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

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Auckland Airport Interim Results 2024 Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Carrie Hurihanganui, Chief Executive Officer of Auckland Airport. Please go ahead.

Welcome, and good morning to everyone joining the call. I'm joined today by Acting Chief Financial Officer, Stewart Reynolds, and we are pleased to be able to share the interim financial results from the first half of FY '24 with you. Well, during the period, airline capacity surpassed pre-COVID levels in key markets, and we welcome new airlines and destinations to the network. As New Zealand Gateway, strong connectivity between Auckland Airport and the world is essential for our economy. So the continued growth in international routes has been very positive. However, we do acknowledge the period was not without its challenges. We had some customers experiencing unacceptable delays in processing in quarter 1, particularly. However, our collaborative efforts with government agencies, airlines, and airline ground handlers were able to drive significant improvements across the experience with travelers with the system running much more smoothly in time for the summer peak. Now we all know airports are complex ecosystems, and we still have more improvements to deliver as our goal is to ensure we have a fit-for-purpose airport that provides seamless experiences for our customers. Essentially, that's why our airport upgrade is so important and what our investment will deliver. Now we have quite a bit to cover with you today before we get into the Q&A. So let's go to Slide 4 to kick things off. Now the half-year results reflect the continued growth in capacity and passengers as well as the increasing momentum we are seeing in our capital investment program. Passenger movements, great to see them bump up 22% from the prior comparable period to $9.3 million, and you'll see that's driven through an increase of about 4% for domestic PECs and the increase in international travels, excluding trends at up 44% to $4.6 million. And then when you look at transit, they also were up $400,000 or 33%. Our first half '24 revenue increased 53% to $440.5 million with lift across all passenger-driven revenue lines, the commencement of PSE4 Aero pressing from the 1st of July, and the continued growth in commercial property. Operating EBITDA lifted by 64% to just over $310 million, and that saw a first-half '24 EBITDA fee margin of 70.4%. Underlying profit after tax is $145.7 million. That's 115% improvement on first half '23, and total reported profit after tax of $118.7 million. Capital expenditure has been very pleasing, $602.8 million that was 130% up on the first half '23 and reflects a record 6 months of investment across the precinct. That investment does include $263 million of core aeronautical programs and just over $300 million on commercial projects, which Stewart will talk to in more detail shortly. As part of that commercial investment, however, we were delighted to open the Te Arikinui Auckland Airport Pullman Hotel in December, a beautifully appointed 5-star hotel. During the first half '24, the Commission's input methodology review was finalized in December, reflecting a substantial change in the approach to estimating asset data. Having carefully examined that final decision, Auckland Airport, along with New Zealand Airports Association, Wellington and Christchurch Airports filed a notice of appeal for a macro view of the final IM determination. The Commerce Commission also is currently reviewing our PE poor pricing, and you would have likely seen in New Zealand's media release yesterday on their seeking an inquiry into the regulation of Auckland Airport, and I will touch further on all of these later in the presentation. If you move to Slide 5, please. The continued capacity and passenger recovery that we've seen is driving improvements, as you would expect, across all key business lines. Air revenue lifted by 92% to almost $195 million, and that was driven by the growth in international airlines and passengers, PSC4 aero pricing and those all flowed through to higher airfield and passenger revenues. Retail revenue, again, with the uplift in international passengers and solid duty-free performance saw a lift of 52% to $90.3 million. Car parking income, we are seeing the ongoing increased demand of self-drive the availability of all products being available in the ramp-up in passenger numbers having a positive impact on that with a lift of 23%. And property does continue to be resilient. We've seen in the first half, revenue up 11% to $72.5 million, and that is investment property rental income up on the prior period, primarily driven by rental growth in the existing portfolio, new leases, and part period contribution from new developments. And with that, we have declared an interim dividend of $0.0675 per share that will be paid out for the first half of the 2024 financial year. Moving to the next slide, please. Our focus, however, does remain on building a better future with operations returning to what I guess is this new norm as we call it. We continue to work with airlines on capacity, frequency, and passenger numbers, including new routes to provide travelers with more choice. A key milestone on this front in December, we're seeing China's capacity exceed pre-COVID levels for the first time. We're also continuing our focus on continuous improvement across our operational efficiencies and its impact on our customer experience, as I mentioned in the opening, working hard to make it the best experience not only it's possible today with assets such as domestic terminal, but also for the future and how we're looking at our investment in the new integrated terminal. We continue to be on track with our core aeronautical investment program and investment in the commercial property development space when it makes sense. The eastern bag hall and new remote stands are great examples of the progress being made in the enabling works for the integrated terminal and our focus on building resilience for the future. So with that, I'll hand over to Stewart to take us through the financial performance in more detail. Stewart?

Thank you, Carrie, and good morning, everyone. It is a pleasure to be sitting here today and presenting my first set of results for Auckland Airport. If we turn to Page 8, the first 6 months of the financial year has been a very positive period for the business with a strong recovery in aviation activity. The reconnection of international services as well as the increase in frequency has seen a significant increase in aircraft movements compared to the equivalent period in the prior year, up 14% to almost 80,000 movements in the 6 months. International aircraft movements were a key driver of this growth, up almost 40% as the number of international carriers serving Auckland rose to 27 by the end of the period, connecting Auckland to 42 international destinations across the globe. This was up from 23 airlines connecting to 35 destinations in December 2022. Domestic activity also increased in the period, and it was pleasing to see a 4% increase in aircraft movements in the period to 53,000 for the 6 months and now representing 86% of the pre-COVID equivalent. Turning to Page 9. The increase in aircraft movements was mirrored in the significant growth in passenger movements in the period, up 22% on the prior period to almost $9.3 million, reflecting the strong recovery in the international network. International passenger movements led this growth in passenger numbers for the half, up 43% in the period to a touch under $5 million, including 386,000 trends of passenger movements that Carrie mentioned earlier. Key markets leading this growth were North America and China, where significant additional capacity was added in the period. But notwithstanding the rise in international arrivals, New Zealand has still made up the majority of the increase in international arrivals in the period, and it was good to see Kiwi arrival numbers up 46% in the 6 months. Turning to domestic. Passenger movements followed a similar trend to what we saw in aircraft movements with 4.3 million passenger movements for the first 6 months of the year, up 4% on the prior period. While pleasing to see this growth, domestic volumes have plateaued in the 6 months to December at circa 90% owing to what we can see as continual capacity constraints. Now turning to Page 10. With greater passenger and aircraft activity in the period, revenue for the 6 months to 31 December rose significantly, up just over $152 million or 53% to $441 million for the 6 months. The growth in revenue flowed through to a 64% increase in EBITDA fee to $310 million for the 6 months as the benefits of operating leverage flowed through into a higher EBITDA margin of just over 70% compared to 66% in the prior period. Looking below the line, the improvement in aeronautical performance seen in Auckland also occurred in Queenstown Airport with improved international demand for visiting the jewel of the South, driving an improved contribution from our investment. Reported profit for the 6 months rose to $118 million, well up on the $5 million in the 6 months to December '22. And with that, underlying profit, that is profit after reversing out the impact of revaluations of investment property, fixed asset write-offs and fair value movements and derivatives, rose to $145 million, up 115% on the $68 million in the prior period. If you now turn to Page 11, where we see out the breakdown in revenue. As can be seen on this page, the increase in the aircraft and passenger movements mentioned earlier has flowed through to a significant increase in aeronautical revenue in the period. This has coincided with the first year of our PSC 4 aeronautical charges and has resulted into the aeronautical revenue being up 92% to a total of $195 million. The rise in aeronautical revenue was partly offset by a reduction in aeronautical parking revenue as aircraft spent less time on the ground and more in the air and a reduction in aeronautical incentives of $3.3 million in the 6 months, down on the 1H '23 equivalent of $3.9 million. This increase in passenger activity contributed to improved performance in our commercial lines of business with retail and car parking income up 52% and 23%, respectively. It was pleasing to see retail recover strongly in the period as the recovery in international travel, combined with improvements in the retail offering resulted in a lift in sales across all categories and delivering a lift in PSR and a 25% lift in income per passenger to $9.97 for the 6 months to December '23 when compared to the prior period. In car parking, we continue to see parking products resonate with travelers with a number of exits up 16% on the prior period and ARPS also up just over 20% on the prior period. Property and other rental income from investment property rose by $8.6 million in the period or 11%, driven by a combination of rental growth in the existing portfolio of $3.8 million, a full period contribution from new leases of $1.3 million, and improved trading in the Ibis hotel. In addition, as you'll see from the page, Auckland Airport booked $10 million of income associated with the insurance proceeds for the January '23 flooding event. Turning now to Page 12. Reflecting on the increase in activity over the period, operating costs rose to $130 million as the business scaled up to support the higher activity levels. Employee numbers rose 15% as greater headcount was taken on to not only manage the increase in activity that we've described earlier but also included important roles in the operational parts of the business and also additional headcount to improve the customer experience as the aviation system experienced its busiest season since the COVID outbreak. With activity levels increasing, Auckland Airport incurred higher costs in the areas of asset management, maintenance, and airport operations in the 6 months as the volume of outsourced activities such as cleaning, bussing, et cetera, rose to support the recovery in aviation and repairs and maintenance rose, reflecting more planned and corrective maintenance undertaken in the period. Naturally, with the recovery in aviation underway, marketing and promotional costs also rose in the period to $4 million, up $2.1 million relating to marketing and promotional costs to support airline route development as well as marketing for our commercial lines of business. In addition to the operating costs, depreciation in the period rose $15.6 million or 23% in the period, reflecting the new assets commissioned and also just over $10 million of accelerated depreciation in the period that arose as a result of the demolition of old assets to make way for enabling works associated with terminal integration. Finally, as you can see on this page, and probably has no surprise to many of you. Interest costs rose in the period reflecting the combined effect of the increase in borrowings and the weighted average interest costs rising over the period. Turning to Page 13. Now I won't spend too much time on this page because Carrie will touch on this a little bit later, but capital expenditure for the 6 months to December totaled just over $600 million, with significant investment right across the airport precinct to support terminal integration, transport projects, including car parking initiatives and rolling new airfield works, including our remote stands to the north of PRB, utility upgrades and a number of commercial property projects, including Auckland Airport's exciting new retail development, Manawa Bay, which is due to open later this year. Now turning to Page 14. Despite the significant capital expenditure in the 6 months, Auckland Airport's balance sheet remained strong, with total assets at 31 December of $11.3 billion and shareholders' equity of $8.4 billion, driving this increase in assets. Work in progress or WIP rose to almost $1.1 billion at 31 December, up from $664 million in June '23, reflecting the substantial works underway right across the precinct. Now finally, before I hand back to Carrie. On Page 15, you'll see that despite the significant capital expenditure in the period, which is largely being funded by debt and retained earnings within the business, Auckland Airport maintains a strong liquidity position and robust credit metrics. Total drawn debt at 31 December amounts to $2.2 billion with an undrawn bank facility headroom of close to $1 billion. Auckland Airport's key credit metric of FFO to net debt remains over 18%, well above the rating threshold for an A- of 11%. During the period, Auckland Airport undertook 2 public bond issues, including reentering the Australian medium-term note market, and we were very pleased with the outcome of both issues with CapEx expected to continue, further bond issues are being considered for the second half of the financial year. Now with that, I'll hand back to you, Carrie, to take us through building a better future.

Excellent. Thanks, Stewart. Very much appreciate it. Let's jump to Slide 17, please. Now as we've now reconnected to the world, we are looking to build on it with continued strength across international. As Stewart mentioned, 27 airlines now find 42 destinations to and from Auckland Airport. That leaves us with only 2 carriers in one destination short of pre-COVID numbers for the period. The North American market is a particular highlight, Auckland is now the most connected city in Australasia to this key market. 7 airlines are flying nonstop to 8 destinations, which is providing much greater connectivity between Auckland and some of the largest commercial centers in the world. Other key markets have also shown considerable growth in capacity. For China, there are now 5 airlines buying the 6 destinations with leisure visitors. Importantly, now accounting for over 60% of all inbound travelers from China during the half year, overtaking those arriving, visiting friends and family visitors that we had previously, which is a really key signal to the return of the Travelex that's more in line with historic profiles. Auckland's Indian Philippines markets also have shown strength with demand for seats exceeding pre-pandemic levels during the period. Moving to Slide 18, please. Now with this, we are committed to driving efficiency in seamless customer journey. As I mentioned in my opening that as services ramped up, we know it hasn't always been the smoothest experience of travelers, particularly when you look at international arrivals. The work that we did that I referred to that collaborative effort, we drove immediate improvements in the customer journey through a clear focus across everyone in the ecosystem, and that resulted in over 20% improvement in international arrivals processing time for customers, much more in line with the 2019 performance that people came to expect. Airports are complex, however, and require all parties to operate in concert to unlock value. That might be from increased resourcing to self-service functionality to digitization across key platforms, including the New Zealand traveler declaration. Increased usage of the traveler declaration is going to be a key platform to enabling a more seamless experience for customers. We still have more improvements, however, to deliver to get to what we want our aspirational experience for travelers, both for today and for the future. And as I mentioned earlier, that is why our airport upgrade is so important. On the next slide, we are clear that as New Zealand's gateway, it is critical that we continue to invest in the necessary infrastructure and capacity. The infrastructure development program continues to make very good progress to ensure the airport is resilient for the future from transport and roading to enabling works for the integrated terminal and upgrades to the airfield and stormwater systems. Short message, we are tracking to plan. Moving to the next slide. We are very pleased with the significant progress that continues to be made on the terminal integration with the first stage of enabling works well advanced. We've undertaken significant work on the detailed design of the new integrated domestic and international terminal, and this is nearing completion. Construction of several areas of enabling works are now complete, including the relocation of the airport operations center to a new purpose-built facility, construction of the new Eastern bag home, and the relocation of the Eastern airfield operations. Construction and other key enabling work continues to progress well, such as the Northern Sand taxiways and stormwater upgrades, West Terminal, and replacement of Power Center West, and terminal fire system upgrades. Moving to the next slide. Transport hub construction is also very well advanced, and we are excited to have Stage 1 of the pickup and drop-off area on track to open in April this year and the remainder at the end of 2024. And this will act as a transformed entrance for the millions of travelers who visit Auckland Airport each year. The new transport hub will help travelers move between vehicles, public transport, and the international terminal quickly and easily. And when you look at Auckland weather, the fact that the new PUDO is undercover and protection from the weather that is a very good outcome. It also sees roads being reconfigured to provide a seamless one-way system for transport and a new landscape Pedestrian Plaza provides an uplift in the overall experience. Moving to the next slide. If we look at parking, it is performing very well with all products on offer over the period and continued growth in demand that I touched on earlier. Net revenue left to $34 million really reflects the growth in passenger numbers, a rise in the average sailing, and customers choosing high-value products. And you can see there on the slide that, that includes or manifest in the Vale growth of 39%. We also, however, continue our very important delivery journey on other transport projects to deliver smoother journeys for travelers. Our new Park & Ride South facility is due to open in the final quarter of this financial year and will create easier travel connections for traffic from the south. And when you look at it, it makes up 40% of all precinct travel, so very important that we add efficiency into the system there. The new facility will offer convenient parking options with more than 3,000 spaces and easy connections to the terminal biobus services. And just to call out, because we are focused in a little while, I'll talk about sustainability, but that those buses will be transitioning from fossil fuel to electric next summer. We've also completed a new priority lane on Lawrence Stevens Drive for public transport and high-occupancy vehicles to provide easier access to the airport. And we've also delivered a new road, Te Ara Kōrako Drive connecting George Bolt Memorial Drive and Nixon Road. Moving to the next slide and looking at retail. We have, with the continued growth in international travel, the move to a single duty-free operator, rental car performance, and enhanced and enhanced product offering has seen a strong retail performance. In my opening, I mentioned that rental income was up 52% on the prior period. We've also seen income for tax lifted 25% on the pro period to $9.97. And so when you look at an FY '19 equivalent, that's around 93%. Duty Free is a key component of our retail strategy and the transition to a single operator in June last year, along with the reconfiguration of the store layout has increased choice for customers, resulting in a 6% increase in international PSR. And we do remain on track for the full retender in the second half of 2025. The omnichannel offering of prepurchase and collected the day of travel continues to resonate strongly with customers, and we continue to explore options to expand that offering. Moving to the next slide, please. Commercial Property maintained its momentum through income growth and diversification. We saw a 3% increase in the rent roll in the period to just under $152 million, and that's off the back of strong market rental growth. 2 of the 5 new industrial developments for financial year '24 have been completed, adding over 25,000 square meters of net lettable area. We have a pipeline of 6 new developments under construction, adding a further $33 million in rental income once completed. The investment property portfolio value is now sitting at $3 billion, and we have occupancy rates remaining high at 99.2%. If we look at Manawa Bay, which aims to be New Zealand's first 5 Green Star premium outlet shopping destination, it is on track to open in September 2024, and we're very pleased it's experienced strong demand from tenants. Hotels have also seen significant improvement in occupancy and average daily rate in the period, with average daily rates up 11% across the portfolio to just over $241 in occupancy lifting to $91.3 million. I mentioned earlier, obviously, the Te Arikinui Pullman Hotel, our joint venture with Tiny Group Holdings, opening its doors in December, and the Mercure remains on hold in the short term. However, fit-out is ready to reactivate as demand dictates. If you jump to the next slide. The opening of the Te Arikinui Pullman Hotel does see an additional 311 rooms in the portfolio, resulting in 782 rooms available on precinct and most importantly, creating choice and options for travelers. On the next slide, please. Now [ Croat all ], we're very pleased with some of the results, but we also remain committed to our role in tackling climate change and building a sustainable future. We're focused on reducing waste and have several initiatives underway. One successful trial to separate organic waste in the international and domestic landside food courts has already saved 8 tonnes of waste from the landfill each month and is being turned into valuable compost. Alongside this, we have a new $5 million transitional waste facility, and it's improving the way waste from international flights, airline lounges as well as always from the domestic terminal, and airside waste from the international terminal, how it's managed separating low-risk clean recyclables and diverting those from biosecurity treatment and disposal in landfill. Preparing for climate change impact continues to be a key focus for us, and the airfield expansion currently underway includes the construction of 3.5 kilometers of new stormwater pipes as part of a major upgrade of the western end of the airport, and this is designed to manage any extreme rainfall Delos in the future. I mentioned the transport hub earlier, but the sustainability at the forefront of that has been key with a giant solar array that will help power the transport facility itself, the office building, and the EV chargers within it. And we've set aside a corridor of land right next to the transport hub to future proof for future mass rapid transit. We also have a role to play in protecting and enhancing our natural environment that we have the privilege to operate on. And moving to the next slide. The first half was the first financial period in which the new aeronautical charges for PSAI applied and the Commerce Commission completed its input methodology review. The Commerce Commission's review of price setting event 4 is underway, and Auckland Airport has submitted on the process and issues paper. A draft report is expected late May and a final report from the commission due in September this year. I mentioned in the opening, you will have no doubt seen [indiscernible] call for an inquiry into the regulation of Auckland Airport. We believe the current regime works and that the current pricing review underway needs to be run through to conclusion. Some of the information provided by Air New Zealand in its release was incorrect, incomplete and/or let important context, and we will continue to advocate the full picture to all stakeholders. On the 13th of December, the Commerce Commission released its final determination following its review of input methodologies. And assuming most of you understand the input methodologies but obviously, the rules, requirements, and processes that outline how the commission regulates electricity line, gas pipeline, and airport services under Part 4 of the Commerce Act. Having carefully reviewed that final decision, our Auckland Airport along with New Zealand Airports Association, who represents both city and regional airports, Wellington and Christchurch Airports filed a Notice of Appeal for Mount review of that determination. It's important to note that this appeal process is included in the act as an appropriate way for the commission's decisions to be reviewed. Auckland Airport believe the final IM decision undermines the purpose of the input methodologies to provide a stable regulatory environment, which operates for the benefit of New Zealand consumers and provides certainty to organizations that invest in long-life infrastructure assets. So finally, we are focused on a capital pathway to build a fit-for-purpose sustainable, and resilient Auckland Airport precinct, one that's focused on delivering a world-class customer experience and fueling ours and our partners' future success. I will let Stewart walk through the outlook, and then we will open it up for questions. Stewart, over to you.

Thank you, Carrie. If you turn to Page 29. As we look to the remainder of the year, we continue to see growth in capacity from international airlines and strong demand for commercial products and services that we offer here at the airport. However, uncertainty remains around the pace of this growth given the effect of the economic headwinds on domestic demand and the externalities impacting capacity to Auckland. Reflecting this, Auckland Airport reconfirms underlying earnings guidance for the financial year to 30 June of between $260 million and $280 million, but lifts its capital expenditure guidance to between $1.1 billion and $1.4 billion for the year, reflecting the ongoing significant investment across the precinct. So with that, Carrie, I'll hand back to you, and we'll go for Q&A.

Fantastic. Thank you, Stewart. I'd like to open it up for questions, please.

[Operator Instructions] And a first question coming from the line of Andy Bowley with Forsyth Barr.

So a couple of questions from me. The first of which is around the guidance point you've made, Stewart, around retaining 260 to 280 range. If I work through that, it implies a reasonably weaker second half from an NPAT point of view. So the question being what's driving that given your revised PAC forecast just a sequentially better second half versus the first half?

Certainly, Andy. So what's driving that is essentially, as I outlined on that page, whilst we remain confident in the ongoing growth in international services, we are cautious around the economic headwinds and the effect that has on the domestic demand. And that domestic demand for both domestic services as well as our largest arrivals group, which is Kiwis arriving back home. So we remain cautious around what that does to aeronautical revenue and naturally how that would flow through into our commercial lines of business. In addition, below the revenue lines, we are seeing in the second half a gradual lift in operating costs as we effectively ingest essentially a full period of the increased headcount that we've taken on during the year and higher costs associated with operating the airport as well as the expectation that the higher depreciation and interest costs will flow through during the second half as we continue our investment program.

Okay. Could you just give us maybe some color in terms of what you're anticipating around OpEx, interest, and depreciation for the second half, Stewart, please?

So in the first half, we had OpEx of around $130 million, but that also included some flood-related costs of just over $8.5 million. So as we turn to the sort of second half, I would anticipate that OpEx would lift above that $130 million and be closer toward $140 million. Now that will depend on our ability to get after some of the initiatives that we're looking to do that will drive improvements in operating efficiency. But I'll be comfortable with more towards that $140 million, and that reflects our more tempered view of profitability in the second half.

And depreciation interest.

So in terms of depreciation and interest, Andy, reflecting -- and you'll see from the presentation, our weighted average interest cost has risen during the period. We don't tend to give a separate breakdown of depreciation or interest, but we tend to combine the 2. So if you think about the first half, Andy, the depreciation and interest was close to $120 million. As we look towards the second half, I expect that to be a little bit further north of that and more $125 million together.

Great. Okay. So the other question I've got is around the commercial assets and retail in particular. So you've talked about retail income per pack being 7% below pre-COVID levels. But what about the PSR in the international terminal, how is that tracking versus what you were doing, say, in FY '19?

So Andy, I think we talked about sort of the PSR as what it was looking like pre or up on the pre-period, but against prior to COVID, I'd have to come back to you on that number. I don't have it to hand, sorry.

But you're generally comfortable in terms of how retail is tracking in the post-COVID environment and the resumption of store openings, et cetera.

We are. We've talked about in previous periods how we anticipated that retail would underperform relative to the pre-COVID equivalent, but we're comfortable with the trajectory and the work done by our team and the range provided by the retailers is delivering improvements not only in sales but in conversion and ultimately, basket size and income per passenger.

If I could add to that, Andy, just also the view of -- we've had the first 6 months, which was the first half period with a single duty-free operator. The reality is they didn't hit the ground from 1st of July, fully productive of that's the word you want to use. They were in a transition state. So we also are optimistic in regards to retail that now they have hit their straps so to speak, and we will see that continue to play through in the second half.

And our next question coming from the line of Grant Lowe with Jarden.

Just touching on similar things really. So the retail side of things, I think at the full year result, there was a steer towards retail per pax down 15% to 20%, simply below pre-COVID levels. Obviously, a very strong result today. Have you got an update on where you think all of this normalizes out?

I think again, as far as the view of that transition, I think if you're saying at the full year results, we were still pretty early on in that transition. But I think that 15% to 20%. Again, we've been looking through and looking forward because of that shift around the previous MEG setup, and we flagged around that transition to MEG and some changes there, but I think that 15% to 20% still holds.

Yes. And I think, Grant, you'll recall that, that 15% to 20%, we were focused on duty-free when we use that.

Right. Okay. So we shouldn't extrapolate a great result for this half, but the expectations remain broadly in line with previous -- in terms of the passenger volumes. So yes, it's still pacing on the international side of things. So I think it was roughly hives and 5.3 implied for the second half. Where have you seen in the total for the year has been moderated down a little bit? Have you seen the softness versus your previous expectations of $10.6 million? We've seen some soft load fees coming out of North America. Is that sort of the primary region?

Yes. Well, a couple of things. One would be just the play out of the seasonality of the northern winter versus the northern summer and some distillation of that. We have had the announcement of AirAsia, for example, in February, withdrawing some movement there. But probably the biggest driver of volume and numbers is Australia. If we look at our markets, it's always been our #1 market. It still is the #1 market. But actually, we're seeing more softness out of that as compared to many of the other markets. So it's just again a hypothesis of whether they're choosing to go to Vietnam and Bali rather than New Zealand. We don't have clarity on that, but it is the Aussie market at circa still 45% of volumes historically, but that's still yet to recover.

And just around, obviously, good progress on the CapEx side of things. You flagged previously some risk around the delivery of that program seems to be going well at this stage. So there was no mention a potential equity raise in the material at least as far as I've seen. Is there an update on that? I assume that the DRP sort of remains in place. And obviously, that's going to contribute. Have you got any updated thoughts on a potential equity raise?

Yes. So Grant, what we talked about previously when the specter of sort of an equity raise was mentioned was there are a lot of factors that need to play out before equity comes to the front of the queue, so to speak. First of all, was our progress in terms of executing on the capital program. And as part of that, that's about the speed and the cost of that program. And whilst you see that playing out in our results to date, that we have to get some way through that program for us and to give us confidence around what that future pathway looks like. In addition to that, there's a big element, which is around the future trading of the business. And in particular, our ability as an organization to generate revenue from not only aeronautical business but from our commercial lines as well because that will then go to effectively the other part of the credit metrics that will determine how much they get squeezed towards the end of PSE4 so there's still a bit to go in terms of some of the sort of lead indicators on that and the decision around where the equity will be required. And so what we've done is just continued to maintain the capital structure settings to ensure that we maintain the flexibility as we begin on this capital program.

So just the last one for me on a return, so just for clarity, that equity raise was that 0 to $1 billion, was that inclusive of any DRP proceeds?

Yes, it was.

And our next question coming from the line of Marcus Curley with UBS.

Could we just start with a little bit of background on why you're going from Merit's review on the building blocks? Are you unhappy with the outcome on the day?

Thanks, Marcus. So in effect, the biggest piece is there were significant moves away from what has been an accepted model for 15-odd years largely. And some of those moves away have raised questions for us in regard to the risk of undermining the regulatory stability. So it's a bigger question than just PSE4. And as part of that, ensuring that we have that stability and then the outcome itself also had errors in regards to some of the calculations and the findings. So the combination of those things for Auckland Airport, New Zealand Airports, and Christchurch and Wellington was the belief that we needed to ensure that we could address those with the Commerce Commission. And again, the merit is part of the regime, which is the appropriate channel that if there is questions in regard to a decision, that's the channel for the appropriate channel for us to use.

I suppose against the backdrop of the market reaction on the day with the 0.67 asset beta was seen as a good outcome for the port long term. So I suppose it's a little complexing in terms of is that number something long-term. Obviously, we're talking PSC here and beyond that you're unhappy with.

I'll comment, and then I'll let invite Stewart, if you want to comment as well. But some of it is also around the longer-term volatility. There was changes that impact the asset beta. You've got the comparator set, et cetera. So obviously, like anything, the smaller the competitor set the higher the volatility that goes over time. And so it is a question about the longer term and that element as opposed to necessarily the outcome that would impact PSE4. But Stewart, is there anything you want to add?

Yes, Carrie. There's that point, Marcus. And then there's also the one around how the effect of the pandemic is reflected in the asset beta. So the approach taken in that really was coming up with essentially an adjustment factor to add to the asset beta. But there was not a lot of clarity as to how that would apply going forward. Would that be a permanent adjustment or a one-off adjustment, et cetera. So when you apply what the final determination was and you think about the long-term billions of dollars of CapEx for not only PSE5, but potentially further for PSE6, et cetera. What we're looking for is certainty in that regime and less subjective judgments that could change and materially affect the risk profile of investment.

How do you marry up the merits review, and I suppose the relationship with the Commerce Commission with the fact that, unlike the other 2 airports, you've got still an outstanding review to be tabled which is obviously potentially a lot more influential to the company certainly in the next few years?

I think from my perspective is that they are, I guess, an element that they are 2 separate processes. I absolutely get the potential influence and the interconnection markets absolutely. But PSE4 is a pricing for a period, the IMS methodology have a much longer run. And to Stewart's comment that clearly getting more clarity of stability rather than leaving errors or unanswered questions to play out, which then creates uncertainty for the next IM review and the application of those review, and listen, the relationship with the Commerce Commission is good, we engaged. They're clear. We've reached out to them to say, "Hey, listen, we've got some concerns on this, particularly around the years, and we're going to use the process and the regime to try and get clarity on those." So I don't see that as damaging the relationship but we're following the regime as it was intended to be used.

And then once you get the review on PSE4, is there a mechanism for appeal of that outcome? Or is that just a final result, which then you need to either follow or goes to the Minister for his appraisal?

Yes. Marcus, so the draft report will come out in May, and naturally, parties will be invited to submit on that within a final report due in September. So that September report will effectively then go to the minister. So I'm not going to prejudge what the draft or final report has. But essentially, that's the simple process. If you look back in PSE3, it was quite a protracted period through that. And so we are just awaiting the Commerce Commission's draft report in May and we'll assess what its findings are.

But there's no link between the fact that you are appealing the building blocks through merits and the ability to dispute the PSE4 report?

No, I don't see a link at all.

Okay. And separately on probably a much more maintain issue. Stewart, could you just talk a little bit to what the spot interest costs are? I know you've just recently done a couple of bond issues. What rates were you achieving on those? And what are the rates that you're getting from the banks at the moment in terms of incremental funding, please?

Yes. So if I talk about the public bond issues as an example, what we're talking about there in the Australian market, that was a 170 over swap. And then in terms of the NZ DCM trade, that was, I think, just 100 over swap at the time. They are not materially different from what where we've historically been, probably just a little bit elevated. And when you compare to the market today, I would look at the AMT market as potentially even trading inside of that. In terms of bank pricing, look, we haven't done a bank issue for a little while. So I don't have the numbers to hand, Marcus, but I think I'll come back to you on what those are.

And so what was the all-in cost there, Stewart?

You can probably see that in the presentation where our weighted average interest cost is just over 5%. I think it's 5.5.

Yes, I can see the weighted, but that's clearly not reflecting the -- obviously, it reflects those but amongst that is obviously your substantial book of other debt, isn't it? So I was just trying to work out the incremental marginal cost of that.

Yes. So you've probably seen in terms of the marginal cost markets depending on, obviously, the tenure that we're looking for, would that be trending more towards 6.5%.

Our next question coming from the line of Amit Kanwatia with Jefferies.

If I can ask on your CapEx plans for the next 5, 10 years on your key aeronautical projects. And there was another impression thinking that -- I mean, you said this was in consultation with the airlines, but now [indiscernible] seem to be emerging. So maybe just interested if you can talk to the process, how you arrived at those CapEx levels. And maybe also touch on the role that Commerce Commission is expected to play on your investment plan for PSE4 and PSE5, please?

Yes, certainly. There are distinct elements of consultation with airlines. One is the capital plan and the regulation requires that we're not only looking at the next 5 years that are in the pricing proof but also a road map for the full 10 years. But there is an acceptance that the back half, the 5 years that are not in the pricing period that there can be variability in that. And if you look back historically, that's been proven in regards to what you think you're going to do and then what plays out. And whether that's just growth is slower than you anticipated to be or it's faster. So you have consultation on the capital plan. You then have consultation on pricing, which we have concluded both of those last year, made the relevant decisions after considering all of the feedback and consultation. And as Stewart mentioned before, that price-setting event is now with the commission for scrutinizing. If your question is, how do we decide what's the role of the Commerce Commission's view of capital, their role is left to decide what's the right capital because that's for airports there best place to be able to provide the material in the what and the why. Their primary role is in regard to the pricing and ensuring there is not excess returns as part of that. Does that answer your question? Or are you wanting to know more about some of the things that are sitting in that PSE5 period?

No. I mean no, it is helpful. I mean you're saying essentially, that's the thinking that it has been consulted with the airlines. But I mean, given the position that [ Ansel ] is calling for, I mean, that is surprising. And I think that's helpful that Commerce Commission looks more at the excess returns rather than the CapEx for those. But I mean, if I think in a scenario that you might have to scale some of those projects, is there any view, what can you reduce as far as some of those developments if Commerce Commission is of the view that those CapEx are predominantly higher than what it should be? So is there any view how much you can scale back in? And I mean, given you've started spending on these projects would there be a risk on the impairments potentially?

Yes. So certainly, if we look at PSE4, the majority of expenditure in PSE4 is related to the integrated terminal. There are some other elements. And so I'll say terminal and associated projects. If you have a bigger terminal, you need more roads, et cetera. So that is really the heavy focus. We've been very clear on that commitment of the $3.9 billion, which is over PSE4 and 5. That has been looked at over 10 years, revalidated, reengineered. And otherwise, it's certainly not gold-plated. It is a functional airport that is going to provide an improved customer experience. So that's largely committed. The other element is you then tip into PSE5 around other things around international assets that will be linked ultimately to growth and other things around the need for that. But I can say the integrated termite 3.9 that you've heard us talk about is largely committed but does cover both periods, PSE4 and 5.

That's very helpful. And just finally, on the retail side, I understand the new Duty-Free tender contract is expected to be happening in the next 3, 6, or 12 months. Maybe if you can provide just a bit more update on how you're going with the Duty-Free tender.

Absolutely. It is progressing well. We expect working on it now, but ultimately to go throughout to market for the tender to assess and land on a preferred provider and implement that will be -- for that to be in situ would be back half of 2025. So financial year '26 in first half as far as that being implemented. So we're on track. We're where we expect to be in that process. But as I said, we will be in the not-too-distant future, formalizing that over the coming months in terms of going out formally to market.

And our next question coming from the line of Roy Harrison with Bank of America.

Thanks for the presentation. Just sticking with CapEx, what's driven the increase in the CapEx guidance range in FY '24? Is that driven by CapEx inflation? Or have you brought forward in some of the developments?

I'll answer, and I'm sure Stewart, want to add to it. I mean, fundamentally, it's a combination of things, but we are tracking to plan. It's progressing very well. And last year, there were lots of weather events, for example, on the view of how that impacted the program. We've had a great period of time. And so run rate is generally performing very, very well. Stewart, do you want to add?

Yes. And when you break that CapEx guidance down into the individual projects themselves, a lot of those are a lot further through their execution. So it's giving us more confidence around the delivery and thus getting more towards the middle to upper end of that range. So that's why we've lifted the bottom end of the guidance range.

And then maybe moving to retail, seeing the increase in the revenue per passenger number is driven by the mix shift between international and domestic. If you compare both international and domestic on a like-for-like basis, are you still seeing a similar level of growth, or are you experiencing weaker consumer spending off the back of economic headwinds?

Roy, if I had to think about it from a PSR perspective, we're still seeing positive PSR growth, both in the IT and DTB, as we sort of outlined in the presentation. And we're not seeing the headwinds you talked about, manifesting itself materially in demand, particularly from a domestic standpoint.

Thank you. And our next question coming from the line of Owen Birrell with RBC Capital Markets.

I just wanted to ask a quick question around, I guess, your engagement with some of the international airlines. You mentioned that there were 27 airlines that connected with the airport in the last 6 months. I'm just wondering if you can give us a sense of what additional capacity, those airlines are likely to put into the airport over the coming 12 months. And are there any other major airlines that are yet to return to Auckland that you think will be joining that group in the next 12 months?

Thanks. What I can say is our business development team certainly works the room. So we continue to engage with airlines and painting the picture of, obviously, growth. New Zealand is still an attractive destination for inbound tourism. I think to answer your question, what we have seen, there are still some airlines that are building out their capacity that they may have returned to New Zealand. So we have the number of destinations in the number of airlines, but they haven't necessarily got the frequency that they had before. So there's still an element of building out that. And we're seeing that we've obviously had new players into the market such as Delta America and the traffic that we're seeing on L.A. You've got some outstanding ones. You've got Virgin, for example, from a Tesla perspective, returned to Queensland, but nowhere else. And so that's left quite a hole from a competitive set on the Tasman. You have the likes of Thai Airways that haven't returned yet and ongoing engagement around the view of their potential return to the market. And then as I said, it's hard to forecast absolutely in a 12-month period, who will be returning but my tongue and cheek comment of working in the room is on a serious note, something that we continue to engage there are markets that are important. We know we've seen the Philippines and India continue to grow the idea of a future state. I just can't say when, but direct services is certainly something that would be great for New Zealand to have, but that's a work in progress and there's a lot more that links into that as far as trade relationships and otherwise that are bigger than just Auckland Airport, but we certainly continue our focus is on building out the international portfolio.

And I guess, can I ask a follow-up question, just looking at the activity of Tourism New Zealand and how active they've been in terms of offshore marketing? Are there any particular regions that they are actively marketing into?

I think well, lots of markets, but certainly, the North American market is a very big market. New Zealand is a great destination. We have been to my earlier comment about Australia being soft, that probably hasn't traditionally been a market that we've needed to do as much promotion but the needs that we're all revisiting that to say, well, that hasn't rebounded like some of the other markets and what's the role we can play in stimulating that because it is a very important foundational market for us. So yes, those are probably the 2 call-outs from our perspective.

Thank you. And our next question is coming from the line of Robert Koh with Morgan Stanley.

Yes, let me apologize for Aussie softness. I'll do my part as soon as I can. I suspect also Taylor Swift will be -- might have something to do with the current choices. Anyway, my first question, I guess, Roy asked it already, but I just wanted to make sure I understood. Within the CapEx program, are you actually seeing cost escalation or with your high-quality CFO team containing that so far?

I might let my high-quality CFO respond.

Rob, we continue to see pressure right across the system when it comes to inflation in construction activity, and that's whether it's from labor through to building materials, et cetera. But it does vary. And so depending on your procurement and your procurement strategy, I should say, and how you structure those agreements. You can go some way to mitigate that. And so we're seeing now some building materials getting price reductions, whether it's in steel or cement, et cetera. And so the team is very active on that procurement practices and trying to find ways to drive down cost. So at this point, what we're probably more grappling with is probably scope rather than the actual materials themselves and making sure that as we move through stages of design that we maintain scope and the philosophy to really deliver the right product and the right quality that the customers are looking for.

Then my second question is, I guess, just relating to the flood repairs, a small item in the half, but associated with that expenditure, is there any, I don't know what you'd call it, like asset hardening or making sure that the next time there's a flood that there's potentially less of an impact?

Yes. There is, Rob, in short. Naturally, we take the opportunity whenever things like this occur, to look at our investment program and assess critically whether what we had planned or on foot, as you Australians call it, it still fit for purpose or then changing some of the scope of that to mitigate any future effects, et cetera. So whether that's in things like drainage and or stormwater capture systems or in the design of some of that terminal infrastructure and using things like potentially ways that you can capture and channel water. We're looking at that constantly as we go through essentially looking at the impact that climate change can have and may have on our investment program. We recognize we are based near the coast and we recognize that these climate-related events may happen more frequently going forward. So we're constantly looking at ways to try and mitigate the impact of that. And some of those can be designed out, others. Essentially, you have to deal with through a multifaceted approach through less hard assets like concrete, using more natural drainage channels, et cetera, to quickly move them away.

My last question, just around managing the debt book. And I noticed you've gone up to about 70% fixed. Can you just give us an update on your thinking on how you manage the hedging and the duration of the book, particularly when you've got the Commerce Commission moving the dial on return things which goes to the activities of NZ Airports in the merits review appeal? This is a concern for investors, isn't it?

Yes, that's right. So look, we recognize that in some industries, particularly in Australia, they lock in their debt book to really coincide with regulatory pricing periods. For Auckland Airport, that's a little bit more difficult because effectively, it would require quite a sway of debt to mature at any point in time and may create some inefficiencies essentially in repricing that debt at a point in time in the cycle. So what we've historically done is essentially managed debt on a portfolio basis right across essentially the entire business rather than effectively have a very high degree of leverage with a high degree of fixed debt and using the portfolio approach really fixed within policy bands that essentially stepped down as you move further out. So our increase to 70% really reflects the recent issuance that we did last year, and the organization's posture at that point to lock in those rates. But each time we do an issue, what we have regard to is our treasury policy and staying within those bands. And importantly, our outlook on interest rates and what those will do. So if you look back over recent years, Rob, you'll see that the interest rates and how much has been fixed has oscillated quite a bit between that 70% write-down to low 50s.

Yes, noticed that. Many thanks for the answers. Really appreciate it, and good luck out there.

Thank you so much. And we look forward to seeing you over here soon, Rob.

Thanks, Robin, and I'll take your earlier comment that you might be a Swiftie, you might be going to the concert.

No comment.

And our next question coming from the line of Wade Gardiner with Craigs Investment Partners.

A couple of quick questions from me. First up, just in terms of the property revaluation. This is the third 6-month period. We've seen a downward revaluation. Can you just give a bit of color around what's happening with the cap rates there, where you're at level of underwriting in the portfolio? And did the whole portfolio get revalued this time around?

Yes, why don't I take that one? So look, in terms of that negative movement, that was largely driven from our industrial asset class within the portfolio. You'll recall we've talked about previously when we enter into these agreements with tenants, we often sign up very long-term agreements that may have fixed terms within them, which essentially provide Auckland Airport with a high covenant and tenant quality. Now with that, as cap rates move, we're exposed to those -- essentially, those agreements being in or out of the money, but they give other benefits to us in terms of risk management, which we assess at that time. So the movement that you saw in the 6 months to December really comes from some of those long-dated agreements that we've entered into not only recently but previously that we're very comfortable with. In terms of rating, though, I couldn't really comment on that.

Okay. But that comment you made about mainly industrial and how does that differ to what we saw, say, in FY '23, where we had negative decreases there? Was that a different part of the portfolio? Or are we talking about sort of ongoing movements in the cap rate? And so can you give a bit of color as to where that cap rate sits now?

Yes. I think my suspicion, I'd have to get back and just check, but yes, it's all cap rate movements in the same asset class.

Okay. The guidance you gave on second half OpEx. If we strip out the flood costs in there, then it's up about 17%. I assume there's no those sorts of abnormal items that you're expecting in that close to $140 million number. And if we're talking about sort of a 17% or almost $15 to $20 million increase in the dollar amount of OpEx in the second half, where is it largely coming from? Is it just that labor increase?

Thank you, Wade. It's across the board actually. So your points are right. We're not anticipating there are any abnormal items in that number. What we're seeing is some of the rate of price increases that have been put through in areas like utilities, et cetera, and you're starting to get a full 6-month effect of that factored into that second half number. So not only are you seeing some of it in personnel, but we're anticipating as we move into a quiet period further work in repairs and maintenance, so a step change there as well as further increases in the areas like cleaning, marketing, and promotions and also just the cost of running the airport. As you know, we outsource a lot of activities, and we're wanting to make sure that the quality of service that's provided to the trapping public is maintained, and we've lifted our investment in the 6 months for that.

I think it was in the last period, you started reporting some of the marketing costs as aero incentive charges. What was the number in this half for those euro incentive charges, which come off your aero fees, I believe?

Yes. I think I mentioned as the contra to revenue wide, is that what you're talking about?

Yes.

Yes, I think it was $3.3 million in the half, and that's down on $3.9 million in the prior period. And that will be a contrary to the revenue.

Okay. And finally for me, just in the presentation on the property side, you talked about 6 new developments and $33 million of extra revenue in the pipeline. Can you give a bit of color around the timing of them coming on?

Yes. A lot of those are essentially due to come on in the financial year '25. So I think there's still a lot of obviously, construction activity this half, but it's really an FY '25 completion for the majority of them.

And a full year of revenue in FY '26?

Yes.

Thank you. And I'll now turn the call back over for any closing remarks.

Well, certainly, with that, it's been a pleasure to have the chance to connect in certainly FY '24 and beyond for us is the new normal and our forward outlook both in terms of what we've discussed today with international capacity, the capital program, and our focus on creating a future and resilient airport for Auckland and New Zealand. So with that, pleasure to speak to everyone, and we look forward to seeing some of you out on the road. Thanks very much.