Risk Factor

STRATEGIC RISK

FISH AND SEAFOOD COMPETITIVE LANDSCAPE
DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

The fish and seafood industry is a highly competitive and constantly-evolving market. Thai Union, as one of the world’s largest seafood producers, is well adept   at managing these industry risks.

Global consumer trends are changing, resulting in slow global growth for the traditional canned, shelf-stable seafood category. Although the global fish and seafood industry has been growing steadily over the past few years, and growth is expected to continue further. There are some mature markets, especially Europe and the U.S., where growth in processed seafood consumption has slowed. At the same time consumer preference shifts towards healthy living, convenient lifestyle and sustainably sourced products.

Furthermore, Thai Union continues to face strong competition in its core categories of tuna, shrimp and salmon. Exports from Thailand are pressured by Thai baht appreciation.

Thai Union continuously adapts to the changing and challenging market conditions.

Thai Union continues to invest in innovation to address market trends and stay ahead of competition. Some of our innovation achievements in 2019 include;

  • Thai Union launched SEALECT FITT tuna products in Thailand in September 2019.  This has contributed largely   to an increase in our tuna market share in Thailand (up to 51%, as of December 2019)
  • Thai Union received People Food Award 2019, as “The Best Supermarkets Product of the Year” from successful launch of Chicken of the Sea Infusion products in the US
  • Thai Union has launched rebranded our Qfresh frozen product brand in Thailand to address a wider and more modern consumer base

We will continue to invest in innovation to bring new, exciting products to our consumers globally - and to enter and build new businesses, for example, Ingredients and Feed.

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TRADE BARRIER
DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN
TARIFF TRADE BARRIER

There are increasing trade tensions and geopolitical uncertainties across the regions.

The risk mostly relates to a change of import tariff rates due to:

  • The US - China trade war, which included an additional 25 percent tariffs on seafood products;
  • Brexit, which may see a change of import and export tariffs between the U.K. and other countries;
  • U.S. - Thailand trade imbalance investigations, with a threat to remove General System of Preferences (GSP) for all U.S. exports
TARIFF TRADE BARRIER

The Company assessed potential risks with entities in the U.S., Europe and Thailand. Mitigation options were generated for each scenario. Due to uncertainty and the potential for the situation to develop, the Company closely monitored and reviewed the plan. In 2019, the U.S. removed GSP from over 500 Thai products exported to the U.S. No Thai Union seafood products were impacted.

Brexit took place on 31 January 2020 but will have no real impact until the end of the transitional period on 31 December 2020. It is too early to know what will be the outcome of the Free Trade Agreement that will be negotiated between Europe and the UK.

Although in general the trade wars and geopolitical tensions have not had a material negative impact on our business, Thai Union has a global production and supply network as well as plans for alternate sources of supply, if needed. This will help us mitigate geopolitical risks should they arise.

NON-TARIFF TRADE BARRIER

Risks mostly relating to the environment and social sustainability which can impact trading conditions or cost competitiveness.

Thai Union Group’s key non-tariff trade barriers are posed by:

  • EU - Illegal, Unregulated and Unreported (IUU) fishing yellow cards issued against our sourcing countries Vietnam and Taiwan;
  • U.S. – Trafficking in Persons (TIP) report and State Department ratings for Human Trafficking and Forced Labor as well as the implementation of the U.S. Trade Facilitation and Enforcement Act. U.S. Seafood Import Monitoring Program and other legislation that imposes a trade barrier to imports.
NON-TARIFF TRADE BARRIER

In 2019, we continued to implement SeaChange®, our global sustainability strategy. This strategy covers every aspect of the seafood business: from how we look after the oceans to how we manage our waste; from the responsibility we take for our workers to building brighter futures for the communities around our key sites. This also includes the ability to fully trace our seafood – from catch to consumption.

Key global achievements in 2019 included:

  • Thai Union continued to work with governments around the world to advance sustainability in the industry. This included engaging with the Royal Thai Government, the European Commission and the U.S. government on diverse issues such as combatting illegal, unreported and unregulated (IUU) fishing, tackling modern slavery and discussion of catch quotas and helping fisheries meet sustainability standards;
  • Ranked first globally in the Food Products Industry Index in the Dow Jones Sustainability Indices (DJSI), for the second year in a row;
  • Ranked first on the inaugural Seafood Stewardship Index (SSI) which assessed the contribution of the world’s 30 largest seafood companies to the United Nations (UN) Sustainable Development Goals (SDGs);
  • Completed the first round of third-party social audits against the Vessel Code of Conduct and implementation of the Vessel Improvement Program to our suppliers—upholding labor and human rights in the supply chain;
  • Made progress on our Tuna Commitment to responsibly source our branded tuna from fisheries that are either Marine Stewardship Council (MSC) certified, or engaged in Fishery Improvement Projects (FIPs) to move them towards MSC certification. We aim to achieve a minimum of 75 percent by the end of 2020.
  • Involvement of Thai Union vis a vis local government (Ghana, Seychelles, Thailand etc.) to advocate against IUU fishing.

More information on Sustainability at Thai Union on page 86, as well as our Awards and Recognition on page 48.

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CLIMATE CHANGE
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, the world’s oceans saw their warmest year 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, all of which could 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 accident reduction. 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 also strive to make advances in our occupational health and safety policies; continually strengthening our safety standards, procedures and processes. The Company also set a goal to reduce GHG emissions by at least 30 percent by 2020 (using 2016 as a base year). With these efforts, Thai Union is moving toward becoming a low-carbon organization and reducing the impact of Greenhouse Gases (GHG) on the environment and on society.

Towards this goal, we have implemented a number of initiatives, including Project Sunseeker, which looks to place solar panels on our factories, solar rooftop at plants, reusing and recycling 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.

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OPERATION RISK

OPERATION AND SAFETY
DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

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

Key areas for continuous improvement include:

  • Safety at plant
  • Cost productivity
  • Product quality to meet the increasing sophistication of consumer demand in quality and nutritional requirement

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

In 2019, we conducted risk assessment for each production plant as risk profile changed over time either from human made or natural disaster. Several management and mitigation programs were put in place, for example; lift-up safety, health, environment mandatory requirements, especially risk reduction programs for fire and ammonia.

Moreover, new project investment and changes in plant design, construction, equipment, machinery and others that could create safety, health, environment (SHE) risks, need to be approved by SHE department prior to investment approval.

In term of cost productivity, we put in place structured programs to increase productivity across the group. For example; Total Productive Maintenance program, Labor Optimization Continuous Improvement program, increasing the percentage of ‘right first time’ production and investing into automation.

For product quality, our Quality Management System is the platform that we use globally to ensure consistent food safety, compliance with quality standards and to create value for consumers. Our internal Quality Management System is audited and verified by independent certification bodies to prove conformity to internal standards, ISO norms, laws and regulatory requirements.

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RAW MATERIAL
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

TUNA

In 2019, the Company faced both price volatility and supply challenges across various tuna species. On the one hand, prices for Yellowfin and Albacore raw materials maintained at high levels, especially for Albacore tuna, where the market has notched a record high. On the other hand, prices for Skipjack tuna have been below average and fell to a 10-year-low in the last quarter. When tuna prices were high, it was difficult for our branded sales to pass on volumes and prices to customers. But when the tuna price was low, it pressured our private label sales in Thailand because our business model follows the “tuna market price” rather than inventory costs, which were higher.

In addition to price risks, the Company was confronted with tight tuna supplies, especially Yellowfin tuna, which is impacted by a quota allocation system (QAS) and irregular ocean temperatures.

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

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

In 2019, Thai shrimp raw material prices were generally lower than 2018 because the country’s status as the world’s major shrimp exporting country continued to fade when the output of other major shrimp producing countries has kept on increasing. (e.g. Ecuador, China, India, Vietnam, Indonesia, etc.)

Also, the unexpected strength of the local currency (Thai Baht), relative to other major shrimp exporting countries, became a new risk factor, dampening Thai raw material prices in 2019. When raw material prices were high in US dollar terms, Thai processors and exporters were under tremendous cost and pricing pressure to stay competitive and profitable. As a result, local shrimp buying by these exporters shrank, forcing farm-gate prices to stay low.

For our U.S. based frozen seafood unit (Tri-Union Frozen Products, Inc.) which has a highly-diversified supply base, given the nature of its trading operations it is subject to price risks related to the supply and demand situation in major producing countries and its own inventory costs.

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.

Besides 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 improving productivity and consistency in product quality were also implemented with the ultimate objective to offset the negative impact of Thai baht strength on our product costs.

To reduce 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

In 2019, the salmon price remained strong but slightly lower than 2018 due to increased harvesting volume at the second half of the year. However, in December demand increased and supply tightened resulting in a significant price spike. Therefore, the overall salmon price fluctuated throughout the year. However, we were able to sell within the price range from the pricing contract made with customers for 2019.

In term of supply, there was no supply shortage except on organic and at the very end of the year, mainly from Scotland due to several storms.

SALMON

We have implemented a strong strategy which allows us to react faster according to the trends through hedging together with keeping good flexibility when prices are low.

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

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CYBERSECURITY
DESCRIPTION AND IMPACT MANAGEMENT AND MITIGATION PLAN

As a company that strives to stay competitive and operate sustainably, we are making significant investments and rely heavily on IT technology and systems.

Any breakdown of critical IT infrastructure and software could lead to potential business disruption.

Cybersecurity threats are disruptive and can manifest from any source (Malware, Virus, Hardware/OS vulnerabilities and from unauthorized persons). Malicious actions can severely cripple our business by destroying or misusing company information assets and data.

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 asset and personal data. Adaptive measures include:

  • Increasing security protection including enforcing password security, implementing two-factor authentication, installing a fully-protected firewall with phishing filters, updating antivirus/endpoint protection.
  • Continuously creating user awareness of cyber security through training, road shows and top down communication of the importance of security in the Company

The Company has engaged a global cybersecurity market leader to perform a comprehensive risk assessment and evaluate the governance structures the Company has in place against international cybersecurity standards. This company provides recommendations on a strategic remediation security roadmap to uplift our cybersecurity controls in order to minimize the potential risks.

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FINANCIAL RISK

EXCHANGE RATE
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, trade receivables, investment activities and borrowings.

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

In 2019, there were significant uncertainties from the US-China Trade tension, global economic slowdown, many Central banks cut rates, Brexit and political unrest. These events created financial risks, especially regarding foreign exchange fluctuations.

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.

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 the future earnings.

Financial risk management 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
    • 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.

See more detail on financial risk management in Note 3 to the financial statement on page 202.

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COMPLIANCE RISK

OVERSEAS LAW AND REGULATION
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.

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 established policies, provides guidance where necessary and trains related employees on all important matters. In 2019, the Company continued to train and increase awareness our employees’ awareness of antitrust law and anti- corruption law.

The antitrust investigation of Tri-Union Seafoods LLC, a subsidiary of Thai Union Group by the U.S. Department of Justice is still ongoing Tri-Union has received conditional leniency, which means that, subject to requirements for fully cooperating, neither the Company nor any employees remain subject to prosecution. Risks and mitigation on other litigations were presented in Note 43 to the financial statements, page 280.

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