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

Good morning, management, analysts, bankers, investors, distinguished guests. On behalf Thai Union Group, I would like to give you a warm welcome to our second analyst meeting of 2022 for the first quarter result announcement. Finally, we meet in-person, and I hope you guys are all well. We will start our event with usual performance announcement. The key speakers are our President and CEO, Mr. Thiraphong Chansiri. He will walk you through the key highlights and recent developments and followed by our Group CFO, Mr. Ludovic Garnier. He will walk you through the consolidated results and then followed by our Investor Relations team, Ms. Lina Goldman. She will walk you through the business performance. This session will take approximately 15 minutes and followed by Q&A for 30 minutes. Today, we have ranged of special session for you. We would have the knowledge sharing session on the good corporate governance at Thai Union. This session will be led by Mr. Rapeepong, who is our Deputy General Manager for Legal and Compliance and Tax. That session will last approximately 30 minutes, including Q&A. After the knowledge sharing session, we will take a short break around 10 minutes, and then we will continue with TFM result announcement, followed by the Q&A. For those who are joining us online for English interpretation, please mute original audio, and for when Ludo speaks please unmute. Without further ado, I would like to welcome Mr. Thiraphong Chansiri to begin the results announcement.

[Interpreted] Hello to all the analysts today, we are going to report our results for the first quarter of 2022. This New Year has come with many challenges, different challenges compared to the last year, and the theme is inflation all around the world, whether it's with the oil prices that have affected our packaging and also the labor that we will be experiencing in the future. As for the results for the first quarter of 2022, the management team is very satisfied with the results, even though we faced so many challenges. But in terms of the demand for our products, that demand is still quite good, it's very good historically, because we haven't seen double digits like this for quite some time. And our sales grew by 16.5%. If we exclude the ForEx impact, you'll see that it's grown not just in terms of the price, but also the volume that has grown. And if we look at units, we are quite impressed that PetCare and the value-added products have grown by 27.2% and our Ambient products have grown by 14.3% and our Frozen products has also grown by 14.2%. The gross profit may seem to be diluted a bit from the last year. And right now, it is at 17.5% and mostly from the costs that have increased. As I mentioned earlier that the company is continuing to deal with these prices to be able to handle the investment costs. I would like you all to understand that the cost that we have will continue to increase to some degree, but we will do our best to catch up with these. In terms of operating profit, it crept down by 10.9%, mostly because of SG&A. This comes -- this stems mostly from the shipping costs, which continue to increase. And aside from this we also have inventory that we have to carry and increased amount of this, and the transit time for shipping has increased twofold. And our net profit has gone down only by 3.2%, which is mainly due to the tax credits that have been higher for us. And these are our overall results for the first quarter. On the next page, you'll see in different areas, we have our gross profit that has increased. You'll see that the net debt to equity, even though it has increased a bit from 0.93x to 1.01x it's mostly due to our net working capital that is still negative because of the inventory -- high level of inventory that we have and also because of the account receivables. But we -- there's no need to worry, because we have been able to sell quite a lot in the first quarter, and that is the reason for this. And on the next page, I'd like to point out that even in the first quarter, despite the Omicron variant, our supply chain, we are continuing to take care of this. Every production facility of ours continues to operate at 100% capacity and we have our prevention measures to prevent infection, of course, and we continue to be strict on that front, whether it's mask wearing at every factory, whether -- or despite the fact that in many countries, they have got away with the mask mandate. But this is a measure that we want every single plant to continue to follow. And we also have the alcohol gels in place. So this is something that we are giving great importance to. And we also had ATKs for our employees to continue to check for infection regularly and we have over 93% of our labor, which have 2 doses already and about 36% or there or so have the booster dose. And there is a sufficient supply of vaccines. So this is not a concern for us. And on the next page, you will see our CSR efforts. We are very worried about the communities where we operate, and we have donated food products and materials to those communities. And on the next page, I would like to share ZEAvita, a product that we launched last year. And today, our trade channels that are not online we are #2 in that regard that's a fast development for us. The product has been well received, and there is confidence and also credibility behind the Thai Union name and therefore, our products have been well received by many establishments, and we also have samples for you today for you take home. And on the next page, we continue to invest in food-tech startups, especially SPACE-F, which we have -- we are collaborating with the National Innovation Agency at Mahidol University. And in February, we began our third batch and for batch 3 there are 17 start-ups that have been chosen from over 200 companies and 8 of those are accelerators and there are 9 incubators. What is interesting is that 50% of these are from overseas, whether it's the U.S., Canada, Finland, France, Hong Kong or Poland and food-tech in Thailand is very interesting and will attract start-ups from all over the world. It's a magnet. And in terms of our fund, we have invested in 8 companies so far. And what is interesting is Orgafeed, which is a Thai start-up and it has begun production. They are raising insects and we have a factory set up already in the first quarter and the products that they have manufactured are pet treats, and we have been working with our very own i-Tail herein Thailand. Flying Spark is from Israel and this is another example, which should be able to start producing insect protein within the first half of this year, and it is -- their factory is perhaps the most state-of-the-art. And this factory is in Phrae province here in Thailand. Once this factory is up and running, we may put together a trip for our analysts to go and visit. And I would now like to ask Ludo to take over, and he will give you the details about the financial results.

Good evening, ladies and gentlemen. I'm very happy to be with you today to see you physically after 2 years and very happy also to go to share some good news on the Q1 numbers. I will be quite quick on this slide, because Thiraphong already mentioned the key highlights. I think for you the key takeaway are really the record high top line, okay, for Q1 for us to be so high in Q1 is something which is a bit unusual. 16.5% growth compared to last year. We have, of course, some positive FXs. If you exclude the FXs, the growth is still double-digit at plus 12% and I will elaborate a bit more in the next slides. The GP margin, we are diluting a bit. Honestly considering the inflation -- and we'll elaborate on the inflation -- I think the performance is still very good. We are very close from last year where we were not facing with the same inflation pressure. The OP dropping from -- mostly coming from the freight cost and also some additional marketing costs. So yes, operating performance is declining a bit. That was expected. We told you last year, especially in Q1 and in Q2. The operating performance has been very strong. So it's not a surprise to decline a bit compared to last year. Share of loss, we have more share of loss compared to last year. The key component is of course, Red Lobster. Again, I will elaborate a bit more on this one, but you know the company is facing some challenges in Q1 for different reasons. We have also a lower share of profit coming from Avanti in Q1. However, bottom line, our net profit is very close to last year, decreasing by 3% compared to last year. We have in between some good news, mostly on the tax and we will elaborate a bit more where does it come from. So if you move to the next slide, I think this is something we are very proud, and you can see really all the efforts and all the progress that Thai Union has been doing over the last few years. It has been 9 quarters in a row where we are delivering some top line growth, okay? We have a gross profit margin, which is exceeding 17% and in the range of 18% over the last 8 quarters in a row also. So very strong performance. We told you a few years ago, it was our key focus. And I think this is a clear demonstration that we can be good, and the Q1 performance, despite the inflation pressure is also very, very strong on this one. We just wanted to elaborate a bit on all the topics related to inflation that we have to face in Q1. And of course, we are not the only one to face with this context. I think overall, the macroenvironment is very complex for all the industries right now. Since last year, we have been talking a lot about the logistics issues, the container shortage we are facing. Of course, you know that we are an export company, so we are very exposed to that. The situation is actually improving. You can see from a cost point of view and also from a transit time, mostly from Thailand to the U.S., we don't see any improvement in Q1. We can see now in April a bit of improvement, okay. In terms of cost it is very soft. We need to see the next months, if it is confirmed. But we have, again, in Q1 compared to last year, an impact -- a price impact on the freight cost almost at THB 700 million -- THB 710 million. And if you do remember, in Q1 2021, we told you we had already an impact of THB 200 million. So meaning in 2 years, we have a price impact coming from the freight cost almost at THB 900 million. So keep in mind this is really impacting our numbers. The packaging and ingredients, we discussed about that also in our Q4 presentation. We told you we're expecting some very strong inflation coming from the packaging and ingredients, and this is happening. Again, you can see some kind of softening over the past few months, but still very high compared to the full year 2021. I think what is new in Q1 is really the raw material situation, and I will elaborate in the next slide and also the utilities. I think we were not expecting the war between Ukraine and Russia to happen, and you can see the pressure older utilities everywhere in the world have been growing up much higher compared to our initial expectation, okay? So this is mostly from us in Thailand, some impact on the gasoline and also on the coal prices, which went up, as you can see here on this graph. Of course, we have different solutions on how to face with this inflationary context. The first one is we're not fully exposed. On some of these topics, we are partially hedged, okay? So we are doing some hedging every year. It's not new. But we try to be very cautious. We know we can be exposed to this. We cannot take some hedging on everything. For instance, on the tuna price, we cannot get hedging. On the salmon price, for instance, we can. We have also some high inventories. We decided since last year to increase our inventories, both in terms of raw materials and in terms of finished goods. This is also one of the reasons why our net working capital is so high at the end of Q1. The price negotiation is something which is really key. Of course, we try to pass through the inflation increase to our customers. We cannot increase the prices to the same extent the COGS are going up. So very likely, we'll have to get back again to the retailers all along the year to get some new price increase. And we are not the only one to do that. I think I'm sure you have seen all the other food industries communicating. And you can see the inflation right now is very high everywhere. So here, the price negotiation was very important. Always -- we always have a lot of discussion with our retailers and I think we have been quite successful compared to expectation in Q1 on this side. The cost management is something which is key. You know it has been a few years already when we put a focus on this one. We did show you some videos in Q4 regarding all the automations we have been doing on our Frozen business. We want to push more. We have to move anyway in that way. We have to be very efficient in the factory. We have some good successes, especially in Thailand. The production costs per ton are going down. This is good, we have some challenges on some other factories. So we still have some room for improvement here. And lastly, I think we need to remain very agile. You can see the situation is highly volatile on the raw material price, on the packaging, on the ingredients. So we need to be very agile and sometimes we need to change the way we are doing the businesses. So difficult macroenvironment overall, but we do believe we can face the situation, okay? We are used to face some inflation. It's not a new topic for us, we know this one. What is a bit unique this year is to see all -- the raw materials, the packaging, the ingredients and also freight costs all coming up together. One good thing, we are not the only one being exposed. Of course, all the industries and all the corporates are facing with the same situation. We wanted to share with you a quick update -- our usual update on the raw material prices. And you can see the tuna price increasing and exceeding $1,700 in Q1, increasing by 34% in Q1. The selling price is also increasing a lot compared to last year at NOK 78 in Q1, increasing by 45%. The shrimp price also is going up at THB 182 and increased by 24% compared to last year. So here we told you in our Q4 guidance that we were expecting some inflation on the raw materials. So we are not surprised to see the prices going up. However, we are not expecting this magnitude to happen. There is one good news, which is in April, the tuna prices go down a bit compared to March. Let's see, we need to see the confirmation over the next months. But overall, the raw material prices are higher compared to our expectations. And again, it's coming after the freight cost increase, the packaging and ingredient costs. I think in the macroenvironment, there is one good news, which is the FX, okay? And the FX in Q1 has been very favorable for us, especially the USD has been increasing versus Thai baht. You know, of course, we are an export company, so when the Thai baht is depreciating versus USD versus euro or versus GBP it's very favorable for our business. So we have this situation in Q1, mostly coming from the dollar. We'll see we have a small positive impact also coming from euro and coming from GBP, but it's much, much smaller compared to the USD. Now a quick focus on lobster. And Red Lobster we discussed yesterday, we shared with you, you can see the performance. Very clearly, they are facing some heavy challenges in Q1, okay. We told you in Q4 already that we are facing with the Omicron variant in December, in January, in February. The impact from that is drop in the guest count, okay. Much less people going to the restaurants, being afraid of the COVID-19 again, they have been facing also with the inflation. And some of the key products sold by Red Lobster is of course, lobster and shrimp and also shellfish and the inflation of this product has been extremely high. So if you compare the performance of Red Lobster compared to some other restaurant industry in the U.S., they are more exposed in terms of inflation. They've been also impacted again by the labor shortage in Q1. We told you since last year really, we were looking for more managers, more staff also in our restaurants. The situation is improving. But of course, you have more cost. You have more cost in a time where you have less guest counts, okay? So these are the key explanations for the share of profit drop in Q1. So from the numbers you can see here in Q1, the share of loss from the operation is THB 243 million. Usually, in Q1, they are always positive. They are always profit-making in Q1. So here it's a heavy loss in Q1. There is one good news, which is a share of loss coming from the lease accounting adjustment. If you do remember, we told you last year in Q1 '21 the amount was minus THB 300 million, included THB 200 million coming from the catch-up from 2020 year. We don't have this impact anymore. So here, we have a lower impact coming from the lease accounting adjustment in Q1 '22. And we told you the guidance for the whole year for this lease accounting adjustment is something around minus THB 400 million. So it would be roughly minus THB 100 million every quarter before any FX impact. The other income, interest expense are not changing a lot. Compared to last year, we had a bit of FX impact, but it is very small. The income tax is growing, okay? Just for you to remember, something you don't have always in mind, Red Lobster, the legal firm it's a partnership, okay? What does it mean? It means that when we take the share of profit, they don't have any tax income or tax expense reported in the share of profit. In fact, the tax income or tax expense has to be calculated by all the partners. All the partners being Thai Union, the Seafood Alliance and all the other one also on this one. And there are 3 key areas of tax credit coming from Red Lobster. The first one is, of course, they have their share of profit or loss coming from the operations. From this one, we have the normal 25% tax rate coming from this one here. We had a share of loss. So we have some tax credit coming from this one. So this is the first source. The second one is due to the structuring of the acquisition of Red Lobster, since the beginning, since 2016 we had a tax goodwill, okay, not in accounting, but a tax goodwill that we can depreciate over 16 years -- over 15 years, okay? So every quarter and every year, we can amortize just for the tax calculation. So we are benefiting from tax credit from this one. It's not new. We have this one since the acquisition, but sometimes we don't have it in mind. The last thing is Red Lobster is in restaurant industry, and the restaurant industry, they are benefiting some tax credit from the tips that they are getting. So all the restaurant industries in the U.S. they are benefiting from tax credit. This is a bit more difficult to predict. This is why from time to time from one quarter to another quarter, you have some increase or decrease of the tax credit, okay? But the combination of the 3 is explaining the big amount of tax relief that we have in Q1. So Red Lobster by itself is THB 206 million in terms of tax credit compared to last year. And we had an increase of tax credit by almost THB 120 million compared to last year. If I move on to the next one. So here, again, we going to see some other challenges we are facing. I'm sure you heard also about Kelli, CEO of Red Lobster who joined us 8 months ago has decided to resign by mid-April. That was her decision. You can see from the numbers that the challenges in Q1 has been extremely high in Q1 at Red Lobster and very clearly it appeared that we were not fully aligned between the Board of Red Lobster and also the top management at Red Lobster, and how to react, how quick do we have to react. And we believe we should have been much quicker on how to react to this crisis situation. This is why she decided to leave on this one. The Board of Red Lobster, together with the senior leadership team at Red Lobster they are fully determined to turn around the picture, okay? And I think there were some new joiners over the last few months. We have a new CFO. We have a new marketing lady at Red Lobster, which seems to be very strong. Of course, situation is not easy, but here, we are confident that we can turn around the picture. So we just wanted to update also our assumption kind of share of profit for the whole year, okay? There is no change for the lease accounting adjustment. It was THB 400 million -- minus THB 400 million. It is still minus THB 400 million, but we did update the share of loss from the operations. If you do remember, in our Q4 communication, we told you we were expecting a range between minus THB 400 million to minus THB 500 million. So the total was minus THB 450 million, the midpoint range. Here, we did update on this one to minus THB 650 million for the whole year and the range which should be between THB 600 million to THB 700 million on this one. Strategic initiatives. I don't comment further on this one. We want to push further. We told you that we are revisiting the menu. Also the execution is improving in the restaurant. The off-premise has been very successful since the first wave of COVID-19, and we are still pushing on this one. The value proposal is something which is very important. You need to understand in the U.S., especially the price of the fuel is something which is very important. And the price of the fuel has been going up in Q1. And many people are very sensitive to this indicator, because usually, the fuel is never very expensive in the U.S. Now in Q1, because of the overall price increase everywhere, the fuel price has been going up a lot in Q1. So many people, they decide to cut their not necessary expenses and not to go to the restaurant anymore. Okay? So this is also one of the explanations why the guest count has been dropping in Q1. The marketing, we have changed completely the way we are doing some marketing activities at Red Lobster. Compared to 2 years ago, we are doing much more digital activities, much less on the TV on this one. So heavy challenges. We are not happy with the Q1 performance. However, we do believe we can turn around the picture in the next quarters to come. Next one, sustainable finance. I will be quick on this one. We did a lot last year. If you do remember, we did a lot of refinancing, almost THB 100 million of our refinancing was performed together with Blue Finance strategy. We did a bit more also in February 2022. We did issue some sustainability-linked derivatives in February. Again, we go in the same direction. We want to push further in that direction. Plus, we did communicate also our first KPI. You can go to our website you will see we were successful in -- at the end of 2021 on all our goals. Next one is just a quick focus on SeaChange, you know SeaChange is our sustainability program. Again on this one I will be quite quick. On that this is our usual commitment that you have. Few things for you to keep in mind. The first of all is we will announce very soon our target in terms of greenhouse gas emission reduction, okay? There will be a target to be announced to 2030 to 2050. We are working on that. It will be science-based target initiative on this one. Apart from this one, we still have our packaging -- sustainable packaging initiative, which is going on. We have our tuna commitment. All of this, I guess, you know, so I don't comment further on this one. Maybe the box on the right, the Sustainable Fisheries Partnership is something which is new. We signed this one at the beginning of Q1. Here, the idea is, again, to move to much more sustainable fishing, much more sustainable practices coming from the fishermen and to improve overall -- all our operations. So now if deep dive a bit on our numbers. So this is a quick focus on sales. And you can see here our track record. Q1 2020, if you do another Q1 2020 it was a quarter with the first wave of COVID-19, so the sales were up, and they were only at THB 31 billion. Q1 '21, again, our sales were at THB 31 billion. You can see now in Q1 '22, our top line exceeding THB 36 billion. This is really extraordinary performance, okay. Our record high performance for Q1, extremely unusual. And what I think is very interesting, of course, we had a bit of FX. But even if you exclude this one, the top line is still very high. And our 3 categories -- and Lina will elaborate on this further. Our 3 categories are growing in Q1, which is really good because you have seen in 2020 and 2021, our Ambient and Frozen business, they were kind of offsetting each other. So here, the 3 categories are growing. Of course, we have a significant price effect in Q1, but the volumes are positive in the 3 categories. Not misunderstand we have a lot of changes happening in every category. The Frozen category, for instance -- Lina will elaborate on this one. We have a lot of changes with lobster declining and shrimps increasing. But overall, the top line performance is excellent and a double-digit growth in Q1 for us is something which is very unusual, and we are very happy with this one. The gross profit is growing consistently by almost 15% compared to last year. Again, it's a record high gross profit in absolute term when compared to last year's THB 6.4 million in Q1 of course. This is the impact of the price increase to absorb the freight cost, inflation and also to absorb the raw material, the packaging and the ingredients in inflation. In terms of gross profit margin, we are diluting a bit compared to last year, 17.5% compared to 17.7%, potentially, the top line growth, our GP in absolute amount is growing a lot. And I think it is really good again. We have some favorable impact coming from the translation, mostly coming from the USD. Now moving to the OP, you can clearly see here the impact of the freight cost increase. And here, overall, we had a decline of our OP by almost 11% compared to Q1 2011. However, at THB 1.7 -- almost THB 1.7 billion, I think this is our best ever performance in Q1 in terms of OP, okay? We did really good last year. We were almost at THB 1.9 billion. If you do remember, Q1 and Q2, the operating performance in '21 was really excellent. And there was another strong performance, I think it was 10 years ago. But over the last 10 years, this is the second highest performance at almost THB 1.7 billion. Here again we are impacted by the freight cost. I told you the price impact, freight cost is almost THB 700 million. So we are facing huge impact coming from this cost. We also increased our marketing activities in Q1. You know we have now the supplement business in Thailand, which is a new activity for us and where we are spending a bit of money to support the launch of this new brand. And we spend a bit more also in Europe and in the U.S. in terms of marketing activities. These are the key reasons why our SG&A ratio has been increasing from the 11.7% last year to the 12.9%. 12.9% for us is a record high also for Q1, okay. So moving on to the net profit. I told you below the OP, we have many good news. We have some, first of all some bad news on the FX gain. We had some FX loss in Q1, a very small one versus the THB 200 million as against last year, so it's declining. However, this is almost offset by the other income increase. The other income increase is mostly explained by 2 topics compared to last year. The first one is we signed a settlement with the MMO. MMO is the name of the U.K. duties. You know we have been litigation with them since 2013. So it's a very old litigation. They were suing us. They were saying that we have been using some IUU fish coming from Ghana. 2 years ago, back in 2019, we were found not guilty on this one, and then we sued them for damages. And basically, we did recover something like THB 70 million settlement coming from this one, which is recorded in the other income plus. Plus, last year, if you do remember, we did record some impairment on goodwill, some fair value adjustment on our Russian business for almost THB 70 million. So the other income increase is almost offsetting the FX again decrease. Of course, we have a share profit drop compared to last year. I told you mostly coming from Red Lobster and a bit also coming from Avanti. We have some good news from RBF because we have a contribution from RBF on this one, but it's not enough to offset the drop coming from the Red Lobster and also coming from Avanti. The good news for us is really coming from the taxes, okay? And the taxes last year in Q1, we had a tax expense by almost THB 200 million. Now in Q1, '22, we have a tax credit of almost THB 200 million. So we have a change by almost THB 400 million. So I told you Red Lobster is really a significant component of this one. You can see, if you get back to the chart of Red Lobster, the tax change just for Red Lobster only is something like THB 120 million, okay? So this is one big component. Another big component is our U.S. business, excluding Red Lobster. So here, I'm talking about our Frozen and also our Ambient business in the U.S. We told you last year, our Frozen business has been extremely successful in 2021. It was generating a lot of profit. We don't have the same situation in '22. We are facing a very strong and very violent normalization of the context in the U.S. So our U.S. business -- Frozen business is loss making in Q1. We do expect this temporary situation. It will turn around in the rest of the year. But in Q1, we are benefiting from tax credit also coming from this one. And here, again, the impact is something like THB 120 million. On the same side, we have also our European business, which is a bit less positive compared to last year. We are positive. We paid -- we have some tax expenses in Europe. However, the amount is lower compared to last year. So here something like THB 70 million, THB 80 million compared to last year. Finally, there is a last component, which is last year, we did reverse some tax credit related to Russia in Q1 because of the impairment of the goodwill and these kind of topics. This is another THB 70 million. It was a one-off impact in Q1 '21. We don't have the same impact in Q1 '22. So these are the 4 key components to explain the changes in the tax. The key components just for you to understand and to remind mostly coming from the U.S. The tax credits are mostly coming from Red Lobster and also our Frozen business in the U.S. That's why overall, we end up with a net profit at THB 1.746 billion, very close to last year, just declining by 3%. And again, keep in mind, the net profit of Q1 '21 of THB 1.8 billion was really very high compared to our track record. So we have in terms of normalization. There is one one-off to be reported to you in Q1, which is the one I just mentioned on the MMO settlements. So this impacted our subsidiary in John West, the amount is THB 77 million. We have, of course, a bit of tax. Also on this one, we did not mention it. Sorry, on this one, but we have an income tax of roughly 20% on this one. So if you remove this impact, then the adjusted net profit amounts to THB 1.668 billion compared to our reported numbers of THB 1.7 billion. Just a quick focus also on our net debt, and you have seen that our net debt has been increasing in Q1. So it was THB 61 billion at the end of Q4 last year, and now it is THB 65 billion. And if you look at the bridge, there are 3 key components. The first one is of course our EBITDA. This is quite good, quite okay in Q1 at its THB 3 billion. Our CapEx, THB 1 billion is under control. You know we have a CapEx target for the whole year of THB 6 million. So at THB 1 billion, we are a bit below our plan. I do expect to catch up over the next quarters. We really have a lot of plans on this one. But the bad news is really coming from the change in net working capital. As you can see here, it's an increase of net debt by THB 5.7 billion. There are 2 key components for this one. The first one is, of course, we have record high sales. So we had record high receivables at the end of Q1, okay? It's a good thing, of course, these receivables, they will be transformed into cash into the next months, okay? So this is a good thing. There is no issue on this one. We follow very carefully if we have any receivables, and we don't have any issue on this one. Another portion is coming from a further increase of our inventories by almost THB 2.3 billion. I told you already in Q4 '21, our inventories were already at record high, okay? So we are still facing with the same logistic issues. So we have a lot of inventories on the water. Plus, we have decided to increase our inventories of raw materials over the past few months. This is why, overall, you can see this one it's a bit too high. There is one portion that -- which is fully aligned with our expectation. There is another portion which is a bit higher compared to expectation. So here, the clear direction to our businesses is to see this amount decreasing over the next month and quarter. It will take a bit of time to us, but we do believe that we are still in a position to achieve our 60% target of cash conversion rate. If you do remember, we always want to generate 60% free cash flow from our EBIT, and we work very closely in that direction. Apart from that, we didn't have any significant investment in Q1. You can see we have a bit of FX impact. You can see the remark just below the bridge. We had a bit of investment in a new joint venture that we did communicate already in Q4, but the amounts are very small. So moving to the next one, the free cash flow situation. The free cash flow is negative in Q1 at THB 3.7 billion. Here again, the key driver is really the net working capital, the THB 5.7 billion coming from this one. We are still committed on our CapEx target, THB 6 billion. We are a bit late compared to our spending. So we may have a bit of headroom. At the end of the year of this one, this is not our direction. We want to spend this money because the last 2 years, we had some very high expectation in terms of CapEx. But because of COVID, we were not able to spend all this amount, okay. Now in '22, we really want to spend this money. So here, you can see our key ratio. Of course, our profitability ratio, the ROE, ROC are declining a bit slightly a bit because of the lower profitability. You can see here the inventory days 132 days. There is nothing to be alarmed about, but the amount of the inventory at THB 49 billion is record high. The amount of net working capital at THB 52 million is also a record high, and we want to see this one. Overall, net debt-to-EBITDA, I think net debt-to-equity, we are within our guidance. There is no concern at all on our side. And now I will leave the floor to Lina.

[Interpreted] For the next topic, I will discuss the results of our core businesses. If you take a look at the sales that have continued to grow well in the past quarter. They come from our diversified portfolio. And in the first quarter, our Ambient seafood had a sales portion of 43%. Our frozen and chilled seafood was 38% and our PetCare, value-added and others increased from last year and is at 19% compared to 18% in the first quarter of last year. As for our mix between the branded and OEM, we have increased sales from the private labels at 61% compared to 58% from last year. And this is a result of increasing demand for PetCare products and also the value-added products as well as the Frozen seafood products that have continued to grow. The 3 businesses on the bottom of the slide, you'll see that we continue to advance in newer businesses of higher profitability, and these are ingredients, supplements and Alternative Protein and our target is to achieve sales from innovations at 10% of sales and a gross profit margin of up to 20%. In the last quarter, if we compare to the pre-pandemic situation or even during the COVID, we have continued to see growth, especially in the frozen and chilled seafood that grew by 26% compared to the first quarter of 2020, and this is thanks to the revival of restaurant businesses. During the first wave of COVID-19 there was the lockdown, which affected them. And in terms of PetCare, value-added and other products, they have continued to have healthy growth up to 54%. We see an increasing demand for PetCare because people are giving more attention to their pets. And in terms of our Ambient seafood products, there wasn't much of a change from the same period in 2020, even though this is a high base and people were hoarding products during COVID. And if we take a look at the overall sales on the right-hand side, you'll see that our sales have grown significantly. As we mentioned earlier, it is about 17% in growth compared to first quarter of 2020 and it is 17.5% in the first quarter of '22. This is a very significant rate of growth because we have been actively looking to reduce our cost, increase automation and a focus on higher profitability products. And this is a result of our diversification in our products and the strength of our core businesses. This has all led to higher sales in the past period. In terms of our Ambient seafood, the sales have grown significantly by 14% compared to the year before, and this is mostly due to the increasing sales in tuna in Europe -- excuse me, the U.S., in Europe and Asia. And the sales have grown by 7%, thanks to the demand that has increased in Asia, along with movement in the -- FX movement. As for our OEM sales, on the right-hand side, you will see that between the OEM and the branded products, the OEM sales have increased from 42% to 58% this year. And the gross profit margin is at 21.7% increasing from the year before at 20%. And this is due to the strategy of our company. As Ludo mentioned earlier, we adjusted the sales price for both OEM and branded to pass on the costs that were increasing and also thanks to the increasing sales, along with our product management to focus on higher profit margin products. And the same goes for our Ambient business, we were able to deliver at a high level as well compared to the pre-pandemic level. The Ambient business has grown in terms of both sales and profit, and there hasn't been much change from the first quarter of 2020 when we experienced COVID. In terms of our Ambient strategy, we have a 3% increase in CAGR despite the normalization from last year after our high base when people were hoarding products during COVID and the gross margin was at 21% to 22%, which is quite high, thanks to our cost management and our focus on higher profit margin products. We have also launched new products that are value added. For example, we have increased vitamin C, omega-3 in our canned tuna under our Healthy Living portfolio in Europe. We also have new products under our SEALECT brand that is yellowfin tuna in olive oil. This is different from the regular tuna that we see in the market. This is a premium product. And again, we're using yellowfin tuna rather than skipjack tuna and it is placed in olive oil. And we hope that you will all have a chance to try this new product. And those of you who have changed the product or who have tried the product many of them say that it's more delicious, it's softer and this is a healthy choice for those who want to take care of their health, and it is available in the 7-Eleven convenient stores throughout the country and in supermarkets as well. In terms of our inventory management and raw material management, we have adjusted the cost. We also pass through some of the costs and we have adjusted our promotions to reflect the increasing raw material prices. In terms of our frozen and chilled seafood sector, we saw an increase of 14% in sales and this is due mostly to the higher selling prices and the recovery of the restaurant business, as well as the depreciation of the Thai Baht. And as for gross profit margin, it is at 9%. This is a slight decrease compared to the first quarter of last year, which was at 10.5%, and this is due to FX in the U.S. and Europe, higher logistic costs and higher raw material costs. Even though we have a gross profit margin that has increased by about 1%. This is due to demand in Asia and higher exports as well. If we compare this to pre-pandemic levels our Frozen seafood business has increased in terms of sales and margin. And as far as strategy for our first our frozen and chilled seafood, we're going to continue to focus on profitability. And in the past quarter, we had gross profit margin equal to THB 1.3 billion. This is higher than our past periods as well as our pre-COVID levels as well. And in U.S., Asia and in Thailand, we have a solid sales and demand continues to grow. We also have higher exports, thanks to the recovery of the restaurant business and also higher selling prices. We will continue to launch new products that are value added. For instance, we have pre-fried shrimp, we have mussels with cheese. And you can see pictures on the left-hand side. And we're going to launch these products in our market here in Asia and in other regions. We also are focusing on expanding our Qfresh and Thammachart Seafood brands, and we will expand in Southeast Asia. In addition to this, we are preparing to open a culinary plant that will heighten ready-to-eat products and bakery products. We're going to increase the production capacity to -- here to a very large brand in the world that's towards the end of this year. We're also focused on automation -- continuous automation to reduce our cost and to increase our production efficiency. In terms of PetCare and value-added and others, this is one of our rising stars. And in the past quarter, our sales grew by 27.2% compared to the last year, and the quantity went up by about 8%. And this is due to strong demand for our PetCare products after people have started to give more attention to their pets. We've also launched new products, new innovations and we continue to widen our portfolio. We have sales from packaging as well and also the FX effect that has helped our sales figure. As for our gross profit margin, it is at a high level and at about 24.4%. That is a slight decrease from the first quarter of last year because the exceptional performance last year due to the favorable raw material prices and the sales in the trading PetCare companies in the U.S. that increased during that time. As for our sales and our margins, we have grown well, growing strongly compared to the first quarter of 2020 and the COVID periods. Our PetCare and value-added strategy, as you can see on the chart, our business continues to grow with a double-digit growth and we continue to see this growth in the first quarter. We are focusing on R&D and we have our PetCare innovation center, and we also have joint venture with Mahidol, we are going to open at the end of this year. We want to be an OEM producer from producing according -- changing distributors and according to the strict formula, we want to be an ODM or original design manufacturer, which means that we will innovate the product itself and the packaging to be a leader globally. We are expanding our PetCare business into the U.S. and in Europe and China, and we are launching new products continuously. We're also expanding our packaging business as well. This is a reflection of our components for the revenue. You can see that we have growth in every segment, especially in terms of tuna, it grew by 15%. Shrimp and other Frozen foods, PetCare, value-added products, you can see that all of these have improved. The FX for the U.S. -- the USD effect and the euro effect that have also helped. On this slide, as Mr. Chair Thiraphong told you, our sales have reached a record high for the first quarter at THB 36 billion, and our margin is still high for the first quarter at 17.5%, and our gross profit is also quite strong at THB 6.4 billion. And now I would like to turn the stage back to Ludo to explain on our guidance for this year.

Thanks a lot, Lina. Yes indeed concerning the Q1 performance, I mean -- there are challenges we are facing in inflation and the opportunities we have also we have decided to adjust a bit our guidance. So you can see on the sales, our initial guidance provided last quarter was for the full year trying to grow between 4% to 5%. The new adjusted one is, we are targeting a growth between 7% to 8%, okay? So of course, this is far away from the 16% we delivered in Q1. So we don't expect to deliver the same performance the same growth in Q2, Q3, Q4. Q1 was record high. Yet for the full year, we do expect 7% to 8% growth overall, which is a very good news. Remember, 2021 for us was a record high year in terms of sales and we expect to grow further compared to this one. There will be different components to this one. FX is one component of this one. In Q1 the FX impact is very large. We don't expect the same FX impact to happen in Q2, Q3, Q4, if you look at the dollar changes. The volume growth will be there. We told you in Q1, they are positive for the 3 categories, and this is our expectation for the whole year. The pricing effect, lastly, will be very important, of course, because we need to kind of pass through the inflation coming from the freight cost, the packaging, the ingredients to our customers. So overall, very happy with this performance. The gross profit margin, the initial guidance was between 18% to 18.5%. So we adjust a bit down on this one to 17.5% to 18%. We do remain very confident on the growth profit margin. We are very happy overall with the performance. We do believe the Q1 performance, which is almost close to last year is a good one -- really a good one. We do believe we have also a lot of headroom to improve further on this one. We fully acknowledge that there are some challenges. We don't try to dismiss this one yet, we do believe we have some good opportunities on this one. I think one of the big differences compared to last year is, last year, Q1 and Q2 in terms of operating performance were extremely high. We do expect that this year, H1 will be lower, and then we do expect to recover in Q3 and Q4. The SG&A, we gave you a guidance which was a bit wide. At the beginning of the year between 12% to 13%. We just fine-tuned this one from 12% to 12.5%. Different reasons for this one. First of all, the top line growth is, of course, higher compared to our expectation. We do have also in this guidance some expectation that the freight cost situation will improve in Q3 and in Q4. So the expectation for Q2 is the SG&A ratio to remain very high -- in the high range of this guidance. Yet we do expect some improvement to happen in Q3 and Q4. For the rest, the interest rate, the CapEx and the dividend policy, there is no significant change. We confirm our guidance. I told you the CapEx we spent THB 1 billion in Q1, so we are a bit behind. We may have a bit of buffer at the end of the year. But overall, we do remain very confident and we are pleased with the Q1 numbers. And now we can move to the Q&A session.

[Operator Instructions]

[Interpreted] I am Adisak from Krungsri. I would like to ask about your guidance. Your gross profit margin to sales, what items have been adjusted significantly, is it the sales to price volume?

[Interpreted] The sales that have increased over the first quarter, we've also have been accompanied by increased volume as well. So overall, we expect increased volume. At the same time, we have the FX effect and it also adjusted the selling prices. You can see that it's not just the price but also the volume that has growing. At this moment, our OEM business in Thailand as for our Frozen business, we have a strong level of orders until the end of the year. As well as for our canned products, we have orders for 2 to 3 months in advance. Overall, this year, we are satisfied and not worried in terms of our -- because we have good strong top line growth. Our gross margin has been revised down a bit because we believe that we still believe we can manage the situation and we're going to be focusing on our costs. And at the moment, the situation is quite fluid and our job is to monitor.

And the cost for tuna you said it was manageable at $1,200 to $1,700 and the oil that you're using, the gasoline prices have increased for fisheries. So will this range change?

[Interpreted] I believe that the gasoline prices do have an effect because the investment costs for fishing, the main cost is gasoline. And it all depends on the demand in the market. The raw material cost at $1,700, the highest was in the third month at about $1,900. Again in the fourth month, we've seen it come down to about $1,800, and we see an improvement in the capture. So we expect a decrease in this area. And our procurement department is also working on these costs. This trend should weaken. At the same time, in terms of shrimp, even though the cost has increased, we -- compared to other seafood businesses, our cost is low. Lobster is very expensive. In the restaurants in the U.S., especially, they have stopped promoting lobster-based products. So if you don't -- you can't see a lobster, of course people would turn to shrimp and this will be a main choice in terms of seafood, so demand is still high for this.

I'd like to ask the price for tuna that is high at $1,900 in March. Do you believe that we will see a higher level than that this year?

[Interpreted] I think that at this moment, we can see that the price is beginning to weaken. And the trend -- when it went into $1,900 we even thought it would go up to $2,000. But these things are things that have to be monitored weekly and it seems to be getting better. More fish is entering the system. So the price is going down. So we don't expect it to go higher than $1,900. It already reached that level.

And what do you expect the lowest level to be this year in U.S. dollars?

[Interpreted] We don't expect to see less than $1,500, and we will continue to monitor. But I think there will be a weakening of the cost, lowering of the cost. There will be more room for the market to grow.

And what about the inventory level that you have right now for tuna, how much do you have in terms of months?

[Interpreted] 2 months' worth of tuna is what we have.

As the raw materials, right?

[Interpreted] Yes, it is.

What about canned tuna?

[Interpreted] We have a small canned tuna inventory because we produce and we ship it out immediately. It is for OEM. If it's OEM, we have a high level of raw materials. But for branded products we have more finished products, because we don't need to store raw materials so much.

And the brand?

[Interpreted] We have to have 3 months' for it, because the transit time, especially for Europe, it has to be produced in Ghana, Seychelles and Portugal. So they have a longer lead-time -- longer lead-time than Thailand does.

And the quarter 1 inventory level increased, this it by business, are there any businesses that have a higher level of inventory?

Yes. I think in Q1 the [ destinations ] is great for Frozen business [indiscernible] impacted by the logistic costs and the challenging on the containers happening in this one. So overall, we have some ups and downs, but the key explanation from the inventory increase is coming from the Frozen business in the U.S. Second explanation for this one, the shortage -- the container shortage, logistic issues are still there. We're expecting to sell a bit more on this one and you have a very violent market normalization in the U.S. happening right now, which Thiraphong mentioned in this one. You have some restaurants moving out some lobster, some chefs blah, blah. So it's a bit slower compared to our expectation. But the team right now is working very hard on how to release all these inventories.

[Interpreted] I believe that in the next few quarters, the inventory level will decrease, because right now is when we are we are focusing on lowering our inventories.

And you increased the selling prices in the first quarter. Is this enough for the packaging costs and the gasoline prices or do you think you will have to increase prices further in the next quarter?

[Interpreted] For our branded products, I think they've had their second round of increases in prices. So at this moment, we will continue to monitor the situation. And for OEM, we increase or decrease depending on transactions. We produce and we sell. That is the process, that's the cycle. So for OEM, there's no need to worry.

I'm not sure about has time shortened due to the negative factors. For instance, 3 months -- 6 months change in prices for OEM?

[Interpreted] For OEM, we change -- we adjust the prices all the time. We sell in advance by 1 to 2 months. And for every transaction, every week, we adjust the prices. Every time we have new sales, we adjust the prices. Actually, it's not just the price adjustment, we also manage our product mix. We have our value-added products that -- and this is something that we have done quite well in the past few years. The higher margin for these products -- these are not commodity products. Our portfolio -- our product portfolio has improved over the past 3 years in every category.

So what about the freight cost? Does the company see that it's reached the peak already or do you expect to have -- do you expect to face higher costs in the future?

[Interpreted] I think the freight cost will continue to increase this year, the entire year, and we will continue to monitor the news on new -- there will be newer ships. Once those new ships are introduced, we will see lower wing freight cost, because it has increased by about 10x, hasn't it? So it's not -- there's no way that these prices can continue to stay so high. And we have been able to manage the situation, and we see a downside. We think that the upside has probably peaked and can't go up any further.

I don't really understand, has it peaked?

[Interpreted] I think it has peaked. We see the prices -- we will see increasing prices for one more year -- this whole year. We don't think the freight cost will lower this year. However, we will pass the cost on to -- we'll pass the cost on depending on the brand cost.

If we look at Slide 50 in the appendix, the sales for Europe have dropped quarter-by-quarter. And what is the sales trend in Europe? Will it improve or what is causing this uncertain growth?

I think we had compared to last year, if you compare to Q1. You need to remember in Europe they have a very strong seasonality. So it's a bit difficult to compare quarter-on-quarter because you will always have some upside and downside. So what makes more sense is really to compare Q1 with the Q1 last year. We are growing in Europe. The growth is lower compared to the one we see in Asia. That's very clear. We have already -- for some countries like the U.K., we have already increased the prices since January, okay? And this has an impact on the volumes. Despite this one we are able to generate some volume growth overall at European level and also some top line growth, okay? But overall, we are generating some growth here. It's bit lower compared to the other regions, correct. But right now in terms of sales for the Q1, we are quite happy with the performance, okay? Remember, the Q4 performance was very high for Europe in Q4 last year. The Q4 overall for the whole group was super high in terms of sales for Q4.

So in terms of sales in Europe, what is the current major currency? Is it EU -- euro?

Euro. Euro will be the key one. And then the second one will be GBP, okay. Our key markets in Europe are France, Germany, Italy, also where we are using euro and in the U.K. where we are using GBP.

So compared in terms of the depreciation of the currency, so it has a growth, right?

It has a positive effect, yes, but not that big. If you compare the euro and the GBP compared to last year, Thai baht is depreciating a bit, but very small, okay? The impact in terms of FX is much bigger for the USD.

If we look at Page 18, Slide 18, please. I see in the last sentence, you see -- you say you have a challenge for the labor shortage, what is the trend in the U.S.? And what plans do you have to deal with this in Thailand.

In the United States, we don't expect to be using robots to help, but we will continue to manage internally at the restaurants to improve the efficiency using, for instance, IT, but we don't expect to be using robots in the restaurant. The labor shortage has been something we've been facing for over a year, but it has been manageable. The pressure is the labor cost that need -- the labor costs have increased. Our strategy for Red Lobster today, we see room to reduce our costs significantly in terms of waste in the restaurants. This can be improved in the restaurants. There are some price adjustments, but not that much. We're focusing more on the menu mix dealing -- looking at those that have higher profit margin and lower profit margin.

[Interpreted] There is no questions coming from the room. Please allow me to raise a question coming from the online channels. The first one is how much of our cost is in Thai Baht compared to other key major currencies like the U.S. and Euro.

I think the key exposure for us is really the Thai baht versus USD. You remember, in Thailand, we are buying the fish, which is our first source of expense in dollars. So the key exposure for us in Thailand is really the conversion cost. We pay our conversion costs in Thailand in Thai baht. This is first key exposure in Thai baht. In terms of purchases of raw materials, we have kind of natural exposure, natural coverage because we are buying, and we're also selling mostly in dollars, okay? So the key exposure for us is really coming from the commercial cost and the commercial cost over the last 2 years have been really under control in Thailand. Of course, we have some increase coming from the utilities, coming from the inflation of the salaries and this kind of stuff. But overall, the performance in Thailand has been really good in terms of FX and Thai baht management.

[Interpreted] The second question is about the change in prices for branded, the higher prices that have increased by 5% to 7%. This will be realized in quarter 2. Will this have an effect on the sales volume? And will it offset -- how much will that offset the costs? And as for the gross margin, will it be better than quarter 1?

So here I think we there is differentiation by country. I told you, in Europe, for instance -- I'm talking about branded first. Some of the price increases were already effective since January. I told you the case of the U.K., this is kind of unique in Europe for all the other countries for France, for U.K. and the price increase will be effective indeed in Q2. For the OEM business, it's usually different. Thiraphong mentioned this one. We always adjust the prices. So yes, in Q2, would you expect to have some impact coming from the price increase. There may be some impact on the volume. We have seen in the U.K. some negative volume impact coming from the price increase. However, we do believe we can manage on this one, and the outlook are good. We do expect to improve the performance in Q2 and in Q3, especially in Europe. Overall, at group level in Q2 we'll have also to release that some inventories with higher fish price. So there may be a bit of pressure overall on gross profit margin level. However, we do remain confident -- and this is why for the full year guidance we gave a guidance, we did adjust very closely from our initial guidance, and we just adjusted it a bit down.

[Interpreted] As for the OME, do we have any long-term contracts? And what is the proportion of sales and in the current situation with the increasing cost, what is the company doing to handle its cost?

Business with the long-term contracts. It's a minority, something around 20% that we have with some very specific customers, mostly in the U.S. So we have some long-term agreements. Of course, we cannot adjust the prices on this one. So it's very beneficial when the prices are going down -- it's going on the opposite side. We want to maintain this kind of long-term agreement, because for us, it provides us some visibility, okay? However, we have some way to work on this one through our efforts on the commercial cost and also on productivity in the -- within the factories. Again, it's a minority, a small portion, 20% of our OEM business.

[Interpreted] For our animal feed, we have value-added products that we've been launching. And these are products that have a good profit margin.

[Interpreted] How much of tax credit is from -- how much tax credit does Red Lobster have left?

I think we have one specific slide on this one. You can see for Q1, we have something like THB 200 million -- we generate THB 200 million tax credit. It's a significant amount. Again, we have -- I told you why we have -- specific on Red Lobster 3 resources of tax rate. The first one coming from the operations. In the share of loss that you see there is no tax including these numbers. Again, Red Lobster is a partnership. So the tax income or expenses are calculated by the partners. So this is the first one. The second one is we have some goodwill tax depreciation. You don't see it in the accounting. It's a pure tax calculation. So we have -- we are benefiting since 2016 from tax credit coming from this one. And lastly, it's a restaurant business and the restaurant business in the U.S., they are benefiting from specific tax credit. So every quarter, there is some organic tax credit coming from the normal business of Red Lobster. So these are the 3 components, which are explaining why you have more tax credit. But the key one is, of course, the higher share of loss from Red Lobster in Q1.

[Interpreted] I'd like to ask about how you manage risk about your risk management. You have increasing interest expenses, especially for the U.S. So what is your plan for risk management?

I think the fact that the interest rates overall are increasing it's not a surprise for us. I think everyone was expecting from this one. I'm sure you have seen the interest rate increase happening in the U.S. very recently that was expected. Yes, the prices may go up. We are doing some hedging also overall on our interest rate. We don't expect huge impact. The goal clearly for us on that one is to decrease our net working capital and to improve our net debt situation. This is really the expectation that we have for the whole year. There may be, in the short term, some small increase of our interest rate, but this should be quite marginal. So we don't expect to have a strong impact coming from this one. At this stage, we did not decide to put any CapEx plan. We told you no, we want to spend the CapEx amount this year and want really to execute our plan. So there is no concern on our side. But of course, we need to watch out for the situation. The inflation rates are very high. You can see that everywhere, the U.S. for the time being, they were the first one to move quite significantly on the interest rate. We need to watch out for the other countries, but no concern on our side on this one.

[Interpreted] We have one minute left. If anyone else from the room would like to raise a question, please feel free to do so now. We have maybe time for one more question.

I'd like to ask about the PetCare that will be OEM, in terms of margin -- I'm sorry, I can't hear.

[Interpreted] OEM we have contracts to manufacture and this is -- it relies on the development of the PetCare product formula along with our partners. And these are customized formulas and this is why our customers continue to stay with us, because we have these special products that you can't find anywhere else. And in terms of PetCare, we want to see growth, and we expect 12% to 15% per year. But in the first quarter, it has grown by over 20% and the gross profit margin for our PetCare sector, we're looking at mid-20s -- about 24% or 25%, and this is our target moving forward for the next 3 to 5 years. And this is our strategy for PetCare.

[Technical Difficulty] session for the Thai Union performance result announcement. Thank you so much Lina and [Technical Difficulty]. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]