i-Tail Corporation Public Company Limited (ITC) Earnings Call Transcript & Summary

Hello, and welcome to the Analyst Meeting for the performance results of the First Quarter of 2025 for i-Tail Corporation Company Limited. And we are honored to have with us executives from ITC. Mr. Pichitchai Wongpiya, our CEO; Mr. Pornchai Tatiyachaitaweesuk, our CCO. Mr. Weerawit Keeratikulset, our Assistant CFO; and I am Neroli Goldman, the Head of IR. Today, our agenda, we'll take about 55 minutes for presentation and then we will have a Q&A for about 50 or so minutes, and then we will have the key takeaways at the end. [Operator Instructions] So I would like to invite Mr. Pichitchai to take the stage now.

Hello, everyone. Agenda for today, we are switching things up. We have a key development update for quarter 1 in addition to taking a look at our financial results and also our business performance. Today, I'm not sure we have changed rooms. Normally, we are on the mezzanine floor and the room is a bit bigger. I'm not sure if the room is smaller today or if we have a lot of people joining us today. So we have a big crowd joining us joins today. That's a good thing. You're welcome to join us to sit in front if you'd like, we still have some empty seats up in front here. In terms of our key developments, I'd like to begin with the overall look at the industry. Overall, let's take a look at the entire industry. Last year, there was a forecast that pet food or cat and dog food would be at 147 tonnes, 147,000. And for the next 5 years, we see about 6% growth. You can see the blue graph in the U.S., this is the biggest market. You can see the numbers in the boxes and the numbers we're looking at continued growth. Down below, if we take a look at just wet pet food, wet cat food and wet dog food, you can see that wet cat and wet dog food, they continue to grow. There's about 10% growth, and the forecast is for the next 5 years, we will see about 5% growth. And why are we looking only at wet food. i-Tail is a wet pet food industry member. Therefore, if we compare the share of our global markets, i-Tail calculated our share is about 60% of the entire global market, 60% we have a footnote for you. Our sales are from FOB sales. Before they enter the value chain, we have importers and brand owners and retailers and supermarkets, et cetera. This leads to added value and i-Tail share is compared to -- we're comparing the shelf price to shelf price. Moving on, let's take a look at the developments, commercial developments in America, we have new projects and we have new products that will be launched as well. In the U.S. these two things this year, this should lead to sales for about USD 40 million for us. In Europe, our first shipment took place with our importer this month to U.K. and Europe. In Thailand, we are relaunching our dry dog food under the Marvel brand, and this will begin in 7-Eleven's online. And this is -- these are some brief discussion of our key developments. And now on to our performance for the first quarter. In the first quarter, our sales grew by 5.5%, ending at THB 4.2 billion. And that 5%, the growth is from volume increased by about 12%, pricing about 2%. Nonetheless, we also had discounting resulting from our premium mix or product mix dropped by 5%. So altogether, about a 4% drop from the foreign exchange as well. Without the foreign exchange element, the growth were year-on-year would be to 9% -- over 9%, and that is in terms of sales. Our gross profit is at 24% margin dropping down by about 1%. Our operating profit is THB 560 million and our net profit is at almost THB 700 million, and the net margin is at about 16%. Our sales volume is about 27,000 tons, increasing over 10%. And in the first quarter, we had 13 new customers joining our customer base. And on to our financial performance. And this is our performance for the first quarter in terms of our financial performance, if you take a look at the graph on the right-hand side, all the way right to the right-hand side 2025, you can see Mr. Pichitchai also talked about our sales. We have sales of THB 4.249 billion. That's a gross about 5.5% in terms of sales. Our gross profit margin is at about 24.5%. If we compare year-on-year, we have a bit of a drop. But if you take a look at the -- we had a onetime element in the past, it was reversal that we recorded. If we exclude that from 25.7%, it's 25.1%, excluding the reversal element and now we're at 24.1% for this quarter. And there are three factors, three key factors. The first is depreciation for our new factory that we have fully depreciated already. And we recorded this since the first quarter of last year. So the first quarter for this year, we still have that element. For the first quarter of 2024, we did not record the depreciation yet. And the second factor is the low labor cost that was announced in January this year compared to the first quarter of 2024, we did not have the minimum wage element to affect the gross profit. And another factor is the product mix, we have more premium products, you'll see this in the next few slides. Our premium mix for the first quarter, we have decreased that proportion, and this has led to our gross profit margin dropping a bit as well. Overall, our profit is at 24.1%, which is at a level that is similar to what we had before. As for our net profit, it's at about 15.9%. That's our net profit margin. This excludes the transformation cost if we do not include the transformation costs, which is a front load fee since last year, up until the first quarter of this year, if we exclude the transformation cost, then our net profit margin is at 15.9%. And these are the factors, the transformation cost of the consulting fees. On the next slide, you can see our production costs, investment costs, 1/3 is our raw materials. And then there is labor and factory overhead and another 1/3 is packaging and ingredients. And our policy, our risk hedging policy is 90% hedging. If we take a look at the tuna price, the Skipjack tuna price, the price has gone up in the first quarter. Nonetheless, thanks to our pricing policy, we have cost plus. We're using a pricing mechanism to present prices to the market and the increase in the tuna price is in line with the market mechanisms. As for the chicken prices, we can see an increase from THB 95 to THB 93 per kilogram, but this -- we have a long-term contract, and we have locked the prices for those suppliers since last year -- since the end of last year. And the price is about THB 90. So we have the benefit of the -- we're benefiting from this price lock. If we take a look at the exchange rate, it's not so volatile, it's pretty stable and the volatility is also -- we're also reporting less impact, thanks to our hedging. And as for the aluminum cost, the price has also gone up a bit. Nonetheless, we have negotiated prices with our suppliers, and we have cost management and inventory management so that we can stock the pricing for aluminum at a favorable price, and we can benefit from that. And we also have a price mechanism that supports us in this regard as well despite the increase in prices of aluminum. We take a look at the various ratios, the 3 on top are ratios that deal with our liquidity. If we take a look at them, liquidity is quite stable compared to the fourth quarter of last year, there isn't much of a difference, a significant difference. So thanks to our high liquidity in terms of both our trade receivable, inventory turnover and trade payable. And the cash cycle days, we're at 150 days. This is a cash conversion possibility, so it's very similar to 149 days that we had in the fourth quarter of last year. Our ROA and ROE, they've gone down a bit compared to the last quarter last year. ROA has gone down 14% to 10%, ROE has gone down from 15% to 11%. And the net profit for us has gone down and this is mostly due to depreciation, the labor costs as well as the proportions of the premium mix affecting our net profit and our ROA and ROE have thus dropped due to, again, the drop in our net profit margin. If we move on to the third agenda, our business performance. Let's take a look at the left-hand side, this is our various categories. We have tuna, we have dog food, and we have pet treats. We have 71% for cat food, this gone down from the year before in the same quarter, quarter-on-quarter of 77%. The 71%, this decrease and 71% we have an offset of increase in dog food. In our cat wet food, the decrease is due to our lower orders compared to the fourth quarter. Many of you who joined us with the meetings, you know that the first quarter is -- if we compare to the entire year, this is the quarter where we record the lower sales. But at i-Tail, we actually believe that the things are on the uptrend because our pet treats have increased about 3 percentage points year-on-year. And our dog food has increased also 3% year-on-year. On the right-hand side, you can see if we take look at our customers, the world pet food companies or the global brands. This is stable at 48%. Our portfolio -- in terms of portfolio, again, very stable for world pet food companies. And the brand owners and importers, this has increased because we have new customers joining us, whether it's from -- mostly they're from Europe and we continue to look for new customers. So we have an increase in our brand owners and importers. And this has led to our private label, which is our retailers, their proportion has dropped compared to 2024 from 16% down to 14%. However, if we take a look at our retailers in -- if we look at them individually, we still have strength in that respect. Our portfolio is quite strong, customer portfolio is very strong. We still have our global brands, which are -- they continue to place orders, and we have forecasts, which are very strong. We have our private labels and our retail brands in the U.S. market. Once the economy drops, the private labels sell well and private labels that we have, they have, in fact, been recording better sales. In terms of our mix, it's been changed, adjusted a bit. This is about our product mix. As you know, with the current economic situation, the mid-priced products, if you can remember, I often say that our target that i-Tail is happy with in terms of premium, we're looking for 47% to 50%. Why 47% to 50%, why not more than 50%. Because we need a balance between products that create volume and products that create profit, we need a balance here. So 47% to 50% is a good range for us. Anything we can do better than 50%, that is a bonus for us in terms of profit. And the volume, we want the volume to grow as well. So in the first quarter, you can see that we have a drop to about 49%. And this is close to 50% target that we have set. On the next page, you can see the proportion of our sales in the Americas, this is the biggest share of our sales. We are at 60% for the first quarter. And people will ask, of course, 60% from 50%, what happened, why did we have 50%? The orders from the Americas were placed before the tariffs were announced. Therefore, these orders are orders that were considered normal. We have new stocks because we have increased demand from retailers that want to sell more. We have been able to sell to retailers in Americas in the first quarter is continuing on into the first quarter of this year. And this is one of the reasons why our global brands is strong in our portfolio, if you take a look at the shipments, it's also very strong. In terms of Europe, the European proportion has dropped by about 6 to 7 percentage points, even though we have more customers in our European markets. There are some customers in our European market that in the first quarter, they have not placed large orders that has led to the drop. And Asia and Oceania, which is also very significant. In Asia and Oceania, our biggest market as Japan. And during the first quarter due to the value of the yen, we had orders. The sales for Asia and Oceania had dropped due to that factor. On to the next page, we'll take a look at the various zones. I'll start with the Americas. Americas is 60% if we compare year-on-year, we grew by 38.7%. Quarter-on-quarter, it was 1.6%, a small increase. But the growth, if we compare quarter-on-quarter, you can see that we grew because of our global brands. Our global brands, continue to place orders and this also includes the NPDs and new products that we continue to launch since the fourth quarter of last year and into the first quarter of this year. So we're still seeing more sales in that regard. As for our new products that we have launched in the first quarter, we have the chicken, tuna in bone broth and beef pate. These are functional and digestive and skin and immune support products. And this has helped to maintain our profit. So the premium mix might be a bit smaller, but we're still within an acceptable range. And if you look at Asia and Oceania, the impact -- the main impact is from Japan, as I mentioned earlier, it's due to the value of the Japanese yen. And this led to these orders from Japan, the orders were focused on red meat. And this is in line with their economic situation. The sales quarter-on-quarter went down 23% and year-on-year went down 17.4% as a result. We have continued to launch new products in this region, whether it's sachets and thanks to our sachets, we have new products. We have retailers in Taiwan, new retail customers in Taiwan. And for Taiwan, we are continuing to work to expand our growth there. And we are seeing a positive trend there. We also have customers -- new customers in China, two new customers there. And we have new products that we have introduced in LA, and we continue to see product orders from Australia as well. And we talked about this in the fourth quarter that we have new customers in Australia. In Europe, you've seen a drop in terms of sales quarter-on-quarter by about 20%, year-on-year it's about 30.6%. In the first quarter, the result is a result of our retailer customers who are ordering less and adjusting their strategy, but we believe that the situation will normalize in the first quarter, remember that this is the quarter where we had the lowest sales for the entire year. So this is quite normal for us. And we still have customers that we're talking with in Europe, and we are working to expand customers in the U.K., in Germany and Italy and we have customers we're discussing orders with them and we're looking for orders in the third and the fourth quarter. On to the outlook for this year. Normally, we have 1 page slide because our guidance, we normally share just on one slide. But today, the guidance that we're going to discuss, we have two different scenarios, and we'll explain to you what this is. And we also have a few more slides to talk about the U.S. tariff with you as well. We have an update about the M&A that we discussed earlier and other meetings. We have a methodology that we're going to update you on, we have about 3 slides for that. And we have another slide, the last slide to discuss the update on project Tailwind, which is about improving our transformation. In our guidance, we assume, we have two scenarios. The first is if the tariff remains at 10%, a flat rate. And the other scenario is if in the 2 months, the 90-day window, the U.S. says that 10% and after that, they're going to resume tariffs that were announced, which is 36%. So the first 2 months April and May will be at 10%. And from June onwards to December, we will be facing 36% tariffs, and we have looked at the scenarios and figured out what it would be for us. And the guidance for this year, we said it will be 13% to 15% growth previously. If it's 10% flat rate, we don't know if this is going to happen or not. Will it continue? We're not sure. But right now, the current situation is very volatile, very dynamic and this could lead to -- again, we have no idea how things are going to be. So that's why we have these forecasts. If the rate continues at 10%, then we will record or be impacted only by 11% to 10%. If the tariff goes up to 36%, I think we will see a bigger -- the bigger impacts our growth will be 6% to 8%. In terms of our gross profit margin, we will also sustain impact. Our sales will drop if the 10% rate is flat. And we're looking at gross profit margin of 23% to 25%. This is a drop from what our previous outlook was at 27%. And in the second scenario, the gross profit margin would be about 20% to 22%. As for other areas, SG&A, sales or CapEx or our dividend policy, we expect things to remain basically same, the same guidance. And what we want to know more about what will impact us significantly is the U.S. tariffs, of course. The U.S, tariffs on this page, this is perhaps stating for you. We all know that since the beginning of April, the U.S. administration announced tariffs of 10% effective on the 5th of April. And after that -- not long after that, the U.S. administration announced another tariff which would be 36% for Thailand. And this second tariff is different for each country. If we take a look at the table on the left-hand side, you can see that China has an effective rate of 54% on April 5 -- as of April 5. At the current rate right now, they are facing a 145% tariffs. Vietnam and Thailand are also facing effective tariffs of 46% and 36% respectively. And the current rate right now is 10%. If we take a look at these 3 countries, why are we looking only these 3 countries? Because these are the 3 countries that have -- that are greatly involved in our industry. These are exporters -- these the biggest exporters to the U.S. in terms of wet pet food. In Thailand, we're facing a lot of -- the effective rate is 36%, but this is lower than Vietnam and China, significantly lower. So if we look at the industry, our own industry, we can see that what ITL is producing, we are focusing on the premium products, wet food premium products. And these products in terms of economics or price elastic products are lower, they will have low price elasticity. So that means that regardless of the change in prices, consumption will not sustain a heavy impact due to the low price elasticity. And another advantage that ITL has is that in terms of our raw materials, our seafood, especially in terms of tuna, which is 50% of our raw materials. We have access for these raw materials. Another strategic advantage of ours or competitive advantage of ours is that our know-how in terms of skilled labor is something that skilled labor doesn't happen overnight, and Thailand is the location of high skilled labor. And aside from that, is it possible that the higher duties -- is it possible that in America, they could increase their production capacity to replace us in the United States, wet pet food production, the capacity is pretty much at its max and this is based on research papers that we have -- research that we've been able to do. They do have more room to expand in terms of dry. But in terms of wet pet food, it will take at least 1 to 1.5 years for them to set up production facilities to increase their wet pet food capacity -- production capacity. So again, this is all about facts. So if we -- if this is a situation, then what is i-Tail doing in this regard. Even though the tariffs in the U.S. are dynamic right now, we aim to monitor and also remain proactive. As we mentioned, our assumptions are the April to May tariffs stay at 10%. And then June to December, say we have 36% tariffs placed on us. And how will this impact our volume? Well, the volume will be -- the impact will be about 8% from April to May and then from June onwards, it will be an impact of about 30 or so percent. And let's talk about the price elasticity. Based on studies for every 1% to 2% increase in prices, consumption will drop by 0.8%. This is based on our assumptions. And based on fact and these assumptions, what action are we taking? Most recently, we are managing our inventory. We are accelerating our product shipment to the U.S. within the 90-day window and the tariff rate is still at only below 10%. In United States and Americas, we have DDP, which means that we are responsible for the duty. We are building up our inventory. We have already built up our inventory that is at about 4 to 6 months' worth of inventory. And I'm telling you this because most of our customers are FOB -- we have FOB incoterms with them, which means that the customer is responsible for more the duties. Therefore, whether the tariff is 10% or 36%, the importers or the customers are the ones who are responsible for the duties, the increase in the duties. And the next thing that we're doing is that we are also looking at other markets. Do we have an opportunity for growth in our other markets and how can we grow? If we take a look at Canada, for instance, or in Japan or in Europe, we are increasing our growth mechanisms there. Based on the category and differentiating ourselves, for instance, we have pate or treats and toppers. And these are category -- this is a category that is quite new for i-Tail in these markets. We are considering to support our customers to soften the impact for them? How can we do this? We're considering that. And lastly, for us in the short term and the medium term, we are looking at cost management through our Tailwind projects. In terms of the long-term action, we are diversifying -- looking at diversifying our production or manufacturing in the U.S., whether it's through M&A or partnerships or perhaps even the joint venture. And we -- in terms of the long-term action, we are also looking at our inventory management, and we are going to put an emphasis on our high-value products. That was about the U.S. tariffs. Now let's take a look at our M&A, let me give you an update. On this page, the thought might be a bit small, but I will take you from this step by step. This is our methodology to decide on our target. And we take a look at the ability -- the profitability on the Y-axis. And we look at these businesses, whether they are new or far from our core business, which is on the X-axis. And to the right, the farther right we go, the closer we get to our core business. And on the vertical axis, the profitability for these different businesses. This is what we look at in terms of profitability. And once we plot everything out, we can see the size of the businesses. And on this graph, we can see that we see Zone A. This is the group of businesses that are in manufacturing, which is one of our strengths. Whether it's manufacturing in America or Europe or in Asia or in China. Aside from this, and this is manufacturing of both wet pet food and treats and dry food as well. The dry pet food is lower -- on the lower side, which means that the profitability is lower than the profitability of treats products and wet pet food products. And in Zone A, you can see there is some dry pet food. This is the branded business. We have pet food branded business in the U.S. and Europe as well in Zone A. And this is a higher profitability for us, the petfood branded play in the U.S. and Europe. In Zone B, this is something that we need to consider closely. It may not be a priority for us, but it's branded in China, for instance, we have dry manufacturing in Asia, dry food manufacturing in Asia, more supplement brands in the U.S. This is in Zone B. And if you take a look at Zone C, these are -- we are deprioritizing where we are getting less importance right now. And these are areas where we're looking at sourcing of raw materials, it's our land farming or salmon farming, slaughterhouses for beef. These are business despite the large size, this is quite far from our growth skills or core business as well as the fact that profitability is not that attractive. And thanks to this methodology, we have been able to prioritize our focus. And as for the value chain, we have some raw materials all the way to manufacturing, all the way to brands and then to our channels. And the channels, of course, this is not our forte. We're not going to go take over some channel. That's not something -- we're not experts in e-commerce or anything. So what we're focusing on is manufacturing and brands. And if we take a look at zones we have in the U.S., again, we're facing U.S. tariffs, right, and then we have Europe and we have China. And these are our -- this is the space for opportunity for us. And lastly, this might be a lot more difficult to understand. We have funneled. We have this type. We have -- from the very beginning, we identified. If you take a look back at the first two pictures, right, we prioritize and we listed at our customers based on our methodology, and we find what fits our M&A. The first filter, we have more than 300 companies and we started with the list of 300 company. Let me figure out where they fit with us or not. And when we look at organic, inorganic, for instance, something about $500 million, the profitability threshold, for instance. We consider what's worth our time. If we're looking at taking over a company in Europe, its USD 1.3 billion, perhaps that's too expensive for us. So we have to find the best fit. We have to figure out what we should screen out in terms of sales as well, if their revenue is low, then we may not prioritize them. If they have EBIT of less than 10%, they will be screened out. And once we have screened or once we have gone through this list of 300 companies, just getting rid of companies that don't make -- seem like a very good match. We come down to about 140 possible links. And then we continue to prioritize who has revenue between or who can produce revenue between $100 million to $300 million, and they have an attractive profit margin. Are they in a high-growth segments, for instance, U.S. treats and after going through these different categories or different elements. And we funnel further and we come down to about 50 possible targets. And then we funnel even further based on more criteria, we come down to 5 to 15 targets. And in the 5 to 15 targets that we have left, we begin to strategize how to discuss with them. And we've already began conversations for about a month with these targets that we have identified. And this is perhaps the first time that we have provided such a detailed explanation of how we approach our M&A prospects that we are looking for our synergistic take relationship. We have a rationale in joining with them. And on our next slide. This is to tell you about project Tailwind. On this page, you can see that we -- for 2027, our annualized basis, our OP uplift will be USD 50 million. We're looking at commercial targets of USD 33 million to USD 36 million, manufacturing of USD 10 to USD 12 million and procurement USD 5 million to USD 6 million. I wanted you to pick up the blue on this page. Our target, we said USD 15 million. Today in the first quarter the benefit that we get from the Tailwind -- the project Tailwind, we have already acquired about USD 3.5 million in terms of OP uplift benefit. And this is a front loaded fee -- against the frond loaded fee. In the beginning, the front load fee is high and then it tapers off. And our OP uplift starts off small and then it will continue to grow. So we are starting to see the results, we're starting to see the outcomes. So we have about THB 100 million from this project Tailwind so far. We're going to talk a lot about the tariffs today. So we have -- in terms of the global minimum tax, on this page, this is not different from the analyst meeting from last time. What has changed is that for the first 3 months, the first quarter of 2025, if you take a look at the financial statements, you can see that the effective tax rate is about 2% or so. And this means that in the first quarter, we don't have the global minimum tax. We haven't recognized that yet. The reason for the global minimum top-up is based on the actual profit in the first quarter, which is not high. And based on the calculation, we have consulted with KPMG as well, the number is immaterial, so immaterial that it does need to be recorded. So that's why we don't have the top-up tax rate included. But this does not mean that i-Tail does not have a top-up tax. We do have a top-up tax. The target that we have for 2025 is still at about 3% to 4.5% and for the group will be from 7% to 8.5%, the effective tax rate guidance for ITC Group. And so we might start to recognize this in the second quarter, and we will recalculate for the first 6 months. We can see whether the profit is significant enough to realize this tax or not. We can have a Q&A session now.

[Operator Instructions]

Can you talk to us about the M&A? What stage are you in?

As I mentioned earlier, we have begun to engage with our targets. We have opened a conversation with them. And we are not able to tell you who they are at the moment and/or what zone they're in, but we have began -- we have started a dialogue and we are considering looking for a consultant to help us engage with another partner. So you have a list of about 300. Oh no, no, the 300, we have funneled down to about 5 to 15 targets, as I mentioned earlier. Our targets of 5 to 15 in number. It is a lot of resources to engage with each of our new prospects. So that's why we need to funnel them come down to a specific list.

Can I ask you about M&A more further. This year, will we see the results of your M&A efforts? Or do we have to wait longer?

I can't say exactly it's going to happen this year, but I don't think it will in this year. But we do have progress, we will see progress in our conversations with each of their targets 5 to 15 targets. We have identified them, but perhaps they're not interested in us. So it is possible that nothing will come of that. But we have identified these 5 to 15 targets, and we know that this group is, for instance, family owned and the group is different.

Do you have a budget? How much money will you need to use to acquire these companies?

I believe that if we -- with THB 100 million to THB 300 million in sales under EBIT, with regards to your EBIT, which differs according to the different companies. It depends on the size of their business as well. We have a certain range that we're looking for.

Could we go back to the GMT, global minimum tax in the second half. Mr. Wongpiya told us that the profit in the first quarter is not enough to have to pay the GMT, right? So how much do you need to have to pay the GMT or global minimum tax. Can you tell us about the calculation?

Well, it's the same as we -- it depends on TU, Thai Union first. This is our ultimate parent company. Once they finish their calculation, then they will allocate the portions to their subsidiaries. The concept is still the same. But in the first quarter, we had numbers for the companies in -- Thai companies in the Thai Union. We have not reached the range to have to pay the global minimum tax. I can't give you an exact number. But the calculation, as we informed you before, it's very calculated. There are a lot of additions and deductions. And we did inform you earlier that if we're going to calculate the impact from GMT, it will be based on the guidance, which is 7% to 8.5% for ITC.

It's for the entire year. But what about each quarter, we'll have to take a look at the operations in Thailand, right?

Yes, that's correct.

And we also have to look at the different deductions -- allowed detections, right?

Yes, that's correct.

So we go back to the sales in the first quarter, I saw that in a broad, whether it's Europe or in other countries, you also shared a little bit -- I'm not sure whether what is missing is, is it the economy that has led to the drop or the valuation of the currency that has led to a drop in the sales. Could you explain about this?

If we take a look at the economy, it has a big impact in Europe. The cost of living in Europe has an impact. So customers, there are those that are very good customers. And there are those customers that have seen a significant drop. And for those customers that are very good customers for us and their brands are very strong, they continue to order from us. Cat drinks, dog drinks, these are very strong customers of ours and they continue to grow. But if we take just like one of the biggest customers in Europe in the overall picture, the biggest customers of ours that are so strong even we're not able to maintain things, so there was a drop. In terms of retailers in Europe, different from retailers in the U.S. The retailers in Europe, they are not as strong as the retailers in the U.S. So the ones that have seen significant decline in Europe is the retailers. And importers or the branded customers, the leading brands in these regions, they are continuing to see growth. It's the retailer growth that has led to a decline. And in Europe, the retailer group, they have different -- they operate on a different concept. When the economy drops, they focus on mid-price products, they do order, but they order more mid-price and premium products. But in America, the focus is more on premium products. And they continue to buy the premium products more than the mid-priced products. So the concept in Europe and the U.S. is different. That's why we're seeing a decline.

Could you explain once again, I wasn't sure who has the bigger portion of the U.S., Europe?

If it's in terms of the retailer group. American retailers group is better and they order more premium products. But if it's in Europe, the retailer groups, the brand owners, the regional brands, the global brands do better than the retailer. And this is the reason for -- in Europe, we are focusing on non-retailer groups and in America in an economic situation like this, we have the global brands and the retailer brands in the U.S. The retailer brands focus on premium products as well in the U.S.

Could I ask about the revenue in the first quarter from the U.S. We saw growth and this is because of the inventory push?

No, we're not seeing any effect yet. In the first quarter, this is the tariffs. We had orders placed before the tariffs. It's not due to the tariffs. It's not the inventory buildup. The retailers in the U.S., we have built the inventory to begin with. So the sales we make in the U.S., they are domestic sales because we sell through our agent there. The retailers want -- the retailers continue to sell well, so they continue to place orders.

And in the second quarter, we will push inventory further, right? In the second half of the year, will there be restocking orders? Will there be a drop in restocking? How will you manage this?

We are monitoring this. We are increasing our inventory. If it's inventory in our -- domestically, GDP, we are not increasing it beyond demand. We're looking at 6 months and this will match the demand from retailers -- inventory from retailers from 4 to 5 months. We're looking at the sales of our customers, their sales per month. We are getting information from our customers on this so that we can manage our inventory better. So we're increasing inventory up to 6 months, which we think is an acceptable level. So we don't have to worry about destocking. We faced destocking issues in the past. So that's why we are managing this better now.

I have 3 questions. The first is the growth that is resulting from America, 39%. Is there a new -- do you have new products, new customers or are these the same SKUs in the first quarter? Are they buying more because it was the first 3 months before the tariffs were announced, right?

Based on principle, the portion is the existing products and plus new products that we discussed -- that we mentioned for America. The new products will be launched in September, October and that fills up their pipeline. And in the fourth quarter -- that's for the fourth quarter. In the first quarter now, the new products are not that numerous. So it's most of the existing products. And the driver for the first quarter is the global brand and retailers, those are the main drivers for the first quarter.

And I'd also like to know about the GP margin for your mid-price products and premium products, are they very different?

They are about 10% different. There's a 10% difference.

Mid-price is 10% lower, right?

Yes, that's correct.

And lastly, I'd also like to ask about MNC. They don't use for OEM, what country around the world, wet pet food? Is there another production hub that they have as a reserve from Thailand?

Actually, our CEO showed the wet pet food, it's in Southeast Asia, both Thailand and Vietnam, and China. These are the top exporters for wet pet food. And we have an advantage here in Thailand, thanks to our raw materials, which is the main reason for our key advantage, whether it's tuna or chicken, we have better quality compared to our competitors.

And could I ask -- I talked with other OEMs, and they said that in China, that the production cost is so low, for instance, the pet food production, their production cost for one package, they can produce plastic cup or plastic packaging. They said the customers, they choose -- they don't choose the Chinese production line because they can't trace the production.

Can you trace production? Yes, you can to a certain extent. But if the customer is very serious about sustainability and labor, if the customer is very selective in this regard, then China will be the first to be eliminated from their choices because of the labor issues, their traceability issues, even though they have low production cost, but that low production cost comes with high risk. And they might face NGOs pushing back, for instance.

And in Europe, there is another -- there's no hub, production hub in Europe?

In Europe, there is Germany. This is a big hub, production hub. But imagine in Germany compared to Thailand, if we just take a look at the raw materials, they cannot compare to the events that we have. So it depends on the product and the packaging. But all in all, our -- in Asia, especially Thailand, we have a strong competitive advantage.

I would like to add on. The Bangkok Post just issued news that if you take a look at the screen, whether it's the rate now or in the future, China is significantly higher than Thailand. And if China is one of the wet pet food exporters to the U.S., one of the top food exporters to the U.S., this crisis for China is a significant opportunity for Thailand to export to the U.S. The products, why am I saying that China, the uniqueness from these 3 countries or for Asian countries, the products that we provide are products that the U.S. cannot produce at a comparable cost. They have to produce at a much higher cost. So in Thailand, I know that there's an increase in the tariffs from 10% to 36% possibly. But if you look at the difference in the tariffs that China is facing from 54% to 145%, that's very significant.

Could I ask about, right now, we are not seeing demand flowing from Chinese manufacturers to [indiscernible]? In particular for the tax rate, Thailand will continue to prevail because we are facing lower tariffs compared to China? Are we are seeing a flow of demand to the U.S.?

So yes. Yes, this is not a crisis. It's an opportunity for Thailand, isn't it.

Yes, yes, I would like you to expand on this opportunity.

We see -- are we seeing a shift in demand from China to Thailand? Not just yet. It's only been less than a month tariffs have been announced. And during this, it's been like a drama that you watch television. There's been changes back and forth, up and down. And the Thai government has not even had an opportunity to meet with the U.S. administration just yet to discuss these tariffs. So in the end, we have no idea what the rate is going to be, and we have this 90-day window as well. The 90-day window is something that Thailand, Vietnam and China -- this is something that let's focus on our own customers first. Our customers are seeing the 90-day, they as well are watching the 90-day window. They are managing their value chain, their supply chain.

I believe that our Chinese customers that are in America, they be worried about inventory. Will it shift to Thailand? How will this happen?

I don't think we're going to have to wait much longer for it to be approached by Chinese customers or U.S. customers.

Our customers right now, what is their reaction? Are they -- they're waiting -- their approach is to wait and see, right? Whether it's Thai customers or U.S. customers that are buying mostly from Chinese suppliers?

Yes, I think all of the customers are -- they're all working on their own strategies on how to deal with their supply chain. There is one example I can share with you. There's a European brand that is selling in America, high sales in America, and their supply sources from many factories here in Thailand. And they said that they will continue to buy from Thailand because they know for certain bad things due to the brand identity, they will not be able to buy domestically. They will not be able to change their source from China or Vietnam. Business as usual, it's still business as usual for them.

What about the size that we can take over from China? How much do you think we can absorb from Chinese manufacturing or exports?

Over the medium term, for instance, if the tax still has not been negotiated, has not been concluded, I'm certain that there will be shift of demand. China does export heavily to the U.S. I know that China, their exports to the U.S., they have chicken jerky, for instance, which is a dog snack and that is a treat market, which is a very big market in the U.S. We talked about the production capacity, China is 1/3 cheaper than us at the raw materials, if we compare our prices, can't compare to this. But with these new duties, there is an opportunity. We will -- I imagine or I expect that we will get inquiries for our chicken jerky even though at the moment, ours is more expensive.

So the difference in the tariffs -- so what difference in the tariffs will lead to our having a better competitive advantage?

That's a very good question. I think that we ourselves -- producers in China, there are so many producers [Technical Difficulty]. We have no idea what the cost base for them is. So to answer this question, we need more information, and we need to do an in-depth study to find the average production cost to see actually how much cheaper they are compared to us. And this is the dog manufacturing cost. And I've been talking about other factors, it was the credibility of the supply sources. There are other things we need to consider.

And I know that in February, we met and Mr. Pornchai talked about new opportunities, new customers about USD 30 million. Right now, what's the progress for that prospect?

We've confirmed that prospect. No change has taken place. Nothing negative has happened despite the announcement of the tariffs. So we have confirmed our business with that customer that is one amount that we want to benefit from. We also have customers who want to launch new products. We have additional prospects in the third and fourth quarter, and they will be launching new products in the third and fourth quarter. So yes, I can confirm that the talks with that customer have gone ahead and we have secured that deal.

In the 10% tariff -- during the 10% tariff situation, are we passing the cost to the consumers or customers? How are we passing that cost on to the consumers? Are we -- this 10%, how are we sharing this cost?

Surprisingly, our customers are saying that the 10% -- almost every customer in the U.S., the 10% is not a problem for them because the pet food industry is very profitable and the distribution channels have 40% to 50% profit. So the 10% is not a problem for them. But this does not mean that there will not be an impact on us. We have to consider whether the 10% if it is not an issue. But if it's 36%, they said that we will have to come back to [indiscernible]. They know this responsibility, they know that they are responsible for customer being more -- assuming responsibility for this duty. i-Tail, we have so many global customers, global brands so their profitability is very strong. So the 10% tariff is not an issue. But if it's 36%, if that ever comes to pass, yes, we will have to have discussions about that on how to handle the increased tariffs. Our customers have not pushed the cost on to the consumers yet. They are still absorbing the cost.

Right now, the inventory, their stocks, is it sufficient enough to cover? For how long for this year if -- we have 10%, right? [indiscernible]

In the second half of the year, their inventory from 2023, each customer has built up their inventory. They have significant stock levels. They have about 2 to 3 months inventory. And yes, if it is 36% tariff, then there will be an impact on the customers. First of all, their profit will -- they will have to sacrifice their profitability and they have admitted that they have to absorb the tariff or have to deal with it, and they also want to have talks with us asking us how we can support them. In i-Tail, we have already considered this. We are not going to absorb the tariffs. And the third thing is the consumers, they will also be impacted. So the shelf prices will probably have to be increased. Each company has a different policy in terms of pricing for the customers, and they're all considering this. But none of our customers, whether they're big or small, have made a conclusion as to what they will do if the tariffs are up to 36%.

I'm not clear on the DDP. What does this mean? This means that we are FOB. That DDP, is this going to be an addition to the agreement conditions?

In America or the U.S., we have a DDP terms but only a few large retailers because they treat us as a local supplier. That's why we have a DDP terms with about 2 or 3 customers in the U.S. And we have built our inventory with those customers. Whereas the DDP means that we have to absorb the tariffs of the customers. They are very good to us. They know that this is a tariff that needs to be fixed that we are looking at and we are going to also to increase prices. They know that they will have to absorb the tariff. The customers, we are looking at how we can support them and we are building up the volume. In economic situation like this, sales will continue to grow. We're hoping for that.

And what about your NPD in the second half of the year? Will you have to renegotiate in terms of pricing, product design?

Right now, this is something that we are asking our customers as well. The customer said there's no need to get excited just yet. And this is a surprising response that we've got from our customers that we don't have to get excited yet. They're saying business as usual for now. Price and the volume remain the same, business as usual. But we ask them why aren't you excited? Why aren't you worried in the time when we are waiting for them to restock. They said [indiscernible] that this -- they don't expect this to be a long-term problem. They consider Thailand -- they think that Thailand will not be facing tariffs as high as 36%. But still we don't know what's going to happen.

And for Asia, that's softer market. Is there a trigger that will lead to Japan or Oceania seeing a return to sales growth?

If we look at the economy, Japan is on -- the value of the currency, Japan is bigger when it comes to the yen. They are very sensitive when it comes to currency. And they are paying the same price, but they are getting fewer products. So the value of the currency is something that is uncontrollable, it's out of our control. What we can control in terms of [indiscernible], we have to grow with the business in Australia, we have new customers there. And there is trend for more customers in Australia as well as Taiwan. We have new customers in Taiwan and current customers in Taiwan and they continue to grow. And we are talking about launching new products with them, more functional products or supplement products. And we have products that we will be launching later in this year, not just in one. And we have retailers in Taiwan as well, new retail customers and we are not just [ suffice ] on Japan. Japan, yes, is a one of our bigger customers and their currency is a [Technical Difficulty] in Asia and Oceania.

Is this a structural change that we need to take a look at the product price points and the markets?

If it's the Japan, yes. So Japan -- if their currency remains stable [indiscernible] right now, there will be an increase [indiscernible]. We have to do product classifications to reduce the price points while there's change in the raw materials or reducing the topping or perhaps reducing the net weight. And this is something that we are doing in Europe as well. This is something that the customer -- we have to discuss with the customer, they have to agree with us. But in principle we do make these changes and the nutrition remains same, but the price point will lower because we adjust the part of these nutritions.

Will we see this happening this year?

Yes, it will happen this year. We have already started, so we have already begun. We haven't waited. We have taken action already.

Could I ask about the assumptions for your revenue this year, whether it's the first scenario or second scenario in terms of growth in the volumes? What are your expectations?

Year-on-year growth, we said it would be from 11% to -- from 13% to 15%. [indiscernible] that would be from the volume about 17% to 18% and from pricing, about 5%. We have a negative FX impact compared to 2024, about 6%. So it will be about 13% to 15%. That was our previous guidance, right? If it's a 10% flat scenario or a 2-month 10% got exchange for the remaining 7 months, look at the volume impact. We have price elasticity as well. If the price continues, the volume [indiscernible] expectations. So the major impact will be in the volume. So I don't have the exact numbers to share with you, but the volume is 17% to 18% and the impact will be -- the next impact will be what you see on the screen.

May I ask about the transformation project? You had a slide about the profit margin. You showed the impact -- the resulting impact. Is this the expected range for you? Or do you see any possible change? You said that from this year, they will have payment on benefits received. It won't be ongoing. There won't be an ongoing base fee. Is ITC the same as TU?

Our structure is basically the same. It's a fee-based benefit. It's the same content with TU front load fee, structure will be heavier compared to the front load.

You're still experience front load fee, right?

Front load is heavy in the beginning and then it will lower later on. It's not forever. I may not be able to give you a detailed description, but there is a limit.

I'd like to add to this front load fee in the first quarter, if you take a look at the numbers, the benefit is about USD 3.5 million. In the first quarter, we're still looking at negative territory. But in the second quarter, we will have the fee as well, but the benefit will continue to grow. The second quarter forecast, if we combine with the fee in the third quarter and the fourth quarter increase, we see a positive number because compared to 2024, we didn't have any benefit at all. We had only a fee, but now we're looking at benefits.

The uplift in the first quarter, is this cost reduction? Where are you seeing the impact?

Firstly, it's the commercial USD 3.5 million operating profit rate or commercial realizing the sales, SG&A [indiscernible] so it affects every line. But it's an OP up lift. This is different from manufacturing and procurement because these are cost savings.

So this will drive the top line, not just disappearing costs, right? Could you talk about the impact on tariffs? There's no impact on your margin, right, because your customers are absorbing this and there's no buildup in inventory because the customers are not reacting. Is that correct? No major actions. Is that correct? And do you expect discussions with your customers? Or do you expect your customers to wait and see until they see a certain -- more certainty?

Our customers are saying that once there is an announcement, a clear announcement from the U.S., then we will have to have a discussion. How we will share the announced Europe burden, we'll have to decide how we're going to share this. And again, this will happen on a certain -- once there is certainty about the tariffs to be imposed. Our negotiating team -- those 90 days may be extended. We're not really sure. This is something that has been relative at the 90 days may be extended to longer than 90 days, whether it's in India or South Korea, those 6 countries. U.S. is looking at those countries may be looking at longer than 90 days, an extension of 90 days, but we have to wait and see whether there will be a co-extension to the 90 days. So in the second quarter for Thailand, what we're looking at site-based movement from the first quarter. We don't expect a drop because in the first quarter, those customers, they've seen a drop in the second part of their orders. The orders from certain customers are in line with the plan, there will be a change in the product mix.

Could we talk about seasonality now in the trade tariffs and the appreciate in Thai baht in the first quarter, this is the lowest quarter for seasonality, right? The second half, you should see new orders, right?

Overall, yes. There's an online question, which is similar to what you're asking. In the second quarter, how will be -- what are we expecting in the second quarter? The percent mix will be -- will continue on because new products that we have, the premium products, they have not been launched yet. In terms of volume, we are looking at the forecast, we will see a slight improvement. But this slight improvement, will it come to fruition? Whether it's Europe? Are you asking about Europe or the entire world?

This is the volume quarter-on-quarter, right, will improve?

Yes, quarter-on-quarter, the volume will improve. But it will not -- it will slightly improve. We will not see a significant jump. The overall picture for volume in Europe, this will still continue as a pull. It will still hold us back a bit. But we're looking at increasing volume in Taiwan because the Taiwanese volume seems to be quite strong.

What about the freight shortage, shipping shortage is that a problem for us?

It might drag or disappoint -- lead to a disappointing volume. Our customers are actually supporting us more strongly. There was one of our global brands in the past month that they had shipping issues and we had a backlog with about 60 or so shipping containers. And they actually made it possible for a ship to come and receive that shipment and it's been dealt with to -- they also -- they send the ship to transport the backlog and the new orders and other brands were not facing shipping issues. If there is some drag, it will be because of traffic because of customers who want to receive their backlog and their new orders as well. So it is possible that there will be a slight drop. We do have orders for quarter 2 at about 83%.

I have a question from the back of the room.

Let me answer an online question because the microphone hasn't reached the audience in the back there.

There's an online question about our view for Mexico. What's our viewpoint on Mexico? Could Mexico be a competitor for us? Do we see Mexico as a competitor? Does Mexico sell mostly dry food advantage? Do we have a competitive advantage over Mexico in terms of pet food?

Mexico and Canada, if we can recall, these are the 2 customers of 25%, right? And they made adjustments, pet food is USMCA's agreement between America, Mexico and Canada. If I understand correctly, pet food is in the USMCA agreement. It's duty-free.

Before the tariffs were announced, we were also duty-free. So why were those countries not able to stand as competitors against [indiscernible]?

We assume that they are dry food, dry pet food, Latin and South America in terms of the market or production, focus on dry pet food. Brazil, for instance, is 90% dry pet food, is a dry pet food market in Brazil. Brazil is one of the top 10 pet food markets in the world. I don't know what the future is going to be like, but the 10% in terms of competitive advantage, we still have competitiveness if it's at a 10% rate. Mexico has never been in the picture as a player in wet pet food. Hopefully, that answers the online question.

The forecast, the hypothetical -- your assumptions about the response from your customers. I just wanted to ask about the numbers of these assumptions because we have assumptions in the first 2 months, 10% drop in the volume and then the following 7 months, the volume, these are based on our assumptions.

That's correct. Many of the customers are also confused based -- due to the tariffs. Like Mars, for instance, they're not going to buy only from ITL, they're not going to buy just from Thailand. They're going to import from so many countries, whether -- whatever the product is, they're importing from various sources. So they are looking at their priorities as we are. So at this moment, we don't know what our customers are going to do and how much they're going to buy. But all of our customers have told us, it's business as usual based on the 10% tariffs.

And if growth goes down, then your GP goes down, right?

Yes that's correct.

Based on our fixed cost and variable cost, not everything is based on volume. And can I ask for more insight the wet pet food, the domestic manufacturers in the U.S. What percentage are they? Do you have those numbers?

Interesting study. What I can tell you is that in terms of wet pet food, their our production capacity is close to be maxed out, but they do have more room to grow in terms of dry pet food. Dry pet food is [indiscernible] raw materials are locally sourced because they're being -- they're also facing tariffs [indiscernible]. I think they have both. If we don't talk about the tariffs, in terms of production in the U.S. they use [indiscernible wet pet foods in terms of tuna [indiscernible] but it's out of their ability [indiscernible]. And I don't have numbers, but their domestic product, they probably do source a lot of [indiscernible].

[indiscernible] is it more attractive to buy 35 targets to do share buyback, i-Tail share buyback compare?

We are not looking at the returns. We haven't looked at the returns from share buyback and M&A. We haven't compared that yet. M&A [indiscernible] when we do our due diligence will give us a better picture. So right now, we have not compared the share buyback. We have not compared the share buyback possibility with M&As possibilities yet.

[indiscernible] from the assumption from the worst case scenario, this reflects that -- what drivers from what markets are you looking at?

If we look at in the short or near-term action, in other non-U.S. markets and the new categories, the chunk and pate products, we have been holding intensive discussions. We are quite happy with these new categories. In the worst-case scenario, we still see growth. And the gross margin assumption that is based on the premium mix, one is [ 80% ]. That's 47% to 50% of premium. That's the ratio we want from the premium mix. And the [indiscernible] tariffs, if it's down to 10%, except for China, do we see an opportunity or risk or trade flow. We discussed this earlier already, we see businesses or customers in America that buy from China. There will be a shift from customers that are sourcing from China. They will shift demand to sourcing from Thailand. That's what we expect.

And my question is about project Tailwind. If the commercial was less than USD 30 million, will we have lower variable fees?

Yes, variable fees, of course, because of variable. If the benefit is lower, then the cost will be lower.

Another online question is about, aside from Vietnam and Indo-China, are there any other competitors that you are worried about in terms of wet pet food manufacturing?

Right now, it's from Europe. Our customers told us that in Europe, the countries that are doing wet pet food that still have some competitive edge is Turkiye. But their country, the Turkish country, is a small sized country. Therefore, their raw materials are not that sizable. They are like an Asian, Europe country. They may be able to do well in terms of certain products like sachet products like low-based products or fish-based. They are at a disadvantage.

If there are no further questions, we'd like to recap for you the key takeaways. This is not in your handout.

Key takeaways from the U.S. tariffs. First of all, we'd like to reemphasize that we are in a growth mode. We have strong partnerships, and we are leading our business on the basis of innovation. We are confident that we will continue to grow. If we address or if we summarize the U.S. tariff situation in our inventory management, this is for domestic manufacturers. We have a presence in the U.S. that allows us to manage our inventory. This is a competitive advantage of ours, especially during the 90-day window. We continue to manage inventories to reduce the impact on our customers. Our FOB customers, there are more than 80% of them. They take up more than 80%. So the tariffs must be managed by our customers. However, we are not leaving them out in the cold. We are working with them closely so that we can provide support to them. And I'd also like to emphasize that in the 3 countries that are the biggest exporters of wet pet food to the U.S., Thailand has -- is facing the lowest level of tariffs. And we have support plans with our customers, for our customers. In terms of expanding the production expansion in the U.S., as I mentioned more than once earlier, they have -- they are basically maxed out in terms of their wet pet food production capacity. If we look at the strengths of ITC, more than USD 30 million and we have more than USD 30 million in active projects that will support our long-term growth. As for our brands, we have plans to drive the growth with our branded customers, strong branded customers. We didn't talk much on our strategies for 2030, which we discussed in the earlier session. We are still on track. We kicked off the 2030 strategy already. In terms of M&A, one of our strengths for ITL is if you look at our financial statements, you will see our financial strength. This is something that will embolden us. If we need the funds, we have no issue. [ The government ] is ready and able to sign checks for us. In the third pillar, this is about our nutraceutical efforts and our innovations. We are very strong in this regard. We are discussing with our supplement customers. We've already begun discussions with them, customers that sell supplements, and we are codeveloping supplements with them as well. We also have functional ingredients. We can create those on our own as well. We have done tests with our suppliers. We are doing better than our competitors. we will discuss this with our customers. And in terms of our new innovations, it's very on time and is on progress, whether it's emotional [ sufficience ], smart supplements, biotechnology and pet food, preventive functional items. These are things that we are continuing on with in terms of new projects with our large customers and in terms of long-term development for these products [indiscernible] not be very high for supplements for instance. But this shows i-Tail's tools capacity potential. This is something that we are happy to showcase to our customers that we continue to grow and develop. We still have strong advantage over our competitors. And for wet pet food, we're still #1 in terms of our product portfolio with the customer global brand to take about 40% to 50%. And we also have large retail customers and our trade with them is very positive. And this year, it will be over USD 20 million exceeding our expectations. There is one customer [indiscernible]. And we're in the final stage of discussions with this customer. In terms of our customer portfolio, it's all positive.

And I'd like to add [indiscernible] about our strong free cash flow for i-Tail [indiscernible]. We have net debt equity [indiscernible]. We have [indiscernible]. So our financial position is very strong. We are looking at further investments aside from [indiscernible]. These are the key takeaways that we want all the way to take home with you and write positive reports for ITC because I've been reading -- I've been looking [ ITC channel ] for many of the analysts who might comment. I don't want to comment because you all know who is commenting, but I have looked [indiscernible]. And we are very confident [indiscernible] or any other issues, we continue to move forward silently.

Thank you to everyone for joining us today, and we hope that we look forward to seeing you in the next quarter. Thank you for joining us today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]