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

Good morning, everyone. Welcome to Thai Union Analyst Meeting for the Third Quarter of 2024. My name is [ Nonwan Kidwa Taisan ], and I will be your MC today. Before we start, I'm excited to share you our souvenir from our own brand, SEALECT, which is a fun collaboration with Sesame Street that brings beloved character to our SEALECT tuna products. And now I would like to start by introducing our key speakers. First, Khun Thiraphong Chansiri, our President and CEO; and followed by Mr. Ludovic Garnier, our Group CFO; and last but not least, Khun Pinyada Saengsakdaharn or Khun [indiscernible], Head of Investor Relations. And this section will take around 1.5 hours, including the Q&A and followed by a 10-minute break and TFM result announcement. Without further ado, I would like to pass this on to Khun Thiraphong.

[Interpreted] Good morning to all of the analysts and executives from financial institutions joining us today. We would like to share with you our performance results for the third quarter. We're very happy that in the third quarter, especially for our top line, it is a top line that is in positive territory now after having been negatory for 6 months consecutively. And we're back on track now. And overall, our performance results, whether it's our gross margin is the highest at 19.5%. Our OP, net profit have all gone up. And if you take a look at this page for the 9 months, our sales have grown by 2.7%, while our gross profit has gone up by 12.9% and our operating profit has gone up by 17.9% and our EBITDA has gone up by 17.8% and our net profit has risen by 15.8%. Overall, I believe that we're looking quite favorable. Our balance sheet is good. Net debt to equity has increased a bit from 0.78 to 0.79. Most important here is our cash flow. Our net cash flow this year, we have achieved great levels, whether it's in terms of controlling our inventory, and perhaps it's even better than we wanted in the region, we're doing well. And as for CapEx as well, this year will be a CapEx number that is the smallest ever since in our historic low. And we have some projects that they've been delayed, and we've been able to expedite those. And so our CapEx is at a good number. And I would like to tell you about the fourth quarter, we're going to remove the [ perp ] that have come due after 5 years, we have repurchased those stocks and our net debt to equity will rise because of that, even though it is lower than 1. And we're doing this to save cash and save on interest, and we've been able to save THB 150 million per year. And this is something that we will continue to do. In the past, the recent few months here, many people have advised us about our cash for i-Tail, whether we will be able to manage or not. And after having had discussions with our investors for i-Tail, they seem to be worried and there we decided against it then, and that's quite regrettable would have led to benefit i-Tail would have received about THB 40 million to THB 50 million in benefits, not a lot, but it would be good. THB 40 million to THB 50 million in benefit is good. Nevertheless, we discontinued that idea. So there's no need to worry. And in the third quarter, if you take a look, you can see that our gross margin has gone up by 19.5%, and this is the highest for us in many past quarters. And our net profit, I believe that we have achieved a great level at THB 1.4 billion. Overall, our costs for affecting our transformation programs for i-Tail as well, the Project Tailwind, project for i-Tail. If we do not include these transformation costs, then our net profit would be at THB 1.6 billion, growing by about 20 or so percent. So the costs come first before we see the benefits, and we will see the benefits next year. And on the next page, you can see a cleaner picture. We have adjusted net profit. There are 2 of them, 2 figures. There's the reported net profit at THB 1.2 billion. If we exclude Red Lobster, then you can see the numbers are better. It's at THB 1.3 billion. And our reported net profit is THB 1.4 billion. our transformation costs are THB 234 million. We have grown by 21.8%. So this is a very good quarter. On the next page, what we have for you is a story of our transformation, our transformation programs. We will see you again next week on the 11th of November. It's a good day. It's a single day in China, 11/11. We would like to invite everyone to come join us for our sharing about our 2030 strategy and our ambitions and also about our Sonar project. And you can see on the left-hand side, this is the Sonar project. We have a purpose. Our organization is -- our purpose is for healthy living, healthy oceans and our vision, we have adjusted our vision from trusted leader to the world's leading marine health and nutrition company. There are 3 pillars, 3 key pillars. One is to revitalize the core. The core of our business is extremely important and very strong, especially our branded business. We want to strengthen our branded business even further. And our second pillar is drive the next wave of growth. And this is a focus on our growth engine, whether it's pet or feed. And the third pillar is exploring new frontiers, and this is about new areas that we would like to explore more. And for Project Sonar, we have 3 programs. And the one is the operating model. This is to adjust our organization, one of the largest readjustment, whether it's the operating model, it's the structure, it's the process. We want our organization to be leaner, to be faster and better. And this is something that we will pursue. We also have our supply chain excellence segment, and this is about procurement and manufacturing. It's all included here. And lastly is our digital transition. We want to be an organization that is data-driven and analytical more than before. And so this is what we're doing. And the Project Tailwind is all about accelerating our growth potential for i-Tail, whether it's in terms of commercial excellence, how can we have more efficient sales, how can we enter better markets, how can we take better care of our customers. And at the same time, we have operation resilience as well as procurement. And these are things that we will share with you as well as our 2030 strategy next week, next Monday. And on the next page, what you will see here is the opening of our Innovation Hub in the Netherlands in the Food Valley in the area of Wageningen University there. We opened our center there to be close to the commercial area. And the focus there is developing our Ambient branded products. And this center will take care of our innovation and make it more formidable and faster. We have a video to share with you on this as well. [Presentation]

[Interpreted] The first innovation that we've launched is the ECOTWIST that is a -- it's been patented as well. It's been launched in the U.K. and we are monitoring the results, and we hope that we will be able to expand to other countries as well. This is what we are pursuing right now. Next, we'll take a look at sustainability. On the left, you can see we have taken part in the SeaBOS event Sustainability Expo 2024 at Queen Sirikit Convention Center. In the middle, you can see this is another activity of ours that is under our sea change strategy. It's a partnership with the organization known as Seven Clean Seas and also Second Life to collect plastic in the ocean. And our goal is to collect 1,500 tons by 2030, and this is something that is ongoing. And lastly, is our know-how in terms of water management. As we have mentioned earlier, we are doing 0 discharge and which means no water -- no wastewater release from our processes and the Minister of Labor asked to visit these facilities of ours, and we opened our doors to allow outsiders to learn from our activities. And I'd like to hand this over to Ludo to present the financial results.

Thanks a lot, Khun Thiraphong. Good morning, everyone. Very happy to be with you today. As usual, I will start with the key highlights in terms of financial performance. I think we have many good news to share with you today. First of all, the top line. I think the top line growth is in line with our guidance. We had 2.7%. I will elaborate a bit more. The organic growth is higher. but we have a negative FX impact in Q3. I will elaborate about that a bit further. The volume also are strong. And you remember, we told you at the beginning of the year that was one of the priority for us this year. So we have volume growth in pet food and also in Ambient, and we are very happy about that. Gross profit margin, I think, was kind of a surprise maybe for you, very high. It's a new record high at 19.5%. We draw your attention on one point. We benefit this quarter from a bit of reversal of hedge inventory. So if you remove this impact, then the GP margin would be around 18.9%, so still very high. Just for you to explain, we have a very conservative hedging policy. So we push our management, our leaders to accrue quite quickly because we want them to focus and then to release the inventories as soon as possible. So every quarter, we have some plus/minus coming from this. Sometimes we accrue, sometimes we reverse. This quarter, we have a reversal, which is a bit more significant compared to usual. This is why we highlight this amount. But it's a positive news because it means that we were able to release some edge inventories. The cash flow also is a very good news. I think you will see that the EBITDA is strong. The CapEx is low. It's a bit lower compared to my own expectation. I'm not very happy about this one. But overall, it's a good news for our cash flow generation. If you look at the 5-year story, you can see the GP margin of the past 3 quarters has been improving. We told you in Q1, we're expecting this to be at the lowest point. Again, just for you to remember, that was due to the drop, the sharp drop of the fish price over 3 quarters at the end of 2023. Now we are constantly regaining, and we are in these territories of 18%, 19-plus percent that we are really looking for. So it's a good news. The net profit margin also, we are back to a territories of 4%. This is where we want to be, definitely. We don't want to be lower than this, and we want to be even higher than this number. Next slide, we just have a quick focus on the details of our reported sales, okay? So here, we explain -- we detailed the reported sales growth by quarter. You can see you have 2 colors. The dark blue, this is the organic sales growth. And the light blue, this is the FX impact. And we give the breakdown over the past few quarters. And you can see here in Q3 '24, we have a strong organic sales growth by 3.1%, and then which is partially offset with a negative FX impact. And you can see if you compare with the last 6 quarters, it's a complete change. Over the past 6 quarters, the organic sales was declining, but then we are benefiting from the positive FX, and we have been very transparent about that in our communication. So it's a shift. You have seen that the Thai baht has been strengthening over the past few months. Of course, you have seen yesterday with the election of Trump, the USD getting gain momentum again. So let's see what is going to happen in the next months to come. But overall, very happy to see the organic sales growing, okay? This is what we are looking for. We told you that in '23, a significant portion of the drop was explained by the frozen rightsizing. So it's good to see the organic sales back on track and back to growth. On the fish price, I think in Q3, there was no surprise on the tuna. I think it was aligned with our guidance. We have a Q3 average around USD 1,410. In October, it was USD 500 (sic) [ USD 1,500 ] we do expect in Q4 to be in the same range, USD 1,400 to USD 1,450. So we don't expect a huge change for the Skipjack. The shrimps on the right, you can see here, THB 141 on average for Q3, but it's rising in October. So it's one topic for us to watch out the shrimp development. It's not a surprise. Quite often, we have this kind of mechanism. The salmon price went down. You can see NOK 78, Again, very similar compared to the fact pattern we have seen over the past 3 years. So again, no surprise on the raw material price in general. On the FX, as I mentioned, you can see here the Thai baht strengthening versus all currencies. So here versus dollars on the top left, on the top right, you can see versus euro. So we are not anymore in the territories of THB 35, THB 36. In Q3, the average was THB 34.8 and even declining further in October. You can see yesterday, it was regaining a bit, now exceeding THB 34. So let's see where do we go for the rest of the year. Quick focus also on Red Lobster. We told you, if you remember, in last May, they went for Chapter 11. The good news in Q3 is they went out of Chapter 11. So they exited in Chapter 11 on September 16. On the same day, we didn't exceed of our role of shareholder, okay? So we don't hold anymore 49% in Red Lobster that we are holding before. You have a new group of shareholders. And of course, now they are back to a normal situation. They don't benefit anymore from the bankruptcy protection. It's a very good news. We told you already that they closed something like 120 restaurants. So in terms of scope, it's a bit lower compared to what they had in the past, but it's excellent news that they were able to exit from Chapter 11. You can see in the middle. So here, our role, we get back to the role of a normal supplier, okay? We told you that we never stopped delivering any products. We have a strong partnership with them over the past 30 years, it was existing before the shareholding time. It will continue to exist after the shareholding time, and we'll continue to supply to them. We just signed a new supplier agreement with them. So again, it's a positive news. On the right, we told you that we were expecting some claim and some litigation to happen after the end of the Chapter 11. So here, no surprise, we have one claim being performed by Fortress against us regarding the guarantee we did provide back in 2022. At that time, if you remember, we did provide to Red Lobster a $65 million guarantee, okay? There were some termination events for this guarantee. There were 3 of them. We already mentioned that to you. There was a minimum EBITDA to be delivered. And then there was a CEO and a CFO to be appointed U.S.-based and with an experience in the restaurant industry. For us, these 3 events happened, okay? However, we told you already that we never get the formal paper from Fortress that they agree and that the guarantee was terminated, okay? So now it seems to be that they believe the guarantee is still in place. Our conviction is very clear for us, the termination events happen, and then there is no more guarantee to be called for, okay? So it seems to be we'll go to a litigation. Let's see over the next quarters. I don't expect any short-term development, to be frank on that. It could be 1 to 2 years process overall on this one. That was expected. So it's not a surprise. It will mean some legal costs, but we want to defend very strongly our position, okay? So you can trust us to be very strong on this position. Again, that was expected, so it's not a surprise, and we told you about that. A quick one on the freight cost. You can see the freight cost on the left. You can see the graph, the freight cost keeps increasing. In Q3, now we are around $8,000. It was $6,000 in Q2. Still a watch out for us. We are still facing the same issues. The Red Sea issue are still there. The tariff increase with China are still there. There was a big risk with the strike in the U.S. Finally, they find a temporary agreement. That's a good news. I guess we had a small impact at the end of September. To be frank, we have a bit of delay of some of our deliveries on this one. But overall, it was a good news, they find an agreement, even if it is a temporary agreement. But you can see the lead time on the bottom left is almost aligned with Q2 at 45 days. So we didn't see any significant increase or decrease of the lead time. So still a watch out. Definitely, we see the cost increasing in our numbers, but we are still far away from the $13,000 we have seen during the peak of COVID. So a quick focus on our ratio. The ratio are improving. The return on equity, the ROCE, both of them are improving. Please have a look in the middle. We told you the inventories, we're expecting some drop to happen, and this is happening. I'm very happy about this one. The inventories are dropping to THB 44 billion. The inventory days also are dropping. So of course, there is a positive impact in our net working capital. That was one of our target for this year, and we achieved this one. Look at on the right, the net debt to EBITDA now we're in a very strong position, just at 3.59. We told you we wanted to be in the range of 3.5 to 4 at the end of the year '24. So we are already there, okay? So it's a good development. The net debt to equity also, we are very comfortable with this kind of range at 0.79. Just as a reminder, we say anything between 1 to 1.1 for us, we are comfortable with this situation. So our financial situation is extremely strong, and we are very happy about that. So our usual bridge on the net debt. Our net debt is decreasing over 9 months. At the beginning of the year, it was THB 51.5 billion. Now it is THB 49.7 billion, THB 8 billion, it has been dropping. The free cash flow is strong at THB 8 billion. And again, the EBITDA is strong. We have a positive impact from the net working capital drop by THB 3 billion. I already mentioned this one. There is one thing which is the CapEx. The CapEx is too low, okay, THB 2 billion. We don't have very large. We told you for this year, the initial guidance was THB 4 billion to THB 4.5 billion. We have a bit of delay. in some countries of some large CapEx. So I would expect it will be a bit delayed to 2025. It's not a concern, but I would have expected the CapEx to be a bit higher. It's good for the free cash flow. But of course, it may delay some of our projects. And then on the right, you can see the investments, the payments we've been doing on the taxes, interest, dividend as usual. And then on the right, the treasury shares, the THB 3 billion. We did that already in H1. So there is no change and the proceeds from the LDH sales. The cost of debt is now just below the 4%. Again, it has been increasing a bit that was expected, and this is fully aligned with our guidance. So next one, just a quick focus also regarding the maturity, our debt maturity. Khun Thiraphong mentioned this one. So we decided to call our perp. Here, the idea for us is to save our cash, okay? And you can see on the right some explanation. If we were willing to continue with our perp, just for you to remember, the perp, we have THB 6 billion, okay, and it was issued 5 years ago. If we were to continue with our perp, we would pay 6.6-plus percent interest rate, okay? So that was the option number one. Option number two, we could decide also to try to refinance with a new perp. And right now, given the market conditions, we could expect something around 5.75% in terms of interest rates. There was an option #3, which is, okay, we call for the perp, and we refund this one with the traditional funding. And here, the idea would be between interest rate around 3% to 4%. So the whole idea is to say we have a strong financial situation. We want to save some interest costs in the future. So we decided to call for the perp. Of course, when we do this, and this is expected to be performed in December, we lose the very nice accounting treatment. Remember, with the perp right now, we show this one as part of the equity and not in the net debt. Of course, when we refinance this one, it will be removed from the equity and it will appear in our net debt. No surprise, we know this one. So right now, our net debt to equity, which is just below 0.8, very likely will move around 1, just below 1 or just above the 1, okay? Again, still a very strong financial situation. And you can see also in '25, we'll have THB 12 billion of funding to be refinanced. This is just normal refinancing. We decided to wait for next year to refinance all of this together, okay? So the 2025 plus also the perp will be refinanced. Of course, you have seen the interest rates are going down right now. So we want to try to refinance this one at the right time, okay? So in the short term, we will refinance with short-term proceeds. We have plenty of this, so it's not a concern. And now I'll leave it to Khun [ Kwan ] to comment on the business performance.

[Interpreted] Thank you, Khun Ludo. For our performance for the third quarter, let's begin with our mix, the contribution. You can see that for the 9 months of this year, the first 9 months is at about THB 103 billion. The category of our portfolio profile, you can see 70% is focused on our high-margin business, which includes our ambient products, our pet care products and our value-added products. In terms of sales, we have 3 categories that I mentioned, their sales growth for the past 9 months. Nonetheless, the frozen business is still making a profit, although it has gone down from the year before. This is because of our rightsizing that we explained before. For the third quarter, in terms of our ambient products, the income -- the revenue is at an all-time sales -- all-time high. This is because of strong demand recovery. And in the third quarter, we have about THB 18 billion, going up by 3.1% quarter-on-quarter, 13% year-on-year, and this is mostly because of the increasing sales volume that went up by about 24%. And the sales volume, we have more demand. We're seeing more demand, a return to higher demand from private labels for private labels in the U.S. and in Canada. And for branded -- the branded segment, we are seeing a demand recovery from the U.S. And for the branded segment, we've seen improvement over the 9 months because of our marketing, and this is to boost our sales, and you can see a return to a good sales level. And quarter-on-quarter, sales went down -- went up a bit 3.1% quarter-on-quarter. But in terms of sales volume, it went up almost 14% quarter-on-quarter. And this is because of demand in all of the regions, except for in Europe. And gross profit, the gross profit margin, the momentum for the quarter-on-quarter is also at a favorable level. Right now, the gross profit margin is at 20.1%, which is in a range that we are happy with from 20% to 22% according to our guidance. In terms of the past 9 months, you can see that we are back to growth for our Ambient business. And for sales contribution, there's a contribution that is the highest since we began doing this business. And for the business update, we have innovations from [ Packet Up! ] in France and also in the U.S. and also innovations from Chicken of the Sea in the U.S. For our frozen business, you can see that the revenue year-on-year has gone down by about 15% year-on-year. However, mostly, this is from soft demand in the U.S. And the sales quarter-on-quarter have also gone down. And this is due to lower sales along with the private label. With regard to private gross profit margin, the sales have gone down, but our gross profit margin is still at an acceptable level, good level at about 12%. Our performance, even though our U.S. business has dropped a bit, the feed business from TFM has performed quite well and has expanded in Indonesia. In the past 9 months, I would like to highlight our margin improvement significantly. The margin is at about 11.5%, which is in a range in our targeted range of 10% to 12%. In terms of our strategy for the frozen business, you can see that we have expanded to retailers and our target guidance for TFM this afternoon, later on today, we will announce our revised targets for TFM. In terms of our PetCare business, we have revenue at about THB 4.3 billion, increasing 15.4% year-on-year. This is thanks to high contribution from the premium products that ITC has put in place a strategy for. And in the past 9 months, the premium product sales were at about 54% compared to 2023 at 43%. And the sales volume, we've seen demand increase from the European countries, especially in Germany. And in the U.S., there has also been increase in demand for the pet care business. As for the sales volume in this quarter for pet care, mostly -- this is resulting from the recovery from a low base in the third quarter. If we take a look at last year, you can see that in the third quarter of last year, the situation for destocking had improved. In the third quarter of last year, it was still the low base where customers were starting to restock once again. In terms of a quarter-on-quarter look, the revenue has gone down 2.3%, in line with the volume that has gone down by 2% quarter-on-quarter. And this is due to the shipping container management, we had a bit of a mismatch. And as for gross profit margin, it's still on a strong level. For PetCare, it's at 30.6% for this quarter. And this has increased continuously. It has increased more than 30% for a few quarters now. And this is thanks to our premium product increase in our product mix. For the past 9 months for pet care, the revenue is back on track, and it is increasing 20%, which is quite significant and the gross profit margin has gone up from 19% to 29%. And in terms of the business update for PetCare, we have a new warehouse. We expect it to be completed by the end of next year. And for ITC has a revised guidance that was announced yesterday. in terms of the sales, it's at 15% to 17% growth and revised up for the gross profit margin as well from 24% to 26%, increased to 26% to 28% now. And SG&A is at the same level at 8% to 9%. And lastly, in terms of value-added business, you can see that for the third quarter, the revenue was at THB 2.7 billion, increasing 1.3% year-on-year. But if we take a look at the volume, the volume went up 6.7% year-on-year. And the sales revenue in this category for value-added, a combination of businesses that are value-added Ambient and frozen and also packaging and ingredients and our supplements as well. And the increase in revenue for this quarter is mostly driven by the packaging and value-added items. And in terms of sales volume, in addition to the value-added and packaging, there is also the byproducts that have increased. In terms of the demand for value-added products, the demand has been driven in the U.S. and in Canada as well as in the Middle East. And as for the domestic market, you can see that the demand is returning for packaging as well. And at the same time, sales have increased by about 5% quarter-on-quarter. and the volume has increased by 17% or so quarter-on-quarter. And this is mostly thanks to the -- all of the categories, except for value-added and supplements. And for the gross profit margin, it has gone down by about 4% to 25.1%. And this has led to an impact, a temporary impact in our culinary plant, we will recognize depreciation. And lastly, for the value-added business in the past 9 months, the revenue is a high potential growth category for us. The increase in revenue has gone up 9% year-on-year, and the gross profit margin is still at about 27%, which is at a high level. And for our business updates for the value-added segment, we have launched products that are alternative protein-based. They're plant-based in Europe. And now it's time for us to have a look at the outlook. So I would hand things back to Khun Thiraphong.

[Interpreted] Thank you very much. For our guidance for 2024, we are going to adjust our sales growth down from our previous adjustment of 4% to 5% down to 3% to 4%. The main reason there is not much except for the appreciating baht in the third quarter. And we expect it to continue to strengthen, and this will affect our target. So the gross profit margin, we have done tremendously well, and we expect this is a good margin. Therefore, we would like to adjust it up to -- from 18% to 18.5% to 18.5% to 19%. And as for SG&A due to our transformation costs in the third quarter onwards, therefore, our SG&A is increasing. So we have readjusted this from 12% to 12.5% up to 12.5% to 13%. Actually, if we do not include the transformation cost and our SG&A would be at about 12.5% to 12.6%. And our effective interest rate is going to be maintained at 0% to 0.5% increase and CapEx has been reduced from THB 4 billion to THB 4.5 billion down to THB 3.5 billion to THB 4 billion. And as for our dividend policy, we will maintain the policy that we have in place already. We would like to thank all of the analysts joining us. Thank you for loving us. Thank you for the Investor and Analyst Association. We received votes from the analysts being outstanding CEO and CFO. Thank you so much for this honor. Normally, you don't love us this much, but you're still voting for us. So thank you so much.

So as there are no further questions, I would like to thank everyone for joining us today. And we will now take a 10-minute break and followed by the TFM result announcement. Thank you very much.

Please join us on Monday. I think this is exciting. Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]