Earnings Transcript for CKHUF - Q4 Fiscal Year 2019

Hans Leung: Thank you very much for joining the webcast today to discuss our 2019 Full Year Results. Today, our speakers are Mr. Victor Li, our Chairman and Group Co-Managing Director; Mr. Kin Ning Fok, our Group Co-Managing Director; Mr. Frank Sixt, Group Finance Director and Deputy Managing Director; and Mr. Dominic Lai, Deputy Managing Director and Group Managing Director of A.S. Watson. In addition, Mr. Erich Ip, Group Managing Director of Hutchison Ports; and Ms. Malina Ngai, Group COO and CEO of Asia and Europe of A.S. Watson, will join us in the Q&A session. [Operator Instructions]. We can start now.

Frank Sixt: Good. Well, welcome. If you go to Slide 4, you'll see that 2019 actually stood the company in pretty good stead considering what we're facing as we go into 2020. Sorry. What is that? I'm having a bit of difficulty with the slides. Here we go. So although we were buffered again by some adverse currency winds, particularly in euro and in sterling. Euros were down 5% year-on-year. Sterling was down 4% year-on-year. That's the lion's share of what affected us. Nevertheless, we were able to improve net earnings by 2% to $39.9 billion. And if you strip out the ForEx impact on earnings, that was actually up 6%. So we reported $10.33 earnings per share, plus 2% and a dividend in line with last year as a result. If you go to the next slide, it's a waterfall that explains the split by divisions and looking at EBITDA. But frankly, if you looked at earnings, it would look more or less the same by way of a waterfall, right, what were the contributions by division? And you can see that the total EBITDA of $112 billion in the pie chart, right, is derived from the geographies indicated and the sectors indicated. So I think that's kind of self-explanatory. As you go through the buildup from 2018 to 2019, we had a positive uplift of $428 million from ports. We had a very solid uplift of $1.3 billion from retail. We had a serious downdraft from infrastructure. But I stress that, that's not as a result of infrastructure operations. Actually, the contribution of CKI per se to CKHH was line balled us slightly up, if I recall. The real reason for the difference is, of course, that we completed the disposal of 90% of the economic interests in a number of co-owned infrastructure assets that CKHH had direct ownership interests in, which we no longer have. And as a result, they're completely deconsolidated, and we don't have the contribution that was being recognized on that front last year. Clearly, the biggest disappointment was Husky Energy from an operational point of view, they fell HKD2.7 billion short in their contribution to our EBITDA. But they also took a number of writedowns, both in terms of the carrying value of resource assets, which everybody in the industry did. And a couple that were unique to us simply because we're in the course of upgrading a refinery at Lima, and when you upgrade and change the capacity, it actually increases the capacity quite substantially. You have old equipment that you can't use, and so you have to write that equipment off. So you put all of that together, our share of that, all of which, by the way, was noncash, was $5.9 billion. So that combination of $5.9 billion cash and $2.7 billion of operating shortfall, right, accounts for really the reason why we didn't have substantial EBITDA and earnings growth, right, from the year. We did realize a disposal gain on Hutchison Chi-Med. We reduced our interests from over 50% to around 48-somewhat percent, if I remember right now. And in doing that, you recognize the value of what you take back. So the gain is calculated based on the value of the remaining position, which is about 48% of the company. And I can say that we have no actual cash invested cost in that company now. But the couple of percentage points that we sold returned to us more than our total investment in the company. CKH Group Telecom is a good picture. And I'm sure Kin Ning will get into that in much greater detail later on, but it was up $6.4 billion in terms of EBITDA contribution for the year. A good part of that is, of course, because we had the second, the 50%, right, of Wind Tre for the full year, we only had it for a part of year the year before. But nevertheless, the other businesses, when you look closely at them and, in particular, look at them in local currencies, right, all performed reasonably well during the year. As did Hutchison Asia Telecom, mainly driven by the uplift in the profitability of its Indonesian operations over the course of the year, and that contributed $1.1 billion to the upside. Finance & Investment, we pulled a few rabbits out of hats, but basically contributed another $859 million on the EBITDA line. That would have taken us to $116.4 billion. And then as you can see, the adverse foreign currency effect on the EBITDA line was $4.3 billion. So if we go to the next slide, and this one, I think, is really reason for quite a bit of encouragement because we actually very much improved our financial profile during the year in a couple of ways. From an operating free cash flow point of view, you can see that we went from $60 billion to $70 billion, right, of the EBITDA that we recognized coming from subsidiaries, in other words, cash that is totally within our control. And correspondingly, our share of associates reduced from $14.5 billion to $9 billion. So overall, we had a, on the positive side of operating free cash flow, $79 billion. And we spent a little bit less, so CapEx and investment, we spent $29 billion. And so as a result of that, our operating free cash flow netted, right, to $50.1 billion, which is up by comparison to 2018 by some 16%. The pie chart down at the right just gives you a snapshot of which businesses contribute the most to operating free cash flow. I don't really have anything to comment on that. If we go to the next slide, this is the usual slide that details the operating free cash flow by division and we present it every year, so anybody who needs it has a basis for comparison to prior years, we can talk about 2018, 2019 in Q&A if anybody wants to. But I think one of the things that this shows very, very, very clearly is that, if I can put it in the vernacular, nobody is eating more than they're killing. So we have good cash flow coming from almost all of the divisions and a very sustainable reinvestment profile. The only major exception, of course, being Husky Energy, and we'll talk more about that later on. And again, if you do the year-on-year analysis, you'll see big differences in infrastructure, but that is also really because of the disposal of the co-owned infrastructure assets. So debt maturity profile, I mean, again, on the left-hand side, you have the big blue bar, that was our cash and cash equivalents as at December 31, so HKD144.8 billion. The average return on that, by the way, was pretty good during the year, it round about 2%, including some ForEx gains and some realized interest-rate swap gains along the way. So it was a very good cash-generating year. As I said before, our EBITDA was down by 1%. But funds from operations like operating free cash flow was basically up, at 57.9%. Our shareholders' funds, our ordinary shareholders' funds attributable to shareholders were up by $30 billion at $488.6 billion. Our debt principal was essentially flat. And our net debt at $202.9 billion was 24.8%, so a reduction in net debt of $5.1 billion and a reduction of net debt to net total capital to 24.8%, which is a reduction of 1.2 percentage cost. And as you go down the right-hand side of the page, you'll see that we have a nicely staggered maturity with an average of just under 5 years. Our average cost of debt for 2019 was 2.1%, which was a reduction of 0.3%. Interestingly, that will be significantly below 2% as we head into 2020, simply because we refinanced very efficiently all of our telecoms' debt in late 2019, which brings me conveniently to the operations discussion starting with ports, and Mr. Fok has joined us.

Kin Ning Fok: Okay. Now since I'm alone here, all right, and I, so now I'll start with the ports. Okay, the ports has a, has quite a solid year, okay, with 290 berth, 52 port in 27 countries, and then we did 2% more lift, more containers than last year at $86 million. And then EBITDA grew 3% from to $13.4 billion, okay? But because of exchange rate, it is only a record of 0.1%. Can you hear me? Yes, 0.1% in local currency. So if you go through the waterfall on the upper right-hand corner, and then you show how it is make up. So that the thrust is more or less the same. So that Yantian did okay. Hong Kong is a little bit bad. And the China business, again, we saw Santo Point last year and also with Shanghai is, the business we have seen Shanghai is lower yield than last year. So that, however, the business is quite good, quite similar to 2018. In Europe, recall, a negative, actually is because of some accounting. And the European port actually in operations are doing better than last year, but there were some onetime provision we took in 2018 and it's not recurreing this year, so that these are not big figures, so they end up almost the same as last year. And Asia is good. Basically from Egypt, Pakistan, Mexico. And actually, surprisingly, it was reversed down by Panama. But good for this year because Panama for the first two years is doing well. So that, and then the head office is some balancing out item. And last year, we took profit in the sale of Chengdu. And this year is covered by the dividend from our investment in 2019, so that everything net out is a small $200 million positive. So I think the big figure that took us back is the foreign exchange, so, because of risk places. And I think principally, it's in Asia and Europe, so the $400-odd million, and as we saw, $13.4 billion, slightly higher than last year in Hong Kong dollar, so solid performance. So go to the next one, it's retail. Dominic is the Head Office Director, but also he's the Group Managing Director of Retail. So I'm going to rest a little bit. Dominic, please.

Kai Ming Lai: Okay. So on this slide, talk about the retail. In fact, it's a very healthy business. And in fact, I can show you a little bit later, it's quite resilient as well. So from the left-hand side of the slide, basically, the background of the retail, it is the world's largest international Health & Beauty retailer, operating in 25 markets under 12 retail brands. And we have, or the retail has a member base, loyalty member base of 138 million, which is one of the largest in the world, if not the largest, member with sales participation of 62%. That shows the loyalty of the members. On exclusive sales, which include our own brands and exclusive from A brand suppliers, in fact, contribute 34% of the total sales, that shows the differentiation factor of the retail business. When we come to the, next come to the store number. Total store number increased 5% and to 15,794. In fact, there's 818 net store additions, making us a very, the largest retail, Health & Beauty retail store portfolio. And then the increase is primarily in China and also in Asia. On EBITDA. EBITDA increased 4% on reported rates and 8% in local currencies. And it reached $16.9 billion, with about 48% coming from Europe and 52% coming from Asia. And on the right-hand side, talking about the EBITDA growth, as you can see from the waterfall chart, in fact, we see EBITDA growth across-the-board from all business divisions. If you notice, there's a big number, $571 million, increase under other retail. These include one-off gain, dilution gain, of $633 million from the merger of our supermarket business in China with Yonghui and Tencent. And also, there's adverse FX translation impact of $558 million. For the health business, which account for 92% of the retail division's EBITDA, we also see EBITDA growth in all regions

Frank Sixt: Yes. I think we've actually spoken about infrastructure. The year-on-year differences, as I say, relate to the fact that we no longer, we have effectively disposed of 90% of what was our interest in the co-owned infrastructure assets. Other than that, the CKI has announced its results. And the effect on us is as you would expect, and the guidance going forward is also as you would expect. About energy?

Kin Ning Fok: So can you [indiscernible]?

Frank Sixt: No? Energy? You want to do this? Someone has to do it.

Kin Ning Fok: Okay. Why don't you do last year?

Frank Sixt: Okay. Well, and I mentioned this at the beginning when we were looking at the big contributors on the negative side of the balance. Clearly, Husky was, its production was only 290,000 barrels a day. It suffered a net loss of C$1.37 billion, and attributable to us $3.139 billion, which was a very, very substantial year-on-year decrease. It was due to a number of factors, right, some self-inflicted, some market-related, some governmental as in, for example, the continuation of curtailment of production in Alberta, Husky Oil. But nevertheless, Husky, from an earnings point of view, took away our opportunity to report pretty solid earnings growth between 2018 and 2019. And that's a bit the long and the short of the story. Having said that, right, the impact from a cash point of view in 2019 on CKHH was actually positive because Husky paid more in dividends during 2019 than it had in 2018. And I think we'll be talking about the outlook for Husky later on in the presentation or now if you want to go.

Kin Ning Fok: Actually, when I just came down from the press conference and then the press all actually asked about what happened to Husky Oil now when oil price today is, I think, it's $25, $26 a barrel. Actually, we actually look at it and then the Husky's breakeven, not making money, not losing money is at $38.50. So you have oil price traded for the whole year at $38.50 and then we should breakeven. So for every dollar that trade below $38.50, says that every dollar, it has C$51 million effect on the performance of Husky Energy, okay? Now at $25 today, if this prevails for the whole year, then this C$51 million has to multiply by 13.5. That gives you almost $688 million, almost $700 million. So that, this is what we are looking at. But in addition, there will be some inventory adjustment. For example, as an average, now we have 20 million barrel of oil in our pipeline, in our tank and all those. And then this is at the end of February, and this is valued at $49. So let's say, if this is today, we have revalued that mark down the inventory, that will come down to after-tax figures of $416 million. So if you add this $416 million and $688 million, actually, if the $25 persists for the rest of this year, Husky would make $1.1 billion loss. So this is not a forecast. And this is a mathematical calculation. So, and our share is about C$440 million, which come up to about HKD2.3 billion. So that this is the effect of Husky on Hutchison. As far as the cash concern, maybe, Frank, you should comment about whether Husky needs support in cash and all those?

Frank Sixt: Yes. Okay. A couple of things. Husky's own financial profile is actually very solid. It's a solid investment-grade issuer. Everybody's ratings are being reviewed, right, as we speak. But I think there's a reasonable prospect that it will remain an investment-grade issuer. And among other things, that's because its liquidity is very strong. It has more than C$4.9 billion in liquidity, and that's comprised of C$1.4 billion in cash and C$3.5 billion in undrawn committed bank facilities that it can draw on. It has no debt maturing at all before 2022. And the only financial covenant under its undrawn committed facilities is to maintain debt-to-capital below 65%, and it is currently sitting at below 27%. I would also say that the cash flow impact on Husky, right, in the $25 oil's price for the entire remainder of this year on average, right, it would be in the order of C$1.0 billion of negative free cash flow. However, that's after 1.8 billion, right, of assumed capital spending. And obviously, to the extent that you're heading into a protracted period of $25 oil prices, there will, without doubt, the opportunities for further savings, both in CapEx and in OpEx in addition to what Husky announced, I think, during the course of last week. So overall, a very difficult time, right, for Husky, but certainly not one where we would envisage that there would be any call on CKHH in anyway. And indeed, the only exposure for CKHH, apart from the blow to earnings that Kin Ning described, would be that we would be at risk not to get a dividend. And I'm not saying that Husky is or isn't going to pay a dividend. I'm just saying what's at risk is C$200 million. So in cash terms, just over HKD1 billion. And that's the sum total, right, of the 2020 real cash exposure to CKHH in relation to Husky.

Kin Ning Fok: And also, I just want to add one more point is that Frank mentioned the 1 billion negative cash flow after the 1.8 billion CapEx in 2020, if oil prices stay at $25, actually, this morning, we have quite a long meeting with the management of Husky. Actually one of the exercise for them to go back home and to do the report back to the Board is to see that how much of that 1.8 billion can be further reduced. So okay. So that what we are trying to do is to have as little negative capital for Husky Oil, Husky Energy for 2020 as possible. So I think with this, we can go to telecommunications. So this year, it proves that our wisdom is correct. And total revenue, $87 billion and went up by 12% and 17% in local currency. Mobile customers stand at 40 million and ARPU at 11, okay? Everybody is doing 5G. If you look at the waterfall, where does the increase come from? And then it actually come from Italy. And last year, we only have 3 months. In June '18 and June '19, we have the whole year. But you can see later on, Italy business is quite okay, and the quality of the business is better and better. So you can see that UK came down as, at HKD429 million. And I think we will go, I think we will be discuss that later in the next page. And of course, foreign exchange play a major negative role in this, so reduced the growth of EBITDA from at 21% to 17%. You know that you note at the $1.4 billion negative from it. So we can go to Page 15. And UK is, actually has a very stagnant year, not growing the total margin. The base grows somewhat. But the margin doesn't grow. And you could see that the CAC increased just to maintain this EBITDA. And so, and is a very, an exciting year for UK. And this year, you saw that there is a change of management. And we have been doing the network upgrading, IT upgrade, restructuring and all those. But however, we have in 3 years now, the thing has not been successful, has not complete. So towards the end of 2019, we have replaced CDO with somebody that we think can do the job. And also at the beginning of this year, to, we have also come up with the concept to merge the 2 company. And so that Sales and Marketing Director of Ireland, who has done a very good job, will be in charge of both Ireland and UK. And at the same time, because of family reason, the CEO of UK division want to spend more time with the family and, which I fully understand. And as a result, Robert Finnegan, the CEO of Ireland, will also become the both CEO of UK and Ireland. So that the things happen, it just happened. And this turn out that it is kind of a good thing because that Ireland is a smaller country, doing quite well. But however, have a lot of capable management, and in order to have them to have growth, and it will be a good time to have this company, although it's not like in market consolidation, but it is a very near market consolidation, I can really see the synergy, there will be huge synergy in terms of management skill and also a lot of IT skill, and a lot of thinking we have together. I'm looking forward to a good year this year. And Italy, if you look at the Page 15, of course, if you look at the comparison between last year and this year, $1.3 billion and $2.1 billion on the EBITDA, and it is a hill increase, which is not quite fair because in 2018, it's only about 4, 3, 4 months of 100% Wind Tre is included. But then we also, if you see further, it's a 100% basis, so that actually it has a slight increase of 5% from $2 billion to $2.1 billion on EBITDA. And you can see that we are still operating a very, very competitive market with, as a result, gross margin dropped 3%. But then if you look at the business is run much better, the CAC is much lower from 146 million in 2018 to only 82 million, and then this is a very good operation. And of course, you saw a reduction of operating expense. And, so what we have gained in Italy is not only this figure. As I always say, Wind Tre is just like one either animal plus 1-legged man with the other is 1-legged woman. If these 2 combine together, actually, we have three eye and three legs and look better and run faster. So as a result of this, not only that we are able, of this consolidation, we are now, we are able to generate much more financial muscle, including reducing the interest expense from 2.75% to 1%, less than 1%, number one. And number two, we'll follow the support of the shareholder. We follow the support of shareholder. The company is able to build the best network, best network in Italy. If you look at during the corona crisis, our network was so good. And one of our competitor actually collapsed, and we are still okay. So that I think our network is today is the best network, and you can see that give us a lot of leverage going into the future. And then Sweden, Sweden is actually doing quite good. You saw a drop in revenue of 4% and margin. Actually, it's because in 2018, we are still taking the VAT as an income. And, but in this year, because we lost our court case, so that we don't do that anymore. So actually, the margin is actually higher than last year. So as a result, I think Sweden will be doing good business. So as Denmark. And Austria, the EBITDA is 1% less than last year. I think they better do well. I hope they listen to me here because I just put $90 million to allow them to buy the fixed line MVNO, so they promised me that I will see the reward this year. And Ireland, as you say, they have been, I told them that I don't like spring, the project spring they have. And then they recovered from that, and, so that they are doing very well. You saw it in the figure. And just one, the next page, just one final comment on telecom and the result. I think everybody is interested in 2020, what happened to the virus. I think as the Chairman has said in the press conference, and actually, what happened, what we have seen is that in some cases, the growth sales have reduced a little bit. But then the churn reduced a whole lot. And then the voice and the data usage is, we have seen data and usage growing a lot. As a result, every one of my business is on budget and more than budget actually in the first 2 months. So then I think going forward, I think the special attention is to the safety of the staff and also how to run the company remotely, which we are prepared, and also the more important is the network. And then in Italy, we are doing very well in anywhere. In, our network is quite good. And in Ireland, we saw not only, actually, in Ireland, growth actually went up. I still have to find out why as long as they announce the coronavirus. And then, of course, you see the same effect everywhere. Even in Hong Kong, you see the same effect. People talk more. People would stay at home, had nothing to do, watching shows, telecom communication is one division we don't need to really worry. Take us to Page 16. And Page 16, maybe, Frank, you want to cover this?

Frank Sixt: You've already actually covered this. This is really just talking about Wind Tre's performance, which was very, very rewarding. The underlying year-on-year was very good. And as we say, we've got the network consolidation completed as at the fourth quarter last year. And I don't think we would hesitate to say that we currently have the most robust and highest capacity network in Italy. And one of the fascinating things about it is because it's so new, it is the largest 5G handset-ready network in Italy using something called dynamic spectrum sharing on the 1800-megahertz frequency. So any 5G handset can handle 1800, right, will get 5G performance on the network right away. There'll be further 5G construction, right, which will be aimed at specific business opportunities and aimed at continuing to expand the overall network speeds and the overall network capacity. That's over the course of the next few years. But nobody who buys a 5G handset is going to be disappointed in Italy by comparison to using anybody else's network. Very briefly on this one. We've done pretty well what we said we would do so...

Kin Ning Fok: Actually, can I add some more on Page 16?

Frank Sixt: Sure.

Kin Ning Fok: Actually, it is a strategy of us because Tre is famous for target business. Actually, we actually, as a strategy, we do the target base. If you see that, our target customer grow from 42% to 45% in 2019, and this is a very, very, very significant because in Italy, you can see the market is mostly on target and this is our strategy. Because one of the specialty in Tre before we merge is that we are in, we are almost 90% target. And also, if you look at the network on the left-hand side, the green color, actually, we should bright green because let me tell you the effort to do that is tremendous. And you don't know how much hard work my team has done into to produce this network, which today is the best network in Italy. And of course, you look at the left-hand corner, the synergy, as we discover, we're still coming to fit the synergy, come up more and more. You can see the synergy increased by 2021. And that is really important with the competitiveness in the market. This synergy can give us a cushion against margins and which we are doing quite well. We have went through the stage when a network is not good. Actually, our network is only good in the last quarter of 2019. We have worked so hard and then even 90% complete by July, I still remember the presentation last time, and then by September, actually, we are good. And then we have been fine-tuning the network in Italy. So most successful. I hope that this will give us a foundation for further improvement. Okay. I turn safely to...

Frank Sixt: Okay. Well, very, very quickly. I mean we announced that we would we doing a structural separation of our, if you want to call it, passive telecommunications infrastructure assets or otherwise, known as towers that has preceded a pace. Essentially all of the local agreements are now in place, signed, subject to some closing conditions that sometimes have to do with regulatory matters, sometimes have to do with other matters. But basically, we are on track to have the full structural separation completed by June of this year. And we're comfortable enough now in what we're decanting into this new CKH Networks company, which is, of course, a wholly-owned setup initially as a wholly-owned subsidiary of CK Hutchison Group Telecoms. It is indeed 28,500 towers, and we believe that the reckoning of attributable EBITDA from those assets to those assets to CKH group networks is in the area of €300 million. So in terms of servicing value, this is a sector that actually has held up reasonably well in the equity market turmoil that we've been seeing. And so we think that we will have brought to the service value in the range of anywhere from €5 billion to €6 billion. And of course, having it completed essentially into July will mean that we will have fully fledged financials by the end of the year. And also means, effectively, we have all of the optionality in terms of how this is financed and how it behaves going forward. And we'll certainly be looking at all of our options. On to Hutchison Asia Telecom?

Kin Ning Fok: Okay. I think this small, little division become rather, grow in size now. And revenue, almost $9 billion, plus 9%. And customer base, 45 million. There's a reduction because of Indonesia, they are still working on consolidating the SIMs, and data usage is a lot, plus 46%. But if you look at the EBITDA, you grow quite a bit from $1 billion to $2 billion, $1.1 billion to $2.2 billion. Where does it come from? And mostly the $1 billion increase mostly come from Indonesia, okay? So let's go to Vietnam, also stabilized the business. So we have a new management there and they're doing quite active, so I hope to see continuous improvement over there. And Sri Lanka, I think they have come through the terrorist attack and then come through the problem in the, when you merge 2 companies together, there are some unexpected event. I think you'll see good stuff coming out of Sri Lanka, all right? And then of course, the major contributor is basically Indonesia. Why are they so good? I think it's all coming from margin growth, which is like they're happy. If you look at Page 19, actually, the $367 million on service revenue and $609 million on CACs, looks like that we have saved a lot of CAC actually, it's how they do business before they pay a lot of cash to get revenue. Now the final such a expense is so difficult to control. They do it differently. And then they just sell the business net, and then it's up to the dealers to make a profit for themselves on the SIM card that we gave them. So as a result, the ARPU go, went up by 31%, so which is quite a lot from $2 to $3. So that it is good. And that as a result, you see the EBITDA increase. All right?

Frank Sixt: Okay. We had flagged these 3 areas as the principal strategic challenges that we thought we were going to be looking at in 2019. So it's worth spending just a brief moment on where we ended up. And first, obviously, was currency volatility and risks associated with Brexit. A number of the risks associated with Brexit have moved off of the front stage as a result of the certainty that has been achieved at least in terms of Britain leaving the EU and not electing a government that would nationalize a significant portion of our assets. But what we give to people, as I said before, was the impact on currencies, with the main ones, sterling down 5%, euro down 4%, what that translated into was a $4 billion adverse movement on the EBITDA line, $1.4 billion on the earnings line and the net profit after tax line. Right? And I guess it's worth leaving that one on the page because that is going to be a challenge going forward. Sterling has dropped. The last time I looked, about 12% in the last 10 days. If that remains throughout the rest of the year, the impact on the EBITDA level would be $2.3 billion negative, and on the earnings level would be $860 million negative. However, our net debt would improve nominally by HKD1.5 billion and net debt to net total capital would move just a snick up because of the impact on overall shareholders' funds, that would move up by less than 0.4%. We were worried, obviously, about the impact of social unrest and things going on in Hong Kong. I'll leave it for you to read the bottom left summary. But at the end of the day, it was not wonderful for Hong Kong, but for CKHH, it was not particularly impactful at all. And I think we stressed also that the exposure of the group to the actual ebbs and flows of the trade war last year between China and the U.S., which is the lower right-hand box, would not be a huge sensitivity for us. And indeed, the report on ports shows that this little box just shows you that at the end of the day, it was a bit of a tempest in a teapot, right, from the point of view of impacting CKHH's cash flow or earnings. We would be remiss if we didn't do the same thing going forward and look at what our new strategic concerns in 2020, starting obviously with COVID-19. Kin Ning?

Kin Ning Fok: So why don't you cover the financial market turmoil first?

Frank Sixt: Financial market turmoil. Well, the main exposure is the currency exposure. And as I said, right now, it's sterling. Euro is not particularly up or down, the last time I looked, anyways, relative to its last 6 months range. So I don't see anything clear at this hour. Having said that, though, there are so many unknowns looking forward. As the impact of COVID moves into European economies and the response is unknown, we have to take a prudential approach. We are taking a prudential approach. We're prioritizing our financial strength over investment and growth. We have essentially put everybody in a mode of scrutinizing all uses of cash, including, of course, investment in capital spending. So that only those which are very near-term returns or which are necessary to protect our people or which are necessary to protect the viability of our businesses, right, are going forward. Everything has to go through the filter of the head office and the co-MDs before spending will happen. So our CapEx outlook, needless to say, it looks like it will be significantly lower than last year, whereas in a normalized environment, it might have been expected to be a little bit higher than last year. Just a reminder that we, our cash and cash equivalents cover all of our debt maturities through pretty well to the end of 2022, actually.

Kin Ning Fok: So with the financial background covered, I would like to talk about the coronavirus, what is the effect on us. Actually, it goes without saying, the safety of our colleagues is the most important. Actually, we have, in every country, we have strict procedure in place and what to do and how to, if anything happens in a shop, what you do? And then, for example, we've got the clean the shop and then, the affect the employee, they will go into isolation. And then we also look at, we start to shop, get started from the surrounding shops to come over there and plus there's some help from outside, so that, so it's quite detailed in the procedure how to handle it. So about how does it affect our operation, I think Dominic has talked about in the Mainland. And then actually, it affect us, it affected us. You just imagine, we are going without 1 months operation, 90% of our shops are closed. And the 60% of our shops is closed and 90% of our sales gone, so everybody stay home. But actually, during those time, we managed to, our staff to manage to keep the customer and engage by doing a lot of retailer, sending them styles to how to do make up and how to do this, how to make the skin better because they are quite bored in China staying at the home.

Frank Sixt: Quite bored.

Kin Ning Fok: Quite bored. And, so that you see the result that when the shop starts open, although only 50% footfall, and then our sales reduction and footfall, our sales actually only have a 25% reduction. So that you can see and I hope that this, we are emphasizing on this we start post coronavirus in China. And hopefully, we can gain back that month, that 1.5 months, I would say, February and January is not easy. And then in Europe, actually, we see the other way around. And in terms of Watson, and you see that in our main market in Europe is UK, Germany, Netherlands and Poland. And none of this market is being closed down yet. And then actually, we are a drug store, and we are priority and people in need of us. So that actually, we have seen double-digit growth sales in the first 3 months, in the last few weeks, actually.

Kai Ming Lai: In all these countries affected by the virus, usually even if they have a lockdown scenario, would be groceries and drugstores will have to be open. So actually, it's our duty to open.

Kin Ning Fok: So that in that way, I, of course, the coronavirus is getting more and more evolved in these places. But it looks like that in these 4 important market and, a, the shop keep open; and b, the sales in UK is growing up by double digit, which I haven't seen for a long time. They are high single-digit last year, but now it's double digit. Anything you want to add?

Kai Ming Lai: Well, just to supplement. Of course, you mentioned China. China, the recovery is on a daily basis. So that's being taken care of. What you mentioned about Europe, in fact, although we are sympathetic and sad about this trend in Europe, but people may think, oh, that has a great adverse impact on our retail business. But the fact that our main business in, say, UK, Netherlands, Germany, they are classified as essential business by the government. In fact, we've got government confirmation in The Netherlands that even if they have a mass store closure, our stores has to stay open. The government ask us to stay open because we sell a lot of OTC drugs, vitamins. So based on this, let me, Kin Ning just said the double digit. Let me give you some concrete numbers. Say, for the first 2 weeks in March, our Netherlands, comp growth, 28% increase. In Poland, 23%. Germany, 20%. This is comp growth, right? So actual growth is maybe even be higher. UK for Superdrug 14%. So all these are big numbers, that, I must say, will help the bottom line in these difficult times when the business is under pressure elsewhere.

Kin Ning Fok: Just one more. I'm just talking about health and beauty now. So that the Merano is classified in a much smaller business now and classified under CKH office, okay? So the biggest one is France. You will say that France total knockdown. They are not specialty, all the shops need to be closed. But however, what is happening, that France is a very fair government and then they actually, they will pay 70% of our staff costs. And also, we have stopped paying rent for the next quarter. And then what we expect, we will continue to renegotiate all the rents because the shops are not open, why should we pay? So that actually, if you look at the profile of our business. And then we are not so profitable until the end of the year. So maybe whether it is good or bad, it's not totally bad, okay? And if you go to, I think I talked a lot about telecommunication business. The most important for them is the employees' safety and also the churn is low and the network. The most important is the network. The network is just continuous open and then our network is really resilient. And hopefully, this year, we will, the telecommunication side should not disappoint us. And then infrastructure, you have to pay your bill. You have to pay your bill. So that I think infrastructure is kind of this kind of thing proof so that we are happy that we are, we have the infrastructure business. And then ports, so I report at the ports for the first, until March 12, I just go to my phone, March 12, it dropped 7%. Yes. March 12, it drops, it's 7%. And then, actually, this is a very, as I said, this business is a working horse. Whatever we lost and then because of the inventory, it is not inventory that high class. It's a synergy everybody use. So that I would, today, if you ask me for my opinion, I would say that this year will be more or less the same as 2019 at the end of the year because the [indiscernible] start to ship and maybe if this is lower, a single digit lower, so I won't go further than that. So, but I'm not worried at all about this business because all the ports we are in, in the right country, in the right place and it's good to have. Okay. So we cut further.

Frank Sixt: So lastly, we've added 3 slides on ESG because we've realized how deeply important this topic is to our customers in all of our customer-facing businesses, and it's very important and of increasing importance, right, in terms of capital markets. So I'll only focus a little bit on the first slide, so that you are aware that we are taking very significant steps, right, as a group, right, so that our divisions take stock of and get advice from external advisers on all of the ESG strategies, legal frameworks and so on. So that we come up with an approach, which is coherent, which is fact-based, which is science-based, sector and country specific, which will enable us to engage in a better process offsetting targets and goals in this area, and we are using our existing audit and compliance mechanism, which enables us to make sure that we comply with antibribery and corruption and that we comply with Antiforeign corrupt practices act concerns and that we comply with tax integrity and our tax policies that we have, et cetera. We'll be using the same self-assessment system backed up by our audit system to look at the targets and the achievements and the goals of our divisions and the business units within them. And we'll we doing that on a semiannual basis. And needless to say, this will lead to an ESG report, which is significantly more comprehensive and detailed than you've seen from us in the past. Some of the objectives are described in the next 2 slides, as are some of the divisional initiatives. One of the things that is interesting about this is, I think the world simply didn't know, right, what we were already doing. And clearly, we're going to do a much better job of making sure that that's well understood. But we're also going to be raising goal posts pretty significantly as we go through the next couple of years because it's important to our customers and it's important to financial markets. So that's the end of the presentation. Takes us to Q&A.

Kin Ning Fok: Yes. There's a first question.

A - Hans Leung: Thank you very much. We will now begin the Q&A session. [Operator Instructions]. The first question is from Karl Choi of BofA Securities. Actually, there are 3 parts of his question. The first one is, could you discuss how COVID-19 has impacted your various business so far?

Kin Ning Fok: I thought that, I think we...

Frank Sixt: Already done that. Yes.

Kin Ning Fok: We have done that already.

Hans Leung: Okay. The second part is will CKH [indiscernible] at least a stable dividend if earnings come under pressure this year?

Unidentified Company Representative : I think our dividend policy will be in line with our midterm forecasts for our profit. I don't expect a lot of swings unless very unpredictable things happen. But right now, we're steady.

Frank Sixt: And the third question.

Hans Leung: Yes. The first part is what is the latest thinking on potentially separating, separately listing the tower business?

Frank Sixt: I think as I said, complete separation gives us all of the optionality. Listing is, of course, an option, maybe not the preferred option at this point. And there's also potential for M&A-driven activity that could create value for us. So we will see. We're in a position to explore that optionality now that we've created the tower co.

Hans Leung: Thank you. The next question is from Cusson Leung of JP Morgan. With the net debt-to-capital ratio down to below 25%, is this the right time we can expect dividend to be moving in line with earnings?

Unidentified Company Representative : We're always moving dividends in line with earnings. That's the general thinking.

Hans Leung: Thank you. The third question is from Praveen of Morgan Stanley. Is there any merit in deciding to privatize Husky Energy at this time? Can you also comment on dividend outlook for Husky?

Unidentified Company Representative : I think all that should be fired if we talk about a privatization scheme on a webcast. No, we cannot discuss that. Sorry, the second part of the question?

Hans Leung: That's the only one. The next question is from Simon Cheung of Goldman Sachs. For the telco business, other than merging the UK and Ireland operations, where do you see other potential opportunities to create more synergy benefits? And what, also please give us an update on the e-market consolidation accounts.

Kin Ning Fok: Actually, it is our prime strategy. In-market consolidation is what we want to do. So that it's no secret. We are working very hard in both Denmark and Sweden. So that we hope we can do something there. And also, we are working very hard in Indonesia. But we have been working very hard for almost two years already, still working hard, but no result yet. But it tests our strategy to merge business to become much solid because the result of consolidation in market, is the most accretive one for our shareholders. We have witnessed it both in Australia, in Austria, in Ireland and also in Ireland and in Italy. Now Australia, the court just proved us to merge with the four player and the fixed line player, so that we are very excited about that. We will not stop it there.

Hans Leung: Thank you. The last part of Simon question is, how has the virus outbreak affected your expansion plans? For example, will it change the store opening target for A.S. Watson? And what is the CapEx guidance this year?

Kin Ning Fok: So CapEx, if we can open a store, we can open store. Of course, it's difficult to determine the footfall nowadays. But I don't think we will stop. But then we have today, the environment in everywhere is different, so we have to see it. But the general strategy for Watson is still to expand.

Frank Sixt: So our CapEx last year was around HKD28 billion, and we probably would have expected that to go up a snick by $1 billion or $2 billion, during the course of this year. I think with the capital disciplines that we've put in place and the deferral, right, of essentially anything but essential or immediately returning capital spending that you'll see a significant reduction from last year's level. It's impossible at this point to say how far that reduction could go.

Hans Leung: And finally, Simon would like to share your thoughts on share buyback.

Unidentified Company Representative: We cannot talk about share buybacks today. Sorry. We cannot talk about share buyback today.

Hans Leung: Okay. The next question is from Praveen of Morgan Stanley.

Frank Sixt: No. We already said we can't comment on that.

Hans Leung: He's referring to Page 15 of the presentation. He would like to ask why the Italian operating free cash flow declined from $1.040 billion to $910 million? He would also like to know the outlook for the Italian business cash flow in 2020.

Frank Sixt: Well, certainly, the outlook for 2020 on cash flow is really very positive. And so far, cash flow is, as our earnings significantly ahead of budget, right, for the first 2 months of this year. Again, nobody has a crystal ball, but this business seems to perform well even when the office staff and indeed, in some cases, some of the shop staff are working from home are not working in the shops. It is, we live in a digital age, which is what we're doing today, and what supports that is telecoms businesses, and we have one of the best in Italy. So I think the outlook is positive.

Kin Ning Fok: I think 2019 is a year that we have to finish the network, and this is why you see CapEx went up.

Hans Leung: So the next question is from Matt. Can you please address the share price weakness and the possibility of utilizing our strong balance sheet to increase the shareholders' return?

Unidentified Company Representative : Virus times. It's difficult look at share prices on a day-to-day basis, all I can say is that Hutch is good value, and we're going to use, evaluate the opportunities. But right now, we cannot disclose our plans.

Kin Ning Fok: Actually, we are working very hard on the cash flow and the possibility of the company. So if you see that in this year, there are many things coming. But again, we are able to produce the kind of earning that we produce.

Unidentified Company Representative : I think this year, the Hutch aim is to show that even in a shock like the virus, a lot of our business is still very resilient and that we can deliver the cash flow in such hard times. So that will show the quality of our earnings.

Hans Leung: Thank you. The next question is from David of Insights. Can you comment on M&A in a wider sense? Beyond telecom? Where do you see the most likely opportunities?

Unidentified Company Representative : I think this virus will open up quite a number of new opportunities. And I think there may be opportunities or different members of the group, the CK group to capitalize on such opportunities. Some business will be CKHH. Some business will be CKA. Some business will be CKI. But in our, if you look at our group's tradition, whenever there are hard times, right after the hard times, generally, we fare better than a lot of our counterparts. When everything is rosy, we are not necessarily the operator. When there are difficulties, our colleagues and our team seems to have a better competitive advantage. It's in our blood. This is very CK DNA.

Unidentified Company Representative : One day, Frank, I'd like show you the photo when we sell flats and [indiscernible] and all of us were covered and everything. And in the whole team was covered in protective clothing and selling flats. I will hand the trenches together with the team.

Hans Leung: Due to the time constraint, this will be the last question. Our IR department will answer your unanswered questions within the next few days. The last question is from Angus of UBS. Will the group take a more active look at acquisitions and consolidation this year? Different asset values have already collected, if so, which business segment do you see the most opportunities?

Unidentified Company Representative: We've already answered. We'll be opportunistic and look at new projects. And this is a strength of the CK group in general.

Hans Leung: Okay. So thank you very much. Ladies and gentlemen, this concludes our presentation today.

Unidentified Company Representative: Thank you, and good health to everyone. Thank you.