Ferrovial S A : Transcript New Terminal One JFK Conference Call

TRANSCRIPT

June 09, 2022 - New Terminal One JFK Conference Call

Madrid, June 09, 2022 - 18:00 - Edited Transcript of the New Terminal One JFK Conference Call

CORPORATE PARTICIPANTS

Silvia Ruiz	- Ferrovial S.A. - Investor Relations Director
Luke Bugeja	- Ferrovial S.A. - Chief Executive Officer, Ferrovial Airports
Ignacio Castejón	- Ferrovial S.A. - Chief Financial Officer, Ferrovial Airports
Ernesto López Mozo	- Ferrovial S.A. - Chief Financial Officer

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TRANSCRIPT

June 09, 2022 - New Terminal One JFK Conference Call

Conference Call Transcript

Silvia Ruiz, Ferrovial S.A. - Head of Investor Relations

Good afternoon, everybody. This is Silvia Ruiz 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 One 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 the webcast. 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.

Luke Bugeja, Ferrovial S.A. - Chief Executive Officer, Ferrovial Airports

Thanks, Silvia, and good evening or good afternoon to everyone. As Silvia said, my name's Luke Bugeja I'm the CEO of Ferrovial Airports. I've been with Ferrovial for almost one year now, and I'd like to present to you the acquisition of our stake in New Terminal One, which we're very excited about. So next slide, thanks Silvia.

So firstly, as you see in the middle section bit of detail about the transactions, it is a 38 year concession to build, operate and maintain New Terminal One or the redevelopment of Terminal One at JFK. It is a massive increase in size, it is three times 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, 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, a heavily constrained airport in terms of wide-body gates. And that's where the demand is and that's where the pitch point is, and Terminal One will provide the largest increase in wide- body capacity, at 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 a top left-hand corner here Ferrovial is subscribing to the new capital of Mars LLC, which is an investment vehicle established by Carlyle to finance its participation in the project. After the subscription of the shares, Ferrovial will have 96%, Carlyle 4% and Mars in turn 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 US, but of note also LaGuardia, Terminal B. Ullico is a labour union, labour life insurance company, which provides the pensions for the construction labour union workers across the US. They clearly have 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 client, very helpful when you're doing such a complex transaction and construction of this type. We've worked extremely well during the change of control process, strong alignment and high level of respect and really delighted to be working with the Port Authority going forward.

In terms of key figures, massive catchment area, 22 million residents, which is the largest metropolitan area in the United States. 82,000 gross regional product of the US, which is also the highest in the US. And specifically with regards to JFK, as I 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 to 23 million. 9.3 billion investments in 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. The 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 and Ferrovial Construction, which we'll talk a little bit about later, are providing the construction oversight for the project management office for Phase A. Ferrovial Airports will provide management service agreements in the project, which effectively provides operations, route development, commercial and innovation support into NTO. URW will provide the master concession agreement for the retail and the F&B.

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June 09, 2022 - New Terminal One JFK Conference Call

Some key dates there, financial close hopefully tomorrow. Operations will commence on completion of Phase A, which is expected in 2026 and end of the lease in 2060. Next slide, thanks Silvia.

So a bit about the New York region and JFK specifically. So, we spoke about the catchment area and the GRP, but it is New York as a destination is highly diversified international tourism. So, there's no dependency on a single region. There is demand across the world for New York as the destination. It's 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 an extremely international city with its ethnical diversity. So, which is very, very attractive from visiting friends and relatives from around the world.

Specifically on JFK, 62 and a half million passengers, 84% O&D, which basically says that it's a very, very low transfer traffic airport. It's not dependent on transfer traffic, it's very much a destination airport by number of airlines and 56% of that is 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 uncertain to recover post-COVID. But leisure and VFR are very, very strong, we've already seen that around the world.

JFK is the US' largest international gateway, and specifically in New York, it has 66% of market share and the next largest is Newark, which has 28%. So, it is very much far and away 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 One, it is across the whole airport. Next slide, please.

And just focusing on the project. The existing Terminal One continues to operate and is operated by a group of airlines called TOGA, which is made up of four airlines: Japan Airlines, Korean, Lufthansa and Air France. They will continue to operate that until completion of Phase A. It currently has 20 airlines operating there, 65,000 square metres, which is less than a third of the future size of the terminal and was actually at capacity in 2019. So, will be limited to growth until Phase A is opened.

New Terminal One, which is the area currently occupied by Terminal One and Terminal Two, which is operated by Delta, which will be vacated, and the former Terminal Three, which is for the aviation nostalgic people, it's the old PanAm World port site. It's expected to operate as one of four terminals going forward, currently there are six. The redevelopment of JFK will move from six terminals to four 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. This is really focusing on 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 five ranking of SKYTRAX rated airports in the world. So this is - and that's not just rated by the amount of money that's 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 roadways and other core facilities. So, some key points there: 23 gates will be delivered after both phases are completed. Capacity of 23 million passengers, 223,000 square metres, that's a similar size to Heathrow Terminal Two, and 16,000 square metres concession, which is considerably larger than what has been offered at the moment and is a similar amount of concession area that Heathrow Terminal Two has on offer.

And you can see the diagram there, for the future will be four terminals: New Terminal One, Terminal Four will be the terminal dominated by Delta and then Terminal Six, JetBlue and Terminal 8 American and BA. The table at the bottom, sort of shows you the expected increase in wide-body gates and the Terminal One currently has just over 22% or just under 22% of the number of wide-body gates and expected to increase that to almost 35%. Next slide.

So, in terms of construction, obviously a major part of the redevelopment and the focus of the project over the next four years, it'll be firstly the first phase will run from 22 to 26. The next phase, phase B will be delivered, expected to be delivered shortly after, and that's based around traffic triggers. And then Phase B will be to follow that. So, phase one 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 aprons and roadways. So that is the longest project and it's the most technical project that's happening over the next four years. And then once phase A 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.

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June 09, 2022 - New Terminal One JFK Conference Call

Focusing a little bit on the design-build. Contractor Tishman, AECOM Tishman seem very, very well known. I'm sure everyone on the call, highly experienced New York City constructor and airport developer. Over 120 years of experience, including the redevelopment of One World Trade Center, done several projects with the Port Authority and over 65 projects, airport projects worldwide. The Phase A project has been de-risked quite significantly, the design has progressed to 50%. It's important to note we have agreed a guaranteed maximum price that's locked in for the entire phase A project, then there's a pass through of the majority of the NTO obligations and liabilities for construction work through to Tishman. And distinct from the construction, the PMO, so Ferrovial Construction, who I'm sure you will know, will coordinate and supervise the design and build programme and provide advice to the NTO and coordinate that with the Port Authority. So effectively the owners engineer and providing advice and support and oversight on the construction for phase A. Next slide.

Focusing on operations, so to give you a bit of a view on how revenues are generated, aero and non-aero: 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, 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 enplaned passenger, and it has inflation link. There are four airline agreements already in place, really proving the attractiveness of the project. 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 with the cost of operations and the quality-of- service offer that will be provided. And the new terminal projects across all the JFK terminals are likely to drive CPE higher.

Now just quickly on the non-aero side, URW have the MAG concession very, very well known in the shopping mall world industry around the world have, you know, over 1.2 billion annual visitors to their shopping malls. I think in terms of airports, extremely well known for the work they've done in Tom Bradley International Airport in Los Angeles. There's a minimum annual guarantee in place, which is tiered revenue. So, it's very much a strong incentive for our performance for URW to deliver. In terms of the breakdown of that revenue, duty-free sales is a key component and largely due to the passenger mix, but also to what we call the cash and carry concept, which in the United States, as you know, with shared terminals, terminals are shared between domestic, 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 organisation, this is run by NTO based in New York and a fully staffed organisation with support from Ferrovial Airports as mentioned earlier. Next slide.

Just on the financing. So, the five-year bank facility capital market take-out assumed in the coming years, investment grade ratings from all three 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 control arrangement. The equity is spread across the construction period up to 2026, as you can see there. In terms of ESG, the target is LEED Silver certification, which is based around terminal design, construction operations to manage natural resources use. There's the onsite energy generation of electric power 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 their site vehicles will be electric.

It's important to note here, you know, we have ambitious goals for diversity and the local economy. We're committed to reaching the minority, women and business enterprise targets of 30% in all categories of work. This is not a 'nice to have', this is something that we're very, very serious about and committed to also, local inclusion as a priority. We're really focusing on local jobs and ensuring that the local community also benefit from this massive development, 10,000 jobs, 6,000 construction union labour jobs for this project, it's huge. And just for everyone's reference, NTO has already contracted 83 MWB firms and paid them over 46 million for delivering professional services already.

Final slide, key points as it says in the tagline, this investment fits perfectly with our Horizon 24 strategy. The focus is for double-digit returns. This is the US' 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, transformational product or project delivering world-class experience. This is really focusing on top five in the world with unregulated aeronautical charges.

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June 09, 2022 - New Terminal One JFK Conference Call

Questions.

Silvia Ruiz, Ferrovial S.A. - Head of Investor Relations

OK. Thank you very much, Luke. The Q&A session will begin shortly. Please stay tuned.

Q&A SESSION

Silvia Ruiz, Ferrovial S.A. - Head of Investor Relations

OK. First set of questions comes from Luis Prieto from Kepler Cheuvreux. Could you please share a bit of light on why Carlyle has so significantly diluted its presence in the consortium? Has Ferrovial's, oh, let's start with that. Sorry.

Luke Bugeja, Ferrovial S.A. - Chief Executive Officer, Ferrovial Airports

Ok, 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 realised that, you know, 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's remaining in the project. They have a huge amount of institutional knowledge, which is important for us and it is an important part of our investment to ensure that Carlyle continues on. The next question, Silvia.

Silvia Ruiz, Ferrovial S.A. - Head of Investor Relations

Has Ferrovial's entry into the consortium been the result of a competitive process?

Luke Bugeja, Ferrovial S.A. - Chief Executive Officer, Ferrovial Airports

The 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 suitors. But again, it's a question for Carlyle.

Silvia Ruiz, Ferrovial S.A. - Head of Investor Relations

And how relevant will be Ferrovial Construction's participation in the project from an economic perspective?

Luke Bugeja, Ferrovial S.A. - Chief Executive Officer, Ferrovial Airports

Very, very important. As I said earlier, they are providing the PMO services, which is the oversight of the construction. You know, you've got a world-class design and build organisation, Ferrovial 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 DD that we have put together and are a key part of what we're doing. So, I think that's a really important, important message.

Silvia Ruiz, Ferrovial S.A. - Head of Investor Relations

Ok, next set of questions coming from… one second please. Ok, sorry. There was a problem with the sound. So next set of questions coming from Robert Crimes from Insight. First question, any more colour on the revenue sharing on non-aeronautical? Specifically, what percentage of revenues approximately in non-aeronautical are shared with the Port Authority?

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