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

[Foreign Language] [Presentation]

[Foreign Language]

Thanks a lot, Khun Thiraphong. I'm very happy to be with you today to share our numbers. As mentioned by Khun Thiraphong, we are very pleased with our Q3 numbers. We can jump directly to the key takeaways. I will go quickly on this one because I will get back to these after. So here, what you need to keep in mind is despite the fact that we have a baseline in Q3 2020 which was very high, we were able to generate a new growth in Q3 '21. We are very happy about this one by 2.2%, mostly coming from the Frozen and PetCare activities. We are benefiting from a strong FX impact. If you exclude the FX, our sales are dropping a bit by 1.2%. Gross profits were increasing in absolute amount. We are declining a bit in growth profit margin but overall a very high level. We remain around this very sustainable level of 18%. I'm very pleased about this one. OP were impacted by some one-off, I would say, that we had to face in Q3. We are facing with very high logistic costs. And I will get back to this one after. We have also to face with additional expenses coming from the COVID-19 outbreak. Below the OP, we are declining in terms of share of profits. You will see the [indiscernible] performance is almost the same as last year, declining a bit but very slight. We have the impact also of the accounting lease and -- that we have been recording since the beginning of the year. And we are also facing some decline coming from Avanti. But bottom line, Q3 net profit stand at THB 1.9 billion, but declining a bit compared to last year. Again, we believe this is mostly due to the SG&A expenses COVID-19 related, the lower workforce capacity that we had to face and also as mentioned by Khun Thiraphong, some temporary factory closure on this one. But overall, we did manage quite well. I'm very happy about this performance. If you look at the last 4 years story in terms of net sales and gross profit margin, I think we are quite happy with this one. The gross -- the net sales have been increasing over the last 7 quarters in a row. The gross profit margin has been very high, always around the high line of 18%. If you could remember, at the beginning of the year, we told you anything around about 17%, we would be happy. But here since last year and this year, we have been able to generate more than that and around 18% on average. And you can see, of course, the impact of the net profit has been very interesting and especially since the beginning of the year. Just a quick update also now, rating position. Of course, we have a very strong financial position. So you could see maybe we start with the news on the right here. For the first time, we have been asking the Japan Credit Rating Agency to perform rating within -- about Thai Union, and we have been assigned with A- a stable outlook in August 2021. We are very happy about this rating. It was the first time we are asking the Japan Credit Rating to do it. And just to give you some benchmark, the A minus is the equivalent to the sovereign rating of Thailand, so we're very happy about this one. And we believe it's a clear demonstration of our very strong financial strength. On the left, you can see the rating provided by TRIS in Thailand. We confirmed A+. The outlook turned to positive. So we have a better outlook compared to before. And again, we are happy with this one. We talked at the beginning of the year, 2021 will be for us a journey to sustainable finance. And just to give you some background. So here in 2020, all our finance long-term financing was coming from the traditional finance. In '21, we have moved already a significant portion of our long-term financing to sustainable finance. At the end of '22, our goal is to achieve 50% of our long-term financing being linked to sustainable finance. And you can see 2025, our goal is to move to 75%. You can see at the bottom here, the 2 topics we already mentioned in our Q1 and Q2 earnings release. I don't -- I will not get back to this one, but we have the first SLL and the first SLB in Japan. The new news is in Q4 '21, and we are about to announce this one is we have the SLB, the second one in Thailand for THB 6 billion to maturities of 5 and 10 years. And you can see here the interest rates that we are able to reach are very attractive. This is not the end yet. You can see we are right now working also on launching second SLL in Japan. And hopefully, this should be finalized at the end of this year. But overall, very happy. It's a journey for us that we moved and we did a very significant step-up in 2021. Next, just the way we manage our portfolio. And of course, we told you since a few years already that we are focusing on the loss-making businesses or some of the businesses which are not performing as much as we're expecting. And here you have 2 clear examples. The first one is our joint ventures in Middle East. We have 2 joint ventures here. We done this one in 2015. We were not happy with the results. So we decided to divest to our local partner and to sell these businesses back to them, okay? The significant -- the impact in terms of accounting is very small. So there is no significant impact in our Q3 numbers. But we believe going forward, it can be better for us and also for the local business. On the right, it is the news coming from beginning of October, Thai Union Europe, our subsidiary, announced the closure of our chilled business in Poland. We have a small factory in Poland, taking care of the [indiscernible] mostly. Over the last 2 years, we have been facing with difficult situations. Here, we have lost some volumes. And basically, we don't have any -- enough volumes in this factory to be competitive. You may know that the Polish market is highly competitive. So we decided to close or to sell this factory. We'll see in Q4, we are having some discussions right now with different partners. Just for you to keep in mind, if we mention the big picture, the big activity for our chilled business is coming from our factory in France. It is Quimper. And this one -- there is no change on this one. Any impact on our numbers will be quite small. Next one, just to watch out. And we are not the first one to talk about this one. I think you have heard the whole food industry mentioning about these ones on the left. First of all, I told you I will elaborate a bit on the freight cost and the container shortage. We told you that in Q1 and in Q2, the impact -- the estimated impact was something around THB 200 million in third quarter. In Q3, the impact has been deteriorating. And the impact in Q3 stand-alone stands at THB 468 million. So this is a key explanation from our high SG&A in Q3. So the same situation and even worsening in Q3. The difference is in Q1 and in Q2. It was mostly the U.S. and also Asia being impacted. Now in Q3, we can see also Europe being also impacted. And you can also see that our Frozen business has been very successful in Q3. And of course, the vast majority of our Frozen business is export. And this is why we have such an increase. The second impact on top of the cost is also an increase of the transit time. And you can see here, we have a small graph. We have lost something like 15 to 3 weeks -- 15 days to 3 weeks in terms of days of transit time between Thailand and the U.S. And this is one of the key explanations why our inventories have been growing so much in Q3. On the top right, you can see the inflation we are facing. Two topics: First of all, the packaging. And you can see here, we just give you the examples of steel price, which have been increasing a lot and also on the oil. We are using different oils and here are the example of the sunflower oil. All of these raw materials have been increasing a lot at end of '21. And we do expect also some impact in 2022. So here, our mitigation factors are we are trying to share the pain and to negotiate with our customers and with our suppliers also on how to cope and to face with this price filtration. But of course, it will mean some price increase for next year. For 2021, the impact would be rather limited because we have some long-term agreement and supply term agreements. However, to watch out for 2022, this is another challenge we have to face next year. We are not the only one. Again, all the food businesses are facing with the same situation. Just as we -- on the tuna price. I think in Q3, they were under control, $1,400 on average. In Q3 '21, decreasing a bit compared to Q3 2020. You can see in October, we are facing a small inflation. And this is our expectation for Q4. We are expecting an inflation of the fish price but that rather limited and still in the range of $1,300 to $1,700, where we say at this stage, we are able to manage. Next one is a big focus on our sales. So I told you, overall, year-on-year increasing by 2.2%, minus 1.2% if you exclude the FX, but just compare to where we were 2 years ago before COVID-19. So we are growing by 11.6%. So that's why we say, overall, we are very happy. Again, the 2 drivers are the Frozen business and the PetCare, same situation that what we had in Q1 and Q2. The Ambient business is also still normalizing. Over 9 months, we reached sales of top line of THB 103 million growing by 3.6%. I think we are exactly where we wanted to be and in the guidance we gave you at the beginning of the year. And we believe also in Q4, we'll follow the same direction. We are quite positive over Q4. I think next graph is very interesting for you. This is our year-over-year bridge. You can see by segments and you can see on the left all the Ambient segments are declining, mostly the tuna, the mackerels. And you can see in the middle on the right, all the Frozen segment and also the PetCare and value-added are growing a lot. Okay. You can see, I think, the PetCare activity is very interesting because we told you that we had some factories being closed in Q3. And despite this one, we have been able to generate a 9% top line growth. Of course, you can see the boxes on the right. The FX impact was very large in Q3, and they are very favorable. The Thai Baht has been depreciating versus euro, USD and GBP in Q3. Next one, I will go quickly. This is our usual breakdown by regions and by business. The U.S. have been growing to 43%, 29% for Europe, domestic market around 10%. So the U.S. has been growing mostly explained by the U.S., China. So the dynamics is coming from our Frozen business there. In terms of business, you can see private label represents 53% branded business, 48% and then food service for the rest. But we don't have any big change on that one. Gross profit margin. I think this is really one of the topics where we are very happy on this one. First of all, in terms of absolute amount, we have been growing by 1% to compare to Q3 2020, which is good. Again, Q3 2020 performance was already extremely good. But if you compare to pre-COVID to Q3 '19, we are growing by almost 26%. And this is really a great achievement, and achieving a growth profit margin of 18% is something, which is very interesting. We want to continue in this direction and to make sure this level of gross profit margin is something sustainable. Looking over the 9 months, so we achieved a growth profit of THB 18.7 billion on average, a gross profit margin of 18.2%. So we told you at the beginning of the year, our guidance for the full year was 17% to 18%. We will maintain this guidance. You know that in Q4, usually, we have a small decline of our gross profit margin because of the seasonality because in Q4, the Frozen business is growing and it's a bit less profitable than the Ambient business. But overall, a very nice story about the gross profit margin over this year. OP. So OP, you can see here in Q3, we achieved THB 1.9 billion. Again, the key explanation is coming from the higher G&A. Because the GP is increasing, so the SG&A are increasing also. So sharp rising of the logistic costs. The impact estimated is THB 470 million. We did try to manage it and reduced the marketing and administrative activities on this one. And at the end of the day, we managed to reduce the SG&A level. So at the end of the day, OP only decreased by 6% compared to Q3 2020. Again, at THB 2 billion, the OP in Q3 2020 was very high. If you compare to 2 years ago, to pre-COVID situation, we are increasing by 24%. And the performance over 9 months, we achieved THB 6.3 billion, growing by almost 7% year-on-year, which is an excellent performance. EBITDA, of course, is just a consequence. Very healthy EBITDA in Q3 at THB 3.9 billion. We are declining a bit, same story that for the OP, by 2.7% compared to last year. But if you compare to 2 years ago, we are growing by 19%. And over 9 months, I think having an EBITDA of 11.3% is very healthy for the business. Again, we are very happy about this one. Net profit for 9 months is record high. We achieved THB 6.1 billion. Very happy about this one for Q3 [indiscernible] to 1.9% declining a bit versus Q3 2020. But again, anything around THB 2 billion net income per quarter is something where we are very happy with the -- compared to 2 years ago. Before -- prior to COVID-19, we are growing by 41%. So this is extremely good performance. And if you look at the 9 months performance. With THB 6.1 billion, we are very close from the THB 6.2 billion we have achieved last year, which was record high already after 12 months. So again, very happy about this very strong performance. We have one one-off to report in Q3 2021, which in an insurance claim. We had to face over the last few years with different issues in Canada, and also in Germany. We have been benefiting in Q3 '21 from an insurance debt amounting to THB 63 million. This one is recording in the other income. And this is the only one-off that we have to report over the quarter. Earnings per share. Of course, next one, we are declining a bit by 4% compared to last year over the quarter. But again, if you get back to 2 years ago, we are increasing by 39%. And overall, over the 9 months, we are achieving THB 1.26 per share. And we are almost already at the level of from last year, THB 1.26 was the performance for the full year. So we are already almost at this level. If you compare to 9 months over 9 months, in 2019, we were THB 0.87; 2020, THB 0.96; and then 2021, THB 1.26. So this is a remarkable performance. Our focus on Red Lobster. So here, you have a different line. You know the first one is 25% of share of profit and loss coming from Red Lobster. You can see in Q3 2021, they did deliver THB 63 million loss, quite close from last year, minus THB 54 million. In Q3 2020, they did perform quite well. And we do achieve almost the same performance in Q3 '21. So this is for the first line. The second line is a new line. We have now -- since Q1, we told you we had this lead accounting difference between U.S. GAAP and between Thai GAAP. So we have to record every quarter. In Q1 '21, we had a one-off impact because we had to catch up with the -- THB 200 million. We told you the impact, the gross impact before tax would be something around THB 100 million every quarter. And this is what we having in Q3 '21. Other income, this is our preferred interest. And we have also the management fees coming from Red Lobster. And interest expense and income tax are almost stable compared to last year. Overall, we have a positive net income contribution by THB 75 million coming from Red Lobster. So this is really improving compared to 2020 situation. The Red Lobster operations have been improving dramatically, and we are happy with this one. The restaurant situation is good. All the restaurants are open for dining halls and of course for off-premise business. We are working very hard on the strategy of Red Lobster. And we told you at the beginning of the year that the guest count growth was the top priority. And you will see on the next slide some different strategies we are really trying to work on, different things. The few things, if you want to be successful with Red Lobster, we need to improve the quality of the food, okay. This is very important. So we have been performing some menu satisfaction. We know we have some very good meals within the menu, but we know we have also some other meals, where we could improve on this one. So here, we have a very deep analysis to understand, okay, what is a good satisfaction call for all the meals? And we want to have more very good meals in terms of satisfaction coming from the customers. The second part is execution. And you know this is a challenge for Red Lobster, and for the whole restaurant industry. We have been hiring a lot of new resources since the beginning of the year. So we need to make sure we could train all these people. We need to make sure the food preparation and the service quality are consistent and we are always delivering the top high performance in terms of execution. This is right now for the whole restaurant industry in the U.S., one of the key challenges they are facing. On premise, I don't discuss that much. We have been growing and improving a lot since 2020. We want to continue our focus on this one. The next point is important. The next one is important: to create everyday value. One of the feedbacks that we have and one of the trends from the restaurant industry is everyone in the U.S. -- a lot of the people in the U.S. are looking for value, okay? Some of the people have been losing their position, their situation. So clearly, the value proposition is something which is very important. So again, we have been working on this one. And we have now in our menu some specific items where the value proposition is very interesting. The last point, marketing activity is something we kept in 2020 to face with the shortfall. However, we want to relaunch again, okay? So we are starting again some marketing activities. However, we are shifting our investment from the traditional media to the digital activities. We still have also some traditional media but much less significant compared to before. And I think Red Lobster, we have a very strong guest database, something around 11 million people -- customers in this one. We want to grow and we want to take the full benefit coming from this. So overall, Red Lobster, we have some positive news. However, we are delivering, again, a loss this quarter. We're not happy with this one. So we want to turn around the company. We told you there is a new management in place, and we are working very closely with them to change the picture. Next one, just a quick overview regarding our cash flow performance. We are cash positive in Q3 by THB 609 million. Again, I think we are facing here with a unique situation. okay. The container shortage, the delay in terms of lead time between Thailand and the U.S. is creating an increase of our inventories in Asia, in the U.S. and also in Europe. So clearly, our cash performance is below expectation this year. But this is also a decision we made to support the business. We want to make sure -- because right now, the momentum is good for all our activities, we want to make sure we are able to benefit from this opportunity. So right now after 9 months, our free cash flow is THB 2.1 billion. And I think you can have a look at next graph, which is our usual bridge between our net debt from last year to Q3 '21, and increasing. You can see EBITDA is record-high at THB 11.3 billion. As you can see the second box, the change in net working capital is very high at THB 6.1 billion. So we are consuming most of the EBITDA into net working capital. Apart from that, the CapEx is under control. Keep in mind that in the CapEx, we have a net of THB 0.4 billion we see coming from the sale of a piece of land that we delivered in Q3. So the number, the gross amount should be closer from THB 3 billion. Then we had the dividend paid to the shareholder. And then on the right, you have the impact coming from the different investments we have been doing. You have all the details below. The key one is R&D, of course, for THB 3 billion; Rugen Fisch minority interest buyout for THB 1.7 billion; and then you have also investment in Australia for THB 700 million into Clover. So these are the key drivers. Again, we told you in Q2, we are ready to perform some investments. We have been doing some of them in Q3. We don't have any concern regarding the net debt to equity. We told you we have a target at 1.1. We are still below this target. Next one, just regarding our funding. As usual, the Thai Baht funding is a key maturity. You can see the USD funding also has been increasing with all the activity we have been doing over the quarter. You can see also by maturity, we have an increase of the current portion, but I guess, which would change at year end with the new SLL and new SLB that we are currently negotiating. Just talking about the ratio, of course, the ratio situation is quite good. Profitability is high. We've on watchout regarding the inventory days. You can see 135 days in Q3 '21. Compared to last year, we were at 123 days. We are increasing also compared to Q2, again, which is fully under control. And this is a clear decision from the management to say we want to support our business. The net working capital also is record high. We do believe this one will improve in the next month and quarters. Net debt to EBITDA, we are still fully in our range. And net debt to equity, we are also fully in our range with no concern on this one. So overall, very strong financial performance. And now I will hand over to Khun Kal for the update on the business units.

Thank you, Ludo. So -- sorry. And then -- sorry. [Foreign Language]

So thank you very much, executives, for all the presentation today. Now moving on to the Q&A session. Our team will read the questions that you type in chat box for our executives to answer. Please keep the question coming, so you can know more -- much more about us. If you would like to...

[Foreign Language]

So we have a few questions coming in now. The first one from [indiscernible]. Could you please provide any target or guidance for 2022 as well as 2023?

So here, what we said yesterday is we are working right now on our budget for 2022. So at this time, we don't provide any guidance. The guidance will be released in our Q4 communication as usual. But I believe with the track record we have in 2020 and '21, the momentum is very strong for operations. And we believe the momentum will keep remaining the same in 2022. We are looking for growth. We are very ambitious. So clearly, we want to achieve growth year-on-year, okay? So our guidance in '22 should be growing versus our 2021 landing.

The next one is from Khun Maria. With products arriving lower on the shelf, has this affected your pricing since there is some sort of a temporary shortage?

I can take this one, too. We don't have any shortage to face with. Indeed, we have some issues. And again we told you the containers are a bit longer to arrive between Thailand to Europe or Thailand also to the U.S. But at this stage, we are not facing with any shortage. We have some strong inventories. And that was one of the decisions we took. We agreed to increase our inventory. So basically, overall, apart from maybe a few exceptions, our inventory is very high. And we are not facing any shortage. Very different situation compared to last year. Last year, in Q2 in Q3, we had to face some shortage. This is not the case at all right now.

Okay. Maybe just a follow-up question on that. Do you expect the current level of the impact from higher logistics costs and rising raw material costs from inflation to continue in the first half of next year? Do you expect your SG&A to sales to come down from 12% to 13% level? Or will it maintain around here for the foreseeable future?

[Foreign Language]

Maybe on the raw material side of it. Tuna price direction increased a bit in October. What's your view on the tuna price trend? Is this because of the cost inflation? Or -- and what's the average tuna price5 that we should keep -- that should keep the gross profit margin of canned tuna at this level at around 20% or above?

I think you're right. First of all, we mentioned that in October, the tuna price has been increasing a bit to $ 1,500. You can see we have a specific chart on this one. We don't have any concern with that. We told you we are expecting a bit of inflation. I mean as we are between $1,300 to $1,700. We believe this is comfortable. And over the last few quarters, honestly, we have been lucky with the fish price overall. One watch out, of course, we are looking for the fuel price. The fuel price is one of the key source of expense for fishermen. And it has been growing over the last weeks. We need to see if there could be an impact on the midterm on this one. But right now, the level of catches are quite good, and the level of inventories are good. So far we are planning for some inflation in Q4. For next year also, we are planning to have an inflation but controlled inflation. At this stage, we don't expect to have a very large inflation on the fish price for 2022.

[Foreign Language]

Relating to the recall in Avanti, is that situation resolved now? Do we expect any negative consequences in the short to medium term?

So yes, the recall -- from the information we get, the recall with Avanti is resolved. We took already some of the impact. And this is part of the explanation for the decrease of the Avanti share of profit in our 2021 numbers. You could see there was some specific communication being performed by our partner in India. But we believe, yes, now it is resolved and behind us.

[Foreign Language]

[Foreign Language]

Automation is key to productivity enhancement. So how much more investment is needed? And where is TU going to land in terms of the number of employees?

[Foreign Language]

Another question from Maria. If you would like to attempt to make a currency basket specific to Thai Union, what would be the good ratio per currency?

The question is a bit specific here. Of course, the dollar will be the key one. Our -- key exposure for us is Thai Baht versus dollar. We are buying the majority of our fish and also of our packaging in dollars. We have also -- the vast majority of our income also is in dollars. So it will be combination of majority in dollars. And then you have also Euro, GBP. Thai Baht is also key also for us. We have also some [indiscernible] currency which [indiscernible]. But overall, this is the mix if we would have. Providing a very clear split is a bit difficult on this one. But these are the key exposure we are always following.

We have one question from Khun [indiscernible]. I see the inventory level is quite high. How long or when do you expect the inventory level to return back to normal?

I think this is correct. The inventory level is a bit high. I think we are -- we have to recognize that we are facing with a unique situation in terms of supply chain and goods shortage. You can see on the news everywhere all the containers in front of the U.S. spending. And then we have some drivers, also shortage in the U.S. and in the U.K. So we believe the situation normalization will take few quarters. This is my expectation. Initially, we're expecting the situation to improve in H2, the overall logistics and supply chain situation. However, in Q3, we didn't see this improvement. And in fact, we have been seeing a deterioration. We still have the same issues and challenges between Thailand and the U.S. And now Europe is also impacted, okay? So it could take a few months and 2 quarters for us to get back to normal. Again, this is a very strong decision coming from the management of Thai Union to say we want to keep supporting our business. And overall, our momentum is very good in terms of sales and in all our different activities. So we took the decision to maintain and to push for level of inventories in our different businesses. It will take 2 quarters.

[Operator Instructions] Okay. No further questions. Please allow me to send the stage back to Khun [indiscernible] to end the session. Thank you.

Thank you for joining us today. I hope you guys are doing well. And hopefully, we will see you next year. If any further questions you have, please feel free to contact our IR team during any office hour. Thank you.

[Foreign Language]

Thanks a lot.