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

Ladies and gentlemen, good day, and welcome to UPL Limited Second Quarter and 6 months ended 30th September 2021 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Radhika Arora. Thank you, and over to you, ma'am.

Thank you. Good morning and good evening, ladies and gentlemen. Thanks for joining us today for the results for the quarter and half year ended 30 September 2021. On this call, we will be referring to a presentation that has been shared with you and is also available on our website, and we take as having read the safe harbor statement. From the management, we have with us Global CEO, Mr. Jai Shroff; Global CFO, Rajendra Darak; COO, Carlos Pellicer; Global CFO, Anand Vora; Raj Tiwari, Global Chief Supply Chain Officer; and Farokh Hilloo, Chief Commercial Officer. We will start with a brief overview from Jai followed by a business update from Carlos, and then a financial update from Anand. With that, let me hand it over to Jai.

Thank you, Radhika. Pleasure to talk to everyone today. It's been a challenging year as one can imagine, lots of volatility in almost every sector we can imagine, every aspect of our business. Particularly running a business with a global presence, there has been a lot of sleepless nights for our whole team, but they have done an exceptionally good job as you will see. On the ESG front, I'd just like to cover some highlights. Reimagining sustainability is a key focus of UPL. Over the last 5 years, we have reduced water consumption by 21%, carbon emissions by 26%, waste by 45%. In the first half of this year, we have reduced carbon emissions by 4%, water by 18% and waste by 29%. And we keep investing in technologies and ability to reduce waste and reduce our -- improve our ESG across the board. We've also signed The Climate Pledge, which is a commitment to reduce our carbon footprint and -- by 2040 to 0. We've also launched The Gigaton Challenge, which is to reduce CO2 in the atmosphere by 1 gigaton by 2040. This is using agriculture as a free tool to reduce -- to decarbonize the world. We will mobilize 100 million hectares of acres with true farmers to decarbonize the world. It's one of the most exciting challenges in our sector in the world for decarbonization. At -- nurture.farm is one of the key initiatives of digitizing the ecosystem for agriculture inputs. nurture has had tremendous success in the last 18 months. We have onboarded 1.4 million farmers. We've onboarded 60,000 retailers. We have had a GMV of INR 600 crores in the last 6 months. We have serviced almost 3 million acres, and we have 90% adoption on our digital platform. We have also helped farmers trade 5,000 tonnes of their produce. We also launched the end of the burn campaign, which actually helps farmers not to burn their crop. One of the key challenges in the North India is, in this time of the year, farmers burn about 6 million hectares of rice stubble. UPL and nurture, our platform, was able to reduce -- take a target of 10%, and we are very happy to share that, as of last night, we did -- about 400,000 acres were completed. We will do a little bit more, but we are committed to end this in the next 3 years. We have a lot of requests from the government and other agencies to do that next year, completely end the burning of the rice stubble. NPP is another initiative, which we have formed. All our biological business comes through NPP, and we have launched a lot of products in NPP. The platform is also doing amazingly well. We have focused on developing biosolutions for all the key challenges being faced by farmers, and that business also is growing. We have signed a long-term agreement with Christian Hansen, one of the key companies in Europe on biosolutions. They will manufacture products as per our request for some of the challenges we see and research targets we give them. We also bagged the Asian Sustainability Award a couple of months ago. So with that, I'll hand over to Carlos to give you a business update. Thank you.

Thank you. Good evening, everyone. I am pleased to join you today to present our financial results.

Mr. Carlos?

Yes?

Sir, sorry to interrupt. If you can speak closer to the device please, you're sounding very distant.

Let me start again. Thanks, Jai. Good evening, everyone. I am pleased to join you today and present our financial results for the second quarter of full year 2022. We are operating in a high volatile and uncertainty world with every -- with ever-emerging disruption. Whether this challenge comes from supply chain or from manufacturing cost, we have continued to provide solutions to address the pain points of the farmers globally while delivering our financial commitments. These have been made possible through our strong backward integration, manufacturing capabilities and our supply chain excellence. The strength of our team and our OpenAg network, whether through our customers or partners, has helped us anticipate [ the COVID ] challenge and has made us better prepared to effectively overcome them. Driven by our purpose, we are inspired to be agile, focused deeply on our customers and grow sustainably and just -- as just identified by Jai. We are also excited to announce that 2 new patents, among other pending applications, have been granted in Brazil on a [ novelty way ] mixture to support our soybean disease resistance management platform. These patents have been granted in 9 additional countries including U.S.A., Argentina, Australia, Russia and European countries. Now moving to the financial results. I'm glad to report that our revenue as well as our EBITDA for the quarter have been so robust growth. The revenue has grown by 18%, while the EBITDA has increased by 13% versus Q2 full year 2021. The increase in revenue was led by strong volume growth enabled by our strong backward integration capabilities, along with improved overall price realization. Even though there has been a significant cost pressure on our key AIs in this inflationary environment, we have been successful in maintaining our gross profit to Q2 full year 2021 levels. Further, when adjusting our EBITDA for the nurture.farm-related investments, our EBITDA margin improved to around 20.1%, flat versus previous years, implying a 16% growth over Q2 of full year 2021. Now let's look at the performance of our regions. In Lat Am, we registered around 21% growth led by a strong increase in volume. Brazil, the key country in the region, grew by around 27% versus last year driven by solid growth of our key products and supported by improved price realization. Other subregions such as South Cone and Argentina also demonstrated robust volume-based growth. Furthermore, Mexico has managed to maintain its revenue versus previous year despite prevalent several drought conditions. Looking to North America now. Revenue growth was achieved through higher price realization, especially due to upside on non-selective herbicide. This was driven by improved price realization, resulting in robust growth of 24% over Q2 full year 2021. Improved commodity price, tight supply for key products and favorable channel stocks further enabled this strong performance. [Technical Difficulty]

May we request all the participants to please stay connected while we reconnect the management.

Yes. Sorry, I'll just repeat North America as I don't know until when and where you have been able to have the information. In North America, revenue growth was achieved through higher price realization, especially due to the upside in non-selective herbicide. This was driven by improved price realization, resulting a robust growth of 24% over Q2 full year 2021. Improved commodity price, tight supply for key products and favorable channel stocks further enabled this strong performance. In Europe, we grew by a robust 31% in Q2 versus previous year. This strong performance has been achieved through a mix of favorable volume growth and higher price realization. Improved market conditions including weather led to accelerated sales in Q2. France, DACH regions and the United Kingdom have delivered strong growth driven by robust performance in fungicide, herbicide and biosolutions segment. Moving to India. India, we added a better performer than the overall market in this part despite general slowdown due to average 9% deficit rainfall and reduced Kharif acreage for key crops such as cotton, soybean and groundnuts. Looking to the rest of the world. Delivered around -- we delivered around 13% growth in [ headroom ] this quarter against last year despite the ongoing major supply constraint. Australia and New Zealand registered strong growth led by the higher volume and improved price realization. Japan sales were comparable with the previous year despite depreciation of the Japan yen. Among the regions, Africa and Middle East regions registered degrowth primarily due to the unfavorable rains in parts of Africa and overall supply chain challenges. But before I hand over the call to our global CFO, Anand, to provide more details about our Q2 financial results, I'd like to congratulate our team for their resilience, dedication and unified focus to deliver this strong performance in Q2 despite challenging on several fronts. Up to you now, Anand, please.

Thank you. Thank you, Carlos. Thank you very much. Good evening, everybody. I'm taking as read the presentation, which is put up on our website and having read the safe harbor statement. I'll begin with providing you the key highlights for the second quarter and first half earnings and then take you through the detailed financials. The performance of second quarter is a true reflection of company's resilience and strong business model that help us deliver strong results amidst the global supply chain disruption and a tough environment. This was enabled by the backward integration and end-to-end manufacturing capabilities for our key products and, of course, the agility of our team. The Q2 performance highlights and Q2 P&L highlights are as follows. Talking about the key financial metrics for Q2, we ended the quarter with revenue of INR 10,567 crores, an increase of 18%. What is most hard thing to mention here is the 15% growth in volume over that of the same quarter in the previous year and 3% due to price increases, which primarily started coming in, in September 2021. Talks about -- talking about gross margin for Q2, the impact of 85 basis point increase in freight and 96 basis points on account of geographical revenue mix, the higher sales -- this revenue mix was largely on account of higher sales in Brazil given the strong demand and the increase in acreage. However, I would also like to add here that the gross margins included Brazil, and they were still lower than -- although they were still lower than the company's average, thereby impacting our overall gross margins. So in spite of about 2 factors impacting the gross margins by almost 180 basis points, the gross margins for the quarter were at 39.7%, same as that of the previous year. In reality, therefore, our gross contribution increased if we were to keep -- take aside the increase in freight, which is exceptional for this quarter, at the same time, the revenue mix. On the fixed overhead side, as the world is moving towards normalcy post the COVID global pandemic, we are seeing increase in travel, marketing and advertising spend, reaching close to the pre-COVID level. In addition, we also continue to make long-term investments in the digital platform; and for Q2, this was INR 81 crores. As for EBITDA, keeping aside the investment in digital platforms, which are long term in nature, we delivered EBITDA growth of 16% over that of the previous year, and EBITDA margins were at 20.1% for the quarter. The reported EBITDA stands at INR 2,045 crores, a growth of 13% over last year and the EBITDA margin at 19.4%. The finance cost for the quarter is at INR 359 crores against INR 343 crores in Q2 last year. Of this, the interest cost on borrowing has reduced by INR 67 crores over that of the Q2 of the previous year. As mentioned in the last quarter, where we had NPL mark-to-market impact on hedges, on advance orders, particularly in Brazil, these have been winding down with the execution of orders. In addition, the real depreciated during the quarter by 8%. It moved from BRL 5 as of 30th of September, BRL 5 to $1 to BRL 5.4 to $1 as of 30th September. On the tax line, the tax rate for Q2 was at 23%, higher than Q2 last year, primarily because of the increase in profit in Brazil as a result of reversal of mark-to-market losses from Q1 on advance orders as we start invoicing on the products with the beginning of the sowing season. Overall, full year tax rate is expected to be lower -- is expected to be at the lower end of the guidance of 15% to 18%. Net profit for the quarter stood at INR 633 crores versus INR 464 crores, which was lower than the market expectation mainly due to increasing factors as explained earlier. H1 performance highlights. On H1, there was again a strong increase in revenue with the overall revenue growing by 14%. Gross margins were marginally higher at 41.5% compared to that of H1 of the previous year. This, of course, was after considering the 2 impacts, as I mentioned -- touched upon earlier, which is the impact of freight costs as well as the regional mix. Without considering the above 2 impacts, the gross margin would have been at 43.4%, around 200 basis points higher than that of H1. Our fixed cost on investment and digital platform for H1 were at INR 124 crores. EBITDA without considering the INR 124 investment in digital platform is 14% versus H1 last year. And H1 EBITDA margin stood at 21.1%, almost at the same level as that of the previous year. Finance costs, which increased by INR 72 crores, is mainly attributed to the exchange impact and the NPV adjustment for long-term payables in line with the IFRS accounting standards. The interest on borrowing has gone down by INR 56 crores during H1. The effective tax for H1 is at 6.5% and will remain within the guidance range as mentioned earlier. Moving on to working capital. The net working capital base stood at 114 days, higher by 8 days compared to last year. The payables as of September 2021 increased by 14 days, while inventories increased by 12 days, and receivables increased by 10 days. We expect the net working capital base to be around 80 to 90 days by end of the financial year. Cash flow and debt position. As mentioned earlier, our debt obligation is being serviced sufficiently, demonstrating our commitment towards our bankers and stakeholders at large, and we remain committed to reduce our debt and maintain investment-grade credit rating. The gross debt and the net debt as of 30th September 2021 stood at INR 27,146 crores and the net debt at INR 24,279 crores. The net debt increased by [ INR 430 crores ] over that of the previous year's same period. However, it increased by [ INR 535 crores ] over March '21. We maintain our guidance to provide at the end of -- at the end -- towards at the end of the year to bring down the net debt to below 2x that of the net debt to EBITDA. Overall, we believe that we are well placed and will continue to deliver strong results. With this, I will hand over back to the operator to take further questions. Thank you.

[Operator Instructions]

Just one point before the questions. I just would like to talk about the perspectives. Say, overall, in another direction that nothing is impossible. We continued to maintain our full year '22 outlook despite our volatility, as highlighted in the Capital Market Day presentation in 2021. In continued collaboration with our customers and partners, we are trustful of achieving the higher end of our full year '22 guidance. It was set at a 7% to 10% revenue growth, 12% to 15% EBITDA growth and net debt-to-EBITDA ratio less than 2x. So it is -- we are -- very possible that we will be able to deliver that. Thank you.

[Operator Instructions] The first question is from the line of Rahul Veera from Abakkus.

Sir, just wanted some feelers about the current ongoing season in the Latin America.

Ongoing season in Lat Am. The -- if we get Brazil, the planting season starts, and it's moving very well. The weather is very good. Farmers are very motivated. The same for South Cone and Argentina. Mexico has had a very tremendous result in the Q1, but Q2 has recovered. And we are believing that Mexico will be able to recover the numbers as per budget until the end of March 2022. Say, in general, the Q1, Q2 for Latin America, except Brazil, had been more difficult -- except Argentina, South Cone and Brazil because of this drought in the Mexico and Central America, but we are very confident that our deliverables in Latin America.

Sure. And sir, in terms of the -- given the current glyphosate prices, how is the demand shaping up with all that?

I'd say this is a quite good opportunity for us now because glyphosate is the main herbicide in the world, the biggest use in volume in hectares. And with price of glyphosate moving up and scarcity, not availability, it's the many and shifting demand to products like our select or some other products that we have, our -- some of our solutions like a [indiscernible], like a glufosinate, like some of our -- even our pre-emergents, our [indiscernible] that we have just launched. Say, the herbicide perspective, it's very, very good and opened up a lot of opportunity for us. And some of our AIs, we are sold out because of -- the demand is very high.

The next question is from the line of Probal Sen from Centrum Broking.

With respect to the guidance that you again reiterated for the full year, H1 performance really clearly is running ahead of that as of now. So should we interpret the guidance as just being conservative as of now? Or is there some wrinkles that you see on the horizon because of which the revenue growth guidance is still maintained at around [ some ] 10%, where we are running at 14%, 15% as of now for the first half? That was my first question.

Yes. Thanks, Probal. I mean, as you know, we don't give guidance in the beginning of the year because things are changing. While, clearly, we do expect the revenues to be higher than what we have guided, which is 8% to 10%, there's no doubt, and we do expect also to have good improvement in EBITDA. But I'm sure you're well aware of the pandemic, which we are there seeing in the world in terms of supply chain and other things. Although we must -- I must say that we are very, very well covered because of our manufacturing assets that we have and most of the key products, we manufacture ourselves. So we are very well covered. So -- well, we are hoping for the best. As Carlos said, we'll certainly be at the upper end of the band. But we generally don't like to state the guidance in the beginning of the year. Although we are very, very optimistic to be -- if I have to say much about the guidance in both revenues, I mean.

Sure. Got it, sir. That's useful. The second question was with respect to the -- just on the domestic business or on an overall basis. Sir, what kind of product launches have happened in H1? How many new products have been launched? And what's the sort of schedule that we have maybe for the second half of the year?

I'd say we have launched products in a lot of different parts of the world now, and there are a lot of products to be launched in the next months until the end of the year. We are producing to keep our innovation rate in the range of 20-plus percent as we are keeping these launching in a very important way. One of the key launch will be our triple [ way ] mixture of fungicide in Brazil, Evolution. That is a really very, very unique product, a very unique formulation, very unique mixture, and we are very positive with that in the first year. And this product is part of the family of MMX that we have already launched many products in that platform, like Unizeb Gold, like Tridium, like Triziman, like Glory and now Evolution. And we have other ones coming in the near -- in the future, but that's -- it's moving quite good.

Yes. Again, if you ask specific about the India domestic product, we also have our Global COO, Farokh Hilloo, on the line -- CCO. So Farokh, can -- you can add a few more color to that.

Thank you. Thank you, Anand. We do have -- we have 2 ways, [indiscernible] and there is also [indiscernible] that we have produced [ to pull off ] in the mix as well. [ Have you seen them? ] So there are a few lined up. Once we launch and we would disclose more information about them.

Okay. Farokh, Thanks.

Question if I may. What sort of CapEx guidance have you given, if at all, I'm sorry if I missed that earlier, ex of any acquisitions that may [ have been completed ] for '22 and '23?

Our CapEx guidance was about $300 million to $320 million. This is, I would say, 60% towards product registration and 40% is towards putting up digital assets.

This is for this year, sir, this financial year?

That's right. This is for this financial year.

The next question is from the line of Girish Achhipalia from Morgan Stanley.

I have just 2 questions. One was just the pricing environment. How has that been within the inflation that we've seen? And are there any specific pockets in the second half where you think there could be some pressure continues? And the second was just a vision question around nurture.farm as to how do we look at what kind of CapEx or investments are we expected to do this year and next year. And how do we think about it sighting in medium term?

Thanks a lot. I'll take that. So as far as the pricing, there has been a complete disruption. UPL is probably the most backward integrated company in our industry. And there is a huge disruption of supply from China because of all the reasons which are well known, including power, the Winter Olympics and various other issues going on there. We feel quite confident that all the cost increase will be passed down to the market because there's just no way to be able to absorb some of the costs, which are increasing dramatically across the board. So -- and we are -- while there are some ongoing commitments, which have been made, but most customers are absolutely open to an understanding that the -- there is a kind of a force majeure in the environment, and we are able to see the price increases month by month. So we are quite comfortable with passing that through. As far as nurture.farm, it's an ambitious project, which is transforming the agriculture space in India with digitizing a lot of the aspects of their operations, and we are very happy with the adoption of our digital platform. Most of the services are being ordered, 90% adoption we've had on our platform for various aspects of our initiatives. And we are going to continue to invest about 50 million a year, give or take, for the next couple of years at least. And then we will review that.

The next question is from the line of Vishnu Kumar from Spark Capital.

[ Something ] back on the same question, margins, 2 questions. One, when do we expect some respite in the cost in China? Second, from a pricing front, should we expect some uptick in pricing in the next 2 quarters?

Maybe, Raj, you -- Raj, our Global Head of Supply Chain, is on the line. Maybe, Raj, you can answer the first part. And then Carlos can answer the second one.

Yes. Thanks, Anand. I mean we expect that China situation should normalize during the next calendar year, sometime early part of this calendar year. Because of this energy crisis, we don't see things getting any better at least until the end of this year, for sure. And next calendar year, we see some normalization happening. So that's on the cost side.

On the price uptake, Carlos, maybe you can answer.

Yes. Thanks for the question. It's a -- we have been increasing price in consultation with our customers. We are aware of the current situation to ensure that their requirements are fulfilled. So we have a very strong customer intimacy, and we have been able to sit down with the customers and work together with them to understand their needs, understand their problems and to make them understand our -- the [ momentum, too ]. And they are aware of that. They are aware of that, and we have been able to really ensure and work together with them to found the best solution, and these have been working in a very positive way. We are also trying to help farmers with alternative solutions like biosolutions, functional [indiscernible] technologies that we are working to help them to overcome this moment.

And Vishnu, just to add to what Carlos said, I mentioned in my commentary that, this quarter, we could start paying price in the -- somewhere from mid-August or -- and in September. So we did see the full impact -- we will see the impact of full price increases in Q3 and Q4 as we move forward.

Yes, yes. That is -- it's -- we have been able to manage that because of our relationship with the customers and the way that we care about that. And as Anand said, we will see that more effectively in Q3 and Q4.

Got it. So just one question on the taxation-related commentary in the notes with specific ones on the management and control from India. Which subsidiaries are there? And any potential impact that you could just highlight?

These are basically subsidiaries out of Mauritius and Gibraltar. And we don't -- we are challenging the orders -- I mean the information requests and other things because we do believe that there is no real case for us -- for them to raise these questions. So we'll be taking legal advice, and we'll be providing a reply to that.

The next question is from the line of Tarang from Old Ridge Capital.

Two questions from my side. One on the Chris Hansen collaboration. What's the significance of this? And what factors do you think that might have worked for Chris and UPL for this collaboration to come through?

I can answer that. So UPL is #1 company in the biosolutions place. We -- today, with our NPP platform, we are a market leader in most markets and most crops in the biosolution place. We have clear focus on that, and a company like Christian Hansen is looking for partners. In fact, they have actually walked away from existing relationships in some of the markets and moved their existing portfolio to us like in the groundnut market in Argentina. And our whole ProNutiva concept, which is a combination of bio and the traditional chemical business, is finding great acceptance among the agriculture sector. Also with our focus on sustainability and our focus on sustainable agriculture practices, this concept is being accepted very well. The OpenAg platform, which is really collaborative by its inheritance is something which is helping us really open doors with many other companies, not only Christian Hansen.

My second one is on nurture.farm. How are you generating awareness on this? And are there any competing platforms? And what's differentiating about nurture.farm?

Yes. So nurture.farm is a grassroot level. The awareness is with farmer, there is a direct contact. UPL has a huge presence on the ground. We have ProNutiva villages, which are platinum gold villages, where we have more than 70%, 80% market share there. Last count, there was close to 100 such villages. So we have a lot of grassroot connect at the farm. Our whole business is moving from selling products to selling outcomes, and we are -- with the nurture platform, we are actually working towards offering farmers outcome rather than just products. And that allows us to have a much more stronger relationship and also a much stronger, trustful relationship with the farmers.