Bayer CropScience Limited (506285) Earnings Call Transcript & Summary

Hello, everyone. Good afternoon, ladies and gentlemen. Welcome to the Investor meet of Bayer CropScience Limited. I can see over 35 attendees and some more are still joining as I speak. Let me first introduce our speakers for this meet. Mr. D Narain, Vice Chairman and Managing Director of the company; Mr. Simon Wiebusch, Executive Director of the company; and Mr. Simon Britsch, Executive Director and Chief Financial Officer of the company. The sequence of today's late will be to start with presentation by the management team followed by a question-and-answer session. We have received several questions by e-mail, some of which we'll be covering during our presentation. And rest of the questions will be taken up in the Q&A session. If you have additional questions, please look at the chat icon at the bottom of your screen and send in your questions to us through the chat box. We'll attempt to as many questions as possible with the exception of items of commercial confidence. Considering time constraints, if any questions remain unanswered, please reach out to us at [email protected]. Please note that we are recording this interaction and recording will be available at the company's website. Presentation slides are available at the BSE website as well as company's website under the Investors section. With that, I now request Mr. D Narain for his address. Over to you, D.

Thank you, Nikunj, and a warm welcome to all of you joining this virtual investor meet. I hope each 1 of you are staying safe. It's been a tough couple of years. And I hope things are getting -- as things are getting better is the same for each 1 of you as well. And hopefully, in 1 of the days in the near future, we'll go back to a physical investor meet and looking forward to seeing all of you in person. So let me start with setting the context from an excel respective. To start with what we have been sharing with you on the significant positive momentum we are seeing on the agri-policy environment is continuing and continuing, but also seeing momentum. The recent regulatory guidelines on gene editing is a major step forward and comes in the back of deregulation of drones that we saw less than 4, 5 months ago. The second major trend is a strong feedback at the farm level seeking integrated solutions with a major focus on improving their farm incomes. The third trend, especially we're seeing a horticulture with more connected supply chains starting to emerge linked to city clusters and for agri exports as well, which could also see the need for produce certification. All these trends directly lead to the opportunity establishing crop-focused value chains that are able to address the major pain points of farmers, good quality inputs, agronomy knowledge, labor shortage driving mechanization with a strong linkage to the produce markets as they harvest their crops. Hence, the major push towards characterization through the farmer producer organization and also the new agri entrepreneur led last mile farmer connect models that are starting to merge will all accelerate this transformation with Digital Connect being a key enabler across the entire value chain. These models will also help deliver the sustainability goals of improving water efficiency, soil health and also the potential to reduce environmental emissions at scale, which are absolutely critical to deliver, especially if we consider the context of climate change. Who knows, in the near future, we might see Indian farmers generating carbon credits as a source of revenue as well. In summary, I believe we are moving to a decade, which will see significant growth in Indian agriculture. Having said that, it's also important to factor in the dynamics of the world around us. While we are still recovering from the major impact of COVID globally, the global supply chains continue to be stressed and the current Russia-Ukraine situation has compounded it with a number of import-dependent countries around the world, who are likely to face significant challenges of food security. For us in India, we need to manage through these emerging challenges, especially the availability of fertilizers and the impact to globally connected supply chains for the crop protection industry. Added to this is a challenge of inflation despite the strong efforts of the government to keep it in check. In summary, as an industry, we will have to weather through the storm with prudence to meet the planting needs of millions of the small holders of India, and also to meet the food security needs of the country, which I'm sure we will successfully overcome, because just 2 years ago, we faced enormous challenges of COVID and could collectively meet the challenge. So I can clearly say that while we do have short-term challenges, the long-term environment continues to be extremely positive. With that, let me turn it over to Simon Wiebusch to start walking us through his perspectives on Indian agriculture, but also the performance of the company. Over to you, Simon.

Thank you very much,D., and namaste. Welcome also from my side. It's a pleasure now being virtual to be with you today, and I go forward as to the questions later on. Yes, summarizing a little bit what we've done since integration, I would say we've been on a very strong trajectory with an initial focus on the channel, specifically aligning the placement with liquidation as a priority. Now -- what is developing now is a more holistic go-to-market, which is focusing on farmer needs. Specifically, what we're looking at is income increases, but also the predictability of that income. We're looking at reduction of farming burden per se, seeking better produce quality, but also production convenience. And clearly, a stronger emerging theme is the sustainability where we look at things, including soil health, water savings, and obviously safer applications where, for example, drones are a great opportunity. Still, the channel is important. What we aim for is a very tight, fresh, inventory management. And that's where really the old focus continues to be the new focus as well. At the same time, we need to extend our reach. We need to get on to more shelves. And we are aligning new alternative channels with the existing partners, which is sometimes a challenge, as you can imagine, with the emerging e-commerce. For that, partnerships is the key. So really Better Life Farming centers as an inclusive model to scale up and help the farmer expand the channel and really collaborate with others. Farmer producer organization, D has mentioned it, the collectivization of farm in India will be a theme, which is super important. And to this also connects us to 2 value chains, where not only do we want to help farmers to sell their produce, but to ensure that the quality meets what that channel -- the food chain actually leads. On the crop portfolio side, we are driving further the differentiated portfolio, targeting more acres and farmers served. We're launching big on the basis of building strong key confidence before the launch. And we're looking at broader offerings also via collaboration with partners. On the people side, we continue to invest into knowledge of our people, especially towards agronomy and digital developments. All of this needs to be supported by a better digital backlog. So we're really focusing on enhancing the farmer connect with digital tools such as [indiscernible]. We're improving channel convenience with digital order and account management tools and further upgrading also our liquidation tracking to meet the goals as mentioned before. If we can go to the next slide, please. Operationally, we see continued strong demand for Bayer offerings, driven both by market pool creation but also good channel sentiments. We see a continued sling of the market towards herbicides driven by labor shortage and convenience needs. And there has been COVID-induced supply concerns and some inflation expectations, which drove strong channel demand during the first quarter. From a liquidation perspective, it's very pleasing, may I say so to see, that the liquidation and the channel placements are actually starting to converge, which leads to a more synchronized growth with selling more or less matching the sellout. We have had broad gains across crops and the portfolio offering. And that actually represents a little bit, a, yes, may I call it, the risk diversified business, where sometimes in the past, we would have had 1 crop per season. We are now really able to satisfy broader needs. And as an example, looking at the fungicides to drive quality much, much more. Hybrid rice was tough for us, and it is still more challenging, though, having had now a good quality production and sensing a lot of confidence in the team, I do look forward to a good rice season. On the takeout side, clearly, we had a strong rebound in spring, which was driven by higher acres, but specifically, again, an excellent team effort around being competitive, but also launching a new hybrid. Better Life Farming centers for us are exceeding 1,000 as we count. And this is increasing the attention and interest by partners. We have almost 5,000 of [ supply needs ], which are narrowing rural entrepreneurship with significantly increased farmer reach for us. And with that, I can really say that our new business models are starting to scale to relevance, leading to more diversified go-to-market models per se. We go to the next slide, I'd just like to share 2 examples. We just had a fantastic launch on Dekalb 9208, which was very important to us because of our strong strength position, amongst the rising competitive pressure that we had on the existing 9108 franchise. It's an excellent example of a big launch on the basis of a great preparation by the team in terms of confidence building with farmers, with the channel, but specifically also with the team itself, taking a call and going for more than 10x actually, the usual launch quantity that we would enter a market in. The hybrid itself is exerting excellent heat tolerance, which currently is actually a big, big plus, but also representing a great opportunity in the salad segment, which is growing right now. Another important launch dimension is Vayego. It's a new class of diamide insecticides. It's relevant to us, because we will expand this franchise, having a good list of labor expansions coming in, but also looking at mixtures and seed treatment opportunities going forward. It's currently in rice and soy, we expect labels into things like the corn for [indiscernible], which is going to be an important segment as well. With this, I'd like to hand over to Simon to run you through the figures a little bit. Thank you very much.

Thank you, Simon Wiebusch. So hello, everyone, and also a warm welcome from my end. I will now walk you through the financial performance during the quarter and of course, also for the financial year that ended in March 2022. As you can see on the left hand of the slide, our revenue from operations increased by 31% to INR 9.6 billion during the fourth quarter. Major factors driving this growth were, a, rebound of our spring corn, and b, new product launches such as Vayego and Dekalb 9208. In addition, positive crop sentiments resulted in increased revenue from operations. Let me also comment on the profit before exceptional items and tax for the quarter, which more than doubled compared to the previous year to INR 1.9 billion. Major reasons for that achievement were the increase in volumes and the favorable sales mix with a higher spring corn seeds. Moreover price increases enabled us to partially offset inflationary pressure. Now let me zoom out a bit and comment on the full year performance, where we recorded a revenue growth of 11% to INR 47.3 billion. This growth was mainly driven by increased crop protection volumes based on effective demand generation, newly launched products, and also the scaling up of our alternative business models. As the next step, let me move on to the profit before tax and exceptional items for the year, which remained flat at INR 7.9 billion. Main reasons for that development were first, the sales mix impact as overall corn seed sales remained almost flat. Second, an increase in our employee expenses, mainly due to incentive payments. And third, the normalization of our operating costs back to pre-COVID levels. Kindly also note that our profit after exceptional items and tax for the full year increased by 31% to INR 6.5 billion. The main exceptional item for the current year was the profit on the sale of part of our seeds distribution business for INR 0.6 billion. Regarding the tax, the previous year included a onetime tax expense of INR 1.3 billion under the VSV Act. Please move to the next slide for balance sheet revenue. So our overall balance sheet increased by 3% to INR 43.5 billion. Let me share some comments on the main developments here. As you can see, so trade receivables increased by INR 2.5 billion. That was mainly on account of higher Q4 sales. In addition, we also saw an increase of the DSO from 60 to 75 days, which is still well below our standard payment term. Our cash balance reduced by 35% to INR 7.8 billion as on top of the annual dividend of INR 25 per share, we also paid out the special dividend of INR 125 to commemorate our 125 years of Bayer India. This also resulted in a reduction of the shareholders' funds by 1%. Please switch to the next slide to review the cash flow. As you can see in the blue box, cash flow from operations was at INR 2.2 billion compared to INR 6.9 billion for the previous year. The main factors I want to highlight here are the changes in working capital, due to the increase in receivables, as I explained in the previous slide, when we looked at the balance sheet, and also a buildup of the paid inventory on the 1 hand in anticipation of the kharif season. And on the other hand, due to the higher carryover from corn seed returns. An additional factor for the reduction was the taxes paid under the VSV act. Changes in the cash flow from investing activities were due to the exceptional proceeds from the sale of our seed distribution business that I mentioned earlier. And lastly, changes in cash flow from financing activities are mainly on account of the dividend payout. Thank you very much for your kind attention,and I now hand over to D Narain to wrap up.

Thank you, Simon. So let me wrap this up with some key summary points. As we execute our strategy and grow our business, we are strongly committed to partnering to improve farmer incomes, drive sustainability goals around -- specifically around water efficiency, soil health, and reduction in carbon emissions in major crops like rice. We also believe strongly on the need to increase women participation in the agricultural ecosystem. This includes our strive to hire more women in our commercial organization into frontline sales on agronomy roles, supporting women agri entrepreneurs to own and lead Better Life Farming centers, but most importantly, give access and knowledge to create visibility to numerous woman farmers, who are playing a key role in Indian agriculture as we speak. Leveraging our core strengths of product and business model innovation, we will continue to strengthen the Indian food value chains with strategic collaborations. We will continue our efforts to select, develop, and attract best-in-class talent, which will be foundational to deliver, both on our vision, but also on our long-term goals. Finally, we commit to proactively managing the near-term challenges without losing our long-term objectives, and we will deliver sustainable growth and upload smallholder farmers in India and beyond. With that, I will transition back to Nikunj, and then we will move on to our Q&A section. Over to you, Nikunj.

Thank you. Thank you very much for the presentation. We now open the session for Q&A. And I again invite the Simon Wiebusch and Simon Britsch, again. We have received a couple of questions already through chat functionality. So I'm taking them 1 by one, and I'm combining a couple of questions together. So the first 1 is about sales breakup. And Simon Britsch, you can take this. The question is, please provide breakup of sales in terms of domestic, agrochemical and corn seed exports, credit sales for Q4 FY '22 and FY '22?

Okay. So let's say, for the Q4 of the financial year, the sales mix was for domestic agrochemical 75%, domestic corn seeds 90% and exports 6%. looking at the whole year for the domestic agrochemicals, 82%, domestic corn seeds 11%, exports 4%, and also the traded seeds 3%.

Okay. Another question. What is the outlook of Dekalb going forward with recovery in commodity prices? Simon Wiebusch, perhaps you can take this.

Yes, happy to. thank you, Nikunj. Yes, on the back of a challenging 2021 season, the recovery in spring was obviously very important for us and that's what made the corn season a mess as Simon just said flat. The kharif outlook at this point is positive, although we see competition for acres. All crops are actually, at this point, yielding quite good farmer prices that we see. But still, we do expect good acres and potentially also good corn seeds.

The next question is, what were the top 5 products for FY '21, '22? Simon Britsch, perhaps you can take this.

Yes. Sure. I can take that. So the top 5 products are Dekalb, Roundup, Nativo, Laudis and Antracol.

There are a couple of questions on alternate business models, Simon Wiebusch, perhaps you can take this. When you talk about customer key accounts and alternate business model vertical, and how is it adding value to the organization and future growth prospects?

Yes. I mean it all starts with size and diversity of the country, and electricity helps. Our acre share still remains significantly below where we would like it to be. And to be able to achieve a better acre share, we actually need dedicated business models to serve different segments also profitably. So what we did build is a separate work to focus all commercial key accounts as we call them. And they basically work with food value chain partnerships. They work with e-commerce. They work with a differentiated smallholder portfolio. And additionally, also industrial business where we would be changing compounds with also competitive companies, really to increase our CP as we go forward.

So Simon, again, for you. The question is on new products. Please give an insight into short-term growth drivers of CP and seeds portfolio with a specific focus on new products. And what are the new products launched in FY '21-22 and what are the plans for the next financial year?

Okay. Yes. we fundamentally believe that the Indian ag input market will continue to grow. And that's on the back of increased investments by farmers as well as driven by consumer and industrial needs, right? So main drivers for market value increases to my mind, will be continued lower labor, so labor shortage basically but labor costs as well, grower convenience, produce quality and a continued need for pest management, we just saw, for example, with the [indiscernible] attack that we have in the South of [indiscernible]. Additionally, from my perspective, environmental aspects will influence lower practices leading to, for example, more direct seeding in rice. We will see a mix of increased demand for our existing portfolio, and that's important. And this is why I would like to differentiate and say, I talked about new launches, because these were very special new launches. So the existing portfolio will actually continue to drive it. And we want to add to our queue, obviously, with new franchises like Vayego. On the rice side, we need to widen our footprint over and above the 6444 portfolio that we carry. And in corn, we do see sustained growth in the country as a proper say, and we believe our current, but also our future portfolio faces us quite well. We have challenges in the rabi season, but we do hope that with new hybrids coming online, it's a little bit questionable whether we'll get marketing authorization this year, but latest next year, we will be also more competitive in that season again. At the end of the day, it's clearly the team that will drive the success. And I fundamentally believe also our new business models will create more reach for us.

So there is another question on ES divestment. D, perhaps you can take this. Can you please share ES divestment status and impact on the company's revenue?

Yes. Thanks, Nikunj and thanks for the question. So you're all aware that globally in March this year, we announced the divestment of the ES business. Obviously, this is still work in progress, but for the India piece and Bayer CropScience, has to go through the approval of the Board and finalizing the sale with the new buyer. At this point in time, the size of the business within the Bayer CropScience portfolio is around 1.5% of the overall business. So it's a very small part of our overall portfolio in India today.

The next question is on synergies and Simon Britsch, you can take this. What is the quantum of revenue and post synergies accrued in FY '22 post merger? And I'm getting another 1 as well. Do you believe most of the synergy benefits are already achieved by the company?

Okay. Thanks for the question. So when it comes to the achievement of the synergies, we've mentioned that also in some of our previous investor meets, the combination of both business allowed us to achieve the synergies that we had anticipated. We also, in that context, also stayed below what we estimated as a onetime cost scenario. But I also like to flag here that the ERP system integration is pending and is expected in the years to come. A general statement going forward, of course, we will continue to invest into our strategic initiatives, while we also will maintain our prudent spend management. Back to you, Nikunj.

The next couple of questions on RM cost and price increase. Simon, if you can take this. RM costs have gone up worldwide for ag-chem industry. How is the company dealing with this? And I'm clubbing another one. Are generally companies more proactive in price increases? And do you anticipate further cost pressure and price increase in the upcoming season?

Right. My favorite. Well, I mean, the increase in input costs have been driven by global inflation in basic materials, production shortages and supply chain disruptions, that's a fact. Also, we, as a company, and I think Simon alluded to it already, implemented price increases, and we'll continue to monitor our position versus both the cost, but also market dynamics. Given our usually deep and integrated global supply chain, we might not see as erratic cost of goods development as spot buyers do. So we do anticipate underlying inflation in COGS to continue, but we will react, as I said, according to really our cost position and the market dynamics. Currently, what you see in the market is still a mix of products. And especially in the channel, you're still holding them quite some inventory from last season by some competitors. So not everybody has as much as channel discipline as we do. And so from that perspective, really to get price clarity, we expect this to emerge rather when channel replenishment happens for the kharif to be really able to make a call the market dynamics.

So there is 1 more question and perhaps D you can take this. This is with respect to glyphosate products. So what is the status of glyphosate products in India? Are there any restrictions around that?

Yes. So thanks for the question. First of all, we have been fairly clear in terms of a global position on glyphosate. And the other big piece of that is all the regulators globally where glyphosate is sold have fully backed the product as a safe product. At this point in time, we have all the necessary licenses and registration to sell glyphosate and there is no litigation on glyphosate in India.

There is another question on inventory, and Simon Britsch perhaps you can take this. The question is, sir, our year-end inventory has faced by approximately INR 200 crores to INR 1,512 crores. So in a rise pricing price scenario, is it correct to say that we'll be enjoying inventory gains. If you could kind of elaborate on how inventory is getting valued in our books?

Well, let me comment in this way, let's say, of course, for us, inventories are in a lower cost of the cost of acquisition or the net realizable value. So you can expect what that will also mean going forward.

Why is there assets on inventory the -- another question on channel inventory, Simon, if you can take it, I guess. There has been an increase in closing channel inventory of March '22. What is the impact of this on receivables and liquidation? And is this a risk for the next financial year?

No, simple answer at this point, is no. The quarter itself saw demand from the channel, partly also in anticipation of some potential for supply constraints, so numerous in the market, but also the channel, yes, expecting price increases and hoping they can still get a good deal on some deliveries. But also, really, we started with a very low channel and they gave us an opportunity. We did see some earlier buying absolutely clear. But at this point, the channel inventory is of no concern and we're approaching the kharif, and really that's where also the major liquidation happens. Having said that, there have been also good liquidation months at this point. So overall, nothing to be concerned with. And Simon has alluded to it already, we are deliberately, let's say, not incentivizing early payments or cash payments where it's not necessary. So we are extending a little bit on payment terms deliberately.

So I think we have covered most of the questions in our -- either in our presentation or no other questions. I can see 1 more question on direct tax and Simon Britsch, perhaps you can take this. Could you provide guidance on effective tax rate going forward?

Excellent question. So as you truly know, 1 of the main factors determining our effective tax rate is our electronic. And we have also been consistently maintaining the position that such income is exempt from tax. So now for the tax rate going forward, of course, changes in the core income, therefore, will impact our effective tax rate.

Thank you, Simon. So I think we have covered all the questions. Just one, and I think perhaps you can take this is the last 1 coming from Aditi. Company has given out this INR 125 dividend in November 2021 and INR 25 as final dividend. Considering the company's robust performance, can we expect a similar kind of distribution of profit? And do we also see the same ramping up in next 2, 3 years? I think D, you can take this.

Yes. Nikunj, this is always the most favorite question in every investor meeting, right? First of all, I hope everybody is happy with the dividend that they paid out, signifying 125 years of Bayer. But having said that, the answer that I will give you this year is going to be the same that we've always consistently give you, that we'll be prudently managing the dividend payout. It will factor in both our short-term needs and long-term needs, and especially some of the emerging challenges that are out there that we talked about through the entire presentation. So preserving liquidity is going to be very critical at this juncture. But having said that, you have seen our track record on how we handle our payouts. And so you will continue to see it in a way we maximize our return to shareholders. Back to you, Nikunj.

Thank you, D. And I think with that, we are also [indiscernible] with the questions we have received. So with that, again, ladies and gentlemen, thank you very much for taking out time and attending today's Investor meet of Bayer CropScience Limited. We thank you for your support and association with us and wish you good health. Stay safe and take care. With this, I close this investor meet. Thank you once again.

Thank you.