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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.
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