually running a bit behind on that. Other areas that influence returns in IRR, again, I touched on is your regulatory asset base and delivery of commission CapEx. We are absolutely committed to the CapEx program that we set out at the start of pricing but we have acknowledged that we're running a little bit behind and that might tend to offset to some extent the production pax numbers in terms of overall returns. The other area is OpEx. And we're very focused on controlling our operations expansion growth we did have a big lift in H2 2018, and we're somewhat more stabilized now.

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Robert Koh, Morgan Stanley, Research Division - VP [32]

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Okay, great. So I guess I might -- and I appreciate that there's a longer term thing at play in PSE4. It gives you opportunity to reset here. But I guess, we're getting a lower WACC, you're kind of underperforming on volume. CapEx is maybe a little more back ended for quality reasons. And so doesn't that just mean that OpEx is the main lever you have or have I oversimplified things?

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Phil Neutze, Auckland International Airport Limited - CFO [33]

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So we work hard on OpEx, but we also work hard on commission development and as Adrian, I think, touched on, we do have some irons in the fire that could potentially deliver some lift in round about a year's time.

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Operator [34]

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Your next question comes from the line of Adam Fleck from Morningstar.

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Adam Fleck, Morningstar Inc., Research Division - Director of Consumer Equity Research & Regional Director [35]

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I wanted to talk a little bit about you go through , the new domestic, [destination] terminal upgrades in international. Obviously, we saw the positive impact, new retail space can have in this half. But how do you think about as you go through those projects to potential choppiness in retail? How do you manage through that?

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Adrian Littlewood, Auckland International Airport Limited - CEO [36]

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Yes, that's a good question, Adam. Look, I think, we have a broad view on the retail category more generally. And I guess, I would again highlight some of the work we're doing in the online channels. So it's not just terminal retail that we think about. We also think about off-airport -- on airport but not on terminal and in multichannel online work. So I think we are lucky, I guess, to have the privilege of the travelers coming through here for travel reasons. That gives us a strong addressable market. So if I compare it to High Street malls -- big malls -- suburban malls of High Street, we have that natural advantage of foot fall growth coming through here with a willingness and a propensity to spend. You are seeing a deepening of, for example, of food and beverage category, a much deeper and broader food and beverage category, because that is a hard propensity to purchase category. And with the right range and the right offers, you can actually generate some decent sales and returns off that. So we are very mindful of the longer-term dynamics in retail. I do think airport retail, while not being a unique beast, is different and doesn't have a perfect comparison to High Street or suburban mall retail, and we are, as I said, keeping a broad idea about how do we service the retail category more generally, rather than just general retail. And I'll just add we've got more demand than we've got space in the terminal.

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Adam Fleck, Morningstar Inc., Research Division - Director of Consumer Equity Research & Regional Director [37]

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Great. That's good to hear. And then, just following up on the conversations, the regulatory conversations. Obviously, as you talked about the impact of PSE3 is small, but is there any concern from your end and I appreciate again this is a much longer-term conversation. But any concern that the precedent this sets, if you look (inaudible) you're looking at a much larger asset base going into that period and probably some efforts to recoup that as well. But in your discussions with the ComCom, is there any concern on that precedent?

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

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Yes, there is some concern, where we set our prices initially, we truly believe that it was a fair target return for us, given the scale of our investment program and the outlook for the business. So we have wound that back a little and the reason for that is that the commission had a different view to us. And just to explain that in very high levels, we based our assessment looking at Auckland Airport specific data, the commission's view is based on a sample set of 26 global companies and it gave a lower average WACC estimate then we got looking at Auckland Airport. So it is what it is. Actually, it would not be, in our view, a sustainable position for us to continue to have a reasonably large difference of opinion with the commission, and we think we're now at a very comfortable level. So we believe that our decision that we announced today somewhat lessens regulatory risk going forward, so that gives us some certainty and that's definitely a value contributor to our business.

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Operator [39]

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Your next question today comes from the line of Marcus Curley from UBS.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [40]

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Just a few quick ones. I just wondered if you can give some color in terms of the level of the aeronautical charge discount that will be applied in FY '20.

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Phil Neutze, Auckland International Airport Limited - CFO [41]

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Yes. So big picture, that's around about a 4% discount on those charges that we're altering. And that's passenger charges and landing charges.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [42]

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And then secondly, Phil, can you give us some color in terms of based off the current schedule, what seat capacity growth is expected to be in the second half and then into the first half of next year?

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

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We don't really give guidance beyond the current year, but big picture, somewhere between 4% and 5% pax growth for the full year across both international and domestic with domestic likely to be a bit higher than international.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [44]

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So that was pax growth as opposed to seat growth?

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

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Yes.

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Phil Neutze, Auckland International Airport Limited - CFO [46]

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Yes.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [47]

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And then just on the Retail business. Can I draw you on giving us some color on what the run rate rental revenue is at the end of February now that the expansion is completed?

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Adrian Littlewood, Auckland International Airport Limited - CEO [48]

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I haven't got that off the top of my head. I think you can take the guide from what we've sort of signaled, but it will moderate in terms of growth rates from what we've seen in this period. Clearly, we've seen a big bounce up through the full half period. So I haven't got the guide on where there's going in the future, but it will moderate off the growth rates we're seeing.

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Phil Neutze, Auckland International Airport Limited - CFO [49]

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We have had a number of destinations, specialty stores in the first half and international outbound. So there will be a lapping effect again next year. So it's beyond that year it would stabilize, I would say. But it's the rate of growth come down, recently significantly from this year.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [50]

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And so just drawing on that point. So as footprint matures, how long do you think it takes for the retail revenue that you're collecting to move back to sort of a pax rate growth? Is it -- can I draw you on what level of -- what -- how long it takes to get away from MAGs into a turnover rental?

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Adrian Littlewood, Auckland International Airport Limited - CEO [51]

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Look, Mark, it's quite hard to forecast that at this stage. I think until we get stabilized performance by the operators and look, I've seen it so many times is, you can project how a retailer will go by based on past performance, but if they get poor on the floor management or change, it can have quite a material impact. So I think it's not until we really get through another probably a year I reckon until we get a good read on that. But as always, we'll have pockets of high performance and under performance. I wouldn't be surprised as we did last time, we went through a cycle like this we'll bounce a few retailers if they're not performing or either they want to bounce and we refill it with other categories at a time. But I can't really give you a guide on that until we've seen our way through the balance of this year into the next.

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Marcus Curley, UBS Investment Bank, Research Division - Executive Director and Head of New Zealand Research [52]

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And then finally, heard a couple of rumors around problems getting visas out of China. Obviously, that corresponds with some declines in Chinese visitor arrivals. Are you hearing anything along those lines, in terms of visa issue?

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Adrian Littlewood, Auckland International Airport Limited - CEO [53]

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No, I wouldn't get too excited about that. I think, there's a risk that people are joining disconnected dots. I think we remain and certainly our feedback from the airlines remains positive overall. I think generally the country just needs to get back into the issues that are positive and working between the 2 countries and focus on those. At the moment, there's a lot of dots being joined that aren't connected. All right. It looks like no further questions. So thank you to everyone who joined the call today, and we look forward to seeing those who we have meetings set up with. Thank you.