Zydus Wellness Limited (531335) Earnings Call Transcript & Summary

[ Welcome ] to the post results teleconference of Zydus Wellness Limited for Quarter 3 Financial Year 2019-'20. We have with us Dr. Sharvil Patel, Chairman; Mr. Ganesh Nayak, Director; Mr. Umesh Parikh, CFO; and Mr. Vishal Gor, Senior Vice President, Corporate Finance at Cadila Healthcare Limited. The quarter gone by has remained a challenging quarter for the company in view of the overall economic slowdown and also exorbitantly high commodity prices of milk, refined palm oil and dextrose monohydrate, putting pressure on gross margins. During the quarter, the company has taken certain large-scale initiatives, outcome of which is monumental in terms of the various integration projects, which had been planned post acquisition of Heinz India Private Limited. We have successfully implemented 3 major projects that will leverage scale and build our organization to be future-ready. First, building a scaled up go-to-market. This will increase direct reach to double and reduce distributors from 1,500 to 800 with a reduced cost to serve. Second, supply chain. We are doing our CFA consolidation. It will help us reduce logistics costs through warehouse optimization and freight lane consolidation. We are reducing from 65 to 23 C&Fs for the company. Third, implemented a future-ready, integrated ERP system, SAP S/4HANA. This was one of the fastest implementation done in any FMCG company of this scale. Along with the parallel implementation of various projects, we have been able to deliver and ensure the momentum and steady state of the business. Our reported total income from operations on a consolidated basis grew by 128.8% to INR 3,327 million during the second quarter of financial year 2019/'20. Consolidated reported profit after tax at INR 42 million for the third quarter. Since the consolidated financial results for the quarter 1 of financial year 2019/'20 includes operating results of the acquired business, hence, the reported results are not comparable with those pertaining to previous period. Also, due to seasonality of some of the group's products, group's revenues and profits are skewed in favor of the first and the last quarter of the financial year. Hence, the performance of one quarter is not representative and cannot be generalized for other quarters. During the quarter gone by, our key brands, namely Sugar Free, Everyuth Scrub, Everyuth peel-off, Glucon-D and Nycil have been leading in their respective categories. Let me take you through the highlights of the consolidated financial performance of quarter 3 financial year 2019/'20. During the third quarter of financial year 2019/'20, our total income from operations has increased by 128.8% year-on-year to INR 3,327 million. EBITDA was down by 13% year-on-year to INR 327 million. Profit before tax was down by 112% to minus INR 55 million. Net profit was down by 89.3% to INR 42 million. With that, let me share some of the highlights of the operations for the quarter gone by. We've continued our thrust on marketing initiatives to grow the categories and increase market share for our brands during the year. To narrate a few: On Sugar Free front, during the quarter, we activated the safety ecosystem on the back of 360-degree campaign involving safety TVC on air, combined with PR on this subject. We scaled up medical marketing program to 5 cities in visiting more than 2,400 doctors on a monthly and a annualized basis, about 20 -- sorry, 6,500. On the Everyuth front, the brand continued to expand its footprint with the launch of e-commerce exclusive product, Micellar Cleanser. The brand continues to drive offtakes with TV campaign for peel-off. On the Nutralite front, during the quarter, we have seen good volume-led recovery on the brand. We continue to support it through sampling and other below-the-line activities. On the Complan front, we continue to invest behind the brand with a consumer-validated communication, highlighting Complan's nutritional superiority and by increasing media weightages in the key markets through multiple media. Complan partnered with Disney during the release of its film, Frozen II, and launched consumer offers, which were supported by other activities as well, including a TVC. As per the MAT December 2019 report of Nielsen, the sugar substitute category growth rate is at 8.9%. Sugar Free has maintained its #1 position with a market share of 94.6%. The facial scrub category has grown by 9.1%. Everyuth scrub has maintained its #1 position with a market share of 32.4%. The peel-off mask -- facemask category has grown by 15.3%. Everyuth peel-off mask has maintained its #1 position with a market share of 80.9%. The prickly heat powder category has grown by 9.9%. Nycil has maintained its #1 position with a market share of 34.5%, which is an increase of 255 basis points over the same period last year. The glucose powder category has grown by 11.9%. Glucon-D has maintained its #1 position with a market share of 59%. The MFD category has grown by 9.2%. Complan has a market share of 5.5% in this category. We hereby inform that the -- to the investing community that the budgetary support scheme under GST for our Sitarganj facility has ended on December 2019. As the company approaches the season for Glucon-D and Nycil, it has embarked on season readiness initiatives with the intent to start the season with fresh stocks. The company further plans to consolidate synergy benefits going forward. Thank you, and we will now start the Q&A session. Over to the coordinator for Q&A.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Sir, my first question is on Complan. So historically, this category has had very high gross margins. Now recently, we've seen a lot of inflation in the food raw material. So my question is, do you need to take pricing hike? Or you see operating at a lower gross margin so that there can be more offtake, so more focus on the LUP and no price hike because of the inflation?

What we've done is right now, we are maintaining the same prices. We are in a recovery phase for Complan. As we had reported, in the first 6 months of last calendar year, we had seen a decline in this brand. We're seeing a good recovery. We intend to maintain the prices for now. If the commodity inflation persists, we will take call in terms of both price increases and cost reductions. But as of now, for next 1 or 2 quarters, we don't want to change the prices.

And in terms of LUP, what is the percentage coming at LUP? And any plan you have longer term to have a particular number at LUP?

For Complan -- in fact, the whole MFD category has -- is quite questionable on the LUP strategy because of the low margin in LUP. And therefore, we are staying away from that. And that's how we intend to maintain today unless there is some change in the mix that comes up.

And could you talk about the synergy in chemist channel? Because historically, that's a channel where you can add value. So any benefits you have seen because of this? Are you able to push much stronger because of this benefit?

Absolutely. Distribution is going to be our big plus point when -- because we have been able to integrate the 2 sales systems together, we are seeing already a 20%, 30% increase in our direct distribution by just integrating the 2. And over the next couple of quarters, we'll be in a journey of expanding that. Chemist will certainly be a plus point for us in terms of leveraging it for the acquired products.

My second question is on e-commerce. So one of the other consumer company highlighted that the growth has slowed down significantly in e-commerce for them. Are you also seeing that? You also mentioned that you're having an exclusive brand for this -- exclusive product SKU for this. So what is the plan for that? Do you see a lot of offtake coming because of the exclusive brand?

For us, e-commerce, we are very bullish about it. We are seeing across the brands a good uptake on that. In fact, on Complan, we have a strategy where we believe there is a good upside on this. On Everyuth, in fact, we already have 6% to 7% of our sales coming from e-commerce, and this Micellar Cleanser, which we've launched should only help us. So -- in fact, in the $1 billion sale of Flipkart, we were amongst the top 2 players in face wash. So we clearly believe that e-commerce stays important to us. Micellar is just one of the first products we've launched. We've a couple of other products in the next 3 to 4 quarters, which we'll launch focused on e-commerce, and we're strengthening our capability there.

And sir, last question on personal care. A lot of the other companies have highlighted slowdown. Of course, winter was part of the reason which may not impact your segment that much. But other companies have highlighted that personal care has slowed down. But the numbers you have reported for the category, they don't show that slowdown. Is it because of urban? Or is it because of Nielsen, any specific data issue is there?

So there is a slowdown. There is always a gap between what we witness ourselves and what Nielsen reports, and I will let that be from a Nielsen. But yes, there is a slowdown. But we are seeing that we've been able to, in volume terms, stay ahead of the category growths internally from -- on personal care, though value-wise...

I think from the earlier growth, double-digit growth of the market, the market growths have come down. But for us, because we are a value player also, our volumes have kept up with the -- even though when the market has gone down, the volumes have kept up.

So the category has slowed down. That is true.

The next question is from the line of Kinjal Desai from Nippon India Mutual Fund.

I just wanted to understand, see, now with the new portfolio, we have a very different rhythm of our quarters. So -- and this is the first time that we will be also viewing this. Can you just help me understand like from a Q -- you said that Q1, Q4 are -- between Q1 and Q4, which is a heavier quarter for us?

Yes. So I'm talking about now the calendar quarter. Calendar quarter Q1 and Q2 are the heaviest. So H1 in the calendar is heaviest. And Q2 and -- Q3 and Q4 are the leaner quarters. So...

So Jan to June tends to be heavy...

Okay. So would it be -- hello?

Yes.

Yes. Would it right for me to assume that Q1 and Q2 together could make up more than 60% of the revenues and probably the EBITDA as well?

That's right.

60% of revenues. EBITDA even larger.

EBITDA is 90%.

Okay, fine. All right. All right, fine. That's really helpful. And sir, just one more thing on the -- we've also been doing a lot of integration, et cetera. There would be some kind of one-off costs, which will not get repeated in the next year. So for the 9-month number, would it be possible for you to ballpark give an idea how much are these one-off costs which won't get repeated?

Yes. That one-off cost is to the extent of INR 44 crores in these 9 months.

INR 44 crores?

Yes.

All right. And sir, lastly, how are we looking at A&P.? So I know -- because we just have about a Q-on-Q idea, but we have seen that A&P costs have come off on a Q-on-Q basis. So just basically some idea, some strategy, which you can help us understand how are we taking that forward?

So typically, for the annualized, we have a 15% kind of A-to-S ratio that we have planned to maintain. Now some of the things that happened in the quarter 3 of financial year is, there is practically no spends on brands like Glucon-D and Nycil, which also have a much lower sales. And that -- therefore, the mix -- the ratios change. Even our Nutralite is relatively lower spend. So it is a bit of mix, and we've also taken certain calls because with the commodity price being under pressure, so we've also taken some temporary calls as well. But our annual guidance, you can look at a 15% is a fair ballpark number that we would operate on.

The next question is from the line of Shirish Pardeshi from Centrum.

Yes. I have a few questions on Complan business. You have mentioned that INR 6,726 crore is the category size. This is December exit or this is MAT '19?

This is MAT '19.

Okay. And you've said that the category growth is about 9%. Will you be able to help us to understand what's the whites versus chocolates growth?

Of hand, I'll not have it available. Maybe you could reach out to us separately, I'll share that. Because we really don't look at just whites versus chocolates, but the issue has become further different segments.

No. What I'm trying to understand is the penetration. Do you have the penetration number handy? I mean, obviously, there is a lot of penetration...

No. We don't have it as separated for whites and chocolates. Separately, we will be able to give you.

No, no. I'm saying HFD penetration at this moment?

About 24%.

And what would be the Horlicks -- for us, Complan penetration?

So we can discuss a little bit of these brand level details. You can meet us and we can catch up on a separate call in brand level details because it will be a varying number at a national level. But for our focused markets of West Bengal, TN, the number is different. And therefore, taking a national number, one number may not be the most suitable number to share. So we work on more focused market.

Basically, when we were -- I mean I wanted to understand the Complan has a future ready -- I mean you have the brand, you have the background, you have chemist coverage which you have displayed. I mean what -- from 3 years' perspective, where Complan can fit in, if you can tell me in terms of penetration distribution or uptick?

So we clearly have -- I'll just put it in 1 or 2 lines, and we can have a more detailed discussion in a follow-up discussion. We're clearly putting all the fundamentals in place to grow this brand. The brand has a strong product story, which delivers a superior nutrition. Our go-to-market is now strong, like you said, in chemist place. We believe now we are -- and we are investing behind it. We believe we are ready for a market share expansion, which will happen, may not overnight, but will take over -- and we will also play in a wider segments as well as we go along and some of which will come over in the next few quarters. And that's how it will help us gain the share over the next 2 to 3 years.

Sure, sir. I understand. Just one quick question on Sugar Free. What is the volume growth we have got this quarter?

So the category, like I mentioned, the share at a MAT level is 8.9. Major portion of it is volume. There is a small portion of value also involved in this at a MAT level.

Okay. And on a 9-month basis, what is the price increases blended value growth we have got for 9 months?

So we have taken this year price increase about 4%, which is after almost -- which is going back to our 2015 pricing. Because at GST time, we had reduced it from a consumer point of view.

Okay. Just one last question on distribution. You mentioned the 3.75 lakh outlet coverage which you are planning. What is the current level of distribution we have?

So we used to -- if you're talking about direct distribution, we used to operate at 2.3 lakh to 2.5 lakh between both businesses. We already crossed the 3 lakh. Because of the combination, we believe, we'll be 0.5 million when the whole operations is complete over next few quarters.

And aspirationally, you're saying you will reach 5 lakh in first half '21?

Yes, yes.

Yes.

The next question is from the line of Kaustubh Pawaskar from Sharekhan.

Sir, my question is on the margins in that for first 9 months, now consolidating the Heinz portfolio, we have achieved margins of around 13%. Initially, when we acquired this portfolio, the margins were similar to what the base product -- or base portfolio margins were. Our Zydus margins were of about 20%. So I don't think that in FY '20, we would be achieving close to 20% margins, considering the integration costs and one-off items and all those. But in FY '21, can we expect the consol margins to reach to base product margins of around 20%?

See, currently, with our current understanding of the commodity pricing and everything, we are expecting between 17% to 18% margin. If the pricing -- commodity pricing eases down, then we could see improvement. But currently, our best estimate is between 17% to 18%.