Earnings Transcript for ACKDF - Q4 Fiscal Year 2022

Operator: Good day, and thank you for standing by and welcome to the Auckland Airport Interim Results 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. I will now hand the conference over to your speaker, Carrie Hurihanganui, Chief Executive of Auckland Airports. Please go ahead, ma’am.

Carrie Hurihanganui: [Foreign Language] Welcome, and good morning to everyone joining the call for the interim results for financial year 2023. I am Carrie Hurihanganui, CE of Auckland Airport. And I am joined today by Chief Financial Officer, Phil Neutze. It’s pleasing to see Auckland Airports delivered its first underlying profit in 2.5 years through the return of the international airlines increasing travel demand and record high load factors. However, similar to the industry globally it has not been without its challenges such as labor shortages, lost luggage, queues, which we have unfortunately have been felt by our customers as the system has went up to meet the increased demand. We are working hard across the airport ecosystem to address these issues, but it will take time. I also want to take a moment to acknowledge the recent severe weather events impacting Auckland and regions across the north island. Our thanks go to travelers to their underlying patience and the team here at Auckland airport who continue to work incredibly hard to support the recovery of the business. And finally, our hearts go out to those around New Zealand who continue to navigate the impacts to their homes and communities. Now that there we have quite a bit to cover with you before we get to the Q&A. So let’s jump into Slide 4 to kick things off. Now the happy results do reflect the uptick in travel with almost a full six months period without any travel restrictions for New Zealand. Passenger movements increased substantially 341% on the previous comparable period to NZD7.6 million and if you look at that in first half ’19 comparison that’s 71% of what it was. Now this is primarily driven by the increase in domestic PAXs to NZD4.1 million and the increase in international passengers including transit to NZD3.5 million. First half 2022 revenue increased 128% to NZD287.8 million, which lifts across all revenue lines. Operating EBITDAFI lifted NZD289 million, which saw first half 2023 EBITDAFI margin of 65.7%. Now that’s resulted in underlying profit after tax of NZD67.9 million and the total reported profit after tax of NZD4.8 million impacted by the NZD94 million non-cash investment property valuation decrease. As agreed with our banks following fresh interest covenant accommodations in February last year, no dividend has been declared for the first half. In line with the increased passenger movement in international airlines returning you see that in the aircraft movement which rose up 117%, driven by both domestic and international. Capital expenditures NZD261.6 million was up 124% on first half 2022 and that’s a reflection of increased core aeronautical investment in – field renewals which includes the purchase of the air field ground liaising the design and enabling works to support the future development of the integrated international and domestic terminal building and that also includes the Transport Hub, as well as ongoing key property development such as Mānawa Bay, and the five pre-leased warehouse and office developments underway. If you go to Slide 5, what we are seeing is the continued recovering is driving improvements across all key business lines. Aeronautical revenue lifted significantly to NZD101.5 million driven by the growth in international airlines and passengers and that subsequently flowed through to higher air field and passenger revenues. Retail revenue was up on the prior year to NZD59.4 million as a result of the increased passengers with 95% of domestic and 87% of international retailers trading daily. Car parking income also increased to NZD27.5 million, that’s not only reflected in the increased passengers that we talked about, but also the demand for self-drive, the fact that we have availability of all parking products and the recovery in those numbers. Property has been and continues to be resilient with revenue up 31% to NZD72 million. The property rental income was driven by rental growth in the existing portfolio, new leases and a positive contribution from new developments. Hotels, again, in line with the increase of strong demand, is up to NZD22.4 million. That's an increase of 173% from the comparable period and that strong demand is driving rate growth. It had an occupancy for the period of 61% average across both the Ibis and the Novotel, although also noted that the ongoing staff shortages has constrained or been the threshold to a certain extent on the pace of that recovery to the number of available rooms. In Queenstown, their passenger numbers now have surpassed pre-COVID levels, seeing an increase to revenue of NZD30 million. If you could move to Slide 6 please, one of the things that we've seen obviously with passenger numbers recovering, we've virtually had no domestic or international travel restrictions in the first half with the exception of non-visa waiver countries, which was the 1st of August that they were able to travel. So that has delivered a steady increase in those international passenger numbers. It continues to gain momentum with many international carriers returning to New Zealand, which is great to see, but as well as the addition of new airlines such as AirAsia X, which commenced from Kuala Lumpur via Sydney last year – in the first half, sorry. And then, of course, in second half, ahead of us we've got Qantas's New York flight commencing in June. Now we do expect to see continued recovery strength, not only as further capacity is added, but much of that potentially is through frequency build. If we move to Slide 7, our focus really is on building a better future and as we've looked at that, it is with recovery well and truly underway. We are working with airlines to continue to rebuild capacity, frequency and passenger numbers, including the new routes. But we also know how much our customers enjoy the shopping and dining experience as part of an overseas holiday or work trip and we are working incredibly hard to make it the best possible experience, not only for today, but as we look out to the future and that includes our recent announcement of the move to a single duty-free operator from September 2023. And finally, over the past six months we have been reestablishing the key aeronautical infrastructure developments that had been put on hold when COVID arrived and that's alongside the continued investment in commercial property developments that make sense. And core to that is embedding our sustainability and resilience priorities as part of that. Now I'll hand over to Phil to take us through the financial performance in a little bit more detail and I'll be back in a little while. Phil?

Phil Neutze: Thanks, Carrie. Well, things are certainly looking a lot better than they were a year ago. Now we are on Slide 9. So it's great to see international passengers continue to recover in the first half of FY '23 averaging 60% of FY '19 for the half and that's after starting the financial year at less than 50% and we expect this trend to continue in the second half and our full year earnings guidance, that we'll come to later, reflects our expectation that FY '23 will see approximately 70% of FY '19 international PAX. Domestic passengers on the other hand have pretty much plateaued at 85% of FY '19 and this reflects constrained domestic seat capacity. That's clearly showing up in domestic airfares to and from Auckland Airport, which averaged over December and January this summer more than 30% up on the pre-COVID summer of 2019-2020. On to slide 10, I won't dwell too much on this slide regarding aircraft movements and MCTOW. It's pretty consistent with the passenger trends that we saw in the first half of this financial year. But perhaps the most interesting statistics are that domestic aircraft movements and MCTOW have recovered slightly less than domestic PAX versus pre-COVID levels and thus reflect strong load factors, again, demonstrating domestic capacity shortages. So moving now to Slide 11. So finally, Auckland Airport has been able to deliver a strong underlying profit for the first half of FY '23 of circa NZD68 million and this is 50% of the pre-COVID FY '19 comparator. As Carrie mentioned earlier, revenue of circa NZD290 million was 78% of the first half of FY '19, but operating expenses on the other hand of nearly NZD99 million were 106% of the first half of FY '19. So pleasingly, this growth in OpEx associated with the COVID recovery this half versus PCP was a lot less than the revenue recovery. So EBITDAFI margin increased to 66%, compared with 48% in the previous corresponding period and we expect the rate of annualized OpEx growth to slow appreciably in the second half of FY '23 and to fall further in future years. Both depreciation and interest expense are up strongly on PCP and this reflects roughly a doubling of CapEx this half versus the FY '22 run rate. So now on Slide 12, big picture, as you'd expect with such a strong lift in passenger numbers, passenger-related revenues grew strongly in the first half of FY '23. So that includes passenger charges, retail income and car parking revenues. But airfield income growth was lower and that reflected a couple of things, one was the nearly NZD4 million of landing charges discounts this half to help incentivize airlines to return capacity to Auckland; and the only 90% increase in MCTOW, compared with – and this compares with more than a 300% increase in total passenger numbers versus PCP. Investment property had another strong half with rental income up nearly 20% versus PCP and owing to new property developments signed up this half, rent roll increased a bit to NZD133 million. That compares with NZD127.5 million that we announced with the FY '22 full year results. Moving now to Slide 13, for first half of FY '23, operating expenses of nearly 99% - sorry NZD99 million were up 50% versus PCP. But when you normalize that for the NZD4.2 million wage subsidy that we received in the first half of last year, it's up 41%. And as I guided at the FY '22 results announcement, we are experiencing strong inflation, particularly in rates and insurance. So looking at rates, our rates bill is expected to nearly double this year, compared to the NZD15 million that we paid the Council in FY '22. Staff numbers and wage rates are also up strongly as are many of the components of the P&L line, asset management, maintenance and the airport operations. So that includes expense lines like outsourced operations. That's paying external providers who manage our car parking, bus operations, trolley and baggage services, also cleaning, also power, gas, water, and wastewater and repairs and maintenance, all associated with a lift in the activity as we recover from COVID. And we have taken the call to rebuild staffing levels and other operating activities ahead of the COVID recovery curve. But as I mentioned earlier, the OpEx growth rate should slow significantly in the second half, as well as going forward. Looking below EBITDAFI line, due to the step-up this year in CapEx, as well as the significant buildings upward revaluations that we booked in June last year, we expect depreciation to be between NZD140 million and NZD150 million in FY '23 and interest to be between NZD60 million to NZD70 million. Not long to go now before I hand back to Carrie and she'll give some more color on the business recovery going forward. But let's take a quick look at CapEx on Slide 14. As the chart on the right-hand side shows, the CapEx runrate in the first half of this financial year is running at roughly double the FY '22 runrate , you can see we've got roughly the same CapEx, but only in half the financial year. And the text on this slide gives a breakdown of the key projects underway. I won't repeat that chapter and verse, but CapEx so far this financial year has been dominated by enabling works for the new integrated domestic terminal, a number of property developments plus airfield renewals works. Moving now to Slide 15, so far this financial year, we have drawn down an additional NZD134 million net of new borrowings to fund CapEx and we have considerable undrawn bank facility headroom. What we'll look to do is draw down on this progressively to fund CapEx going forward and then we'll term that out with debt capital markets bonds periodically. Our financial metrics have recovered strongly this half and we don't expect the banking interest coverage covenant to be an issue going forward. This covenant requirement will peak at 3x and that's for the 12 months to December 2024 and moving forward, but already for the 12months through December 2022, we're sitting at 5x. And FFO to net debt is another one that we look at closely. It's also very respectable at 14%, and this compares with Standard & Poor's 11% threshold for our A minus credit rating. But we do expect this metric to gradually soften as we get cracking on the aeronautical infrastructure program. And speaking of that, just a bit of an update there. At FY '22 annual results announcement in August last year, we told investors that they should expect our CapEx runrate to be at least NZD600 million to NZD700 million per annum for the next decade or so with at least NZD0.5 billion each year on average in aeronautical CapEx. So as we progress our PSE4 aeronautical pricing consultation, we are more confident that the aero CapEx number will be higher than that amount with an average of NZD600 million per annum being a better guide at this stage. We hope to also provide more details soon with the full 10-year aeronautical capital plan to be published as soon as the Board approves PSE4 aeronautical prices and we're targeting that for June this year. So moving now to Slide 16, this summarizes the key components of Auckland Airport's balance sheet as at 31st of December 2022 and as at June last year, as well. It's self-explanatory, so I'll leave you to peruse it at your leisure. So back to Carrie now.

Carrie Hurihanganui: If you move to Slide 18, please. I think it's fair to say the recovery is well and truly underway if you look at March 2022. So, just on a year ago, it was less than 20% of pre-COVID international capacity. We are anticipating that to reach 92% by the end of this financial year and international seat capacity continues to show that positive growth. That's been demonstrated in some of the key. Delivery behind that clearly has been the return of airlines, not only to New Zealand but the announcement of new routes such as Air NewZealand's starting flying to New York from September last year, American Airlines to Dallas-Fort Worth from October last year and AirAsia X that I referred to earlier. As we go forward, we've got Air New Zealand operating to Bali from March this year and both the Qantas flight to June that I mentioned before and the Delta flight to LA commencing from October this year. Alongside that we know that New Zealand was named as one of the 20 countries open to Chinese travel agencies and online tour operators. So we do look forward to a step-up in activity from April with the choice of 19 weekly flights across China Eastern, China Southern, and Air New Zealand. To go to Slide 19 please and this really is a story of reconnecting New Zealand and, dare I say, back to the future. If we look pre-COVID, there were 29 airlines operating to 43 destinations. At the worst of COVID that dropped down to 12 and 21 destinations. As we rounded up the first half of FY '23 at 31 December, there were 23 airlines to 35 destinations and that continues to grow with upcoming restarts and new routes expected by September 2023 taking us to 24 airlines to 37 destinations, which will deliver good regional coverage across the Middle East, Asia, the Americas and the Pacific. Moving to Slide 20, the other thing that's really good here is that the recovery is coming from a broad base. Many of you might remember the discussion of pent-up demand and that initial surge of Kiwi outbound Travelers visiting family and relatives or VFR. That has balanced out over time. To give an example, May was sitting – if we go back to May last year, it was sitting at 62% of VFR, on visiting family and relatives and only10% of holidaymakers. As we ended quarter 2 of this financial year, it was 43% VFR and 38% holiday as well as business. So that broader base delivers a more sustainable and also in line with historic proportions that we've seen and it's clear that New Zealand remains an attractive destination. Moving to Slide 21. I did mention in my opening that the continued recovery of travel demand hasn't been without its challenges and whether that be the labor shortages, which have had plenty of airtime across all industries, actually, that the schedule reliability; lost luggage; cost inflation; ticket prices; supply chain and that list goes on. It has had an impact to the recovery of the aviation system and while I can reassure that certainly the industry is working incredibly hard on addressing many of those, it will take time to recover. Moving to Slide 22, the reopening of the airport proposition has been key for us to focus on delivering the experience our customers expect, but also in line with international passenger numbers as they increase. We touched earlier on the rental income and the driver of that 95% of domestic and 87% of the international retail offering was open and they continue to work on that. In some instances when you've got a 20-hour day of coverage at the international terminal, that will be down for that continued – down to the continued recruitment of staff. Income per PAX lifted 102% on the prior period to NZD8.15 and that is, as I said about, circa 75% of the FY'19 equivalent. There were retail rent abatements in the period of NZD51.2 million, which is a 46% reduction on first half '22. We often talk about the fact that duty-free is a key component of our retail strategy and we know the importance it has for our customers as well. We have selected Lagardere as our duty-free partner from September this year, until the full retender process is complete and an appointed operator is in place from June 2025. Along with that we have moving – are moving into the space such as omni-channel offerings of pre-purchase and collect on the day of travel. That's resonated incredibly strongly and we've seen that through the results with income up 8x on the prior period. Moving to Slide 23. As we look at our transport business, parking is recovering well with all products on offer, as I mentioned earlier, over the six month period and seeing increased demand. Not only is it the increase in international passenger numbers driving that, but it is also a rise in the average stay and customers choosing to upgrade to higher-value products as part of that as well. In the six month period, we also introduced a new mobility Valet in our short-stay car park with designated accessible parking spaces directly opposite to the international terminal and those are being received well. The Transport Hub, construction is well underway now with Stage 1 of the pickup and drop-off area on track to open at the end of this calendar year and the remainder at the end of 2024 and in January we announcedNZD90 million of other transport projects with the key aim of smoothing journeys for our customers in and around the airport with Park & Ride South being initiated to connect southern travelers, the new priority lane on Laurence Stevens Drive, which will connect to public transport and high-occupancy vehicles providing easier access and also the building of a new road, Te Ara Korako, which connects to George Bolt Memorial Drive and Nixon Road. Moving to the next slide, please, 24. Phil had touched on the fact of the commercial property momentum remains and we are seeing that through income growth and diversification. The five new industrial developments I referred to earlier are under construction and they are expected to add NZD8 million to the rental income once completed. We're also pleased, an example of recent completion of developments, including 13,600 square meter temperature-controlled office and warehouse facility, is a credit to the team in delivering that. At Manawa Bay the retail outlet center design is now complete and construction well underway on the150,000 square meter site and on schedule for a 2024 opening. In regards to hotels, I talked about before that the increasing demand was driving outperformance there and in line with passenger recovery. We did see an occupancy of 73% in December, but as I've said before, those labor shortages are throttling the pace of that recovery. But positive progress made on construction of the facade of the Te Arikinui Auckland Airport hotel that is now complete and fit-out underway with expected completion this calendar year, but it will need a period of commissioning and opening in early 2024. The Mercure remains on hold. However, that is in effect ready for fit-out as soon as we decide to reactivate that as demand dictates. Moving to Slide 25, Airline consultation on the 10-year capital plan continues, but we do expect that to complete soon and in line with that, we have also continued to progress with key resilience projects. I mentioned earlier the Aircraft Ground Lighting purchase, but also updating and upgrading airside access such as Checkpoint Charlie and the enabling works on the integrated terminal continue. Slide 26, just touching on terminal integration a little bit further. The first stage of an enabling works is well advanced on that and we have taken significant work over financial year '22 and first half '23 on the preliminary design of that new integrated domestic and international terminal and this preliminary design is now complete. We are consulting with customers on key elements before moving to detailed design. Construction of further enabling works is well advanced, relocation of airport operations center, the construction of the new Eastern Bag Hall, and relocation of eastern airfield operations such as livestock and the like is advancing well. Moving to Slide 27, one of the things obviously when we have a significant infrastructure and capital program, we do recognize that new builds increase our carbon footprint, and we are actively taking steps to mitigate this as much as possible. We announced this week that we are looking to move to generate on-site renewable energy with plans for a rooftop solar system on two of our newest buildings the Transport Hub and Manawa Bay. Manawa Bay will have a 2.3 megawatt solar array to support over 80% of the 100 store centers' anticipated power usage when it opens in 2024. At 36,000 square meters, that is expected to be the largest rooftop solar system in New Zealand and for the Transport Hub, a 1.2 megawatt solar array on the14,000 square meter roof and its output will power the attached office building that is part of that build along with the vehicle charging stations within its car park. Moving to Slide 28. We've previously talked about our commitment to reducing our carbon footprint and that absolutely remains laser-focused for our organization. We have developed a clear pathway to reduce scope one and two emissions to reach net zero by 2030. 90% of that will be achieved through reductions and there is 10% currently that we anticipate will be achieved through certified carbon removals due to refrigerants and the likes used in our emergency services that there are currently no alternatives. But one of the things that will help us deliver to that target, we kicked off, and actually in February this year fitted our first electric heat pump, moving away from fossil fuel gas-based heating and cooling at the terminal and the international terminal air conditioning system actually is one of the largest in New Zealand. We've replaced our first one with a heat pump in Pier B of the international terminal and expect to save 30 tonnes of carbon per annum just on that one unit and once we have replaced all of them with the new heat pumps, this will grow to a saving of 1,500 tonnes of carbon per year. Moving to Slide 29. Climate change resilience also is key focus, not only for Auckland Airport, I suspect for wider New Zealand after recent events. The unprecedented flooding when we look at that, that brought forward impacts the previous studies we had completed and indicated was not a risk until the mid-2040s. Clearly, the 27th of January challenged the contents of that study. It was the highest-ever recorded daily rainfall in Auckland in excess of 250 millimeters. The previous high was 161 millimeters and not far from that previous high was 132 millimeters that fell within a 2-hour period and it was the intensity of that that was the primary contributor to the subsequent flooding. Work was fast and furious and with lots of volunteers, I have to say, to get the terminals back up and running with the domestic terminal back up and running within 18 hours and the international terminal within 37 hours with 20,000 people traveling in and out of that international terminal on that first day, which is not far below the 25,000 average that we had in the peak period leading up to Christmas and a credit to the airport community who invested time to assist with that. Moving to Slide 30, one of the things, obviously, off the back of that, as we think about climate change resilience, we continue to review and plan our infrastructure with an eye to designing and building what will withstand what are clearly increasingly frequent and intense weather events and rising sea levels. I made mention to the study we had in 2019 to understand the flooding and inundation risks that we had across critical areas and they're indicating that mid-2040s was an area that we needed to be prepared for. Clearly, we've been challenged on that and notwithstanding those findings, we actually kicked off, post that report in 2019, proactive works and planning to upgrade major stormwater upgrades through to 2025 to prepare for a worst-case event well in advance of that original timeframe. Upgrades have been across stormwater network capacity for the Domestic Processor as we are designing that Pier A1 and the Apron, the Eastern Forecourt, the Inner Terminal Road, and Northern Network that we recently completed, as well as diverting stormwater to a new stormwater pond as part of the Remote Stands Stage 2 project, which is part of our capital plan that is currently in consultation. But clearly, following the events of earlier this month, we are reviewing the program that we had in place to ensure that that upgrade that we have planned is going to be delivering to the needs that we have now going forward. Moving to Slide 31 and in summary, to a certain extent for me, is that Auckland Airport remains optimistic. The long-term recovery is positive and we are focused on building a better future. The airport is part of a broader aviation ecosystem and this means moving together forward positively with those that we are in partnership with. Part of that will be reestablishing the network and continuing to lead the sustainable recovery and travel and the visitor economy through giving choice to customers. We do want to ensure that our products and services such as retail, transport, hotels that they are delivering not only to the growing demand, but also the increasing customer expectations. And as the recovery gains momentum, we are entering a period of investment at Auckland Airport to build the resilient gateway that New Zealand needs. So in summary, we're focused on a capital pathway to build a fit-for-purpose, sustainable Auckland Airport precinct and one that is focused on delivering a world-class customer experience and fueling ours, our partner and New Zealand's future success. I'll hand back to Phil now to work through the latest update in regards to pricing consultation in a little bit more depth and the outlook, and then we will look to move to open it up for questions.

Phil Neutze: Thanks, Carrie. Also, you stole my thunder there that we'll open up the Q&A shortly. So just three slides to go before them and we're on Slide 33. So, as most of you'll know, to support our airlines during the early COVID recovery phase and because of the building blocks forecasts that were used to set prices were so uncertain a year ago, we froze prices in FY '23, which is the first year of new five year pricing period at FY '22 levels. Intensive airline consultation has been underway all this financial year and with significant components of the capital plan consultation kicking off well before them. And we are targeting setting PSE4 prices by the end of June this year, to be followed immediately by a detailed market disclosure, and that will include our 10-yearaeronautical capital plan. Concurrently, the Commerce Commission is reviewing what it calls the WACC IM methodology for all regulated sectors, and that includes airports. The draft determination due in May this year will help inform our final decision on PSE4 target return. I'll finish up on Slide 34 and then hand back to Carrie. As many of you will have seen in this morning's media release, today we're revising our underlying earnings guidance for FY '23, upwards to between NZD125million and NZD145 million. This reflects that we're seeing a stronger international passenger recovery than we previously assumed. We expect the full year to average 70% of pre-COVID FY '19 and this is a strong outlook given that we started FY '23 at below 50%. Domestic PAX, on the other hand, which delivered about on a per-PAX basis about a 1/5 of international PAX revenues, they're expected to finish the financial year broadly where they started, i.e., at circa 85% of pre-COVID. Regarding FY '23 CapEx guidance, some of our commercial developments took a little bit longer than originally assumed to progress from design into construction. So we've revised our full-year CapEx guidance down to between NZD525 million to NZD600 million. Back now to Carrie.

Carrie Hurihanganui: Thank you, Phil. And just to round out before we do turn to questions, Slide 36. They say that a picture says a thousand words and those photos clearly demonstrate the extraordinary flooding events that occurred at the end of January and again just our thanks to the Auckland Airport community for the Herculean efforts that went into getting things back on track and our customers traveling again. So on that note, I'd like to open it up to questions.

Operator: [Operator Instructions] And our first question coming from the line of Andy Bowley with Forsyth Barr. Your line is open.

Andy Bowley: Thanks, operator and good morning, Carrie and Phil. I've got a few questions to start off with here. The first of which is around retail. You've given us some detail around the retail income per PAX being back to 75% of pre-COVID. But what about PAX spend rates? Can you give us a little bit of color around how they've developed over the period and where they stand now?

Carrie Hurihanganui: Thanks, Andy. Phil, have you got the numbers on the PAX spend rate?

Phil Neutze: I might have to come back to you on that one, Andy. They are definitely up this financial year. They're still a little bit below where they were pre-COVID. But just hold that question. We'll come back to you on that one.

Andy Bowley: Maybe just another one on retail then, what kind of initial uplift can we expect from the shift to Lagardere asa solo duty-free player? I'd imagine in light of the shift from 2 to 1 that there's some benefit to you in terms of concession or mix?

Phil Neutze: Yes. So, as you touched on duty-free income per international PAX, for the first half, we're running at about 75% pre-COVID. You may recall back when we announced the FY '22 results, I guided you to expect that moving forward when we get into a single operator that we will be down on pre-COVID by somewhere between 15% and 20%. So that means the outturn would be somewhere between 80% and 85%. So we do expect that level of strength when going forward.

Andy Bowley: So no real change to the recovery profile from a retail point of view in terms of what you thought previously?

Phil Neutze: Not, not. Broadly consistent.

Andy Bowley: Okay, great. So, next question just around OpEx. Phil, you mentioned the OpEx growth will slow through the second half relative to what we saw in the first half. But how much more to go is there from an OpEx point of view half on half? Are we at steady state now or is there more investment necessary in OpEx to get back to full capacity?

Phil Neutze: Yeah, we still see growth rate in OpEx while certainly coming back massively from the 50% we saw for the first half, but it's likely to track above passenger growth rate for a while to come.

Andy Bowley: Okay. And then maybe lastly on OpEx. How much of the OpEx currently is going into your regulatory or pricing account, i.e., can we get a sense in terms of the uplift that we've seen in OpEx for the company as a whole to how we should be thinking about the pricing event over the next few months?

Phil Neutze: Yeah. Well, actually, I don't have that right at my fingertips, but it's somewhere between 2/3 and 3/4 gets allocated to aeronautical.

Andy Bowley: Okay. Great. That’s it for me. Thanks guys. Appreciated.

Carrie Hurihanganui: Thanks, Andy.

Operator: Thank you. And our next question is coming from the line of Andrew Steele with Jarden. Your line is open.

Andrew Steele: Good morning. First one for me is just a follow-up on the OpEx. I think at the full-year result you guided to full-year OpEx being at about NZD200 million. Do you expect that still to be the case or has there been some shift with the stronger passenger recovery?

Phil Neutze: Yes. So, we certainly have experienced ongoing inflation pressure and we've had a stronger lift in activity that that guidance is based on. So, it is likely to be above that level.

Andrew Steele: Could you give a sense as to how much above, Phil?

Phil Neutze: It would be less than 10% above, somewhere between 5% and 10%.

Andrew Steele: Great. Thanks. And just to confirm with regard to the earnings guidance, clearly, there has been the terrible weather events in the country. Are you factoring in any sort of negative impact into your guidance in terms of either OpEx or revenue impacts?

Carrie Hurihanganui: Andrew, we probably have on that in terms of – again, when I talked about domestic being back up within 18 hours and international within 37 hours, so we don't expect significant impact from that perspective. Clearly, we are working through as far as insurance and how that plays out in terms of we have material damages and business interruption insurance. So, there will be an element there in regards to our insurance excess as it works itself through. But as far as actually the broader passenger numbers in that element, we don't see a significant change.

Andrew Steele: Great. Thank you. Just one on passenger recovery. You highlighted – I think it was China Eastern and China Southern resuming their services. In terms of the other carriers that were coming here pre-COVID, what are your expectations as to the return of those other airlines? And do you have any sort of sense in terms of feedback from the Chinese airline partners as to the passenger demand that they are expecting as their services ramp up over the coming 12 months?

Carrie Hurihanganui: Thanks Andrew. Yes. So China Eastern, China Southern, and Air New Zealand, obviously, as far as their flights direct to mainland China, so they are with the change and in restriction they are looking to want to build on that. Other carriers previously that operated to New Zealand and you've got examples of Air China, Hainan, Citron, et cetera, all of those, our understanding, are in planning and dialog, but ultimately, there's a variety of requirements across different airlines in terms of approvals and otherwise. So, we don't – it's probably a little bit early post the announcement of the lifting of the restrictions for us to have an absolute for the next 12 months. What we do expect is what is, I think as at today, about 11 flights per week is jumping to 19. We do have an anticipation that as we get to midyear and in the new financial year, that will continue to increase. But just a bit early we haven't had firm commitments from any of those airlines as yet, but they are certainly interested and engaged in the process of how they could look to return or increase.

Andrew Steele: Just related to that, will you be – I think Phil highlighted that there were about NZD4 million in aeronautical charge, sort of incentives that were provided in the first half. Should we be expecting that to ramp up over the next 12 months as you get – trying to incentivize more airlines to return?

Carrie Hurihanganui: Yeah, I might hand that to Phil.

Phil Neutze: No, that will trail off going forward. So, by the end of FY '24, that should have worked its way out of the system.

Andrew Steele: Great. And sorry, just one last one for me. In terms of the changes to CapEx guidance, sorry if I missed this, but could you just highlight which projects that related to? And I assume just the difference just gets pushed back into FY '24?

Phil Neutze: Yes, that's right. So it's across those non-aeronautical projects.

Andrew Steele: Great. Thank you. That’s all for me.

Operator: Thank you. And our next question coming from the line of Marcus Curley with UBS. Your line is open.

Marcus Curley: Good morning and I just wondered if we could start with your property revenues, Phil. Could you break down the growth between rental rates and footprint and maybe rebatements? It seemed like a particularly large increase this time around.

Phil Neutze: Yes. So looking at pure investment property, including non-continuance of previous abatements, 90% of the uplift is through rental increases and circa 10% from new properties that were delivered during the period and I'm trying to remember of the splits between abatements versus the other component there. And I think it's roughly about 25% would be abatements.

Marcus Curley: That’s 25% of the 90%?

Phil Neutze: Yes. Yes.

Marcus Curley: And so, you've done a fairly aggressive reset on rental levels across the portfolio in the last sort of six months?

Phil Neutze: Well, just according to the schedule. So they typically come up for rent reviews every three to five years, and we just apply a market-based approach to that. But yes, there has been strong rental growth.

Marcus Curley: Great. And yes, could we just talk a little bit about what you could say around the aeronautical price reset? By the look of the commentary, there is no suggestion of a smoothing. So, it sounds like you're looking for a full recovery within the four years as opposed to any sort of smoothing of the potential lift in aeronautical charges.

Phil Neutze: Yes. That's what was agreed with the airlines when we agreed to price freeze for FY '23 that we've forecast to make that up over the remainder of PSE4.

Marcus Curley: And could I draw you also on the likelihood of a step-change versus some sort of phasing in? And obviously, we're not looking for the magnitudes, but what would be the more likely profile?

Phil Neutze: Yeah, well, you might need to [ goal seek ] that in your own model, Marcus. But broadly speaking, we would aim for annual increments to be roundabout 5% or less. So that does require quite a significant step-up in FY'24.

Marcus Curley: Okay. Yes. So, from '25 onwards, you wouldn't want to do more than 5% per annum.

Phil Neutze: Yes. That's right.

Marcus Curley: Okay. Thank you. And just switching over to airlines, obviously, you had 92% in the middle of the year. One airline you didn't mention was Virgin, which was probably a particularly large part of the mix. Any suggestions on them coming back to the Tasman?

Carrie Hurihanganui: Well, certainly, Marcus, at this point in time they have, obviously, from a Queenstown perspective, been in that space. But no, at this stage, they continue to be primarily focused on domestic Australia at this point in time. Ultimately, whether as we get into FY '24, that changes, that remains to be seen, but there is certainly nothing on the cards for the remainder of this financial year at this stage.

Marcus Curley: And then just, finally, you've obviously mentioned at the front, Phil, that you've lifted or you're thinking about lifting the 10-year aeronautical CapEx by about NZD100 million. Does that reflect the cost to build increased capacity or potentially some of the sort of, let's say, newer projects like stormwater and solar?

Phil Neutze: It's mainly revised cost estimates and more certainty regarding the overall program as we continue with consultation.

Marcus Curley: Okay. That's clear. Thank you.

Phil Neutze: Marcus, just to follow up on that question, if you're looking at pure investment property as opposed to total rental income, investment property was about NZD10.3 million increase this half and 60% of that is the rent reduce 30% of that is non-continuation of abatements and 10% of that is new properties.

Marcus Curley: Great. Thank you.

Carrie Hurihanganui: Thanks, Marcus.

Operator: Thank you. And our next question coming from the line of Wade Gardiner with Craigs Investment Partners. Your line is now open.

Wade Gardiner: Yeah, hi there. While we're on the topic of abatement, can you give us an idea of what we should be looking at with regard to the retail concessions in the second half? How are those being structured? Is it related to the hours of opening or what sort of numbers are we looking at?

Phil Neutze: Yeah, I think the better way to look at it is that contracts will renew and drop off and the effect of income per passenger that you're seeing in this first half is likely to roll forward, maybe strengthening a little bit as I talked about with duty-free earlier and we'd expect a significant uplift when we complete the duty-free tender in June 2025.

Wade Gardiner: Okay. Within the car park revenue number, clearly, there is a – if you look at on a dollar-per-PAX basis, there is clearly a big mix change with the international coming back. What’s the sort of underlying price inflation look like within that?

Phil Neutze: Sorry, Wade, can you repeat that question, please?

Wade Gardiner: Just within the car park revenue, there is clearly a mix change that affects it on a dollar per passenger basis. But what's the sort of the - excluding the mix, what's the underlying inflation that car park pricing inflation that you're getting?

Phil Neutze: Yeah, not, not much. Most of that has been a shift to higher-value products; valet, for instance, dominated by that.

Wade Gardiner: Okay.

Carrie Hurihanganui: And I'll just add to that, sorry Wade, it was – and people are staying longer, so it is upgraded, as Phil outlined, but also the average stay is extended, as well. That would be the other key driver of the change that you're seeing.

Wade Gardiner: Okay. And finally, just the new design of the integrated terminal, what sort of aero capacity look like relative to the current domestic and how much scope is there for growth in the future?

Carrie Hurihanganui: We are still in consultation on that, Wade, in terms of whilst the decision of May 21 was made to have an integrated terminal that is part of the finalization of consultation that's currently underway, and if you want to refer to it colloquially, is the size of the box and the capacity that goes with that. So at this stage, that's in consultation, so probably not appropriate for us to comment until we have concluded that.

Wade Gardiner: Okay. Thank you.

Operator: Thank you. One moment for our next question. And our next question coming from the line of Suraj Nebhani with Citigroup. Your line is open.

Suraj Nebhani: Hi, good morning. Thanks for the opportunity. Maybe one for Phil on the OpEx side. Phil, I think you made some comments that the growth in OpEx will likely slow into future years, as well. Can you give us some guide as to what's the best way to think about that? Is it in terms of where can EBITDA margins get to, let's say, versus pre-COVID levels?

Phil Neutze: Yeah, one way to think about it would be roughly a halving of the rate of growth each period. That's probably a decent sort of ballpark.

Suraj Nebhani: That's for the next couple of years you mean?

Phil Neutze: Yes, so H2 versus H1.

Suraj Nebhani: Yes. I mean more into future years. Is that obviously, I understand you can't say much now, but would you expect a further sort of ramp up with passengers? Or are there other lines growing probably in line with passenger numbers or will there be lower growth than passengers there?

Phil Neutze: Yes. So big picture, we expect OpEx growth to run a bit higher than passenger growth going forward because we're still rebuilding the team post-COVID and resources are experiencing quite strong inflationary pressure. But I guess, this is back of the envelope and really we don't provide forecast beyond the current year, but roughly speaking, on a period versus PCP basis, the rate of growth should roughly half each period going forward.

Suraj Nebhani: All right. And just another one on the property side, I noted that you called out the CapEx guidance cut being primarily on investment property. Should we expect investment property spend to I guess, kind of slow down going forward or would you expect that to ramp back up?

Phil Neutze: There certainly won't be a conscious decision to slow investment property developments. So it depends on the market. Yes, we have – we are going into a heightened phase of aeronautical capital expenditure, but we are mindful of the overall business mix. So, we will be looking to invest in investment property if those opportunities are there and that guidance I talked about previously indicated somewhere between NZD100million and NZD200 million per annum of non-aeronautical CapEx.

Suraj Nebhani: Okay. And then, just one final one on the CapEx for this pricing – regulatory pricing period, PSE4. I'm assuming the aeronautical CapEx in FY '23 will be included into the cancellations, as well. I just wanted to double-check that.

Phil Neutze: Yes, that's right.

Suraj Nebhani: That’s all I have. Thank you so much.

Carrie Hurihanganui: Thank you.

Operator: Thank you. And our next question coming from the line of Alex Prineas with Morningstar. Your line is now open.

Alex Prineas: Thank you and thanks for the presentation. Just on the - with the recent storm events, I was interested in what the impact there is on some of those maybe greenfield areas of future property developments or even some of those recent developments of the airfield. Were those areas impacted by water?

Carrie Hurihanganui: Hi, Alex, actually, if you're talking outside terminal, if you're talking kind of the landing or the commercial area, actually, they weathered very well, pardon the pun and actually managed through that storming. And again, a lot of those developments, as we think about the planning around stormwater, the various drainage ponds we have, et cetera, there are multiple across the precinct. So oftentimes what's draining away for the commercial area is different in a different system than what it is for the terminal. But certainly, whether it be aeronautical or non-aeronautical or the commercial side, as far as our future planning, we will certainly be looking after the events of the last month to ensure that our forward planning, whilst we already had upgrades and step-ups in plan, we will want to validate that those remain appropriate based on recent events.

Alex Prineas: Thanks. And those other areas faring better, is that – it's a fairly flat area overall, but are they slightly higher up or is it just that there is less development there, so water drains away more easily at present? I guess, I am sort of asking did the recent storm event affect the outlook for future property development.

Carrie Hurihanganui: It hasn't affected the outlook. It is really more of the view that we knew stormwater upgrade and we've been doing. I think I mentioned in the presentation earlier, our climate change resilience and how we looked at rising sea levels and inundation has been part of our planning. Really it's more an exercise of validation that in those – that forward-looking piece that we have that right? And we're doing that now. But no, it hasn't fundamentally changed our view of that future -- the future prospects. It will be just ensuring that the stormwater and the plans we have in the broader capital investment is appropriate.

Alex Prineas: Thank you. I appreciate that.

Carrie Hurihanganui: Thanks, Alex.

Operator: Thank you. I am not showing any further questions at this time. I will now like to turn the call back over to our speakers for any closing remarks.

Carrie Hurihanganui: Well, thank you. Certainly appreciate everyone taking time out of their morning to join us and we certainly look forward to seeing you again in the full year results and the positive trajectory that we've had in the first half continues. But thank you all and have a very good day. Operator Ladies and gentlemen, that does end our conference for today. Thank you for participating. You may now disconnect.