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Key Risk Factors

STRATEGIC RISK

DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

In 2020, the largest health and economic crisis in recent history, COVID-19, has impacted people and economies globally.

Thai Union Group, with its production plants, offices, customers and consumers around the globe, was no exception. The global pandemic led to a dramatically changing business environment. Several key risks emerged, including:

  1. Risk to employee health
  2. Risk to production and supply chain interruption
  3. Risk to business performance and financial risk, including customer credit, FX and liquidity
  4. Risk related to the public health authorities’ response in each country, state, or municipality
  5. Risk related to stakeholders’ confidence in our company’s ability to response effectively to the challenges

Fortunately, COVID-19 has not only brought us risks but also opportunities such as increased demand for healthy food from consumers during these difficult times, which resulted in some positive tailwinds for parts of our businesses.

In addition to helping to maintain food supply, Thai Union was also able to contribute by providing humanitarian assistance to communities in which we operate.

In order to effectively deal with the challenges from the pandemic, Thai Union initiated its crisis response protocols and implemented Crisis Management Teams (CMTs) at both global and country level.

Thai Union’s top priority is ensuring the ongoing health, safety and wellbeing of all its employees, partners, suppliers, customers and local communities. In 2020, Thai Union rigorously followed all measures required by governments and local authorities and proactively implemented comprehensive safety measures across the full range of activities associated with the operations and outside the work environment; for example, temperature checks before entry to our facilities and limiting visitors, installing hand-washing or alcohol stations at entrances and in high-traffic areas, redesign of workplace and common area to have enough social distancing and protection and implementation of work-from-home and workforce clustering, where possible.

Additionally, from late December 2020 when an outbreak started to rapidly spread in Samut Sakhon province until now in early February 2021, Thai Union conducted two comprehensive rounds of testing of all of our active employees in Samut Sakhon and implemented comprehensive protocols to manage any positive cases. These protocols include taking care of the affected employees while isolating them according to government guidelines, identifying and testing close, tier-1 contacts, and the deep cleaning of visited work areas. In addition, we are participating in the government-mandated "seal & bubble" program with selected factories.

Regarding production and supply chain, in addition to the abovementioned measures, all factories put in place business continuity plans at the beginning of the pandemic, which are being updated as needed. These business continuity plans include; for example, increasing production on critical items, increasing inventory for critical supplies, reviewing and updating our supplier management in order to reduce supplier risk such as high dependency on specific suppliers and developing alternative production scenarios should a factory or production line have to be closed temporarily. As of February 2021, all Thai Union’s factories remain open and operational. While there has been some, temporary impact on production capacity, we do not foresee significant impact on our operations and ability to fulfil customer orders for most of our businesses.

Regarding to our business performance and financial risks, Thai Union has performed stress testing across the Group to understand possible business impacts and as mitigating actions has prepared several measures to ensure business resilience. These measures aim at protecting net profit, ensuring sufficient cash flow and maintaining key financial positions to comply with covenants. Specific measures include a comprehensive cash preservation plan for cost control, close monitoring of customer credit and optimization of inventory levels.

Overall, the business performance was good. There was a minor decline in revenue from frozen and chilled seafood products as demand from many food service customers was affected by lockdowns and a general decrease in on-premise consumption. Fortunately, there was favorable growth in ambient and pet care products as consumers cooked more at home and sought out healthy and affordable food products. This growth was supported by our supply chain, which was able to manage the increased demand.

Finally, in line with our SeaChange® strategy and commitment to support communities where we operate as well as to support UN Sustainability Development Goals of SDG 2 – Zero Hunger, SDG 8 – Decent Work and Economic Growth, we donated our seafood products to help people who were negatively impacted as well as authorities and people who supported fighting this pandemic in many countries around the globe.

Elements of Thai Union Strategy that management and mitigation plans aim to achieve
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COMPETITIVE INNOVATION
DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

Our revenue relies on the continued global demand and needs of customers. Achieving our business results depends, in part, on successfully developing, introducing and marketing new products to meet customers’ expectations that could change over time. Several changes during recent years that could be risks include:

  • Consumer behavior shifting to more on-line shopping and bring-in service, especially after COVID-19
  • Dramatic demographic shift which may lead to a change in product preference
  • Change of consumer trends to focus more on global sustainability and healthy food

The Company must be able to successfully address the changes and developments. Failure to continually innovate, improve our seafood products and manufacturing processes, and respond to competitive moves could compromise our competitive position and adversely impact our results.

In order to respond to this strategic risk and pursue business opportunities, the Company has governance and processes in place to understand up-to-date market trends, short- and long-term strategy planning reviews, strategy risk management reviews and robust strategic initiatives to capture opportunities and mitigate risks.

There were several investments during 2020 to drive competitive innovation; for example:

  • Continued to enhance our research and development through our Global Innovation Center to develop game-changing solutions for enhanced consumer satisfaction, shared value, and sustainability
  • Continued to invest though our corporate venture fund to drive food-tech innovation. Several investments were made in 2020; for example, in a diabetes food-tech innovation firm, an insect technology and e-commerce Company, an aquaculture technology operation, a cell-based seafood startup.
  • Established a joint venture Company "Interpharma-ZEAvita Co., Ltd." to focus on healthy products that promote wellbeing
  • Introduced healthy and sustainability marine ingredient products. for example – "UniQTMBONE" bone powder, ZEAvita bone powder, ZEAvita – ZEAessen Boost, ZEAvita – tuna oil
Element of Thai Union Strategy that management and mitigation plans aim to achieve
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DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

The global climate has shown increased rapidity of change in recent years, which has exacerbated extreme weather events. In 2019 and 2020, the world’s oceans saw their warmest years on record, which had an immediate and serious impact on not only the oceans but also the marine species and aquaculture production on which we depend.

Severe weather and natural disasters which are associated with climate change include floods, droughts and tsunamis, as well as ocean warming and acidification, which could all impact our production, raw material supply and human resources.

Thai Union operates with a strong commitment to respect and responsibility, showing a duty of care to our workers through responsible operations. We have a number of initiatives in place that contribute to water reduction, waste to landfill reduction, greenhouse gas emission reduction and monitoring natural disaster hazards and water risk management. We want everyone that works at Thai Union to play an active role in delivering against our environmental and safety goals. We see safety and environmental protection as everyone’s business.

We are in the process of setting our 2025 environmental goals as well as Science Based Targets (SBT). We also aim to increase our energy efficiency.

Towards this goal, we have implemented a number of initiatives, including:

  • Becoming the first food producer and Thailand-listed Company to join the EP100 Cooling Challenge, a Climate Group global initiative on smarter energy use
  • Continued initiatives: Project Sunseeker, which looks to place solar panels on our factories, solar rooftops at plants, reusing and recycling of water in our production processes, using fertilizer made from wastewater sludge for planting trees, and recycling contaminated plastic that previously would have gone to landfill.
Element of Thai Union Strategy that management and mitigation plans aim to achieve
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OPERATIONAL RISK

DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

Our key raw materials such as tuna and shrimp are similar to commodity prices, with no direct hedging instruments and market prices can decrease or increase rapidly

Our sourcing strategy balances seafood stock availability with price volatility, securing continuous access to sustainable raw seafood material from reliable suppliers.

TUNA

In 2020, global tuna markets continued to face price volatility and supply challenges across various species. The industry was also confronted by volatility in demand and logistics restrictions caused by the COVID-19 pandemic.

Skipjack tuna prices started the year at a low point but quickly saw a continued uptrend through April due to poor fishing and strong demand caused by uncertainties around the virus outbreak. Prices declined from May through July driven by improved fishing and softened demand. The market rallied again in August and reached the highest point of the year in September due to reduced fishing efforts and supply during the annual Western Pacific FAD closure, which prohibits vessels from using fish aggregating devices (FADs). Finally, the market retreated again in Q4, caused by improved fishing and softened demand in the food service sector amid the global pandemic.

Prices for Yellowfin and Albacore raw material remained at high levels in the first quarter of 2020. As supply continued to improve, prices for the two species lowered and were stable in the last three quarters of the year.

TUNA

The Company has a global fish procurement organization with a team of experts to enhance our strategic sourcing capability and supply chain management of fish. With centralized sourcing, the Company is able to leverage our global scale and build best-in-class sourcing capabilities.

On the operational level, the team closely monitors and mitigates challenges around prices and supply that are common in our business today. This improvement has increased communication and information transparency throughout the supply chain of all Thai Union factories.

SHRIMP

Thai shrimp raw material prices in 2020 were generally higher than 2019 as supply was constrained because local farms were busy containing consistent disease outbreaks (white feces, white spot, EHP, etc.) and a dimmer market outlook that caused farmers to delay cultivation and harvesting. The global COVID-19 pandemic negatively affected the food service segment in major export and local markets due to local lockdowns and social distancing requirements.

Also, the strength of the local currency (Thai Baht) since the second quarter, relative to other major shrimp exporting countries, became a risk factor, further dampening Thai export prospects in 2020. When raw material prices were high in U.S. dollar terms, Thai processors and exporters were under tremendous cost and pricing pressure to stay competitive and profitable.

Our U.S. based frozen seafood unit (Tri-Union Frozen Products, Inc.) is vulnerable to raw material price fluctuations caused by supply and demand imbalance in major producing countries and its own costs of inventory. But it reduces these risks by developing highly diversified supplier and customer bases.

SHRIMP

To differentiate ourselves from the competition, reduce cost pressure and secure profitability, we actively invest in new processes and equipment in order to meet new customer standards and requirements through obtaining globally recognized certificates, launching new and innovative products, and initiating industry-leading sustainability programs.

Strategic raw material procurement (in respect of timing and volume), which is derived from our inhouse view and intelligence on the supply and demand balance within Thailand, helps keep our pricing competitive.

Also, programs of process automation with an aim to reduce reliance on labor and improve productivity and consistency in product quality were also implemented with the ultimate objective to offset the negative impact of the Thai Baht’s strength on our product costs.

To reduce an over-dependence on certain markets, we diversify into new export destinations, such as Asian countries, in addition to the Thai market. We also partner with major customers through exclusive supply contracts over an extended period of time to ensure stable pricing and business volume.

SALMON

The global 3-6 kg salmon price annual average in 2020 was generally lower than 2019 due to COVID-19 and the closure of food service, driving demand down, especially from China.

In terms of supply, there were few supply shortages except in the last week of 2020 from Scotland due to BREXIT.

SALMON

We keep following our strategy which allows us to react faster according to the trends through hedging together with keeping good flexibility

Moreover, we apply a tracking tool to follow the main drivers in order to adapt our strategy if needed.

Elements of Thai Union Strategy that management and mitigation plans aim to achieve
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DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

In every production facility, the Company faces various potential risks, starting from sourcing raw seafood materials to processing and manufacturing finished products. These risks involve, for instance, the health and safety of employees, major damage to a plant, food quality, cost control and inventory management. These risks could directly or indirectly affect production, sales targets and ultimate corporate goals.

Key areas for continuous improvement include:

  • Safety at plants
  • Cost productivity
  • Food safety
  • Food quality to meet the increasing sophistication of consumer demand in quality and nutritional requirements.

Thai Union Group focuses on operational excellence and recognizes the importance of Continuous Improvement discipline.

Regarding safety risks, we regularly conduct a risk assessment for each production plant as risk profiles change over time (both man-made and natural disaster), as well as constantly assess the gap against our safety standards. Several management engineering and management mitigation programs were put in place, for example the development of a master plan which includes standardized practices and needed investment, especially risk reduction programs for fire and ammonia.

Moreover, we have strengthened our new-project investment and changes in plant design, construction, equipment, machinery and others that could create Safety, Health and Environment (SHE) risks, to ensure proper integration of SHE considerations before investment approval.

In terms of cost productivity, we put in place structured programs and dedicated CAPEX to increase productivity across the Group. For example: automation process, Total Productive Maintenance program, Labor Optimization Continuous Improvement program, increasing the percentage of RFT (right first time) in our production.

For food safety and quality, our Quality Management System is the platform which we deploy globally to ensure consistent food safety, compliance with quality standards and to create value for consumers. Our internal Quality Management System is constantly being audited and verified by independent certification bodies to strictly conform to internal, and international standards, laws and regulatory requirements. Several of the food quality and safety accreditations or certifications the Company has obtained are, for example: ISO9001, ISO14001, TIS18001, BRC, BAP, GMP, HACCP, Halal, Kosher.

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DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

The changing dynamics of work brought on by environmental factors such as COVID-19 have forced our business to increasingly rely more on technology and collaboration and this has a net impact on cybersecurity as the threat landscape becomes more sophisticated and attacks become opportunistic.

Cybersecurity risks can manifest themselves by making critical infrastructure and software unavailable. At worst, unauthorized access or misuse of data could compromise highly sensitive and confidential data. The risk could result in a financial impact where we are unable to fulfil customer orders, increase our cost of operation and incur fines and penalties from regulatory bodies. This could result in loss of reputation and confidence from our stakeholders.

Thai Union has undertaken a holistic review of IT security across all layers - from governance, structure, policy, technology, to people and processes to prepare for cybersecurity risk management. The Group information technology department responsible for implementing our IT policy has put in place measures which it enforces strictly across the business in order to protect the Company’s assets and personal data.

In 2020, we took several important steps forward to mitigate cybersecurity related risks. These include:

  • We performed an ERP SAP system security assessment to review and revise user authorization
  • We deployed a global platform and process "Infosec security monitoring" to monitor security alerts and incidents for speedy resolution by IT functions
  • We continued to strengthen security protection by enforcing password security, enforced Multi-Factor Authentication for all corporate phone users where applicable,
  • We are implementing advanced email filtering solutions to safeguard against unsolicited email
  • We are implementing brand exploit protection to protect stakeholders from phishing campaigns using domains similar to Thaiunion.com
  • We have put in place a Disaster Recovery plan for key applications
  • We strive to continuously create user awareness of cybersecurity through training, road shows and top-down communication of the importance of security in the Company
Elements of Thai Union Strategy that management and mitigation plans aim to achieve
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FINANCIAL RISK

DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

With a presence in a large number of countries, the Company is exposed to a variety of financial risks coming from foreign exchange, interest rates, liquidity, trade receivables, counterparty risk, investment and borrowing activities.

The risks are primarily:

  1. Foreign exchange risks on commercial flows, financing/ investing activities, net investments in foreign subsidiaries and raw materials we purchased in a foreign currency
  2. Interest rates risk on borrowings
  3. Credit risks on financial and commercial activities

In 2020, there were significant uncertainties from the COVID-19 pandemic, Brexit development, Trade tension, Political unrest in Thailand and the U.S. Presidential Election. These events created financial risks, especially regarding foreign exchange fluctuations.

COVID-19 influenced currencies when countries were hit by COVID-19, which then changed relative expectations of the country’s future economic growth. There were also impacts due to the pandemic effecting the core financial risks e.g., credit risk, market risk, operational risk, and liquidity risk.

Brexit also led to currency fluctuations for the GBP against the EUR and USD and impacted John West’s import costs and product pricing as well as translation effects.

The fiscal and monetary policies as well as the foreign policies of the U.S. administration had a significant impact on foreign exchange and led to a weakening of the USD against all other key currencies that the Company has businesses in i.e .EUR, JPY, GBP and THB.

Despite the COVID-19 pandemic and following the financial crisis, the replacement of benchmark interest rates, namely the London Inter-Bank Offered Rate (LIBOR) and other impacted interbank-offered rates (together with LIBOR, the ‘IBORs’) has become a priority for global regulators.

Many uncertainties remain but the roadmap to replacement is expected to be mostly completed by the end of 2021 to ensure that financial statements best reflect the economic effects of IBOR reform.

The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses derivative financial instruments to hedge certain exposures to stabilize future earnings.

The Financial Risk Management Policy is carried out by the Group Executive Committee. The Group’s policy includes areas such as foreign exchange risk, interest rate risk, liquidity risk, counterparty credit risk, raw material risk and operational risk. The framework parameters are approved.

  1. For foreign exchange risk, the Company’s policy and strategy to manage risks are as follows:
    • For trading activities, the Company used natural hedging and entered into forward to cover a certain percentage of risks, which is dependent on the profile of risks in different businesses
    • For all borrowing, lending, or placing deposits in foreign currencies where those currencies will be used, 100 percent hedging on foreign exchange risks is a must.
    • For equity investments where the returns can be expected from dividend payments or recapitalization, the decision of hedging on equity investments will be centralized and decided by the Group Executive Committee.
  2. For interest rate risk, the Company manages or caps portions of borrowing by using interest rate derivatives to achieve an acceptable targeted level of fixed/floating rate net borrowing.
  3. For counter party credit risk, the Company has policies, procedures and controls to minimize the risks, while trade insurance and credit limits have been bought for most customers.

In addition, the Company has implemented a contingency funding plan and account receivable monitoring and AR risk mitigation plan through AR insurance or AR factoring. This is led by the Cash Preservation Team so that the Company will be able to follow up and closely monitor situations during the COVID-19 pandemic.

The transition of IBORs is an ongoing process that the Company is aware of. The changes are limited to the IBORs and may impact the Company depending on the reference rates used in the loan instruments, lease contracts, bonds, derivatives, and hedge accounting. As a result, the Company has considered transitioning the financial instruments and the hedging derivatives to the relevant replacement benchmark at the same time, as well as to adhere to the ISDA 2020 IBOR Fallbacks Protocol to be applied for the existing derivative contracts.

See more detail on financial risk management in Note 6 to the financial statement on page 230 - 240.

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COMPLIANCE RISK

DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

Our business is subject to a wide variety of laws and regulations across all the countries in which we do business, including laws and regulations around intellectual property, product liability, marketing, antitrust, trade competition, environmental, employment, anti-bribery or anti-corruption, data protection and privacy, and other matters.

In recent years, data privacy or data protection laws have gradually come into force including nearly every country in Europe and many in Latin America, Asia and Africa. Key laws and regulations here are GDPR for Europe and PDPA for Thailand. For the U.S., in addition to federal laws and regulations that relate to information, the U.S. also has many data privacy and security laws among its states. For Thai Union Group, which has facilities, employees, customers, suppliers and visitors around the globe, this will pose a challenge for data privacy control and management. International data transfers and development of cybercrime have increased risks exponentially and will require new security measures in networks, internet infrastructure, people knowledge and work process.

Failure to comply or not being aware of changing laws and regulations and related interpretations could lead to substantial fines and penalties and have a negative impact on Thai Union’s financial performance and reputation.

The Company has a global legal and compliance function to monitor the development of laws and regulations and also provide regular updates to supervisory authorities.

To ensure we understand and take appropriate actions to remain compliant, the Company has established policies, provides guidance where necessary and trains related employees on all important matters. The Company continued to train and increase our employees’ awareness of the laws and regulations the Company has to comply with, as well as update them on upcoming laws and regulations.

Regarding data privacy or data protection laws, we have awareness of the development of data privacy and information security laws around the globe. We put in place several measures to ensure compliance to those laws and regulations as following:

  • A compliance strategy which is comprehensive, integrated, and centralized for achieving data privacy and information security compliance
  • Prepared compliance experts in order to understand laws and regulations thoroughly
  • Established data protection policies and procedures
  • Inventoried and assessed collected personal and sensitive information
  • Developed an emergency response strategy and plans

To update on the Antitrust Litigation case as of 11 January 2021, Tri-Union Seafoods LLC (Tri-Union), a Thai Union Group subsidiary which was accused in 2017 of involvement in anticompetitive activity in the U.S. tuna market, has reached an agreement in principle to settle the remaining antitrust litigation cases.

At this stage, all that remains is final court approval of the settlement agreement negotiated and concluded by the parties. The settlement of these remaining antitrust litigation cases brings to an end the antitrust litigation cases in the U.S. against the Company and Tri-Union. If this litigation case is successfully closed, the Company’s risk related to compliance will be significantly lower than the prior year.

Element of Thai Union Strategy that management and mitigation plans aim to achieve
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