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.