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Earnings Transcript for AUKNY - Q4 Fiscal Year 2021

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Auckland Airport Annual Results Call for 2021. At this time all participants are just in a listen-only mode. Following the presentation, there will be a question-and-answer session. And just please be advised that today's conference is being recorded. Without further ado, I'll hand the conference over to your first speaker for today Adrian Littlewood. Thank you, and please go ahead, Adrian.
Adrian Littlewood: Thank you, and good morning everyone, and welcome to annual results webcast for FY '21. Just a quick note, we are doing this remotely given the level four lockdown here in NZ. So just advanced apology for any audio quality issues or if we have some bumps along the way with dial in dialups we will work our way through that. But thank you for joining us. I'm joined by Phil Neutze, our CFO, who is on the call and some of our team also listening in. So look FY '21 really reflects, I guess the status of our business in the context of the pandemic. Its significant impact from passenger activity volume but underlying strength, and that's looking through and out the other side of this current phase, and really trying to strengthen our business for the longer term. So I'm going to turn to - and say a few words, and then try to summary referencing the slides. I'll then hand to Phil who will walk through some of the more detailed results, and then I'll - then give you an overview of some of the detailed activities and looking ahead to the future. So I'm going to turn to Page 5 of the presentation results. And look, this just gives you a quick scan of really what I said as the impact across our business quite heavily dominated by passenger impact was, if I reference FY '19 numbers International down about 95%, domestic still down almost 40% on what might have a normal FY '19. So quite high impact flowing through to retail, again heavily down in the period down 87%. Transport have been a bit better obviously supported by the return of domestic travel during the year. So, only down about 42% in the period. Then I'll touch on that more later. Hotels also affected by the same dynamic as is our investment in Queenstown. Property though has been shown in last in our current results breaking through $100 million revenue mark for the first time up almost 14%. So we have a good pipeline with $160 million projects under construction and our portfolio value is now broken through the $2.5 billion mark, with the lift in underlying property values in the metrics, they remained very strong. So I'll touch on that in more detail later. Just looking at the high level results and have that all rolls out on Page 4. So going back to page. So our topline revenue down 50% to $281 million, underlying earnings $171 million for the year, down 34% so reflecting some discipline there and cost management. But obviously the headline being the underlying loss in the period. Page 6 of the presentation really shows that story quite starkly in the context of our history. We've talked a lot about this, but this just shows you how the '20 and '21 have been affected by the pandemic compared to our long history back to 1995 in this period. So that sharp decline. On the right hand side, you can see that breakout for international versus domestic and the various lockdowns throughout the year affected in domestic volumes. But obviously as we all know we are back into level 4 now, and so we're back into something that looks closer to April 20 until we get out of this level 4 period. Turning to Page 7 so, for I feel like I just really wanted to preview and touch on what a great job our team have done because literally I'd say we've not wasted a day during this last 19 to 20 months getting after what matters. And if I think about the four legs there working on we're running the border safely, doing our work to protect New Zealand from COVID at the border. But at the same time leading, I think the work on how do we think about the future border models and that work continues. Secondly investing in core active resilient investments, runways, roads, fuel lines, fiber and taking the time, while we have it to invest in those core assets, but at the same time resetting our infrastructure program and announcing it last week. And in commercial business again, we're very happy with our tenants right across our retail and commercial property portfolio. It's stay helping NIM, support of NIM, but obviously working and keeping the momentum into discount fashion outlet that we've announced today, is I think a sign of our view and through this and underpins through all of that has been the work we did to stabilize the balance sheet raise, new liquidity, really concentrate our effort on our capital operational cost management, and then reset our funding of covenants for the years ahead. That really does allow us to chart around part through this pandemic. So with that I'm going to hand to Phil who will pick up on Page 9 of the presentation. Over to you, Phil.
Phil Neutze: Thanks, Adrian, and thanks to my team and thanks for giving me this confronting slide to kick off with. At Slide 9, by the way. So the comparison of PAX versus PCP is consistent with our usual approach but it's slightly understates the impact of COVID-19 on our FY '21 numbers so versus the pre-COVID FY '19 results international PAX for FY '21 were down 94.7% and domestic PAX were down 39.1%, but in the final quarter of FY '21, domestic PAXs were running at just over 77% of pre-COVID numbers and thus peaked at nearly 90% in July of this year. On to Slide 10 now. So this is pretty self-explanatory. The main call out is that government subsidized international cargo services held up our international aircraft movements and make tie at circa 30% of pre-COVID levels relative to the much greater decline in international PAX. Again, Slide 11 it doesn't make great rating. It shows that border restrictions continue to have a dramatic impact on Auckland Airports revenues during FY '21. We did however carefully control operating expenses as Adrian mentioned during the year and we guided investors to expect this time last year, but this slide overstates the turnaround in expenses owing to some FY '21 reversals of CapEx and payments and termination costs, a better view set out on Slide 14 which we will get too shortly. Depreciation was up by about $12 million in FY '21. This reflected prior year's CapEx and completion in FY '21 of runway slab replacements airbridge refurbishments and various IT upgrades, and that included fully new car park garden systems. Interest expense rose by $22.2 million in FY '21. But all of that increase relates to one-off impacts of USPP, 'make-whole payments and various swap closeout costs. So these changes will deliver more than $10 million per annum of interest savings going forward. Moving to Slide 12, the two main call outs I want to make from this slide relate to retail income and investment property income. So retail income was down nearly 90% versus PCP. International retail sales were down by nearly 95%, slightly more than the reduction in international PAX versus PCP. And this is because MAG was wide for FY '21 and there were also some concession rate reductions. Investment property income on the other hand was our key standout performer on FY '22, and was up $12 million or nearly 14% versus PCP, and this reflected some big new property developments coming online in FY '21 that included the Foodstuffs, warehouse and office development. I think we will end up more about later in some rate revisions. So now on Slide 13, and as indicated last year Auckland Airport made into quickly re-science after the border was closed and our revenues fell quite dramatically. So this impacted many expense lines. Sadly, we had to fill role many fellow staff in the final quarter of FY '20 and the annualized impact of those contributed to the 27.5% staff cost reductions in FY '21. The FY '21 P&L also benefited from some one-offs. We reduced impairments on some post CapEx projects that we now expect to resume over the next couple of years, and successful negotiations with civil contractors that had to down tools on CapEx projects when we pull some. But we have resolved those discussions in result of the significantly lower termination costs than we provided for in FY '21 - FY '20, I should say. So to give away these resulted in $19.4 million of reversals of prior period fixed asset losses. And that was partly offset by $2.5 million of new provisions that we made in FY '21. Turning now to Slide 14. As our first mentioned a few slides back and as we indicated to investors this time last year, Auckland Airport was able to significantly cut back on operational expenditure in FY '21 to respond to COVID-19. On a normalized basis, we further reduced OpEx by circa 30% versus FY '19 and those savings were concentrated in staff costs, as I mentioned earlier, as well as outsourced operations examples include baggage handling, bus services our Strata Lounge Valet services and Park & Ride, and we also had reductions in utilities, cleaning and marketing costs. Now on Slide 15, and not too long before I hand back to Adrian. This slide is self-explanatory, and it calls out some of the main projects that contributed to Auckland Airports nearly $200 million of CapEx in FY '21. So key projects included major upgrade of the northern airport access rights that's George Bolt Memorial Drive. The construction of State Highway 20B, so that's over east, high occupancy vehicle lines. We renewed runway slabs, as well as some additional apron slabs in fuel systems. We stood up a dedicated facility for process in the passengers to manage isolation, and we completed the Foodstuffs, offers some warehouse development, as well as a couple of other investment property projects. So turning to Slide 16. So as you can see from the table to the right of the slide, it wasn't for the interest coverage covenant waivers that we negotiated with our banks back in April last year where we've been in default on this covenant for FY '21. And then moving forward from then even before the Tasman bubble was closed on 23 July and later of course, New Zealand level four lockdown from mid-night this Tuesday, we were getting uncomfortable regarding our ability to comply with the 1.5 times EBIT based interest coverage covenant for FY '22 after the existing due to expire. So we said about negotiating and modified EBITDA base interest coverage covenant. So apply from June next year. So this starts at two times and steps up in calendar 2023 to 2.5 times and again in calendar 2024 to 3 times. Now, I should just clarify that the EBITDA measure in this context is measured before fair value changes and investments and associates. So it's equal to our reported EBITDA measure. And we expect to comply with this covenant going growth forward so why those no longer required. At the same time, we extended nearly $700 million of bank facilities due to mature early next year for the 27 and 19 months. So all-in-all, we're very comfortable in terms of liquidity going forward. Finally for me today we are on Slide 17. Again this slide is self-explanatory, but there's a couple of highlights, I would like to call out. Non-current assets grew strongly as a result of the circa 13% left and PP&E and that was dominated by the $760 million uplift in the fair values of non-investment property land in FY '21. We also booked nearly $530 million fair value increase in our investment property portfolio in FY '21. And this includes it to be developed investment property land. Cash reduced significantly during the year and that mainly related to the circa $650 million of debt repayments that we made in FY '21. So that was largely USPP. There was some maturities as well as preparing the remaining balance and $150 million in New Zealand debt capital markets bond that we repaid. So to give us result in our total borrowings falling by more than a third, and as I mentioned earlier, these debt repayments, plus the closure of some interest rate and currency hedges will reduce our interest expense by more than $10 million per annum going forward. Back to Adrian now.
Adrian Littlewood: Thank you, Phil. All right. So starting at Page 19 and just as a reminder for our followers about results, this presentation is really designed not only to support this call but also for others who can't join, who can view it latter. So there is a bit of a record of the year as well as, I want to talk to you, so. And some of the things we've talked about we've touched on already, so I'll just touch on highlights as we go through. So we may move quickly through this next section. So on Page 19. I guess it's just a reflection and a summary of the broad-based activity, we've taken right across the business. No stones they moved unturned both to reset the business for the pandemic phase, put out ourselves and control as much as we can of our own destiny through the equity raise and restructured financing, but all the work we've done to reshape the business, and I think that's paid dividends and will help us on the way up. So that's a sort of a summary of the strategy going into this, but if I turn to Page 20 again I just want to acknowledge the great work our team have done over the past 19 months to safely operate the border to work closely with government border agencies in the airlines around getting domestic travel going again. And then really investing time and energy on how do we make systems and process work again in a safe way. So for example, we will need to work on the trans-Tasman safe travel zone. We've built a quantitative risk based border model. It was peer reviews through New Zealand medical journal. And we obviously split our terminal into a health management zone and a quarantine for traveler zone. And again my Tasman issue, particularly when you have to put all systems into separate categories and mange it safely. So that's been a real joint effort, I just want to acknowledge our team's work on that. So that's operations. So if I turn to Page 21 the other thing that I touched on before was keeping on with the critical infrastructure investment despite the pandemic. So we have taken advantage of this time to keep on with key projects as well as bring forward others that we're previously planned, which are very difficult to get after. And I think we've set about $220 million across obviously a couple of financial years business the pandemic started and runways AWPs routing and so that's been a feature in for those of you who've traveled. You were seeing the road works they're getting close to completion now. For example the runway upgrade was another huge project and we've taken that same philosophy through into our updated infrastructure program, and it was great last week to be able to talk to that, and talk about how we reset that program. And I think the key in all of it has been a gain at close work with border agencies through the Board of Executive Board, bonds in New Zealand, the other ones and how we've rethought about that program. And then as I narrowed down program with an anchor around the new domestic hub merging into the international terminal. So just quickly touching on that in a bit more detail. And this is the next page, which is Page 22, just to try and locate it, because sometimes it's hard to get to hit around different elements. Just try to capture what was the eight anchor projects on those map. So you can see this projects that are now on hold, which is obviously the northern runway Northern taxiways stands, the international arrivals project and the cargo precinct. Those are on hold and as we said last week, they are more orientated towards international travel, and so it's absolutely appropriate for those to go on hold. They are particularly the work is not lost. It will be restarted. And the team did a great job of navigating a way out of those contracts where they were underway. So the four that are continuing which I touched on was obviously anchored by the new domestic hub merging with international terminal and that location in the center of the page. A new ground transport hub, which I will come back to you later. The road and transit system, which I think will up - we will be spending $160 million in this space on that program, which creates an entirely new traffic and transport system and then obviously fund going investment in the current domestic terminal. So that is the plan, and if you can locate the perhaps the domestic hub you can imagine underneath that heat house area we call it, there's a lot of existing infrastructure that will be decommissioned to like baggage systems and bag halls, power centers, operation centers, services and utilities, service aircraft. So we were not able to do that prior to 2019 under our previous model because of how intensively use those assets were. So we are trying to use this time to decommission those assets and in fact we will end up with - there is a beta product in product for airlines, passengers and those operating in the airport environments and it allows us to get real efficiency through contiguous security-screening, common check-in, civil around transport hub in a way that it wasn't as possible before. So it's great to look at that and that work will really kick off in the New Year, that work has been continuing over the last 19 months that we will be into demolition and preparation of the sites in calendar next year. The next page it was a quick out of personnel the walk here, if you can imagine for those regular travelers through international New Zealand a few and Auckland if you go through current aviation security you sort of hit right towards the international gates. Under this model, I mentioned going left and hitting down towards a new peer that is the view, you will see looking at towards the peer in the background, and this is the transitional area as you go through it will be in another shops on the way out to the new domestic hub. We think this is going to be a great product coming, New Zealanders are really keen to see happen. Now turning to Page 24, obviously the year terminal was only part of the transport hub, and how you keep from vehicles and transport into the terminal is a key part of that transition. And we have updated our plans that we were starting out on previously, and I think, again we've used this time to make a better run. So we have reconfigured our transport hub that will provide public pickup and drop off commercial operators and transport with access to the front door of the terminal connected to the terminal with airbridge's so you've got a transit across acreage, where airbridge, it will provide about 2500 car parks with the covered pickup and drop off area for the public. And really does part of a wider multimode transport plan, they can satisfy what we need now, but also the future. So we have a really clear view of Stage 2 and we also have a clear view on how mass transit would integrate into this transport hub. So we are aggregating activity in traffic public movement into the terminals from this area. So this will be a huge step-up in terms of experience to travelers. And I think we'll be well welcomed and fits very tightly into the, I guess the land side precinct with a hotel precinct just adjacent to that area and is entirely in line with our current roading partnering that is almost complete. Now turning to Page 25. This really takes a bit deeper into the retail and transport sub segments that Phil touched on before. Look again I won't go into too much detail, but we've worked really hard to support our retailers in the retail segment, and our rent abatement arrangement is now circa $185 million in the year and it's really a reflection of our support. And I guess that's also reflected in the fact our occupancy still remains very, very high. I think something like 96% to terminal retail and 99% on commercial property. And that's because we've supported in through and obviously we are focusing on the restart and want to make sure they're ready and whole to restart when they can. And then we've had fantastic feedback from our retailers on that. On the transport side, look I mean pleasing, I guess, to some degree, so well down on the prior year. But what we have seen is domestic parking recover strongly relative to passengers and we've actually seen a bit of a mode shift away from taxi vehicles and private vehicles that's been helped our teams have worked hard on also promotions and upgrade cycles to give a great customer experience. And I think, so you're seeing the stronger car parking domestics relative to passenger activity if you compare that to the July 20 period. You can see that separation. So that's great and the team, and let's talk about the full suite of products in the year. Look turning to Page 26. One of the highlights here has been our investment property that has continued. I think for us, the quality of the product we build, the feedback from tenants, the core metrics on the portfolio have remained very, very strong and I think we've brought in roughly $500 million of assets into the portfolio in the past year with Foodstuffs DC in head office due to West developments in the - Geodis Wilson that has now been laced at Timberly Road. And we've got a great pipeline of high quality tenants coming through. Just as an update on the hotels, we continue to adopt our policy on the hotels, which is on hold. We're tracking recovery very closely. So the mature last time, we want to talk was getting close to completion on closing the facade and protecting that socket is now complete and then works have stopped there. On the Te Arikinui Pullman Hotel plus that Pullman Hotel that work is continuing, facade is ongoing, and then we will track the decision about whether we continue with facade when that moment comes. Novotel has been supported by the MIQ contract there. So adjacent properties had continued to be very strong and a real stand out in this period. Really underpinning our plans to plot our way through the pandemic and out the other side, we've announced today the fashion outlet, located on the northeastern sort of boundary of the airport precinct on what is the old aviation golf course that's just been out of action for some time now. This the concept we've been thinking about for quite a long period. We obviously have some lands on retail today and some discount stores in there. But really we had been holding this until we were clear on some key actions which really revolves around runway orientation, consenting, the associated transport planning and our investment that we've been doing in the last in a while and then updating our infrastructure program focused on the domestic terminal. So we wanted to confirm that, and understand the parcel then be clear with that before we confirmed on the discount fashion outlet. But this is a really exciting development. About 26,000 in a LA a little area in this developments, located away from the airport precinct, generous parking and an owner-operator develop and operate model where we will be the sole operator owner of this, and we think that's important for the overall Airport business and system, both commercially and operationally that we're able to manage that effectively and we spend a lot of time looking at these similar developments, overseas Vancouver Airport, it's been a long time talking to them, Brisbane and Perth, and others. And we think there's a real opportunity in the markets for a really focused DFO developments, and we've had fantastic feedback from retail brands and actually through our market testing with in consumers about what they're looking for and we want this to be a really quality development in the context of what a DFO should be, and so we're focusing on things like dream style rising and how we work on general sustainability initiatives in this context, we want to make this a really fantastic development. Look obviously time to develop, but we are planning our way through that path and excited about the estimate today. I'm going to move now to Page 28 and 29, because again for a small number of team with reduced headcount, I'd say we are really very hard on many different fronts. And when I have a really pleasing that's a work our team right across our business have been involved and is updating our strategy and goals. And we have announced the whole range of new targets, that's been matched with our updated reporting which includes the Climate Change Disclosure Report and the greenhouse gas emissions report explaining our impact on the world and what we're doing about it. We're not - reason to this - we have been at this long time of the many, many years and in fact targets we see in 2012 around sustainability focused on warming at 1.5 degree rate. We have well surpassed and actually, so it's appropriate to reset that. We've reset that at a 2 degree scenario, and have tested scenarios right through up, I think to 4.8 degrees of warming across the world, but obviously climate change in carbon is not the only bit but important to acknowledge carbon in the context here is a net zero by 2030 target, which I think was silver learning but it goes across four dimensions of purpose plus people in community. It touches on customer satisfaction in terms of their experience of the airport, procurements, shareholder returns, carbon, water and waste targets. People targets around gender and diversity, safety and then how we can play a part of helping the community to benefit from being alongside an important economic hub for our country. So some real meaningful target for us to work on, mainly focused on 2030. If you look to on page 30 you can dig into those in more detail as a best practice we for the first time have published these reports alongside our annual report and you'll be able to get some real detail on our disclosures in there - you'll see that we've got some things to work on. I think as every company does, but an important that we put that down on paper and look towards it. So now some tuning a little bit to outlook. And this is in a couple of phases. If I turn to page 31 we acknowledged that there is still uncertainty right now with this is a very unusual time nothing like this in the history of the airport of 50 odd years, but we have worked hard on this, and we'll continue to work hard on it. You would have seen the Prime Minister the last week, talked about reconnecting New Zealand strategy. I'm pleased to say, I'd say been leading on a lot of that work and that Prime Minister mentioned an eight week program to look at how we might design at bolder model for the future. We've been central to that alongside our aviation colleagues, that is a public and private partnership model and we are determined to try and help. The first is on it, but then also importantly convert into a critical operating model that can be operated at the border. Underneath all that obviously vaccine rollout is a critical, as it's health capacity in the country and health technology around testing and surveillance. And I guess we are looking for close overseas and we can see those countries, who had a tougher road to recovery no doubt, but have had high vaccination rates, where a new normal is emerging. It's important for listeners on this call to remember that we don't need a switchback to FY '19 to continue with our program. We have quite a degree of flexibility to work with any recovery scenario, and continue with our program, but we want to be involved and help at bottom with government. So, we're working hard on that. So what is - what is position for a post-COVID world look like compared to - it's really simple, we need to work our way through reestablishing our aeronautical networking and our aero commercial team, both much smaller and not traveling nearly as much has maintained very close contact with our airline partners around the world and we continue to get really good feedback about the - they decided to contact working with New Zealand. New Zealand is seen as a safe destination state after COVID and I do still think that in the future model of travel, high value travel, New Zealand's proposition features very strongly in that So, we will work very hard on re-establishing that network route by route working with governments and the airlines. We will work with trade here to support growth in travel and cargo and we do want to make sure our commercial business is in great shape, so that we come out the other side and even better positioned than what we were. So, if I then turn to 34 in terms of guidance and outlook. We are facing uncertainties I mentioned and that's really why we are suspending underlying earnings guidance for FY '22, there's just too many moving parts at the moment for us to give that and hope it would be in constant updates to the markets if we try to. Having said that we are committing to guiding on CapEx and so CapEx guided to $250 million to $300 million in FY '22 and that does include completing some existing projects that are underway, but also progressing the design and enabling works as I mentioned before about the terminal development program and we want to see it through and - it's important, and it's important for you to know that, that program has been part of the discussions with our banks and our partners are really clear on that path. Obviously pricing is looming on horizon and we are consulting on whether we defer that, obviously, with the uncertainty, it's quite hard to supply the usual building blocks model in the way I think we normally would. And so we need to go through that process of consultation with the airlines just to work that out, but I know that some of the other airports have done the same. So look, obviously the guidance is subject to those materialized changes, which are becoming more frequent these days. Just finally, before I sort of sign-off and hand over to Q&A, this is my final results in this job. It's been a great privilege to work for this company. I'm incredibly proud of what our team has done, particularly during the pandemic period, but even pre-pandemic, they work incredibly hard and really proud of the work they do. We'll see our way through this and I'm hoping that the work we've been putting in the last 19 months has really set that up for the future. It's also been great to work with all of you on this call, wish we get a chance to meet face to face, probably. Before I let, I just want to thank you all for your support. And with that, I'll hand back to the moderator.
Operator: Our first question today comes from the line of Amit from Jefferies. So, please ask your questions, Amit.
Amit Kanwatia: Good morning, all. Thank you for taking my question. The first question is on the domestic hub infrastructure investment. Now, if I think correctly, you said it would be dependent on the aviation recovery as well. So I was just wondering if you can talk to some of the passenger business - you agree with the airlines, when this investment gets activated in a meaningful way?
Adrian Littlewood: Yes, sure good morning, Amit. Look, I think the way we've constructed the program in a way we're thinking about the program is in sizes. So we've highlighted and focused on the enabling works that first NZD30 million in the early part of next year is the first phase. Obviously the mix phase we’ve started to press buttons around spend coming out of the ground is obviously those points where we will pause and just look at the market. It's quite hard to be precise about what specific metrics we'll be watching, but clearly passengers will feature must highlight and combination of both domestic and international. But if I try and give you a reference point that can see where we talked about, you only have to believe domestic operating roughly where it has been in the last year, or so, plus roughly just over half of close to two-thirds of Tasman traffic coming back for us to be able to continue on our program completely. And what that means is we don't believe a full FY '19 sort of traffic recovery to continue on the program as we've described it. We've got quite a lot of capacity. We're in a position where when markets or passenger volume drops heavily, and it's quite hard because we've got fixed costs, but on the other side, when markets recover. You also you’ve significant better capacity quite quickly. So that's probably a rough guide Amit in terms of how we would look at it. We're obviously still a quite a way away from those moments, but we are thinking about this as we construct contracts and program.
Amit Kanwatia: Very good, thank you just another question on the PSE4. Obviously you've said the pricing is, I mean that would be delayed and you said, some of the under recovery from lower pricing. I mean would be recovered through the years PSE4 progresses. But I mean can you can just give a sense of, in terms of would you be still retain the passenger volume risk in the PSE4, or would you be looking to share some of this risk both upside and downside with the airlines?
Adrian Littlewood: Phil you want to take that one?
Phil Neutze: Yes, sure. So yes the concept that we're consulting on is that for the period of the price raise effectively where we are sharing passenger aircraft movement recovery risk on that because that year, or whatever the price freeze period would flow into the building blocks models as actuals. So it’s the extent that we have non-routine in that period, it will be made up through the forecast return on the remainder of PSE4. At the moment, we are not looking at an extended form of risk sharing around recovery, but that's definitely something that we would need to look into detail. Effectively what we're talking about is a two-stage consultation. One is the consultation to freeze prices for a period, while we've got the extreme levels of uncertainty on the outlook. And then we would consult on the remainder of the period and discussions around risk sharing around passenger recovery will come into that consultation.
Amit Kanwatia: Great, thank you. Just a final question on the OpEx now obviously NZD135 million in OpEx in fiscal 2021, that's a 30% reduction good outcome. So I mean, just your view for fiscal 2022. I mean would you be able to deliver similar levels of underlying OpEx for the next year, or how sticky are some of these decreases?
Phil Neutze: Yes, we did provide some guidance on 1st of July around the OpEx outlook as well as on our expected retail income. And so, we still see that range as being relevant. I just can't remember off the top of my head it's what that range was but we guided perhaps I'll just…
Amit Kanwatia: I think you said 150, 175?
Phil Neutze: Yes, that's correct. Yes, so given recent events you'd I think it's fair to assume that we would be aiming for something less than the top of that range. We need to work through our response for that the account disruption and and in fact OpEx over FY '22 they were and a number of the areas that were on hold during FY '21 that we can't indefinitely. And so we do need to incur that additional expenditure examples include upcoming re-tender of Duty Free. There's quite a process that's involved with that as well as Adrian touched on area the aeronautical pricing reset there is quite a bit of input from the commerce and regulatory laws et cetera that go into that and some other compliance areas that we do need to pick up. So we're not expecting to be able to continue at the FY '21 levels, but we are expecting to be within that guidance range that we announced in July.
Operator: Your next question comes from the line of Benjamin Brayshaw from Barrenjoey. So, please ask your question Benjamin.
Ben Brayshaw: Yes, good morning Adrian. Thanks for the presentation and congratulations on a successful 10 year as CEO. I just wanted to firstly, chat about tax. They would appear to be NZD29 million of tax expense for the second half of 2021. Could you just clarify what does that relate to, and does IRA have carried forward tax losses that it can utilize for the next 12 months?
Adrian Littlewood: Firstly, thank you for the comments. I'll hand the floor to Phil Neutze.
Phil Neutze: Yes, yes so this is deferred tax expense relates to the investment property revaluation, non-land component of that. So it's not going to be incurred as a cash expense this financial year and yes, we do have significant losses that we'll carry forward.
Ben Brayshaw: Okay, thank you. And just on the - I suppose the covenant renegotiation. Could you just clarify, has there been any change in the margin for the underlying syndicated facility?
Phil Neutze: Yes, so the way we went about the extensions was bilateral conversations with refi or so - of that base that have matured facilities over January to April next year. And we - the line fees and margin we are part of that discussion together taken together, there was a material reduction in overall fees through those refi - compared to where we've got to dividend refinancing in April last year.
Ben Brayshaw: Okay, thank you. And just finally, in relation to the property portfolio you’re highlighting 185 hectares of land available for future development. Could you just talk about the composition of that how much is available for development within the landings? And how much is outside of the land and therefore presumably more long-term in opportunity.
Adrian Littlewood: Yes, I think the available land from the landing is round about 40 hectares of that. But in terms of our total investment property land holding, we've got more like 220 hectares. So, those approximately 40 hectares of that that we have tagged those not developable, that's things like Waipu and margins around histories and other news unsuitable for the development. But yes, it's the minority that's in the landing and a significant area in the old golf course and also as you move east on Parnell Road to the right of East.
Operator: Your next question comes from the line of Andy Bowley from Forsyth Barr. Sir, please ask your questions. Andy?
Andy Bowley: Thanks, operator and good morning, guys. And best wishes Adrian for the future a couple of questions from me. The first of which is around the recovery profile. So, really keen to dig into your thoughts about how things unfold here in New Zealand. There's clearly a lot of unknowns out there at the moment, but IATA if we step back or expecting global pax recovery back to pre-COVID levels by calendar year 2023, it may be the way to frame my question is could you give us an idea of how you're thinking about Auckland Airport in calendar '23 versus pre-COVID type levels?
Adrian Littlewood: Sure, Andy, and slightly disappointed you didn't get first of the question at Prices Creek. It's really hard to say what it looks like and it's, as we said consistently through this, it has been the New Zealand dimension on this. Look, my personal view is, it's going to be clunky on the way out and it will probably happen initially slowly and then will accelerate in terms of what are the coverage types. So, that curve will sort of take a while to get going and then really take off. And that's all subject though to what we don't know around virus behavior activity and also mitigations and response. I know overall prognosticators on virus now, but they seems to think fizzle out over time as that things sort of take place and it becomes endemic. It's just New Zealand maybe slower to that for that path then the rest of the world. I think we've been tracking very closely. We do and others, what's happening other markets, U.S., Europe, and others, there are still bumps no question, but some of those domestic airlines in the U.S. are operating over FY '19 performance. In people - routine to travel again. So will be some catch-up in there. It's also why we are very focused on how do we help safely to reopen the border and we could govern on that. I think the comment here now is the PFC that we have to reconnect. It's going to be a tricky period between now and then. So we want to price that - we put the reference design in the system. So there's not a hit and hope outcome. So look Andy I do think in the New Year, you'll start to see market covering that naturally Australia always be the focus for our country. And then you will see other countries reconnect them and some candidates region with Singapore, Korea and others Taiwan. So, yes, it's hard to give a clear view. But by '23, '24 maybe normal is getting closer again, it will be a new normal because I question something still be hit today around process will remain and be new and then other things will fall away as it becomes more normalized. Sorry, it is about, because we can give us the stage.
Andy Bowley: Fair enough. I don't know, either. So I'm not sure anyone else - any of us. Second question retail Phil, you mentioned a couple of things. One, you mentioned concession rate reductions, and you also mentioned around the RFP process for Duty Free concessions. So maybe could you elaborate on both of those firstly in terms of the concession reductions. Are they temporary? And how you are thinking about concession rates when borders reopen and then on the RFP side of things, what's the process? What's the timing for the Duty Free concessions?
Phil Neutze: Yes, okay. It looks, so right through this Andy we've taken quite a spike. It's been very custom to each tenant in this circumstance in the markets. So I assume with land side or terminal it has been temporary in nature, sort of rolling and maybe that's gone from more mark-to-mark to slightly longer so window and we're constantly leading in thresholds and metrics that allow us to restart the conversation with retailers about to - start to be going again. So I mean domestic well very small compared to international is a good example of that. We supported the domestic terminal retailers through the initial lockdown periods going in and somewhat we're trying ahead of where they were pre-pandemic. So that's a great sign. What's important for us is the continuity through to the other side and getting going again. A lot of the hard decisions by some of those retailers, have been made and we still have, as I said, occupancies I think close to 96%. So that's been really pleasing. And I guess, obviously, we are looking ahead to extend the cycle, so, again not sort of focused on here, but our team had done a lot of work on looking ahead to the next tender cycle and trying to think about how we planned and approach would look what we had and that sequence was the terminal integration plan and have domestic with integrating to International. And so we've actually, we did a lot of working through a range of options which integrating here, but how that would work, because obviously we don't want to hit a tender process with a lot of details not confirmed. So look, I think we're actually pretty good side. We are still focused on, I guess, a single operator model, the Duty Free which is by far the vast majority of airports around the world is only a handful, which we have like a couple globally who run at full service to your model. So that still remains our focus. But we're going to work our way through that, but I think we're in good shape.
Andy Bowley: So just in terms of timing of that, I think the current concessions and what next year end of next year…
Adrian Littlewood: Yes.
Andy Bowley: Are you expect still to manage the process as those expire or can we extend the existing conditions further because of the uncertainty?
Adrian Littlewood: Well it does it all, parts of the calculation way to work through, and I guess we'll leave our time as long as we can to get a clear path. A lot of it like we're doing lot of pricing. I think that the greatest certainty we can have on what recovery looks like the better, I think we'll strive to be close on that Q1 to calendar year next year. So that will help us, but look no change of program, we working on the basis we're running standard program in terms of rating. But obviously, we can modify that if we need to discuss some of the retailers if we go through.
Operator: Your next question comes from Andrew Steele from Jarden. So, please ask your question, Andrew.
Andrew Steele: The first one from me is just on your CapEx guidance. Can you just highlight the swing effect between the top-end and bottom-end of the range? And if you could, in particular call out the amount of investment property expenditure that you expect?
Adrian Littlewood: So you want to pick that up, Phil?
Phil Neutze: Yes, sure. Hi. Andrew. So the range really reflects potential range and delivery of those CapEx plans over FY '22 as we've talked about, particularly this time last year. We put on ice, almost the entire an excess of $2 billion aeronautical CapEx program, I bet before this time last year. And that means that quite a few of the redundancies, we're focused on that project management space. So we're in the process now of ramping up that team again. So, it's just applying risk adjustment to delivery of the budget and CapEx. And sorry, what was the second part of your question, Andrew.
Andrew Steele: How much within that do you expect for investment property expenditure?
Phil Neutze: Yes. So, let me refer you to - if you look in page 15, the financial results at the bottom of that, we've got the outlook for FY '22, so investment property between $50 million and $65 million.
Andrew Steele: Thank you, Phil. And just I guess a follow-up to Andy's question on the retail side of things. How would you describe your current relationship with two duty-free operators?
Adrian Littlewood: Yes, really good. We're in constant contact both here more local offices. Look, they got you the same things in parallel with protection of not to some of the airlines. Right. So, it's nothing like an existential crisis to bring around together. So look, it's very regular and that applies not only to the duty-free guys but all retail.
Andrew Steele: And just last one from me is just on the change in profile of capitalization of OpEx and just costs. What's the to the level of those two numbers? I'm sorry, what was the level of two numbers you expect for FY '23 - FY '22?
Phil Neutze: We will have to come back to you on that one, Andrew. I actually don't have that in my finger-tips, but we are restarting a number of projects. So, we would expect capitalized interest to increase reasonably significantly in FY '22.
Operator: Your next question comes from the line of Wade Gardiner from Craigs Investments. Please ask your question, Wade.
Wade Gardiner: I just want to belabor the point on retail. I mean outside of the duty-free operators, are there other number of other tenders because my understanding is that we know the timing of the duty free, but some of the other retailers are on different timing is my understanding? Are there a number of those that are also expiring? And are you comfortable that they will be happy renewing contracts?
Adrian Littlewood: Look the timing is definitely all right. I can't at the top of - remember exactly the sequences. But if you think about, when we would through that cycle Duty Free came out of the blocks, was contracted some I think on 24 months I think before the new space was complete. So there is a profiles expiry which starts really with Duty Free. Look, in terms of what that means at the other side, it look at still a bit hard to say, because we're not alone in this. This is a global issue. Some of the retailers are global. Some of them are more local and local operators. So I don't want to pretend it's going to be a perfect pivot out outside, but, and there will be some bumps that out with some of them - and spin up and start going again. But look, the best thing we can do that the most that we can do to just stay and control around Duty Free is to stay to close them, support them and keep them operating on the return path - sorry that's probably all I can day - as well until we get there still outside.
Wade Gardiner: Okay. Just on the Aero discussions. Can you give bit a color on how far through those discussions are you in? And is the clawback of FY '23 going to be sticking point?
Phil Neutze: Yes. So we have completed the initial round of consultation so had feedback on the proposal, the - we are working towards values and then we'll come back to a couple of the airlines regarding the request, so we are expect to have that completed. We have aeronautical pricing committee meeting coming up in November. So we want to run that to ground by then, and, certainly a strong understanding of why we would expect to recover under earnings in the first year. That's the period of any price freeze. You may recall that this is quite similar to the approach that Wellington Airport adopted, unlike Wellington Airport though we're not seeking to recover in PSE4 about several $100 million of aeronautical losses as the result cargo whereas Wellington that the COVID actually spend it's pricing period that was consulting on. So it's been able to forecast to recover as well. So but those are the sort of things that are under discussion, and we haven't quite landed that.
Wade Gardiner: Okay, just final question, the guidance that you - the retail guidance that you gave in early July that was clearly before this most recent lockdown and I think also, I mean prior to New South Wales really cases taking off. Are you still comfortable with that retail range or should we assume that it is sort of track - that given the current situation, you'd be more comfortable at the low end than the high end?
Phil Neutze: Yes, that's a valid assumption Wade, as in the low end of the range is a better guide now.
Operator: Your next question comes from Suraj Nebhani from Citigroup. Sir, please ask your question, Suraj.
Suraj Nebhani: Thanks for taking the question. So, firstly, sorry to harp on about retail, but just wanted to get something clear, when exactly does the duty-free contract expire, please?
Adrian Littlewood: Suraj, it's not a contract, it's two contracts and it expires - the two don't expire at the same time, so there's three. From memory, it's towards the end of next year and the period thereafter, some half year or something after that.
Suraj Nebhani: Okay, thank you. And this one for Phil, I think you were talking about the additional cost through FY '22, the ones included in the $160 million to $175 million number. Can you just provide a bit more detail on that, Phil?
Phil Neutze: Yes. So, we re-building teams, so there's going to be additional headcount will come through there. I mentioned the consulting and legal work around aeronautical pricing, we see it the similar work around the duty-free re-tender and also we had significant savings in outsourced operations. So, the likes of car park operation, park and ride, valet in particular and also cleaning with operation of red zone separate processing facility in PAB that's an incurring additional cost that will carry forward. So, those all the categories that are contributing to that step up in OpEx in FY '22.
Suraj Nebhani: Okay, all right. Is it possible to quantify them? And is there any flex around those items depending on how the lockdowns progress?
Phil Neutze: Yes, there is. We see the flex has been reflected in that range that we provided back in July, $160 million to…
Suraj Nebhani: Okay. And on the debt costs, I think Phil, you were talking about a reduction in the overall fees. Are you just able to quantify that, or give some numbers around the debt cost expectations for FY '20 maybe?
Phil Neutze: Yes, the base starting. We are sure that we're expecting on a normalized basis, interest expense to reduce by a little bit over $2 million for FY '22 going forward. So it was roughly $70 million pre the abnormal regular restructuring expenses in the FY '21.
Operator: Your next question comes from Marcus Curley from UBS. So, please ask your question, Marcus.
Marcus Curley: Can we just start maybe, Adrian with where you see the key gateways next year for border reopening in particular, you know what needs to happen to get Australia back operating?
Adrian Littlewood: Yes, well, look, the gateways, I mean the attention we had on - is obviously Australia as you sort of finished on that's going to be fundamental, but from a personal connection, commercial and tourism point of view, it's a critical market. And we got most of the way there and it was great. And it was building actually. So one of - were needed to be longer term. It was building strongly. So look, that's an obvious place to start. And I think we should be realistic that vaccinated travel pathway rather than the quarantine free travel on vaccinated model, let me say before, is how it's going to restart. I think given the outbreak of - Delta New South Wales and recent Australia and now here. So based on pathway to a story I think is probably realistic. Beyond that, I think it will be - it's a little bit the start again from the beginning. It goes away your fundamental routes were before it started expanding significantly in the sort of 16, 17 year. So, Singapore, would be an obvious one, probably Korea, Taiwan and then you look to the U.S., it's always Canada. The MRRT hubs, it is a lot of cargo going in that way at the moment, but they would be natural. What it will be underpinned on how those have to subs operate the infrastructure something we've been dealing with, but if I have significant infrastructure and will be able to operate potentially different travel types and/or process to make reconnection here work. But it's actually that data Marcus that we need to work through this work program because ultimately New Zealand has to decide what it needs from here. And we are more country, right. So, we've got to be realistic around it. I think that's a dose of operating reality we need to advise the government on in terms of what can be achieved with those ports. So, I would start from a simple principle of go to the core sort of hub routes that we had in the early part of our network for 2016-'17 and then build back from there. The big swing factor is probably China, I think, and that will really depend on both China's attitude and New Zealand's attitude. World-class, getting people tested and vaccinated in a short period of time. So, I think if they can work that out and New Zealand wants to reconnect with that market, which it does that will be the thing that will probably shape the speed of the recovery.
Marcus Curley: And your discussions with the government, has it been or can you provide any color on whether there is a minimum threshold for New Zealand vaccination levels before a vaccine passport traveler from Australia can enter our country?
Adrian Littlewood: No, look, I can't give any color on that unfortunately, Marcus. That's really a question for the government. We'll try and make it work whatever standard they choose to, but I think the key thing, I think this was mentioned last week was the intent to open and a sort of sense that it's figuring out how to do that and no hard time on vaccination. In a way you could argue that was smart because it allows a more nuanced approach to vaccination status of the country as we understand what the roll out looks like. But in a roundabout way, it's seeking out the current outbreak might encourage vaccination rates to go quickly as it has in New South Wales. So, that might accelerate whatever metrics the scientists and the advisors to the government are thinking about in terms of what reopening looks like. I think they understand both the human impact and the commercial impact on being disconnected from the world means and so figuring out that answer is I think they really understand get on with it.
Marcus Curley: And secondly, has there been any change in the dividend policy, or are you thinking around the dividend policy post that covenant changes?
Phil Neutze: I'll dive in there Marcus. So, the dividend policy hasn't changed. However, we are still under a dividend blocker that the existing covenant ways are in place until January 1, next year. And dividend policy is to pay obviously dividends out of underlying profit. So very much depend on the recovery under FY '22 and FY '23 and extend towards those funding through underlying profit to pay a dividend, but this will be re-examined by the Board probably round about this time next year. And there is a possibility that dividend policy may change reflecting what the experience through COVID.
Marcus Curley: Okay. Thank you. And then just on the new outlet center. Yes, I know it's early days, but, any sort of ballpark on the CapEx investment there and potential timing?
Adrian Littlewood: Look, it's probably a, I mean this is a rough guide - and it's milestones, we have to get through but probably if you, which you can do is they can wait probably a 4-year projects, but we haven't disclosed any numbers, but it's a meaningful projects cohort that's but look as we get through the party. I think we'll get to talk more about that, but you can kind of get a sense of scale 25,000 square available areas. So that's a meaningful size project. Look Marcus will come back to that once we get through the project.
Marcus Curley: Okay. And then just finally, just hopeful as well. You mentioned interest costs. Can you give any guidance on what you think depreciation lands next year?
Phil Neutze: Most of the projects will be ongoing. The CapEx projects that are in place today. So there will be likely a small uplift but not significant certainly not at the level or experience between FY '20 and '21.
Operator: And your final question comes from Jason Familton from the ACC. So please ask your question, Jason.
Jason Familton: I'm sort of, Marcus - one a little bit, but just on the outlet center just talk about what sort of metrics or hurdles you're looking at? What sort of yields and costs you're targeting? And then just for clarity all right you will be the owner, so landlord et cetera. So taking all tenant risk, et cetera.
Adrian Littlewood: Yes look that's right Jason. And that's actually important part of the story and we did think about this. You can imagine these are well understood operations and commercial businesses globally and so there is real interest in this kind of concept. But we thought about it as part of the total system and we talked many times before about how we saw the future of our retail business emerging through four different conventions, including the online channel as well as terminal, off-channel and landside. So this is the final leg I guess some degree of that retail stuff strategy coming to bear. In terms of metrics, I think what I would really see in term once it's organized, but we've looked at local examples, looked at rates skewed rates as the rental rates and compared them and so we have a pretty good handle. I think on what they looks like. And I think it's a very attractive proposition from that point of view for us. And we've had excellent feedback on time under through this, but we have been working very, very closely across Australia, New Zealand, pre-pandemic where we're doing work on this. Like talking to brands and all they did - as well as doing a lot of a consumer recession and qual and quant works and some of our feedback has been exceptional and really strong. So I think both on a commercial analysis, using our reference cases and based on tenancy back and consumer feedback, I think it's a very exciting prospect. And it is complementary and I think that's been a big part of our thinking the overlaps with our terminal activity and online stuff. I think we can really focus on complementary, those are brands. I just don't it won’t fit on the terminal environment that we've been missing out on. We know there are products around Auckland, where some of those brands. Don't think fits what they want to do in a DFO stock model. So I think this proposition, the feedback we had absolutely fix that gap. So yes, I mean I know that's not specific Jason. But I think that gives you rough - and are working at it.
Jason Familton: Okay. So just on retail, one of the labor the point, but if we look back, when you gave the guidance on 1st July about NZD25 million to NZD30 million, NZD35 million. And then look at what you delivered this year to the Board I mean, there is not much of step-up, but clearly when you gave the guidance, the chances of bubble was operating. There was probably an expectation at some stage once you see more international traffic coming back? I'm just trying to understand why this uplift wasn't expected to be greater? And I guess, I'll marry that with what you see today around patient spin rates by those travelers who were hitting across the Tasman being back above back to 2019 levels. So I'm just surprised that both number wasn't higher when you guided back in 1st July, can you just allude to why that is the case?
Phil Neutze: Yes perhaps. I'll dive in there it really reflects to level of relief that we're providing to international retailers at the moment. So as I mentioned it's a combination of MAG relief notes and no MAG and also some reduction in concession rates. And probably, fair to say, we tend to take a conservative approach through our recovery assumptions, which we would know we are below market consensus and of course that's changed dramatically now with the Tasman bubble closed and lockdown we're experiencing in this.
Jason Familton: Okay. And then just one, final one, just on those the new covenants, I'm right in thinking that they apply on a calendar year basis rather than financial year basis or I start applying from 1st of January, 2022 and then 1st of January, 2023?
Phil Neutze: Actually, they apply on a rolling 12-month basis and they are only measured twice a year. So, they are measured at 30th of June and 31st of December, but we express them in terms of calendar years because - the metrics themselves adjust on a calendar year basis so, 2.0 times for calendar 2022, 2.5 times for 2023 and then three times from 30th of June, 2024 onwards.
Jason Familton: Okay. And so to assist, so the covenant, is it like this time next year for the full year 2022 result will be based on the two times number which applies for the whole of calendar year 2022?
Phil Neutze: Yes that's right. And I'll just re-emphasize that's equivalent to our EBITDA to a measure that excludes further any changes and associates.
Jason Familton: All right and Adrian all the best thank you for your great contribution of the airport, you've done a fantastic job obviously because I mean the last 18 months or so, I guess you perhaps other people will plan for, but well done and all the best for future.
Adrian Littlewood: I appreciate that. Thank you.
Operator: But next question we've got from Paul Butler from Credit Suisse. So please ask your question, Paul.
Paul Butler: I just wanted to ask about the proposal to delay the PSC for regulatory pricing for 12 months. I completely appreciate that there is good deal of uncertainty and trying to do that now, but I'm just wondering, apart from volume forecast? What are the key inputs that are difficult to nail down and just question, is there not an opportunity to do that now in an environment where there is uncertainty where potentially you could argue for higher returns because of that uncertainty?
Phil Neutze: So building blocks were key components in the forecast, obviously passenger numbers or units of demand and because of years then to divide you require revenue prior to the process. Forecast operating expenditure and forecast capital expenditure. And the elements, the most uncertain there are certainly unit demands, some units of demand, I should say passenger numbers and MAG time. And we are - somewhat concerned it will still be a significant uncertainty on that come around May next year when we have to set prices and the problem of having that uncertainty as it becomes difficult to reach agreement between the airlines and the airports naturally airlines argue for a strong recovery. So that the unit prices are lower in airports tend to base of on what evidence we're seeing at the time. So it's not helpful to have a big strip around the forecast demand assumptions and that's part of the reason why we are going to put off the decision until we had greater alignment with the airlines on the recovery. Also as we touched on earlier, we've got a significant aeronautical infrastructure program that we're targeting moving forward other than the enabling works to FY '22 CapEx guidance. The rest of that program isn't yet triggered, and as Adrian touched on we would need to see something like the Tasman reopening at circa two-thirds of pre-COVID levels talk of the whole program. So it's a moot point whether or not will be at that at the time when we set prices. On the question of what about target return if there are certainly dividend that we have compiled with expert advisors that would suggest that there is an argument around target return, systematic risk associated with COVID and risk the paid index. But we will apply that the pricing period even if one of those deferred would start from 1st of July next year. So we would have to calculate weighted average cash cost of capital in our target return from the 1st of July next year that would simply apply for the five-year period. But as we touched on the first period June price raise will be based on actuals rather forecast. But certainly any arguments around weighted average cost of capital and target return will apply right from the beginning of that period.
Operator: Okay. With that, there is, no further questions so, I am going to hand the call back to you for now Adrian, for some concluding remarks.
Adrian Littlewood: Great, well thank you, everyone. Really appreciate the questions and thanks again for your support over the past year and also beyond. So I just wanted again, thanking out same for unbelievably for the last 18 months they've done themselves proud. And I think the results and the pass out reflects their hard work. So, thanks again everyone. I hope you have a good day and hope lockdowns goes okay for you. Thank you.
Operator: Ladies and gentlemen, that does conclude today's conference call. Once again, thank you all for participating today. And you may now all disconnect.