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Edited Transcript of IFT.NZ earnings conference call or presentation 12-Nov-19 9:00pm GMT

Half Year 2020 Infratil Ltd Earnings Call

Wellington Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Infratil Ltd earnings conference call or presentation Tuesday, November 12, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marko Bogoievski

Infratil Limited - CEO & Director

* Phillippa Harford

Infratil Limited - CFO

* Tim Brown

Infratil Limited - Chair of Wellington Airport

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Conference Call Participants

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* Aaron Ibbotson

UBS Investment Bank, Research Division - Director & Research Analyst

* Andrew Rupert Pelham Harvey-Green

Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities

* Grant Swanepoel

Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research

* Stephen Hudson

Macquarie Research - Head of Research

* Jason Paris

Vodafone New Zealand Limited - CEO

* Martin Harrington

Wellington International Airport Limited - CFO and Company Secretary

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Presentation

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Marko Bogoievski, Infratil Limited - CEO & Director [1]

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Okay. We'll make a start, if that's all right. Thank you, everyone, who's joined us in Wellington. I'm Marko Bogoievski, I'm the Chief Executive of Infratil Limited; joined by Phillippa Harford, our CFO, who'll be doing half of the presentation with me this morning.

So it's been a busy 6 months. We've got, sort of, a quiet satisfaction about the amount of things that we've ticked off. I mean, we've had a long list of initiatives that have been running for what feels like a couple of fiscal periods, at least. And I think at the May result full year announcement when we talked about the portfolio construction piece being largely complete and now being able to focus on, sort of, core set of assets, which were nicely balanced between, I guess, defensive cash-generative core type of risk profiles, more predictable profiles and a number of development platforms.

So in the first 6 months of this year, we -- thankfully, we put a lot of capital at work inside those platforms. We obviously, had a major acquisition as well with Vodafone New Zealand. So it feels like a half year dominated by capital investment on the high-conviction areas.

If I can turn to Slide 4. I'll just make some introductory comments and then hand it over to Phillippa to do the bulk of the work, and then we'll come back at the end and wrap things up. As I said, we've been talking about our beliefs inside renewable energy, data and connectivity, in particular, and to a lesser extent, retirement living for a number of years now. So it feels like we've reached a point where you've got a number of well, sort of, established platforms in Australia and New Zealand and the U.S, particularly when it comes to renewable energy and they actually are of scale, and I think they're likely to grow. If you look at the quality of their pipeline and the, sort of, the amount of current activity that they're getting through. And that, sort of, matched nicely, I think, with a big data center complex in Australia, which is now operating across the Eastern Seaboard with Canberra and New South Wales. Again, big visible pipeline, high-quality management team. And I think our -- one of our issues will be how do you, sort of, prioritize sequence the highest and most accretive projects, whether they be in energy or data or other sectors and make sure that we can oversee them properly, we can manage the risk properly, we can deliver the outcomes in a way that we -- that fits our capital structure and what we're saying to investors. And it's actually getting -- I think, for a while there it was quite difficult to manage those various components. I think it's getting easier now, where we've got a number of these businesses that have been in place for a while.

So we've just landed a new one, the Vodafone New Zealand business. It's good to have Jason Paris in the room with us today. I might fling you some questions later on, JP. I mean, it just feels like a -- not a portfolio completed because it's more than that, it's a more exciting proposition than that, but it's a significant asset. We own half of it, and we're really excited about the management team here. So we'll spend a bit of time talking about that in the presentation.

So the numbers, so aside from the $1 billion we spent roughly in Vodafone New Zealand for just under 50%, over $300 million of CapEx going into energy and data centers in particular. And $120 million -- yes, split roughly half and half, you see there on the chart, $123 million in renewables, $127 million in data centers. No real surprises on the DPS and dividend per share, same nominal cent per share as the last half year, $0.0625 partially imputed, Phillippa will talk to us about that. And a good solid total shareholder return of over 25% for the 6 months to 30 September. I think that's based off a $4.92 share price, which is pretty close to where we are at the moment.

Okay. So more from me, later. We'll let Phil walk us through the financial highlights.

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Phillippa Harford, Infratil Limited - CFO [2]

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Thanks, Marko. Yes. So as Marko said, we've had a lot of activity during the period. But when you actually look at our net parent surplus and our underlying EBITDAF, you don't really see that coming through. So we've got a relatively flat net parent surplus of $56.4 million and underlying EBITDAF of $289.4 million, but we'll talk a bit more later about really what's going on in those numbers because there was actually quite a bit of movement as to what's coming through there. Net operating cash flow for the period is down to $68 million. That's largely being driven by the incentive fee that was paid out in the current period but flowed through the financial statements for March 2019. But we're also seeing a reduced distribution from Longroad. And really, where that comes down to is the comparative period included the [feebee] distribution of about $50 million to Infratil, and we haven't seen that level of distribution come through in the September 2019 period. And as we can see there, we've got earnings per share of $9.5 million slightly down on the $10.5 million from the prior period. So then we have the results summary, and looking at operating revenue, it's well up to $802 million from $736 million. That's got a couple of contributing factors. We've got lease curtailments at Tilt, which has come through to more generation. We've got a full contribution from Salt Creek and Tilt and also, Trustpower's benefited from the higher spot prices in New Zealand. At the same time though, we've got quite a big increase in operating expenses and largely that's coming through from the Trustpower result.

Looking now at the international incentive fee. What we've got there is we've got a $12.8 million accrual for the current period. The thing to note about that is that's the estimate of the expected performance fee as at 31 March 2020. That's been driven by the performance of CDC, Longroad and Tilt. But in addition to those assets, it also looks at the expected performance of RetireAustralia and ASIP. So unlike the comparative period where we were doing our initial assessment of the performance of some assets for a 3-year period, essentially, those assets have now rolled into the annual bucket. And the consequence of that is that they also get assessed against the other assets in the portfolio.

So there'll be more on that at the full year because clearly, at this stage, that number is just an estimate. The way that, that process will play out is that there will be independent valuations undertaken at 31 March 2020. And at that point, we'll have a view, therefore, of what that position actually is.

So moving then on to net interest. You can see there's been quite a bit of movement in that, probably not that surprising. Essentially, our interest costs go up as CapEx projects are completed across the business. And we've also had an increase in our interest costs at the parent level because we've obviously invested a fair amount into Vodafone, part of which was funded by, sort of, debt facilities. So no real surprise there.

In terms of the revaluations, that movement that you'll see there is largely driven by the Trustpower interest rate swaps and other derivative movements. So discontinued operations. I suppose the thing I'd draw out there is a lot of activity in the last 6 months when you think about the shape of the portfolio, as Marko said, with a new purpose-built student accommodation. That was actually disposed of. We announced that sale on 1 April and completed 6 weeks later, whereas NZ Bus, Perth Energy and Snapper have all been sold and completed since our half year result. And so what you see coming through the year as a net parent surplus, as I said, of $56.4 million in terms of our contribution to our result from that.

So then turning to underlying EBITDAF. And where we come to is $289.4 million, which is slightly up on the prior period. But running down that list, you can see a few notable changes. Trustpower is $20-odd million down from the prior period, whereby [everybody] obviously come through with their result, but we're talking about lower hydrology and higher costs, which were essentially drawing or giving that result.

CDC data centers. We've seen a lot more fit out of the existing data centers. And I think most significantly, we've had the announcement of the Sydney site, so you'll see that -- we see that coming through in our results.

RetireAustralia. Not a lot of movement there, relatively speaking, but not a big contributor to the result. And of course, we've got the contribution from Vodafone New Zealand for the first time, which we're showing $39.1 million. Now just to note, both Vodafone New Zealand and CDC come through as Infratil share of the reported EBITDAF.

So then we turn to CapEx and investment. I think some of this will already have come through the comments to date, but we've had a lot of activity at Tilt Renewables with the ongoing construction of the Dundonnell Wind Farm. CDC has progress in it, both Canberra and most significantly, in its Sydney sites. And we've also had a little -- a bit in our Auckland development of the hotel, which is being undertaken by Infratil Infrastructure Property Limited. And as you can see there, the big movement as well has been $1 billion invested into the Vodafone. So all up, we're talking about CapEx and investment of over $1.3 billion for the period.

So turning now to the distributions. And as Marko said, we're looking to maintain the interim dividend at the same level that it was in 2019. We're actually going to reinitiate our dividend reinvestment plan for this dividend. That's largely in response to requests from shareholders who like to see the opportunity to invest. So essentially, that will be reactivated. But because of the fact that we've had to reissue our plan to comply with the new NZX rules it's just worth noting that any shareholders who had previously opted into that plan will need to re-opt in, in order to get back into this one.

And in terms of the dividend outlook for the final, I think we were at, at the moment as we're continuing to signal that we expect the final dividend for FY '20 to be the same as the FY '19 final dividend on a cents per share basis. But obviously, that will be a higher number in absolute dollar terms given the amount of shares we've now got on issue.

And then debt capacity and facilities. There's a lot to see and talk about in terms of the capital structure of Infratil in the way that we've tried to position ourselves given the Vodafone acquisition. Our bonds on issue have increased significantly over the period. Basically, that's about $268 million up in, sort of, raw terms, and that was because we issued a 2026 and a 2029 bond in about September. That was a very well received issue.

We've also had an increase in our wholly owned debt facilities. Essentially, they've moved to $873 million, of which, about $337 million is currently drawn. That movement was largely driven by the Vodafone acquisition. We went and arranged facilities of $800 million but essentially drew $400 million to buy Vodafone. So some of those acquisition facilities have now been terminated because clearly, we didn't need them.

So really, a lot of activity where we sit at the moment, though, as we do have quite a bit of capacity and flexibility in our capital structure. We intentionally went out to the bond market after we had completed the Vodafone transaction to try to, sort of, change our mix of where our capital was coming from. But we continue to have that bank debt facility availability, so we're comfortable where that sits. Part of that bank facility is acquisition debt, which has a maturity of July 2020. So obviously, that will mature at that point. But we've got plenty of headroom in other facilities. So we'll manage that as we go through.

And then just to note, we've also opened up a new bond issue with our March 2026 maturities. So that was available to the bonds that matured in November. And we like to give our bond holders an option to roll into new placements where we can. So then debt capacity and facilities overall, and I suppose looking at our gearing. In addition to the bonds we've issued and the new bank facilities, it's also worth noting that we've had a fairly significant inflow of capital from our asset realizations. That's about $320 million, of which about $150 million came in since the Vodafone announcement. So essentially, where we were at was we signaled at the time we did the acquisition that we were hoping to fund part of it through our proceeds, and that's essentially what's come home, and it's through the NZ Bus announcement and the Perth Energy sale announcement. So we're very pleased with that result.

At the same time, you can see the market value of our equity has increased about 60%. That's a combination of both the equity raise but also the Infratil share price movement over the time. It's coming through, and that's essentially resulting in a gearing of 34.5%, up from 31.5% in the comparative period.

And then share price performance. Marko has largely touched on that, but it's good to see the graph anyway. For the year-to-date, we've got a total shareholder return of 25.4%. And for the year to 30 September, we've got a total shareholder return of 50.8%. And you can see where that's -- some of those movements have come through, sort of, looking through the back.

Now turning to the operating businesses. And the 3 that I'm going to touch on have largely already, sort of, announced their results so I won't need to sort of spend too much time on them. But first and foremost, let's go to Trustpower. As I said, you've got an EBITDAF result, which is $22 million down on the prior period. That's as a consequence of hydrology, and also they've had a plant outage at Highbury. But I think it's fair to say that it's also a lower result than expected. They've had higher costs as they've tried to grow capability and they've also had a slightly -- what we would call a slower pickup in terms of their retail customers and that's particularly in the telco segment.

Other than that though, I suppose, really, it's not that much of a surprise where they're landing from our perspective because we are talking about Trustpower that is generations short. And given where we were at in the cycle and they operate in a pretty competitive retail market, I suppose, it's probably the kind of challenge we would expect to see it at this present time.

Looking now to Tilt. As we've signaled, they've had a pretty strong year. All of the operating assets are performing well. They had less curtailment in their South Australian wind farms. And at the same time, they're spending a lot of time and capability, and obviously, money developing out Dundonnell. They've also recently announced their Waipipi wind farm in Waverley and that's going to be funded without any shareholder debt -- beg your pardon, shareholder contribution. So it's effectively residual cash available in that business together with additional debt facilities. So that's a pleasing outcome from our perspective.

And the other thing to note with regard to Tilt is that they've announced the strategic review of Snowtown 2. And at the same time, they've managed to refinance that wind farm, with the result that if that sale does proceed, then essentially, it will have minimal impact on the remaining, sort of, corporate group for Tilt, so that's great.

Then finally, Wellington Airport. Quite a few things going on there from an activity perspective. The picture -- I'm on Page 16, and the picture you'll see there is the new Singapore Airlines aircraft that now is flying in and going from Wellington to Melbourne and on to Sydney. So nice to see that upgrade in fleet there. We've also had the main terminal upgrade, and I don't know, you've probably seen that as you've gone through the airport. And really, there's been, notwithstanding all of that activity, the result itself was relatively flat. That's a mixture of a change to the passenger and fleet composition and also slightly higher costs. So a lot of activity there, notwithstanding what you could see as a slightly flat result. Other things going on to the airport. They've now released their 2040 master plan. That's all about what needs to be done in order to cater for the passengers that, that airport is expecting out to 2040. I think they're essentially looking to increase passenger numbers to something like 12 million per annum, so it's a significant increase from where we are now. It's worth noting that they are also in the process of consulting with their airline customers in terms of aeronautical charges for the next 5 years. And as you would expect, we've still got work going on, on the runway extension. The next steps are to make a submission to the Civil Aviation Authority in relation to the safety requirements of the runway extension. And once that's been approved by the Civil Aviation Authority, essentially, the airport will then go and resubmit its resource consent. So plenty of work going on there, and we'll expect to see there -- just to note, we'll expect to see the consultation from the airline, the pricing to come through and be known by the end of the financial year. So we'll have more certainty on that.

Thank you.

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Marko Bogoievski, Infratil Limited - CEO & Director [3]

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All right. We'll keep scrolling through the remainder of the operating businesses. Let's start on Slide 17 with CDC data centers, which is actually the new name, it's not a typo, because of their expansion, I guess, into New South Wales. That makes sense. You can see there, whatever it is, 52% year-on-year growth and EBITDAF, sort of, gives you a profile of this is a business with momentum. Clearly, we had an Investor Day in Sydney about a month ago. So the messages out of that day are being reinforced today. There's not -- there's no intention to create new messages. We're trying to reinforce, sort of, confidence that we were showing that day and Greg Boorer talked about. The full March '20 forecasted EBITDAF for that business is in the range of AUD 110 million to AUD 120 million. And I guess, because the business is growing so rapidly, it's probably more interesting to talk about what, sort of, run rate would you be at, at March. And we think we're heading in that, sort of, AUD 135 million to AUD 145 million range by March '20 and that's a view of -- pretty high visibility view. We know what contracts we booked, we know what facilities we're likely to have in place, and we've got confidence about their delivery. So fantastic, really, to have an asset like that inside our portfolio. We talked a lot about it before.

The Sydney development, or otherwise known as Eastern Creek, is sort of built in a series of platforms. If it's fully built, you're talking about another 120 megawatt on that site. Our expectation is that will get built at some stage, at that point, it's the largest single data center facility in Australia. So it gives you, again, an idea of the scale of that business particularly when there's other both global and other regional players there that have been in market for a lot longer. So it's a pretty impressive effort by that management team to secure that type of development options.

We are continuing to improve the quality, I think, of the clients in that facility. It's still dominated by federal government and the business with Microsoft. I mean, we talk about weighted average lease life. I still -- I would emphasize that, that's actually not the thing that gives you confidence about predictability of cash flows in that business. It's actually the fact that this -- delivering this quality service. And actually, it's interesting with the Vodafone acquisition, you're, sort of, seeing another perspective on the same set of trends around into connectivity, communications, storage and how our clients, whether they're mass market customers, SME, corporate enterprise, how they're sort of using these, sort of, facilities and driving the growth. So it's, sort of -- it's a much more complete picture when you get involved in sort of a retail integrated telco and it makes -- frankly, gives you more confidence.

So good segue into Vodafone New Zealand. I love these photos, by the way, coming out of Slide 18, coming out of that more creative business and some of our traditional infrastructure businesses. I mean, we -- again, Vodafone was a participant in the Investor Day. I mean, the intention right now is to say, look, okay, we're the proud owners of it. We closed the transaction on July 31. And we did quite a lot of work preacquisition to make sure that we could reposition that business as sensibly and as confidently as we could, understanding there was a lot of work to do. So I think it's fair to say, I think that business has got more upside than when we first looked at it and commensurately more risk, so bigger set of outcomes. And the risk part is more about the level of execution required to deliver the upside.

I think you would be surprised how bold some of the aspirations and the reshaping of that business the way it's starting to turn up. I'm really impressed with the management team and Jason, how they've, sort of, latched on to the opportunity to not just reposition that business but act as an industry leader. I think it's great for New Zealand in terms of, sort of, outcomes you'll get in terms of products and services and technology in the future. And there's, sort of, 2 parts of it: Part of it is, I think, sort of, maybe less exciting, more traditional integrated telco, work on cost structures, procurement strategies, reducing complexity, reducing product lines. That's just stuff, I think, they can comfortably get on with it and are getting on with; I'm really more talking about how do you reposition the business past that. What sort of strategy goals do you set for that business? How do you fundamentally replatform it? And it's quite a long set of choices to make there. I mean, you can increment from what you've got, you can build new what's -- using some of the brand-new set of ideas about how you deliver these sorts of services. I think it's pretty exciting. And at the same time, first-to-market and 5G out there right now, ready for December switch on date there. And I should stress that a lot of that stuff is still optionality in the business, right? Sort of, the future capability that we're building will initially drive cost savings and capacity benefits and coverage benefits. But there's apps developers everywhere across every market segment looking at how to utilize those sort of networks and infrastructure. And we need to work with them in some cases and some of them will just come anyway. And the trick will be can you monetize? Can you commercialize? Can you participate in the share of value that's created? And in some ways, I guess, not get caught in the same trap that telcos got caught in during 3G to 4G type transitions. We end up building infrastructure and a lot of the value drifted.

So it's a long way about saying I think we're pretty excited and just -- there's a lot of work to do in that business. We have a full year forecast that we are leaving unchanged. I think Jason in Sydney and me now are saying the same thing. I think we're at the bottom end there. But sort of -- it's not really the point. The point is what sort of messaging will we have, I think, in the middle of next year around how we're intending to reposition that business, what sort of CapEx is involved in that and what might it mean for our industry leadership.

All right. It's a different sector, but no less important, renewable energy. So Longroad, I mean, continues to deliver. I think it also continues to complicate our -- the analyst models. And there's a couple of slides this time, just to see if we could walk through what's happening there. So just as a reminder for those who are not as familiar with Longroad. So it's a U.S.-based utility scale renewables developer. It operates in wind and solar and it operates particularly in a dozen different markets throughout the U.S. So it's well diversified. Its pipeline of opportunities today, and I'm not talking about bragger-watts, but actual pipeline is 3 or 4 gigawatts. So you're talking about massive numbers, even in the U.S. scale. And beyond that, it's probably another 3 or 4 of development opportunities that you would say have to be proven. The tricky part about -- for Infratil's forecast and for reported earnings with this entity is not the economics that it's delivering, it's the fact that they are quite chunky projects, quite -- you can only record gains once you've reached either financial close or commercial operations date. And typically, there's a sale involved there. And it's, frankly, difficult to predict which quarter these projects will get completed.

And clearly, we're optimizing economics, we're not optimizing accounting outcomes. The slide on Page 20 was an attempt to just, sort of, break down what I meant by that. So at the moment, Project Rio Bravo, which was a wind project, where substantially, a lot of the work was done in the previous financial year, technically didn't complete from an accounting perspective into this fiscal year. So we recorded the gains, we're in the, sort of, mid- USD 30 million at the Longroad Energy holding 100% level. They came through as expected, and we're really pleased with that project. In fact, we went to see that project, and it's a really impressive facility, 238 megawatts, USD 300 million. El Campo was another wind project where we have sold part of the equity of that project to 2 Danish pension funds and quite an innovative, I guess, partnership relationship at very strong pricing. So we effectively achieved the, sort of, economic potential of that business and only sold half of the equity. The issue with it is that we're continuing to hold 50%. We've got operations and management responsibility for that facility. And technically, we are still accounting for this as a consolidated operating asset, therefore, we can't record a gain by selling something to ourselves. We're at a lot lower basis on it. If we ever did sell our equity, we'll record commensurately a much larger accounting gain.

Prospero is a large Texas solar project. In fact, I think it's -- as it says there, one of the largest solar projects in the United States, USD 400 million. So you think about all these $300 million, $335 million, and $416 million, these are the sort of scale of these projects. That's being marketed at the moment. It's derisked. It's got a revenue contract. So we're seeing what the right outcome is for that asset, whether we hold it, whether we sell it, whether we do another deal that's similarly structured to say what we did with the 2 Danish pension funds. We're optimizing the economics. So we're going through that process. I don't know where it's going to end. So we're trying to probability weight outcomes around these sorts of developments. And just as another example there, Foxhound, which is another utility scale, but a little bit smaller project in Virginia in the PJM market. Another very attractive asset, has got a lot of interest from equity investors. And again, scheduled to close on or around our fiscal year-end. So not very helpful for Phil in terms of trying to come up with an accounting estimate. But that's -- what I'm trying to do is give you a flavor of the permutations you can have when you're building these large-scale projects, right? And these are large compared to, sort of, our outcomes, and we couldn't be more pleased with the economics. I think I'm just trying to explain the accounting for it.

RetireAustralia, obviously, Slide 21 is an entirely different proposition. I think it's well understood, some of the issues that the retirement living industry is facing. And I guess, the bit that we're not really involved in is the aged care sector. It -- there's a royal commission that -- process that's happening. I don't actually think that's the factor any more. So we're starting -- what we've done is really reposition that business for a new market setting. We slowed down the rate of development activity. We're still looking for quality development sites to set us future options to acquire where we can. We actually haven't seen the repricing quite happen yet on those greenfield sites that you might have expected. I think there's plenty of brownfield opportunities out there if you want them, we're not interested in those. We're starting to see maybe some stabilization in the resale market. You can see there that we've got a bit more confidence around the second half of the year. I think more importantly, from our perspective, on the things we can control, particularly the execution, brand-new Chief Executive, brand-new Chief Financial Officer, and we're really pleased with the way they're showing up. And there's some detail there about the developments that are in progress. We haven't stopped. We're building 2 villages at the moment, one in Queensland, one in New South Wales. And the greenfield ones are more interesting in the fact because they operate partly as that integrated care offer that we've been talking about since we first established the asset.

The pipeline today is about 800 units. 22, just for completeness. We talked about the divestment program, there's no surprises here. These have all been announced. There is our contingent consideration with NZ Bus and Perth. NZ Bus is more of a traditional earn-out type of structure. So it depends on the current operating performance. So please, use the bus as much as you can. And Perth, I've got to do more of the technical analysis around some of the energy credits that they've received in the past and the way it's been treated for tax. So that's something that will come out, might take as long as 2 or 3 years, right?

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Phillippa Harford, Infratil Limited - CFO [4]

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Yes.

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Marko Bogoievski, Infratil Limited - CEO & Director [5]

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So we'll see. We've obviously booked the cash, not the contingent consideration. So we'll see.

Turning to the guidance and the outlook. So again, having just explained that some of our businesses are more predictable than others, I think it's important to spell out the specific assumptions. We're still maintaining our underlying EBITDAF guidance at $655 million to $695 million. I think on the left-hand side of that chart, I'd sort of encourage you to look at the bullets in detail, but Trustpower and Tilt have already reported and indicated guidance, so that's -- we don't have any shareholder overlay on that. Longroad, I already discussed. We're effectively including the Rio Bravo project, which has been realized, and we're making, sort of, an assessment of how those 2 or 3 remaining projects might turn up in this fiscal period. We'll see what ends up at the full year.

And Vodafone, as I said, is at the bottom end of that $460 million. Maybe Jason surprises us, but we've been conservative in this assessment. We exclude incentive fees in the outlook and the full year dividend, I think we already discussed. So hopefully, that's clear, and we'll see -- we've got an Investor Day in sort of the first quarter of next calendar year. We will probably update that and if something materially happens before then, then obviously we'll talk to the market as well.

So a couple of summary slides. I think we really like this photo too. We've used it twice. But we -- I think there's sort of 2 parts of the, sort of, summary. I think the -- if you said the portfolio construction work is finished, what do we mean by that? I mean that's -- because it's an ongoing piece of work that I think we're accountable for. But at the moment, it's balanced in terms of the way you've got defensive cash flows supporting growth platforms is what we really mean. And it's sort of -- it's very, very important that the cash-generating businesses, the more predictable businesses, actually perform. So there's no pressure taken off the Wellington Airports, the Trustpowers and the part of Vodafone that should be just delivering. I like the fact that all of our assets now line up cleanly with our views on investment themes and trends, so it's sort of almost zero now misalignment, and they are all chunky, scalable businesses that you could afford to spend a lot of time on.

And for the construction theorists, it's more diversified. It's by sector and geography. And largely, the returns are noncorrelated. So it's almost exactly what you want in this sort of environment. And particularly where the core defensive assets are not regulated assets subject to some of the things that are happening in society and pressures that are put on politicians and, therefore, regulators, they're more contracted cash flows with high credit-worthy parties. So that's where you want to be. If you've got core in your infrastructure portfolio, right now you want to be there. And therefore, in total, a bit less exposed to interest rate movements either way.

And the last slide there before we go into Q&A. Just to remind ourselves that the growth options are proprietary. So it's one thing to talk about confidence in trends, where you want to position your equity and capital and origination program you have. It's another thing when you wake up every morning knowing you've got quality management teams in a number of different jurisdictions with their own proprietary pipeline, where the issue is scheduling, sequencing, getting your order right and supporting them when they want to go. And I think it's a nice problem to have that we've got big projects in flight, in Australia and the U.S. in particular, and soon to be in New Zealand with the Waipipi scheme and actually interesting developments and options, I guess, coming up on the Vodafone business. The pipeline is strengthening all the way through. It genuinely is strengthening. I mean, that -- you couldn't be more happy with what's happening with the pipeline of opportunities. So you have to -- when you communicate to our businesses, it can be a little frustrating if you're a CEO in our subsidiaries because you sort of sit there and you don't really know whether you're going to get the capital support when you need it. The reality is, history would say, actually, all good ideas get funded. And we find a way to do that.

Our default setting at the moment is that our capital is being preserved for our existing platforms. That's sort of the mode we're in for now. So as long as the CEOs are giving us good visibility about what's coming and the quality of the pipeline, it's sort of my job to make sure we can support it when necessary. There's always sort of levers, right? We just rattled through a list of 4 subsidiaries that we sold that generated, I don't know how much met total, $400 million or so of proceeds? Phillippa talked about the Snowtown 2 project in Tilt, which I'm not suggesting for a minute, it all comes back to shareholders, but it's a really large scale. I think analysts have it on an average EV of about $700 million or $800 million; it's sort of that scale project. So it's quite -- you can get confident about sequencing capital when you've got that many levers to play with. And it's our job, I guess, to decide how much capital you have in the development platform. So something like Longroad Energy is quite a skinny platform. It's got USD 100 million of cash equity and USD 150 million of LC facilities. It's not exactly -- it doesn't sound like a lot, does it? But it's generating these tremendous economics. So you always have the option of resizing it if you want to. And that's something that Infratil talks about with management team, but also its co shareholder in that case, which is the Super Fund. All right. So that's how it feels to us. I think we're happy to take questions.

Can we start in Wellington? And then before we go to the phones, please? And if you don't mind just waiting for a mic if you do have a question.

Not getting a lot of takers. Maybe let's go straight to the phones and see who's there.

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Questions and Answers

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Operator [1]

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Your first question comes from Andrew Harvey-Green with Forsyth Barr.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [2]

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Marko and Phillippa, a couple of questions from me. First one, Marko, you actually touched on, just towards the end of your commentary there, just around Snowtown 2, and certainly just given the recent sales in that market looks reasonably encouraging. Are you able to sort of talk through a little bit more in terms of your thinking about potential use for that cash. I guess some -- is it likely to stay, obviously, Snow -- Tilt's got a number of opportunities in front of it. But -- or whether that comes back to and for Tilt to redeploy elsewhere?

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Marko Bogoievski, Infratil Limited - CEO & Director [3]

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So I think the clean answer is what we say to our chief executives is, if you're sitting on excess cash, you would assume it's going to be swept, right? So it's not going to sit there. The reality is, if you've explained to us the quality of your pipeline, we understand the economics of your next set of projects, we already start baking that into potential uses. So if I'm Deion Campbell, I should be assuming that excess capital is returned, but you will have equally strong support for the next best idea you come up with. We ultimately owe shareholders though an answer about why we'd be prioritizing, say, the next wind project in Australia relative to doing something in retirement living or doing something in North America with renewable energy. I mean, that's our job to ration capital. I think the scale of that project, maybe you're referring to the -- it was a recent transaction with Macarthur Wind Farm, where there's a 50% stake sold to AMP at very attractive economics. I -- there are some differences in that facility, I guess, that don't -- automatically mean that's what Snowtown 2 is looking at, but it's more of a flavor of what's happening in that market; there's a strong appetite for contracted wind. And in our case, with Snowtown 2, you've got a strong counterparty, it's a well-located asset, I'd be very surprised if we don't get a good outcome. But we're not the -- I think, Tilt's talking about mid-December, aren't they, for an outcome. So they have got quite a strong pipeline. So I think there -- I should add, for Deion's benefit, that we are convinced that there's more projects to be built there past the Waverley Waipipi project.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [4]

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Okay. Next question for me is just around the Vodafone numbers, and so I think at $39 million for 2 months, if I do a simple extrapolation, that's -- goes up to about $470 million over a 12-month period. I'm assuming that $39 million includes, I guess, some IFRS 16 accounting adjustments. Is that right? And if so, how much is it?

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Phillippa Harford, Infratil Limited - CFO [5]

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I can probably answer that as a start. No. Actually, what we've done there, Andrew, is the numbers that we're including don't include the IFRS adjustment. So where we're at is we are expecting the IFRS adjustments to result in a reduction in the Vodafone contribution. We are -- the reason we haven't included them at this stage is when we set our guidance for the period, we hadn't taken into account any IFRS adjustments. Clearly, those are noncash items. They will come through the EBITDAF, but in order to really put our guidance out on a like-for-like basis, we started out with a non-IFRS guidance number. That's where we were at the time, and certainly, that's where we'll continue to go. We will see that flow through. But as I said, that will be noncash. And we're 2 months into the reported result. So the number that you're seeing there is excluding those IFRS adjustments.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [6]

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Okay. So is there any, sort of, one-off gains are going through that? Because I mean coming up to $470 million before you have any additional growth, it looks like a reasonably strong 2 month period.

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Phillippa Harford, Infratil Limited - CFO [7]

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Yes. So I think that's sort of still at the -- yes, I don't think there's any one-off gains in there.

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Andrew Rupert Pelham Harvey-Green, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [8]

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Yes. Okay. And last question is just around Wellington Airport. The result, I thought, looked a little bit soft given the car park and hotel contribution have been coming through for the first time. Are you able to just talk a little bit more to that?

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Phillippa Harford, Infratil Limited - CFO [9]

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Yes. I think the drivers of the result -- and part it is that actually with the addition of the hotel and the car park, the Airport has seen an increase in insurance costs and an increase in rates. So some of it's come through, that's when I was referring to those, sort of, higher costs, that higher cost line, some of that is through the rates bill and also through the insurance costs. They've also been adding a bit of their capability. So they've got a high head count out there and added some extra capability to the team. So really, that's what's coming through the cost line. And on the revenue side, as I said, actually, it's more about a mixture of what type of fleet are landing there, your jets versus your propellers. And also just what works they're doing. So that really is where the flat revenue line's coming through.

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Operator [10]

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(Operator Instructions) Your next question comes from Aaron Ibbotson with UBS.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [11]

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I actually had a question on the unconsolidated results or, I guess, the approach there, Phillippa. I wanted to know if you can talk a little bit to your thoughts around cash flow for the Infratil mother company. Basically, your interest expense is up, if I got it right, something like 30% or so with Vodafone, dividends, up 20% with the increased share count and maintain dividend and the management fee should be up given your strong performance and acquisitions up something like 60%, 70%. So I get to cash outflow from -- during a maintained dividend of around $250 million, but your inflow remains about half of that, if I'm roughly right, from Trustpower and Wellington Airport. I just wanted to know if you had any thoughts around that medium term or if you're comfortable with, sort of, that setup? And if I've got the numbers broadly right, particularly around interest expense.

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Phillippa Harford, Infratil Limited - CFO [12]

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Sure. Yes. So I think there's probably 2 variables that we'll see come through in the second half of the year that I think it's worth pausing to talk about. First of all, there's -- we do actually expect to receive distributions from CDC. We haven't actually seen cash distributions come through from CDC in the first half of the year. The main reason for that is actually, as you can imagine, with all of the activity that they've got going on, they've got a reasonably significant refinancing currently underway. As such, what we decided to do was let them hold off and just accrue their payments through to us and we'll see that come through though, and we're expecting a catch-up of that in the second half of the year. So when you look at that on a like-for-like basis, our half year to September '18 would have had cash flows coming through from CDC. We'll see that come through in the second half of FY '20.

And as I said, that will also be, sort of, on a catch-up basis. So that gives us some confidence about what kind of cash we're expecting to see from CDC in terms of our mothership position. I think the other thing to note is we've also, obviously, got a bit of a watching brief. And Marko, kind of, alluded to this about our Longroad investment, that actually has the ability to generate significant cash back to Infratil. So we'll look at how those projects are progressing and whether or not any further cash flows will come from there. Beyond that, really, I think what we're trying to do is actually just look at our capital structure and maintain a position while there's other things in the portfolio going on. Clearly, we've got our investment in Vodafone. We're expecting that to deliver within a, sort of, I'd say, within 2 years from now. We are saying that we will expect to see cash-imputed dividends coming out of Vodafone.

Actually, in the meantime, we still -- we'll still have some cash coming out from shareholder loans into that vehicle. So we're comfortable that we've always got to find a balance between when we outlay the capital and when the cash comes in from that. But there's a few levers we can pull, so we don't really have any concerns from that perspective in terms of your, sort of, 1 month, 2 year out -- I beg our pardon, 1-year, 2-year outlook, and then we'll obviously see where other cash flows are coming. I mean, without, sort of, overcooking it. You can see the cash flows that are coming through from CDC. We've got a lot of optionality there as to how that's structured, the bank funding into that vehicle gets more and more confident as it executes and delivers well. So I think what I would say about that is none of that stuff is particularly steady state. So we're comfortable with our outlook.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [13]

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Yes, sorry. I didn't mean like you were uncomfortable with your financial position, but I just meant that historically, when I've looked at your, sort of, cash flow management, the dividends from some of your core holdings have largely covered your -- certainly, your interest expense and your dividend, whereas now, you're quite far off. And because CDC's doing so well, I would assume it would be quite a few years before you will see it go cash flow positive, hopefully. So it was more -- my question was more around whether you considered restructuring, having more regular dividend payments rather than shareholder repayments or interest contributions. So I take that as a no.

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Phillippa Harford, Infratil Limited - CFO [14]

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No. Yes, you're right.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [15]

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Okay. Fine. Perfect. And then finally, my other question was actually also related to Wellington Airport because as you alluded to, it seems like basically, all of the additional revenue contribution from the hotel and the car park has been eaten up by increased costs. Are those extra insurance costs and rates that you mentioned, are they related to the car park and the hotel or are they related to the other businesses of Wellington Airport, the aeronautical bit?

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Phillippa Harford, Infratil Limited - CFO [16]

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Perhaps we can ask either Tim or Martin, we've actually got the benefit of Tim and Martin being in the room, so, Sharon, would you mind passing the mic?

We'll get it straight from the horse's mouth. Just use that mic, nobody can hear.

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Tim Brown, Infratil Limited - Chair of Wellington Airport [17]

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It's about 50% because, of course, once you complete a project like the hotel or the car park, you stop capitalizing expenses and you start also paying rates and insurance on the completed projects. So I think from memory, the rates and insurance increase in that -- the half was about $700,000; there was a similar level of additional costs from management, as Phillippa said, from additional capabilities. So the other $700,000 wasn't related to the car parking or hotels expense, it was just general other functions.

Is that right, Martin?

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [18]

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But the additional costs, if I recall the Wellington interim correctly, was something like $5 million or $6 million?

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Tim Brown, Infratil Limited - Chair of Wellington Airport [19]

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We're not looking at the EBITDA level, so which level are you looking at?

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [20]

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Yes. So the additional top line contribution, which looked like it was -- even though it wasn't specified from the hotel and the car park, was $6 million or $7 million in the Wellington Airport interim, not Infratil, and there's nothing of that drop down to EBITDA. So I was just -- and you know there was just...

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Tim Brown, Infratil Limited - Chair of Wellington Airport [21]

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No. The hotel definitely made a contribution. I'll give it to Martin to answer.

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Martin Harrington, Wellington International Airport Limited - CFO and Company Secretary [22]

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Just a bit of context that the hotel has been opened 7 months. It's obviously growing into its occupancy and things are going well in accordance with the business case. The model level car park as well has open in October last year, it's about a year in operation as well. So you do get that as you grow into the asset, you obviously get the unfortunately, year 1 of the rates and insurance and the other costs that Tim mentioned and the revenue growth comes over time. So we're very happy with how those assets are performing, growing well.

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Aaron Ibbotson, UBS Investment Bank, Research Division - Director & Research Analyst [23]

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Do you feel -- have you checked that your return on the significant CapEx you put in or something? Are you basically happy that that's covering cost of capital?

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Martin Harrington, Wellington International Airport Limited - CFO and Company Secretary [24]

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Yes. We're happy, as I say, that things are growing in line with the business case, in line with a business case, which covers cost of capital.

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Operator [25]

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Your next question comes from Stephen Hudson with Macquarie Securities.

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Stephen Hudson, Macquarie Research - Head of Research [26]

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Phillippa and Marko and Tim, actually, I'm going to put a question to you too. Just 3 for me. Firstly, RetireAustralia. I just wondered, you've noted that your patience remains on that asset in terms of realizing the full value from the investment. Are you expecting to realize that full value, sort of, organically or would you entertain growing the business through acquisition or joint venture? I guess, is the first question. Secondly, on Wellington Airport. Tim, if you can just give us an idea on what you're expecting the revenue reset to be from 2020 onwards? Just some sort of sizing of the revenue change there? And then just, I guess, a clarification on Vodafone. Back to Andrew's question, it looks as if it's in the middle of the $460 million to $490 million guidance range when you gross up for the 2 months. Are you expecting some deterioration in that business going forward from here, Marko? Or -- I'm just trying to reconcile your comment on the number coming in at the low end of that range?

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Marko Bogoievski, Infratil Limited - CEO & Director [27]

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Okay. I'll take the first one and the last one, maybe we can get Tim involved again on the WIAL one. So I mean, I'll give you a generic answer on RetireAustralia. It's the -- I'd say 90% of the focus is on execution, right? Inside of that business. We talked about new senior management team. We've got 2 in-flight projects. They have got strong views about how you integrate care, they're participating in an industry-wide basis on some of the issues that address the whole industry is facing. It doesn't feel like the time, right, to entertain, sort of, large-scale inorganic activity would be my starting point. Having said that, I think the shareholder, Infratil and NZ Super, both understand that these might -- exactly, that'll be the sort of circumstances where others capitulate and lose faith in a theme, and that could be because they don't have -- they have a different set of ideas, they don't have the capital to participate or it could be that they're a large integrated player with retirements only a small part of their business.

And so I'm open to all that stuff. What we won't do is just pick off, sort of, brownfield old inventory that's out there just because it's cheap. I mean, they're just not doing any activity as far as I understand looking at those sorts of opportunities. On the Vodafone point, Stephen. I mean, Jason's here, I'm happy to get him to talk about. I don't think it's just as simple as taking a ruler and multiplying $39.1 million x 6. The -- I think that management team has already said, they've put in place quite a lot of people they support to work their way through customer services issues today, which includes basically for people, right? And that's a sensible investment to make while we're making our strategic choices, rebuilding new platforms. And actually, there's a lot of product activity happening inside that shop. So it's more, I think, a reflection of some of the investments we are making to stabilize the customer service experience, would be my answer. I don't know, JP, am I missing anything else in that?

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Jason Paris, Vodafone New Zealand Limited - CEO [28]

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Yes. Yes. No, that's exactly correct. So the trading performance that you're seeing is reflective of very strong cost management in a tough trading environment. And then we've made some strategic choices, including a $10 million investment in complex technical support onshore to help with some of the legacy technology challenges that the organization has had over the last few years but also to ensure that we improve and get our customer experience back up to where we would like it to be.

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Marko Bogoievski, Infratil Limited - CEO & Director [29]

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Okay. Thank you. So that was Jason Paris, our Chief Executive, for those on the phone. On Wellington Airport, I mean, do you want to have a crack at it? Or was that one for you, Tim or Martin? Martin?

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Martin Harrington, Wellington International Airport Limited - CFO and Company Secretary [30]

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Yes, I'm happy just to give a couple of points on that. Just regarding the sort of the volume yield mix, just to sort of touch on, again, the flatness was sort of has been referred to. If you look at the last 5 years or so, there's been very strong growth in the airline industry, both within New Zealand and around the world, and there's definitely been a bit of consolidation around the world on passenger growth. So there's definitely slowing growth that I think most people would be aware of in New Zealand and around the world for different various reasons. So there's a bit of that, sort of, consolidations, we call it, rather than flatness. And then from a yield perspective, we are at a good time. We're partway through the consultation, so I have to be a little bit careful with what I say. But in broad terms, the proposal we're at the moment is pretty, sort of, no large increase and no large decrease in prices and reasonably flat yield per passenger.

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Operator [31]

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(Operator Instructions) Your next question comes from Grant Swanepoel with Craigs Investment Partners.

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [32]

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Just 2 quick questions. The first one, are there any IFRS surprises in that EBITDAF guidance? I wouldn't assume that there's anything in CDC in terms of leases, et cetera, other than what's already been disclosed by Trustpower and Tilt, that is. And my second question is on what should we be assuming for Longroad for the full year? I know it's a bit of a coin toss in terms of when these projects get completed but when I put in the mid guidance into your numbers, I get almost a 0 impact from Longroad. Can you just give us some sort of color what's in your guidance on that and are they the Foxhound and Prospero -- I mean, El Campo, that you potentially are the 2 that you're going to be putting in for this year?

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Phillippa Harford, Infratil Limited - CFO [33]

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I can start with the -- so yes. Your question, Grant, on the IFRS. Essentially, the way that that's coming through, as you say, half of -- we're expecting about $7 million across the Group. Half of that is coming from Trustpower. We've got a bit of a contribution from Tilt and there's a little bit in Infrastructure Property Limited. So essentially, that $7 million will lap of which half comes through from Trustpower.

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Marko Bogoievski, Infratil Limited - CEO & Director [34]

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And Grant, on the Longroad question. I mean, so we're not giving specific guidance at the Longroad level. But the way I think about it, we had about just under -- around USD 35 million, 100% development gain on Rio Bravo. That's in this year. And we're estimating a similar level to come out of the remaining projects to land as an accounting result in this fiscal year. And then you've got a tax effect that, obviously, and there's incentive outcomes for that management team that come off that, so the net result -- and then you've got to take 40% of it for Infratil, so that's what your spreadsheet should be doing. So without looking at your spreadsheet... right? Yes. Okay?

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [35]

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Well, that does put a bit of pressure on some of those unforecasted numbers, particularly RetireAustralia?

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Marko Bogoievski, Infratil Limited - CEO & Director [36]

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Pressure you mean in what way, Grant?

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Grant Swanepoel, Craigs Investment Partners Limited, Research Division - Director & Head of Institutional Research [37]

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Well, if we try and balance your forecast EBITDAF of $655 million to $695 million, put in the midpoint of all the other indications, put in the Longroad, it just means the stuff that we don't have guidance for is now looking like it's going to struggle a little bit, on that mid guidance, that is.

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Marko Bogoievski, Infratil Limited - CEO & Director [38]

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I think we're being conservative. So -- and we're trying to be explicit on the things that are probably move, in our view, could move the most, right? Just so it's clear when we report our actual results where the deltas are.

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Operator [39]

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There are no further phone questions. I'll now hand back for any room questions.

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Marko Bogoievski, Infratil Limited - CEO & Director [40]

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Okay. Fantastic. It's 11 o'clock on the dot. So I appreciate the questions and participation. We will, I guess, our next formal presentations to shareholders in Investor Day, beginning first quarter of next year. And no doubt, these themes will be updated and, hopefully, we can answer more of your questions then. Thank you.

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Phillippa Harford, Infratil Limited - CFO [41]

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Thanks.