Thai Union Group Public Company Limited (TU) Earnings Call Transcript & Summary

Welcome to Thai Union conference call for first quarter earnings. We have top executives here joining us today. Let me introduce Mr. Ludovic Garnier, Group CFO.

Hi, hi. Good afternoon to the people in Thailand, and good morning for both in the U.S.

And Ms. Narisa Phahulrat, Group Accounting and Controlling.

Good evening, everybody. Glad to have you all here with us.

And myself, Kalvalee Thongsomaung, Head of Investor Relations. So now please allow me to pass on the stage to Mr. Ludovic to begin the session.

Hi, everyone. So we have, I think, some very good news to announce to you today. Maybe you have seen it already on the SEC website, our numbers, but we have many good news to share with you. And I hope you will be very pleased with our results, which are very strong. So just moving to the Slide #5. So here, just basic highlight for the quarter. Top line is at THB 31 billion, very steady, very stable compared to last year and I will get back to this one. Gross profit is high at 17.7%. Profit, operating profit is at THB 1.9 billion. This is very high for Q1. And net profit is very unusual for us for Q1 and stands at THB 1.8 billion. And in fact, we are growing the net profit by 77% compared to last year. If I just get back to each of these components. Top line. Did you know that last year, we generated quite a steady growth in Q1, thanks to the panic buying and the pantry loading happening in Europe and in the U.S.? Of course, in 2021, we don't have any more of this impact. But here, you will see that we have the normalization in the Ambient sales. But at the same time, we had a very strong push in our Frozen category and also in our PetCare and value-added category. And this is why, overall, we managed to deliver the same performance compared to last year. We had a small growth, including the FX; and a very small decline, excluding the FX. But overall, I think we are very proud of this Q1 performance. Just want to remind you also that in Q1 '21, we have to face the COVID-19 peak in Thailand in certain sectors at the beginning of Q1. Plus, and we will get back on this also, we had to face with many logistic issues happening in -- due to the container shortage. Despite all of this, delivering the same sales, I think Q1 2020 is a great performance, and I really want to thank all the Thailand teams everywhere because it's a really -- it's a huge piece of work. Gross profit margin, I mentioned this one already. Absolute amount at THB 5.5 billion. In relative amount, it's 17.7%, very consistent with what we have been delivering since Q2 already last year. We told you that the target for this year was 17% on average for the whole year. So we are exceeding this one. And we will get back into the details, but you will see all the 3 categories are really growing compared to last year in terms of gross profit margin. SG&A, I mentioned the logistic issues we are facing. We estimate the extra cost coming from all the container availability issue and the shortage of blah, blah, blah, to be between THB 200 million to THB 250 million. This is why we have an increase in terms of percentage of the SG&A from 11.3% to 11.7% in 2021. If you exclude this impact, then the SG&A only amount to 11.1%. It's a bit slow compared to usual. And it's mostly explained by some the -- marketing campaign activities which will be postponed to Q2 and Q3, okay? We had a different marketing campaign phasing compared to last year. But overall, OP for Q1, it stands at THB 1.9 billion, very close again to the performance we have been delivering in Q2 and Q3, and this is excellent. I think the key change compared to the previous quarters is below OP. We also have some good news. We have some FX gains, if you remember. In Q1 2020, we generated some FX loss by almost THB 260 million. In Q1 '21, we managed to deliver an FX gain by THB 240 million . So overall here, you have a THB 500 million net income growth coming from this change. We also managed to decrease our finance costs, if you remember. Lastly, in Q4, we told you that we have been decreasing our net debt and decreasing also our interest rate. And I will get back also on Red Lobster. We have also some positive news on the operation of Red Lobster, which are really recovering. And we have also some one-off impact on the lease accounting. I will get back to this. Next, you will see here, in short, we have all the good news. We are growing everywhere. I did not mention the EBITDA, but the EBITDA is also growing by 30%, but overall, very good news. Gross profit increasing by 9%, OP by 22% and net profit by 77%. So very strong, again, very strong performance. In Q1, we are very happy. The next slide, you will see our usual long-term view since Q1 '17. And here, you can really see the improvement of the operation since now 4 years. We have been delivering 5 quarters in a row of top line growth, okay? It's not a lot. I agree. But still, it's growing. We're expecting some normalization. And if you get back to last year, Q1 2020, we are generating 5.9% growth. We have been managing to deliver the same performance. And I think it's quite a strong achievement. Another good news is regarding the gross profit margin. If you look at our track record, that was really one of our key concerns back in 2018 and '17. We managed to increase around 16% in 2019. And now, since 4 quarters in a row, we are around 18%. Again, our full year target for the gross profit margin is at 17%. So in Q1, we overdelivered compared to this target, which is pretty unusual because you know that the mix category in Q1 is usually more push coming from the Frozen business, which is less profitable for us in general. Net profit margin at 5.8% is very high for a Q1. So just if we go through the key developments, we just wanted to give -- to share with you also a quick update on the COVID-19 impact for us. We have been managing to keep all our operations interrupted since the beginning. We had only one exception in Ghana. If you remember, in 2020, our factory in Ghana was closed for a few weeks. But above from that, everything is working almost normally. I mentioned to you the peak of COVID-19, which happened in Samut Sakhon, where we have our operation in Thailand. So we had a bit of delay. We have some drastic measures in Thailand, but now all the employees get back to work, and everything is working normally. The vaccination campaign is also going on. Of course, we fully comply with the local regulation. And of course, it depends on the vaccines' availability. But right now, we have made some great progress in the Seychelles, in the U.K., in the U.S. and also in Thailand. We have been continuing to support the local communities. And you can see here, we made some donation, some food serving in Samut Sakhon. We provided also some funds and some power strips to some hospital. So we are really willing to help. We know that Thai Union has been quite lucky during this COVID-19 pandemic, and we are really willing to help all our consumers and the ecosystem around us. Next, just a quick feedback also, and we communicated on that in Q4 earnings release. We told you some news regarding our 2025 corporate strategy. And here, you had a small graph where we are summarizing the key elements. You can see here on the top all the progress we make in our core business. So first of all, we told you that we have a program of branded business, which is already ongoing in Europe since 2 years and in the U.S. since last year. This is ongoing, and this will continue. We have also great efforts regarding our manufacturing. We want to improve. We want to move to much more automation so our R&D team are working regarding the factory of the future. And then we have 3 different steps. You will see here, we have a culinary project. We mentioned in Q4 2020. The factory is starting to be built, we'll get back on this one, and should be up and running in 2022. Healthy living, we have some example of this one. So I don't comment that much. And then we have some sustainable packaging commitments planned for 2025. If you look at the bottom part, these are all the key developments regarding the new value-enhancing businesses. I go quickly on this one, we have one specific slide just after so I don't need to repeat everything. You can see here on the right, and we just remind you our target for 2025, we want to achieve 10% of our top line coming from innovation, with gross profit margin higher than 20%. We want to beat also the inflation and we want to achieve 3% annual conversion cost improvement until 2025. And in terms of EBITDA, we have a target in USD, which is between $450 million to $550 million in 2025. Next, just a quick update also. Here, you will see 3 areas where we wanted to do some specific communication. First of all, in ingredients. We told you that the new factory in Germany is operating since April 2021. The audit are currently going on. Of course, we have a bit of delay because of the COVID-19 restriction in Germany. We have launched also some products, the crude oil, the UniQDHA and the UniQBONE tuna calcium powder. We are also building a new factory in Thailand, the protein factory. On the supplements, so we have been setting up a new company called Thai Union Lifescience. And this company will be distributing some products in Q3 2021. The 2 other joint ventures, we mentioned this one, ZEAvita by Interpharma and also ThaiBev. We mentioned this one in Q4 last year, and they will start commercializing their product in Q2 2021 and in Q4 2021. The last one, alternative protein. We told you that we launched the OMG Meat plant-based protein, which are available since March 2021 in Thailand. Plus we are planning also to launch some new alternative protein product range, more the shrimp product in Q3 2021. This is the next one. We do a quick focus on some products, which were launched at Petit Navire in France. If you remember, so now we insist a lot on the healthy living and healthy products and healthy options. And here at Petit Navire, we have launched some new products in Q1. These products are MSC label, and they are rich in essential nutrients such as vitamin C, omega-3 and antioxidant. Here, the idea is really to push further the Petit Navire market presence in healthy and nutritional seafood brand. They are available both online and also on the leading supermarket. We are very happy about these developments. We have been working very hard on this one. There will be some more coming in the U.K. soon and also in the other countries, but this is the right direction, I think. Last, supply chain. You know this is now one of our strengths for Thai Union, we have been partnering with TNC, which is The Nature Conservancy, and we have a commitment to move to 100% electronic monitoring of tuna supply chain by 2025. You can see just below, we have also some other initiatives on sustainability. But overall, we are making some good progress. And you can see the last bullet point, our sustainability efforts really continue to be recognized. And you can see here some different examples where we have been recognized on this one. So here, just as another view, very strong Q1 performance. We are very happy on this one. We will dig a bit more into the details, thanks to Khun Amie. Amie?

Thank you, Ludo. And hello again, everybody. Ludo have already mentioned a lot of -- I mean, he already covered some of the key takeaways here. So -- and one thing that is worth reminding is that we have our first quarter record-high net profit, 77% improved year-over-year to THB 1.8 billion. And if you look at the absolute value, we gained THB 787 million versus last year. Part of it is from our strong operating profit. We gained THB 343 million, and the other part is from other nonoperating expenses, we gained THB 444 million. Next, please. Tuna prices were down 4% versus prior year -- I'm sorry, versus prior quarter and down 11% versus prior year. Prices at Q1 '21 was USD 1,283 per ton, and outlook in April has already increased to USD 1,340 per ton. Prices are within our expectations. Next, please. We have already mentioned the revenue of THB 31.1 billion. So allow me to move to the next slide for more detail. Next, please. So here, mix picture between our main 3 segments. And if you compare Q1 '21 to pre-COVID-19, sales increased 6%, and we are very happy with Q1 '21 performance when we compare to the normal situation. Move over to Q1 '21 versus Q1 '20, sales were stable. And if you break that down, we had increases in Frozen, PetCare and value-added, offset by decline in Ambient. Ambient dropped 13% due to, first, exceptional increased demand at the beginning of the pandemic last year. Second, container shortages this year causing delayed shipments. Frozen turned around and grew 10%. Restaurant and food services rebounded from vaccine rollout which proven effective and bending the curve of infected cases, particularly in the U.S. as well as stimulus checks and other relief support from the government. This drove increased demand for our shrimp, lobster, crab meat in foodservice and other channel. PetCare improved 27%. The demand was stimulated from repeated lockdowns and isolation, more pets were acquired and people spent for better ingredients in pet food and treats, resulting in encouraging product development and innovating. Our product portfolio expanded in both existing and new products. Next, right -- no, sorry, let's go back. Next is value-added. Let's go back. Value-added grew 10% year-over-year led by packaging business who support can and PetCare products of our own and external market. FX impact was positive THB 78 million from gain in euro, offset by loss in USD. Next, please.

Let me add maybe just one thing on this one. I think this is a very important chart. If you remember, last year, in Q1 2020, when we were generating quite a high-growth compared to last year from the Ambient business, there were many questions regarding how sustainable the growth is and I think with this chart, you can see very well. The interest for Thai Union having a very diversified portfolio. Here, you can see in Q1 2021, we indeed have some normalization of our Ambient products, you can see this on the left. And then you can see that the Frozen product and then on the right, the PetCare and value-added products are really compensating the decline coming from the Ambient. I think this is a very important chart. We strongly believe that with our unique positioning, which is combining Ambient, Frozen, PetCare and others, we are very well positioned. And you can see here in Q1 that we managed really to deliver the same, very strong performance in Q1 2021. So I think it's a very good point to keep in mind. Back to you, Amie.

Thank you, Ludo, for adding all good information. So next, please, look at our revenue structure is well-diversified. And in terms of regional mix, there were changes coming from USA sales shift to 43% of sales -- of total sale portfolio driven by 6% sales increase, thanks to Frozen recovery. Domestic also shifted to 12% driven by 5% sales increase mostly from PetCare. Europe reduced to 27% due to 11% sales decline resulting from panic buying in March last year. Next, please. Gross profit, like Ludo mentioned, improved 9% year-over-year to THB 5.5 billion, thanks to growth in PetCare, value-added and Frozen offset by softness in Ambient. In terms of gross profit margin, all segments improved and margins have been consistent in the last 5 consecutive quarters. Next. Here, operating profit was THB 1.9 billion, increased 22% year-over-year. Moving to cost, higher SG&A, 4%, primarily due to higher logistic costs, offset by lower marketing and advertising and other selling expenses. We control unnecessary spending in the level where operating profit is leveraged. Next.

Actually, I just -- let me just add on this one because I think it's a very important point. The OP, we say in Q1 '21 is THB 1.9 billion, okay? If you compare last year, it was THB 1.5 billion benefiting from some push on the Ambient sales. But if you compare to before COVID-19, in Q1 '19, the OP during this quarter was only THB 1 billion. So here, in 2 years, we have been managing to increase from THB 1 billion to THB 1.9 billion. Very important, this is one of the key driver for a strong performance in Q1. You can see -- you could see that the mix of our category has really changed in Q1, but very strong OP. And even in the OP, we mentioned that in the SG&A, we have some extra costs coming from the logistic issues and the container shortage. Of course, we have been in discussion with our customers, with our supply chain partners on sharing these costs. So it doesn't mean that the THB 250 million is an impact bottom line. It's a clear impact in our SG&A. We have been managing to pass through some of these costs to our customers and also to our supply chain partners. But overall, we are really delighted with this Q1 OP. Back to you.

Thank you. EBITDA was THB 3.4 billion, increased 30% year-over-year, driven by favorable nonoperating expenses mostly from FX gain as a result of Thai baht depreciated against the USD. Other changes were from lower finance costs from lower debt principal and lower interest rates, offset by higher other income due to fair value adjustment in Russia and higher tax from more profitability. Regarding share of profit movement, this will be illustrated later by Ludo. Next, please. Net profit for the quarter, THB 1.8 billion. Next. So here, there were 2 one-offs for the quarter. One was Red Lobster lease adjustment for the amount of THB 154 million after-tax; two was THB 73 million fair value adjustment in Russia due to the business was underperforming. Net profit, excluding one-offs, was THB 2.0 billion or 100% improved year-over-year. Next. Earnings per share was THB 0.37 in Q1 '21 versus THB 0.20 in Q1 last year. Next. And here, Red Lobster, I'm going to pass this over to Ludo, please.

Thanks, Amie. Red Lobster, so we have 2 key topics to mention to you, and this is our usual slide where you can see all the details of Red Lobster contribution in our numbers. The first news is on the share of profit coming from the operations. Red Lobster is generating some profit in Q1 2021, you can see THB 81 million to be compared to a loss by THB 111 million last year. If you remember, March 2020, peak of the COVID-19 in the U.S. We had many restaurants in the U.S. being closed, which explained the loss which happened last year. We're expecting the situation to improve, and we are expecting Red Lobster to be around breakeven in Q1. They have been overdelivering compared to our own expectation, and the operation has been very successful. There are a few explanations from that. Some of them are maybe onetime, I would say, because we were benefiting in Q1 from some stimulus checks, some free money provided by the U.S. administration to many people and some of these people have been spending this money in our restaurants. So we've been benefiting from this one and the same for the whole restaurant industry. Apart from that, you know that Q1 is always a very good quarter for Red Lobster. This is Lent period for the Christians, and many people go to the restaurants at that time. And in Q1, we could see that. But we have also some feedback from Red Lobster management saying, we start to see some customers we have not seen since 1 year. We can say the vaccination campaign in the U.S. is very successful. You can see that with the numbers. And now people feel more and more trustful and they can go back to the restaurants. The whole industry has been benefiting in Q1 from this increase and Red Lobster particularly. Of course, we will need to follow-up over the next quarters but this is a very good news, and we are very happy about this one. We are still a bit careful. On the last time, if you remember, last year, they have been generating THB 1.2 billion. For sure, there will be some losses generated in the next quarters, and we still maintain our target of generating half of the losses in 2021 compared to 2020. However, the picture is good and is really improving. Keep in mind one thing also is that the average capacity for Red Lobster restaurants is still around 50%. So here, we mean that they have been able to manage to deliver a profit in Q1 2021 with almost all the restaurants opened but only with 50% capacity. So this is really a great performance coming from them. Now we are facing some new challenges. Indeed, we need to hire more staff and more managers in our restaurants. And there is a high competition on these people, plus the fact that the administration is providing some free money to many people is not a good incentive for many people to get back to work on this one. So you can see now, and you could see there were a lot of articles in the newspaper recently on this one of people trying to hire more workers and more staff. So the first good news is really Red Lobster is back to profit in Q1, and this is a very good news for all of us. There is a second news, which is the second line that you can see here, share of profit coming from the lease accounting adjustment, which is a loss by THB 307 million. So where did it come from? And on this one, usually, the U.S. GAAP and the Thai GAAP are almost fully aligned on the lease accounting standard. Here, we are just talking about the specific accounting standard, which is called lease. And here, normally, you don't have a big difference between U.S. GAAP and Thai GAAP, except on one thing. The reason of depreciation of the right of use is different between U.S. GAAP and between Thai GAAP. And in fact, in Thai GAAP, it is what we call front-loaded meaning at the beginning of the lease, you will record more depreciation expenses in Thai GAAP compared to U.S. GAAP, okay? And this is why at the beginning of the lease, you generate more expenses in Thai GAAP. Normally, you don't have any significant impact. And I have never seen in any other companies, some significant adjustments coming from this difference. However, within Red Lobster, there is one specific and unique situation. A few years ago, they have been doing a transaction, the sale and leaseback for the vast majority of their restaurants. And this is why now when you look at the portfolio of Red Lobster, something around 800 lease, the vast majority is just at the beginning of the lease period, okay? And this is where we have a significant negative adjustment between U.S. GAAP and IFRS. Plus the lease period is always a bit long in Red Lobster, on average between 20 to 40 years, okay? And as I mentioned, so we have something like 800 lease to be analyzed. So here, it took us a long time, really for us to assess the differences. Initially, we thought, beginning of 2020, that there was no impact coming from these differences because we could not see anywhere any difference coming from that. However, we have been investigating, and it took us a lot of time. Remember, in 2020, Red Lobster was facing with a lot of challenges in these operations. They have been working also on the refinancing. So we only get the conclusion early 2021. And this is why we recall in Q1 '21 these negative one-offs. So if I go into the details. Over this THB 300 million adjustments, it is made up with two parts. There is one part, which is related to prior year, which is for THB 200 million, THB 207 million. There is another part, which is specific to Q1 2021, which is THB 100 million. So the total impact on the share of profit is minus THB 307 million. Of course, we record some additional expense. So we have a small portion, which is offset by some tax credit for 25%, and we have something like THB 78 million tax credit happening in Q1. Now moving forward, we will have this impact every quarter. So we can already mention that in Q2, in Q3 and Q4, we should have roughly an impact of minus THB 100 million in the share of profit and an impact of plus THB 25 million in the tax. So we do expect to have a net impact around THB 75 million coming in Q2, in Q3 and Q4. This is not a good news. However, we have to recall this one. It's a pure accounting difference, a pure timing difference between U.S. GAAP and between TFRS. There is no cash impact at all. Apart from this one, we have the usual topics in the other income in the interest expense and income tax. You can see the net income impact coming from Red Lobster was positive in Q1 at THB 64 million. If you compare to the contribution in Q2 2020 and Q4 2020, we are very happy about this development. Just next slide, we just wanted to share with you some of the improvements performed by Red Lobster during this quarter. You can see on the top right, and we start with this one. This is a percentage of outlets which are opened. And you can see in March and April 2021, we are quite high, around 96% and 98%, which is quite strong. If you compare to last year, they were almost all closed in March 2020. So there were different initiatives, which were launched in Q1 2021. Of course, we have the Lobsterfest, which is one of the key events for Red Lobster. We have Valentine's Day. We have also the Lent period, I mentioned this one. The off-premise business remains also very strong. And the curbside pickup also has been growing very quickly. If you remember, we discussed in Q4 regarding all the digital investments that Red Lobster have been doing. The menu has been changing. If you remember, last year, we moved to something which was very simplified. We moved to a 40-pages menu to something which has only 2 pages. Now we are increasing again. We have more customers, and they want to have more choice so we are reacting very proactively on this change. And right now, as I mentioned, the key focus is really for us to attract some new staff and new managers. Of course, one of the key actions facing all these issues with the operations in 2020 was to cut into the resources of the restaurants. So now we have the 2 new challenge beyond us, which is recovering and increasing again all these people. So we are positively -- we are positive regarding the outcome of Red Lobster in 2021. The vaccination campaign is very successful in the U.S., as we mentioned. There are also some few stimulus check coming on this one. We are also conservative. We maintain, for the timing, our assumptions of loss decreasing by 50% in 2021 compared to 2020, but we may have some good news in the future regarding Red Lobster. Back to you, Amie, for the net working capital discussion.

All right. Thank you, Ludo. Here, we had negative THB 125 million free cash flow for the quarter. We generated a strong profit, and this required cash for our net working capital. At the same time, we had high level of inventory in transit due to delayed shipments. So this inventory hasn't been cleared and cashed to us yet. So we saw this as a temporary timing issue and will be recovered in the next quarter. Next, please. Here, net debt increased by THB 1 billion driven by reduced in net working capital, as I just mentioned on the previous slide, offset by gain in EBITDA, THB 3.4 billion. Capital spend, investing in financing activities and everything else were in the normal level. And net debt per equity ratio was 0.93x versus 0.94x at the beginning of the year because equity increased more than debt increased. Next, please. Here, our interest-bearing debt funding, the debt was diversified to different currencies through the new sustainability-linked loan program. In Q1 '21, Thai baht funding was reduced and increased to USD, euro and Japan yen in order to reduce the currency volatility. And on the right-hand side, by maturity, changes were from long-term debts that are mature in 2022 will be classified to short term, as shown on the right bar. Shift was from 14% to 37% in Q1 '21. Next, please. Financial ratios, they're all healthy. Return on equity and return on capital employed will improve to 15.5% and 10.4%, respectively. Net working capital was high from temporary increase of inventory and net debt per equity was healthy at 0.93x. Next, I'll pass the presentation to [ Khun Gail ].

Thank you, Amie. So for this slide, we show you the average of raw material prices, starting from average tuna price was USD 1,283 per ton or a drop 11% year-on-year in first quarter. The shrimp price was stable year-on-year at THB 149 per kg in first quarter. However, the average salmon price was -- declined 23% drop year-on-year. In April, we see the key raw material prices movement remain -- still remain in our expectation. Next is on the currencies. In first quarter this year, Thai baht weakened against euro and pounds currencies while strengthened against the U.S. dollar. So this partly supports our sales growth in first quarter this year. And also for the 3 core businesses, this quarter, we saw higher sales portion from PetCare and value-added business unit. The Ambient sales portion still at 43%, frozen and chilled seafood at 39% and PetCare and value-added sales at 18%, which is higher from the past quarter at about 15% to 16%. So thanks to the strong demand of the PetCare business and value-added. So we go to details of each business unit. First is on the Ambient seafood, the sale declined 13% year-on-year. We already mentioned on the lower tuna sales in the U.S. and in Europe, that because of the -- partly of the global container shortage and the exceptional sales push in first quarter last year during the first wave of COVID. Despite the lower sales, we look at the gross profit margin, it remained high at 20% first quarter this year versus 19% first quarter last year. So this thanks to the lower raw material price, improving business in sardine and mackerel and salmon. The Ambient business, we want to highlight on the both sales and margin that we still grew from pre-COVID-19 level first quarter '19. So on the frozen and chilled seafood business, we recovered well at 10% year-on-year. We saw food services, particularly in the U.S., improve substantially thanks to the vaccine administration. So the gross profit also recovered to 10.5% in first quarter this year. So for both sales and margin expand strongly for this business unit compared to pre-COVID-19. So thanks to the business recovery in shrimp, lobster, and we have seen an increase in export. We'll explain more about the frozen and chilled seafood. This, on the left hand, you see that the chart -- that the gross profit for this business unit are back to growth already. First quarter this year, gross profit record THB 1.2 billion, so up 44% year-on-year, and that also beat first quarter '19 pre-COVID. This pushed by the strong sales in the U.S. and Thailand. So our strategy, of course, we focus on the modern trade, supermarket and online channels. We introduced new value-added products to customers. For the cost side, we have focused on the cost-saving and productivity enhancements. Move to the PetCare and value-added. That increased 21% year-on-year. We see the volume, the selling volume increase as well. That's because people spend more for their pets in the pandemic. We focus on the higher-margin products and new product launch driven by the innovation. So gross profit margin remains strong at a high level, 27.4% in first quarter. So we see the strong demand in both domestic and export products. And of course, on the top line and the margin expand largely compared to the pre-COVID-19 level in first quarter '19.

Let me just jump in on this one, Khun Kalvalee, if I may, on this one. Really this channel and this category is one of the key drivers. You can see here the numbers. And I think what I can find very impressive here is the top line graph we have on the top left. You can see since Q1 '19, we moved from THB 4.4 billion and then to THB 5.5 billion. So this is really one of the key drivers and one of the key explanation of Thai Union's strong performance in Q1 but also the previous quarters. You can see the gross profit margin are very healthy. For TU, we have an average for the whole group, which is around 17%, 18% over the last quarters, and we are very happy about this one. But you can see here for this category, which is smaller in terms of size compared to the others, we are delivering around 27% gross profit margin. So keep in mind, this category made up with PetCare, value-added and others also is highly profitable for us, and we are really willing to push more in this direction. Back to you.

Thank you. So I think this picture of this chart explain what Khun Ludo said about our past 5-year history on the PetCare sales and gross profit margin. We can see that PetCare and value-added sales grew from THB 15 billion in the past 5 years to THB 20 billion last year, with the upward margin trend so the key driver, of course, is the higher demand from the global cat and dog population increase. And thus, of course, the pet food. We also have our own internal factory automation of our factories, a launch of new and innovative products. So our global care innovation centers, we continue to explore pet food solution, push new category to the key existing customer. And of course, in Thailand, our key cat food brand is Bellotta. So we are doing quite well, and we donate over 40,000 cat food cans during the pandemic. And this is the sales portion by geography. In fact, it increased slightly from North America, thanks to the recovery of frozen and chilled seafood business. So we go detail in the North America, that sales increased by 6% year-on-year in Thai baht term. The U.S. Frozen seafood business of lobster and shrimp sales increased substantially by 50% year-on-year. And also, we see the Red Lobster operation also marked a profit in first quarter. So this was thanks to the vaccine administration that have promoted a favorable environment to the food services in the U.S. And of course, compared to first quarter '19 pre-COVID, the performance in North America remained strong. In Europe, we experienced the sales decline 11% because of lower branded demand across all markets. Last year, we had the exceptional push from shelf-stable products during the first wave of COVID. However, if you see compared to the first quarter '19, Europe's -- European sales remained strong compared to that number, THB 8.2 billion. So thanks to our strong branded position in Europe market. And then move to Thailand. Thailand sales grew by 5% year-on-year and very strong from pre-COVID level driven by the PetCare and value-added business. And lastly, on the geography, is emerging market and the rest of the world. We experienced sales increase, 3%, so mostly, we see a strong sales in tuna segment in Middle East market, but however, performance in Asian markets remain challenged comparing on a year and the pre-COVID level. So overall this quarter, we delivered consistent high gross margin, derived from 3 core businesses, particular frozen and chilled seafood and PetCare and value-added businesses. Lastly, of course, we maintain our financial guidance for this year. We can highlight a key monitor that would be the global container shortage, the pandemic situation and also the FX, the currencies. That would be key monitor for investors to look at that. But of course, 2021 guidance is maintained. And lastly, the last slide, we emphasized our Thai Union, we have commitment to the Healthy Living, Healthy Oceans and the 2025 corporate strategy. So this is wrap up our presentation. Now it's Q&A session. [Operator Instructions]

So here maybe we'll start with the questions on Red Lobster. Okay, no surprise. I think there are many questions on Red Lobster, and maybe I can take some of them, if I may. The first question is, what do we have in the other income of Red Lobster? [ Khun Gail ] can you get back to the details of the Red Lobster, please? In the other income, we have 2 significant components. We have the 8% preferred interest that we record on the preferred shares, and there is no real change, each one quarter after quarter. There is only some changes coming from the FX. So this is one impact. And the second one is we are benefiting from some management fees provided by Red Lobster. You can see here in this chart, this is the line other income. So the amount is very stable, around THB 240 million, THB 250 million every quarter. This is coming from the 8% preferred shares. There is one extra amount in Q1 '21, which is the management fees. In 2020, we did not record any management fees from Red Lobster because we were renegotiating with the banks. And you know that Red Lobster was doing its refinancing at that time. And it was not sure that we could get some management fees coming from Red Lobster. In Q1 2021, we finalized the refinancing, and we did record a catch-up of our 2020 management fees. We did not record our management fees coming from Red Lobster in 2020 and this is why you can see a small increase in the line other income in Q1 '21. Maybe the last one, question also on the lease accounting adjustment. And maybe here, [ Khun Gail ], we can go to Slide 51. So I just want back to this one, and we tried to put -- it's not very easy because it's a very technical question. I'm sorry for that. But I just want to share again, the lease -- what is the lease adjustment? The lease adjustment is, basically, you are removing the lease operating expenses from your P&L. This is what you can see here with the blue -- the dark blue on the top. So it's a positive impact in your P&L. And then in U.S. GAAP and also in Thai GAAP, you are basically just replacing these operating expenses by some depreciation and also some finance costs. If you remember, the key topic for the lease endowment is to say we take all the lease and we capitalize these lease in your assets and with the related financial debt, okay? And of course, the asset is called right-of-use and then is depreciated. And the financial debt is also generating some financial expenses. And you can see here the net impact between the removal coming from the operating lease expenses in the P&L and the new expenses coming from the depreciation and the finance costs. And you can see here the yellow line. The yellow line is the impact of the net profit on Red Lobster, coming from the lease -- this lease accounting adjustment. So it's a negative impact, and it will remain negative until 2030, okay? The impact is pretty large, and we mentioned this on the impact for 2020. 2021 will be roughly THB 1 million -- THB 100 million per quarter. So for the full year 2021, we do expect a THB 400 million expense coming from this one. Plus we have, in Q1 2021, catch-up also of 2020 and prior year for THB 200 million. So the total impact for the whole year is expected to be around THB 600 million in the share of loss. This is very significant. Please keep in mind that we have also some tax credit for 25% of this amount, which will partially offset this amount. Again, I insist, it has nothing to do with the real performance coming from Red Lobster. This is again a pure accounting difference. Don't ask me why there is such a difference, but it is a fact and there is a small difference in the rhythm of depreciation, which is front-loaded in Thai GAAP and which is not front-loaded in U.S. GAAP. So we'll continue -- can you get back to the Red Lobster, please, and details? Going -- moving forward, we will share with you this table where you will see in the first line, the share of profit coming from the operation. And then in the second line, you will see the share of profit coming from the lease accounting adjustment, okay? So the first line you can see here is fully comparable with the past. There is absolutely no change. And they have been generating a benefit in Q1 2021 by 80 million -- THB 81 million. Just below, we have the impact on the share of profit coming from the lease accounting adjustments. We have THB 100 million coming from Q1 '21, 200 -- THB 207 million coming from prior year. Moving forward, you will see a minus THB 100 million, roughly, as per our estimate in Q2, Q3 and Q4. There is another question, still on Red Lobster. I try to cover all of them. Does the target to lower loss from Red Lobster by half include the impact from increase in the lease expenses? No, it does not. If you remember, last year, we did -- in Q4 2020, we did communicate to you this target of Red Lobster decreasing their loss by 50%, and it was before this information regarding the lease accounting adjustment. So clearly, it does not. Right now, our assumption is on the first-time share of profit from operations to have Red Lobster decreasing their losses at least by 50%. Last year, in 2020, the full year impact coming from Red Lobster was minus THB 1.2 billion. So we want them to achieve and have a loss of THB 0.6 billion, excluding the lease adjustment. The lease adjustment will come on top. And I mentioned for 2021 the total impact on the share of loss is roughly around THB 600 million, THB 200 million coming from the prior year and then THB 100 million for each of the quarter. But I think overall, we are a bit conservative in our assumptions. I think that the share of loss coming from the operations could be much better compared to only half of the losses coming from last year. The Q1 has been really strong. There is one impact, which is a bit difficult for us to appreciate, which is how much of this improvement is coming from the stimulus check and the free money coming from the administration. But overall, we can see really some really good underlying trend. We can see the gate count is increasing, and we can see more and more getting back to the restaurants. This is applicable to us and also to the whole restaurant industry in the U.S., but we want to be a bit conservative on Red Lobster. Considering the past we had last year, we say, we want to be a bit careful in our approach to them, but the news in Q1 are quite good on this one. Next one, maybe Amie? Next question?

Sure. I can just pick one, right?

Sure.

Regarding -- we saw some question on the fair value adjustment regarding our business in Russia. And the question was, please explain the additional fair value adjustment related to Russia that we recorded in Q1 '21. So we told you at the end of last year that we were facing some challenges with our business in Russia. And this is why we recorded this change in fair value in Q4 2020. And Q1 '21, the business is still performing below our expectations. So we recorded another EUR 2 million or THB 73 million change in the fair value. We can now see some kind of stabilization for this business in April, to be confirmed in the following months.

Maybe I'll take the next one. Next one, we have a question regarding the fire situation happening in Germany in April 2021. And indeed, here, if you go through our financial statements, you can see in the subsequent events, we have one specific paragraph for getting the new fire unfortunely happening in Germany. So this happened in April 2021, so after the closing. We have something like 4, 5 factories in Germany, and there was 1 fire happening in one of these factories in Germany. If you remember, in 2019 and in 2020, we have 2 very large fire incidents happening in Germany also, but in a different factory, in our new -- brand-new facility called TUMN. And then last year, we have also a fire destroying one factory in Canada. Now we have, in Q1, a very different situation. The fire incident is much less serious compared to these 2 large incidents. Yet, our production is -- in this facility stopped. We have been engaging in discussions with our insurance company on this one. We are sure that this -- that the damages will be covered. At this stage, today, we don't have any view on the production damages. We expect to -- it may end up with a few hundred of million of euro, but it would be fully covered by the insurance. Again, the building are not damaged and all the equipment are not damaged, but the ceiling is destroyed, and you have also a lot of dust everywhere. So we have a lot of decontamination to be performed in the factory. We are not really concerned. We won't have any significant impact coming from this one. We have 2 months of finished goods inventory before this fire in Germany. We can use also the other factories in Germany. We can use also other factories in Europe. And if need be, we can use also our own factory in Thailand to help them facing with this issue. It's a challenge. It's not a good news for us. It's the third fire which happened in a few years. We know we are in a risky business, and we need to cope with this situation, okay? So I think in Q2, we will be able to provide you with some more details regarding the damages, but from a pure operation and finance point of view, we don't expect any significant impact coming from that.

I'll take the next one. What is Ambient business outlook? And can we maintain Q1 '21 momentum into the next quarter? So normalization was expected in Q1 '21, and we all knew that peak sales from the first wave of COVID-19 last year do not repeat this year. And if you compare Q1 '21 versus pre-COVID-19, Ambient grew quite a bit, and we're very happy when we compare when the situation was normal, especially when the gross profit margin was at 20%. It is a very good success to us. So we remain positive and believe that we have strong plans for the rest of the year.

So next question, we have a question regarding the cash flow. And indeed, we have in Q1, we have -- and maybe we get back -- can we get back to the specific slide, please, [ Khun Gail ]? We have, in Q1, a very strong profit. We mentioned a very strong OP. Maybe we just get back to the net debt bridge, if I may, okay? So you will see in Q1 a very strong EBITDA generated. You can see here on this graph, we have THB 3.4 billion EBITDA. However, we have a highly negative impact coming from the net working capital by THB 2.7 billion. The key drivers for such negative net working capital is an increase of our finished goods and our goods in transit also. As we mentioned, we are facing in Q1 with some supply chain issues and logistics, and there is clearly a delay in our sales in the U.S., in Europe and also in Asia. And we have many products just being on the sea or waiting in the port for some vessel containers. So you have an increase of the inventories. At the same time, we have been managing to decrease our inventories of raw materials. And we have also a decrease of our account payables. So overall, we have a strong increase of our net working capital by THB 2.7 billion, and this is almost offsetting the EBITDA, the strong EBITDA coming in Q1. You can see also the impact coming from the CapEx. We have THB 843 million spend in CapEx in Q1. If you remember, we have a target for the whole year of THB 6 billion to THB 6.5 billion. We are on track. I think we are slightly late on this one. When we set up this target of THB 6 billion to THB 6.5 billion, we didn't have in mind the COVID impact in Thailand. And of course, the peak which happened in Q1 has been delaying some of these amounts. So I would expect that over the -- we need to see what's happening in Q2 and in Q3. But over the full year, we may not be able to spend exactly the THB 6 billion that we are planning. Apart from this one, you can see the other amounts are much smaller. So the key drivers really for the negative cash flow are the net working capital and also the CapEx and the interest paid in Q1 '21. I think we are not concerned. We still believe we will generate some cash in 2021, and this is clearly our target. But clearly, it's a good heads-up for us. So we'll follow carefully the situation in order to make sure that from a cash situation, we get back to where we want to be in 2021.

Okay. I'll take the next one. Our gross profit margin seems to be gradually eroding since Q2 of last year from 18.2% to 17.7%. If you look if we compare from our track record, 17% and 18% is very strong. And 18% last year was all-time-high record for us with some exceptional push in Ambient from COVID-19, and we are now at 17.7% versus 16.2% last year. We are very happy with this performance.

So maybe I'll take the next one. And here, we have some questions regarding the Q2 2021 in terms of revenue, in terms of segments. I think what we can say, you could see the picture in Q1 2021, basically the Ambient category is declining, but this decline in total top line is fully offset by the PetCare, value-added and also the Frozen categories. We do expect this positive momentum to continue in Q2 2021. I think we are a bit surprised and the decline in the Ambient category is a bit stronger compared to what we're expecting. And on the flip side, the growth on the Frozen and the PetCare and others is also a bit stronger compared to what we were expecting. So all in all, we are almost on track compared to what we wanted to be but who is, however, a different portfolio what we have. In Q2, and maybe you get back to the 5-years graph, if you can see this one. We told you that we have a growth target for the full year 2021, which was between 3% to 5%. We maintained this target for the whole year. If you get back to Q2 and to Q4 last year, the growth -- top line growth was not that high. You can see here, 2.6% in Q2, and then we are just below 2% in Q4. So we believe that the growth will mostly happen during this quarter. So in Q2 2021, we do expect to have a strong top line growth. So this is for the top line story, and we maintain again our target of 3% to 5% top line growth. There will be one key driver, which would be, of course, the USD impact. USD is very important for our business. You know that we have something like 40% of our sales in the U.S. So depending where the FX rate tied by -- against USD go, we may have some challenge in this top line. But we had some issues in Jan and Feb because the actual FX rate was a bit far away from our budget assumptions. However, now it's improving. And right now, the actual FX rate is very close to our budget operation. So we need to see how does it flow. But right now, I think we are in good track. And we strongly believe that this is very positive momentum that we have since 4 quarters now will continue over Q2, Q3 and Q4. We are very optimistic for the whole year. Just maybe one word on the gross profit margin. We told you that the gross profit margin was very high over the last 4 quarters. It will continue in this direction. We don't see any reason to change right now. The raw material price are still where we want them to be. Of course, we have some challenges here and there, but overall, they are under control. There will be one topic to keep in mind, which will be the development regarding the logistic cost. We told you since Q4 and that it was impacted negatively our business. In Q4, we told you that we were expecting the situation to improve and to get back to normal at the end of Q2 2021. I think we are now revising these assumptions. We believe this difficult situation from a supply chain point of view will remain until the end of Q4. However, we believe the situation will improve, but it improved gradually, and it's much smaller, much lower compared to what we are expecting. So this is maybe the only topic that we need to keep in mind. But overall, the guidance is to say the momentum right now is positive for TU since 4 quarters, and we believe it will continue in the next quarters. Of course, we are not sure we'll be able to deliver such a high performance. In Q1, this is particularly high. You need to keep in mind that part of this one is explained by some FX gain. We have THB 260 million in Q1. This may not repeat again every quarter. If you remember last year, we had some FX loss in Q1. And then after we had some FX gain in the next quarter. So this one, we don't fully control. But overall, we're positive and the outlook is highly positive for our business. Next question, we have one question regarding the situation of Avanti, our associate in India. And of course, the COVID situation in India is very challenging. So far, so we don't have yet the numbers. For Q1, we know they will reveal the numbers a bit later compared to us because we don't have exactly the same year-end. However, it seems to be under control. They have -- they are facing some regarding their frozen products. But regarding their feed business, it was okay. I think that they had some impact regarding the availability of the workers in Q1. And that one, they have been facing with some challenges in their frozen business, but from the last news we have, the situation of the feed business was good on this one, but it will have to be confirmed with the numbers. If you remember, in 2020, we were very impressed by Avanti's performance, which was very strong and, in fact, much better compared to our own performance in the frozen industry. So we'll see how it grows in 2021 in the specific context of COVID-19 peak happening in India. I just have one more question also on the Red Lobster management fees in Q1. So here, normally, this one is supposed to be recurring, but as I mentioned to you, in 2020, we did not record it. And if you get back to '19 or '18, normally, we were recording this one every quarter. It was a bit different in 2020 because we were renegotiating and we were refinancing the company. And at that time, we are not expecting the management fees to be paid. Finally, it was concluded in Q1 '21, and we could be managed to be paid for a portion of this one. So the 2020, for sure, there is a one-off impact happening in Q1 2021 on the payment of these 2020 management fees. But going forward, we will still continue to benefit from these management fees as we have been enjoying since the acquisition of Red Lobster. There is maybe some few more questions, questions regarding Canada. And with the factory, we resume the operation after the fire happening last year. We are right now investigating different possibilities on this one, and one of the possibilities for us to sell our business in Canada. So we have different options on the table. I think there will be more developments and more things to say in Q2 2021 for us. Right now, the direction is not for us to resume the operations there. Just for you to remember, the factory in Canada was mostly sourcing for our lobster business in -- for Chicken of the Sea Frozen in the U.S. and you can see in our segment category, that the lobster business has been increasing in Q1 2021. What does it mean? It means that Chicken of the Sea Frozen, our Frozen operation in the U.S., has been able to replace basically this Canadian sourcing in Q1 2021. So we don't have any concern regarding the long-term operations, and it does not hurt our operation in the frozen channel. A few more questions with Seychelles. Seychelles, we can now read some news that Seychelles is looking down again. Will this affect TU's operations? I think you are correct. We could read also in the past days, some increase in the COVID-19 cases in the Seychelles. It's a bit weird because I think the vaccination campaign has been very successful in the Seychelles. So we need to see the development over the next days and weeks. With the COVID-19, the situation is highly volatile. So we need to manage on a daily and a weekly basis, okay? And we need to know that this is our new way of working, okay? You will have some peak of the COVID-19 happening in different locations. And this is our role, and this is our task to try to manage it the best way we can. Until now, I think we can -- we have demonstrated that we are very successful in managing our supply chain. And again, apart from the example of Ghana, which happened for few weeks last year, we did keep all our factories up and running during the COVID-19, and I think it's a great success. So we'll follow carefully the situation in the Seychelles. The vast majority of our workers in Seychelles is vaccinated already with 2 doses. Now we need to see which variants are we talking about. At this stage, we don't have any impact at all in our production, but we need to manage carefully and to follow-up over the next days and weeks. Sorry, here, we are running a bit out of time. I just take maybe some few more questions, and then we stop. So we have one regarding the pet food. What would be the growth momentum for pet food for the rest of the year compared to Q1 '21? I must say I'm very pleased and very impressed by our -- the performance of our category PetCare and value-added in Q1 '21. And you can see it's a consistent growth since, I think, 4, 5 quarters. And this is one of the key driver for TU's strong performance in Q1 '21. I'm not sure this momentum will remain and they will grow in the same path for the year to go. However, we have some strong expectation. We have some good plan. We have a very strong portfolio in terms of NPD in the pet food and maybe one next quarter, we can share with you some more examples. There are some very funny and good products that we want to launch in this category. So the momentum will remain very strong for the rest of the year. We grew exactly the same path. I'm not sure. I think it's a bit too early to mention. This one, we have been really successful in Q1 '21. We want to continue to push further, but maybe it will be not exactly growing exactly at the same rate. Can you go up in that, please? And maybe I'll just take the last one, which is on the incremental growth on the reported net profit. What is coming from the FX? What is coming from the fair value? And what is coming from the operations? I think if you get back to our P&L, you will see the increase coming from the OP is something around THB 300 million. So OP is very strong in Q1 '21. This is one of the key drivers. That is the second big explanation for the improvement compared to last year, which is the FX. We have in Q1 2021, FX gain around THB 250-plus million. Last year, it was a loss by THB 260 million. So clearly, the switch in terms of FX is really also one of the key drivers for the performance in Q1 2021. So they are the 2 key elements. Operating profit is very strong. FX gain also switched from an FX-loss situation to an FX-gain situation. If you go line by line, you will see that we have also some good news in the finance interest, in many different lines, but these are really the key items. I want to insist again also on the share of profit. If you compare to Q1 '21, you don't see a lot of changes. But this one, keep in mind, include also the THB 300 million lease accounting adjustment we have been recording on Red Lobster. If you exclude this one, you will see the share of profit is strongly improving, in fact, compare compared to last year. Anything remaining on this one? Okay. Just get back on the revenue growth target for 2021. I think we mentioned this one. We said at the end of Q4 that we had a revenue target between 3% to 5% for the whole year. For the time being, we've maintained this target. And I think Amie mentioned this one. In Q1, we are flat compared to last year. However, we have some strong expectations and strong plans to generate some growth, especially in Q2 and in Q4 2021, where if you look at 2020 performance, we are not growing that much during this quarter. So this is really where we do expect to have some growth. So for the timing, we maintain our target sales between 3% to 5% compared to last year. [ Khun Gail ], I think we should conclude the call.

Yes, sure. Thank you, Mr. Ludovic, for your presentation. So thank you for your interest in joining our conference call today. So if you have further questions, please feel free to contact IR team. So thank you for joining us today, and have a good one.

Thanks a lot, guys. Thanks also for all your questions. We can see, and we are not surprised, a lot of interest coming from our numbers. Again, we are very pleased with this one. If there are any remaining questions, you can still ask tomorrow. Tomorrow, we have the physical -- the online, sorry, analyst meeting. Please join this event. We can elaborate more. Khun Thiraphong will be with us. He will share his own insight. But really pleased with Q1 numbers. And I think this is very encouraging for the rest of the year.

Thank you. And see you again tomorrow. I won't be in the call, but...

Thanks a lot, everyone.

Yes, any questions, just let us know. Thank you. Have a good one.

Thanks a lot.

Thank you.

Goodbye.

Bye.

Cheers.