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Edited Transcript of TU.BK earnings conference call or presentation 6-Aug-19 10:59am GMT

Q2 2019 Thai Union Group PCL Earnings Presentation

Bangkok Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Thai Union Group PCL earnings conference call or presentation Tuesday, August 6, 2019 at 10:59:00am GMT

TEXT version of Transcript


Corporate Participants


* Bunlung Waiyanont

Thai Union Group Public Company Limited - Investor Relation Manager

* Joerg Ayrle

Thai Union Group Public Company Limited - Group CFO

* Ludovic Regis Henri Garnier

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

* Wai Yat Lee

Thai Union Group Public Company Limited - General Manager of IR




Operator [1]


Okay. The call will start live in 5, 4, -- yes, okay (foreign language)

(technical difficulty)

our presentation session. And after that, we'll have 15-minute session for the Q&A session. So please do note that this conference call will be conducted in English. (Operator Instructions) Now, I would like to invite Mr. Joerg Ayrle, our group CFO to start the briefing. Thank you very much.


Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [2]


Okay. Good afternoon, everybody. Let's jump right in, as we do every time. I'll give you a quick update on the overall financials and current status. I'll then ask Ludovic to share with you a little bit more in detail the financial performance and Khun Best will then give you the segment reports and give the details of all segments. And then at the end, we will all be available for you to ask questions.

Yes, so let's jump quite in, very solid underlying operating improvement. We do have legal expenses. We're going to talk about that, whatever we present right now is without those legal expenses. We've achieved THB 32 billion in revenues. That is a 9.7% growth over Q1. That's quite expected on a seasonal level. However, we have year-over-year contraction compared to Q2 2018 of 4.6%. Half of this is only due to exchange rate differences and FX effects from U.S. dollar, British pounds and euro, and the other half of it is lower sales volumes from focusing on higher margin sales, focusing on improving our profitability and reducing or minimizing less profitable businesses. We also had a deconsolidation in there of our Middle Eastern business, not a very large effect, but still also playing this.

Gross profit has grown 13% year-over-year, 22% quarter-over-quarter, and we've reached 16.7%. This is the highest gross profit in any quarter since 2015. So I'm really pleased to share with you the operational recovery, the operational improvement of business continues. And if we would exclude the onetime effects from the new labor or retirement expenses here in Thailand from a new royal decree, we would have reached 17% gross profit margins, really a good underlying improvement. You will see later, a lot comes from tuna. Some comes from PetCare. We still have a lot of room to grow on the Frozen business, the added value business is improving setting across the board, we really see a good, solid operational improvement. And this leads to an operating profit of THB 1.570 billion. That's 4.9% of sales, still short of where we would like to be with 6%, 7% operating profit. This is achievable. And the key challenge we face right now is primarily from the low level of revenue. This leads to an SG&A ratio of 11.8% from 10.4% a year ago. We've lost 100 basis points on SG&A. And I think this is something we have to get under control. But the key focus here is not cost management. I think the key focus must be going forward, refocusing on growth and on underlying volume growth. Net profit, THB 1.513 billion in Q2, that's 4.7% of revenue, 10%, 11% growth year-over-year, 19% growth compared to Q1.

And so we have some not so great effects on FX gains, we have lower FX gains than a year ago. We pay a little bit more tax than a year ago from a higher operating profitability, especially in Europe. And -- but we have a substantial improvement on profits from Red Lobster. The Red Lobster operating profit contribution is nearly breakeven. And I think this is good for Q1, we're really pleased with the progress we make on Red Lobster.

If we turn the page and we look at the first half year. This leads to THB 2.787 billion in net profit to an EBITDA of THB 6.1 billion in Q1, our operating profit increased by nearly 100%. So I think you can really see the magnitude of our recovery and we see strong gross -- profit growth, the key challenge, that we have to discuss more about the underlying reasons for this, is a revenue contraction for the first half year at 2.4% primarily from FX losses. So I guess this is something you will see from us in the coming quarters, but much more focus on top line growth. We have to really now balance the gross profit improvement that we have achieved up to nearly 17% with a difficult top line development. I think we have to really look at this equation again, and maybe we need to be a bit more aggressive on the pricing front to regain volume momentum to contribute more growth. Share price development, it's better than 16.7% since January -- plus 16.7% since January. So that's good.

And on the net of equity, and you will see this a little bit later. We're now at 1.38x net debt-to-equity, that's a very small reduction in ND/E ratio. One part is because of the new accounting standards on hedge accounting that deteriorated somewhat the asset base and the equity base, but primarily, the effect here is that we have now -- by now paid nearly $50 million in legal fines and civil settlement amounts to U.S. plaintiffs, and this is weighing a little bit on our deleveraging plan. Overall, we are quite satisfied with the free cash flow development.

So record quarter margin since 2015, even though we've included here the onetime labor, time and benefit provision. I will come to that a little bit later and share with you to say this. Here, our long-term development, you can really see how we had already a soft business from Q1 '17 to Q1 '18 to 11.6% gross margin in Q1 '18. And since then, really a substantial increase in gross profit. And if you look at our gross profit growth last quarter, we have a positive gross profit growth, even though our revenue didn't really grow, and the result is that our net profit looks equally positive.

Some recent developments, we have opened our Global Innovation Center, we talked a lot about the Gii, the Global Innovation Incubator before. We have now moved and upgraded this into our own premises [3 for us] here in Bangkok, substantially larger premises, and we've renamed it into Global Innovation Center, that's really focusing on innovations around seafoods. And in June 2019, we have celebrated this with an official opening with Princess Maha Chakri Sirindhorn, Her Royal Highness honored us with her visit here at SM Tower. You can see on the pictures, she even cooked Som Tam for us, which we all tasted afterwards. I think we were really proud and happy for this event and for this great opening of the Global Innovation Center, and it gives us some drive going forward into really a new phase of innovation, new growth initiatives, venture activities, we've opened SPACE-F, a Thai venture activity, an accelerator that we operate together with Mahidol and the government of Thailand.

The sustainability efforts of Thai Union are still totally on. This is one of our real success pillars. Here, we have contributed the #GhostGearReborn Kickoff on World Oceans Day. You see Khun Thiraphong, our CEO, who is diving along with 40 other experienced divers to remove debris, ghost gear, plastic from the oceans and one of the things that also contributes to our great results in the food, seafood -- good emerging market index.

I jumble my own topics. But I think what I would like to talk about a little bit. I think we've progressed in the whole sustainability debate. We were asked very often around what's the ROI on this investment. Why do you do this? The whole sustainability and human rights, and all this stuff. Why do you need this? And my response is becoming clearer and clearer around this. I think these questions are entirely misleading. We should not talk about ROI when it comes -- when it's about sustainability, human rights and very basic needs of people. We should talk about an ethical ROI. And I think, I -- maybe not in this session, but I think we can set up further discussions and debate about what is an ethical ROI, engagement of our people, compliance not only with the laws, but compliance with common sense. And I think we'd like to talk much more about ethical dividend. And we believe, in the end, this will pay off with our customers, our clients and our investors, who really, I think, embrace our activities in sustainability and human rights arena. I've also joined the CNBC Global CFO Council. I think it's a good platform to spread the news.

Refined Tuna oil remains a key value-added initiative. As you recall, we've invested $10 million here in Thailand for an oil extraction facility to reduce crude oil. We've invested around EUR 26 million in U.S. dollar in the U.S. in Germany, into an oil refinery. Unfortunately, we had a fire accident, the fire occurred on a weekend. The plant was not in operation. No staff were on site. There have been no injuries, but the plant burned down, and we're now in the process of rebuilding this. We've made financial provisions with [insurance], but we are rebuilding this as a core pillar of our growth in the future. It delays us by a year, but we will now be able to also implement further learnings that we have during this first period.

Our overall footprint, I don't want to go through a lot of those innovations, but we really have a new wave of innovations from all our brands. We are now 4 years into the Global Innovation Center, and we see more and more innovative products in our pipe packaging, new lobster initiative, premium products, launch of tuna in Germany and many others. And we'd like to share this with you. Innovation remains really a key ingredient to our success. We've received several awards of recognition. I don't want to go through this in detail, you can read this more in detail.

On the dividend front, we've decided despite the antitrust accruals that we have built on top in Q2, we've decided to stay on THB 0.25 dividend payout. I think it's a vote of confidence, we believe we have a strong balance sheet, we believe in the next couple of quarters. And that these payments will not burn us too much. We are -- we have proposed THB 0.25 to the Board as dividend payment today. And the payment date is going to be third of September.

Consolidated financial results. You will hear me and others talk much more about value growth, the Thai Union product portfolio -- or business portfolio and value growth opportunities. So that's why we've added this here as a key quote. So we will talk a little bit more in future about innovation, how this leads the product portfolio and business portfolio of Thai Union to move into a much more value accretive element.

Quick update, antitrust fast litigation in U.S. As you recall, we've accrued for our initial assessment last year, our Chicken of the Sea has agreed -- has accrued last year for the first assessment on this litigation. Chicken of the Sea has now had further settlements with large plaintiff groups, the financial exposure has been substantially higher than originally anticipated, we are quite clear about this, the reasons lie in other defendants' willingness to extend themselves substantially more financially. So this has become a much more expensive exercise for Chicken of the Sea. Nevertheless, Chicken of the Sea is accountable for the behavior in the market. The company has made additional 600 -- $60 million in accrual, there's a related tax benefit. So we have THB 1.4 billion net impact on our P&L. So our reported numbers are somewhat smaller, you see a table next to it that, including this [THB 1.8 billion] and then the positive tax effect on it. We come from THB 1.5 billion net income to just about THB 100 million net profit. But again, I'd like to highlight that despite these substantial finance charges, we have never experienced a loss-making quarter. And I think this is a really, really strong sign for the health of the company. We are able to deal with this difficult situation in the U.S. We believe that the financial impact of this occasion is now fully provided for by Chicken of the Sea. We all know that the process is not over yet, but our belief is now -- Chicken of the Sea's belief is that this now leaves the financial impact absolutely behind us. And we can now close out this activity and move on.

I'd like to move to Ludo, who can share with you a couple of key takeaways and some more details on the financial performance.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited - Head of Group Accounting and Control and General Manager of Corporate Accounts [3]


Thanks a lot, Joerg. So moving to Slide #19, we go through the key takeaway for the quarter. Joerg already mentioned some of them. So the first one is challenged sales, getting unhappy with the top line development. We are declining by 4% versus last year on a reported basis. And we are declining by 2% if we exclude the FX. Why? There are a few reasons for these ones. The first one is, we decided already to focus on the profit versus the top line. And we can see the benefit now in the growth rate, which is increasing. However, the sales are deteriorating a lot. Of course, the FX explain doesn't help us. We have been facing with a very strong depreciation of euro and GDP over this quarter, something between minus 6% to minus 7%. The tuna price is also an explanation, and then we get back to this one. We have to face in Q2 with a very sharp decrease of the tuna fish price. And this has, of course, impact now in our top line.

And we have some few other factors. We roll out SAP in Europe, which doesn't help us for the sales, and we have few items here and there. The revenues for this quarter is, of course, the gross profit margin, 16.7%, and it's even 17%, if you exclude the impact of the new Thai labor law. So we are very happy with the developments. We were really looking since last year for very strong recovery of our profits and it's happening. 16.7% is a record-high since 2015. So we are very happy with this one. And another good thing is this is quite consistent among the different business segments that we have on this one. And we will elaborate a bit more on this one.

SG&A a bit high, 11.8%, 11.6% if you exclude the impact of the new Thai labor law, so it's quite high compared to the 10.4% that we had last year. We have few explanation, mostly, it's from marketing cost phasing. We have a lot of NPD happening in Q2. And our [branded] business, mostly in Europe and also in the U.S., they focused a lot of marketing costs during this quarter. But we really expect this SG&A ratio to decrease in Q3 and in Q4.

Thanks to the very high GP, the OP stands at THB 1.6 million, reincreasing versus last year, and really showing the very strong OP recovery that we deliver this quarter. [BOOP], the nonoperating items are a bit less favorable than last year, the effects are still positive. However, much less compared to last year. Few reasons for that. First one is the volatility of the USD has been really decreasing versus last year. So the USD, in average, has been [decreasing] by 1% compared to '18; in Q2 2018, it was much more. Plus, we had some one-off transaction last year reported in Q2 '18 regarding the unwinding of some hedging specific [refractions]. And if you get back to the communication we did in Q2 '18, this was clearly one of the one-off we isolate, and this is something like THB 240 million, plus we also have the implementation of the new hedge accounting standard. And now we have some positive impact going back to the sales and the COGS versus the FX line. So this explained the drop in the FX. The Other income is declining by THB 140 million, mostly because we had 1 one-off last year from the [Ghanasha] plant, we had an incident in our Ghanian factory, and we got the insurance claim in Q2 '18. That was a one-off. We don't have this one in Q2 '19. So we had a drop on this one. The Share profit is improving and we'll get back also to this one. The lobster contribution is still loss-making, very slightly loss-making, very close to breakeven over the quarter, but we're improving compared to Q2 '18.

The antitrust, you already mentioned this one, I will not comment this one except that we exclude this one from the performance analysis. We said the same situation. Last year, we said this one. This transaction has nothing to do with our normal business, our recurring business. So we exclude this one from the performance explanation.

So moving to the next slide. So here, you can see over the last 4 months, since March, we have been facing with a very sharp decrease of the tuna price, moving from $1,600 to something which is close to $1,000. So here, this is a territory where we have not been facing since beginning of 2016, and you have to realize that in this kind of situation, we have a lot of retailers -- of customers, which are just delaying their orders. Why? Because they just want to see if we can see what is going to happen. And either fixed price can go even lower compared to the $1,000. So you can see that in July 2019. So there is no impact in our Q2 numbers. But to give you some insights, in July, we get back to $1,200, which is equal to the average we had to face in Q2 '19. But this is part of the reason why our tuna volumes are also declining in Q2 '19.

So moving to the top line. Top line is declining, as we said, by 4.6% versus Q2 '18. So we delivered THB 32.2 billion sales, increasing by almost 10% versus last year. So here we have a different situation. We still have some growth in the Frozen and the PetCare business, which are quite good. However, the Ambient business is really facing some challenge there and especially the tuna for all the reasons I already mentioned. The FX does not help us, of course, if [equal] 6 months. 6 months, we are almost flat if you exclude the FX. So once again, in Q1 and Q2, we have very strong impact coming from the GDP and from the euro, if you remember, last year, last year, the FX impact was coming from the USD. This year, it's a different situation. Brexit is expanding part of the story, but the key factors we structured across really USD, euro and GDP. And if you look at the dividend of the currency in July, it's not going in the right direction because we have further depreciation on the euro and on the GDP.

So moving to Slide #22. Here, you can very clearly see the challenges that we are facing. On the top line, clear challenge in the tuna, where we are declining by 1.8, minus 13%, partially offsetting the shrimp. Shrimp is doing really well, our business in the U.S., especially COSI has a very strong growth even despite the FX impact, it has some few ups and down. PetCare business is doing well. Frozen seafood -- Frozen, we have some very specific challenge in the crab business in the U.S. So overall here, we have minus 2.2% growth year-on-year on this one. Plus, on top of this, we have the FX impact, both of them are negative from the USD and from euro, but you can see here the impact coming from the euro, minus THB 700 million, minus 7%, is very significant on this one.

So moving down here on the breakdown by geographies, here you can see the share of Europe is declining to 29%, which is much lower compared to what we had in the past 3 years where we were closer to 31%, 32%, 33%. And this is only coming from an FX impact. On the contrary, you can see the domestic share is increasing to 12%, and we are very happy with the development we are delivering this quarter.

Moving down to the gross profit. So here, we achieved 16.7% in Q2 '19. We are really recovering compared to Q2 '18 and also compared to Q1 '19, we are very happy with this one. A few explanation on this one. The tuna and the Ambient business, we are really focusing on the profitable business. So we [are leaving some loss-making business, which I think is good for the gross profit plus we are also enjoying some low tuna fish price, which is also helping us. And again, the Frozen and the PetCare businesses are also delivering quite hard margin on this one, and we are happy with this one. One one-off we mention, the labor retirements. If you exclude this one, then we'll be at 17%. 17% is very high. This is where we want to be on a recurring basis, and we are very happy with these developments.

Moving to the OP. OP is only just a consequence of the very high GP, so we are really recovering. We had also mentioned that Q2 '18 at [THB 1.2 billion] was a bit low. You remember in Q1 '18 and Q2 '18, we are low in terms of operation. So the comparison is quite easy. However, overall, if you recall, track record for the Q2 '1,9, we are very happy with the OP we deliver and the same for the 6 months on this one. EBITDA, we [look at] margin increasing. It's just a consequence of the very strong GP and all P&L of this one.

So moving to Slide 27. Net profit, so really increasing the OP. Thanks to the very strong OP, But, we have lower FX gain. We have higher tax -- the higher tax I explained mostly by the recovery in the OP, and we have a higher share of profit, mostly coming from Red Lobster on this one.

Slide 28, we just have 1 one-off this quarter, which is the one related to the new Thai labor law, it costs us something like THB 200 million, THB 205 million. And you have a split between the cost impact and the SG&A impact because some parts impacting the people working in the factory and some of the parts impacting the people from the back-office. And from the commercial, this is why we're having impact on COGS and SG&A. So if you restate these 2, then the adjusted net profit would amount to THB 1.7 billion.

So moving to the Red Lobster, so again, here, you can see the share profit it's still negative in Q2 '19, minus 9, however, it was minus THB 128 million in Q2 '18, very strong recovery. Still, we are not yet at breakeven. However, the trend is very strong, and we are very happy with this development. Of course, we're ready to confirm that in the next quarters of this one. Apart from the share profit, you can see all the other components, other income, finance cost and even income tax are quite similar to last year. So no big change. So overall, the net income, Red Lobster contribution is 168, which is an EPS of 0.04, and we are happy with this one.

Cash flow, so the cash flow developments. We achieved THB 1.2 billion in Q2 '19, which is not so great if you compare to last year, but last year, huge impact coming from the change in net working capital, plus we did some quite large payments related to the antitrust in Q2 '19. So overall, we are quite happy with the development at the end of the day.

Moving to Slide 32. So this is the net debt development. So we started the year at 1.35, if you remember, before the adoption of TFRS-9 and 16. After the adoption, then this net debt-to-equity moved to 1.39. And then at the end of Q2, we had 1.38. So we managed to repay something like THB 900 million. You can see the key developments, we have the EBITDA, which is also of course, impacted by the antitrust accrual. And then we have a large portion of CapEx. And then we have some few items here and there. But overall, we are quite happy with the new developments. Of course, we won't go bit deeper, it's not strong enough, but at least it's going in the right direction.

The breakdown of the -- by currency and maturity, we don't have significant shares on these ones. So we move right away to the key profitability ratio.

So Slide 34. Here, you can see as a result of our good performance or the ratio improving ROE 14.1% versus 9.9%. Net debt-to-EBITDA moving down to 4.85, net debt-to-equity to 1.38. And you can see also the inventory days at 124. Overall, all the ratio in the right direction, and we are happy with one, again, very strong operating performance. As we said, net working capital has 107 days is also good over this quarter. We can do a bit better. So we have some plan also to improve this one a little bit. But at least is going in the right direction.

So I would pass through to Best to go through the financial results.


Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [4]


Thank you, Ludo. Okay. In regard to the financial result breakdown in terms of segment, we have presented here the key operating metrics. Clearly, the raw materials, the key raw material price has been declining during the quarter. During the second quarter of year 2019, tuna price has been dropping 27% compared to last year. And this is one of the key reason why the sales of seafood product has actually been declining compared to last year. Nonetheless, I mean the shrimp has been pursuing in the same direction. Shrimp prices also declined by 1% compared to last year and salmon price also down by 5% compared to last year.

But again, one of the hardest hitter on our revenue is actually the currency. While the USD compared to Thai baht has been relatively stable, and which shows USD depreciation against Thai baht, by only 1% compared to last year. The euro and the pound hardly -- probably this result from the Brexit, has been depreciating against Thai baht by 6.8% in case of euro and 6.5% in case of pound. So I mean that has been putting a pressure on our sales value.

In [hema] sales breakdown -- segment breakdown, our international performance, the Ambient [seafood] have seen a sales decline of 14% compared to last year. That is on the top of the quantity sales, sales volume declined 17%. This is mostly -- partly due to the falling tuna price, the FX weakness and the volume decline as well. This is -- however, this has been reported to be one of the highest margin as we have been delivered. Clearly, the approach that we choose, to be more discrete and picky about choosing our partner and focusing on higher-margin product of businesses has been clearly paid off here. Overall, Ambient Seafood's gross profit margin has been delivered at 22%, which is a record -- one of the highest level since year 2015.

In terms of frozen and chilled seafood. We have seen the raw material price decline. Clearly, the shrimp price has been down by 1%, salmon price has been down by 5%. But nonetheless, we have been delivered a very solid quantity growth. The sales volumes have grown by 10% compared to last year. And the sales, despite the volume increase, by 3.6%. So I mean we have seen good growth in both areas, while the gross profit margin has been maintained at relatively good level at about 9%.

On PetCare, well added. We continue to see a strong growth here, both in sales, which is growing by 6.7%, and quantity sales volume growth by 6% as well. The profit margin remained resilient at about 20%. So I mean this has been the key growth focus on our company, especially on the pet food business.

In terms of the sales breakdown by geography, I would go through this very quickly. In terms of U.S. and Canada market, we continue to see a strong growth in the frozen and chilled seafood business, although we have seen some weakness as a result from the canned tuna [and Thai exports to U.S.] of seafood. On the other hand, I mean our affiliate, Red Lobster, has been doing relatively much better compared to last year.

In terms of our product launch that we have done. I mean we have pushed out these good packaging, lobster under brand Orion. And the Chicken of the Sea has been launching a more premium canned seafood segment in the new special packaging that we have been delivered -- has been launched by the -- our innovation team.

In terms of Europe, we have seen sales weakness and sales been declined by 8% compared to last year. This is largely attributable to the weakened currency, which, as I said earlier, I mean the pound and the euro has been weakened against Thai baht by 6% to 7%. Not to say that we have been delivered a relatively good margin in this category.

King Oscar, we deliver new product and Hawesta as well. I mean they have been delivered new infusion product, has been launched in Germany market. So that are expect to diversify the brand that we have owned and exported them to reach further into the consumer market. In terms of the Thai market, we have seen a star performance where Thailand sales has been delivered a solid 19% growth. This has been the result of diversifying sale into home market of a weaker export due to the currency issue. But nonetheless, in terms of consumer market, we have recently launched tuna infusion product, which is originally the U.S. market in the Thai market. So I mean for those of you who residing in Bangkok, Thailand, you can go shop around for premium tuna market called [Flora] Infusion at our nearby 7-11 or Tops Supermarket.

For the emerging market, I guess, we have seen a somewhat weak market, down by 16%. This is mostly attributed to the retails in the Middle East market, while China has continued to be out of focus in terms of the growth. And last but not least, we have our Red Lobster has been launching its first store in Beijing recently.

Okay. And that wrapped up for the segment results, I will pass on for the business outlook to Mr. Joerg Ayrle to share with us how does it look like the business into the future. Thank you very much.


Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [5]


Yes. Thanks, Khun Best, and really, for all of us who are either in United States or here in Thailand, please do try the infusions, an amazing product. It's a low drain, no-rinse product. Amazing flavors, very unique here in market in Thailand, but also in the U.S., and it's the ideal protein pack for your gym visits and to have a healthy snack in between which is fully protein filled. Just some sales here on the call as well, right.

Business outlook. We didn't add here a new guidance. We felt quite self-explanatory, how the business moves forward. We continue to see currency risks. The political environment is such that we do not believe that the Thai baht will be much weaker over next couple of quarters; we believe the Thai baht will remain strong. This will put weight on the growth trajectory in our frozen business, frozen exports in Thailand, a real major impact for our subsidiaries in Thailand, especially on frozen shrimp exports. We also do not believe that the Brexit situation will help European businesses substantially grow in the U.S. We do have some innovations launch. I think we feel pretty good about what we have there through the second half year. So we do think growth can come in the second quarter in the U.S. a little bit. But overall, I think it's pretty clear. We didn't want to revise our top line guidance, but I think we also have to be realistic with the current currency environment. Our growth target used to be 5%. I think we have to be realistic, it's no longer 5%. So we are thinking really about maintain absolute growth which is still achievable for us, and we are targeting that.

Gross margins are healthy, healthier than we had anticipated, which is, I guess, this is good news. So I think for the remainder of the year, 15%, 16% target range for gross margin is absolutely realistic. At the upper end of that, potentially even -- so let's really target this. And on the SG&A, we always said our sweet number is 10%. With the soft growth, with some investment that want to do in top line growth and marketing spending on e-launches. We will probably exceed this, exceed 10%. We'll probably be closer to 11%, and I guess the main reason is, on the one hand, we have onetime effect with labor law in Thailand, but on the other hand, we really want to support our growth initiatives, our NPD launches in the U.K., in the U.S. but also here in Thailand. It is really important for us that we want to be refocusing on new products, new product launches and continued growth. So I think top line, we target at some growth. Gross margin for the rest of the year, upper end 15%, 16%, I think makes sense. 11% for SG&A is probably more realistic than the 10% target that we have, and that is primarily from further investments into marketing and into growth activities.

Yes, low operating profit. I don't think you will see much change, I think interest payments will remain more or less the same, taxation will remain more or less the same. I think we probably will have a little bit of an uptick on the tax rate because we have some one-offs now with the antitrust settlement. But I think below -- you will not see substantial changes towards the end of the year.

And with this, I'd like to move to Q&A session and invite you all for questions. We are still here for another 10, 15 minutes to respond to your questions.


Wai Yat Lee, Thai Union Group Public Company Limited - General Manager of IR [6]


All right, and that sum up the presentation. I would now like to move into the Q&A session. (Operator Instructions) Currently, we have quite a number of questions coming in. So we'll respond to that. But there is no -- and we will try to respond to your incoming questions. Thank you very much.


Questions and Answers


Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [1]


Yes, let me take the first question, and I prefer to take an operational question. Question is, other local shrimp exporters see weak business volume due to currency, but Thai Union, we still grow our frozen seafood business volume by 10%. How do we manage that?

Well, number one, we have a very large frozen business in the United States; our Chicken of the Sea frozen business out of the L.A. office is growing really, really strongly. We are very happy about it. It's one growth contributor. And secondly, if you recall, we have filed for approval at the SEC, we will be filing for approval with the SEC for listing our subsidiary, Thai Union feed mill. TFM is gangbusters. TFM is growing very strongly. And we're really very encouraged by recent numbers and it will support our IPO effort. So basically, 10% growth comes from our U.S. business and TFM.


Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited - Head of Group Accounting and Control and General Manager of Corporate Accounts [2]


So I can take the next one. We have a question regarding the Ambient seafood volumes and one of the key factors explaining the drop year-on-year on this one. So we already spoke about this one. We have few key factors on this one. First of all, the very specific situation with the shop feed price decline. And in that case, especially for the [Orion] business, the customers, they just wait and see -- they wait and see for the drop. I think these are the key factors expanding the volume drop, especially in Thailand. Plus we decided since the beginning of the year and since the end of last year to do a very clear focus on profitability versus top line. And sometime, it means that we accepted to do -- not to do any more loss-making businesses on this one. And this is one of the reason also for the volume drop. We had so large focus on the inventory. We wanted to decrease the overall level of inventories. This is why you have some quite strong achievement in terms of cash flow because we had a very specific situation in June with the rollout of SAP in few countries in Europe, in France and in Italy, namely, and this, of course, will help us for the volume sales in Q2 '19.


Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [3]


Okay. Let me maybe address the understandable question about the antitrust settlement. First question is, do you accrue the $60 million of U.S. legal fees. But we have booked something already in 2018. What had changed to increase the total amount booked? When we accrued this a year ago, this is our first assessment: we went in, we had our press settlement with Walmart. We had first initial discussions that we felt, this is a very good trajectory. And we have good solid understanding on this case. I think as the months progressed, we had really good discussions. Plaintiffs up until sometime earlier this year, February, March, discussions were not as good. And we realized that some of the other plaintiffs, the 2 other companies that are here in this lawsuit were significantly more aggressive in how quick and how financially impactful they want to settle and hear this. We had a very, very good analysis, and we still have very good analysis on what we feel the damages are. In this case, it seemed other companies felt they damaged consumers much more than us. We felt our average damage to consumers was around 1.5%. Since our companies felt that they have really overcharged consumers substantially more. Now that's really bad behavior, I think. So that's why I think other companies were willing to pay substantially higher amounts. Now unfortunately, this had an effect on our negotiations as well. And it led us to reassess the overall risks of this case a little bit earlier this year, and we then were able to settle with -- or Chicken of the Sea was able to settle with a very large plaintiff group on a level that was much higher than we think the actual damage we created for consumers was. So this is basically the result of, yes, other companies feeling that they hurt customers and consumers much more than we have. But we could not keep ourselves completely unaffected by those very, very high payments that others made.

Please excuse that I can't really share a lot of specifics. This is, of course, all classified and protected information. So I can't divulge much more. But this is the fact of the matter, others felt that they've damaged consumers more, so they pay more, and this had a bigger effect on us. So how much of this volume thing -- thing that's been -- so how much of the exposure value has been settled? I think we've settled around $0.89. And for the rest of it, we've made respective incremental accruals. We've not paid everything yet, but we have, in principle, agreements around 80%, 90% of the -- of plaintiffs. There's some outstanding that Chicken of the Sea has to deal with. But basically, with the accrual that we have made or that Chicken of the Sea has made, we believe the financial impact for us is over.

When will this case be truly finished? I think the legal procedures will still take a little bit. From a financial impact, we believe this is now it. So no more financial effects. But I guess, it will still take another 6 to 9 months to really close down every single case. There are 1 or 2 risks involved, but how long it will take -- but we believe, 6 to 9 months, the whole thing will be over. Financially, we believe this is now fully appropriately provided for.

Do you have any read of how much StarKist and Bumblebee is paying for the similar settlements? Look, I really cannot comment on specifics; everything I can share with you are rumors. Of course, we have some insights and some ideas. So that's why we believe other companies feel that they've damaged consumers much more and that's why they're paying more, which is fair, but it had a negative effect on us.

Is there risk that there could be further accrual expense [rigged] lawsuits? We do not see that there's any material risk for further accruals. There will still be legal expenses of around THB 1.5 million, THB 2 million a quarter for the next 2, 3 quarters until the whole topic is really, really over. We try to limit this as much as we can. Not everything is under our control, though. So accruals are done; some expenses are still ongoing.


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


So my question is related to the gross profit. And what are the key drivers explaining the improved margin, especially in the Orion business, so what you can say when you look at the fish price, both in tuna and in the shrimp and also in the salmon, we were quite lucky this quarter because of the tuna price was declining quite strongly. So this is one of the [big driver]. There was a clear focus. As we said on the profitable customers, especially for the Orion business in Thailand, the branded business in Europe is growing quite strongly compared to last year. You remember in 2018, we were not very happy with the performance of the [branded] business. But this year, they are really recovering, plus we have also some impact from the hedge accounting adoption. Over 6 months, the impact of the hedge accounting is something close to THB 160 million in the sales and in the gross profit. So this is also explaining part of the performance on this one.


Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [5]


Okay. Quick question on Red Lobster. What is better in Red Lobster? Red Lobster has significantly improved. What has improved will be breakeven this year. The short answer is, we have budget for the running year that will break even the business. We will earn a bit of money, 2 million, 3 million, I think, so the budget is planning to be breakeven. So that's good. We're running a bit behind budget. So I'm not sure we really make it to above 0, and maybe slightly below 0, but I think at least from a plan from a trajectory business, is really on the right track. What has improved? We talked about it last quarter, restaurant performance is the key focus of management now. We talk much less about marketing activities, we talk really about 4 walls probability in each of the 700 restaurants. Restaurant operations have improved, we took our cost out. We've launched a new menu, we launched a new menu which is much more affordable. We are trying to shift much more business to the daypart consumption. We are attracting a lot of consumers, and get back to the restaurant with affordable day menu items. And last but not least, we have a totally gangbuster off-premise business. So we're now at nearly 8% of revenue off-premise; part of this delivered at home, a lot of it picked up in the restaurant, but ordered through an app or ordered through a phone, so 8%. If you recall, 18 months ago, we were around 3.5%. So this is really the growth story in Red Lobster, the off-premise business.


Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [6]


So next question is related to the SG&A, quite high this quarter, 11.8% compared to 10.4%. So what are the root cause for the decrease in the SG&A? Few topics there. The first one, as we said, is the implementation of the new [Thai rope]. So if you exclude this one, I think at 11.5%, 11.6%, however, still growing versus last year. So here, the key factors. I think one of the first one is really question of phasing of the marketing cost, both through the branded business in Europe and the U.S., they decided to salvage more in Q2 because we have some ND/E launch also in Q2. So this is the key factors on this one. And then on top of this, we are facing with an increase of the freight and the Rostock cost in the U.S., both for the frozen and then the (inaudible) business that we are currently trying to face on this one. Plus, we have some impact coming from the legal costs in the U.S., the antitrust. Of course, we need a lot of settlements of this quarter. So this comes with an increase of legal costs. However, we expect for Q3 and Q4 2019 to have these percentages really decrease competitively until now over the first 6 months in 2019.


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


Next question on the FX gains. So we have, indeed, a huge drop versus last year. Last year, we are at something around THB 580 million. And now we at 80. So we are decreasing by THB 500 million. So we have few impacts here. The first one is last year was especially high. If you go back to the Q2 '18 communication, we are mentioning at something close to THB 230 million, THB 240 million FX gain coming from the unwinding of a specific hedging transaction. So this doesn't happen this year. So this already explained half of the gap, plus another explanation is we have much less USD volatility. We are very exposed to the USD or the FX, and we have into 2019 much lower USD volatility. So we have a much lower FX gain coming from this one. Plus it's true that we have also some impact coming from the implementation of the new policy. I told you that the impact was 6 months was something close to THB 160 million; however, if you just look at the focus in Q2, the impact is much smaller because we have some positive and negative impact. So the FX impact was mostly really Q1 on this one.


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


Quick response to the fire in the oil factory in Germany. We have written off EUR 16 million in [PP&E]. The insurance receivable is booked on as a receivable. So you may not see that as specific accounting line in our books, but it's just one is an impairment. The other one is a receivable. So the financial impact on the P&L is 0.

When do you expect the tuna oil factory to start running again? We've started dismantling the factory; we have started to order new equipment. And believe we're ready in Q3 2020. So we're basically a year behind.


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


We have a last question regarding the employee benefit booking. As you know, we have a new labor law which has become effective in Q2 2019. So we recorded it as one shot in 2019. You have in Slide 28 the breakdown between the COGS, THB 124 million, and the impact of the SG&A, which is THB 81 million. We did not assume any tax impact on this one. Why? Because it's mostly in our factories in Thailand which are dedicated to the export business. And you know that we are really doing some 0% tax impact on this one. So we should have a very small tax impact for the domestic market, but this one is really marginal. So we did not consider this one.


Wai Yat Lee, Thai Union Group Public Company Limited - General Manager of IR [10]


Okay. Right. It seems that there is no more question from the line. So I would say that this concludes our live

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