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

Hello, everyone. Thank you for joining us today for the results for the quarter and 9 months ended 31st December 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 team, we have with us today global CEO, Jai Shroff; group CFO, Rajendra Darak; global COO, Carlos Pellicer, global CFO, Anand Vora; global Chief Supply Chain Officer; Raj Tiwari, and Chief Commercial Officer, Farokh Hilloo. As far as the agenda is concerned, we will start with a brief overview from Jai; followed by a business update from Carlos; and a financial update from Anand. At the end of the presentation, people who are willing to ask a question can write it in the chat box available on your webcast screen, and we will take it over from there. With that, let me now hand it over to Jai.

Thank you, Radhika, and good afternoon, and a very warm welcome to everyone. Thank you for joining us today. On the onset, I hope you all and your loved ones are healthy and doing well in the unprecedented times. Before moving on to discussion on our third quarter performance, I would like to welcome Mike Frank. He is taking over as President and Chief Operating Officer of UPL Crop Protection business from 1st April onwards. Mike brings a deep industry knowledge and expertise from his years at Monsanto and more recently at Nutrien. I would like to thank Carlos for his tremendous contribution over the past year as Chief Operating Officer, during which the company has delivered significant growth. Carlos assumed additional responsibility and temporarily taken up the role of Chief Operating Officer until official last year, until we found a long-term replacement for Diego. With Mike now coming on board, Carlos will resume his original role of group strategy and continue to lead multiple projects under the OpenAg initiative, including post-harvest business, carbon and digital projects. Moving on to our financial performance now, over the past quarter and 9 months the entire sector had to deal with multiple challenges, including higher input costs, a sharp rise in freight and intermittent logistics or supply chain issues. On the positive side, the demand has stayed strong and we believe that these would stay strong for a while. I'm very happy to say the perseverance and unpairing effort of the entire UPL team, we once again have been able to deliver a strong set of results, surpassing our guidance. During the quarter, the revenues grew by a robust 24% and EBITDA by 21%, which demonstrates the resilience and the quality of our business model. Our diversified global presence, in-house manufacturing of key APIs, effective supply chain management and strong innovation rate results in the gradual transition to a high-margin differentiated and sustainable products, enabling such a strong performance even in these inflationary markets. As announced last week, on the -- one of our associate companies in Brazil, Syn Agro, which is engaged in distribution of agrochemicals and inputs has recently brought on board Bunge as a strategic partner. Bunge will acquire 33% stake in Syn Agro. Bunge is one of the global leaders in sourcing and processing and supplying of oilseeds and ingredients. We will enable Syn Agro to leverage the strong Bunge relationship with farmers, thereby accelerating its growth plans in Brazil. On our ongoing journey of reimagining sustainability, I'm happy to share that our efforts have once again been recognized and UPL has ranked #1 agrochemical company amongst its peers on sustainability performance by sustaining on its second time in a row in its 2021 ESG ranking. We successfully completed the first leg of crop residue program, covering 420,000 acres in North India through our digital platform, Nurture. With a very strong encouraging results, this pilot prevented 1 million tonnes of carbon dioxide emission from being released. We intend to expand this cover significantly to higher area next year and continue to invest on our digital platform. Finally, we look ahead to the fourth quarter, the demand for agrochemical continues to be healthy globally. We are confident of the year end this year on strong footing and already demonstrated and more than meeting our commitments. On that positive note, I will now hand over the floor to Carlos to take us through the business update and global operations. Over to you, Carlos.

Thank you, Jai, and good evening, everyone. The last 3 years have been truly special for me. We have been on an amazing journey, and I have been so proud to be part of it. Since the integration of Arysta exactly 3 years ago, we have transformed UPL into a purpose-led company through OpenAg and are now on the path to reimagining sustainability. In addition to deliver upon our financial commitments year after year, we have become the leader in sustainability amongst our peers with a customer-centric approach. In the last year, I assumed the responsibility of leading the global crop protection business in addition to my original role of global COO of Strategy & Innovation. As shared by Jai, after the end of the financial year 2022, I will refocus my full attention towards leading UPL group's growth strategy, leading the group for strategic projects under OpenAg. This have been possible since we have been able to find an excellent candidate in Mike to lead the global growth protection market. We are truly excited to have Mike in our team. Mike brings deep industry knowledge, a passion for environmental and economic sustainability and extraordinary end-to-end expertise. We could not have been choosing a better person to drive our business forward in the next phase of our journey. I would like to once again extend a heartfelt welcome to Mike. I'm now pleased to share some highlights for the third quarter financial year 2022. We continue to operate in a highly volatile and uncertain world, which keeps challenging us in new ways every day, whether these are in the form of supply chain or increasing input costs. We have been successful in providing solutions to address the pain points of farmers globally while also delivering strong our financial commitments. We take immense pride in the agility of our team, the strong cost relationship, unique backward integration and supply chain excellence. As part of our commitment to reimagine sustainability, we are excited about the recent announced collaboration of Syn Agro with Bunge Brazil as highlighted by Jai. This partnership is expected to strengthen Syn Agro's strong origination strategy to leverage complementary capacity of both companies. Some examples include the ability to strengthen fertilizer offers, improve risk management tools for barter and become a preferred partner in sustainable, traceable and certifiable production for farmers and end users. We would like to highlight some additional exciting news relating to our open collaboration front. Firstly, through our partnership with Meiji and Mitsui, we have obtained our first registration in India of our Flupyrimin based solution to address key pain points of rice farmers. Secondly, we continued our strong collaboration with Christian Hansen, and are pleased to announce that we will start commercializing the first solution in India after the next few months. Furthermore, our registrations have been applied in Brazil for a unique Nematicide composed of 3 strengths addressing significant pain points of farmers. Lastly, we have initiated the commercialization of the solution derivate from blockbuster CGPR multiple geographies as a result of our collaboration with FMC. Let's take a look moving now to the financial results. I am pleased to report that our revenue as well as our EBITDA for the quarter have been saw very strong robust growth. The revenue has rose by 24% while EBITDA has increased by 21% versus Q3 financial year 2021. The growth in revenue was led by significant improved price realizations coupled with a healthy volume increase. We have successfully achieved 43% gross margin, enabled by 13% price realization largely offsetting the inflationary achieving ingredients and increased freight costs. We have maintained our EBITDA margin versus last year despite lower contribution through optimization of our overheads. Our net working capital have improved to 108 days from 117 days versus last year. Additionally, our profit after tax have rose by 40% to INR 1.218 crores versus last year. Now let's look at the performance of our regions in the Q3. In LATAM, we achieved 22% growth led by our herbicide portfolio largely through improvement price. Additionally, our insecticides and our NPP biosolutions offering have also contributed to the revenue increase in the region. Brazil and Argentina have shown strong growth, also driven by herbicide. Mexico have maintained its revenue versus previous years despite the impact of drought followed by a hurricane causing high channel stocks. Other countries have also grown robustly over previous year. In North America, heavily grew by 57% this quarter as a result of a higher volume as well as improved price realization specifically due to upsides in herbicides. Further, improved commodity price type supply for key products and favorable channel stocks enable a strong performance. In Europe, we grew by a robust 26% versus previous year. This strong performance has been achieved through a mix of favorable volume growth and higher price realization. Poland in that region have delivered strong growth delivered by robust performance in mainly herbicide. Growth in France have been led by a herbicide in support by fungicide and NPP biosolutions. Italy grew through higher penetration of NPP biosolutions versus previous year. We also like to add this significant growth in Europe have been achieved despite revenue loss due to product bans. In India, we have been able to maintain revenue versus previous years despite several adverse weather condition, which has resulted in high tariff sales return, heavy rains post monsoon and the quarter led to declining key target crops. The Rest Of the World delivered a 15% growth in revenue versus last year despite the ongoing external challenges, including supply chain constraints. Southeast Asia, Australia and New Zealand have growth through improved pricing, higher volume and favorable product mix. South Africa have delivered strong results while still recovering from the warehouse disruption in July last year. Growth in China have been achieved through improved sales in the fungicide and insecticide categories. Japan revenues have been impacted by 10% depreciation of the Japanese yen and lower sales in our H&NS segment. As we anticipate in Q1, Q3 has been a very successful quarter for us. We will carry the momentum forward in Q4. And conclude our financial year with a strong performance that we will outperform our guidance from a revenue and EBITDA growth perspective. Q4 performance will be supported by strong demand for our herbicide portfolio and our continued pricing actions. In addition, we expect an accelerated growth from our NPP biosolutions and a continued strong performance from our differentiated solutions. We are also confident that the success of our upcoming new product launch include the Evolution in Brazil, [ Triscol ] in India, Preview in North America and CTPR-based solution in multiple countries. Before I hand over to our global CFO, Anand, to provide more detail on our Q3 financial results, I would like to congratulate our team for their amazing resilience, dedication, and unfazed focus to deliver such a strong performance in this quarter despite challenges on several fronts. Anand, please, can you take over now?

Thank you, Carlos. Thanks, and good day to everybody. I'll start by providing you with the key financial highlights for the third quarter and 9 months earnings and then take you through the financials in details. I'm extremely pleased to say that we reported a strong all-round performance during the third quarter, achieving robust growth in both revenues as well as profit [ after tax ]. Such a strong performance amidst a disruptive supply chain and inflationary environment is a true testament to the company's resilient business model. The Q3 performance highlights are as follows. Talking specifically about our year-on-year performance for the key financial metrics in Q3, we ended the quarter with revenues of INR 11,297 crores delivering a robust growth of 24%. This growth was driven by 13% increase in price realization and a healthy 11% rise in volumes. I must say here that the price realization growth this time has exceeded the volume growth probably a first in many quarters. It was also encouraging to see the company firing on all cylinders. The differentiated and sustainable segment continues to grow at a strong pace than the post patent segment And we saw growth across most key geographies, except in India. Most importantly, improved realization enabled us to cover the sharp rise in input costs and keep our gross margins intact at around 43%. Notwithstanding the 120 basis point increase in freight charges, our gross margins would have been above last year. On the operating profitability front, we delivered a robust EBITDA growth of 21% on the back of higher contribution and improved operating -- improved operating efficiency with our fixed overheads as a percentage of sales coming down by 100 basis points to 19% versus 20% in Q3 of last year. Our EBITDA margins for the quarter were stable vis-a-vis that of the last year at 24%. Further, we continue to make long-term investments in our digitization platform, and in Q3, the amount spent was INR 75 crores. We continue to reduce the interest costs. In Q3, the interest costs were lower by INR 61 crores. The FX impact in the finance costs saw a decline of INR 191 crores, while there was a corresponding increase in FX loss sitting in other income under the head of Other income of profit and loss account at INR 215 crores, resulting in a net loss of INR 24 crores, which essentially is the cost of taking the hedges. Robust growth in EBITDA, combined with lower finance costs, helped to drive 41% increase in profit before tax at INR 1,385 crores. On the tax front, that's the income tax, effective tax rate for the quarter was marginally higher at 12% as compared to 11% last year. As we have guided earlier for the full year, we expect the tax rate to be lower and to be at the lower end of our guidance of 15% to 18%. Overall, the net profit for the quarter stood at 18% higher at INR 937 crores versus INR 793 crores in Q3 of last year. Further, Q3 had exceptional items of about INR 52 crores on account of costs associated with restructuring, litigation and provisions for certain expenses relating to warehouse fire in South Africa. Moving on to the 9 months performance, financial highlights were as follows: during our performance for the first 9 months of the year, we delivered a healthy revenue growth of 17% over that of the last year, led by 6% higher price realization and 11% increase in volumes. As stated earlier, the improved margins in Q3 enabled us to catch up on the 9 months margin, and we expect to end the full year with better contribution margin than that of last year. EBITDA for the first 9 months continued to be robust and grew by 15% over that of the previous year, while our EBITDA margins were flat at 22% in spite of the inflationary pressures on cost, freight that was faced since the beginning of this year. We reduced the interest cost in 9 months by INR 116 crores. The FX impact in finance costs saw a decline of INR 103 crores while there was a corresponding increase in FX loss, which was sitting in other income ahead of the P&L of INR 405 crores, resulting in a net impact of INR 302 crores. On the whole, during the first 9 months of the year, we saw a strong year-on-year expansion of 24% in the net profits, and we ended the net profit at INR 2,247 crores for the 9 months. Moving on to working capital, on working capital front, though the working capital went up in line with the sales but we reduced our net working capital cycle by 9 days to 108 days as of December 2021 reflecting the efficiencies in managing working capital cycle. Inventories were higher by 3 days, Receivables were lower by 7 days and payables were higher by 5 days. We expect the net working capital days to be around 90 days by end of the financial year. On the cash flows and debt position, on the debt side, we continue to deleverage our balance sheet in line with our commitment. Our gross debt and net debt stood at INR 105 crores and INR 478 crores, respectively, at -- sorry, our gross debt and net debt stood lower by INR 405 crores and INR 478 crores, respectively, at INR 27,453 crores and INR 23,768 crores as of December 2021. We remain confident of meeting our guidance and bringing down the net debt to EBITDA to below 2x by end of Q4. In fact, I'm happy to share that in January 2022, we have repaid gross debt of USD 125 million, that's approximately INR 940 crores. Overall, as Jai and Carlos alluded to earlier, we continue to be well placed on the demand front and are confident to end the financial year with robust growth exceeding the earlier guidance. With this, we open the floor for question and answers. Back to you, Radhika.

So, there are questions on the chat now, then I'll sort of read out those questions and this will be answered thereafter. The first question in the line is, can you please help us understand the debt repayment schedule? And what is the quantum of the debt repayment UPL is planning to achieve during Q4?

So as you would have noticed, most of our debt are long-term debt, and we don't have any obligation to repay that until May of 2024. And -- but we will continue to repay the debt. And this year, we are targeting around USD 350 to USD 400 million of debt repayment, of which, as I mentioned earlier USD 125 million debt is repaid as of January 2022.

The next question is were there disruptions in supply chain of a competitor that was the reason for market share gains of UPL in North America. How much of the supply chain disruption is still visible going into Q4? And can UPL's resilient supply chain continue to gain market share in Q4 as well?

Carlos?

Yes, yes, yes. So we are really focused in the price realization and being able to manage the volatility because the volatility will be there. Now we know that this 2021 and '22, we believe that the volatility will be there. And what we have done to really be able to improve price in the level that we have will be consistent there, and we will be able to really manage that. In North America and in South America, the price of the commodities are so strong, and the farmers are really capturing value from their crops, and they will be willing to absorb this difference as we have had during the last months. I don't know, Jai, if you want to complement any thoughts on that.

Yes, I think the -- basically, UPL has a very integrated business model with a lot of the raw materials and finished product manufacturing in-house that has helped us to continue to gain market share because there is a self-reliance in that as far as supply is concerned, and that has enabled us to gain market share across the board. And we've had less volatility on our supply chain cost increase than maybe some of our competitors. As far as some of the challenges are concerned, we don't see any big supply chain concerns for Q4, except for the ocean freight where things are still historically high and getting -- the biggest challenge for the company has been on getting spaces on the ship and the hazchem containers. So that we have been able to even these tough situations. For the first 9 months, we had a fantastic growth. We have been able to garner a very large share of space on various lines. And that we are confident that even in Q4, we would be able to have that kind of growth [indiscernible] concerns.

And the demonstration of that is say we grew 11% in volume demonstrating that we are gaining share, and we are -- we have been able to manage that in a very focused way.

The next question is any upward revision in the revenue EBITDA forecast? How is the cost inflation expected to impact UPL? Can you also give details on your conversations with the rating agencies? And what has been the reason for the Q-on-Q increase in receivables sold?

Carlos, do you want to address the first two questions? I will take care of the interactions with rating agency as well as the receivables sold.

Yes, yes, yes. I'd say, we have been able to work with an amazing connection between supply and sales, and we have been able to connect very well the ability to pricing. So we have developed a work where the team in the field are completely connected with what is happening in the market. So that connection have given us the possibility to really arrive where we are today, that we are able to manage this volatility. And as Jai mentioned, this back integration that we have give us the possibility to be completely update what has happened in the cost base, in the cost perspective. And the agility side of UPL give us the possibility to really connect that end to end. So we have been able to strengthen our relationship with our customers even more in this moment too because it's a situation that's impacting everyone. And we have been able to use this relationship to manage that. So Anand, can you complement how we are working that with the next question?

Sure, thanks, Carlos. On the specific question on the engagement with the rating agencies, we continue to engage with the rating agencies and as committed to them at the time of taking the acquisition loan on conclusion of acquisition of Arysta in 2019. We have -- we are on target to bring down our net debt-to-EBITDA to below 2 levels. And we share with them on a regular basis, the performance as well as the cash flows of the company. So at this stage, we don't see any apprehensions from the rating agencies on our performance. In fact, we are already engaged with them on seeing if we can get a rating upgrade. As regards the receivable factoring, we have been engaging in this program of receivable factoring on a nonrecourse basis for the last at least a decade. And as we have shared in the past, this program is largely taken to derisk the organization. That's the way we look at it. Of course, in the last 3 years, when we did the -- when we took on the loan for acquisition, it did help us to reduce our debt, but largely, this program has been undertaken in order to derisk our business as when we sell the receivables on a non-proposed basis to the banks -- the credit evaluation of our customers or our receivables is done not only by us, that's the UPL credit team, but also done by the banks before they take it on their balance sheet. So it just gives us reassurance and it's one of the ways of derisking our business. We expect this year to have close to about $1.3 billion of receivable securitization being done by end of March 2022.

Is there any preponement of sales in North America, LATAM? Or are these, say, one-off sales that have happened in North America, LATAM because of the other competitors not able to fulfill the demand due to supply chain issues.

It's when we see the demand for herbicide, we have many different factors. So one of the factors and these impact LATAM and North America in a big way. One of the factors is weed resistance. So the shift in the weeds, the change in the types of the weeds in the fields are really transforming the demand. It's transforming what the farmer needs to manage their crops. And the second factor is that the [ lycosite ] price have increased price by 4.5x. So these two factors together came in the same time. And we have been able to read that, to understand that many years ago. Let's say, we -- when we choose the product line that we have today, have been choosed 5, 7 years ago, and we were already looking for what could happen. And nowadays, it's not by coincidence that we are having the results that we are having that was needed to supply and some of our competitors are not able to do that because we have read that much earlier to be able to back integrate our production, to be able to be more indefinite in the supply chain side, say, our ability to serve the pain points of our customers coming from this ability to anticipate farmer's pain points.

Thanks, Carlos. How much investments have you made in the digital platform so far? How much investment do we require? And how do we plan to monetize that?

So yes, the digitization of the agriculture is an ongoing process. UPL has invested, I would say, about $50 million to partake on the digital platform. The interface of farmers with using digitization is the only way to go forward in the future. This also brings us really close to understand the farmers' challenges. UPL is moving away from being a product company to a solution provider. And this is a journey which will be continuously there. The business will generate its return. So -- and as technology develops, this will be a continuous investment. Monetization, as we all know, it's an exciting space for investment as and when there is obviously a lot of interest in investment because we believe that our platform is the world's largest platform in ag tech. But we are continuously discussing and evaluating options. And as and when there is a good development, we would let the investment community know.

Thanks, Jai. Given the recent induction of Mike, acquisition in Indonesia, extending partnerships like Bunge, further to Chris Hansen in Q2, one gets a feeling that going forward, market access and distribution would garner precedence over creating manufacturing infrastructure. Is that the right inference?

Yes and no. UPL has overinvested relative to all our peers in manufacturing. This gives us a very strong supply chain platform and ability to manage costs and supply chain disruptions. We believe that we will continue to invest there, we will continue to partner. We have developed a lot of indigenous suppliers in India who are large companies now and on key strategic raw materials, for UPL. We will continue to invest and continue to invest both in as far as building a strong supply chain and access to the farmers and to our distributors.

Thanks, Jai. Southern Brazil is facing a lot of weather issues leading to yield losses. Northern Brazil also facing flooding we hear. What will be the impact on quarter 4?

We are not seeing an impact in quarter 4 because of that. What's happening is the hotspot areas in Brazil, Paraguay and Argentina that is having this severe drought, but the farmers are able to harvest basically 50% of their yield at least. And that level of harvest, you give them a possibility to at least breakeven, except some very specific region. And that is -- it's compared to the rest of the Brazil, parts of Paraguay and parts of Argentina, we don't see an impact in our Q4 because of that. And the other parts of the region are moving in a very good way. I'd say the results in the northern part of Brazil are exceptional. The yield is very, very high. So we are expecting a very strong Q4. And in other parts of the world like North America, Europe, Asia, we are seeing a robust Q4 perspective, too. So we don't see an impact for Q4.

What's the update on the FMC collaboration? When do we expect the first product rollout? And when are we expected to start supplying the AI to FMC.

Raj, would you like to answer?

Yes. No, our plants will go into operations towards end of Q4. And therefore, Q1, we expect the supplies to start.

And maybe, Carlos, you can update on I think in some geographies we already launched.

Yes, yes, we have already launched the product in different geographies like Brazil that we are starting our sales now in January, and the perspective is excellent, and we have the first launches in stand-alone products, but we have many mixtures coming on in a very interesting perspective because CTPR plus our solutions, actual solution like Perito, Sperto and other products have an exceptional combination together with our NPP solutions. So we will offer a very broad portfolio, and we can solve the caterpillar problems, we can solve the bugs problems. We will have completed the product portfolio. This will be a very important addition to our portfolio in the next months. And we have several countries that will come step-by-step during the next months.

Thanks, Carlos. The expected net debt reduction from FY 2021, the value.