12 February 2014
Adrian Littlewood, Chief Executive
Good afternoon ladies and gentlemen.
At our annual meeting in October last year I briefed you on our strategic focus and our aspirations to grow faster, aim higher and become stronger, which is at the heart of our new business plan.
You may recall that within Faster Higher Stronger we had developed four simple themes that describe our future focus.
Those themes are:
- Grow travel markets
- Strengthen our consumer business
- Be fast, efficient and effective; and
- Invest for future growth.
The implementation of our plan, in each of these areas, continues.
Our desire to grow travel markets, adopting an ambitious and innovative approach to help New Zealand unlock growth in travel, trade and tourism, is reaping rewards.
Several airlines have announced new routes and additional capacity for Auckland, and international passenger volumes reached a record level in December 2013.
We continue to play a leadership role within the tourism industry, promoting both greater collaboration and the Tourism 2025 strategy to target annual growth of 6%.
Our focus on strengthening our consumer business means we continue to extend the parts of the business that need to respond to evolving customer needs.
We have expanded the capacity of the Emperor Lounge in the terminal and are in the process of expanding our retail footprint in the international terminal building and our parking capacity.
On top of this we have trialled new promotions and launched new campaigns through new media channels.
Being fast, efficient and effective is all about improving our performance by increasing the productivity of our assets, processes and operations.
We have been focussed on maximising the throughput of our terminal, our passenger processes and our runway and apron system.
We have continued to invest in our new airport operating system which will greatly improve our ability to collaborate with others who operate at the airport.
Through good planning and hard work we got through the busy Christmas and New Year holiday period, processing a record 180,000 international passengers in one week.
Being fast, efficient and effective is also at the heart of our aim to carefully manage our balance sheet and leads to our proposal to return capital to shareholders.
A subject which I shall return to.
In November, many of you will have seen in the media the high level details of our 30-year vision and what we describe as the airport of the future.
The vision is our strong commitment to invest for future growth and it is essential in light of the significant travel, trade and tourism growth we expect in the future.
Our long-term planning forecasts suggest passengers will increase from 14.5 million to 40 million over 30 years.
If we, as a country, are to continue to encourage people to travel to New Zealand and, as an airport, we can achieve our goal of being a southern hub airport for Australasia and the Pacific Rim, we must invest in capacity for the future.
As I have already said publicly, the vision is demand-led, customer and commercially focussed, and based on the principles of efficiency, resilience and flexibility.
It is a vision that is designed to be both stageable and affordable.
Ladies and gentlemen.
In November we announced our intention to seek shareholder approval to return approximately $454 million of capital to shareholders, by way of a share cancellation, cancelling one in every ten shares and paying $3.43 for every share cancelled.
Before coming to this decision we reflected on a number of issues.
Firstly, we considered how we support our business strategy by:
- Continuing our investment to drive tourism market growth.
- Continuing our commitment to invest in the right infrastructure to realise our 30-year vision for the ‘airport of the future’.
- Continuously striving for asset, operating and capital efficiency.
And we also carefully considered the need to retain resilience, to manage external risks and market events such as natural disasters, or economic shocks.
Having considered all these commitments, the Board of directors and management believe the Company is able to return capital to our shareholders and continue to deliver on its objectives and commitments.
Our proposal before you today is, we believe, the most appropriate structure for a return of capital – one that is tax efficient, rewards all shareholders equally, and ensures we preserve the funding flexibility offered by a stable A- credit rating.
I would now like to invite our Chief Financial Officer, Simon Robertson to talk through the detail of that proposal, and I look forward to any questions you may have later in the meeting.
Simon Robertson, Chief Financial Officer
Thank you Adrian and good afternoon ladies and gentlemen.
You have just received an overview of some of the detail of the capital return and the thinking of both the board of directors and management that led us to propose the capital return to shareholders.
I am going to briefly go through some of that in more detail and also answer some of the questions we have been asked by shareholders in the lead up to this meeting.
Adrian mentioned the number of funding priorities we have before us as a Company, both now and in the foreseeable future.
So how can we do this and return $454 million of capital?
Fundamentally it is a story of strong strategy execution delivering a more profitable and more valuable Company.
The Company has been on a wonderful trajectory since 2009, when our then business strategy ‘Flight Path to Growth’ really started to deliver strong financial performance, and has been continued under the Faster, Higher, Stronger business strategy.
In addition to the dividends the Company has paid, the Company has also reinvested surplus cash flows into the business to drive further growth.
As a result of that strong performance, our key credit metrics, like interest cover ratios, have strengthened beyond historic levels.
Today, we have a business with a greater proportion of our activities funded by equity and less funded by debt.
In 2009 debt comprised almost 36% of our enterprise value.
By 2011 it was down to almost 27% and last financial year it was down to about 23%.
We believe that it is important to periodically review the funding mix of the company to strive for an efficient capital structure.
Our view is that capital efficiency should reduce our weighted average cost of capital and therefore deliver a more valuable company in the long-term, for you – our shareholders.
Prior to the announcement of the capital return our Standard & Poor’s credit rating was A- with positive outlook.
Auckland Airport has had an A- Standard & Poor’s credit rating since May 2009. At A-, Auckland Airport has the strongest credit rating of any Australasian airport.
Following the announcement in November of our intention to seek approval for the capital return, Standard & Poor’s confirmed our A- credit rating, with a stable outlook.
Immediately following the announcement we sought short-term bank facilities to provide funding certainty to the capital return.
If the return of capital is approved by shareholders today we will execute the agreed bank facilities and will then commence to replace these short-term bank facilities with long-term funding consistent with our treasury policies.
Final refinancing will be targeting an average debt maturity greater than seven years.
To confirm the timetable for the proposed return of capital:
If approved by shareholders at today’s special meeting, then we hope to be able to make the payment to shareholders on 14 April.
This date is however only indicative.
If the final Court orders have not been made by 25 March, the Record Date will be the 10th business day after the date on which the final orders from the High Court sanctioning the capital return arrangement are made.
Any payment to shareholders will be made shortly after the Record Date.
To make the return of capital as tax efficient as possible, we have had to pay out 10% of the company’s market capitalisation, which is what we have done.
The IRD has confirmed that $1.37 per cancelled share will be treated as a return of capital and not as a dividend for New Zealand income purposes.
The remaining $2.06 per cancelled share will be treated by IRD as a dividend, and it will have imputation credits attached at the 28% tax rate.
So some of the capital you will receive will be tax free while another part will be taxable, however that tax has been pre-paid by the Company, up to the Company tax rate.
The capital return does coincide with the time when Auckland Airport could be expected to pay its 2014 interim dividend.
As previously advised, we will not be paying an interim dividend in the 2014 financial year and the next ordinary dividend payment is therefore expected in October 2014.
In summary, why the capital return is a positive thing for the Company?
- Efficiency in our funding mix lowers weighted averaged cost of capital (WACC) and therefore enhances our share price.
- We retain our strong A- credit rating.
- We maintain our long-term funding flexibility.
- And our debt funding capacity remains strong.
And equally important, why is the capital return good for shareholders?
- Your proportionate shareholding in the Company does not change.
- Your voting rights and distribution rights are not affected.
- Your Company becomes more efficient and remains financially strong.
- Excess capital is being returned to you in a tax efficient manner.
I thought before I sit down that I would try and answer some questions we have received since the capital return announcement.
The first one is basically – the share price is currently $3.66 and you are only paying me $3.43, and doesn’t that mean that I am losing 23 cents for every cancelled share?
I can understand why some people have thought that.
One of the objectives of returning 10% of the market capitalisation of Auckland Airport, and at the same time cancelling 10% of the shares, was that, all things being equal, there should be no impact on the subsequent share price.
One option could have been to pay $6.86 per cancelled share and cancel one in twenty shares.
The capital return in the hand of each shareholder would be the same as the Company proposal.
However, all things being equal, we would expect the share price to fall subsequent to the record date of the capital return.
Another way to support this view is to quote the New Zealand Shareholders Association:
“The proposed buyback price of $3.43 reflects the share price immediately prior to the announcement in November. That the market price has since risen should not be of concern to shareholders, since following the share buyback the proportionate interest of each shareholder will be unchanged. Likewise, each investor’s proportional entitlement to future dividends will remain unchanged. The rise probably reflects, in part, the market’s positive take on the proposal on the assumption the deal will proceed.”
Another question is: surely increasing a company’s debt is a bad thing?
In some situations yes it is, however not for Auckland Airport due to the strength of the balance sheet.
We are able to lift the level of debt without adversely affecting our credit risk profile due to the recent strong financial performance of the Company.
In doing so, we expect to lower the weighted average cost of capital, resulting in a more capital efficient and more valuable Company.
And finally, some of you have said that you would prefer not to receive money back, and to instead keep it invested in Auckland Airport.
Ultimately that is an individual choice, much like some shareholders prefer less or no dividends.
However, individual shareholders can choose how they spend or invest the capital return, including choosing to reinvest money back in the Company by purchasing shares on the stock exchange and therefore growing their proportionate shareholding.
Hopefully those few words and slides have helped you to better understand the details of the capital return, and I look forward to any questions you may have later in the meeting.
For further information please contact:
+64 9 255 9089
+64 27 477 6120