CK Hutchison Holdings Limited

Good afternoon. Welcome to the live webcast of CK Hutchison 2022 Final Results Presentation. Today our speakers are Mr. Victor Lee, our Chairman and Group Co-Managing Director, Mr. Kenning Fock, Group Co-Managing Director, Mr. Francis, Group Finance Director and WD Managing Director. Mr. Dominic Light, Deputy Managing Director of C.K. Hutchison and Group Managing Director of A.S. Watson Group and Melina Ai, CEO of Asia and Europe of A.S. Watson and Group COO of A.S. Watson Group. The Chairman Penning and Dominic are still in the media presentation, so Mr. Francis will be our first speaker. During the presentation, please feel free to raise your question in the chat box, which is at the lower right-hand side of your screen. The Q&A session will follow the presentation. Before I hand over to Frank, please also pay attention to our disclaimer, which you can find on page two of the presentation. We can start now.

Hello, everybody. And I'm happy to be pinch hitting at this stage for the chairman and the co-managing directors. So I think if we can go straight to the slides that are in front of you, starting with slide, whatever this is, three. You know, we talked in the chairman's statement about the developing headwinds that started to really come into play in the second half of last year and are continuing in the first half of this year. And I think it's important to understand how the group is positioned because they are reasonably significant. The first, of course, is inflation and the corollary to that or the inflation, particularly in energy prices and particularly in Europe. You know, I think it's fair to say that the businesses most impacted by inflation or the telecom operations somewhat imports and businesses have varying degrees of ability to, in effect, pass inflationary cost increases through in terms of price increases. Just to give you a sense of what the price pressures look like, if you look at wage price inflation, For 2023, we're looking in Europe, in the UK and in Europe, at wage settlements which are ranging from effectively a low of about 8.5%. up to as high as 18% in some environments. So it's not an insignificant amount. Having said that, I mean, across the settled and expected universe in ports and in A.S. Watson's so far, that basically means a cost increase of give or take 250, 300 million Hong Kong dollars. So it's not helpful in terms of margin management, but it's not the end of the world. In terms of energy prices, in 2022, we were not terrifically impacted because we were basically 70 to 90% hedged in most of our major telecom markets. That is not the case in 2023. We have some hedging in place and we have some places where we don't. So we have more exposure to energy prices in 2023. But having said that, I think it's very important to remember that, in effect, our significant but non-controlling interest in Synovus Energy acts as a rather massive hedge against energy price inflation. So again, this is something which is difficult for our businesses to swallow, certainly kicks them into heavy energy conservation mode at every possible opportunity, which is probably not a bad thing. But in terms of the company as a whole, whether it's hedged directly or indirectly, it should not have an overwhelmingly adverse impact on us as we go through the year. The knock-on effects obviously have been the U.S. dollar at a 20-year high and the steepest, fastest rises in base rates all around the world in the last 40 years. So on the interest rate front, we're in a good position to weather the storm. Obviously, we've been repaying gross debt. We'll be dealing with that a little bit later on. And we've been reducing net debt overall. So, you know, we're down closer to 16% today than to the 16.7 that we were at the end of 2022. Our cost of debt remains low. So it ticked up a little bit, but it's still, you know, for 2022, it was still on average the cost of debt capital was 2%. and the average duration of our maturities was still 4.8 years. And so you combine that with the fact that 73% of the group's debt exposure is in fixed rates, contributing to that duration and that average cost. So we've got, in a sense, quite a bit of cushion to deal with a rising rates environment. And you've seen us dealing with that as we went through 2022 with the reductions in gross debt and so on that we'll be talking about. And we'll continue to manage it very closely as we go forward. But interest rates are not going to pose a huge problem threat in the near future to us. And on foreign exchange, I mean, there's been a stabilization. The U.S. dollar is well off of its highs registered in the fourth quarter. And it's good to remember that we actually have quite a strong internal hedge, basically because we have a lot of our borrowings denominated in euros. and a lot of our earnings denominated in euros. And so that cushions the impact quite meaningfully for us. So all in all, you know, the headwinds are there, but we believe in and of themselves they'll be manageable. On the next slide, slide four, what are our key strategic directions? I'm not going to dwell on them because I think for each of the divisions canning will be talking about them. They're not changing much, but they are progressing. I think I'll just move from there on to the next slide, which is slide six, and get into the results announcement. So you'll see right away the impact of currency movements over 2022. So our revenues are up 3%. If you'd measured them in local currencies, they would have been up 10%. Our earnings at $36.7 billion are up 10%. If you'd measured them in local currencies, they would have been up 15%. Our EPS, the same 10%, obviously. And our dividend, we've just announced, will be increased by the same 10%. That is consistent with the promises that we made in 2015 to maintain our payout ratio steady and to have dividends increase as earnings increase. and also the corollary. But fortunately for 2022, we had a very healthy increase of earnings and an increase in dividends. And I hope that stands us in good stead because I'm not sure that there are a lot of companies in Hong Kong that will be increasing their dividends at this juncture. If I go to the next page, you start to get a sense of some of the pressures that we've been under. So our EBITDA, A rough proxy for cash on a pre-IFRS 16 basis. So that's without taking, it's essentially EBITDA after leases, if you think of it that way. So we're not taking account of the lease accounting inflation that hits the EBITDA line, even though it's not generating cash. That was up 7%. It would have been up 14%, right, if you were measuring it in local currencies. operating free cash flow is a little bit down and we'll drill down on that. It was down 6% compared to last year. And the reason for that lies entirely in our subsidiary universe. And we have less EBITDA from subsidiaries and we have more, quite a bit more from associated companies. And we'll get to it in a detailed slide, but they kind of come pretty close to balancing each other off. And of course, we had another very, very strong cash generative year. So that was able to reduce our net debt to net total capital ratio by 3.6 points from year end 2021. And that, I think, is a good thing in that direction of travel has been continuing as we've been reducing gross debt. at a fairly aggressive rate, given the change in direction of travel in interest rates. So if we look at how EBITDA, and again, using the pre-IFRS 16, EBITDA is a rough proxy for cash, but what does it look like? both in terms of the geographic and bisector splits. I would focus you, because we had large incomings in the telecoms division from completion of the Celnex transactions in the UK, so I would focus you on the inner rings, which tell you more about the Holdings Limited because it is a strategic but non-controlling interest. It's where we hold our 16.6% of Synovus Energy. And not surprisingly, Synovus had very good cash flow during the year, so it made a significant contribution to our EBITDA reported as an associated company. So I think if you go through on the right, you kind of see the attribution moving from 2021 reported EBITDA through to 2022. EBITDA, of course, the one-off net gains coming out of 2021, the underlying for 2021 being $106.4 billion Hong Kong dollars. Ports lifted their contribution by $1.2 billion. Retail was only a snick off. Retail, much more challenging in terms of earnings than actually in terms of cash generation, which is a bit of very good news. Infrastructure made a better contribution. The significant negative is NCKH Group Telecom, and again, we will be talking about that, but that has to do with some year-on-year corporate stuff and some year-on-year real operational adversity, particularly, well, actually, mainly in Italy, not unexpected and something that we think is leveling off. Then you move on. I mean, HAT, obviously, with the moving from our single interest in Indonesia to the merged interest in Indosat Uribu Hutchison, suddenly becomes a positive lifter of our EBITDA. on a consolidated basis. Finance investments and others, again, that is essentially the share of the Synovus contribution. And then moving to the right of the underlying EBITDA for 2022, you have the adverse hit coming from exchange translations, not insignificant, it's almost a billion U.S. dollars. but a very significant one-off net gain that we realized because of completing the Celnex transactions. And I think that probably also includes the merger gains in Indonesia. Is that correct? That's right. So all in all, you know, leading us to a year where EBITDA is up 7% on a reported basis and would have been up 14% if you were looking at local currencies. So now let's take a look at operating free cash flow. Now operating free cash flow is essentially the EBITDA of our subsidiaries and the dividends that we receive from our associates as opposed to the EBITDA contribution from our associates minus capex minus investments. And so, again, you see that right away that the difference is essentially all in the EBITDA of subsidiaries line and cutting right through it for the company and its subsidiaries. There's a $9 billion shortfall year on year. that's coming mainly from CKHGT from CKH Group Telecoms from Hutchison Asia Telecoms because it moved from being a subsidiary in Indonesia to being an associated company in Indonesia so no concerning operating decline there and a very very modest reduction in AS Watsons I think that it's important to understand that the the decline, particularly in CKHGT, is probably half attributable to an actual operating decline and probably half of it is attributable to year-on-year corporate comparables. And so, again, that's something we're going to do in more detail later on in the presentation. Happier picture is when you go to the next page, it's what happened to free cash flow. Of course, free cash flow starts with operating cash flow, but then deals with all of the things like the proceeds that we receive from our towers, but also our interest payments, which were modestly, but not concerning at all year on year. Working capital changes, very positive. and favorable movements on 5G license payments, which we'll talk about when we get to the telecom section. But one way or another, they all added up to $47.7 billion, which is a whopping 44% increase in free cash flow compared to 2021. Now, the walk from 2021 free cash flow through to 2021 2022 free cash flow is on the right, and it's pretty easy to understand. As we discussed, the declines from the EBITDA subsidiaries in and of themselves and the EBITDA subsidiaries resulting from foreign currency movements. but on the positive side the actual dividends that we received from our associates increased most importantly if you go across towards the right working capital changes were very positive and a lot of that has to do with really the most world-class working capital management I think I've ever experienced coming from our retail group among others so again A very, very good movement there. Plus, you'll recall that last year there was an unusual adversity in working capital simply because we, in the context of the merger in Indonesia, repaid some very, very large Huawei accounts that had been sitting in payables relating to Hutchison 3 Indonesia so that we could proceed with the merger. So this is a kind of more normalized picture than last year in relation to that single large item. CapEx, I'm happy to report, was down meaningfully in comparison. and that obviously helps free cash flow. And we spent less on telecoms licenses by a considerable amount in 2022 than we had in 2021. So you put all of that together and you had a very healthy free cash flow profile for the year as a whole. Healthy free cash flow profiles tend to translate, as they do on slide 11, into pretty healthy financial profiles. And so the first and most obvious positive movement was the very significant reduction in our net debt to net total capital position, which I've talked about, but I haven't talked about how much gross debt was reduced, and that goes to the impact of rising interest rates, and it also goes to managing refinancing risks and so on. We actually reduced gross debt by $41.7 billion while reducing net debt by $35 billion. So this is a year where the reduction in the gross debt exposure I think matters. So that $284.6 billion is literally $41.7 billion less than it was at the end of 2021. As I mentioned before, our average maturity profile, and you can see the maturity profile in the debt section on the lower left-hand side, is still 4.8 years remaining, and that was the same in 2021, which reflects kind of the management of what we've been repaying and how we've been repaying it. Our liquidity is very high. A little bit lower because we use some to repay debt, but as a practical matter, it's a very, very large pool of liquid assets. No change, by the way, at all in the quality there. a change in terms of the yield, in particular a portion of it which is basically deposits and fixed income securities. We had a pickup of 147 basis points overall in terms of the return. And needless to say, we also had a reduction in terms of the average balance in those categories during the year. I think 2% cost of debt speaks for itself. The fact that 73% of it after swaps is in fixed rates means that there is not a lot of risk. I mean, you kind of do the quick math, and 100 basis points rise in short-term rates doesn't really hit us all that hard on the interest expense line, and I think that's a good place to be. So I think that's pretty well all that I wanted to say about our cash and financial profile and overall results. But we're going to wait for Ken and Victor to get here to go through ports, I think. But Dominic, are you on the line? Is Dominic on the line? Okay. Okay. Well, then I think what I'll do is just offer up some brief comments on the stuff that don't require a lot of comments. For example, the infrastructure slide, which is slide 14. Very, very, keep going, 14. Very good contribution, again, from CKI. And, of course, they reported, I think, yesterday, they reported. So their contribution up to $7.7 billion to us, up 3% for the year. their EBITDA marginally lower than last year in terms of contribution to us but would have been up 5% in local currencies and I think the important thing is that from an earnings point of view again and they will explain this at their presentation but actually if you take out The corporate items that don't have anything to do with the underlying earnings and cash generation of the actual operating infrastructure assets, then you would have been looking at earnings that would have been up by 7% in reported currency and would have been up by 16% if you reported them year on year in their local currencies. So CKI is doing pretty well what you'd expect it to do, which is just behaving like an anchor. for the group, but an anchor that keeps us stable in however turbulent the seas may be. And that's set to go on as we look into this year. There are no resets under any of the major RAV assets in 2022. No reason to expect the net debt ratio, either on a see-through basis or on a company basis. to move particularly adversely during the course of the year. So very solid company generating very good cash. And I have to say with a measure of inherent protection against inflationary pressures just because of the nature of the regulated asset bases and businesses. So strong cash position, low gearing, very good rating. So I think CKI will continue to be a good anchor for our businesses as we go forward. Again, I'll skip over the telecommunications businesses and just go to slide 18. where I can say a little bit about Synovus' contribution. You know, it was obviously not at all insignificant. Synovus contributed $6.6 billion, if I remember right, to our earnings in the year. Yeah, that's on slide 18. They also increased their dividends, both their base dividends and they announced a variable dividend program in addition to their stock buyback program, which is going to be quite important to us because as they reach and exceed their targeted debt profile, which is basically to get their debt to below $4 billion Canadian dollars, they have announced that they will follow a rigid excess free cash flow regime where excess free cash flow will be 100% distributed from that point on in a mix of share buybacks depending on the accretion opportunity that's available to the company in that category and otherwise by way of variable dividends which means that for 2023 I think it's quite reasonable all things considered to expect a performance that is better in terms of cash flow contribution and probably similar if not better in terms of earnings contribution. A couple of things are happening at Synovus that are scale of their refining assets and transportation assets quite significantly over the course of last year through completion of the Superior Refinery, which I believe in in the position of BP's interest in the Toledo refinery. All of that basically reduces exposure to heavy light differentials when you get right down to it because it increases the extent to which what you're really selling to third party customers. is either products going through refining assets or products that you're able to move into different markets, including the Gulf market in the U.S. So I think that is good news. If you just looked at heavy light differentials comparing the first half of last year to where we've been in the second half and where we are today, You could get a little bit discouraged, but there are two things that mitigate that in terms of contribution to our group. One was that in the first half, unfortunately, some of that heady price action that they were seeing in WCS crude and artistry was given up in the form of edging losses, and they no longer have a base price. hedging program at all on fundamental commodity price risk at this point. This is all stuff that Synovus have announced themselves. And so that makes a difference in terms of the contribution profile that we can expect. And of course, the The mix of their exposure is significantly lower this year, basically, because what they're really selling is refined products. And if you look at what's been happening to refined product margins, that's been much more favorable than what's been happening to heavy oil and light oil differentials. All in all, you know, we're expecting, as I say, you know, something like a same-same or maybe slightly better performance from an earnings contribution point of view, but we are hopeful that we'll also be seeing from a dividend contribution point of view a meaningful uplift year on year. Frank?

Yeah, Frank? Frank? Yeah. Canning has joined us already. Good. to cover some pages that we have reserved for you. Let's back up to ports. Page four is the strategy piece. We haven't talked about that one. And then we can follow up with port.