Ferrovial N.V. (FER) Earnings Call Transcript & Summary

Good afternoon, everybody. This is Silvia speaking. I would like to welcome you to this conference call to discuss the recent transaction announcement regarding Ferrovial's agreement to acquire a stake in new Terminal 1 at JFK Airport in New York. Just as a reminder, the presentation is available to you on our website. I am joined here today by Luke Bugeja, Ferrovial Airports CEO, Ignacio Castejón, Ferrovial Airports CFO; and Ernesto Lopez Mozo, our CFO. If you have any questions, you may ask them through the form included in -- during the Q&A session at the end of this call, we will be reading out your questions and who they are from. With this, I will hand over to Luke. Luke, the floor is yours.

Thanks, Silvia, and good evening or good afternoon to everyone. As Silvia said, my name is Luke Bugeja , I'm the CEO of Ferrovial Airports. Been with Ferrovial for almost 1 year now. And I'd like to present to you the acquisition of our stake in new terminal 1, which we're very, very excited about. So next slide, thanks, Silvia . So firstly, as you see in the middle section a bit of detail about the transaction is the 30-year concession to build operate and maintain new Terminal 1 or the redevelopment of Terminal 1 at JFK. It is a massive increase in size of 3x in terms of the size of the terminal, the capacity of that terminal will increase from 8 million passengers up to 23 million. And the retail space will almost quadruple. So a massive increase in terms of size on the offer. On the top left-hand corner, I mean, New York is a premium destination, everyone is fully aware of that. I think it's important to note that JFK is the United States' largest international gateway by quite a long way, 34.3 million passengers in 2019 versus the next largest International Airport, which is Los Angeles, just over 25 million. Slot demand for international growth is strong. We've spoken to a number of foreign airlines who have unsatisfied demand for slots -- international slots into JFK, heavily constrained airport in terms of wide-body gates. And that's where the demand is, and that's where the pinch point is and Terminal 1 will provide the largest increase in wide-body capacity the development at JFK. And the final point there is unregulated charges, operators are free to set charges based on market forces. Next slide. So just the top left-hand corner here, Ferrovial is subscribing to new capital of Mars LLC, which is an investment vehicle established by Carlyle to finance its participation in the project. After subscription of the shares, Ferrovial have 96%, Carlyle 4%, and Mars in total will have 51% of the project. Alongside that consortium, we have JLC infrastructure, which is a minority owned infrastructure business with notable investments across many asset classes in the U.S., but of note, also LaGuardia Terminal B. And Ullico is the labor, you need labor life insurance company which provides the pensions for the construction labor union workers across the U.S. They have a -- clearly have a skin in the game in this project. And really importantly, our client is the port authority of New York and New Jersey very, very knowledgeable and very, very professional clients, very helpful when you're doing such a complex transaction and construction of this type. We're working extremely well during the change of control process. Strong alignment and the high level of respect and really delighted to be working with the Port Authority going forward. In terms of key figures, massive catching near 22 million residents, which is the largest metropolitan here in the United States, 82,000 gross regional product in the U.S., which is also the highest in the U.S. And specifically, with regards to JFK, as you mentioned earlier, 63 million passengers in 2019, 83 airlines. It's a lot of airlines to give you a bit of perspective on that. Heathrow is around 90 airlines and Los Angeles is around 65%. So it is a very, very diverse mix of airline capacity and airline demand. NTO capacity for both phases will increase from $8 million to $23 million, $9.3 billion investments for both phases, equity of $2.3 billion and bank facility of $6.6 billion. In terms of the agreements. There's quite a number of them lease agreement with the Port Authority is obviously a very important one. The Aecom Tishman design build agreement for Phase A has been agreed, getting the architects. Ferrovial Construction which we'll talk a little bit about later, providing the construction oversight for the project management office for Phase A. Ferrovial Airports will provide management service agreement in the project, which will provides operations route development, commercial and innovation support into NTO. And URW will provide the master concession agreement for the retail and the FMB. Some key dates there, financial close, hopefully, tomorrow, operations will commence on completion of Phase A, which is expected in 2026 and into the lease in 2016. Next slide. Thanks, Silvia. So a bit about New York region and JFK specifically. So we spoke about the catchment area and the GRP. But it is -- this is New York as a destination is a highly diversified international tourism. So there's no dependency on a single region. There is demand across the world for New York as a destination. It's the highest -- one of the highest concentrations of Fortune 500 companies and a really, really strong demand for VFR, so visiting friends and relatives, which is due to the diverse population. It's through international city with its ethnical diversity so which is very, very attractive for visiting friends and relatives to around the world. Specifically on JFK, 20 -- 62.5 million passengers, 84% O&D, which is -- which basically says is a very, very low transfer traffic. Airport is not dependent on transfer traffic. It's very much a destination airport, fine number of airlines and 60 -- 56% of that's actually international. It has a good mix of leisure business and visiting friends and relatives. It has a fairly low reliance on business traffic, which is probably the segment which is, I am certain to recover post COVID but leisure and VFR very, very strong. We've already seen that around the world. JFK is the U.S. largest international gateway. And specifically in New York, it's 66% of market share. And the next slide just is Newark, which is 28%. So it is very much far and way, the largest destination for international traffic in New York. And JFK is executing a transformational strategy across the whole precinct. So it's not just Terminal 1. It is across the whole airport. Next slide, please. And just focusing on the project. The existing Terminal 1 continues to operate and is operated by a group of airlines called TOGA, which is made up of 4 airlines, Japan Airlines, Korean, Lufthansa and Air France. They will continue to operate that until the completion of Phase A, currently has 20 airlines operating there, 65,000 square meters, which is less than 1/3 of the future size of the terminal and was actually at capacity in 2019. So will be limited to the growth until Phase A is opened. New Terminal 1, which is the area currently occupied by Terminal 1 and Terminal 2, which is operated by Delta, which will be vacated and the former Terminal 3, which is the -- for the Aviation Nostalgic people as they hold Pan Am [indiscernible]. It is expected to operate as 1 of 4 terminals going forward. So currently, there's 6, the redevelopment of JFK will move from 6 terminals to 4 terminals and the new terminal one will be the largest terminal in JFK, which is really the engine for international growth. It is important to note that the focus is for this terminal to be world-class, okay? This is really focusing on a high class and not just in terms of marble and glass, this is about innovation, customer experience and is focusing on being in the top 5 ranking of Skytrax rated airports in the world. So this is -- and that's not just rated by the amount of money they spent on the terminal. It really is about the way in which the customer experience is delivered. The Port Authority, it's important to note the Port Authority will have responsibility for the overall management of JFK, which includes the airfield Central Railways and other core facilities. So some key points that 23 gates will be delivered in -- after both phases are completed, capacity of 23 million passengers, 223,000 square meters. That's a similar size to Heathrow Terminal 2 and 16,000 square meters concession, which is considerably larger than what is being off at the moment and a similar amount of concession here at that Heathrow Terminal 2 has on offer. And you can see the diagram they are 4, the future will be 4 terminals, new Terminal 1 and 4 will be the terminal dominated by Delta and then Terminal 6, JetBlue and Terminal 8, American and DA. Just to give you in the table at the bottom sort of shows you the expected increase in wide-body gates. And the Terminal 1 currently has just over 22% or just under 22% of the number of widebody gates and expected to increase that to almost 35%. Next slide. So in terms of the construction, obviously a major part of the redevelopment and the focus of the project over the next 4 years. It will be firstly, the first phase will run from '22 to '26. The next phase, Phase B will be delivered -- expected to delivered shortly after, and that's based around traffic triggers. And then Phase B too, will then follow that. So Phase 1 is obviously the major construction, which is the head house, so the departures, the arrivals area and the baggage systems. Eastern concourse and then the associated apron and roadways. So that is the longest project and is the most technical project, and that's happening over the next 4 years. And then once Bezos open, as we said, the existing terminal will be demolished and Phase B will then commence. The project has the required environmental approvals. And then as Phase B, as I said earlier, is expected to happen once traffic triggers are met. Focusing a little bit on the design build contracted Aecon Tishman, obviously, very, very well known, I am sure they are on the call, highly experienced New York City constructor and airport developer over 120 years of experience, including the redevelopment of One Wolrd Trade Center, done several projects for the Port Authority and over 65 projects -- airport projects worldwide. The Phase A project has been derisked quite significantly. Design has progressed to 50%. It is important to note we have agreed a guaranteed maximum price, it's locked in for the entire Phase A project, and there's a pass-through of the majority of the NTO obligations and liabilities for construction work through Tishman. And distinct from the construction of PMO. So Ferrovial Construction, who I'm sure you all know, will coordinate and supervise the desirable program and provide advice to the NTO and coordinate that with the Port Authority. So effectively, the owner's engineer and providing advice and support and oversight on the construction for Phase A. Next slide. And focusing on operations. So to give you a bit of a view on how our revenues are generated, aero and nonaero. Aero is 84% total income, that's high relative to what I'm sure you would have seen with other airports. Big difference is on the non-aero side, it is just retail and food and beverage. And typically, an airport, you have property and car parking, which doesn't exist in this situation. But on aero key points, it's unregulated. The main source is per passenger fee on a per departing passenger fee or a cost per enplanement passenger and it has inflation linked. There are 4 airline agreements already in place, really proving the attractiveness of the project. This -- the target market is foreign carriers that are seeking opportunities for expansion and growth in JFK. In terms of the CPE, the high cost of operations in New York is really consummate with the cost of operations and the quality of service offer that we'll be providing. And the new terminal projects across all the JFK terminals are likely to drive CPE higher. Just quickly on the non-aero side, URW have the master concession very, very well known in this shopping mall world. Industry around the world have over 1.2 billion annual visitors to their shopping malls. I think in terms of airport is extremely well known for the work they've done in Tom Bradley International Airport in Los Angeles. There's a minimum amount of annual guarantee in place, which is tiered revenue. So it's very much a strong incentives for outperformance for URW to deliver. In terms of the breakdown of that revenue, dute free sales is a key component and largely due to the passenger mix but also to, we call it, cash and carry concept, which in United States, as you know, with shared terminals or terminals that are shared between domestic and international, you buy your duty free and you don't receive it until you get to the gate. Here, it's 100% international. So you buy your duty free and you take it with you on the point of purchase. Lease payments with the Port Authority in terms of the non-aero is shared with the Port Authority. And just on the organization, this is run by NTO based in New York, and we fully staffed the organization with support from Ferrovial Airports as mentioned earlier. Next slide. Just on the financing, so 5-year bank facility, capital markets take assumed in the coming years, investment grade ratings from all 3 agencies, 75% hedging in place for long-term financing, and Ferrovial will apply an equity consolidation method based on the fact that it's a joint controlling -- joint control arrangement. The equity is spread across the construction period up to 2026 as you can see there. The intent of ESG, the target is the LEED Silver Certification, which is based on terminal design, construction operations to manage natural resources use. There's beyond site energy generation of electric power and through solar. And for example, the air bridges will all have preconditioned air and fixed electrical ground power. So no need for ground power units and all SI vehicles will be electric. It's important to note here, we have ambitious goals for diversity and the local economy. We are committed to reaching the minority, women in business enterprise targets of 30% in all categories of work. This is not a nice to have. This is something we're very, very serious about and committed to also local inclusion as a priority. We're really focused on local jobs and ensuring that the local community also benefit from this massive development. 10,000 Jobs, 6,000 construction union labor jobs for this project is huge. And just for everyone's reference, NTO has already contracted 83 MWB on firms and paid them over $46 million for delivering potential services already. Just final slide. Key points, as it says in tagline, this investment fits perfectly with our Horizon 24 strategy. The focus is for doubling -- the double-digit returns. This is the U.S. largest international gateway as mentioned, strong airline demand for scarce gate capacity and really adding high-quality capacity. This is not just volume, this is a high-quality offer for international airlines that New York is a destination, a transformational product or project delivering world-class experience. This is -- we're really focusing on top 5 in the world with unregulated aeronautical charges. Questions?

Thank you very much, Luke. The Q&A session will begin shortly. Please stay tuned. Okay. First set of questions comes from Luis Prieto from Kepler Cheuvreux. Could you please share a bit of light on why Carlyle is so significantly diluted its presence in the consortium, has Ferrovial -- oh, let's start with that. Sorry.

Okay. That was the first question. So I think it's important to say that Carlyle has done an outstanding job bringing this project through the development phase. And I'm sure during that period has realized that through the execution phase, it's probably more suited to an industrial partner and a partner with deep construction expertise. We're really pleased that Carlyle remaining in the project. They have a huge amount of institutional knowledge, which is important for us. And it is an important part for our investment to assure that Carlyle continues on. The next question.

Yes. Has Ferrovial's entry into the consortium being the result of a competitive process?

A question you probably need to ask Carlyle on that. We've had discussions with Carlyle for almost a year now. It's a question for them. So we're not aware of other suites, but again, ask this question to Carlyle.

And how relevant will be Ferrovial Constructions participation in the project from an economic perspective.

Very, very important. As I said earlier, they are providing the PMO services, which is the oversight of the construction. You've got a world-class design build organization over construction, who are very, very experienced in doing construction and providing oversight on behalf of the shareholders. So they play an enormous role and have already played an enormous role in the TD that we have put together and a key part of what we're doing. So I think that's a really important message.

Okay. Next set of questions coming from -- one second, please. Okay. Sorry, it was a problem with the sound. So next set of questions coming from Robert Crimes from Insight. First question. Any more color on the revenue share in non-aeronautical specifically, what percentage of revenues approximately in non-aeronautical are shared with the Port Authority?

Yes. Look, it's -- there's a standard lease agreement with the Port Authority, which is, I'm sure, common with many other leases of other P3s in New York, and it is 50% of revenues. So that's the revenue share. And as I mentioned earlier, the non-aeronautical revenue is around 16% of total revenue, non-aero, non-aero.

Okay. Next question from Robert Crimes. How does the tiring work in the revenue share? Is that the port of authority take a higher share as revenues are higher?

No, the tiering is based around a high percentage for URW, so it's a motivation and incentive for URW to deliver a high level of revenue. So in terms of the share from Port Authority doesn't change. It's just an incentive for the operator or the concessionaire, which is URW.

Okay. And last question from Roger Prime, any approximate indication of revenues or EBITDA contribution in 2027 or help us how to forecast this?

Look, I think we're reluctant to give forecast, but the indication of revenues and EBITDA in 2027 will be come short with the buffer levels at that time. So it's -- unfortunately, we're not in a position to give you a forecast at this stage.

Okay. Next set of questions coming from Stephanie D'Ath from RBC. Could you please elaborate on what fee per passenger you would start charging when you start operating Terminal 1? How does that compare to other terminals and Newark?

So obviously commercially sensitive, but all we can -- I can say is that it will be competitive with the other terminals in JFK. And I think there is a data point out there, internal forge. I think at a recent bond issuance that indicated cost per plane passengers around $81. And I think what's important to note, as I mentioned earlier, we have contracts with 4 airlines which does validate the expectation on CPE.

Where do you see retail going as a revenue per passenger. What percentage of income do you receive from gross sales?

It's again, commercially sensitive, so I don't go down that route. But it's -- what's going to be important for us is to develop a world-class offer, particularly on retail and food and beverage. And we think we're going to expect a strong level of revenue combined with the passenger mix. So we have a world-class operator to deliver that. So we're very, very confident about setting the expected revenue.

Next question coming from Frank Greywitt from DWS. You mentioned your partners. Do you think that you will have an opportunity to buy more of the project from them through time? Would this be something you would welcome?

Let's get through financial close first. We have -- a free question for the partners, but we're very happy to work alongside our partners, and we're going to fair ways to go before we consider that.

Next question coming from Daniel Gandoy from JB Capital. Can you elaborate on the aero and regulated revenues? What are the drivers to calculate it? Is there a full pass-through of the inflation?

So it's important to note that it's unregulated. So it is not a building blocks method like you were saying in a regulated environment, it really is market forces. The agreements we have in place are inflation linked. So I think they're the key points to understand. So there's no real -- it's not a real drivers or I mean the drivers clearly are around about the offer that we have for the airlines, but also the competition amongst the other terminals in JFK.

Next question coming from Kenton Moorhead from DWS. What is the lease payment arrangement with Board of authority? Is it a flat fee policy the percentage of revenue? Does it depend on shares of revenue, for example, aero versus non-aero revenue?

Okay. So sorry, Silvia, which question was that? I just -- so you went silent for a bit. Can you please repeat that, please?

Sorry, can you hear me now?

Yes, I can hear you now. Please go ahead.

Okay, sorry. Next question coming from Kenton Moorhead for DWS, which is what is the lease payment arrangement with Port Authority. Is it a flat fee? Or is it a percentage of revenue? Does it depend on source of revenue?

So there are a number of lease payments to the Port Authority, it is initial rents and second rents. And then in terms of the non-aero, there is a flat percentage. So it there's quite a number of different lease payments across the board.

Okay. The next set of questions coming from Nabil Ahmed from Barclays. First question, beyond construction. What's the typical maintenance CapEx you expect?

I don't have that detail, but I think it's important to note that in terms of operations beyond construction, its operating costs, customer service costs, utilities and labor costs in relation to airport security and general maintenance, but I don't have the exact maintenance CapEx forecast.

Next question from Nabil. Please describe the main terms of the shareholder agreement with other shareholders, governance, management, nomination, first right of proficience of shareholders' willingness to sell?

It's commercial in confidence, I'm afraid I can't share that.

Next set of questions coming from Bosco Ojeda from UBS. Could you give some details on the revenue per passenger on a aero, non-aero expected? And how it compares to peers in TIFK and other New York Airports?

I could talk about non-aero per pax and it is buying currently by far and away, the strongest in JFK and also in all New York airports and largely for the -- what I mentioned before around passenger mix and on the Cash & Carry concept. On revenue per pax, you can really kind of compare where it is to mark today to what it will be in the future. But I think the metric that is more relevant is the non-aero per passenger as I mentioned.

Next, question from Bosco. Who sets the landing fees? And is that included in your fees or independent and how our landing fees set?

So we charge terminal charges, landing fees is set by the Port Authority. So it is -- we -- and the lending fees are not regulated. I think the passenger fees are not regulated as mentioned. So the landing fees are separate to the passenger terminal fees.

Next question coming from Dario Maglione from BNP. What's the impact of the inflation on CapEx? What is the maximum -- the terminal cost?

So through the guaranteed maximum price, inflation -- risk inflation is passed on to the design build contractor as Tishman. So there is a maximum guarantee price. So that's an important point to note.

Another question coming from Robert Crimes from Insight. What were the non-aero revenues per passenger in 2019 in Terminal 1?

You've got me there. I don't have it to hand, sorry, but I'm sure we can try to dig that up, but I don't have that to hand, sorry.

Next question coming from Samson Jayes from Ananda Asset Management. How frequently will the passenger fee level will reset, annually every x number of years?

Okay. So as I said earlier, this is nonregulated. So charges will likely be reviewed on an annual basis, but there is no regulatory requirement to do so. And I think actually, there's an important point that we have the contracts that we actually have in place, contract length of between 15 and 25 years. So for the airlines we have contracts with which is important to note, it's around 20% of the expected traffic numbers from 2027, their contracts are between 15 and 25 years.

Okay. There's a couple of more questions coming from Dario Maglione from BNP. First 1 is, what's the total CapEx to be low faces? What's the expected CapEx after that?

Sorry, I was on mute. The -- I mentioned in the presentation before the cost for phase A&B's is $9.5 billion. And that -- that's covering both Phase A and Phase B.

Okay. Thank you very much, Luke. There are no further questions.

Okay. Thank you, everyone's time. I really appreciate you taking the time to [indiscernible] our presentation today. As we mentioned, we're very, very excited about this opportunity. It's a major investment for Ferrovial and for Ferrovial Airports. And we look forward to commencing the project and delivering this world-class facility.