UPL Limited (UPL.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the UPL Limited Q3 FY '20 Earnings Conference Call hosted by IDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Agarwal from IDFC Securities. Thank you, and over to you, sir.

Thank you then. Good afternoon, everyone. A very warm welcome to UPL Limited's Q3 FY '20 Earnings Call hosted by IDFC Securities. On the call, we have the entire senior management of UPL Limited on the call today. I hand over the call to Mr. Anand Vora, our Global CFO, to take the call forward from hereon. Please go ahead, sir.

Thank you, Nitin. Good afternoon, everyone. We have with us here today Mr. Diego Casanello. He is our Global COO; we have Mr. Rajendra Darak, Group CFO; we have Ashish Narkar, our General Manager, Investor Relationship; and myself, Anand Vora, the Global... [Technical Difficulty]

Ladies and gentlemen, the lines of the management has got disconnected. Please stay connected while we reconnect the management.

So again, I'm sorry. There was some problem with the line. So we are back. So as I mentioned, we have Diego with us. We have Rajendra Darak, Ashish and myself. Mr. Jai Shroff will be joining us shortly. Before I go on to the -- sharing with you the numbers for Q3 and for the 9 months period ended December, I would hand over to Diego to take us through the -- to give us an update on the market and maybe add some color on the financial results. Over to you, Diego.

Thanks, Anand. Good afternoon, everyone. In the third quarter, we are pleased to have reported the year-over-year growth of 7% in revenue and 22% on EBITDA on a pro forma basis. And with this performance, we are significantly outperforming a difficult market, which year-to-date is expected to decline in the single digits. Our teams around the world have done a terrific job, gaining market share in almost all territories, capitalizing on revenue synergies, launching great new innovations and strengthening a relationship with key farmers and distribution partners. UPL is offering today, complete package solutions in key crops like soy in Brazil or cotton in India, and our offerings include both cost-competitive [ post ] packing products and innovative specialty products, making UPL a one-stop shop partner to many customers. We have the right breadth of portfolio, and we have the scale. We are also a reliable partner. We have today an international manufacturing footprint with core assets in India, and many of our customers are seeking to reduce the risk, the supply risk after recent supply disruptions in China. And we're offering, as we speak, a welcome alternative to them. Product margins have also improved. You will recall that in Q2, we reported weaker margins resulting from price pressure on a few of our products driven by low export prices from Chinese competitors. As we anticipated during our last earnings call in Q3, we managed to close the gap on product margins compared to the last quarter. This is the result of significant efforts to continue to strengthen our manufacturing cost leadership in key product lines as well as a strong focus on high-margin products like biosolutions and specialty herbicides. Overall, year-to-date, we continue to close the initial gap on contribution margin despite the unfavorable geographical mix. In addition, we are well ahead in implementation of our fixed-cost synergy targets. We have made great progress with cost savings in warehousing, software and hardware licenses, insourcing of formulation, tolling activities, insourcing of experimental field trials, consolidation of offices, consolidation of plants and many more. Throughout the entire time, we have put emphasis on speed of execution. In particular, when it came to announcing a new organization and providing clarity to our employees, about the elimination of roles and the definition of new ones, we have been very, very fast. A 9% reduction of our fixed overhead year-over-year in Q3 has contributed significantly to our EBITDA margin expansion of around 2 percentage points. In terms of our regional performance, the trade tensions between the U.S. and China depressed demand for crop protection products in the U.S. and bolstered demand in Brazil. Our team in Brazil was able to outperform the market. They were able to drive revenue synergies from a very complementary customer and product portfolio in that country. Our business in North America was affected by the shift in soy and corn demand to Latin America. Despite this fact, we are gaining market share, especially share of wallet to many of our customers that are seeking to reduce the uncertainty of supply from China. We have seen share gains in some of our key herbicides, products like Interline, for example. The Western European markets continues to slow. We have seen tough weather conditions impacting farmers in the first half. This has increased channel stocks of many competitors in that market and has impacted demand in the second half. We're seeing, however, market conditions in Q4 still improving. As the leader in biosolutions, we are profiting from the higher focus of European farmers and distributors in this alternative ways of managing pests and abiotic stress, like drought. Europe is a great growth platform for UPL when it comes to biosolutions. India has been a great contributor to our results in Q3 thanks to a strong Rabi season supported by heavy rains in large parts of the country. We also continue to gain market share in insecticide segments with high-value specialties, for example, like our product Ulala. Coming back to UPL as a whole. In the first 3 quarters of the year, total revenue has increased by 8% with EBITDA growth of 15% (sic) [ 16% ]. On the back of these positive results, we are well positioned to achieve our targets for the year and, therefore, we want to reaffirm our revenue and EBITDA guidance for the full year. On February 1, we were excited to celebrate the 1-year anniversary of the Arysta acquisition. We're very proud of the progress we have made in integrating 2 very large companies in only 12 months of time. We're seeing our teams across the world build a common culture based on the strengths of both companies, creating something new and exciting that really differentiates UPL in the market. We have become a very agile organization, and we are best positioned to shape the market in this new decade. We want to use the chance to say thanks to all our employees for this huge achievement, and to thank farmers and partners for trusting us with their businesses. This personally gives me a lot of confidence to lead the way in the crop protection market and to deliver superlative financial results and value to our shareholders in the coming years. Thank you.

Thanks, Diego. Before taking you through the key numbers for the third quarter, we take as having read the safe harbor statement and would also like to highlight that the financial results for the quarter and 9 months are being compared with the pro forma financials of the previous quarter and 9 months in order to make them comparable. The pro forma financial meets the UPL plus Arysta combined financial results for the previous year. I'll now take you through the key numbers for Q3 FY 2020. The gross revenue for the quarter ending December 2019 are INR 8,892 crore as compared to INR 8,273 crores for the quarter ending December '18, a growth of 7%. The gross margins for Q3 increased to INR 3,726 crore from INR 3,508 crore in the previous year, an increase of 6%. Lower growth in -- is attributed to revenue mix in the quarter. Revenues from Europe and U.S. were lower than last year, resulting in overall lower gross margins. EBITDA for the quarter was INR 2,075 crore as compared to INR 1,697 crore, a strong growth of 22%. EBITDA as a percentage of revenue was 23%, showing an improvement of 283 basis points over that of the same period last year. This strong showing was primarily due to integration cost synergies and other ongoing cost-saving initiatives. Of the sales growth of 7%, we saw a volume growth of 10%. There was a negative price variance of 1%, giving a constant currency growth of 9%. The exchange impact was unfavorable by 2%. Comparing the financial results for Q3 FY 2020 with Q3 FY 2019, on an as-reported basis, the Q3 financial 2020 figures are excluding the PPA adjustment of INR 7 crores of variable costs relating to Bioquim acquisition. This is an acquisition which we did in Costa Rica. So this INR 48 crores relates to depreciation and amortization, and INR 19 crores relates to deferred tax associated with the aforesaid 2 items, that's the INR 7 crore variable cost and INR 48 crores on depreciation and amortization. The Q3 financial year 2019 figures are as reported in the previous year, which was -- which are UPL financials excluding that of Arysta, we saw revenue growth of 81% from INR 4,922 crore to INR 8,892 crores. EBITDA grew by 104% from INR 1,018 crore to INR 2,075 crore, and profit after-tax associated income and minority interest was at INR 811 crore, a growth of 47% over that of the previous year. Exceptional costs in Q3 were INR 75 crores. This pertained to integration and severance costs. The pro forma revenue breakdown in terms of geography is as follows: Latin America had a growth of 21% from INR 3,462 crores to INR 4,203 crores. Europe had a degrowth of 27% from INR 1,056 crore to INR 767 crore. Rest of the world grew by 7% from INR 1,757 crore to INR 1,884 crore. North America de-grew by 12% from INR 1,468 crore to INR 1,288 crore. India revenues posted a strong growth of 42% from INR 530 crores to INR 750 crores. Moving on to numbers for the first 9 months of the financial year 2020 on a pro forma basis, we saw the gross revenues at INR 24,615 crore compared to INR 22,744 crore, a growth of 8%. Gross margins after excluding PPA adjustments of INR 349 crore went up to INR 10,396 crore from INR 9,823 crore in the same period last year, an increase of 6%. EBITDA increased to INR 5,283 crore from INR 4,572 crore in the previous year, a growth of 16%. EBITDA as a percentage of revenue was at 21%, an improvement of 136 basis points over that of the previous year. The overall sales growth at 8% comprises of 10% growth in volumes, a decline of 1% in prices, giving us a constant currency growth of 9%. And there was a decline in 1% in the -- 1% was due to the currency impact. While comparing the financial results for first 9 months of financial year 2020 versus the same period in the previous year, as on reported basis, the figures excludes PPA adjustments of INR 349 crore in variable costs, INR 88 crores associated with depreciation and amortization and INR 138 crores related to deferred taxes associated with the above 2 items. The first 9 months result of financial year 2019 figures are as reported in the previous year. These are UPL numbers, excluding that of Arysta. We saw a revenue growth of 85% from INR 13,312 crore to INR 24,615 crores; EBITDA growth of 95% from INR 2,703 crores to INR 5,283 crores; and profit after tax, associated income and minority interest of INR 1,909 crores, a growth of 37% over that of the previous year. Exceptional costs of INR 452 crores for the first 9 months of financial year 2020 includes INR 217 crore pertaining to the provisions for Agrofresh litigation verdict, and the balance was largely related to redundancy costs and other associated integration costs. The pro forma first 9 months of financial year 2020 revenues broken down in terms of geography are as follows: Latin America revenues were at INR 10,372 crores, amounting to a 42% of the total revenues and representing 23% growth over that of the previous year; Europe; de-grew by 9% to INR 3,306 crore. It represented 13% of our total revenues; Rest of the world grew by 4% to INR 4,698 crore, representing 19% of our total revenue; North America de-grew by 4% to INR 3,103 crore, representing 13% of our total revenue; and India region grew by 6% to INR 3,136 crore, and it represented 13% of our total revenue. As for the net working capital, or as of December 2020. The net working capital remained flat at 126 days. Inventory levels were a constant at 111 days. Receivables saw a decrease of 15 days to 124 days. Payables saw a decrease of 15 days to 109 days. The working capital days for both periods are based on trailing 12-month sales. As we highlighted in our Q2 2020 earnings call, considering the seasonality of business, net working capital during the financial year increases quarter-on-quarter and it peaked in the third quarter ending December, and thereafter, we see a significant drop in Q4. Now on to debt and cash levels as of December 2020. The gross debt stood at INR 31,612 crore versus INR 29,370 crores. Cash balance was at INR 1,958 crores versus [ INR 2,851 ] crore as of March 31. Hence, the net debt stood at INR 29,654 crores, showing an increase over March of INR 3,135 crores. Of the INR 3,135 crores, INR 819 crores is on account of exchange rate and, therefore, the net increase in debt is -- for the 9 months is INR 2,316 crore. Cash flow from the operations for the first 9 months stood at INR 4,961 crores. Some of the other key cash numbers to impact the cash flows are as follows: We had an increase in working capital of INR 2,524 crores. Capital expenditure spend was at -- for the 9 months was at INR 1,623 crore. As explained earlier during the half year recall, we paid INR 683 crores additional towards working capital for the Arysta acquisition; we spent INR 165 crores towards acquisition of Bioquim, a company in Costa Rica; and onetime exceptional costs stood at INR 203 crores. There was a dividend outflow of INR 436 crores besides the interest payment of INR 1,257 crores and tax payment of INR 657 crores. As regards to synergies, we continue to remain on track or rather I would say we are ahead of our targets which we have set for ourselves. As you know, we had proposed a synergy cost savings of about $80 million, translating about INR 560 crores for the full year. For the first 9 months, we have already got synergy benefits of -- which are credited to the P&L of about INR 535 crores, roughly amounting to USD 76 million. In terms of revenue synergies, too, we are doing pretty good. We have delivered revenue synergies as of 31st December of INR 746 crores, representing roughly in dollar terms at USD 106 million. I would like to also highlight here that we have completed the purchase price allocation exercise. We had given this assignment to 1 of the big 4 chartered accounting firms, and they have come up with their report. The total consideration, which we have paid for Arysta acquisition, which was INR 31,615 crores. Now we have the fair value of all the assets, and the breakdown is as follows: Intangible assets were about INR 10,665 crores of the INR 31,615 crores. Tangible assets stood at INR 1,059 crores. Working capital was INR 6,076 crores. And we had other small amounts in terms of investments and before-tax liability, noncontrolling interest and other, resulting in a net amount of goodwill of about INR 16,652 crore. So of the total consideration of INR 31,615 crores, there is a goodwill component of INR 16,652 crores. As a result, now that we have the final purchase price allocation numbers have being -- we have to restate our depreciation and amortization numbers. As was reported in H1, we had depreciation and amortization of INR 1,185 crore. The adjustment due to -- once we -- the adjustment on account of PPA has been negative INR 263 crore. Depreciation and amortization for Q3 now stands at INR 494 crores. Therefore, the depreciation and amortization for the first 9 months now stands at INR 1,416 crores. I would also like to share with you -- provide you an update as was reported in the press earlier. The income tax authorities had visited and conducted a search at multiple locations of the company premises in India. During the course of this process, they have collected documents and have interviewed key personnel of the company. Based on this, the company believes that they were wanting to understand and review the company's international operations and transactions. We continue our engagement with the authorities and expect this process of review will continue for some time. The company conducts its business with all applicable provisions of law according -- across the globe. The search and investigation by tax authorities were on UPL Limited and not on any individual or a group of individuals as reported in some media items. With this, I would like to now move on to take on question and answers. Thank you very much for your attention.

[Operator Instructions] The first question is from the line of Nihal Jham from Edelweiss.

So my first question was on the U.S. and the Europe region. I do understand there has been a bit of a degrowth. First of all, just wanted to understand that. Is it that the market has also de-grown at a similar rate? Or was that specifically for as we had higher stocks because -- we will have seen a bigger impact for this quarter?

Yes. So the -- let's say, year-to-date, our performance in both Europe and North America remains above the market performance. So we are confident that we are gaining market share in those countries. Now to the situation in North America, in particular, there has been a shift of demand from North America to Brazil due to the trade tensions between the U.S. and China and especially on soybeans. We have kept capitalized on that in Brazil because we have a very high participation in Brazil. Let's say, in Europe, it's more really the impact of the weather extremes that we have perceived at the beginning of the year, hot and then very wet conditions that has depressed demand for several of our insecticide and fungicide brands. But let's say, we are very confident that as soon as that market comes back and we are seeing actually recovering in this quarter, we're going to be very well positioned to grow in those countries, too.

Any specific reason that the markets would be assessing such a sharp contraction, especially in this quarter? Because in the earlier quarter, you're seeing 4%, 5% kind of around it, but this quarter, it's exceptionally sharp.

No, I mean, we have seen the weakness in those 2 countries already for -- from some months already. So it's not new. I mean, from a...

There's also the industry impact. People deferred.

Right. So I mean, I think one effect that you can sum in the Q3 is that actually, there are 2 things: And one, Arysta used to have in December, it's closing. So we are now having actually our closing in March with the new UPL. And part of that business that used to be done in December will move into Q4. That's one effect. And then in Europe, and particularly, in France, there is a change in -- basically in the -- in some regulations with respect to the ability of companies to offer incentives to basically too early stocking. And as that is not happening anymore -- I mean, those regulations basically prohibit companies to do that. Then the sales into the French industry goes basically closer or will be done closer to application. And that means they move into Q4 and partially also into Q1 next year.

Also, just to add to what Diego said. Last year, 2019, particularly in France, we had a robust sales of some of our products because there was from January 1, there would be ecotax, which was being levied. And that coming in the play resulted in a lot of purchases being done by farmers and distributors just to avoid the ecotax, which would be start -- getting applicable from 1st of January 2019. So we had a robust last quarter in the previous year. Then therefore, when you see this, you see a huge dip in Q3 this year.

What could be France's sale approximately in Europe?

France would be about 20-odd percent of our Europe sales.

The next question is from the line of Sonali Salgaonkar from Jefferies.

So my question is regarding what is the impact that you perceive of the coronavirus in various geographies or products of yours? And secondly, on the pricing power, now it's about 3 quarters that we are seeing some subdued pricing power. So can you comment on the global channel inventories, sir?

So it's early to say, right, because we're seeing this unfolding. And to make a prediction right now, I think it wouldn't be prudent. We are obviously watching. We are well positioned because most of our manufacturing footprint is here in India. Some of our customers are starting to ask, let's say, for material because they want to hedge their positions. We -- let's say that it's too early to say. I think we need to watch -- in general, I think what I can tell you is that we are very well covered from the standpoint of our risk management approach. So you should be concerned about seeing disruptions in our business moving forward.

Then on the pricing power?

Can you repeat that question? Because acoustically, we couldn't hear it, sorry.

Sure. So for the past 3 quarters, we've been seeing subdued pricing that as compared to, say, 9 months FY '19. So any comment on the global channel inventories?

So let's say, there is a certain segment of our business that is competing with some products that are coming from China. And as we have seen in the last quarter, some of that price in China came down, and we have to follow and go actually to make sure that we secure and increase our volumes. But as we speak in Q3 and that we were already forecasting this in Q2, we are actually seeing a recovery of our margins also in those segments because we are taking cost out, production cost out in particular. And in general, we are moving our business more and more towards higher-value products and especially our biosolutions business. So overall, if you look at our margin performance quarter-to-quarter, you see an improvement, and we are confident that -- we are also capitalizing in the next few quarters from, call it, lower raw material prices, right, that you haven't seen in the first half, but you should see moving forward.

The next question is from the line of Saurabh Jain from HSBC.

Again, the question is on the U.S. and Europe geographies. So you highlighted that there -- you are now already seeing some improvement in this quarter. But will this going to be a significant improvement? Or what, having performance in Q3, like a 12% decline and 27% decline in these 2 geographies, can it be a significant growth? Because I believe fourth quarter is more -- the inventory more in favor of U.S. and Europe.

So you will see an improvement or we're expecting to see an improvement. Obviously, in the U.S. right now, we are off-season. So the industry is preparing for the next season. So we have to see how weather unfolds. I mean, if you look at the weather conditions last season, this has been really an extreme situation in both the U.S. and Europe. It's -- I don't want to make weather predictions, but we are hoping that we will see a more normal situation. And as we gain share of wallet in most of our key customers, and we're gaining market share in herbicides in the U.S., for example. We're gaining market share with our fungicide lines in Europe, with biosolutions. Once that market comes back, we should profit not only from more revenue, but also from the higher margin of those regions.

So like you mentioned that there was a pricing pressure in Q3. So is that already behind then that we're gaining margins in these geographies?

So the margin pressure we have seen was particularly in Q2. And in Q3, if you look at our margin profile, despite the geographic mix, because we're doing more business in this quarter with LatAm, which is lower margin compared to Europe and North America. And so despite that, our margins, it's very, very close to last year. I think it's already -- yeah, but actually -- yes, 42%, 42%. So that shows you that we are actually improving the margin power overall.

No. The question is not completed. So I just wanted to highlight that even if you strip out the cost synergies from the -- this quarter's numbers, it seems that our core business margins have improved almost like 200 bps. So is this solely attributable to significantly improving margins in U.S. and Europe?

So I mean the improvement quarter-to-quarter in -- on gross margins is because 2 things: I mean, one is the mix, the product mix; second is also COGS synergies, so we are executing on synergies in our cost of goods. And that is helping us. Also, there is some raw material improvements that are going to be even more present in next quarter. And that is offsetting the unfavorable, call it, regional mix, right? Which is more structural, call it, right? It's not related to a situation right now in terms of pricing pressure.

And you believe this will be sustainable?

Yes, we believe -- I mean, from this point in time, I mean, we believe this is sustainable.

The next question is from the line of Neha from JPMorgan.

Sir, in your opening remarks, you mentioned that we are tracking ahead of our target for both fixed cost and for revenues. So first, is there an upside risk to our cost synergies that we have guided to for the year and, therefore, from the acquisition? And second, could you give us a little color on where we are seeing the revenue synergies coming from?

On the cost side, I mean, I don't see a risk because we are -- we have said that we were targeting $80 million or about INR 560 crores. And we are already, by end of 9 months, we were at INR 535 crores. So we'll clearly end the year much ahead of what we had guided for, so we're pretty much on track. On the revenue synergies, I'll ask Diego to share his views. But...

Sir, on the cost synergies, I was asking if there's an -- is there upside to the target that been given for the 3 year, for the total cost synergies that you've indicated?

I mean, we -- for this year, we are trending ahead of target and, therefore, I assume, because these are synergies which are there, particularly the personnel, those will remain. Those will not go away. So clearly, based on what we have seen in the 9 months numbers, we are ahead, and we will end up much more than what we had guided for.

Yes. So just to answer your question -- this is Jai. I think we are -- as we progress and reorganized these 2 large companies, we believe that there will be some more opportunities to streamline business operations, and those are a work-in-progress. We believe that there is a good chance as we continue to rationalize and look at target areas where we need to focus for our growth. A bit early to specify amounts, but we believe there is room for improvement.

On the revenue, maybe Diego can…