Kyoda. Welcome to Sheard Lunch, brought to you by Chas's with Business Desk. My name is Helen Madison and on the program today I'll be talking to Jason Boys, who's the CEO of Infrastructure Investment Company in fortil.
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Welcome Jason, thanks for hosting us at the Infantile HQ here in Wellington. Welcome now, Infatile. You are actually in the midst of your retail investor road show around the country. So how's that been going good?
I think the team are in total on and today, so I haven't had a report back on how that's gone. But last week we had our first roadshow meeting ever in Fun Today. Over one hundred people turned up. Our chair Allison Gary is from Fun Today, so she presented at that so I think it was a I mean, are over one hundred people was a fantastic outcome. Hopefully everybody attended got something out of it.
And then you've got a number of others around the country coming out.
Yeah, I think we do ten or twelve around the country. I am doing Wellington and Auckland and we sort of split it between the team who are be going through the South londond I think next week, I expect.
And I'm quite excited because actually there'll be one for Cheesy's investors this year, I'm told in July.
Said so, no questions today, but questions in July are so bitter. Be on my toes for that. You better happy, too happy too.
Now thirty years since and for twol became about, which is quite a milestone really for the company. There's been a number of people at the Helm and now you're at the helm. What would you say you've learned? But also what lessons you've learned from them in that time?
Yeah? Thirty is is amazing, isn't it. We've had three CEOs obviously, Marco are now me. I think what have we learned? I mean a million things right, and a lot of we don't have a lot of turnover here at Morrison as well, so it's pretty hard to boil it all down into one or two things. I think, you know, the main lesson is it's never one or two things. It's actually always a million things that come together to make an investment either successful or unsuccessful, because
we've had those as well. And really, I think the magic of the model really has been to have a team who's not, you know, embroiled in the day to day hand to hand combat of running an airport or selling mobile phone plans. You can sit above that and try and understand what are the what are the bigger things to be thinking about here, either now or for the future, and then trying to use our levers because we tend to control the businesses that we invest in,
to position them well for those things over time. It is probably when I look back at the successes what really makes them stand out, and then when I think about the things that haven't gone so well, almost always I think if this as the cardinal rule now is to not fall in love with your assets to the extent that you hold on for too long. And everybody loves all of our assets. They're like your children in some ways. You know there's no favorites, but yeah, don't
hold for too long. It's like the cardinal rule I think.
Now Morrison Group actually managers or is the manager. Now that for a lot of people seems a bit strange. Can you can you unpack what that model is and then how common is that?
So, yeah, it's not as common in this part of the world as it used to be. There was kind of a spata than when in for Too was put in place. It still is me common in property investing. So the model is if people don't know there is a company with an independent board of direct is that if you're an Infratil shaholder, you'll own shares in. But there's no employees of Infratill like there would be of
fishrom Pocal Healthcare or some of these overreat companies. The employees are all employed by Morrison, which is a privately owned investment manager. It's owned by the staff and largely Alloyd's of State actually, and we work for Morrison, and we essentially provide the sort of executive team functions of Prattle, which is overseen by the board on a day to day basis actually around the board table and when we're thinking about budgeting. It all would all look very familiar,
but essentially the management team sits outside the company. The main difference really is that Morrison can have other clients, whereas you know, if you're this CEO of one in z if you're docent Paris, you reallyantly work for one in zed C and I hope. So whereas with Morrison, we have worked with New Zealand Supernovation Fund, Australia's Future Fund, a number of other clients who've ended up being great partners for infantele and investing. But that's really the difference.
That's not so common here anymore. But actually it's pretty common in the UK. There is a class of investments called investment trusts, which were all more or less structured this way, and it was kind of that model that Lloyd imported into New Zealand and for various tax reasons, actually ended up in a company format. But yeah, so not unique, but certainly not as common here as it is, say in the UK.
They've mentioned Lloyd Morrison a few times. He's the late Lloyd Morrison, and he did actually set up infratill way back in the day. Would you say his aspirations have been realized?
I don't know. He's quite ambitious guy, right, So that I suspect that's a pretty high bar that we're all continually trying to live up to he He described it what he hoped for Infantoo before he passed away, as as creating a great New Zealand company is what he said,
which leaves quite a bit of room for interpretation. But I think what he is capturing there is, you know there are it's more than a fund where you sort of pop in a few investments, like if you're doing your own investing and you sort of mix a match and you come out with a financial return and that's happy. His aspirations for Intole were much higher than that. A company that and you sort of saw this when he was alive, you know, was relevant to New Zealand and
other markets if possible. When he advocated for the stock exchange not to be sold for various things that were going on with airlines and the flag, those were the levels of his aspirations for a tool. And I think we're sort of still working I think on that part of his vision. How can you have kind of a broader place in people's hearts and minds than just like a spreadsheet.
And also, I mean eighty percent of the business is Australasian. Still you call yourselves a global and structure investment company, but actually a lot of it still is based here. But I suppose is that always? Is that always what you're hoping to have.
Or I think that's more just where we've come from, which is a strength. So the more mature businesses will be at home, the things where we're willing to take more risk will tend to still be at home. First. Really, where we want to take the investment portfolio is a kind of a more global version of what you see today. So could we have larger data seend the businesses offshore.
I think that would be interesting from an investment perspective, And certainly we have every right, I think, given what we've achieved so far and this part of the world, to try to do that. And you can sort of see that in renewables as well. Right, we've had huge history with our words TrustPower now monor energy tilt that
came out of it definitely earned the rider. I think to try that offshore and long Road in the US is the early sort of signs that maybe we can translate off that offshore, and we've got a few other ways to try and integrate that model to other jurisdictions as well.
Jason, we'll talk about some of the successes you've had with the impressive results that came out a couple of weeks ago, but I think it would be quite good to kind of set the scene. I mean, what has been achieved has been in a climate or a world that is quite volatile. What are some of the challenges that you've faced and had to sort of get through in order to, you know, have the results you have.
It's definitely been I think we say whippy in certain areas. The definitely volatile interest rates has been incredibly challenging for all sorts of investments, and because infrastructure is quite capital intensive and uses a lot of debt if you can set it up correctly, the quick changes and interest rates really through COVID and after has been incredibly challenging for the businesses, and by large, teams have navigated that incredibly well.
But it's always hard to really lean in with confidence to grow businesses you think have every right to grow when they're facing challenging cost increases. So you know, for example, if you're building a solar farm in the US, almost a third of the cost is interest, right, so if that's doubled overnight, You've got a lot of work that needs to happen on the power price effectively in order for the maths to still work. So that has no doubt been challenging. And now really the big debate is
what is the new two percent rod? What is the new long term interest rate? Is it two or three? Is at four? And we have no better view on that than anyone, So it sort of plan for the worst and hope for the best, I think is the most sensible way to approach that in your investment pieces.
But a constant juggle and obviously you're doing your modeling as you always have.
And try and be conservative in terms of hedging will conserve I think then a lot of people although a lot of people there are a number of people who could say you could take more edging, but yeah, try and head you downside as much as you can where the cost justifies it. So that's always a bit of an equation. And then really the other part is are you in markets where either your business has pricing power or the industry as a whole that you're in has power.
To say, in that electricity example I gave before, you can go back to whoever's buying your power and say well, do you want the project? Yes, well, then really the price has to change, and that's always very uncertain until you're right in those moments. You can do all the work that you like on that and get convinced that that ability is there, but until I actually achieve it,
it's all very much uncertain. And I think the benefit of getting through times like this that we have is that has proven now, particularly in the US renewables market, the power price is quite rational. Everybody seems to have more or less the same cost to capital, which means that when something like interest rate happens that affects everyone, the power price is able to be adjusted. And I think we've been happily. You know, data seen has been
a little bit of a different story. I would say, what's really happened there is you've had the same sort of dynamic in terms of interest rates, but there's just been this huge explosion of demand which has helped balance everything in that in that industry.
Just looking briefly at the numbers for the full year result, I think earnings is probably what we'll focus on. And ebitt Dath is that lovely acronym which basically means that before all the expenses come in. That was up sixty three percent. I think it was eight hundred and sixty four million. That said, one New Zealand had a fairly big impact on that. So if you extrapolate that out, what'll be looking at Yeah.
So that's the parent at surplus and so that was that would have been reflecting the revaluation of one through the transaction that we executed last year. Think we spoke about that last time. The well, well, the way we look at it is if you want to understand how the operations of the underlying businesses are performing, we use
this metric called proportionate EBITDAV. So we would take so if we own fifty percent of CDCAT it's actually a little bit less, but say fifty percent, you would take fifty percent of their earnings through, thirty seven percent of Long Road take thirty seven percent through. So take that through across the portfolio and then compare that to the same period last year and say how have the underlying
operations gone. So at that level we grow grew at about it was eleven percent, I think I want to say last year, so above we hit a number that was above our guidance, which was nice, and then we were growing at that kind of double digit rate that we like to see given that we're investing a lot in our businesses to generate that going forward.
Down that that growth and that double digit growth is there. It has been with imperature for a long timement. If you look back ten years in even thirty, there's always been double digits and the last ten twenty two percent, which is pretty phenomenal. That said, the market wasn't that and those were the results? Were they just expecting it to be even better? I mean, how do you win?
Yeah, I think there were a few things going on on the day, So I think the print for the year everybody was happy with because nobody expected us to be above guidence. Everybody at as below it, so that was fine. They were more thinking about the outlook. So then we provided one which we've always done, even through COVID, one year forward view of that proportionate eve deaf metric that I talked about before, and that was still up
double digits. But two of them they were disappointed, and I think I would say one was one inzet which we had as actually flat. So although at an aggregate
level we were showing this double digit growth. We had one in zet As flat, which is really, as we explained on the call, as a result of what Sparker also seeing this market, which is the enterprises, which in New Zealand means a lot of government as well definitely holding back and pulling back in terms of spending on all their needs, including the ones that we provide as well.
So I think the market was prepared for that. There was also a little bit of confusion between some normalizations we'd shown in June when we did the rays and what we were showing on the day, which we were able to clean up during the day, I think, which tied it up to normalizations. But that was a little bit messy on the call, so apologies if you had
to listen through that slightly painful conversation. So I think people have got their head around that, and our message on one really is we're soft because the market is soft on that side of things. Nothing particularly wrong with our investment, and we're still actually really positive about the leavers we have within that business to continue to achieve
good growth over time. Particularly remember one end Z is still really becoming a standalone telco having been owned by Vodafone for all those years, so we've got plenty of simplification we can do, which Spark's already done the good work on, but we still have to do it to generate above market growth we think in earnings once that program completes over the next two or three years. So we're still quite positive about that and people will be
waiting to see us execute. But we've executed well on that before, so I don't think people should expect us not to over the next two or three years. And then there was another little bit of confusion on the day because we had presented Long Roads operating earnings on a slightly different way than the way the team the Long Road team had shown it in March, which even though it was actually labeorly labeled correctly in March, people
had taken to mean something else. So once we tied it up that message, I think people have reset their expectations on what Long Roads earnings should be. But the overall message there which I gave on the day was well, it's the same projects at the same really attractive marginal economics that we've already been talking about. This is really just how you present the earnings as to win their turn.
Up, and the share prices recovered pretty much, you think, I think so.
We had run quite a bit leading into the result. Actually, just on that last day, which is an unusual actually, people like to just in case you're going to run ount something bombastic, buy a few more shares, so it would be normal for it to trade back. You can never really win on that, and I think we are pretty much back to kind of the normalized share price from what the team are telling me this morning.
Looking at the portfolio, it's always good to see what the waitings are, how it might have changed from year to year. What appeared to me that digital infrastructure really is the one leading the charge renewables right up there too, but as the waiting changing somewhat with the airport's the healthcare.
Digital, yeah, I think we was trying to give ourselves the option to up or downweight sectors over time. So you definitely think of healthcare as one of the newer ideas that could increase assuming our thesis plays out as we hoped or just well, even if we didn't expect it to go well in the particular way it chooses to. So that's one for the future. The airport is the airport. It's very hard for us to buy another airport.
I'm going to say you've got airports, but actually we have won airport and it's Wellington add Wellington. The city council are wanting to sell these shares. Does that mean you are going to buy?
And that's all they voted that last week. Well, I don't know exactly what they're going to do. I think infratil shiholders, she would expect us to take a look if that was actually what they want to do. People like that investment.
Is that something you'd like?
I don't know until I see it really. Actually, I think there's a price for everything, right, There's a price at which I would sell the airport too, so I know. So it's all it's all dependent on what people want for things, I think. But I think as it from a portfolio strategy perspective, it's not off base at all.
Yeah, And the runway extension is always the other thing that people investors always.
Want to know about think about. Yeah. I think in Matt Clark, our CEO there, spoke about it at our vest day March. I think what he was saying there really is that there are a number of other technological ways of achieving a similar outcome. He was talking about a new plane stopping distances, some technology the team have put in on the runway itself. It's got grooves and a few other things that they're thinking about. We don't
need a runway extension. If we don't need one, we just want to able to fly slightly further afield directly rather than having the lovely walk.
In Auckland because it was Surfey's. I think are worried and Wellington that you might change many things, I mean fear but at stake.
Yeah, yeah, exactly. It's very important, no doubt. I mean it's interesting, isn't it. Adam per TONI along that what they're doing there with that big sea wall. I wonder if they'll learn anything from that. That'll be interesting. But have a lot of heck full of stone.
Yeah, that's interesting. Double digit growth, that's something, as we discussed before, that you've been able to achieve. How long can it keep going eleven to fifteen percent? I think is what you're saying to shareholders. How confident are you that that will keep coming? And can you better that?
I think we have bettered that, haven't we in the last few years I think, I mean, you never know, of course on these things, but we feel like the portfolio is set up and the right way to give us the best chance of achieving that. And mostly that's through having your high single digit return underwritten by Wellington Airport and something like one which in most cycles will generate that return and that's a good chunk of for two.
But then also having these platforms like CDC and Long Road who have this ability to build a new data center or a new solar farm for fifteen plus percent type returns if you model it. But that asset out to its end of life. Of course, if you sell it earlier, you bring a lot of that return forward so you can earn even more. So to me, that
balance is that's always the critical one. And it feels like we're in a good spot now and really the task is to make sure those proportions stand the right balance to produce the right outcome.
So that you've got cash cows if you like, with one New Zealand the airport's those sorts, yeah, and then you've got the other development prospects and also obviously that's where a lot more capital we'll have to go up as well.
That's right, that's right. So it's that balance of how much you've got invested in those high single digital cash car whatever you want to call them as sets, and then how much can you how much do you need to put in fifteen plus to keep the kind of returns in the right range. The other important component if you look back over our history of the returns is some of those ones for the future maturing. So in the past that's been SA Long Road and now you have sort of gur and maybe as the one to
call out there. Yeah, So what happens often is when those investments come of age, and sometimes that's made evident by transaction. So in the case of Long Road, it was when our partner's Munich reinvested and the value of that asset became clear. That's when you get these kind of big jumps and value as well. I think it went up. The people's valuation of that business doubled or tripled overnight through that through that value realization phase. You've got those as well coming through.
Just on Long Road, we probably should explain that that is the renewables business in the US, Yeah, and gurin is the renewables business. In Singapore and in Philippines I think is the other Yeah.
In Thailand and Korea and Japan, but mostly in Singapore.
The thinking of that lovely wael chest you've got to eight hundred and twenty million, I think it was, and the guidance there's obviously an opted opportunity there. Where are you looking in the world. I imagine it's probably not here, it's or Australia, it's elsewhere.
Yeah, should we look everywhere? And there are some interesting assets here, but it's really just that balance of the portfolio. Really, your stable cashier and as will tend to be here where you can see and touch them, and we can denye on the exactly you do want those ones performing, but the ones where are we looking at in the future. So we announced a transaction last year with Hong Kong Telecom where they wanted a partner to invest in their
international business, which we haven't closed yet. So that's really where that a good chunk of that available capital is earmarked for. And so their international business. What I mean by that, it's access to their exclusive access actually to their international network of subse cables, which is extensive built by that business and predecessor businesses over twenty years and it carries nearly twenty percent of the world's Internet traffic.
To give you this and a sense of the reach of that network, very attractive asset, and then they have a business that effectively markets that capacity to enterprise customers,
wholesale customers, and then even smaller customers. Now can access that network through a software platform they call Console Connect, which means you can sort of go online and using a credit card, provision capacity for ten minutes, one hour, three days, three months to any point on their network in the world, which is pretty much anywhere at whatever kind of speed you might choose within the parameters that
the network allows. And it's really that part of the business that we think is really the future of how people will buy connectivity, because you don't need in the old world used to lease aligne for three years at a fixed cost whether you are using it all or not. This software and there are sort of two or three others in the world that can do this, but not many.
This software allows you to say, well, actually, I'm broadcasting from the Olympics for the next three months, and I need provision capacity down to Africa, say for my customers there, I can buy capacity on that line. That's incredibly high quality because we own the network, but I only have to pay for it for that period pare of time.
Yeah, gosh, exciting.
Yeah.
So what about Saudi Arabia and Middle East, all those sorts of places, I mean, they seem to be going off in terms of infrastructure and renewables.
Yeah, we haven't really looked too much there. Actually a lot of what in our world, what we see from that part of the world is really well funded investors actually who are reaching out into Asia Pacific and particularly to invest to take the money they've earned from all of those good things and invest in Asia Pacific. But we haven't actually spent a lot of time there yet. Anyway, I think we're really excited about Asia Pacific actually, And
a lot of infrastructure investors. If you looked at you know KKR who are listed or the other unlisted infrastructure funds that are being closed around the world, a lot of them have an Asia Pacific focus. And that's really you know, population growth. You have quite strong GDP growth in an emerging middle class and growing middle class, which
is important in terms of their ongoing growth. You have electrification and because they don't really have the inflation problem that most of the West has, which is going to lead to higher interest rates, so you have a nicer interest rate outlook. I think in that market that makes it quite interesting for infrastructure investors anyway, in.
A bit of a hedge. Yeah, so India would be among a lot I imagine, given its population and class.
It's a very interesting market from a fundamental perspective, and we've done a bunch of work on it. We've tried a few things and haven't landed something that we would like, but I think it is interesting yet.
Now dayson, let's look at sustainability. You guys seem to be leading the charge somewhat. You did put out a sustainability of report last year, your first one, and then obviously climate related disclosures. They are compulsory for a number of ZiT X and ASEX listed companies, and there's a lot of consternation about the different standards. We aren't there yet. It's confusing, it's onerous, but surely you know is a way to go. You've obviously thought about it prior. How has that process been.
I don't necessarily disagree with all those conversation from my peers. I don't know if it's a necessarily evil, but it is it does seem like the right thing to do because and there's just a million ways you can count these things at the end of the day, and we're only going to make progress if we can coalesce around a pretty standard set of ways of counting carbon. There's still plenty of double triple counting available, but you've kind of just got to get started, I think. So, I mean,
we're supportive. We've invested quite a lot actually in learning a lot about this because we have fifteen different businesses for different sectors. You're encountering these kind of double counting and border issues and lots of different ways. So it's actually taken quite a bit of time for us and our management teams to get to where we've got to. And I would agree with the current that we're not
fully yet. Only the kind of good thing for us is that New Zealand has pushed ahead really of the rest of the world so in a lot of ways in terms of making these compulsory. So Australia, yeah, so Australia is not till next year, I think, and maybe the year after really win it by it so it's quite helpful for say CDC to see how we're going through it now and then take what we've learned and
applied to them as they come. So I think that's quite good for us because we operate everywhere anyway, But that might not work for everyone who doesn't because.
CDC aren't they net zero here in New Zealand. But that's what they're working toward in Australia. That's right, that's right, because that brings me to another question. I mean we've talked about, you know, the scale and the demand that those data centers are having to now put out, and you know it's going great for you, but I mean AI is an aspect of that.
There's a lot of.
Criticism with AI in terms of the environmental impact power and the like. Can you tak me through how that works in terms of balancing sustainability? I think I think some of the data centers do have some renewable powers them, I mean, how do they work?
Yeah, So it's totally the issue I think on data centers in this new capacity for generative AI, because it's such a huge chunk of megawats that needs to be generated most you know, if you're dealing and most of this is provisioned by hyperscalars that brands everyone knows and they buy their power. So we're a little bit on the side of how they choose to do that, but we're not disinterested at all and how they do it
and what's available over time. I think in Australia, where a lot of the capacity we're talking about is going in, there is huge resource available to them if the transmission capacity can be brought online. So for me, I don't worry about it so much in the medium tom because of the fundamental structure of that market and the availability
of soul and wind. It's going to be just these pinch points really where if it runs too far ahead and then there are compromises that need to be made about where the power goes, that you need to really worry. So most of our customers will be investing in large customers would be investing and bringing on new renewable power in order to power their data centers, but getting the timing to line up, I think that'll be a real challenge.
So there will be an issue that will need to be worked through and mostly driven by our customers who actually dictate the pace of rollout of their equipment, but also have all the levers that can pull to procure the renewable energy. And then I think there are still many other areas where data center sustainability needs to be examined. One would be the use of water is becoming an increasingly big focus where actually our data centers are really
well placed. But then also there's this tricky issue of embodied carbon, so using concrete and steel, which no one's really on top of yet, and that but actually going back to where you started these CIDs, because you'll figure out a way to start counting them is totally how you'll end up figuring out what the trade offs are in order to bring in more sustainable versions of both of those things concrete and steel into the construction.
Speaking of AI, it's something that obviously is changing rapidly and is everywhere. As you know, in terms of your company in modeling and what you foresee, you've always done pretty well in that regard. Did you see it coming in the way that it's manifested and where do you see the potential and where it goes? Yeah?
No, I mean definitely not. But we had been doing work on disruptive technologies for infrastructure for quite a few years. We invested in a Finch Capital firm. This isn't for two, maybe six or seven years ago now based in San Francisco, and the idea is a very small investment. I think it was twenty five million US and we don't talk about it a lot, although it's clear and the accounts
that it's there. But really the purpose of that was to keep an eye on developments like this, and it's always had a big machine learning an AI component to this sort of big bangs definitely not definitely not envisaged, but that's how we try and get it least conversant with what the issues could be with these new technologies.
So you know, optimization and utilization of infrastructure would definitely be quite familiar with that theme, which I think is definitely an early application for generative AI that's relevant to us. And then you know from here that businesses themselves learn a lot as well. So you know, one en z or the healthcare businesses which are all now using forms of AI, need to be conversing in the kind of guardrails and security elements of all those things as well, which we learned from.
Just looking at outlock. Then you did give some guidance. I think earnings looking at nine hundred and eighty million to one point zero three more billion actually, which will be the first time in the Big BS. You're pretty confident of getting there.
Yeah. Yeah, we always stress test that guidance. We've got a really good history of heading our guidance well last year getting above it and we're still early days, so we update so thankfully, still looking good. We update those usually we get a little update at the AGM then and a half year so people can track it as we go along as that going on?
Right, Okay, and Jason, what excites you about the future.
I think trying to become that great New Zealand company is pretty exciting. Actually, a global version of what we've got would be really exciting I think for cheerholders, which includes me and actually a company that's known for I think being relevant, as I said, that looks after its staff, that looks up to its neighbors, that would be a very happy place.
That's been a great chat, Jason, thanks for your insights and for hosting us today.
Thank you for having me. Let's see you again.