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Edited Transcript of TU.BK earnings conference call or presentation 5-Nov-19 10:59am GMT

Q3 2019 Thai Union Group PCL Earnings Presentation

Bangkok Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Thai Union Group PCL earnings conference call or presentation Tuesday, November 5, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Presentation

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Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [1]

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Good day, management, fund manager and all participant online. I would like to welcome you all to Thai Union Group Third Quarter 2019 Result Announcement. Today, the executive who are joining us today are Mr. Joerg Ayrle, Thai Union Group CFO.

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

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Hello. Good evening, everybody.

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Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [3]

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And we have with us today as well, Mr. Ludovic Garnier, Head of Group Accounting and Controlling.

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

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Hi. Good evening, everyone.

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Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [5]

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And myself, Bunlung Waiyanont, Investor Relations Manager. And this event will comprise approximately as usual for about 40 minutes of the presentation session. And after the presentation, we'll go right in the Q&A, of which we will answer any inquiry that you may have. Some of the questions has already incoming, but you're very welcome to submit the question any time along this slides session. And we would take it to answer you guys -- answer you during the Q&A session. And for now -- I mean without further ado, I would like to invite Mr. Joerg Ayrle, our Group CFO, to start the briefing. Thank you very much.

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Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [6]

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Okay. Thank you. Thank you, Khun Best. Hello, everybody. Good morning to the United States, good afternoon in Europe, and hello, good evening here in Asia.

Yes. Let me jump right into the third quarter of 2019. And look despite a headline that you find here is not starting very positive, I have to tell you, I'm actually quite positive about this quarter. There has been a lot of headwind. There has been a lot of currency challenges. There have been a lot of tuna raw material price issues. But what we have been able to do and this, I think, we are particularly proud of, we have been able to maintain the integrity of our P&L.

We have strengthened our P&L, our gross margin, and we have maintained a very strong, healthy operating profit and net profit margin in terms of percent of revenue. Yes. Of course, you will see, we will explain that in the following couple of slides. Our sales has dropped mainly on lower raw material prices. And on currencies in the quarter, THB 31.8 billion in revenue. That is 1.3% contraction compared to 1 year ago. If we exclude the foreign currency effects that we face especially to euro, British pound and U.S. dollar, it is a reported basis of minus 6.8%. But I'd like us to focus on the strong sales volume growth of 3.8%.

So we are growing volumes. The key challenges we are facing is extremely sharp drop in raw material prices. This will affect Q4 as well, and the Thai baht that has appreciated against most of the national -- most major currencies. And we'll talk about that a little bit later. THB 31.8 billion in revenue, 15.9% gross profit margin. That's up 10 basis points to 1 year ago. So again, sequential improvement on the year.

Sorry, let me check in on my microphone. No, on the -- actually on the glass jar. Sorry. So 15.9% gross profit margin, 10% year-over-year improvement. We continuously focus on high-margin businesses. And we have some really good news in our loss-maker removal program. If you recall, we've started probably 1.5 years ago in a loss-maker removal program. We have improvements in ESCO. In our Scottish salmon business, we've removed these losses. We have improvements in our Thailand-based brand business. We have improvements in our Canadian lobster business and our Vietnamese tuna business. So we see a lot of really good improvements and this focus on higher-margin businesses really paying off and the removal of Las Vegas.

In terms of operating profit, of course, the absolute number, THB 1.5 billion is a little bit depressed, basically from lower revenue. We still end up nearly 5% on revenue operating profit. Our SG&A ratio is at 11.2%. That is up from 1 year ago. And the key contributor here is, of course, low revenues, but I think much more importantly, we have focused on maintaining investments in marketing spending. We find it's important after several years of real hard cuts in SG&A spending that we stand from here. We continue to invest in new product introduction. We've put several million dollars into the product launches and fusions in the U.S. A new product range that we've launched that is focusing on younger consumers, on after gym consumption, on the protein pack that we are providing here for consumers. We've also launched products here in Thailand and in Europe, and we continue our top line growth focus despite the currency challenges that we are facing. We do not want to lose steam on demand creation.

Net profit, below OP. We are more or less stable, and we've achieved the THB 1.374 billion in net income. That's 4.3%. We have a quarter this time that did not have any unusual effects. There are no special one-offs or anything we need to adjust. We have solid contribution year-over-year on share of profit, especially from Avanti Feeds. That's very good. We have some positive below the OP and other income, but we have some higher tax expenses because last year, we had some favorabilities on onetime effect.

So overall, look there's no hiding here. We have a weak top line mainly from FX volatility, from falling tuna prices, but our gross margin recovery -- sorry, is continuing. And even in the Q4, I do have some very strong indications that we are running here very resilient on the gross margin improvement front compared to Q4 2014.

So if you look into 9 months, we've achieved now nearly THB 4.2 billion in net income. That's up 5% year-over-year. I think you all noticed, our share price has been under pressure from some news around GSP, around the antitrust topics. And I'm honestly, sometimes a little bit -- well, questioning myself, where we need to do more on communication because we feel we communicate a lot to our investors and to the analysts. And I personally do not understand where some of the negative messaging and the negative momentum comes from. We feel that our operational gross margin recovery story is so strong that we would hope that this is more credited by analysts and the capital market.

If you look at the 9 months compared to 1 year ago, 5% up net profit, 12% up EBITDA, 30% up operating profit, 10% up gross profit. We're a little bit contracting on total revenue, which is primarily a function of FX. So I'm really not so clear where the negative signs are. I see a lot of positive signs in our fundamentals around Thai Union. And I hope all the analysts who are listening can look into our numbers and support us in looking at the positive developments that we see year-over-year if we look at these 9 months.

Page 7. We always show you the last 3 years -- last 18 quarters on our revenue, gross profit and net profit development. As you can see, of course, top line is compressed primarily from tuna prices and from, as a major contributor, FX. Our gross profit in percent of revenue is sequentially improving so we are year-over-year better. And you can see this looking at this yellow line, and our net income remains resilient, remains strong. Clearly, in a range between 4% to 5%.

Now let's jump a little bit in -- to recent developments. And look, let me start with another very good news that we have received last week. You all have heard of the Marine Management Organization in the United Kingdom. The MMO has filed a lawsuit against us in context with IUU fishing in 2013. This process had been dormant for many, many years. And then last year -- in the last year, it kind of doubled up. And then mid of this year, they continue to file, maintained their lawsuit, went to the Crown Prosecution Services and wanted to sue John West for illegal deeds, and illegal and criminal actions in the market.

And the result is, well, there was no evidence offered that we would be guilty. And the verdict was entered that John West is entirely not guilty on all counts, what was brought against us. And this is a very positive proof on our commitment to transparent business practices, and we're very, very happy and continue to offer good quality and fully traceable seafood to consumers all around the world.

So I'd like us all to note, this lawsuit has been filed wrongly against us. We are not guilty. The court has decided we're not guilty, and this topic is behind us, exactly the way how we have communicated over the last quarters and months. So this topic is very clearly behind us.

Another really good news. Despite all those rumors and negative press, we've launched the senior debenture here in Thailand. On the 6th of November, a 10 years, THB 4 billion tranche and a 7 years, THB 2 billion tranche, with an average financing cost of 2.9% in Thai baht over an average life of 9 years. We had 20 institutional investors participating in the book building, and we were 3.5x oversubscribed. So I think there's a lot of very positive support in the capital market for our business, and we're very happy to welcome these 20 institutional investors. Of course, we know all of them. We're very happy that you continue to support us, and we will continue to honor this as being a great creditor in the market.

Now another news that affected our stock in the past couple of weeks. Donald Trump -- well, announced a decision to view Thailand as a problematic country in terms of human rights. We, of course, are not entirely certain if this is really fact-based or if there are other reasons behind. The decision was made that the GSP eligibility for importers from Thailand to the United States has been revoked for many items. Now the good news is, Thai Union is not affected by this. With no impact from this decision on the GSP eligibility, we've reviewed all our documents and all our export transactions, and we do not foresee any material impact on our business from this decision.

We had a webcast together with most of you a week ago -- a little bit a week ago, and we're very happy that this good news has been received well in the market. And actually, I need to say, Thailand is putting a lot of efforts in place to fight human rights abuses, to uphold human rights standards and to support here also our fundamental leads. And we will continue on the side of our peers here in Thailand and the government to uphold and strengthen human rights themes in the Thai market.

Another great news is our commitment to innovation. We have launched a food tech fund, a corporate venture capital fund with an initial commitment of USD 30 million investing into food tech startups in the areas of alternative protein, functional nutrition and value chain technology. And our first investment was into a company called Flying Spark. It's an Israeli an company, looking at fruit flies and fruit fly larva that have a 7-day life span and which body mass multiplies 250x of life cycle. And this technology enables us to a low-cost cultivation and processing of insect protein and a small fraction of insect-based oil with nearly zero waste and nearly zero emissions. This is one of the first startups that we've invested in. We'll work with this company and drive our edge in alternative proteins forward.

Awards and recognition. I don't want to go through this. We again won a couple of awards in the industry. We're very happy as one of the best corporate [stewardship] investor awards receiving that. That's great. Our Yellowfin Tuna Slices have received another product design award. It is always a great recommendation for us if we see that others are recognizing our efforts and our contributions.

Also on the sustainability front. We have now, for the second time in a row, achieved the #1 position in -- among the global food product since we -- in the Dow Jones Sustainability Index. This is an amazing achievement, and I'm really honored and proud at what -- here with Darian and with others in the company to uphold this amazing leadership role in sustainability.

Consolidated financial results. We said most of the things I've already introduced, challenged top line quarter 3 result, revenue declined 6.8%, mainly from depreciating in key currencies: British pound, minus 12%; euro, minus 11%; U.S. dollar, minus 7%, really challenging. But we have solid organic growth and that's really great, 3.8%. And we have strong growth, especially in the Frozen and Chilled segment and the PetCare, and value-added segment.

The loss -- the lower gross profit in Thai baht, but we still have a rising gross profit margin of 15.9% compared to 15.8% a year ago. And again, Frozen, PetCare, value-added margins are all improving. We have tight cost control on G&A expenses, but we're not jeopardizing our investments in the demand generation. And in the growth, of course, SG&A as a result of that, it's a little bit higher at 11.2%. We will see how we can continue to match this into Q4. Our nonoperating items are -- let me give you one last comment before I turn to Ludo, who will give you a little of more details on the FX.

If you recall, 2 years ago, 1.5 years ago, we already had this very, very difficult FX situation with the Thai baht being stronger or below THB 31 to the dollar. And if I recall, already at that time we shared with you, this cost of around $15 million, 1-5, $15 million in profit per quarter. If the Thai baht is as strong as we are now, this costs us $15 million. And I think we are in a very high Thai baht period, and we do have to recognize that this has an effect on our bottom line. And so we did in Q3 as well. But before we talk more about this, let me pass to Ludo, who will give you a little bit more detail.

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

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Thanks a lot, Joerg. So here, we're in Slide 18. So -- which is our usual graph. We're getting the fish price. And here, you can see that in Q3 '19, the average fish price for the tuna was around $1,200, which is almost flat compared to Q2 '19. However, if you compare Q3 '18, you have a huge drop by 17% because in Q3 '18, we were at $1,467.

Just to make it very clear, when you have such a drop in the fish price, then usually our customers just wait and see. And I think this is one of the key reason for the tuna sales drop in Q3 '19 compared to last year, that our customers are just waiting. They're just delaying their orders on this one and just wait for further decline. As you can see in October '19, we reached a price of $900 and let's see what's going on for November and December.

Just a quick focus on the top line. We already shared a lot on this one. But just begin to highlight, when you see the reporting numbers. The top line are declining by 6.8%, which is huge, but of which THB 5.5 million is just explained by FX. And if you remember in Q1 and Q2, we already had to face with depreciation of GBP and euro versus Thai baht. So in Q3, we have the same situation, plus also we have also now the USD, which is depreciating versus the Thai baht. If you remember last year in Q3 '18, the USD recovering versus Thai baht. This is not the case anymore in 2019. So we will have a huge impact coming from the FX and the depreciation of all major currencies versus Thai baht.

However, having said that, we have, indeed, a decline of our organic business, excluding the effect by 1.3%. And here, I will come to the slide just after, just to explain to you the situation. We have very different performance in the segments. So here, you can see we have the performance minus 1.3% in the FX, mostly coming from the tuna. Tuna is declining by 1.612%, but overall the other businesses are growing. Shrimp is doing quite well, starting macro and PetCare are also really growing. But the Tuna is really the one segment declining the drop in Q3 '19, again mostly explained by the fish price, which is declining by 70% versus Q3 '18. And then after this one, you have these 2 huge boxes, which are the USD effect and the euro effect, which is total of THB 1.9 billion. So this is a massive impact in our top line.

The breakdown by geography. We don't have any big change. The domestic market has been increasing. You can see 5 years back, we were close to 8%. Now we are around 13%. The key driver, of course, on this one is, first of all, the currency. Thai baht had been really strengthening, and Europe and the U.S. have been declining on this one. But our domestic performance is really impressive, and we are very happy about this one.

The sales breakdown by business. We don't have really big change on this one. The brand still represents something to 36% and 6% for the full service branded. So we don't have big change on this topic. Moving to the gross profit. So in Q3 '19, we achieved 15.9% gross profit margin. We are quite happy with this one if you compare it to Q4 '18. Q1 '19, we were close to just below 15%. In Q2 '19, we achieved a record high, 16.7%. And in Q3 '19 now, we at 15.9%, which is recovering compared to the 15.8% that we achieved in Q3 '18.

Of course, due to the top line shortfall, we have a drop in the gross profit value, which is 5.1%. That is 5.4% last year. And in fact, this is a key reason for our net profit value drop in Q3 '19 versus last year. Because between looking at the net sales, we don't have any significant change. So the drop that you can see here in the gross profit, you can find this one also in the net profit -- in net profit at the end of the day for the quarter.

Looking at the 9 months. We are still recovering compared to last year, about 9.5%. Many times, a very strong Q1 and Q2. If you remember, with achievements during these 2 quarters. Q3 '19, again, a very different situation. The [Frozen] business is achieving a good performance, same for the PetCare, the value-added are doing really well. The Ambient business and especially the tuna and especially in Thailand and in Europe is not doing that well this one.

So moving to the OP. OP for the quarter, we have the same shortfall that we can have in the GP. So we have a shortfall by something like THB 350 million, declining by 90% versus last year. We also have some huge FX impact on this one, something close to THB 200 million. I think maybe we should discuss about this one. And on the SG&A, we are almost flat versus last year in terms of a note on the bottom. However, due to the top line shortfall, indeed, the SG&A percentage is increasing to 11.2% versus 10.4% last year.

Moving to the EBITDA, so we achieved THB 3.2 billion in Q3 '19, which is very close to the performance we achieved last year in Q3 '18. 10% of EBITDA margin. Over 9 months, we achieved THB 9.3 million, which is really increasing compared to last year. And this is, again, thanks to the very strong recovery we achieving in Q1 and in Q2. Net profit, so just a consequence of the gross profit and the OP. So we achieved 1,374, declining by 21% versus last year at 1.7 However, for the 9 months, we are really recovering at 4.2 versus 4 on this one. Just a very quick focus on the nonoperating items. We have some ups and downs, which offset each other. We have some increase in the other income. Some good news also from the [Shell] profit and what's coming from Avanti as explained by Joerg. Our expenses and the discontinuations are declining, which is a very good news. However, this impact also by an increase in the income tax expense and also the FX. We are still generating some gain in Q3, however, much lower compared to last year.

Maybe just one point on the income tax. The income tax expense appeared to increase in Q3, and I think compared to last year, mostly due to 2 effects. First of all, the tax credit coming from U.S. are declining, and you will see on the focus on Red Lobster that we have something like THB 14 coming from Red Lobster tax rate plus also some lower tax rate coming from the rest of the U.S. And we have also some higher tax expense and deferred tax coming from the Thai baht. In Europe, we are almost flat. There is no big impact coming from this one.

One-off, we don't have anything significant to report in Q3 '19. Just as a reminder, last year, the adjusted net profit was at THB 1.7 billion. The reported profit was at THB 1.3 billion. And the key one-off that we reported last year during this quarter was the ESCO business closure where we recorded an accrual of THB 1.4 billion. But this year -- this quarter, we don't have any significant one-off to report. The EPS is up 4.8% year-on-year, just coming from the improvement of the performance over 9 months.

Just a quick focus on the Red Lobster, this is our traditional slide on this one. A few comments on this one. First of all, Red Lobster is still a profit contributor in Q3 '19 at THB 132 million. However, it is dropping compared to Q3 '18, which was at THB 287 million. The 2 key factors for this one is we have a declining share of profit, and we have been facing in Q3 '19 with a challenged situation in the guest count. Guest count are declining on this one, and we are working very hard with Red Lobster management to turn around the picture and to get back to improvement of the situation that we have seen in Q1 and Q2 '19.

Regarding the finance yield, we don't have any big challenges in the FX, it's almost stable compared to the previous quarters. And then we have a drop in income tax credits. We only have 63 versus 104. We already shared this information that it's very difficult to predict this one because this is related to the ongoing situation of Red Lobster, but also the situation and the profitability of the Red Lobster business in the U.S. But overall, Red Lobster still positive, THB 132 million, in our net income and positive also on the EPS.

Free cash flow, I think this is the first year that we have 4 quarters in a row of quite stable cash flow. We are happy about this one, THB 1.1 billion. It could be a bit better. If you compare it to last year, 2018 was a very unique situation mostly explained by the fish price and the change in our net working capital. I think in '19, we are back to a more normal situation, and we are quite happy with this development.

Slide 13, net debt change. We have a net debt which is almost flat compared to Q4 '18 at THB 64.4 billion. However, we had a deterioration of the net debt-to-equity ratio from 1.35 to 1.43, and I will explain this in the next slide. Just on the net debt bridge, so we have the EBITDA at THB 7.4 billion. This one includes the antitrust accrual we did in Q2. If you exclude this one, then the EBITDA is higher than THB 9 billion. And then we have a CapEx of THB 3.4 billion. I think this is something which is important to highlight, we decided to maintain -- to continue to invest strongly in our operations. We have different key projects within the group, and we continue to invest strongly on this one. We have -- the other key part is the dividend we paid, THB 1.9 billion to TU Group shareholders and THB 2.2 billion if you include also some dividend payments to some noncontrolling interest.

A very quick focus on the net debt-to-equity ratio increase. As I said, the net debt is almost stable compared to last year, I think, THB 4 billion, but however the key impact is coming from the drop in the equity. As you can see here, the equity is dropping from THB 46.2 billion to THB 45.2 billion. And you can see here the key highlights. We have a reported net profit including again the antitrust we did in Q2 at THB 2.8 billion. Then we had a dividend paid to TU shareholders by THB 1.9 billion. But in fact, the key factor for the equity drop is due to the FX translation. So here, over the 9 months, it cost us something like THB 2.2 billion. So this is a massive impact in our equity. And of course, if you exclude this FX impact, the net debt-to-equity ratio will improve, in fact. But here, due to this FX impact in -- over the 9 months, our equity is dropping and, as a consequence, the net debt-to-equity ratio is slightly deteriorating to 1.43.

Next slide, regarding our debt. We don't have any significant change on this one. We have -- we still have a massive exposure to the Thai baht. And then the maturity, we have something which is a bit more exposed to the short term, but it's not really significant on this one. The key ratios are just a consequence of the profitability. So return on equity at 13%. We were at 16.2% last year, ROCE at 9.6% versus 9.9% last year. Inventory days, almost flat versus Q2 '19 versus Q3 '18. And the net working capital at 109 days versus 107 and 109 days last year.

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

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Let me quickly jump back to Page 31. And look, I think I find this rather important. I mean during the whole year, we have a good strong cash flow. We continue to pay a really strong dividend. These are the 2 main -- and of course, we pay interest to our banks. These are the 2 main impacts on our net debt position. If you look at our total equity that we reported on January 1, the THB 46 billion, we then have a reported net profit that's, of course, much lower than our management number because of the additional accruals that we did for the U.S. antitrust case to clear that issue out. We continue to pay a strong dividend. But the key impact here is really a THB 2.2 billion pure translation effect on our balance sheet. So our equity base has reduced purely from FX translation effects.

And I want you to really take note of this, that this is not because our balance sheet has suddenly changed, but it's purely an FX translation effect. It's not a cash effect. This equity is not gone. It is purely a reduction out of the translation effects, and this has led to a very small increase in our net debt-to-equity. We've added this slide for everyone to analyze a little bit more in detail. And to really give confidence our balance sheet is completely intact. And -- but of course, we have to recognize the translation elements on the numbers.

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

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Thanks a lot, Joerg. Just one thing on the ratio, just to end up with this one, the net debt-to-EBITDA at the end of Q3 '19 stand at 5.06. It was 4.92 last year. Again, same explanation on this one. And then net debt to equity, we just explained this one. Having said that, I will pass it through to Khun Best to comment for the performance by BU.

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Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [10]

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All right. Thank you very much, Khun Ludo. For now we will come to the operating factor, okay? We have been hit by a few quite large factors, mainly that has been affecting on the sales of our company. As you can see here, the key operating factors such as tuna price has been declining. I mean third quarter, you've heard tuna price has been steady at USD 1,217 per ton, which is down 17% compared to last year; similarly, with the shrimp price, which is down 9.5%; and salmon, down by 4.1% compared to last year. This drop in commodity prices has put some drag on our revenue growth and resulting in a revenue decline. But moreover, we have a bad currency situation within the same quarter as well as U.S. dollar has been depreciating against Thai baht of 6.9% compared to last year; and European currency, both the euro and pounds, has been depreciating against Thai baht by 11% to 12%. So with these circumstances, we have delivered a negative sales growth in terms of Thai baht. Otherwise, I mean we should have been -- landed in a much better spot.

In terms of the 3 strategic segments. Ambient seafood, mostly canned tuna predominated, still account for 45% of the total sales; frozen and chilled seafood, 40%; and PetCare and value-added, the remaining 15% of the company total sales. For Ambient seafood, as you can see here, our sales have been dropping by 14% compared to last year during the third quarter. One, inventory point, our quantity sales have been dropping by just 3%. This has been also another point to elaborate how much both the currency impact and the commodity price is affecting our revenue trajectory. On the other hand, we continue to see the margin on overall basis of Ambient seafood still at about 18%, which is lower than last year. That's why our branded business has continued to deliver a stable margin profile.

The private label business, which is the export OEM out of Thailand, has been -- the margin has been dropping pretty significantly down to 13%, partly has been cited by both Joerg and Ludo. In the falling tuna price environment, customers tend to become more cautious regarding their purchase. And therefore, our margin has been dropping for the OEM domestic business -- export. However, I mean we have seen quite a different light for the frozen and chilled seafood. Despite that sales has declined by 2% compared to last year, we actually -- on the underlying organic growth, we continue to see a quantity growth of 15% compared to last year. And not only that, we continue to experience a margin of 11%, which is a full percentage higher compared to last year. This has contributed and supported our margin expansion that happened in the third quarter of this year. And so as to PetCare and value-added business, where the sales have been growing by 6% and quantity sales have been growing by 3%. So I mean this PetCare and value-added has been proven to be a strong contributor of our company, with a gross profit margin continuing to be at a solid 22% during the third quarter.

In regard to the geographic sales mix, U.S. still the largest market, accounting for 38% of company group sales; Europe, 31%; Thailand, however, has been at 13% and has been a solid growth market, as I will come down to talk about in a few slides down the road.

On the U.S. market, okay, I mean we have reported sales declined by 5.1%. But given that the U.S. dollars have been depreciating about 7% against Thai baht. So if we exclude the FX impact, sales in the U.S. would have been -- only declined by 1% compared to last year. The U.S. frozen business, both shrimp and lobster, continues to deliver a solid growth, while the canned tuna business sales has been -- also been up, but obviously had been cut down by the impact of the currency sales.

In terms of the Europe market where the -- because the currency impact has become more pronounced, especially in the third quarter, where the Thai baht sales declined by 10%, 9.9% compared to last year. But given that the strong Thai baht appreciation against the major 2 European currencies, should we exclude those FX impact, euro sales would have been actually increasing by about 1% compared to the previous year.

But on Thailand, we continue to see a very solid growth of 18.5% compared to last year. We continue to diversify and focus our marketing effort into the whole market, partly to offset the weak export sales that we make. And we have also launched a quite number of products in the recent quarter, which has helped, supporting our sales growth as well.

For the emerging market, we have seen a sales decline by 17% compared to last year. The key decline in market has been coming from the Middle East market partly due to the fact that the tuna price has been down, and the customer has become -- especially on the private label side, has taken a more cautious stance and buy less. However, we have continued to see the Chinese sales deliver a solid growth of 18% compared to last year. And this is where we believe will continue to be our key growth market in the Asian market.

For the third quarter segment -- third quarter result by segment profitability, the Ambient seafood has been down a bit, while frozen and chilled and PetCare business margin has been improved compared to previous year. And as a result, from the sales of THB 31.8 billion, we have delivered a solid gross profit margin of 15.9%, which is up 10 basis points compared to last year, and delivered a gross profit of THB 5 billion, okay?

So that -- without wasting any more time, I mean let's -- that conclude the presentation. And I would like to move on to the Q&A session where we will answer and respond to your incoming queries.

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Questions and Answers

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Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited - Head of Group Accounting and Control and General Manager of Corporate Accounts [1]

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Thanks a lot, Khun Best. Maybe we'll take the first one. So we have the first question, which is, what are the causes for the sales decline during Q3 '18 and what are the business segments driving the volume growth. So just to make it clear, the key 2 factors you need to keep in mind for Q3 '19 performance are really the FX. Again, we have reported a top line decline by 6.8%, of which 5.5% is only explained by the FX. If you restate this point, we have a decline by 1.3%, and this is mostly driven by the tuna fish price drop in Q3 '19. If you compare it to 1 year ago, a huge drop by 17%. And when you have such a drop, the customers, they just delay their orders on this one.

However, when you look at the situation, business segment by business segment, we had a very strong performance from the top -- from the frozen business and the shrimp and the PetCare, which are partially offsetting the decline of the Ambient due to the tuna drop. These are the key factors for the top line.

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

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We have some questions around operations. One question is how do we manage currency risks. We've adopted hedge accounting early this year. So all operational trade-related FX gains and losses are recorded under revenue and gross margin in the respective underlying trades. All the rest is under the line FX gains and losses below OP. We have implemented a very, very strong hedging policy. We are, for our Thai business, hedging around 50% of our inventory. We hedge 100% of all accounts receivable. And together with the accounts payable, which is primarily U.S. dollar, this gives a very nice natural hedging structure. In Europe, we're hedging 50%. We have already hedged 50% of 2020 budget rates, and we will continue to increase our hedge -- financial hedge ratio into 2020 once we are close to the budget period. Any large order that we make quotes on the customers, we are securing those orders with financial hedges. So that's one way how we manage currency risks. For intercompany loans, Thai baht-denominated loans that we take up or bonds that we then convert in the intercompany loans, in foreign currency will always hedge up to maturities, so there's no intercompany FX exposure.

Well, look, a very deep question, what business segments drive volume. I don't know if -- what's the company's plan to combat the sales decline? Look, this is a very deep question around our strategic direction. I think we've explained many, many times, we have growth areas in China. We have innovation. We are launching a lot of new products. That's why we put a lot of top marketing investment in place. We have a foodservice initiative where we see really solid contributions on top line. We've started our oil refinery -- crude oil business, so we see very nice margins and profit contributions from our crude oil sales. These are some of the topics that we do. We have now started an initiative around alternative protein. So all of this creates a really new business portfolio, enterprise portfolio going forward.

And if we look at our core business, look, there's a lot of innovation happening. We're launching our plastic cups. We're launching the infusions. There's a lot of innovation happening, new products happening, where we are competitive and where we feel we really bank on our sustainability story that we have and gain trust from customers. So of course, it's a concern that currency and raw material prices are eating into our growth momentum, but we do feel that this is a seasonal effect here and an effect that we faced in Q3.

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

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We have another question regarding the tax expense, which increased in Q3 '19 versus Q3 '18 by something like close to THB 130 million. So indeed, we have a tax expense increase. The 2 key contributors for such increase, first one is the U.S. The U.S. is coming from Red Lobster. You have a specific chart on this one. We explained there is an increase by something like THB 40 million just coming from Red Lobster. Again, we are not controlling the tax rate generation at Red Lobster. But also the Red Lobster in the U.S. is more profitable back in Q3 '18, so we generate more tax here. And so in Thailand, we have been enjoying in Q3 '18 some positive deferred tax and tax credit also on this one, which we are not enjoying anymore in Q3 '19. So that's why overall, we had such an increase of the tax expense in Q3 '19.

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Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [4]

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Why is the tuna price decline going to $900 per ton? Look, the catches have been great, and it's really primarily a supply topic. So there's a lot of supply coming to the market, and that drives prices down. Well, of course, this will affect negotiations for 2020. But I think retailers are educated, and they do realize that just 1 or 2 months or 3 months of low prices do not change the whole annual period. So I do feel we have a very good story to our customers and clients. We try to be as close as possible to real annual average cycle of pricing with our clients. So we do not feel that there is any long-term effect.

But in Q4, I think we have to be realistic with such a sharp drop in tuna prices. Again, our private label business is, of course, under a lot of pressure. Our inventory costs do not adjust within 1 or 2 weeks. We need 2, 3 months to adjust the average inventory costs. So I think we are seeing already some margin depression in the private label business in September and in October. So I think there will be some impact on Q4. We do not see that this gives any unusual impact on our branded or private label business. Of course, branded, we will earn a couple of dollars margin more, and then private label will be under pressure. I think it's also not a surprise that during a period where prices fall, customers are holding back with orders. That creates a little bit of a volume overhang, but this is not anything unusual, not that we've not seen somewhere else.

So I think we have to assume that Q4 is, of course, a little bit challenged on top line as well as on margin. But if we look at the overall trend, we will far outstrip Q4 2018 margins also in 2019, so we will really continue our recovery story. So I do not expect a very material impact on Thai Union headwinds on the top line. Of course, I think we've discussed this many times that we have to accept that this year will not be a growth year given the currency effects and the difficulties on the tuna price.

There's a question around Thammachart Seafood. What's the rationale of buying this business? Look, we bought this business in order to gain a stronger foothold into the Thai retail market. Thammachart Seafood has around 160 retail outlets. It's represented in basically all premium retail places and operates in the chilled seafood space. This is the ideal platform and the ideal channel for us to grow in Thailand, to bring more products on to the chilled shelf but also on to the frozen shelf. We are relaunching Qfresh brand very soon with a new massive penetration of the frozen shelf in Thailand, that's the key rationale. We're buying [9.9%] on top. This is the second step of the acquisition. The first acquisition of 25.1% was to get to know Julian and Yeeran, the co-owners, and how we manage together. The relationship goes very, very well. We have a lot of great collaboration. So we go now to the second step, and this is where we want to comanage this company together with Julian and Yeeran who maintain their 35%.

We typically do not disclose profit or net profit of subsidiaries. And I want to hold it like that also for Thammachart Seafood. So I don't think we want to share profitability levels of individual operating companies. The business is roughly THB 1 billion, growing very strongly in the market. We have 160 retail outlets. We have large retail chains coming to us, working with us. And with our financial backing from Thai Union, we give Thammachart Seafood enough financial firepower to grow retail presence even more. We have 7 or 8 F&B outlets. The Dock, The Lobster Lab, the Ocean Bar at Siam Paragon, so some really prime locations. And I invite you to dine in one of our restaurants. I invite you on the weekend to come shopping at one of our retail outlets in any of the premium supermarkets in Bangkok and outside of Bangkok.

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Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited - Head of Group Accounting and Control and General Manager of Corporate Accounts [5]

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So we have the next question regarding the MMO case. And the question is quite simple, is it really over? So here, we'll refer to the Slide #9 that we disclosed, yes, indeed, it is over. And now so John West U.K. was cleared of all the IUU fishing charges on this one. We are very happy with the development. It was a very long procedure, a very long investigation from the MMO since 2013. At one stage, we believe it was already a cold case, but then suddenly it came back 2 years ago. They went back again on this one. So now we have a verdict, which was provided by the judge on this one. And clearly, it's fully aligned with our thinking and John West has been -- the verdict is not guilty on all counts on this one. Very happy with this one. Again, the conclusion for us is a positive proof on our commitment to transparent business practices, and we will continue in this direction.

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Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [6]

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Red Lobster, there's a question around how is Red Lobster doing, why Q3 has been weak. A very good observation, we're not happy with Red Lobster's restaurant performance. We see guest count not going in the right direction. We see that there is an increase in cost pressure from very high lobster prices and high raw material prices. We see that we need to be better in marketing our major events. So I think a very good observation, we're not happy with current trading. We are working with management. We have Kim and Bill here next week in Thailand, and we will have much more discussions around how can we get to the next level of our financial performance improvement, how can we ignite the next level of real productivity and performance turnaround, so we need to see more from management on Red Lobster going forward.

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

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We have another question regarding the GSP changes, which happened a few weeks ago. We know there was a bit of emotion on this one. We have decided to have a specific slide on this one, which is Slide 11. So again, we did some research. And our conclusion is our key products in the U.S., which are tuna and shrimp, are not benefiting from this GSP change. So as a consequence, we do not foresee any material impact coming from this change.

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

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Okay. I have one more last question on the perpetual bond. The question came up, why are you issuing perpetual bond? What's the purpose? What's the target of -- and look, it is exactly as we shared now many times. We have from -- over the last couple of quarters, and maybe the last 3 years, we have not been able to materially deleverage our net debt to equity. We do want to deleverage. We do want to get into positive discussions on future growth and future investments. We want to get over this overhang on what the market perceives as a high leverage. Look, let's face it, 1.4x, 1.35x net debt to EBITDA, that's not really a very high leverage. Of course, EBITDA is a bit short.

But look, we have this overhang in the market. We have this overhang in the discussion around a high leverage. And we want to take this opportunity of a very attractive low interest rate environment to go into this new type of funding perpetual instrument that will be fully equity accounted, and it will help us deleverage the company. It's going to be around USD 200 million to refinance this. It is just purely going into our THB 12 billion bond refinancing strategy. So there are no other purposes behind the perpetual issue. We need to refinance THB 12 billion of bonds in the next 6 months. We have refinanced THB 6 billion last week. And with this THB 4 billion plus THB 2 billion, we'll refinance another THB 6 billion. So I think we are in a relatively good space here. And we'll have, in the process, deleveraged the company. The money will go nowhere else than into refinancing existing debt.

Oh, yes. Sorry, now I get it. I need to highlight at this stage -- sorry, the perpetual bond is issued here in Thailand to Thai investors. And this is absolutely no invitation to any American citizen or American investment company to invest or be even interested in our perpetual instrument. This is purely for Thai investors and is absolutely not an attempt to get any interest of American investors into this instrument. In fact, I don't think you can even invest into it, quite frankly. So this is for the Thai market, for Thai retail investors and for everyone who is not a U.S. investor.

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Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [9]

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All right. So with that, we've finished all of our question list on our hand. And this concludes our live webcast session of the Thai Union Group Third Quarter Results Year 2019 Result Announcement. Thank you very much for your kind participation and your time. Thank you very much for Mr. Joerg Ayrle, our group CFO; and Mr. Ludovic Garnier, our group Accounting and Controlling.

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

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Thank you.

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

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Thanks a lot.

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Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [12]

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And for anyone who have any further questions, please let us know and please contact us at IR anytime during the office hours, obviously.

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Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [13]

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And for those of us in Thailand, see you all tomorrow at the Grand Sheraton for a live session. We have a couple of surprises for you.

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Bunlung Waiyanont, Thai Union Group Public Company Limited - Investor Relation Manager [14]

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Okay. That concludes our session today. Thank you very much for your time. (foreign language)

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Joerg Ayrle, Thai Union Group Public Company Limited - Group CFO [15]

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(foreign language)

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Ludovic Regis Henri Garnier, Thai Union Group Public Company Limited - Head of Group Accounting and Control and General Manager of Corporate Accounts [16]

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Thanks a lot. Good evening.