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Edited Transcript of TU.BK earnings conference call or presentation 11-Aug-20 10:59am GMT

Bangkok Aug 14, 2020 (Thomson StreetEvents) — Edited Transcript of Thai Union Group PCL earnings conference call or presentation Tuesday, August 11, 2020 at 10:59:00am GMT

Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts

Bunlung Waiyanont, Thai Union Group Public Company Limited – Assistance General Manage of IR [1]

Management, investor, colleague and more participant online, I would like to welcome you all to Thai Union Group Second Quarter Year 2020 Results Announcement Conference Call.

Today, the executive who are joining us, including Mr. Joerg Ayrle, the group CFO.

Hi. Good evening.

Bunlung Waiyanont, Thai Union Group Public Company Limited – Assistance General Manage of IR [3]

And Mr. Ludovic Garnier, Head of Group Accounting and Controlling.

Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [4]

Hi. Good evening, everyone.

Bunlung Waiyanont, Thai Union Group Public Company Limited – Assistance General Manage of IR [5]

And myself, Best Waiyanont, Investor Relations Manager. This event will comprise of about 40-minute presentation session, then we will deep dive into the operation results for the second quarter year 2020. And after, at the end of the presentation, we’ll have the Q&A session, about 20 minutes. (Operator Instructions)

So without further ado, let’s start out the second quarter year 2020 results presentation. I’ll pass on the stage to Mr. Joerg Ayrle. Thank you very much.

So thank you, khun Best, for the introduction. Before we get started, I really hope everyone is safe at home. We know we’ve come out of a great improvement period on COVID. But in the last couple of weeks, we saw in many countries somewhat a resurgence of cases. I don’t think it’s very surprising as many countries have reduced lockdown efforts. So I really hope you yourself individually and your families are safe, either at home or at work or wherever you are, and please do stay safe. So thanks a lot for following us tonight here in Bangkok in the morning in the U.S. and lunch time in Europe.

And yes, I want to go directly in media space and talk about what for us, and those of you who are following us on a more regular basis are likely not as surprised, was a really, really good quarter. We have a record high operating profit, and we reported a net profit up 15x year-over-year. Of course, there were some one-offs last year. But look, the results show amazing operating profit. We have an 18.2% gross profit margin. We are growing our top line, and we have a net profit that even on an adjusted basis is growing substantially with 13.4%.

So we have a really, really great quarter, and I want to make this a very short call because if the quarter is good, I really want us to focus on the good things and the underlying great news we see in some of our businesses. And some of the questions have asked — that are being asked, of course, also about the more difficult topics. I will comment on those, but I really want to make it short and focus on what’s good.

So sales up 2.6% year-over-year, mainly driven by a 10.1% volume growth. Ambient sale volumes are up 16.8%. And look, we’ve talked a lot about pantry loading and panic buy. And look, there may have been some. But what we see is there is an absolute increase in consumption in Ambient tuna. We do see that in many of our businesses, we can continue and maintain the favorable revenue development. And only in some markets, we see some modest challenges.

The Frozen business saw a decline of 14%. That is not surprising. Actually, what is surprising is that it’s only 14% because we saw most of the quarter, hospitality industry being shut, restaurants being closed down, and the supply has just not flown to — flown out to the hospitality industry. So actually, with a 14% reduction, we feel there’s actually quite a good result considering the massive impact in the industry. And we’ll come to that a little bit later.

But in the Frozen space, in the United States, we saw that, besides 1 or 2 months, we hardly saw any material reduction in revenue. We saw pretty quick a resurgence back to and actually a little bit beyond prior year levels. So we’re really, really happy with the top line.

Gross profit is, of course, very good. The branded business is driven stronger that drives gross margin. Our Ambient business has seen a much stronger growth. So the mix effect is positive. And we see that with the low tuna prices and very good inventory positions that we had, we were really able to capture very strong gross margin performance. And all this with some prudence on SG&A. With 11.1% SG&A, we are absolute — in absolute terms, below prior year. Some of it is marketing cost phasing, some of it is headcount prudence, some of it is stop of travel and other discretionary spending. But together with an 18.2% gross profit, 11.1% SG&A, we are at an amazing THB 2.4 billion in operating profit. That’s 7.2% of revenue, and I think we should really applaud the operators in our organization for having achieved this.

Now on the net profit side, look, compared to a year ago, we’re, of course, much, much better. A year ago, we accrued for a large legal — a case that we have, we feel we’re over this case, we are accrued sufficiently. So we’re fine. So this year, we do not have this onetime effect, and that has led to a great improvement in net income.

But if we look a little bit deeper, we are, of course, affected by our investment in Red Lobster. We’ll come to Red Lobster in a minute. We have accounted for $22 million in share of loss in Q2 alone. And of course, that is a result of having to close down all dining halls, having had several weeks of minus 80%, minus 90%, minus 70% of revenue compared to a year ago. The team has done a fabulous job in taking cost out and cash preservation in Red Lobster, but on an accounting basis, we’ve recorded a share of loss of $22 million. And that’s in our THB 1.7 billion in net profit. Actually, looking at the number and knowing what is inside, I have to say this is a real amazing performance, and I have to thank the whole organization for driving through this period. Not an easy time for everybody, but I think we’ve done very, very well and managed very well. You will see a little bit later on the cash performance in this — during this period has been outstanding. We’ll come to that a little bit later.

For the half year 2020, we have 97% increase in net profit. We have roundabout, the same in EBITDA. We have 50% increase in operating profit. We have increased our gross profit by 14%, and we’ve grown 4.2%. So I think during this period, we’ve done really, really well compared to prior year.

Now unfortunately, the capital market does not really credit us with that much yet. So let’s see how this shapes out in the next couple of days. Net debt to equity. We’ve started the year with a net debt to equity of 1.07. We had a fantastic cash performance in the last 6 months. We’re now down to 0.96x net debt to equity, and that includes around THB 450 million in treasury stock repurchases and a very strong dividend payout during the first half year. So we’re very satisfied with that as well.

Now let’s look at a little bit of a more long-term view, our last 18 quarters. And you can see how we fell into the ditch in Q1 ’18, and everyone was really scared, what’s happening? Do you have this under control? But then I guess we recovered quite quickly to 14%, back up to 16%, higher than we had been for a long time. And we’re now at 18.2%. So we’ve really walked up 2 or 3 steps to an 18% gross margin. And we’re really very, very happy with this performance, especially as we’ve now, for the second quarter in a row, returned back to top line growth year-over-year.

Some key developments. COVID impact, and I think some of you have certainly seen this. The Ambient business is a clear beneficiary. There’s the increased demand for canned seafood. The Frozen business has recovered quicker than we thought. So there was some depression in revenue. But when I talked probably 2 months ago, 3 months ago in some of the town halls that we had and with some of you, we talked about a depression of 20%, 25% for the whole year. We’re now just down 14% for Q2, and Q2 is likely — it’s going to be the worst quarter. So the impact on the business, even for Frozen, for the whole year, is not going to be as big — by far, not as big as we had expected and feared at the beginning of the year. So we’re really happy to have come out of this.

Global supply chain. Our operations remain largely uninterrupted. Of course, we have now more and more cases, but we have very resolute ways how to deal with this, with cordoning off certain areas, with sending cells of workers home in quarantine. So I think there’s a very good business continuity management ongoing here.

In Red Lobster, we have — basically, all restaurants and outlets open for off-premise, for to-go, for curbside pickup, for delivery. And the delivery business is really doing very, very well. And we are discussing how we can really push that even further with even more focus on this delivery consumer and delivery guest who has different needs than an on-premise dining hall guest. We have 600 restaurants. There’s — more than 80% are actually opening the dining halls. There’s, of course, social distancing in place. But we are — even in some restaurants started outdoor service, which gives a great atmosphere and is a great opportunity for some of the restaurants to attract more guests and be open for visitors.

If we look and we — and let’s just for a second stay with Red Lobster. Look, the whole topic around safety, around COVID-19 measures to maintain safe and high quality guest experience is really on the top of every one of our Board agendas. We have weekly Board calls. And the safety of our staff and guests is really at the top of all our minds. And we are starting to talk about contact-free payments, touchless service, an absolute touchless and seamless guest experience to make it convenient for people and still feel very, very safe.

As some of you may have seen, we’ve concluded a transaction in Russia, more or less within what we had expected. We bought out our Russian joint venture partner a couple of weeks ago. We now own 90% of the equity interest in this business. It’s not a big business. It’s a $20 million business. We went through some challenges with the Russian supply chain and the demand and supply balancing. So I think it’s good. We have now clear leadership with Paul Reenan, our European President, spearheading this activity, and we are all here from Bangkok supporting him to be successful in this very important market for us. Russia is one of the top 6 markets in Europe and has the fastest-growing Ambient tuna segment in Europe.

Our commitment to innovation stays. I think most of you have seen this. We are here with SPACE-F. We have announced the ThaiBev has joined us on the SPACE-F committee. We’re very happy to have ThaiBev as a fantastic partner, bringing a lot of new ideas into this and especially capturing new application fields around drinks, around consumer products that, from our perspective, we were probably not as good in capturing. So really great collaboration. We are now in the second batch of start-ups. And I was in the SPACE-F committee meeting yesterday evening, together with the National Innovation Agency leadership and with Mahidol University and ThaiBev, and the team has presented some really outstanding start-ups that want to join the second batch of our SPACE-F initiative. So with this program, I think Thailand has proven that the food industry — that in the food industry, we’re really one of the global trendsetters, also when it comes to food innovation.

We’ve rebranded Qfresh. You will hear a lot more about Qfresh on the retail shelf, in online channels. We have released our 7th Annual Sustainability Report with details around sustainability KPIs, with our commitments with Greenpeace, with the World Wildlife Fund, with Monterey Bay Aquarium. We report on the global reporting initiative standards and how we score against the key KPIs there. Please visit the report. It’s a great read. And it’s also good for all of us to be reminded of all our — each individual’s responsibility for this planet and what we can do, not only during COVID, but during our normal consumption practices to save energy, reduce carbon footprint and be just good corporate and personal private citizens.

Look, dividend, not unimportant. We decided to really have our shareholders participate in this very strong first half year. We’ve decided to move our dividend back to THB 0.32 for the first half year. We have acknowledged that last year and the year before, our shareholders have participated in some of the onetime effects that we had from the legal cases that we have. We’re beyond that. We’re through this now, and we really wanted to have participate in our success in the first half year. We’re at a payout ratio of nearly 80% — nearly 60%. That’s the maximum we can pay, and we’re very happy to offer that. That’s a very strong dividend increase from THB 0.25 a year ago to THB 0.32 in the first half year 2020.

So — and I don’t know, maybe I pass it to Ludo to guide us a little bit through the consolidated financial results.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [7]


Thanks, Joerg. So just to give a bit more color on the key takeaway for Q2 2020. Of course, we have a lot of good news for this quarter. From the top line to the OP, we have an excellent performance. The first one is on the top line, Joerg mentioned this one, we had a growth by 2.5%, 2.6%, if we put the 2.6% reported, 2.5% if we exclude the FX. And it’s mostly driven by the Ambient and the PetCare segment, which are very strong over the quarter.

We have some challenges in the Frozen business. We’ve been talking about this one in Europe. And I don’t know if you remember that in Q1 2020, Europe was very strong. There was a lot of panic buying, and they are kind of normalizing in Q2.

The gross profit margin is the second very good news we have at the quarter. This is record high for us at 18.2%. Last year, we were at 16.7%. And here, the very high level is coming from the combination of very positive category mix, meaning we sell a lot of Ambient and PetCare, which are traditionally our most profitable categories, and we sell less of Frozen, which is traditionally the less profitable category that we have.

And then within the Ambient and within the PetCare business, we are delivering quite well. We are also kind of protected by the fish price, which is quite okay, and there was no significant change over the last quarters. And this explains a very high gross profit margin we deliver in Q2.

SG&A are fully under control. They are declining, even despite the top line growth at 11.1% of the NSV. Last year, we were up 11.8% of the NSV. So the OP is THB 2.4 billion. We mentioned already, record high, regrowing versus last year by 51%. If you remember last year, in Q2 ’19, we had one one-off for THB 205 million coming from the impact of the new Thai labor level law provision. Even if you exclude this one, the OP is still growing by 37%. So we are very happy. The OP has been a challenge over the last 2, 3 years. But now in Q2 ’20, we are really back on track, and we are very happy to deliver such a record.

Below OP, we have, of course, the very negative impact coming from Red Lobster. The share of loss, which offset most of the OP recovery. And as we said, the conclusion is net profit increasing by 13.4% versus last year. We have some few ups and down also on the interest income on the tax and on the other line, but it’s not that big. The key components are really the OP growth offset by the share of loss.

Again, just to remember, we had in Q2 ’19 also a very large accrual for THB 1.4 billion. And so of course, we exclude this one just to make it comparable.

I was talking about the fish price right now. You can see here for Q2 2020, the average is around $1,267. So we are back at the end of June, July to what we consider to be the normal price, which is between 1.3 to 1.7 (sic) [$1,300 to $1,700]. As long as we are in this range, I think we can manage. And as long as we don’t have any very brutal or very significant change happening, I think we can manage. And you can see over the last quarters, we were kind of protected because we didn’t have to face with any high pay inflation or price drop of the fish price.

Just a quick focus on the top line. So as I said, 2.6% growth top line versus last year at THB 33 billion. We don’t have a lot of impact coming from the FX because it’s kind of the same with or without the FX — sorry 2.5% without the FX. And again, the key drivers are Ambient, PetCare, mostly driven by the volumes. Of course, we have the help by the fact that the consumers are cooking at home and are using much more of our Ambient business. The Frozen business is, of course, suffering because we have a lot of restaurants, which are closed. So the sales and the volumes are declining on this one.

Over 6 months, we have quite a significant growth by 4.2%, and the volumes also are also very strong at plus 8%. I think this is the second quarter in a row where we deliver some top line growth, and we are very happy on the — with the development.

You can see here the breakdown — the usual breakdown by segment. And here, it’s very clear that all the Ambient segments are benefiting from the COVID-19 situation. You can see the tuna, very strong growth, Sardine and Mackerel, salmon and other seafood are all growing, going in the same direction. And then after you can see all the Frozen segment and — same, they are all going in the opposite direction. The shrimp, the lobster, the salmon are all declining on this one.

And then the last one, we have the PetCare business, which is very good performance, growing by 15%. And then we have the FX, which are almost offsetting each other. And this is how we deliver THB 33 billion in revenue in Q2 2020.

I will go quickly on this one. There was no significant change in the revenue breakdown by region. The U.S. now at 41%. We are always around this range. We have a small decrease of the domestic market to 10%. This — it was one of the big achievements over the last 2 years. We have been facing some challenges in H1 2020, mostly due to the Frozen business. But we do expect that this one will recover on the year to go.

On the branded and private label, we don’t have any significant change. We have a bit of an increase of the private label business. However, we need to look at the — over the full year because here, in this graph, we are comparing 6 months together with 1 full year, and sometimes you have some effect of seasonality because of the promotion happening. So I would wait to see the full year picture to see really what’s going on, on this one.

Gross profits. So it’s very here from this chart that we had record high. We delivered THB 6 billion, growing by 12.4% compared to last year. And again, it’s a combination of very positive mix category with very strong Ambient, very strong PetCare compared to the Frozen business. And then within each categories, the gross profit margin is also very satisfactory for both the Ambient and the PetCare. We are facing more challenges on the Frozen business, but we are not surprised considering the overall COVID-19 situation. Over the 6 months, a very large growth also by 13.6%, and we delivered THB 11.1 billion gross profit.

So OP, and I think this is really the key takeaway for me for this quarter, THB 2.4 billion. I think we did already — maybe 1 quarter, a bit higher to THB 2,380 million were a record high. Yes, I think we did 1 quarter in 2015. However, still very, very high, growing by 50.7% compared to last year. SG&A fully under control. Joerg mentioned this one, of course. We have some impact coming from some marketing spend phasing because we didn’t want to spend too much also in Q2, and there were also some effect coming from the T&E. So it’s a combination of different factors on this one. Over the 6 months, we delivered THB 3.9 billion, also very strong growth compared to last year, 50%. This is really amazing, and we are very happy with this performance.

EBITDA, of course, the story is a bit difficult — a bit different, sorry, because we include Red Lobster in this one. So we don’t have the same growth for the EBITDA than for the OP. So the EBITDA is growing only, I could say, by 2.4% and by 27% compared to Q1 2020. Of course, again, the key driver between the OP and the EBITDA is coming from the share of loss from Red Lobster. You can see here, we indicate a share of loss coming that we have, which is a loss by THB 579 million. And the key component we will see after — in a bit is really Red Lobster coming from this one. Over the 6 months, we delivered something around THB 6 billion EBITDA, very close to last year’s situation.

So the reported net income, THB 1.716 billion for Q2 2020. We are growing by 13.4% compared to last year. When I compare these numbers, of course, I exclude always the antitrust accrual that we did in Q2 ’19 because for us, it was not part of the normal business. So we exclude this one. Over the 6 months, we achieved THB 2.7 billion. And again, we are very close from last year. And the direction for Q3 and Q4 is very good. The impact on Red Lobster, we will mention this one just after — just for you to see this impact.

On the adjusted net profit. So we had — there is no significant one-off in — happening in Q2 ’20. We had one last year for THB 205 million happening in Q2 ’19, which was the impact coming from the new Thai labor law regulation. So overall, if you add back in Q2 ’19 such impact, then we deliver roughly the same performance, THB 1,716 million versus roughly the same number last year.

EPS is growing by 8.5%. We have one small topic to mention on this one. You know that we issued in Q4 ’19 some perpetual bonds. So of course, we have some slight impact on the EPS calculation on this one. If you compare the change of the EPS compared to the change in net profit, you will see a small difference. And this is mostly explained by the — only explained by the perpetual bonds calculation and impact.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [8]


But let’s go back 1 page, Ludo, maybe on the net profit. Look, there’s no adjustment. You (inaudible). So all underlying business included. And this THB 1.7 billion, we’ve accounted for $22 million in share of loss from Red Lobsters. If you convert all this and eliminate the Red Lobster effect of this share of loss from this number, we would be at around THB 2.4 billion, which would be an increase of 60% from prior year. So I mean it doesn’t look super impressive here (inaudible) on the adjusted net profit. But you should — remember, we’ve covered here $22 million in share of loss contribution, and we’re still on the same level. So I really think we should acknowledge the amazing business performance of our underlying business in Ambient and Frozen.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [9]


Thanks. Thank you, Joerg.

I think it’s a good transition because here, the next slide is regarding Red Lobster. So here, we have our traditional view that — the view by quarter. And you can see here the share of profit, the share of loss for Q2 ’20 for Red Lobster was very, very high negatively because we delivered a minus THB 700 million loss in Q1 2020. We told you we could see already some first impact coming from the COVID-19, and we delivered a loss by THB 111 million. If you remember, Q1 historically is always the highest in terms of seasonality for Red Lobster, but we delivered a loss in Q1 2020. And we told you at that time, yes, we could see the impact of the COVID, but we expect much more coming from Q2 2020. And here, you can see really in 2020 very large impact coming from the fact that most of the restaurants were closed for a few months during this period. We do expect that will recover in Q3 and in Q4.

Apart from the share of loss, the other income and the interest expense, don’t change that much. We have some FX impact, but they are almost stable compared to last year. And then the income tax is growing. It’s a tax credit for us by THB 221 million. And of course, this is fully correlated to the share of loss. So we have a very significant tax rate in Q2 2020 because we have a significant share of loss. And the net income impact in — from Red Lobster in Q2 ’20 is minus THB 355 million, so quite a large loss compared to the previous quarters on this one.

We just wanted also to give you some quick overview of the different initiatives that we launched at Red Lobster. I think the first one is, of course, we clearly improved all the safety measures around the restaurant. That some people, they were concerned about going to the restaurants. So the team at Red Lobster, they work around the touchless delivery. They’ve been working on the QR menus, and Joerg also mentioned the outdoor dining. And I think we made some huge progress here in a very short period of time.

The off-premise business, I will not comment this one. Joerg already mentioned this one, but we did really — some really significant progress there.

The third one is important, simplified business model. One of the issue we are facing at Red Lobster was the menu was too complex. And clearly, we took this crisis as an opportunity to really simplify the menu and to move to something which is much more simple. You could say this is very simple, and we don’t see really the impact coming from that. But if we simplify a lot of the operations and also the inventories and all that stuff. So I think it’s going in the right direction.

The fourth point is, of course, we’ve been working a lot on how to control and reduce the marketing and SG&A cost. You know that Red Lobster, before, they were working mostly through large events, the shrimp feast and stuff like this. So we decided to remove this direction and to give much more reasons for the consumers to come every day to the restaurant. And I think it’s also a good move.

Last but not the least, Red Lobster is, of course, negotiating some rent abatements with the landlords. Some agreements were already taken. We did not finalize everything, but I think they did finalize the majority of their lease contract on this one. The last point you know that the that the Red Lobster it is starting — has started the discussion regarding the refinancing of the existing loans. We are getting closer from the maturity. So it’s a normal part of the business that we are starting the discussion on how do we want to refinance them.

Anything, Joerg, you want to add on that?


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [10]




Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [11]


No? Okay. The last one is really the other key takeaway for me with the OP, this is the second one, the record high free cash flow, THB 5.6 billion, super, super high. Where does it come from? There are 2 key drivers. The first one is the strong EBITDA we delivered over the quarter, first reason. And the second one is a change in net working capital, okay? And here, I must say, we are a bit cautious because our level of inventory is very low at the end of Q2. Different reason for that. The fish price is not that high. The volumes are — our volumes and inventory are also low. And overall, also, we decided to decrease very significantly our volumes in the Frozen business. That’s why we believe that this performance is not sustainable, and we expect the inventory to pick up again in H2 2020. So very happy with the performance at the end of Q2 in terms of cash flow, but we expect that the — it will turn a little bit around on the year to go. But very impressive performance.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [12]


Yes. I would probably go a little bit further than that and say some of this very strong Q2 number is likely going to come back. So I wouldn’t even be surprised if in Q3, there is some slight negative cash flow. Not surprising. I don’t think we should be alarmed by that. I mean, look, a cash conversion rate of 2.54 is just amazing. And I think we have to just recognize a lot comes from destocking. Our U.S. team did a fantastic job in stopping supplies, in really liquidating inventories, and that has led to a great, great cash performance and inventory reduction. And we see through some of the panic buys, inventory levels have become depleted. So I think we have to be realistic that some of this will normalize back in Q3 and Q4.

I don’t want to make an outlook, but I would be a bit cautious to now extrapolate a cash conversion rate of 2 for the whole year. I just don’t think that, that’s going to be realistic.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [13]




Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [14]


So let’s be realistic. To have a cash conversion rate for the year greater than 1 would still be pretty amazing and fantastic.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [15]


Thanks. Thanks, Joerg. One of the key impact of this very strong cash flow is, of course, the net debt reduction. It’s one of our priorities since a few years. And now we are really happy with the development. We are moving from a net debt-to-equity of 1.07 to 0.96 at the end of June. The net debt is decreasing by THB 3.7 billion from THB 55.2 billion to THB 51.5 billion. And here, you can see our usual bridge between the 2. So very strong EBITDA. And then you can see the change in net working capital is THB 2.4 billion. This is really high.

The next significant box is CapEx. If you remember, in Q1, we did communicate already on the profit protection plan we’re activating. So we decided since March already to perform a very strong control on the CapEx and to reduce the CapEx just to see how the situation was going on. And I think the program is quite successful. We manage and we control the CapEx very, very well. However, we did continue to invest also because we believe in our markets. And you can see with the performance that we see as understandable.

We paid some net interest. We bought also some Treasury shares. So the impact for first 6 months is THB 443 million, and then we paid some dividend for THB 1.1 billion. And this is the other key drivers for the decrease of the net debt between the 2 periods.

On the funding by currency or by maturity, we don’t have any significant change, roughly the same situation. So I will jump directly to the ratio. And maybe just some quick ones where I want you to focus on.

The one in the middle, maybe the inventory days, you could see that last year, we had 124 days of inventory. We moved down to 120. If you compare to December ’19, we were at 128. This is one of the key driver. And you can see also just below the amount of inventories decreasing from THB 37 billion last year at the same period in Q2 ’19 billion to THB 34.7 billion. So this is one of the key achievements. Again, different factors to explain this one, but we do expect this one to pick up in the year to go.

Net debt to EBITDA is just a result of our good performance. We are now at 4.32. We are exactly in the middle of the range where we wanted to be. So we are happy with this one.

Net working capital, I will just comment on this one also. 105 working capital days. And you can see here, 36.7. This is the record low since — over the last 5 quarters. And that’s why we believe this one will pick up a bit in the year to come.

And I will through to Best to comment for the business unit performance.


Bunlung Waiyanont, Thai Union Group Public Company Limited – Assistance General Manage of IR [16]


Right. I mean, in terms of the business by — operation by business unit, we can see that the key raw material price has been more or less pretty stable. The tuna price has been up by only 4% compared to the last year. Tuna price has been up by 4% compared to last year as well. We have seen that the tuna price-wise has been up in July. I mean it’s mostly operate in the range of which we can operate comfortably. So that is part of the reason that we can control our cost relatively well and resulted in a good margin during the second quarter this year.

Baht has been stable. Okay. Thai Baht has been relatively stable. I mean with the Thai Baht marginally depreciated against U.S. dollars by about 1% and appreciate against pounds and the euro by about 1% as well. $7 million, what Ludo has been mentioning, the baht exposure has been very limited. And even excluding the FX impact, the sales growth will be more or less the same as the one on a reported basis.

In terms of the 3 key business, Ambient, seafood continuing to deliver a very strong goal with the — but this quarter, unlike the last quarter, both — we have seen both of the branded business and OEM business have been growing very strong. That has totally contributed to about 17% revenue growth on Ambient seafood business. And not only that, we also see in the gross profit margin continue to increase to 23% in total. This is mostly attributed to the improve in sales mix towards more of the higher margin branded business.

And in terms of the first half this year, Ambient business has continued to grow about 16%, and the gross profit in this business segment also increased by about 20%.

On the Frozen business, on the other hand, like what Joerg has been mentioning before, I mean, we have been affected by the city closure mostly happening in the second quarter of this year. So as a result, our Frozen business has been affected as well with our sales decline by 14% and the quantity sales decline by 10%. However, we expect that the second quarter with the high under-lockdown and city closure happening in the second quarter, we would expect that the Frozen business should continue to pick up in line with the improvement in the foodservice industry.

On the PetCare and value-added and others, we continue to see a strong growth of 7.5% in terms of revenue. This has been mainly driven by the improvement in quantity sales growth that will grow by 8%. And clearly, I mean, with the focus on high margin business, like the value-added business, that has been contributing to the margin improvement to 26% as well. So I mean this has been part of the fact that we have been driven our gross profit margin improvement during the quarter.

In terms of the sales mix, it has been pretty much still well diversified across the world. I mean the U.S. market has continued to see a very strong growth despite the fact that the foodservice has not been doing well. We continue to see a very strong operation for the Ambient business, mainly through Chicken of the Sea. So as a result, our sales have been growing at about 9% compared to the last year. Obviously, Red Lobster operation has been affected from the slowdown during much of the second quarter.

And Europe market — European market has seen a sales decline by 3%. Why it is a small marginal decline in contrast to many of the market participants? We’re expecting that the pent-up demand in the first quarter would hurt Europe in the coming quarter.

Now with the situation has been mostly in control, it just turned out that the European market has fall back to a more normalized level. So we continue to see a normalized business happening in the European market with some of the small declines in the Ambient business. That has been very strong during the first quarter.

Thailand, obviously, we have seen the ban in the travel industry, lower tourism activity. It has been causing some of the decline, and that has been hurting about 10% our sales in the domestic Thailand market.

On the overall, I mean, in the emerging market and the rest of the world, we continue to see a good growth. That has been mainly driven by the growth in Ambient seafood business, mostly coming from South America and Middle East market, while we continue to see growth in Japan and China market as well.

So I mean that would be pretty much sum up the situation for the business segment. I would like to pass back to Joerg for the business outlook of the — going — business going forward.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [17]


Yes. Thanks, Best, and thanks, Ludo.

Look, I don’t think there’s any — much change from last quarter. During this period, we do not think it’s appropriate to give any business outlook. I think we are still up and down of COVID, and a lot of things are in flux. Look, we had a fantastic first half year. We had a very, very good second quarter.

And I think we can make some comments, and you’ll see that in the Q&A, about where we see trends for the second half, but we don’t want to give any guidance or anything. Well, of course, look, we had a good growth in the first half year. I think it’s not unreasonable to believe that things will at least not be much worse in the second half year. So I think the European business is — continues to be quite strong. We fixed some supply chain topics. The major COVID discussions are over. The U.S. is very strong. The Frozen business came back. And even our private label business here in Thailand is doing quite well. We see China coming back in the market. So yes, I think we are — I — don’t nail us down here on the growth number, but I guess we’re feeling quite okay for the second half.

And that’s the second question, what’s the outlook for the Ambient business into Q3? We expect any significant drop or is there any pent-up demand during H1? I think it’s more or less, as I said. Of course, April was very high. It was very strong. May was strong. Already — last 2 weeks of March was strong. So that will normalize to some degree, right? But at the same time, the Frozen business will come back up as well.

So will Ambient be as strong in Q3 as we had been in Q2? Well, maybe not as strong, not exactly as strong, but also not much weaker. We see tuna prices are still more or less in trend. Yes, there is a little bit of an increase of $1,600 per ton. This is absolutely in the range where we see tuna prices to develop in a very healthy way. So quick answer. We don’t expect that the Ambient business will do substantially worse than Q3. I think on the contrary, I would expect, but Ludo, maybe you can say that, but I would expect something more or less quite comparable.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [18]


Yes. Absolutely you’re right. Absolutely you’re right. I’m with you on that.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [19]


Okay. And then, look, the Frozen business, we do see clear signs of recovery. In the U.S., anyway, here in Thailand, is what we just spoke with (inaudible) in our Board meeting, and he felt really strong about a good recovery in the second half year also for the Frozen business.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [20]


Maybe to add on this, we could see already in the U.S., our operation have been recovering over the last 2 months. We are quite surprised with the way it pickup again. And it seems to really go in the same direction. For our tight Frozen business, it was a bit slower. But yes, indeed, we are seeing now some sign of recovery there.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [21]


I guess the next question, is there any further impact from COVID-19 production market, customer supply chain? Look, I think we will see still quite strong demand. Look, the U.S. is not through this. Absolutely not through this. And in the U.S., we see very strong demand.

So also, if you now see expansion into Africa, into North Africa, into other markets, I think there is really, I guess, still a continued demand, higher than what we usually see. What we will see, for sure, is a little bit of an increase in SG&A expenses. I think in Q2 people said, “Look, why spend much money on marketing? It’s flying off-the-shelf anyway.” So the — well — but that’s the truth, right?

And so there was, I guess, a little bit of a holding back on marketing expenses. I would expect in Q3 that there is some desire to spend a bit more.

And look, if the business is doing well, I will be the last one to break in people here to stop something that makes a lot of sense.

So I would expect SG&A to go up maybe a little bit. Is it 0.1%, 0.2%? But yes, that’s what I would expect. We do not see any supplier disruptions from supply chain or production or anything.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [22]


Next question is regarding the level of inventory that we have. And as we said, the level of inventory at the end of Q2 is very low. Again, it’s a combination of very low volumes on our side, both on the Ambient and also on the Frozen business. Joerg mentioned this one in the U.S. Our management put a lot of attention to get rid of the inventories. But right now in terms of volumes, they are very low, and this is not sustainable, especially if the Frozen business is recovering. So we do expect indeed the level of inventory and of the networking capital to recover in Q3 and in Q4. Joerg mentioned this one. Very clear.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [23]


So Q2 2020, was this the worst quarter of Red Lobster? And how much recovery do you expect to happen in H2?

Look, I think the reality is Q1 and Q2, but Q2, especially, was something that the F&B industry, the hospitality industry has not seen ever. So I have met with a lot of executives and CEOs of restaurant chains and of — in the hospitality industry, and people just said, “We’ve never seen anything like that ever in our whole life,” and you talk with very experienced executives. So I guess you have to believe that, that’s probably the worst anyone ever saw.

If you look at what happened after end of March, April, May and then you look at the revenue curve in June, in July, you really see revenues are coming back. We are still 35% below prior year, but we’re not 90% below prior year as we had been. So yes, I think the answer would be, yes, Q2 was likely the absolute very worst quarter that we saw in Red Lobster.

But I also don’t want to take down the red flag, right? Look, there is headwind, and a second wave can come. Will it be as bad as Q2? Probably not. I doubt that it will be. But we need to keep the finger on cost savings. We need rental reductions. It is unreasonable of landlords to believe when nobody visit restaurants that you still get the same money. It’s just unreasonable. And people do need to look at that. This is not how restaurants can operate. And I’m very sure that Red Lobster team does its best to negotiate through this. And look, maybe we’ll lose some locations if landlords are really not understanding enough. That’s fine, too. So we need to keep the pressure on cost and manage through this period with a good plan of measures.

Now what is the recovery plan? Actually, Ludo presented the recovery plan. Some key initiatives that we’ve started, right? Off-premise, key focus area. A major, major area of focus, simplified order system, improved packaging. We have introduced during some periods free-of-charge home delivery. We have family feasts, special offers, for people dining at home.

The simplified business model, we come from a 22-page menu to a 2-page — or 1-page menu that’s printed on 2 sides, right? So helps to drive cost efficiency in the operations, in the restaurants. Labor productivity in the restaurants, very important step.

Reduced marketing and SG&A costs. Look, in a crisis like that where you are minus 30%, 40% of revenue, you have to trim your functions. You have to trim in your organization, and we did go through some reduction in force already. We did go for a nearly 30% reduction in overhead cost. And we did go through a massive reduction in marketing expenses. So these are all the activities that we do in terms of cost saving, and on the other hand, growth. And then the rent abatements, landlord discussions to reduce the cash burn, we’ve discussed about that. And look, these are the key actions that we want to focus on. Make life for the people in the restaurant easy, so they can operate well, they can do a good job, they can bring good food on people’s plates. And then people will be happy and come back.

As a very, very experienced restaurant executive told me the other day, this is not a difficult business. Cook a good meal. Make your guests happy, and he’s just going to come back. And that’s what we’re going to do.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [24]


We have one question regarding Russia. And you could see that we announced that in July. We increased our percentage of shares in Russia from 45% to 90%. So at the end of Q2, we don’t have any impact in our numbers because this is a subsequent event for us. But of course, Russia will be — will start to be consolidated starting in Q3 and will become a subsidiary for us.

In terms of size, we mentioned this one. It’s not a very large business for the time being. It’s $20 million a year business. Right now, we don’t communicate any specific profitability number for a specific subsidiary. But just to give you a sense, $20 million top line for Russia for the full year.

Next one, there is a question. Any specific item in Q2 2020, explaining our very strong profit? I think you could see we don’t have any adjustments in Q2 ’20. There was one in ’19. But in Q2 ’20, our performance is really mostly supported by a very strong operating performance. And if we would mention one one-off, maybe that will be the share of loss coming from Red Lobster, which is very large. We really talked a lot about this one. But apart from that, we don’t have any specific items to be restated.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [25]


How Thai Union needs to support or be involved in Red Lobster’s financing new loan?

Look, I mentioned this in one of the previous calls. We have another, yes, 9 to 12 months to refinance the business. I think it’s far too early to discuss how this will happen. Red Lobster has started discussing with several banks. They have started to reach out to the current term loan lenders, what their view is. We’ve engaged a professional financial debt advisory firm, Guggenheim Partners and PPJ SOLOMON in the U.S., to help us find good ways. And then when the time comes, we will discuss about that at this stage. There is no discussion or anything about any requirement on TU financial support. But look, of course, we are a large shareholder, and it would be irresponsible of us if we would decline discussions and if we would not reach out our hand and help our subsidiary and affiliated companies here. If anything, of course, we will supply and support through vendor-managed inventory, through payment terms, through other supply chain initiatives.

So look, let’s discuss this a little bit later in the year when things become clearer. At this stage, it’s too early to say yes or no. There are no commitments out there at this moment, and the discussions are far too early to say there is or is no financial report required.

Loss contribution from Red Lobster Q3 equals Q2. I think I commented on that. I think Q2 was the worst quarter ever. And I think it’s reasonable to say that Q3 will be better than Q2.

Do you expect gross margin to weaken in H2 ’20?

Look, 18.2% is very, very high, right? So yes, I — if you ask me, yes, it will be lower than 18.2%. I don’t think that’s a surprise. How much will it be lower? Look, I think this will be a strong year. It will remain a strong year. So — but it will not be 18.2%, and we will need to build inventory back.

So I don’t think you should assume Q2 x 4 is then the year. That — I don’t think that, that’s realistic. But I think this will be a very good year. And the second half at this stage looks like we will be able to manage okay.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [26]


Maybe just to add on what you are saying, Joerg, the — what you really need to understand and to keep in mind is for Q2 2020, we have a very favorable mix category. The Ambient and the PetCare are very strong, and the Frozen is quite low. We do expect and we do forecast a recovery for the Frozen, which is traditionally less profitable than the other one. So mechanically, just coming from this end, you will have a smaller gross margin in H2 coming from this one. Absolutely correct.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [27]


Look, sales growth — what’s the sales growth target for Ambient, Frozen this year, I think I mentioned it. We’re happy with what we’ve achieved now. Will there be a slight normalization? Will we achieve another 4% for the year? I don’t know. Will it be 2%? Will it be 3.5%? I don’t know. I think we all have to look at that. We don’t give an outlook, but we will be quite happy with how things go.

What’s the size of Red Lobster’s loan needed for 12 months ahead? Look, let’s update you when we know more where it’s going. I think we probably need a little bit more time to discuss with Golden Gate Capital, with Red lobster management, with Khun, with Bill, the CFO of the company, to say how exactly do we want to approach the refinancing?

So yes, we do — we will need to refinance, but we also have a good cash position at the moment, and we have to think about how much will end up in more working capital type loans? What needs to be long-term fixed type of loans? How much comes from the company’s cash balance? How much do we do through vendor-managed inventory structure? So I think it’s premature to say exactly how much and what this is and what needs to be refinanced.

I think I would probably want to leave it at that before making speculations on, is it $250 million, $300 million or $350 million that needs to be refinanced. I think there are too many moving pieces in there. But it’s going to be in that range, right? It’s not more than that, and it’s also not going to be much less than that.


Bunlung Waiyanont, Thai Union Group Public Company Limited – Assistance General Manage of IR [28]


All right. And this concludes the conference call for Thai Union Group’s Second Quarter Year 2020 Results Conference. Thank you very much for your kind interest and time and focus and attention in this event.

And before we go, Joerg, would like to invite everyone on the line to participate in our analyst meeting? We host a live analyst meeting — fiscal analyst session in Okura.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [29]


Yes, please. Look, we are out of COVID, right? And Thailand has 0 cases or hardly any cases. And we all sit very far apart from each other and all of that. But I think you’re all invited, I think, on Thursday. Tomorrow is a public holiday here, which we’re all very happy. And what public holiday is it?


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [30]


Mother’s Day.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [31]


It’s Mother’s Day, yes. Oh, my God. I need to — so yes, Mother’s Day. Tomorrow is Mother’s Day, and we’ll see each other and many of you on Thursday at the…


Bunlung Waiyanont, Thai Union Group Public Company Limited – Assistance General Manage of IR [32]


Okura Hotel.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [33]


Okura Hotel for live analyst presentation. And look, we’re again all there for you. You can ask all questions. And yes, I’m very happy with this quarter. You can see that in the atmosphere. We’re all a lot more relaxed…


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [34]


You can see it in his smile.


Joerg Ayrle, Thai Union Group Public Company Limited – Group CFO [35]


We’ve been during some of the heavy COVID weeks. So thank you very much, and have a great evening. Goodbye.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited – Head of Group Accounting and Control and General Manager of Corporate Accounts [36]


Thanks, everyone. Thank you.

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