Auckland International Airport Limited (AIA) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Auckland Airport Annual Results 2020 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Adrian Littlewood, Chief Executive Officer of Auckland Airport. Thank you, sir. Please go ahead.

Good morning, everyone. Welcome to the FY '20 financial results. I'm joined by Phil Neutze, our Chief Financial Officer. Usually, we're accused of, if I say it politely predictable results year-over-year. I think this is very clearly and as expected a year like no other, one we've had to dramatically deal with the impact of COVID-19, and we've been at front of the Q. It was only a few months ago that our interim results where we were seeing the first signs of COVID-19 coming through, and we were, I guess, optimistic at that stage that it was going to look more like SARS. But I think as we all know now, it's been nothing like that and a really dramatic impact on international aviation. So our results reflect that, and you'll see that flow through some of the numbers here and some of the highlights in these results, in some ways ex, as a matter of record, of what's happened in the past year. The outlook, and we'll come to that later, is difficult to see, but we'll touch on that in a bit more detail. So I'm going to refer to the presentation that you have in front of you, and Phil and I will walk through various pages as we step into it. So look -- turning to Page 4, and this is just slightly for our benefit to remind ourselves how far things have changed in the past year, but it has been an incredible year and to use that well-worn rugby cliché, a game of 2 halves. First half of the year, we were firing all cylinders, huge infrastructure program underway, big investment program. We've built a big team getting after our program, new flights, new routes, a very positive outlook on what was happening. And then that will change in February and March this year, and our focus shifted to getting people home safely, adjusting to the new COVID environment, empty terminals and then trying to work on a recovery. So it's been a quite stark year in terms of the change and difference across it. And in a simple one page, this gives you a sense of how dramatically different that has been across the year. Just looking at Page 5, the results at a glance, obviously, directly affected by the change in passenger numbers, and that's starkly shown in that passenger movement number. They're down almost 27% in the year to 15.5%. Obviously, that directly flowed through, given the nature of our business to revenue down 23%. Operating earnings down over 50% in the period, and that's obviously affected by write-offs, impairments, terminations of contracts and other redundancies that we've had to work through and underlying profit down 31 and a bit in the year. So a dramatic impact on our business, obviously, reflecting our focus and the reliance we have on international tourism, which has always provided a good reliable position over time. Working through to 6 and just looking at how that's affected the lines of business. Again, this shows across aeronautical, retail and transport that impact flowing through. Obviously, the bright sign here is, obviously property, which is a normal year is about 10% of our business for a couple of months there. This year, it was 100% of our income, almost. That's continued to go well. And with the portfolio value now reaching over $2 billion, that's continued to be a shining light in an otherwise very difficult year. Hotels have been -- performed well relatively, and it's obviously being supported by some of the Ministry of Health contracts we've had in place. And our investment in Queenstown has similarly been affected by the slowdown. They were, like us, getting a bit of a bounce from July, but it's been a big impact for them as well, and they've had to adjust their business, respectively. Just turning to that in terms of what we've seen, just as a small sort of venue, Page 7, just shows you since 1995 passenger volumes across each of the years, and also a reminder of those global events that we've seen and how resilient passenger numbers have been. It's always been something we've referred to but we've never seen anything as globally synchronized as COVID-19 and how that's impacted our business. So yes, dramatic change in passenger volumes in the year. And we also called out the month-over-month numbers because we are going to look closely at each month, and each month will give us a sense of recovery. And it was really pleasing to see June and July bouncing back and getting to 60% volume over prior period. It was great and that was very critical for tourism but obviously, with a Level 3 lock down in Auckland, that's changed that again, and we're back to skeleton operation. We're probably -- we were running at about 15,000 domestic passengers a day in Level 3. We're now probably down about 600 to 800 a day in domestic and international is remaining about 95% down on where it was. So very unusual times. And the tough thing has been the impact that it's had on staff and teams as we've had to let people go, bring them back and then again dial back down, and we're trying to position for a recovery when that happens. So dramatic period of change, one we haven't seen before. So we'll now dig into a bit more detail on the numbers. So Phil, if I could turn to you.

Thanks, Adrian. So yes, what a year. It seemed to be plain sailing during the first half of the financial year and also after the summer holidays. And then our world turned on its head. Before I provide some more color on the FY '20 financial results, I want to make a special call out to my finance team and to our auditors, Deloitte. We've never had such a complicated set of financial statements to prepare, and apologies to all those analysts who are pouring over it. It's a bit noisy this year. We put in some very long hours by my team and also the auditors to get us here today. So thank you all. So turning now to Slide 9. As expected, COVID-19 had us in the pocket in Q4 of FY '20. Full year revenue was down by just a smidge at under 25% on FY '19. Expenses are up strongly for the year with a number of COVID-19-related one-offs, and more on that shortly. And we had some material investment property gains and PP&E fixed asset losses impacting the P&L below the EBITDAFI line. There was a small impairment to the carrying value of our equity in the Novotel hotel. And taxation expense fell like a rock in FY '20, and that was owing mainly to a large deferred tax liability reversal following reinstatement of depreciation deductions for buildings for tax purposes. Turning now to Slide 10. Retail income was well down in FY '20. In fact, it fell significantly more than the circa 27% reduction in passenger numbers for the year. And this was because of this moving practically all retail license holders off MAG and onto concession revenue share arrangements. Retail rent abatements totaled just over $60 million in FY '20. And to complicate things, there was another circa $15 million offset to rental income after we impaired around 3 years' worth of early recognized future retail revenue increases. Now they were obliged to be recognized under IFRS 16, but we now won't actually receive that income. So it's been reversed. Investment property income, on the other hand, held up well in FY '20 despite some low single digit millions of abatements provided to some tenants. And the small rental income increase was mainly due properties coming online this year, as well as those coming online partway through last year. On to Slide 11. So while Auckland Airport management worked very hard to reduce operating costs from March onwards this year in response to COVID-19, the fruits of our labor were more than offset by a range of one-off costs in FY '20. Naturally, we took [ enough ] to marketing expenditure while the border is closed. Marketing doesn't deliver much results there until we get passengers flowing, and we reduced consultancy expenditures significantly in the final quarter of FY '20. But these savings were dwarfed by capital expenditure write-offs, impairments and contract determination costs as we canceled and suspended well over $2 billion of infrastructure projects that were underway. We've also provided for nearly 10x our usual levels of expected credit losses at $7.3 million, as some of our airlines and tenants struggle or are reluctant to pay their bills. Looking now at Slide 12. So this slide attempts to normalize our second half operating expenditure by reversing out nearly $130 million of COVID-19-related costs incurred in the final quarter of FY '20. And after reversing out these costs, non-COVID-impacted OpEx was down by nearly 12% in the second half versus pcp. And you can roughly double that for an annual run rate at that time. But we have locked in additional savings so far this new financial year, and we're on track to have our circa 35% OpEx reduction target for FY '21 until the July domestic pax bounce, and that's resulted in us reopening some profitable domestic-related commercial activities. But even with the planned reopening of Pier B to separate low-risk and high-risk international pax, we expect to land comfortably within $10 million of that original highly [ austere ] OpEx target. So I'm looking at the balance sheet now on Slide 13. You can see several hundred million dollar hit in Q2 PP&E valuation in FY '20, and that was despite just under $400 million of CapEx in the year. And as you'll read in the financial statements, we booked nearly $650 million downwards revaluation to property, plant and equipment in FY '20, and just over $45 million of that adversely impacted the income statement. So this was dominated by the reduction in land values under the retail areas of our terminals, as well as our car parking land, and that was owing to a softer passenger revenue outlook because of COVID-19. However, because of the $1.2 billion equity raise completed in April this year, the book value of equity still increased by around $600 million versus pcp. That was reflected mainly in the $700 million plus increase in cash held at year-end. So I'll hand back to Adrian now to provide more operational and strategic color.

Thanks, Phil. So look, the following pages just again slightly record what happened in the year, but also, I guess, give some signals to recovery when it happens. So look, obviously, on the aeronautical side, we saw some continued new announcements and some really key ones that we've been working on for some time. If I think about obviously the Vancouver service and also Dallas, New Zealand had announced New York. So those long-haul destinations were really looking very positive at that stage. And really, I think we'll, at some stage, return. So it's good to see that those were viable. And just a reminder that our network pre-COVID both domestically and internationally, was very positive and strong. So load factors were sort of mid-80s. And as a guide of overall performance of those routes, that's probably a good guide to the profitability of the airlines operating on those routes. So I think that tells us what our network can look like at sort of a full level, and we were still working hard on new opportunities. So that's a clue for the future. Obviously, across operations, we continue to do new work to invest in new systems. And obviously, in the infrastructure program, really significant program underway across air fields with the northern stands and taxiways work, the arrivals project was an enabling construction contract that was signed and work is underway. We've done the alliance contract and enabling works for the Domestic Jet Hub. And critically, we had secured the consents and done the concept design work for the 3-kilometer northern runway. So really critical and long-term projects that we had underway and had to suspend. Next page, on 16, really, again, and a similar flavor on transport. We kicked off the northern network or our [ off-road ] network to improve accessibility of terminal, and that continues in a sort of a modified scope currently as one of the key project to continue with. Park & Ride South and other parking projects still obviously continuing to those. Final ones have all gone on hold. But property, again, as I said earlier, had continued to go well, and we still maintained winning new deals with Hellmann, DHL and Interwaste adding significantly to our portfolio. And obviously, the work we're continuing on the really significant project for Foodstuffs, head office and DC which is near completion. So that was the positive sort of perspective of where we were at, but obviously, then COVID, head on Page 17 and again, is sort of well known, so I won't dwell on this too hard. But obviously, you can see there the numbers dramatic impact on passenger volumes across international, domestic passenger volumes and obviously, aircraft movements in that period. And that flowed through, as I said earlier, right through to all the passenger-connected parts of our business, and that really caused us to adopt the respond, recover and accelerate mode. So we quickly moved into response mode. And it really -- has really laid out our strategy and plan for the next couple of years about how we deal with it. So on Page 18 as part of our Phase 1 response, as Phil said, we immediately sort of implemented all the new operating procedures required to support repatriation, the new cleaning and hygiene protocols, working with the government and Ministry of Health and the new processes. As Phil said, we supported the tenants, the retailers through allowing them to keep operations alive and adjust as well and received real and direct sincere thanks from the retailers for the support we've provided through there. Phil and the team did a stunning job on dealing with the liquidity and cash flow issues through the equity raise, through the negotiation with the debt holders, both domestically and offshore. And as you probably know, it's biggest [security] market raise in New Zealand history of $1.2 billion, all done under level 4 lockdown remotely and over Zoom. So that was superb. It really has built the capacity in our business to really see through a range of recovery scenarios. But all the way through, we've been to trying to make sure that we take care of our people. We put them in a safe position. We support them through what has been a really challenging time. And I have to pay credit to our team here. They have dealt under very trying circumstances not only saying goodbye to their colleagues, but dealing with very unusual circumstances with information flowing daily, sometimes hourly. We were adjusting process, and they've done a stunning job. So I want to sort of pay my thanks to all of them. Now I'm just going to turn to Page 19, and ask Phil just to talk a little bit more about the work we did to sort of shore up the business and allow us to see through a range of recovery scenarios from a funding point of view. So Phil?

Thanks, Adrian. Yes. So I'm on Slide 19 now, and I'll give a quick overview of the capital restructuring that we completed over April, May this year. I can show you that there's an awful lot going on during that time. But the key actions that we completed included extending all bank maturities to beyond at 31st of December, 2021. So they were spread out over calendar '22 and '23. We obtained waivers through any debt covenant breaches between 30th of June, 2020 and on 31st of December, 2021. We suspended dividends while the waivers are in place and raised, as Adrian mentioned, $1.2 billion of new equity. So if you look at the table to the top right of the slide, it shows that our credit metrics are still in pretty good shape, actually. So that's versus our debt covenants and the A- credit rating targets, but these will weaken over the next 1 or 2 years. Nevertheless, we are very confident in the future for aviation and for Auckland Airport and we are very well positioned to move fast when the international passenger recovery gets underway. So back now to Adrian.

Thanks, Phil. All right. So that was Phase 1 response. And then we have entered into Phase 2, Page 20, and some of this may be familiar to people on this call. Look, I mean, we've wasted no days in terms of our action, and this really goes to the -- credit to the team in terms of not only taking care of the things we're accountable for, but trying to play our part to help the country, to figure it out, working with our airline partners and other airports in New Zealand and across Australia. So obviously, as Phil mentioned, we reduced back and adjusted the shape of our operations business to match our new reality. But as Phil said, we're also very mindful to ensure that we can respond quickly to a recovery. So naturally, as you know, our business is leveraged on both the up and the downside. So it hits hard when things go dramatically down like it has. But equally, if recovery does come on, like we saw in domestic, that is incredibly important and can positively flow through our business. So we need to be ready for that, and we are. We obviously worked very hard on helping the government to think about what is our future safe board process look like and sort of the work we're doing with Trans-Tasman bubble, which involved our colleagues here in New Zealand, officials in New Zealand, also the same in Australia, organizing the different airports in aviation, organizations in Australia and officials in Australia, I think was a great example of how I think the private sector can work with government to help our country to figure out how to live with COVID-19 into the future. And that's really provided the foundation for the government's work they have to do, and diplomats and officials need to do to think about what does a safe reopening look like. Obviously, that's a decision for the government, but I'm really proud again of the effort of those guys to put them there to really move that along as a concept. Obviously, looking ahead into our recovery, we are going to have to be very careful about how we deploy capital and where we put that money to work and treating every dollar on its merits. And so we'll look across our core infrastructure and where we need to put that work in, and we're doing that on roading, on our fuel system, on airfield and runway work, as well as investing in our commercial property where demand justifies it and the quality of the opportunity is justified. And we'll continue to support our tenants and partners managing through and sort of resetting into COVID. So as I said, domestic was a positive sort of glimmer of hope. But clearly, we have some uncertainty ahead of us, and recovery will look a bit choppy, both domestically and internationally. So just turning a bit more detail to the infrastructure piece on Page 21. Look, I mean, key here is our master plan still remains robust and strong. We had well underway with 8 anchor projects in real meaningful work. I think at least 4 of them were sort of in the ground, either enabling or underway. We had the Alliance, as I said earlier, confirmed and signed only in February and then sort of really tough to put that on ice. So great deal of work on there. And the strategy around flexible, stable and [ affordable ] resilience still remains. And I think that will give us a chance to just retest and reset. And -- but we don't want to, again, lose any time in terms of recalibrating that plan. There's no question that the capacity we were adding would see us getting way ahead of where the demand is right now. But actually, we want to be well positioned for recovery when that happens. So we are going through a process of just retesting the plan, just to look at that and say, and our view is fundamentally, that still looks right, but there will be some areas where we need to look at it again. And if I say taxiways and stands and runway, those are clear examples where the demand for those -- that capacity will stretch out into the future. So re-sequencing that, maybe breaking that apart into separate stages, is something that makes more sense. Secondly, if I look at the international arrivals terminal project we had underway and designed and enabling work is underway, again, we need to look at the design and tuning that project to say, is it still right in terms of the inbound border processes that we had designed for given our new potential requirements around inbound health security and how can we use our total infrastructure, land sold on either side to serve that. So I think it's important to just retest that. Important that we signaled, though, that the priority for us in terms of the retest of the plan is focusing on domestic terminal and how do we provide the right provision for new capacity for domestic for the future. On to Page 22, look, we are also thinking about we -- how can we take advantage of what we do have in terms of focus. Obviously, property is one of those areas, and we have a very high-quality property portfolio, land available for development. Industrial sector continues to be very, very strong at the moment. And I think we are a market leader in terms of the projects and portfolio we've built there. Also trying to use the advantage of the things we've invested in for years in the theme of this great acceleration to take advantage of what we do have. And obviously, this won't win the future, but taking the -- investing in online, click-and-collect, the marketing automation tools we've built, the loyalty schemes we've established, the customer relationships we have to say how can we turn that into something useful if we've got a domestic bias. So we built a click-and-collect online tool using the last couple of months' time to build that in our line. We're opening a physical click-and-collect point in domestic terminal. So again, sell tax-paid and other services, serving a convenience or other requirements in our domestic terminal. So -- and we're keen to keep testing that angle and say, well, what other things can we do? If we've got an audience to serve in the domestic market, while international recovers and what can we do to that. But if I think about Phase 3 and looking ahead into the future, we are a long business. We are going to be around for a very long time, and we need to take a long view on recovery. We still believe the fundamental drivers are positive. And yes, there will be some changes around the edges. But I still think the fundamental interest in travel remains. How that recovers still yet to be known, but the pent-up demand for travel and this concept of revenge travel, might be something that happens. But obviously, middle class, growth in Asia Pacific. New Zealand's own growth remain very positive drivers, as does the attractiveness of our country. And I think while we've got an outbreak to deal with, I think COVID-19 -- the management here has burnished our reputation even further as a safe destination. That's something our country can't trade-off. But also the enablers, there's a ton of capacity from an aircraft point of view in the market, and those airlines will be looking to point that metal at destinations where they believe they can earn a decent return. And our constant checks and channel checks with our airline partners continues to be positive. They are continued to be engaged in New Zealand as a destination for a while and that we're filling a lot of inbound inquiry, that are trying to open up bubble channels to our country. And if you think about that fleet capacity plus jet fuel being at historic lows, those are also key enablers we know that are really important for the future. So those things will really be what drives our phase 3 recovery. And obviously, with the big attention on the infrastructure program and restarting our program as soon as conditions allow to get us ahead of the capacity requirements we have for the future. And all the while, across our business as a long business, we are committed to doing it in a sustainable long-term way. So we have continued to put a focus on safety despite the disruption in our business, and our performance has been excellent there. Focus on our customers and our staff has been important. And so in this period of dramatic change, we actually achieved our best customers service scores in 7 years -- that's since 2007, actually. And our performance on energy and sustainability impact has continued to track in the right direction, and we will be doing some more work to reset there for the future as we have sort of pass through some of our target time lines on our target set in 2012. So in all of that, a period of dramatic change. We have a long-term view on this. We remain confident in the long-term future. Recovery is going to be a bit choppy, and it really leads us to our outlook and our guidance. So naturally, we've not provided guidance as we normally would in this period for underlying earnings, given the uncertainty. We'll get a chance to retest that at October and obviously during our interims. And it's partly because we're trying to take a, call it, prudent or conservative view on recovery and IATA and S&P have sort of been signaling, they believe, a 3-year full recovery in international. I think we've said potentially a full recovery in international for us could take longer. It could be outside of that, it could be early or later, but I think it's prudent to take a longer-term view on that. And as I said, it could be choppy as bilateral arrangements are made but they're at different countries over time. But we do see domestic and obviously, Tasman and Pacific were turning, hopefully, sometime sooner than that with a full recovery returning before international returns to normal. In terms of guidance, we have given guidance on CapEx in the $250 million to $300 million range, and that really does focus on those things I talked about earlier, roading, runway sort of core systems like baggage and investment properties where we believe is justified. And obviously, and I said to Phil yesterday, we often have this clarification around our guidance. This is subject to material adverse changes. We've never had to call on it, but this has been the one year where we have been pleased to leave that [ cabinet ] in the prior year results. So with that, I'll draw to a close and happy to take any questions from here.

[Operator Instructions] Your first question today comes from the line from Forsyth Barr, Andy Bowley.

I've got a couple of questions. The first of which is around the uncertainty that we're facing in terms of that outlook, which you just referenced. Adrian, you talk about it could be longer than IATA's take when air travel, I think, from their latest forecast back in calendar year '19-type levels in calendar year '24. With that uncertainty in mind and thinking forward, particularly over the next 12 months, given a couple of processes, I suspect it would ordinarily kick off over the next 12 months around the aeronautical price reset and the next Duty Free tender process. How are you thinking about the shape of each of those processes at this stage in light of that uncertainty that we're looking at?

Yes. Look, it's going to be obviously a good test for both of those things. We're obviously turning our mind to that, but it's still way too early, I think, to say yet, until we take some time to think about our infrastructure plan, get a feel for what recovery might look like before we got a view on that. But naturally, I don't think the regime that we operate under from an economic regulation point of view, anticipated a shock of this nature. So look, I think we just need a little bit more time on it, Andy. I think it will -- it will be a good test of risk calculations, is it better to those kinds of things in terms of the economic sort of regulatory pricing model. And so I think we'll need to spend some time just meddling that through before we come out with a clear view of. I think from a retail and other point of view, I think clearly, we're going to have to adjust our models to reflect this uncertainty. But again, I think the market will adjust and shape to that. I continue to think that we have attractive proposition longer-term and in an uncertain world, New Zealand looks like a potentially a safe destination. So that may mean it's attractive for those in the industry. But commercial models are made to adjust and change. And I think and I'm not saying this is what the case is, but you've seen in other markets where an adjustment of the MAG and percentage rate model changes and you have more shift to minimum guarantees connected to passenger volumes. And it might be something we have to anticipate for the future. And that would share some of that risk, but I think that's a risk on the upside as well.

And do you think you need to -- or do you need to stick to the time frame that's dictated by what's in place currently? Or can you push both of those out and retain some kind of status quo for the time being?

Again, I think it's too early to say yet. I think, frankly, we and the airlines have all been hit down [ but are ] trying to figure out how to work through the daily changes in terms of operations. We've all been going through massive reorganizations ourselves and getting our teams reset. So I think the time for that kind of consideration is now. Look, I think there are -- there is evidence in other airports where deferrals of pricing have taken place for various reasons. So -- and I think pragmatism is probably going to be required, but that needs to be matched with us looking at our infrastructure plan, what we think is required looking ahead. And that's -- look, frankly, that's where some of the challenges may lie is we need to take a longer-term view on this. And the aviation sector will be wrestling with probably immediate challenges and maybe have a narrower horizon than we need to take. So these are all challenges to work through the next sort of couple of months, Andy.

Yes. Okay. Second question, can you just dig into OpEx somewhat? So you're on target for the 35% reduction or within $10 million of that in light of what domestic's recovered back to or there or thereabouts. But can you talk through how that would change in relation to different recovery profiles. So for example, maybe using just as an illustration, Trans-Tasman bubble, what would OpEx look like in that scenario?

Yes. So we are already planning, as you would have seen from our media around reopening Pier B, so that we can have a clear differentiation between low-risk international pax and high risk. And so you've certainly separate any Tasman or Pacific bubble from other transits and arrivals from other countries. So there are some additional costs associated with that. But we've taken into account of that possibility of, as we talked about, Tasman Pacific travel restarting in some level in calendar '21, and that's contained within our estimate of being more than $10 million of that original 35% OpEx reduction target. I can give you a bit more color on where those cost reductions are coming through. So if you look at categories versus FY '19, we would expect circa $10 million or potentially more savings versus FY '19. That would be in the likes of marketing, personnel costs and outsourced operations. Outsourced operations has a few subcategories, the likes of car park, management, valet, Strata Lounge as well as landside bussing. So significant savings through there as well as consultancy, cleaning, R&M, utilities, et cetera.

But Andy, I think you can assume that as the Tasman bubble gets up, some of those categories will return if justified. I think you can imagine that our team are taking a very close eye on switching things back on to make sure they are net contributing, either passenger experience or operating earnings. And Tasman bubble would, as you know, be very positive, I think, for us, and we gain that leverage as that growth returns quite quickly. And it's hard to predict what the frequency of travel looks like under a closed Australia, New Zealand and Pacific Islands bubble. But I'm quite hopeful that, that would see some really positive sort of recovery in those markets. Clearly won't cover the gap that we've got, but it would make a massive contribution to our business. It's a big important part of Duty Free business as well as other parts of transport and others.

The next question comes from the line of Owen Birrell from Goldman Sachs.

Just wanted to just do a bit further on the Trans-Tasman bubble. How does your view change if it can only be between New Zealand and the -- I guess what we recall here the elimination states being every state, except for Victoria and New South Wales?

Look, I think that -- look, at this stage, don't think a state to New Zealand option is likely, although it was possible to be wrong on this. Only in that, that would require a level of comfort around the state-to-state border and Aussie. I guess, so it would go -- it would be very exciting if we could give that up and get that away. But I think it's -- again, we'd probably prefer to take a conservative view and say when Australia and New Zealand is really to do that. It is a total country-to-country point of view. So look, that's probably just a general comment on it, Owen. I think if I take it more generally, as I said earlier, Australia and New Zealand, complete and open together is very exciting. I think Aussie outbound leisure both travel and international was about 5.5 million trips. Kiwi is about so, let's call it, 1.5 million to 2 million. So even in a closed market, that's a really significant lift for us, and you might get some system off the back of that. So yes, I don't think the states in New Zealand at this stage is probably realistic, and FX probably be on country to country.

Okay. And can I just ask in terms of, I guess, retaining business opportunity, while the international borders are essentially closed. With the domestic side, how sustainable is it to run just a pure domestic operation? Can you increase your retail earnings just out of the domestic terminal? Or does it really require the new build of the domestic jet terminal to really drive a more sustainable domestic-only footprint?

Yes, domestic is quite limited by the current sort of terminal footprint in terms of retail opportunity. And so it doesn't really give us much opportunity there. From a domestic point of view, the biggest opportunity is, frankly, in parking and transport. That's in terms of Till 2 pull-through, that's the biggest opportunity, and that's important and does pull-through quite well for us. The only domestic retail option is to continue to trade through F&B in those other areas, and they've been going very well, actually. And to try and see if we can introduce that click-and-collect and make something of that down there. And look, we've actually done some trials with some tax paid run out of stock with the Duty Free stuff, and that actually went much better than I expected. So people buying end-of-line stock and other things, which is something actually we have been planning for some time, and we just pulled it forward because the Duty Free operators always have stock and they want to clear it out and get rid of -- and some of that's not duty-able product. So look, we'll continue to test that. I think the attitude is we'll try whatever we can to take advantage of passenger volumes through domestic. But retail, it certainly doesn't pull-through anything like it does in international.

Well, can I actually just draw you on that, are you able to give us a sense of what the splits are between, I guess, pre-COVID levels between Duty Free, international retail and domestic retail.

Look, rough, rough metric from a retail point of view, I think it's probably 10:1 in terms of a retail contribution, domestic versus international. General sense though across all it's probably 5:1.

Okay. And that's just across the board, is what you're saying?

Yes, it's a general sense across everything.

Yes. Okay. And in terms of the domestic terminal, can you give us a sense of what it would cost to develop that as a stand-alone project, assuming that there was other costs that may have been synergized across the broader master plan. If you have to do that as a stand-alone, do you have a sense of what the cost would be, and how quickly you could restart that?

Yes. Look, it was, I think, $1 billion-plus projects what we signaled. But anything I'd just caveat on that is we need to go back and retest that because our response post-COVID the answer may look a little bit different. And I sort of -- we signaled this in the presentation saying, look, if we can find ways to do it in a more efficient manner, or in a slightly different mode, we would. And I can tell you running that project amongst the volume of passenger movements, traffic and everything else that was down there added complexity to that project. So in a way, we're saying, is there an opportunity to get after that capacity requirement in a different sequence and stage, which makes it easier to execute. So that's why slightly pre-COVID stuff is a little bit out of date now. We do want to complete that work and get through that. And look, the work we have done means we are well advanced in terms of thinking that through the various components of dealing with adding domestic capacity. Right down that we had a digital sort of model thing right down to the furniture. So it's well, well advanced, which will mean that, hopefully, we can move through to resetting our plan. And it's not -- rather than through the balls in the year, it's more a re-sequencing plan for the future.

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

Thank you very much for the preso and, Phil, your apologies, not necessary and accepted. Can I ask perhaps, Phil, some color on fourth quarter cash conversion? I guess if I look at the interim cash flow statement it then infers second half cash generation was only about $17 million. But I don't know, Phil, you'll be to cross it. So I wonder if you could just give us some color there.

Yes. Well, my initial feedback would be that H2 FY '20, we were still only partway along the journey of our cost out. So there's more to come there. So net cash flow, we would expect to increase on a monthly run rate basis going into FY '21. And looking at CapEx. We've given the guidance around CapEx of that $250 million to $300 million range. That's -- the majority of that is going to be incurred pre-Christmas this year, so a greater weighting in the first 6 months than in the second 6 months. Other color, nothing immediately comes to mind, just to add to color to that, Rob. But if you got any other specific questions on that, fire away.

Yes. Yes, no worries. Thank you. Okay, if I can turn to the Duty Free agreements and Adrian, you flagged that you'll be open to or pragmatic about arrangements there going forward. I wonder if you could remind us about how much of the existing Duty Free arrangements are on a per passenger basis and what your appetite would be to looking at other examples, say, airport of Thailand, which has moved to completely per passenger basis. If you could just provide us some comments on that.

Yes. Look, it's probably too early yet to say what the future looks like because we're still dealing with the current position. But look, I think as a general comment, per passengers were useful -- well, were part of the calculation of what minimum guarantees would look like. But the model more directly reflects a more traditional retail model in terms of minimum guarantees, ratchets and the like. Obviously, in this current context, if you hold that line, it's a quick path toward disputes so we tried to be pragmatic in terms of saying, well, what do we need to do. And as Phil mentioned, we sort of effectively moved to a per passenger level. And those are all temporary arrangements for now, given effectively no passengers going through, though there's some trade. We do believe in Duty Free for those repatriating. So we're still very much in temporary mode, maintaining those relationships with our retailers. And I said our response has been well received by our retailers at the highest level internationally. So Rob, the future stuff, I don't think we would sort of provide too much detail on that, only to say that the market will no doubt respond and change as it reacts to COVID-19 around the world, because the forecast outlook for passengers will be less certain than it has been historically no doubt. So the commercial models will need to reflect that. And so I know there's various different commercial models in this part of the world that have a blended passenger MAG and fix MAG, and those are things that could be part of the future. But that's still to be determined as we get into the process.

Yes. Yes. Okay. That's fair. And are you actually getting any inbound inquiries for -- on airport rental? I imagine that the land bank is still going okay, but any luxury retailers doing some inquiries or anything like that?

Sorry, do you mean the terminal, or do you mean for the commercial property?

No, no, it's the terminal.

No. Look, I think it's pretty quiet at this stage. I think we're really just in a response mode at the moment. So I think they are all dealing with it. I mean it's still intense, I mean LVMH and others are still actually turning over okay in some of the markets, in China and others. And so obviously, just keeping an eye on what's happening in China, given that they were first into this issue and maybe first out. And I think there's signs of life in the luxury market over there actually. So hopefully, some clues will emerge as Hainan and other areas start to come back on stream. So you will keep an eye on it.

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

I've got a couple of questions here. Just firstly, if we look at retail revenue, which -- in the first half was -- in the last few halves has been running at sort of, call it, $115 million per half. And then the COVID impacts were really a quarter 4 thing, so call it $60 million was banked in quarter 3, less the $15 million for our period adjustment. It gets you down to about 45%. You reported more, like 28%. Was that because you sort of -- you started the rent relief in March? Or is there something I'm missing here?

I think, yes, I don't think it'd be right just to characterize it as Q4 only. I think, don't forget that Chinese passenger impact happened really at mid-Feb and that sort of started really flowing through. So look, I can't actually remember the date when we started moving on some of these things. But I think it's probably better to think of it as half of Q3 and Q4 together.

Okay. Given your comments about taking a more conservative view than IATA, bearing in mind that the conversations are to be had with the airlines around the next aeronautical negotiations. I mean, clearly, you would want -- you'd be preferring, I guess, to take a more conservative view here. Can you just provide a bit of background as to why you have that view?

Just on -- I just think it's -- I'd rather be surprised in the upside rather than be surprised in the downside in this kind of scenario. I think right through this process, whether it's been board management or otherwise, we've always chosen to say, look, let's be prepared for a range of recovery outcomes. And that's how we -- setting we took into the equity raise, it's a setting we've taken in through the reorg and the structures and the process of canceling projects is, given how choppy recovery could be and I think a good example has been the last couple of weeks, we'd rather have capacity in the business to deal with that rather than feel like we're under pressure early in that recovery. And frankly, no one really knows what the recovery looks like. So we, again, better to be on the conservative side and hopefully, work hard on our performance.

The other element there, Wade, is that IATA and S&P are taking a global view. And of course, if you look across the globe, air travel between countries is freer across most of the rest of the world than are those in New Zealand. So you've got to take a view on when that opens up here, and it's likely to be slower in our view.

Okay. In July, where you had domestic running at sort of 60% of normal, can you give us a bit of color on what the cash burn was in that month?

So in terms of operating cash flow, I actually haven't had a close look at that here, Wade, but broadly breakeven. I think we're fine but let's just hold that and come back to you on that one.

Okay. The property revaluation, how much of that was sort of discount rate changes versus the completion of the Foodstuffs and other projects?

It was -- there was definitely some reduction in discount rates, cap rates. But there were some significant development margins on those new properties. That was the main contributor.

Okay. And the outlook, the forward book, I guess, for property development? I mean you've given us FY '21, but...

Yes, there's quite a bit of interest there. And we obviously need to balance that across aeronautical demands as well.

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

Just a few. Adrian, can you just talk a little bit to what you're hearing from the alliance in terms of capacity adjustments post-COVID. Obviously, with -- we've got a bit of color from Air New Zealand and Qantas but outside of those ones, are you -- have you got any feedback in terms of what Cathay or Singapore or your other major carriers potentially are doing with their networks?

Yes. Look, we have -- and our team have been in close contact with the network planners and REIT managers around our network. Maybe just a comment here. I think as you might have picked up from NZ and QF is sort of commentary, domestic was a good sign. And I think they were adding capacity into August and September prior to level 3. So that was a great sign of if you can get it open and get it going, they will put capacity on, and the demand will flow and our load factors are very positive through July. So that's a good sign for domestic. Internationally -- look, again, the airlines are going through a complete reset offloading fleet, old fleet where they can. But the discussions with the planners and REIT managers and network planners has actually been pretty good on that. Actually, I'd say pleasingly engaged in what we had to say. And -- if you give us to put New Zealand at the top of the list of when they're redeploying their fleet because effectively, all the balls have been thrown in the air for some of them in terms of their existing networks. And our position has always been our network was a high-performing network. As a long-haul destination, attracted premium yielding passengers and in a way, had some natural defenses given us distance for those markets against long-haul low -- sorry, low-cost carrier challenge. So as we have worked through each of those, sort of, analysis projects and we've done some detailed analysis for them in terms of restart, very positive engagement and including some new carriers who haven't been here have been on our target list for a while.

Okay. And have those discussions reached into some of the Chinese airlines? Have you had much conversations with them?

Yes, we have, definitely. And again, and just to add to that, a level of engagement, seniority of engagement, very pleasing.

Secondly, could you just talk to a little bit in terms of the practicalities of international retailing? When do you think the stores themselves would be open again or for functioning normally? What level of travel do you think is necessary for the Duty Free guys or the general retailers to be opening stores?

Yes. Look, we're actually -- one of the Duty Free stores are actually open now and they're actually trading through repatriation flights. And that's why I said before, I was slightly surprised that they were able to keep the game, but they were quite happy to do that. Look, I mean, [ Tauranga ] as an example is probably 3% of our previous volumes. So it's not big. But Tasman would make a very big difference, and that would be a catalyst for a material reopening. And it was -- it's often discounted from a Duty Free point of view, but it's actually quite an important contributor, both because it's Kiwis and Aussies. And as you know, they are well tuned to duty free, particularly core categories like alcohol, tobacco and cosmetics. So that would be, I think, the natural catalyst. If you get Fiji up as well, and leisure has a big draw on duty free as well. So those will be, I think, that's the catalyst here in the markets. But I think you should also expect that it won't be from 0 to 100 in terms of store openings. There will be those who are sort of wrestling through reopening, try and pick what's the catalyst to get going. We'll probably have some casualties through that process. Don't yet know because wage subsidy has been supporting a bunch of those retailers, and they've been trying to keep staff on the books to get started. And there was a lot of focus on Tasman bubble and Pacific Islands bubble, but obviously, that's stretching out at the moment. So that will be difficult. But they are also planning for a restart as well. So looking at it, it's just uncertain, but Tasman is a catalyst, I think.

Okay. And then just finally, obviously, your previous comments around doing a reset work on the aeronautical CapEx. Just when do you think you'll be in a position to sort of provide that sort of medium-term, long-term plan?

Probably early in the year, probably around it in terms of maybe next year, I think we want to take the time. We've obviously got to work it through the airlines, and they need to be in the right head space to be able to deal with an outlook and have some sense of what does that outlook actually look like. So look, that work has already started, but we're in August already. And so I think probably early next year will be a reasonable guide, Marcus.

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

I guess let me just -- Adrian, given the more conservative outlook on international passenger recovery, where do you think that would leave you as you move through calendar '21 in regards to covenant waivers and discussions with lenders?

Phil, do you want to do that?

Yes. So we are currently forecasting to be compliant again when covenants roll off. So the first measurement test for the interest coverage covenant will be the 12 months to 30th of June, 2022. So we would expect to have at least achieved 1.5x EBIT interest coverage for that.

Okay. Great. That's helpful. And then just looking at the half-on-half, I know you've made announcements on obviously, on staff costs, thinking about reducing pay and having some sizable layoffs. But the second half costs for staff were broadly in line with the first half. So is that primarily a timing issue across the halves? I know, obviously, you're talking about continuing to target that 35% operating cost reduction.

Yes, it is. So we have provided for redundancies in FY '21 that the planning was underway before the end of the year, but that had not been worked through to fruition. So there's significant staff cost savings coming as we enter FY '21. There was about $6 million worth of redundancy costs provided and -- sorry, what?

Right. So $6 million redundancy cost provided for the redundancies that are happening in FY '21.

Yes, that's right. There was another element that I wanted to talk to. Yes, it was that we also canceled a lot of -- or just about all of our infrastructure development program. So we had significant staff costs that we've previously been capitalizing to projects that were being expensed in Q4 FY '20 that made a material difference.

Yes. Okay. That's helpful. And then maybe just one last one, if I could. You obviously noted the resilience in the property business. A lot of rental abatements on the retail side, but very few on that side of the business. Are you in discussions with your tenants there? Or are you really not seeing much demand for rental abatements?

No. We worked through that on a very tailored point of view. I mean, we're not going to fall over to offer to those or work with those who it's not justified for. So we've actually taken a very diligent approach to working through line-by-line with each tenant to assess whether there was anything justified. And so I think we've held a fairly firm line. We've also taken the opportunity, as many others have, to extend tenure, to renew, et cetera. So it's actually opened up some other conversations that I think if reset positively for us longer term. So yes, I think we're in reasonable shape on it now, Adam, having worked that through and the team had done a good job on managing that, both on the retail and on the rest of the portfolio.

Your next question comes from the line of Suraj Nebhani from Citigroup.

A couple of my questions have been answered. But just on the CapEx side, seems a little higher than what was discussed at the time of the equity raising. I'm just wondering if you can categorize that between property and aero CapEx, and what's changed towards your expectations at the equity raising, please?

Yes. The main difference is that we have restarted some investment property projects that we have paused at that time. So we've crunched the numbers in terms of our debt covenants and determined that we had capacity to do some more Till 2 CapEx than we originally targeted.

Okay. Are you able to take it down, the CapEx number between property and aero for next year?

We do give some guidance actually in the financial statements, in the commentary at the start of those. I can locate the page.

I'll have a look. I'll have a look, no worries. And just on the OpEx side...

Yes. It's on Page 18.

Okay. Thanks for that, Phil. Just one on the OpEx side, sorry if I missed this earlier. But then I'm just trying to understand what was -- I think the comments that were being made that OpEx target reduction of 35% ex recovery in passengers. Is that the right way to think of it?

Yes. So that 35% target that was versus FY '19, where we had about $190 million of total OpEx. And that was what we were targeting when we were crunching the numbers on what we referred to internally as a [ scorch death ] scenario, so that we could size the equity raised to ensure that we can get through a very austere period. So we're actually seeing somewhat brighter prospects in domestic in particular and flowing through to the transport business. So it's EBITDA -- significantly EBITDA positive, but that will lead to higher OpEx than that 35% reduction but with a positive contribution to the bottom line.

Okay. So should we think about any recovery on -- like an EBITDA margin basis then? And are there any recovery impacts in the case of EBITDA margin as previously?

You could, too. There's huge leverage, as you understand, as we start to rebuild the business, though. So choosing that right EBITDA margin could be a challenge.

Your next question today comes from the line of Andy Bowley from Forsyth Barr.

And I apologies coming back on the line guys, but just 1 quick follow-up question. It's not often we get a new airport development in New Zealand but care to give your thoughts on Christchurch proposal for tariffs?

You get the prize of being first and last, Andy, I think interesting to say that I think our view is that Queenstown and Wanaka provides ample capacity and a long-term view on service for that region. It's also Dunedin and a long runway, Invercargill. So I think we'll leave others to assess. And jet, what we think of that when we think the Queenstown Wanaka model is more than sufficient capacity for growth in the long-term there and more closely aligns with the regional investment and special plan.

There are no further questions at this time. I would like to hand the conference back to today's presenters. Please continue.

All right. Thank you, everyone. I appreciate the questions, and thanks for your attention. I just wanted to finish again by thanking our team who worked on these results. It was a huge effort. Also our whole team for the massive contribution and commitment they've shown over the last sort of 5, 6 months dealing with this unusual event. It's been very unusual. It's tested everyone, but they've done an outstanding job. So thanks to them. And we look forward to meeting some of you on follow-up calls in the next couple of days. So thank you.