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

Good afternoon, everyone. Welcome to Thai Union's Analyst Meeting for the First Quarter of 2025. My name is [ Nonwan Kidwa Taisan, ] your MC today. First of all, I would like to introduce our key speakers. First, Khun Thiraphong Chansiri, our President and CEO; followed by Mr. Ludovic Garnier, our Group CFO; and last but not least, Khun Pinyada Saengsakdaharn, Head of Investor Relations. Today's session will take around 1.5 hours, including the Q&A and followed by a 10-minute break before TFM result announcement. Without further ado, I would like to invite Khun Thiraphong to begin the presentation.

[Interpreted] Thank you very much, and hello to our analysts and investors joining us as well. We have to apologize for having the meeting on Friday. Normally, we don't have a Friday meeting. But some of our directors were unavailable. Thus, we had to move it to Friday. So we do apologize once again for any inconvenience. And today, it seems like we don't have many people here physically but joining us online, but that's still good. For the first quarter, many of you probably already know that we have economic volatility. We have sales policy issues. We have the geopolitical tensions. We have inflation. We have a weakening global economy, and we also have the issue of the reciprocal tariffs from the U.S. and that was in the beginning of April. Nonetheless, I believe that -- on behalf of the management, I would like to say that we are adjusting and we remain flexible and we will use our strengths, especially in the supply chain. We have our global footprint. We will maximize our strengths. I believe that our strengths in every area that we have will enable us to move forward solidly. We have taken many measures in the recent past year in April and in May, we have been busier than ever because we have been shipping products out in a higher volume because the window of the 90-day extension for the reciprocal tariffs, there are 43 days left for shipping to our destination countries. And so we have been very -- again, very busy. And we have been preparing our stocks, especially for our brand Chicken of the Sea in the U.S., we are building up our stocks at a higher level to enable us to be more flexible in the shorter term due to the economic uncertainty. And aside from this, we see the importance of transformation even more. And we are lucky that we began since last year. Transformation is -- our transformation process has allowed us to have an organizational structure and processes that we are improving and ameliorating. We are focusing on our production costs. We are speeding up production, and we are giving importance to cash. We're looking at our balance sheet to enable us to remain strong in these various areas as much as possible. On the next page, you will see before we go into more detail, I would like to talk about our performance in the first quarter of this year. You can see that our top line seems a bit weak. It's reduced 10.3% year-on-year, but this is an organic drop of about 6.9%. And the remainder is from the foreign exchange amounting to 3.4%. In the first quarter, we do admit that every -- whether it's the dollar, every currency, the pound, there have been -- there's been change leading to a drop in the top line. Our gross profit, we have done quite well, especially in the first quarter, which is usually a quarter where we have a low gross profit margin. In the 2023, it was 15% or so, 2024 was a bit higher. But in 2025, we have been able to achieve 18.8%. So this is something that is in line with our wishes. We have wanted to see our gross profit margin to continue to increase to reach or exceed 20%. Our operating profit, our adjusted operating profit, not including our transformation cost, which is a onetime item, has gone down by 24.7%, while our net profit has gone up by 8.9% year-on-year. In terms of our top line, the drop mostly is due to 2 or 3 issues. One is our exports compared to the first quarter last year. The Middle East, we had a special -- we reached special levels last year. And so there's been a drop because the Middle East, we're not seeing the numbers as big as they were last year. The second thing is our tuna raw materials are usually at a low level and increase in the second quarter. This year, however, our raw mats in terms of tuna were higher in the beginning of the year. And this -- many of our customers, therefore, are using a wait-and-see approach they are waiting to see the drop in the raw materials. And so there has been a delay in our sales. And in addition, we also have the shrimp as a raw material, the prices were quite high in the first quarter. But our PetCare business is something that continues to grow even though it is not in double digits yet. But in the first quarter, there was a growth of about 5%, which is a positive. Our feed for the first quarter was also -- has also performed very well. And our feed business is something that I believe will turn around and be on track. It will normalize. It will do well. We have a net margin -- we will have a net margin in a satisfactory level. As for SG&A, in the first quarter, the increase has come mostly from our consulting fees for the transformation cost. And another source is the increase in the funding for marketing support. I did inform you earlier that from this year onwards, we will support our brand more and more. And in the first quarter, we have used a lot in terms of funds due to our ECOTWIST in the U.K. As for net profit, the growth in our net profit, the main reasons for this are we have our investment in Avanti, which has, again, been very favorable. And we also have the taxes from transferring our Avanti shares from one account to another, therefore, we recorded this tax, and this is due to regulations. It's not because we wanted to recognize, this is due to requirements. So on the next page, you can see our transformation costs in the first quarter is about THB 287 million. We want you to see the benefits as well, not just focus on the costs. The similar costs will end in this year. Therefore, you just need to wait it out a little bit longer, and these costs will not be -- we won't have to worry about them anymore, and we will see a surplus, especially from next year onwards. I want to take a look at our profit is dropping mostly because of our operating profit dropping. We have a foreign exchange negative figures. And the FX gain is 1 -- minus THB 183 million. We have our loans. We have our share of profit increasing, and we have the deferred tax as well. Our net income, therefore, overall without the transformation costs has gone up by 8.9%. And on the next page, we would like to inform you of some changes in terms of our share repurchase program. The Board has allowed for a higher amount of money from THB 3 billion to THB 5 billion to also an increase in shares as well. And our repurchase program is still on track, and we expect it to conclude in June. And this again has been approved by the Board. And moving on, you can see on Project Sonar, our target savings is USD 15 million. And in the first quarter, we have recognized USD 1.3 million, and the numbers are in line with the plan, and the number will continue to increase, and we expect to achieve USD 15 million in savings. And as for Project Tailwind for our operating profit uplift, we're looking for USD 17 million. We have been able to achieve USD 3.5 million in the first quarter. Next, we -- let's look at our credit rating from the Japan Credit Rating Agency or JCR. We have received a rating that remains at A and it's a stable outlook. It's not negative. I believe that this is a sign that the rating agency is confident -- the foreign rating agency is confident in Thai Union, and Ludo will report more on our success in issuing our Blue Loan, a second -- another round of Blue Loans. And this is with the Asian Development Bank, which is a bank that is very strict when it comes to lending, and we have received $150 million. And we also have other foreign banks, 6 banks that are joining ADB in issuing loans for us. And this USD 150 million in loans is a special loan that has a special purpose to be used for purchasing shrimp raw ingredients, sustainable shrimp, in fact, 100% sustainable shrimp. And on the next page, you can see that we have also received the first top spot for sustainability from S&P Global. We are in the top percent from S&P Global for sustainability. And this is something that we have done well. It is one of our strengths. It is what diversifies us from our competition. And we continue to work with global partners on this. We also have other businesses or other efforts that we have in terms of sustainability. We were involved in the World Ocean Summit in Tokyo. We were invited to speak at the event. And when the earthquake hit, we also donated water, food and medicine to the affected areas. And now we'll take a look at the financial performance. So I'd like to pass things on to Ludo to provide those details.

Thank you, Khun Thiraphong. Very happy to be with you this afternoon. Welcome again. So we will start as usual with our 5 years, 4 years pictures. Even if we acknowledge that in Q1, our sales are a bit soft, we are extremely happy with the gross profit margin development, okay? If you remember, usually in Q1, our gross profit margin is always the lowest of the year because of the mix categories. I think here, we are very pleased with this one. We are just below the 19%. And then regarding net profit margin, you can see we have 2 lines, the dark blue and the light blue, the light blue is the reported net profit margin and the dotted line in dark blue is the adjusted net profit. And the difference between the 2 is a transformation cost that we incurred in Q1. The next one, you can see we deep dive on the sales on the top line performance. So here, the reported top line is decreasing by 10%, 10.3%. We are facing a significant FX impact that was expected. When we did release our guidance in Q4 last year, we told you that the negative impact from the FX will be significant during the whole year. Why? Because we're expecting the USD and the euro also to be dropping this year. And this is happening. So we're not surprised with this decline. But also our organic sales have been declining across mostly the Ambient and the Frozen categories in Q1, while the PetCare category has been growing in Q1. So just to explain having a deep dive by category, the Ambient sales are declining by 14% year-on-year. Just a few things for you to keep in mind. The first one is Khun Thiraphong mentioned that last year in Q1 '24, our sales to Middle East were exceptionally high. They were very high because during the whole year 2023, the Middle East, which is a very large market for us, they didn't have access to the USD, okay? They were facing some currency shortage. In Q1 '24, they had access again to the USD. So here, we had a catch-up effect, which was exceptional. So the baseline was very high. But also, we have been facing a fish price, which was higher than expected. Usually in our industry, in Q1, the fish price is always decreasing. But this has not happened, okay? And when you have a kind of a mismatch between the expectation and the market situation, then very often, as mentioned already by Khun Thiraphong, the customers, they will just wait and see to see what is going to happen. They delay a bit the orders. And this is what happened, and this has created some lower sales for us, mostly in Europe and in our OEM sales. Different situation for the Frozen business, Frozen declining sales also by 12% in Q1, mostly in the private label, mostly in the U.S. market. Two explanations from this one. First of all, the shrimp prices are very high in Q1. You can see we have 2 quarters of very high shrimp price in a row, which is a bit exceptional. And the demand is still very soft in the U.S., okay? You know one of our key output for us is the food service business in the U.S. The restaurant industry, you can see in the numbers. The restaurant business is weak in the U.S. So the demand is still very soft. Same situation compared to what we have seen before. However, the feed business is doing very well, okay? So please stay for the next earnings call. You have TFM, which will be there. I think we have some very good news on this one. And then finally, the PetCare. PetCare is growing by 5.5%. Maybe you did attend the Ideal earnings call. Even if we expect something more and they will deliver more growth in the next quarters, they are growing in Q1, and the numbers are okay. Just a quick focus on the raw material prices. And I think this is one of the key explanation from the soft performance in terms of top line in Q1. You can see the tuna price was around USD 1,660 in Q1, while we're expecting a drop in Q1. The good thing is in April, you can see the tuna prices are softening a bit, okay? We had at USD 1,550. Just for you to remember, for the full year, our guidance is around USD 1,580, okay? We maintain the guidance, maybe it will be slightly lower. But for the time being, we're staying within this range. I want to draw your attention also to the shrimp prices. On the top right, you can see in Q1 '25, the average price was THB 169 per kg, and it was very close to the one we had in Q4. So here for 2 quarters in a row, the shrimp prices are extremely high, okay? And when you are facing this situation, then the demand is very soft. Regarding the salmon price, this is the opposite situation. We have a bit of softening, okay? Of course, the prices are increasing. This is normal for Q1. You always have this kind of seasonality. However, if you compare to Q1 '24, Q1 '23, the salmon prices are lower, and this is a good surprise for us. Now moving to the currency. I think what we can say is, overall, the Thai baht has been strengthening versus all the currencies. You can see here the change versus dollar is almost 5%, the change versus euro is almost 8%. Versus GBP, it's a bit softer, it's 5.5%. And versus the yen, it's 7%. So of course, for us, this is a key explanation from the very large FX impact that we have in Q1. Again, we do expect this effect to maintain the whole year. Just for you to remember, we told you in Q4 that the overall FX impact, we were expecting a negative FX impact for the whole year. So no surprise that was expected. The good news is the euro is strengthening a bit since the end of March. So moving to our key ratio. You can see, first of all, the inventory and the net working capital, I think we are under control. Overall, our inventories are increasing in Q1. This is always the case, okay? Just for you to remember, we prepare Q2 and Q3, which is the high season for the sales especially in Europe. So we are building up some inventories. So this is what we always see. There is no surprise about this one. And I think in terms of inventory days and net working capital, we do remain under control. In terms of ratio, net debt to EBITDA, we are increasing to 4.5, almost 4.5. We do expect to remain at this level in the next 1, 2 quarters and then to decrease at the end of the year. So that should show some positive trend by the end of the year. Net debt to equity, we are still below 1. For you to remember, our comfort zone is between the 1 to 1.1. So I think we're in a very good financial situation. So if we have a look at our net debt bridge, net debt is increasing from THB 53 billion to THB 56 billion at the end of the quarter. and the ratio is around 1. The key drivers, we have a negative free cash flow in Q1. Why? Because our EBITDA is a bit weak at THB 2.4 billion. We are also building up our net working capital, our inventories by THB 2.2 billion. Our CapEx remains under control with THB 900 million. So the sum of the 3, we have temporarily a negative free cash flow by almost THB 600 million in Q1. We also have the impact of the share buyback, which is THB 1.8 billion in Q1. So total, we believe our net debt to equity is still very strong. You can see also one thing which is interesting. Our cost of capital is decreasing from 3.7% to 3.5%. So here, we can see the impact of the decrease of the interest rate. Just a quick focus also on the Avanti restructuring. And this is a bit technical, I'm sorry for that. So here, we have been facing some changes in the regulations in India. We are holding our Avanti shares through 2 holdings through our Thai Union shareholding and also from our Hong Kong holding. There was some change in regulation in India, which forced us to sell the shares we are owning from Hong Kong to India, okay? We don't change anything. We continue the partnership with Avanti. We have a very strong collaboration. It has been a very successful joint venture over the past few years, and we continue -- we don't change anything. So our shareholders -- our shareholding before and after remain exactly the same, 24%, 25%. So we just transfer the shares from one holding to another holding company. But we enjoy a nice tax effect. Why? Because usually, when you have some investment in an associate company, you will have a tax value and a market value, which will be different. In accounting, you have to record a deferred tax liability when you have a difference between the 2, and that was the case in the past. Now with this transaction, the tax value and the market value is much closer. So we don't have any more deferred tax liability to be recorded, and we can reverse what we had in the past. So we do enjoy a onetime noncash positive income tax from that, which is roughly THB 400 million, THB 380 million. Don't expect this to happen again, okay? Now on the shares of Avanti they will remain in Thailand. We don't expect any other changes to happen. So we enjoy this in Q1, but this will not happen again. Again, onetime noncash transaction. And again, it doesn't change anything with the partnership with Avanti. The last one is the -- and Khun Thiraphong already mentioned this one, the ADB loan that we just announced yesterday. I don't know if you see the announcements. We're extremely pleased with this one. We have been working with ADB and different banks also over the past few months. This is the first time that there is a blue loan, which is being issued in Thailand by the seafood industry. This is also the first financing framework aligned with the Thailand's draft taxonomy. So extremely pleased about this one. Here, we are focusing mostly on the sustainable shrimps, okay? So this is mostly for our Frozen business. And the idea is to increase the proportion of the certified sustainable shrimps. We are using the ASC, the Aquaculture Stewardship Council, some BAP also and some AIP. So all of this, the whole idea is to increase the sourcing, the sustainable sourcing for our shrimp business. Very pleased about this one. More to come. We told you in '25, we have quite a packed agenda in terms of refinancing. So this is the first step, and we are very pleased to have this one. Don't ask me about the interest rate. As usual, we cannot share this one, but you know us, we did manage to have a very competitive pricing for that. So extremely pleased, and thank you to the team for achieving this one. And now we'll let Khun [ Kwan ] to go through the business performance.

[Interpreted] Thank you, Khun Ludo. For the breakdown by business unit, let's begin with the first quarter. As we mentioned earlier, we have our -- let's break down our entire profit our sales. Ambient is at about almost 50%. The Frozen business is at 20.3%. And PetCare is at 14% and Value-added is 8.1% of the total sales. You can see that right now, our PetCare and Value-added businesses have sales contributions that are 22%, and this is in line with our ambition of reaching 25% to 30% by the year 2030. Moving on, let's begin with our Ambient business. In the first quarter for 2024, we had profit -- we're seeing a profit of 14% drop year-on-year in sales. And there's also a 7.1% year-on-year drop in our sales volume. And we're also seeing a negative FX impact. And the FX impact is affecting every business category. As for tuna, the price of fish in the first quarter, you can see it's USD 1,660 per ton. And this is an increase which has led to our customers in the private label. They are delaying their orders, and we're going to wait to see what the situation is like -- they're going to wait to see what the situation is like and then order -- reorder again. The sales volume has dropped down by 7.1% year-on-year, and this is a result due to the major markets, the Middle East. In the first quarter of 2024, it was a high baseline for our revenue in this market because it was a period when the Middle East was recovering from a shortage of foreign currency. And in Europe, there were lower sales in France, in the U.K. and also in Germany. And this was because of rising fish prices. And our sales volume dropping here has been offset by orders that have increased in other markets, thanks to our strategies that we put in place to support this effect. In our Frozen business, we are seeing a strengthening gross profit margin. If you take a look at year-on-year, it's gone up 2.8% to 19.4%. And this is thanks to our sales efforts and our cost management. Moving on to the Frozen business. After we did rightsizing -- after we implemented rightsizing that began in 2023 and concluded in 2024. At the moment for our Frozen business, we have a new baseline. We have our shrimp products, our salmon products and other seafood products, and they each have different sales structures and different profit margins. For the Frozen business in the first quarter, we're seeing sales of THB 8.4 billion, and we have our private labels, the absolute amount in growth for the branded is growing. And the dropping sales are due to the shrimp sales that have dropped in the first quarter due to the cost of the price of shrimp increasing by about 20% or so year-on-year. And our volume went down 2.7% year-on-year due to our private label drop. If we take a look at an offset of this, the business -- our TFM business, our feed business, has grown favorably, and this has provided an offset for the aforementioned incident. And we are doing better and gross profit margin has strengthened to 12.4%. And this is -- we're seeing improvement in our feed and chilled business. And if we take a look at the shrimp prices at the moment, they are adjusting upwards, but they will -- in the following quarters, we expect to see those prices drop. In terms of PetCare, we have sales at THB 4.174 billion, increasing 5.5% year-on-year. And this is mostly due to our sales abroad shipments to the U.S., for instance. And if the volume rose strongly, we have the negative FX impact. If we take a look at our premium mix, you can see that there's been adjustment downwards to about 48.7% temporarily. Compared to the first quarter in 2024, we had a premium mix at about 55%. And the market situation and the consumer demand has been changing. Consumer behavior has changed. And our gross profit margin has gone down to 24.5%. It's dropped a bit. We have to -- this is due to premium mix. We had a higher base before, but it's now back in a range -- within the range of 47% to 50%, in line with our wishes. In Value-added business the sales were at THB 2.4 billion. If you look at our value-added packaging and ingredients and our byproducts, we have a drop in sales for the various brands as well. Nonetheless, the sales volume has increased significantly to about 14% year-on-year. This is because of the increasing sales in byproducts such as our value-added products. The demand is quite solid, quite strong in the byproduct segment because of increasing demand from the consumers. And here, we have 27.9% in the gross profit margin because this is compared to a higher baseline in 2024. And I'd like to pass things back to Khun Thiraphong to provide the outlook.

[Interpreted] Outlook for this round, we have adjusted our forecast a bit based on the 10% flat tariff in the U.S. -- from the U.S. 10%, this increase, it's implemented for every country. Therefore, we don't expect much effect. The retail prices, if the tariff increase is 10%, it doesn't mean that it's going to lead to a 10% increase in the prices in the market. It will be about 7%. The price at the end destination will not be absorbing -- will not see the absorption of the entire increase in tariffs. Most of our partners are conducting business as usual. And nonetheless, due to the uncertainty, our customers will probably, of course, be waiting -- will take a more wait-and-see approach. And our sales growth, we've adjusted from 3% to 4% down to 1% to 3% due to the 10% tariff. And our gross profit margin, we've adjusted it down a bit to be a bit more conservative from 18.5% to 19.5%, adjusting down to 18% to 19%. Our SG&A, we've increased it from 13% to 13.5% to 13.5% to 14% instead because SG&A will increase a bit. It might be due to shipping or other areas due to the increase in tariffs as well. CapEx is a measure that we have taken immediate action in. We have reduced it from THB 4.5 billion to THB 5 billion down to THB 3 billion to THB 5 billion. We want to focus on cash until we arrive at a clearer situation. We will hold our investment for the moment in areas that are not necessary. The effective interest rate, there is no significant change because we have -- we're seeing lower interest rates, and we don't expect much effect. Therefore, we don't need to adjust this much. And our dividend policy will continue to be paid out twice and at least 50%. We would like to provide more clarity for you because people outside also Thai Union's 38% of sales is going to be affected. But in reality, the products that are produced by Thai Union and sent to the United States are at 18%. 20% of the 38% is chicken and sea frozen, for instance. This is bought via other partners in other countries. So there will be no effect because we continue to buy from lower cost sources. So the impact for us is 18%, not 38% as many people may misunderstand. In addition to this, I would like to speak more about if there are -- if the tariffs go up to 36%, if that is implemented, what measures do we have? I would like for you to take a look at this page first to see that the tariffs altogether, Vietnam based on the information that we have at the moment. So right now, Vietnam is at 8.5%. Thailand is at 48.5% total tariffs. Indonesia is 44.5%, just 4% different from us. The Philippines might seem -- might look like they have a much lower -- they're facing much lower tariffs. However, this country doesn't have a competitive scale in our industry, it doesn't have much of a share. And Ecuador may be -- may receive a lot of benefit in terms of tariffs because it's only a 22.5% total tariffs. When take a look at Ghana and Seychelles, it's -- these are 2 countries in our network that have the lowest -- that are going to face lowest level of tariffs, even lower than Ecuador at only 10%. If we take a look back at our businesses, let's look at them by category. For the Ambient segment, we will increase our production capacity in Ghana. Ghana right now, it has the lowest cost outside of Thailand. And therefore, we stand to gain due to the lower tariffs there. We are also preparing things at Seychelles to be able to take advantage of that. Our lines in the U.S. as well, our production in America, we are also preparing things there in Georgia. And we will continue to monitor the situation and see how Thailand responds. We will probably have to reduce things in Thailand if we increase things outside of Thailand. And these are the measures that we are taking. We should be able to manage things quite well because we have Ghana and Seychelles. We have ample production capacity there. And we're also looking at Vietnam as well. If Vietnam has higher negotiating ability or power, we are also ready for that. We are not overlooking that. In terms of the Frozen business, in Asia, there is Vietnam and Thailand and Indonesia and India. And I've also added on in the past year, India and Indonesia, they have faced antidumping tariffs. Many may have forgotten about this. Overall, Vietnam is also facing tariffs higher than Thailand. Let's take a look at Indonesia. They have total tariffs at 35.9%, more or less equal to Thailand's 36%. India is facing 34.3% total tariffs. And again, this is not very different from the tariffs faced by Thailand. Ecuador seems to be at an advantage with only 13.8%. However, you need to understand Ecuador is -- only produces shrimp of a smaller size compared to Thailand or India and Ecuador's products are raw and commodity products. Our products are value-added. They are processed, they are cooked. And therefore, we -- this is a look at the competition for us here in Asia. So we want you to rest assured that there is not much of a difference. As for PetCare, Ideal probably already provided a very good explanation. Our wet-based cat food, the major producing countries are China, Vietnam and Thailand. If they -- if consumers decide to buy dry products, more dry products or middle-range products or lower-range products, there will be a difference, but these countries produce premium products and Thailand still has the lowest level of tariffs out of all of these wet-based food production bases. Lastly, Thai Union has faced so many crises in the past, like, for instance, COVID. And this is another new disease that we are facing. And we believe that the measures that we used during COVID, we are brushing them off and adjusting them. And our focus is we're going to look at our production cost, our cash and our transformation as well. We have reviewed all of our processes, and this is a good time for us to take a look inside and to improve to become more efficient, more effective and more resilient and more flexible. So thank you so much for listening for us.

Thank you very much, and see you next quarter.

[Interpreted] Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]