UPL Ltd Q2 FY24 Earnings Conference Call Insights

Key highlights from UPL Ltd (UPL) Q2 FY24 Earnings Concall

• Revenue and Margins
  • Revenue declined 19% in Q2 primarily due to lower realization and price declines across regions.
  • Revenue decline was largely due to liquidation of high-cost inventory, higher than usual sales returns and rebates.
  • Herbicides like glufosinate, glyphosate and clethodim accounted for 70% of revenue decline, mainly in North America and Brazil.
  • Contribution margin declined 265 bps to 39.9% in Q2 due to inventory liquidation, higher sales returns and channel support.
  • Excluding transitory factors, H1 contribution margin would have been 300 bps higher vs last year.
  • EBITDA declined 43% in Q2 largely due to double-digit drop in contribution profits.
• Cost and Updated Outlook
  • Finance costs rose 18% due to 400 bps increase in benchmark interest rates.
  • FX loss was INR 229 crores mainly due to hedging costs and currency devaluation in certain countries.
  • Losses from associates rose INR 175 crores primarily due to decline in profitability at Sinagro in Brazil.
  • Full year revenue growth guidance revised to flattish vs previous year.
  • Full year EBITDA guidance revised to flat to -5% vs previous year.
  • Initiatives being taken to improve cash flow and reduce gross debt by $500 million.
• Portfolio Growth and H2 Expectations
  • Differentiated and sustainable portfolio grew 9% through strong volume increase.
  • Share of differentiated portfolio increased from 27% last year to 36% in Q2.
  • UPL expects strong performance from differentiated portfolio to continue in H2.
  • Foresees improved profitability in H2 as channel inventory normalizes and pricing stabilizes.
  • Cost reduction initiatives expected to deliver $50 million savings in H2.
  • Confident of EBITDA growing in H2 with overhead reductions and stronger volumes.
  • Expect strong volume growth in Q4 as destocking passes and distributors restock.
  • Fresher, lower cost inventory in Q4 will help expand margins.
  • Plans to generate over $1.2 billion in free cash flow in H2 and use cash reserves.
• Glufosinate Market Challenges
  • Glufosinate prices have come down significantly this year. UPL has lowered prices in North America to be competitive.
  • Expect glufosinate business to be challenged through this year but improve next year.
  • UPL does not expect much L-glufosinate sold outside China this year. North America will still be straight glufosinate.
• Net Debt Reduction and Inventory Liquidation
  • Aiming to reduce gross debt by $500 million by end of FY2024.
  • Slowing down capex and M&A, while improving working capital to generate cash.
  • Expect improved EBITDA in H2 to help reduce debt from H1 financing of working capital and losses.
  • Working capital should not require more financing with flattish sales and costs coming down.
  • Evaluating options to reduce factoring and replace with short-term borrowing.
  • Still liquidating some high-cost inventory from earlier in the year.
  • Costs started coming down in Q1 so will see benefit of lower inventory costs in Q4.
• Brazil Market Outlook
  • Expects strong demand for crop protection products in Brazil for the upcoming soybean season due to record planting areas of 45.5 million hectares.
  • Optimistic about sales in Brazil for the rest of the year due to high demand for herbicides, insecticides and fungicides.
  • New products like Feroce and Evolution are gaining market share in Brazil.
• India Business Performance
  • India business saw 27% volume decline due to weak cotton and pulses market where UPL has leadership.
  • Drought and floods affected key pulses growing states of MP, Maharashtra and North Karnataka.
  • 14 generic competitors entered the glufosinate market leading to volume loss but UPL maintained prices.
• Pricing Growth and Cost Optimization
  • Prices unlikely to reach 2021-22 levels soon due to excess capacities in China.
  • Value growth expected through volume gains, not price increases.
  • UPL announced a $100 million cost optimization plan.
  • $9 million cost reduction already achieved in Q2, most of the impact to be seen in H2.
• Regional Growth Outlook
  • UPL expects growth in most regions in H2 except North America.
  • Concerns in Australia and Southeast Asia due to dry conditions.
  • North America challenging due to price erosion and portfolio impact.
  • Q4 likely to see no growth in North America.