Earnings Transcript for CKHUY - Q2 Fiscal Year 2020

Operator: Ladies and gentlemen, welcome to the CK Hutchison's 2020 Interim Results Presentation. Today, our speakers are Mr. Victor Li, our Chairman and Group Co Managing Director; Mr. Canning Fok, Group Co Managing Director; Mr. Frank Sixt, Group Finance Director and Deputy Managing Director; Mr. Dominic Lai, Deputy Managing Director and Group Managing Director of A.S. Watson; and Malina Ngai, CEO of Asia and Europe and Group COO of A.S. Watson. [Operator Instructions] Before I hand over to Canning, please also pay attention to our disclaimer page, which you can find on Page 2 of the presentation. We can start now.

Canning Fok: Okay. Good afternoon or good morning, wherever you are. And so this is the time to announce our half year result. This first half in 2020 has been a very – a very exciting year in a sense because we witnessed the huge drop and fluctuations in the oil price. And then we also witnessed the COVID-19 that affect initially Hong Kong and Asia – China and Hong Kong, and Asia and then the rest of the world. And then the group has been working hard on this year and then we deliberate the following results. If you turn to Page 4 of the presentation, and you saw that revenue $189.9 billion down by 12% in Hong Kong currency but because we operate in so different countries. Operationally, we could take away the foreign exchange and that is down by 9% in local currency. And EBITDA went down to $47 billion, went down 13% in reported currency in Hong Kong dollar, 10% reduction in local currency and EBIT, $26.7 billion, down 22%, but if you take away foreign exchange it's 19%. And net earnings $13.2 billion, down 28% and take away foreign exchange it’s 25% in local currency. So earnings per share $3.37 and compared to the same period last year, down 29%. And as a result, we also have a reduction in dividend per share payout by 29%, it is HK$0.614. And although we witnessed a reduction in earning, the cash flow of the company, we have been putting very stringent control on debt payments and working capital as a result compared to last year. First half, we are 25.1%, net debt ratio, which is 1.1% better than the same period last year. So I would like to take you to Page 5, which is the – about the EBITDA of the company, $47 billion, minus 13%, and if you take away the currency fluctuation is 10%. So you will notice that if you look at the way it happens, 55% of that is in Europe, 8% in China and 4% in Hong Kong, and it came up this year because the Hong Kong operation, Hong Kong Telecom and of course PARKnSHOP investment will be affected by the COVID-19 in Hong Kong. And Asia is 19%. You will see a big figure of 21%, that is from what you say is the finance division that's basically reflected the earning in – that we recorded in Asia, which is used to – in Australia, which is used to offset the losses as to which you will see in the in the stores in China in the right side. So if you look at the composition of the EBITDA, the biggest one is 34% come from – come from the telecom division, then 29% come from infrastructure division, of course, the other two contributors to a certain extent is affected by COVID-19 is 10% for the retail and 12% for the quarter. So if you go to right side of the screen, and you saw a track. It's a waterfall chart from last year's EBITDA to this year's EBITDA and this year, unfortunately, because it is more affected by the oil company and also by COVID-19. So if you look at the Port business, compared to last year, it is $688 million less and the detail, I'll explain that in the Port division which is about 11% less than last year same period. And I – and then if you look at the Retail, we took off two items. One is the one-time – onetime RAN profit from last year is $633 million and the other is the is the regular income reduced by $2.766 billion, which is about 31%, which was a 31% reduction from the same period last year. And now if you go to Infrastructure, this is more or less the same Infrastructure wasn't really affected by the COVID-19 and by the rest of the world, so that it is – the EBITDA-wise is more or less the same. And then, of course, Husky Oil, which is affected, very – and for EBITDA-wise, the $4.4 billion for ordinary $3.1 billion extraordinary. And of course, as I said earlier, we mix – because of the merger, in Australia, VHA, our 50% interest with the TPG, the fixed line and we got a huge income which is $8.7 billion. Actually, the total income is about $10 billion but we got 75%, some minority interest and so to take up some provision we put against it, so that we record $8.7 billion, which is very crucial for us because to offset the Husky loss. And then the Telephone division in the next two column is doing quite well, except for UK, which I will explain when it comes to the relevant section. All the other countries, Italy – and Italy, Denmark, Sweden, Austria and Ireland are also showing an improvement in EBITDA and also in gross margin, so that our business are doing well. But UK has its own problem which we have talked about in the past it, and then I will elaborate that in the latter section. So that it shop about, you could take away last year, we have extraordinary action in Italy. In addition, we don't have to. This is – that is HK$1 billion. And if you take that away, actually, we are we are about 1% of last year in the EBITDA. And then if you go to the Asia it shows an increase in EBITDA and because basically come from Vietnam doing much better than last year. And then quite a reduction in F&I, and I will let Frank to discuss that, okay? So the – of course, foreign exchange took about $1.8 billion away from total this account for the $55.9 billion from last year to $46.9 million this year, okay? So I would like Frank – I said that the cash flow is better and I would like Frank to talk about it in option whether it's the location, about it or other issues. Frank?

Frank Sixt: Thank you, Canning. So on Slide 6, this is the view of the decline in operating free cash flow, but that doesn't equate to the full free cash flow picture, which we'll get to in a couple of slides. And I would point out that the first half of 2019 had about HK$1.7 billion of onetime occurring items, and it's one of which Canning just mentioned in relation to Wind Tre in Italy. I guess, sticking to the left-hand side here, what you're looking at, of course, is the EBITDA contribution from our subsidiaries, the dividends that we received from our associates netting off against our CapEx and our investment. And again there, it's a little bit misleading to think that the CapEx has gone up because the CapEx account includes some, in effect, cash neutral, noncash CapEx, which is driven by our telecom division, when we swap RAN assets. Quite often, right, we do it on a cash-neutral basis with the provider. So essentially, it means that we are invoiced for, and we show as CapEx, the cost of the new RAN, but our old RAN that's being swapped out is being purchased. So we have a proceeds account, but in the cash flow statement, that reflects that. So in reality, if you strip that out, CapEx was a little bit flat. So all in all, that takes you to $19.1 billion. And that's showed in the bars, right in the middle. And then, of course, on the right-hand side, the split as to where does it come from and not surprisingly, most of the operating cash flow comes out of the telecoms business less than normal, it comes out of the retail business. And I think the rest of the slide speaks for itself. So if I can take you to Slide 7, this is the same numbers split up by division. And to cut very quickly to the chase, you can see that basically, everyone is living within their means, right, except for the net investment going into HAT, which is the bar that you see under HAT, which is higher, obviously, than the EBITDA bar. And that primarily reflects network investment in Indonesia. The other thing that I would say here is that interestingly, if you look at the depreciation on a divisional basis, everybody is living within an envelope of capital spending, which is less than depreciation, and that's been a very rigid discipline that we've imposed. And again, with one exception, which is HAT because of the amount that has been spent on accelerated network rollout in Indonesia this year. Now the story from an operating cash flow point of view is not complete, in terms of free cash flow. And for that, you go to Slide 8, and it gets very interesting because we had some very, very significant savings. So if you go down the right, our operating free cash flow, you then deduct, right, interest and taxes paid, well, we paid close to $2 billion less in interest and just over $1 billion less in tax this year than we did in the first half of 2019, which is really quite a good news. We also had a superb working capital improvement, right, which is shown in the next line. That $4.2 million of increase in working capital compared to a first half increase last year, right, which was more than $8 billion more. So really a very, very good job of managing working capital on a very timely basis, particularly by our retail group, so as to offset, right, in cash flow terms, right, some of the adverse movements that you see on the bottom line on the attributable earnings line. So that took us to a first half free cash flow before our dividend of $8.9 billion, and that was fully 51% better than the free cash flow performance in the first half of last year. So we're very pleased, needless to say, with that outcome. Because it essentially meant that our net debt relative to the first half. And if we're going to take you to Slide 9. You can see this relative to the first half of last year, actually declined by 1.1%, whereas it did go up like – from the year end number, which was 24.8%, we went up 25.1%, but that was only because of the weight of the dividends that we paid in the first half, remember that we always pay the final dividend in – for the previous year in the first half. That accounts for 1.1% in and of itself of the increase in net debt from the end of the year. So long story short, and those dividends, by the way, totaled $8.9 billion paid to CK Hutchison shareholders and another $3.4 billion to other minority interests around the group for a total of $12.3 billion of dividends paid. So I think on balance, the financial profile held up much better than might be implied just from looking at the earnings profile, and that's – in some sense, it's not that surprising because although the Husky results hit us very hard from an earnings point of view, in reality, they don't hit us very hard from a cash flow point of view because we begin to see that in the lower dividend rate, but you'll see that more in the second half than we did in the first half. So I think with that, I'll stop there, and I'll turn it back to Canning, who'll talk about our Ports division.

Canning Fok: Well, Port divisions now and yes – no, I don't want to say it's a tough, but it is affected. It is always affected by the route between U.S. and China. So that this year, it's more and more – it is much more affected by COVID-19 on top of that as a result. And then you saw that the TEU that they handled is 8% less. And then the EBITDA is now 11% less in operation. Today, foreign currency is 14% less. And again, the distribution is for trials in China, is 19% and then 22% percent in Asia and – then a 22% from Europe and then 50% from Asia. So that the business of is still a workhorse style of business. And if you go is a factor this year because of COVID-19 because there was closure in China and is affecting the goods going out. And then, of course, a lockdown in Europe is affecting receiving goods. So then we see that from the northern chart. The Trust doesn't affect that much to us, is on is 7%, $43 million. And it's surprisingly China or an outside of the Trust is also quite – perform better than I thought, it is down only a $42 million. And the platform comes from Europe basically is UK and Netherlands because in the first quarter, both UK and Italy suffered from storms and that affected our operation. And then after March onward, and then especially UK had a major lockdown and then it affected so that the EBITDA is 18% affected $276 million. And then of course, the lockdown also affected Asia and Australia, $223 million, but it's only about 7% less than last year. So then I would say that the cost control is quite good because a lot of the costs are fixed costs in the port. But the group actually react very fast to try to reduce fixed costs. So the foreign exchange is $223 million take us down from our $6.4 billion to $5.5 billion. So and then on the right-hand side on the bottom right-hand corner, we show you how does the throughput look like year-on-year. If you look at the Trust, I think, in our annual report, we say that just for June alone, it makes more – much more money than the whole year – whole first half. And so then we reflect the lockdown situation in China and the pickup and also reflected because a lot trade route of Europe in America so that Trust, June is a good result and also in July, we continue to show the same good result. And if you look at the Mainland China, again, it doesn't affect it as much. This is the port outside of Yantian, China, port outside Yantian. So it's more or less a single-digit set and then in June again, it's so positive figure so that we are looking forward to a good second half performance and July already is also very promising. And Europe, up to June is still hesitating. But however, is still a solid business. It's down 17% in June. But in July, it's only down 4%. So that – I hope that there will be a lot of catch-up, as I've said before, for well needed goods then when – if the goods are not flowing, not flowing in certain months, it will catch up. But however, this time around, a little different because everybody stay home. Maybe the demand will be less, but that we will receive by in July, it's when compared to last year, it's 0.4%. In June, it's about 17%. You can see that and Asia Fund, again, in fact that were as knockdown. And then it is better in June and also in July is slightly better. So the Port division all in all is a solid division and then produce good cash flow and of course, in the first half, we are very stringent on CapEx as well. So we become a cash flow generator also. So that with this, and I think we should go to the Retail Division and Dominic Lai, not only Executive Director of CKH, but also there is in charge of the retail business. So instead of Ka-shing Li reporting, I always would like to ask him to – despite his modesty here.

Dominic Lai: Okay. Well, thank you, Canning. But I'm sure all of you are interested to know what happened to the Retail business under the COVID-19. So let me tell you, the Retail business has been severely impacted by the COVID-19 due to the country and city lockdowns, movement control orders and social distance rules. However, despite this impact, the Retail division remains as the world's largest international Health and Beauty retailer operating in 25 markets with a strong loyalty member base of 137 million and member sales participation of over 64%. The total sales for the first half is recorded at $73.6 billion, 11% down from last year in Hong Kong dollars or single-digit 9% down in local currency. For exclusive sales, which include our own brands and exclusive, remained stable at 34% of total sales. Now let's go to the store numbers. On store number, 623 net new stores have been added year-on-year, bringing the total store number to 15,836 at the end of June. Over 70% new stores are opened in China and Asia. And also, the payback period of these new stores remains healthy at less than 14 months. And on the store numbers, half of it in Europe and then also half is Asia. Now let's go to EBITDA. On EBITDA, which is presented on a pre-IFRS 16 basis, dropped 43% to $4.63 billion against a revenue drop of 11% as a result of the pandemic. But if we exclude the one-off gain of about $633 million in the first half of 2019, the decrease would have been 37%, not a small drop. The EBITDA split is 57% in Asia and 43% in Europe. So if you move to the right in the EBITDA growth chart, shows decreases in all divisions with the exception of other Retail, which is shown in green, which represent a PARKnSHOP supermarket business in Hong Kong, which benefits from more people eating at home. Let me go through it one by one. The big drop of $1.44 billion is in Health and Beauty China, which went through a really tough time in February, when more than 2,500 stores will temporarily close with a corresponding 78% of inventory sales. The better news is that all stores have been opened since April with a robust recovery, which I'm going to show you in a minute. For Health and Beauty Asia, about two-thirds of the EBITDA decline of $574 million came from Hong Kong, where the border closure reduced the tourist traffic by over 90%. The EBITDA declines in the rest of Asia are relatively smaller. If we move to Western Europe, the EBITDA drop is HK$930 million. Over 68% of this drop is in UK because while our supermarket business, our Savers stores are allowed to open or remain open, there is significant drop in footfall due to the movement control orders and social distancing has reduced the sales and profit significantly. The drops in other countries in Western Europe are relatively smaller. For Health and Beauty Eastern Europe, the predominant contributor to the EBITDA decline of $219 million is from Rossmann, Poland, but the good news is that the business has rebounded strongly in July. For other Retail, the $401 million EBITDA increase came from back and shop in Hong Kong, as aforementioned. And the $633 million one-off gain in 2019 relates to the merger of our PARKnSHOP China business with Yonghui last year. So it's a one-off gain. So net-net, together with an adverse impact of $157 million the EBITDA decreased from $8.2 billion in the first half of 2019 to $4.63 billion this year, a 43% drop, as just mentioned. Then we come down to look at the EBITDA margin. For the EBITDA margin of the Health and Beauty business, which accounts for 83% of the Retail division's total EBITDA because of the significant drop in EBITDA dollar, the EBITDA margin percentage also decreased correspondingly. For Health and Beauty China, the EBITDA margin decreased from 19% to 11%, for Asia from 10% to 7%, for Western Europe from 7% to 4% and for Eastern Europe from 12% to 10%. So as a result, the overall Health and Beauty EBITDA margin has dropped from 10% to 7% in the first half. So it's a very challenging profile. So let's go to Slide 12. While this slide shows the sales recovery journey of the various divisions. The top chart shows the sales evolution with the red line, solid red line representing the weekly sales progress over the six-month period. And the total red line needed represent the store traffic evolution. Whereas the bottom chart are just to show you the magnitude of the temporary store closures. So we start with Health and Beauty China on the left. As you can see, the store traffic dropped very sharply in February by 87% with a corresponding monthly sales drop of 78%. So it's quite serious. Although the situation improved steadily through June with the store traffic recovered to negative 26%, and the monthly sales drop also narrowed to negative 16% and in July, it's even getting better to around, say, 11%. So overall, for the six-month period, total sales in Health and Beauty China dropped 30%. But on the positive note, online sales in China during this period increased significantly by over 75%. And then if you look at the bottom chart for temporary store closures, it reached its peak in February with over 2,500 store closures, representing 64% of the China network. So China was affected very much by the COVID, but recovering well. For Health and Beauty Asia, the drop in sales during the pandemic less severe than in China with fewer temporary store closures. Total year-on-year sales decrease for the first half is 18% as shown in the chart. As you can see from the sales chart, monthly sales in April was negative 40% versus last year by improving to negative 20% in June. In fact, we take away Hong Kong, the sales drop in June would only be 12%, and we see continuous improvement in this division in July and August. And for some business, major business recovering well. To illustrate for the month of June, Malaysia sales, which is a big division, dropped only 8% versus June of last year. Thailand sales only dropped 7% and Taiwan sales only dropped 5% versus June of year. Philippines is taking a bit longer to recover as populated areas, such as Metro Manila are still under quarantine currently. Hong Kong remains quite challenging, as I mentioned before, but Hong Kong represents only 2% of the Retail division's revenue in the first half so – and then if you look at the temporary store closure – temporary store closure for Health and Beauty Asia, you can see that the peak occurred in April when 750 stores were closed mainly in Turkey and the Philippines. So also worth mentioning here is that the online sales in Health and Beauty Asia during this period has increased significantly by over 110% year-on-year. Now let's continue on Page 13 to see Western Europe and Eastern Europe. For Western and Eastern Europe, the recovery picture looks even better with drop in total sales of only 9% year-on-year for both divisions and then the decrease even smaller and local currencies. First, for Western Europe, on the left, the monthly sales drop peaked in April at negative 27% with over 1,100 stores closed, mainly in UK and Belgium. It has subsequently recovered from negative 27% to only 5% in June. That's the sales drop and sales recovery. And within this, Benelux is leading the recovery, with sales growth of positive 5% in June. So the negative overall negative 5%. In fact, we see a positive sales growth in Benelux in June. And Germany has also proven to be very resilient with sales growth of positive 4% and EBITDA growth of positive 10%, 12% during the six-month period as all stores remain open. So what drags down the sales in Western Europe is UK with the lockdown measures, which started in March had a very significant impact on footfall. Nevertheless, the silver lining is that we have seen some improvements towards the end of June following some easing of the lockdowns. And for Eastern Europe, on the right, which is predominantly represented by Rossmann, Poland, the drop in monthly sales, which is peak in April with a 27% decrease, but has since recovered strongly to only negative 4% in June, and online sales has increased 126% in this division for the period. So all in all, total sales in Western and Eastern Europe only dropped 9% year-on-year in the Hong Kong dollars for the first six months. So in summary, after you saw all these numbers, the Retail division has gone through a very challenging period with significant drop in sales and profit, but the saving grace is that the division has remained profitable even in the darkest month of April with peak store closure impact. And now practically, all stores are reopened with a strong recovery continuing. Moreover, during this period, the group's e-commerce capabilities have been tested and proven, and online sales has increased significantly during the period supporting the o plus o, the off-line plus online, omni-channel strategy of the division. And also, as for your reference, the June month EBIT, the June month EBIT of the Retail division has rebounded strongly to HK$1 billion, reflecting the recovery picture that I've just painted to you. And then we have just finished the July month and closing two days ago, July, and with EBIT reported at $1.1 billion, which is better than the original budget set last year, which did anticipate is COVID-19 and represent an EBIT growth of positive 14% over July month of last year. So just to run off the story on Retail, a very tough first half, but we expect a robust recovery journey to continue in the second half of the year. So on this, I'll pass back to Frank to talk about our Infrastructure business.

Frank Sixt: Thank you, Dominic. CKI, of course, is the principal component of our Infrastructure interests, and it reported its results yesterday. Again, the reported decline in net profit after tax of 52% is more than half attributable to a deferred tax liability adjustment in the UK, CKI had been on the basis of the government's announced glide path to take income tax rates down to 17% by 2023 if I remember right, had been booking deferred tax liabilities, obviously, using that rate. But the government announced earlier on in this half, that it would stabilize the rate at 19% and not follow the glide path. So that's simply occasioned, right, a deferred tax write-down for CKI, as I say, is more than half, right, of the year-on-year NPAT. And I think they will have discussed in their results announcement, pretty well, everything else that's on this slide and more so. Again, there have been and probably will continue to be headwinds in terms of regulatory resets, the most notable of which I think was Northumbrian Water, which is a heavy reset. To some extent, that is to be expected and anticipated in an environment where governments are putting so much money out to consumers. They want to find ways to support consumers at every level, and that suggests that the path in terms of rate resets will probably continue to be difficult. Having said that, again, from a cash point of view, as you can see down on the lower right-hand side and a debt point of view, net of liquidity, the company is really very stable and will continue to be an important contributor for us in future years. If I can move you along to Slide 15. Again, I mean, Husky Energy, I think we've talked about this in the introduction. We lay out here the components in Canadian dollars of the company's net loss in the first half. And below that, the attributable EBITDA loss, from our point of view. So I think those speak for themselves. It was an unprecedented environment you had not just the collapse in Brent and WTI prices as a result of the actions of Saudi Arabia and Russia. But with the COVID impact in North America, you saw a sudden collapse in the demand for refined products, for example, jet fuel, gasoline, diesel, and so that meant that where normally when you have a drop in commodity prices in an integrated value chain like Husky's, you recover it in to some extent, at least in refining margin, that didn't happen. And we found ourselves moving into as of January and February, a very solid sort of emergency expenditure management, capital expenditure reduction program and cash management program. So basically prioritizing the financial quality, right, of Husky in an environment where it was not just incurring earnings losses. It was also incurring cash flow negative cash flow, both in the upstream right and in the downstream. So we also obviously dialed back production from cash flow negative assets in the upstream. And in the downstream, over a couple of months, we dialed back production from the refineries, so as to not be supplying more product than the market would be able to take. On balance, we were pretty fortunate on the downstream side to be in pad two, which is a heavy agricultural country and probably a better market for consumption of gasoline and diesel as a result. And so less affected than some other pads in the U.S. but nevertheless, an unprecedented situation. Husky's liquidity remained strong. It announced guidance with its results as to further cost reductions. And I think we are in an environment at or around the prices that we're seeing over the last few weeks where Husky's net debt is not increasing. And of course, it doesn't have any significant maturities until 2022 and has a very high degree of liquidity well over $4 billion. And all of that meant that it was able to get back into bond markets yesterday and issued C$1.25 billion worth of 7.5-year bonds at an all-in issue yield of 3.5%, right, and a coupon of 3.5%. So that has in effect, refinanced a lot of its – well, they will be retiring, right, a revolving credit facility, they took to assure liquidity earlier on in the year, and they'll be retiring – they will have pre-refinanced a C$750 million out of the roughly C$2 billion that comes due right, in 2022. So from a resilience point of view, and actually, at this hour, from a ratings point of view, they are holding up reasonably well. They also took some important steps in terms of ESG for the first time, basically setting targets, both in terms of carbon intensity on the products that they produce and in terms of diversity in terms of the senior management teams. So I think I'll stop there on Husky. And with that, I turn back to Canning to talk about telecommunications.

Canning Fok: Well, these divisions, the incumbent area, a more reliable division under this COVID-19 situations. So during the time, we saw that people cannot attend to all features and the most of our countries for one thing or the other and actually from most of them today, the majority starts to working at home. But what we have seen that our business network is very reliable. And in fact, admittedly we just finish our network before this happened. And then it really help us – our customers and also that in terms of the reliability of the network and also, we just have a testing, but independent target, we become the quickest and best name in Italy in terms of stability and downtime. So – but all the other countries, although they have to work on everything customer service and network reliability done quite good and I in particular, it affect us on gross add because the most of the shops cannot open. But however, we switch our business into digital. And then because there's two side edge to the saw. You cannot close – and also our trend perform better good country. And so you saw that the total revenue we said is $40 billion, minus 7% but in terms of local currency, it's minus 3%, 10%. So there is a quite a resilient business and active customer is $38.7 million. And I think the reduction is mostly come from Italy because it is a strategy that we don't aim, and we don't fight against our MVNO, when they are on our network. And so that because we feel said we are income small, making from MVNO and then resulting them. So – and however, what we saw that because of the lockdown, our ARPU is getting better by 1%. Of course, they use a lot – they use a lot of data dividend time of 39%. And during all this time, in the bottom left corner, we continue to do our business, 5G rollout in UK and the best network achieved in Italy. And also, we are ready for 5G network to on 2,100 megahertz covering six cities in Sweden. And of course, Ireland this year, if you will see later has improved up to improve their business very much. So if you look at the EBITDA $14.4 billion, okay? And I would like you to look at this EBITDA copy the figures and then the bottom – the quantum was the percentage. So you will see that up, except for the UK, which I will expand on later. And everybody is getting better, right. So I would like you to – when I go through this, I would like you to bring together on Page 17, okay? If you go to UK, it dropped. It dropped $837 million, which is a 25% change in EBITDA. And then if you look go to Page 17 of the on the UK color, on the left-hand side of the June 1. You will find that it's the same problem. Revenue did not grow, there have been sanctions for quite a while and then also because of the roaming, the customer – the customer doesn't cannot travel. So the roaming revenue reduced and then some change of regulation in terms of long distance call so that you saw that the margin actually reduced by about $10 million. And then, of course, when the business – when businesses locked down and they used to get a lot of brander funding for the adding gross add. And then when you have the business closed, you cannot sell anything, of course, the brander funding getting less and also we switch to online. And of course, you've got to pay more commission there. So that you've got the tax, it's higher and then operating cost also higher why operating ARPU should not be higher. And again, the same old problem of the IT. We have to an incurring extra costs on IT, and we are not able to reduce of course, our description within differences. $25 million come from the right because of our 5G spectrum that we have to pay annual fee that is of course six months, $25 million. And so – but then the other $25 million has come from IT. Not able – they are not able to reduce it but we – be there is an increase. So we will have less income market and more operating costs. Of course, you have less EBITDA. And so that we have changed the management of UK and then because of the success of Ireland, we have asked Ireland team, the CEO of Ireland to be the CEO of U.K, The CF – – the revenue – the Marketing and Sales Director of Ireland to be the Marketing and Sales Director of UK, and then, of course, in our growth. And we have various good CTO, which is happen as always with some various division and then changed the CTO. And as we stated in the in the Chairman statement and then after we change it, and then we see actually a lot of progress in the UK Division especially on the IT side, on the network side, and we are continuing to understand what they are doing. And then we are actually putting a good effort into it. And then on the sales and marketing, it has been stagnant for three years already. If you go back to the financials of the UK, it has an increase for the last few years for the margin. And what I would dare to say that we will see good resell coming in, in the second half because this team was there since April and then for the three months, they have spent a lot of work. They have streamlined their business. They look at the operating costs, while we are talking consolidation in relation to staff that we get through – we will have – have some dismissal, some retirement of the existing staff and then move to support of the Ireland business. This change will be a very smooth one because a lot of the business functions are being supported by the Ireland calling just across the Ireland. So that I'm confident to say that the UK problem should be arrested, okay? And then if you go to Italy actual Italy is doing quite well. Last year, the first half EBITDA was supported by a 1x income of €115 million, which is HK$1.1 billion. And this year, this one business is going to be better. So actually, our objective is to try to earn this back with regular business and the fact that we showed that we have $428 million against the $1 billion so that we are on track with what we want to do. And if you take that take that away just on regular business, it is 5% increase. And then if you go to the rest the Sweden, Denmark, Austria and Ireland all doing very well and all doing very well. Just one point I would like to point out they then have all reasonable increase in EBITDA. But if you look at the subsequent, on the EBIT, a lot of that show a little bit decrease because at first of, we are still putting more network in all these spaces. And of course, after you put network, you have depreciation. However, because of COVID-19, we were not able to take the kind of test that we want to cover the information so this is on the right track. It's also you will the improvement in the – in the improvement in the EBIT, therefore. And hopefully, the foreign exchange situation will change in the second half, and we showed a $636 million reduction. So it's end up from $16 billion or $15 billion to $44 billion because – so this is the situation. And I think if you go to the Page 17, and you'll see that in the middle one, the first quarter is where you saw the EBITDA on underlying business. Minus 25% from UK, plus 5% Italy, 6% for Sweden, plus 4% for Denmark, plus 5% for Austria, plus 8% for Ireland. So and we say 1% positive – negative against a total yes. And then, of course, I'll talk about the EBIT. So – and then again, Frank has said that the CapEx is under control. So you got positive at EBITDA minus CapEx. So I was $7.7 billion, almost $7.8 billion, EBITDA minus CapEx and then the depreciation line and the CapEx line is also someone helping each other. So this the dynamic of the telecom division. So that we are – actually, these divisions have tons of assets and not only that but spectrum, but we also – when we do networks, we also come up with towers. And then, of course, last year, we have announced that we found the TowerCo. So I would like Frank to talk about tower business on Page 18.

Frank Sixt: I'll be very brief. I mean, we said that we would complete the structural separation of our towers into a separate – separately managed TowerCo business, which is a subsidiary of CK Hutchinson Group Telecom. And that we would do that by midyear. We did. So senior management are appointed at that office in Luxembourg in each of the countries but has teams led by managing directors in each of the six countries, and we actually completed the legal reorganizations to make sure that all of the assets – relevant assets are in or the economic benefits of the crew, too CKH networks, and we missed our deadline by a couple of weeks. It was in very, really July that we were able to celebrate, completing that. We also said that we would be exploring all of our options to, I suppose, I would say, surface, the value credibly in this tower business. It's not a tower portfolio now. It's actually a tower business. And we have begun that process. I'm not in a position to announce anything today or to give anybody any assurance that it will lead to a transaction. But certainly, we are looking at all of the options and all the types of transactions and all of the counterparties that we might be able to do things with. And so I think it will be a very busy second half. And with that, I give you back to canning To talk about Canning Hutchison Asia Telecommunications.

Canning Fok: Well, actually, these divisions, we are quite happy with these divisions' revenue plus 5% and active move our customer at 7% and the U shape of cost because of COVID-19 or it all went up by 0.2%. Again, these divisions is actually is operating under for COVID-19 and then actually, it's also under more control. And Indonesia, Sri Lanka and from Vietnam so – all work at home. But then I'll network stay extremely very nice. So that so it's – in fact, we are quite pleased to see. If you look at the total division, the EBITDA we went up from $724 million up to $13 billion loss on foreign exchange. It comprises of Indonesia, losing $77 million a last year. So – and actually, this division is doing quite well. But the COVID-19 is actually expecting – affecting them to a certain extent. And then and actually, every month, there is only one – few on ones that are not doing so well, but actually in the catch up to the $77 billion of the total. All of the total our total EBITDA of $900 million. So that – so it will drop a little bit fast. And we have good June, and we have good July to and ensure we will be able to catch up more than us. Vietnam, it's a small company, but it has actually made a major improvement is a not because of that growth because under COVID-19 was stunted growth but what they did in three months is to change put the subscriber on a bit – on the base of the subscriber and a different proposition so that they incur much, much, much less in the connection cost. So that and also, of course, they work hard on their overhead. So everything reduces revenues increased a little bit and increased about 10% and then still to end up. There are more spectrum is – last year, they lost similar months where they're – this improvement will put them into breakeven and the same package, will break even or loss of $102 million first half. In Sir Lanka. We are merging the two companies. And then, of course, COVID-19 come and everything. So we will not – Sri Lanka. So the – however, the team work very well on past revenue and then we stuck with new EBITDA. And so I think this will be a small edition, which Sri Lanka has. And that, I go to the next page, Page 22 which is about the ESG to Frank who's the champion of the group and let him talk about it.

Frank Sixt: Thanks Canning. We listened to the prevailing winds in capital markets and in equity capital markets. And clearly, being able to be and be well seen to be an ESG responsible player is beginning to matter to a meaningful extent in terms of both access to capital and also the cost of capital. So we decided to put a major push behind, in effect, bringing our management, particularly sustainability-related risks into line with best-of-breed global standards, number one. And number two, to upgrade our reporting. So that we would – I think in the past, we have suffered from not giving enough visibility as to what we do in all of the various category components that make up right, sustainability ratings of one sort or another. So if we can go to the next slide, which is Slide 21. I'm very pleased to say that on the disclosure side, this is our first stand-alone sustainability report, which was issued in July. And I would encourage everybody to read it please download it. We're trying to limit the number of paper copies, which we're trying to save paper, of course. But it is a very big step, and I think a step begins to put us well ahead of norms that you'll find around this part of the world in particular. We also, in CKH Group Telecom, submitted our first CDP report, which is basically ratings in terms of carbon and report. Of course, Husky has been doing that now for many years that will lead us to setting some science-based targets as we go forward in group telecoms, and we'll be doing a number of other things in other group companies. On the governance side, and this is very important. We established a Board-level sustainability committee with three senior directors on the committee. We have sustainability committees at the business units level already in place and a working group under the Board Sustainability Committee to make sure that we are doing things. We hired a Head of Group Sustainability from – who was a seasoned professional in the area. And we introduced a – what I would describe as a bottoms-up and tops-down semiannual risk assessment and forum for establishing the right goals, right, and the right targets going forward. I must say that the A.S. Watson's group has shown a lot of leadership in this area. They have committed to a 40% reduction in Scope 1 and 2 emissions by 2030 as against 2015 levels. And CKH Group Telecom is committed to reducing carbon intensity by 70% from 2015 levels by 2025. So I think that we are both from the governance point of view and from the Commitment to Climate Action point of view, in particular, moving at quite a fair pace. If you just go to the last page, Page 22, obviously, the first significant step in understanding and managing sustainability risks is understanding the materiality of various risks to various businesses in various locations. This is a very high-level overview, right, of which businesses, which people issues, which community issues and which environmental issues are most material in each of our core divisions. And I think they speak for themselves. But again, I would really encourage you to read our sustainability report and offer up any comments on it. We'll also be engaging right with the what we have engaged actually with the major sustainability ratings players, including MSCI and Sustainalytics. And I think you'll probably – well, I shouldn't speak too soon, but we will be working to achieve a sea change, right, in the way that they have rated us in the past. So I think I'll stop there, and I believe that takes us to the Q&A session.

Operator: Yes. Thank you very much. We will now being the Q&A session. [Operator Instructions] The first question comes from Matt of L1 Capital. The question is why did the dividend increase in line with earnings? Did your free cash flow actually increase from first half 2019 to first half 2020, as shown on Slide 8? How much of that has to be reduced before we can start seeing increasing dividend payout ratio from CKH?

Victor Li: I think a couple of years ago, when we talked to investors, we have made a general statement that our dividend policy will be very much in line with our P&L, and this is exactly what we've done. In the debt reduction is more a response to the COVID-19 situation. I think in this time, it is only right to conserve a bit of cash so that we can prepare ourselves for unexpected surprises, and it's also the war chest for potential acquisitions. So I think the two are not completely related to each other. The dividend policy is more in line with our P&L and the reduction is in debt is more to make sure that the company is in safe hands.

Operator: Okay. Thank you, Victor. The next question is from Cusson Leung of JPMorgan. His question is for Hutchinson Network Company, are there any opportunities that the company can explore?

Victor Li: Frank, do you want to answer that?

Frank Sixt: Sure. Sure. I most certainly believe that there are, and we will be exploring them as we go forward now that, that we have met the first milestone, which is establishing CK Networks as a separate business under CKH Group telecoms.

Operator: Okay. Next question is still from Cusson Leung. This question is what's the momentum of the Retail operation in recent months and when can we expect product growth – profit to have growth again?

Victor Li: Can I answer a little bit of that before I asked Dominic to continue on it? The exact recovery rate, of course, is highly dependent on the situation with the virus. And that no one can predict. But the one thing I noticed in the – as soon as the government let the market open and relax the lockdown situation is that customers grow back quite rapidly. To my pleasant surprise that the cosmetics and health care division is a lot more resilient to difficult times. I mean, we've never seen this in our lifetime. I mean, this type of virus situation. And Health and Beauty Retail is more resilient than I originally thought. Now on the exact recovery rate, maybe Dominic, you can answer that.

Dominic Lai: Okay. Well, as I illustrated in the previous slides, the recovery has started. We have a very, I would say, encouraging signs in June and July. Because, as I mentioned, the biggest test or evidence of improvement in the bottom line, which I said, we just closed the July month end two days ago. And then the bottom-line EBIT was 14% higher than last year. So which is already planned under the budget that no COVID ever was thought of so what I'm saying there is that the Retail division, giving what Victor said, it's our daily recoveries. As long as the store remains open and also the easing of the movement orders it will come back. Our current view is that our – of course, we don't have a crystal ball, but from what we have seen lately, although it's just for one month, we would like to strive to reach the same level of sales and profit in the Q3 and overachieve in Q4. So the first half is behind us. So what we are trying to do is to do as much as possible to recover the sales and profit. And also, so far, we have not been disconnected with our customers. During the lockdowns, we kept – we have been keeping our customers engage to the social media, through all the digital means. And it's important that the silver line during the COVID is our ability to connect with customers. And also, our e-commerce capabilities have now been proven and tested. Before that, people always ask me, how is the online, how is the e-commerce but now I can depend on how I can tell you that we have, which said that we are good and online as well as offline, okay?

Canning Fok: This is Canning, there's one more point I wanted to add. If you look at the profile of the Retail business, actually the second half much more money than the first so yes. So if the profile is not what we expect – expected, and then we result lean months. And hopefully, the rich month will come back, but this all depends on COVID-19.

Operator: Okay. The next question is from Angela. The question is, what is the outlook of for Husky and Retail in the second half of the year?

Victor Li: Very broad question. Maybe, Canning, can you – yes.

Canning Fok: Well, a, if you look at the oil price, it was quite stable in June – in July. All through July, it is about 40-odd cents. And I once said that the breakeven for was $0.38. But then when the fining margin dropped from $15 to about $7 that in order to breakeven, we need to have about 40 – at least about $44. And then on the second half, we are – if the oil price stay at this level, we have a good chance of not losing money. But we have to see and how the oil price go. And the thing that we are working on is pending to mine cash flow to these, the affluent we should have – in June and July already, we have almost in cash flow that is controlling the operating cost and hospital controlling CapEx. So that in June and July already, we have a cash flow breakeven. And so the outlook would be that if the oil price stay at this level, we should be okay to have to get that from Husky. And for the Retail, I think we have said it all. So the COVID-19 situation is more or less what we are in for, then we hope to do at least as far as last year second half, this is reference that the Chairman – with reference to his outlook. But it is challenging because we don't know the COVID-19 outlook. But second at least just last year, second half year now it's true.

Victor Li: Just to give some color, say, in the month of July, the Benelux has already achieved positive sales growth same for Poland and Germany and also the negative growth or negative sales in the UK is improving. So everything depends on COVID as far as the Retail is concerned.

Operator: Okay. Thank you very much. The next few questions is on the telecom side. Cusson Leung of JPMorgan asks, UK Telco EBITDA margin dropped from 40% to 30%. Where do you think the margin will stabilize?

Victor Li: Canning?

Canning Fok: Okay. It’s okay. I don't like the figures of UK at all. No-growth in margin. And then growth in expenses like CAC, right, operating cost so that we are doing a total ramp for the last few months already. And our target to be above 40%, you just look at the rest of the group, is about 40%. And actually, we look at our offshore is 30%. And so each market is different. But however, I'm looking – even if you look at Ireland, it was the lowest. Now it becomes 40%. So that I think 40% is the least I can look at, and I provide them to achieve as soon as possible.

Operator: Thank you. The next question comes from Angus Chan of UBS. How will booking out Huawei change the CapEx outlook for the telecom division?

Victor Li: Okay. Canning?

Canning Fok: Well, we actually – Huawei, we don't have that in our European business. We don't have that much Huawei equipment. We use Huawei in Hong Kong, and we use Huawei in Asia and then on Europe, we only signed a new contract with CenterPoint 2.5 years ago in Europe, which was a very good contract. The price is attractive. And then to do of our looping brand redeal network, but not the call. The call, we have given it motive and so that ran actually the usual caveats stood about 30% of our business. And then we – and then for the other part of the business, we have chose – we have chose Ericsson, okay? Of course, when this change will come, and then we have to comply with the board. And we have discussed – we are still in discussion with Huawei. So that we include them – we don't lose our exposure, okay because we have to combine the group. So that other than that, we have a little bit of borrowing in the fibers but not – and then so that our exposure for Huawei is limited.

Operator: The next question comes from Karl Choi of Bank of America Securities. In your discussion to unlock value for the telecom unit, I guess it's the Electric company, is retaining some control on how the units are run a prerequisite?

Victor Li: Whatever happens, I think the more important thing is we need to facilitate our core business. So when we mean control, it cannot hurt our core business. The things that we don't need, and it doesn't affect our core business, and it's not a prerequisite. I think it depends on what type of thing. Frank anything you want to...

Frank Sixt: Yes. It's also the case that operators deal with network and tower providers all the time. And what runs between them is something called a master services agreement for a master lease agreement. And those are the crunch point where we need to ensure, right, that our operators are protected through the agreements that they have with the TowerCo, right, so that they can't impede with their performance going forward.

Operator: Thank you very much. The next question comes from Simon Cheung of Goldman Sachs. He asked a few years ago, Retail was identified as one of the fastest-growing division, which among your five divisions now, do you feel there is still much scope to drive EBITDA growth either through organically or M&A for handset – for monetization?

Dominic Lai: Well, we can all add our optimism. And telecom can be one of them. Retail is certainly a good engine, but not really depends on the virus situation. I don't have a crystal ball on the virus situation. But we do have quality assets. And this virus situation has shown that some of them are more resilient than other people we think. Canning, maybe you can add some more.

Canning Fok: Well, I just go along with what you said, we have quality assets then quality assets means quality in any environment. So that I think you will have seen the telecom divisions, we have the towers. And then we have units that we have not to in market margin yet. Those discussions still going on and then the Retail divisions that we got the O&O situation, which we working very. Admittedly the Retail division did not grow in the last seven years. But saying the big base of assets, these are quality assets. We will – the situation needs to be changing. And then we are – we have very good management that we can get very fast. So that I think the basic of the work is the asset that we have is quality and subject to stress test in a certain environment and this environment with very good asset.

Operator: Okay. Due to the time constraint, we will have the last two questions. The next question is still from Simon. As to extent that it can be disclosed, can you perhaps share with us what are the potential options under consideration for the Telecos?

Victor Li: Frank?

Frank Sixt: Right. No. I mean, I think they are obvious. I mean there are an ever number of players, both strategic and financial. In these areas that offer different types of opportunities. And then ultimately, there is public markets. No decision made as between any of them, but exploring all of the and it would be wrong for me to go beyond that, although we are working very diligently to obtain some good results.

Operator: Yes. Okay. The last question is from Lorraine of Morningstar. She want to know what portion of Retail sales came from online in the first half of 2020? And how does this compare to 2019?

Victor Li: Dominic, do we ask Malina to answer this?

Dominic Lai: Yes, maybe yes. Malina, who is the COO, yes.

Malina Ngai: So for Lauren's question, for – I'll probably start for Q2 because, in fact, the worldwide lockdown start from April. In the last three months, our e-commerce sales growth has been about 90%, 9-0. Compared to last year, it's about triple the growth rate. So as Dominic mentioned earlier, that the silver lining from this pandemic is that we are able to accelerate our e-commerce development, and we are determined to maintain that momentum. Thank you.

Operator: Okay. Thank you very much. This concludes our presentation today. Thank you very much.

Victor Li: I look forward to the chance of seeing of analyst friends in person on our next meeting. Because if we see you in person that means flight have started, hotels are full and restaurants are back in business, and the results will be better. Okay. Thank you. Good health.