UPL Limited analyst Q&A

Hi, this is Prashant from Elara Capital. Sir, how do we monitor liquidation globally? Is there any data-driven thing?

Yeah, so I think the question was how do we monitor liquidation from the channel? Yeah, so there are some markets where we do have access to panel data, which the industry shares, and we participate in that, so there's a few markets where we get near real-time information in terms of liquidation. I would say the more common method is through our sales reps, as they call on our distributors and retail dealers, that they talk about inventory levels, they walk the warehouses, and we consolidate data that way too. So, it depends on the market. Sometimes it's based on, you know, broad market data, and sometimes it's more based on internal market research. Is it possible to do something like one of our innovator competitors does, like your code- driven liquidation for better monitoring of liquidation?

Yeah, no, I think that's right. Like Mike said, I think it was primarily driven by the data from our sales reps and our field people. But what we've done is exactly what you're saying, is that we've launched a whole new digital ecosystem, where each and every product of ours is now QR-coded in India. We've implemented it recently. That should give us a very good idea of the secondary-level liquidation, which was a big pain.

Yeah, maybe just one last point. You know, so we have done some trials in certain markets where we pay the channel rebates. We talk a lot about rebates. Often in the past we would pay a rebate based on getting access to the shelf, and so, you know, the more they would buy, the more rebates they could earn. What we've realized is that, you know, a smarter balance is applying some of the rebate to the sell-out, and so now across the board in all of our markets, at least 50% of our rebates are on a sell-out basis. Again, this doesn't necessarily give us access in real-time to inventory levels, but at least by the end of each season, we do get reports on the sell-out and the current inventory level, which then allows us to apply a rebate to them. So that would be the other change that we're making to our market practice.

Attendee

Lastly, is it possible to incorporate that in our PPT going forward quarterly?

Probably not. Hi. This is Saurabh Jain from HSBC. So, I wanted to know whether the rebates and discounts, pricing adjustments, it's already been passed largely, or we still expect some to be coming in the next year? And also your views on the high-cost inventory?

Yeah. Hi, Saurabh. Good question. So, as we said in our remarks, I think both for the Global Crop Protection business and also in India, much of the pain that we took last year is behind us. I would say in high-cost inventory, over 80% of it got liquidated last year, and so there is a little bit that still is yet to be liquidated in FY25. Most of that should clear in the first half of the year. We're expecting that rebates and returns are going to normalize throughout the year. And so, we would expect the incremental hit that we had last year from higher rebates and revals and returns, that that is behind us, and FY25 will be a normalized year on that front.

Attendee

So just breaking it down, in the first half of FY25, can there still be losses at PAT level, and do you expect the EBITDA margins to be somewhere closer to 15-16%? Last year, first half, we had about 16-17% EBITDA margins.

Yeah, so what we would expect, again, in the international crop protection market, and others can make their own comments, is that there will be probably some volume growth, and so we would expect the volume increase of 4-8% to probably happen quite evenly across the year, maybe a little bit loaded into the second and third quarter. The pricing comparable in Q1 will be a challenge for us, specifically in the post-patent segment. So, if you think back to Q1 of last year, the prices were coming down, so in the post-patent segment, there will be some pricing headwinds on a comparable basis, and so we would expect in the first half of the year that there will still be a little bit of margin compression, especially at the contribution level. That will normalize in the second half of the year, and EBITDA will have a similar impact. Obviously, we've got significant SG&A savings that are going to apply on a full-year basis this year, so that will be helpful to EBITDA margins, but we're not going to guide on a quarter- by-quarter basis, but I think in the international crop protection business, you'll see EBITDA margins and contribution margins increase as the year plays out. So at least there won't be any losses at the PAT level? Can that be a safe assumption?

So, Saurabh, I think at least in Q1, the EBITDA margins will be lower compared to Q1 of last year. But as Mike said H2 is where you will start seeing the growth. Okay, one last question, if I may. So, fourth quarter, we reported about INR 900 crores of EBITDA in UPL Corp, about INR 175 crores at the Seed business, and EBITDA loss in UPL SAS. So probably somewhere INR 1,100 crores of EBITDA from these three businesses. The number that we have reported is about INR 1,933 crores. So, where that balance part of EBITDA is being captured, in which business and how?

It's captured at the group level in the formulation business, tolling business and our post- harvest business called Decco, our animal health business and the health and nutrition business.

Attendee

Okay. So, a large part of the margin is kept in the manufacturing entity, then you start to understand.

Yeah At least for this year, that has been the case.

Attendee

Okay. Thank you so much. All the best.

Attendee

Hi. This is Vishnu from Avendus Spark here. Just wanted to understand, the last 12-18 months has been very difficult for the industry. Going forward, is the industry going to structurally change, let's say, as a cumulative industry? The big ones, do we see the approach of all the companies going to be very different? Maybe the medium ones and the smaller ones, if you can talk about how the last 12-18 months is changing the view of the industry as a cumulative going forward.

I think the industry came off a period during COVID of extending very long credit due to very low interest rates regime and, you know, great demand for agriculture chemicals, little bit of instability of supplies from China, so there was anxiety and nervousness, so everybody was carrying a little bit of extra inventory. I think that swung completely the other way in this last one year, and I think everybody lost price discipline. I think going forward, all of the companies have had similar impact to what we've had, so I expect there to be a lot more discipline across the board. We have seen stabilization of prices out of China fluctuating a lot less than they were in the rest of last year. I think whatever numbers we see, everybody is stabilized, so the industry will start to normalize a lot more. I think all the companies are trimming their growth forecast, so we were also expecting a much higher growth rate in the next few years, so that's been trimmed, so everybody is adjusting their operating costs also. So, I expect there to be a normalization, kind of a new normal, but normalization and much better discipline in the industry.

Attendee

On the working capital, do you expect the industry to structurally think differently given the high inventory and the debtor days? Will that change this time or maybe after a couple of years it will go back to being a high working capital industry?

Yeah, I don't know what will happen a couple of years down the line, but at least right now I see all the companies restructuring. Most of the companies in our peer group, the bigger companies, are reorganizing their global setups, cutting costs, cutting down offices, shutting down offices, cutting down countries where they operate. So, I don't see that at least for the next few years. And there is not enough margin in the business to give higher than usual credit. So, I think the discipline will be there.

Attendee

And one last question, if you could discuss a little bit on your thoughts on the generics pricing from China. I mean, do they make money at these prices or if they were to return to profitability, when do you expect the situation to normalize or come to a level where the generics business would probably make money for a manufacturer?

So, I think we have seen the numbers from all the public companies in China. I don't think they are in a happy situation either. I mean, they have a little more patience than other people. But there is obviously pressure on everybody to improve margins and you will see that there too I expect. Hi. This is Abhijit from Kotak here. Thanks for taking my questions. First on the results, the Europe region and the rest of the world seem to have done particularly well this quarter. So, if you could please just help us understand what happened there. Just with regard to the recent floods in Brazil, is that a concern for our business there?

Yeah, so I would say if you take each market separately, Europe through much of last year was de-stocking. So, coming into the spring season, the channel was beginning to anticipate grower demand, so they were stocking up. So even though rains were excessive and there was flooding in the western northern parts of Europe, we still saw the channel ordering product, getting it in the warehouse and getting ready for the spring season. So, I think the growth in Europe is a natural growth based on the de-stocking impact leading into our Q4. I would say in the rest of the world there wasn't an impact on de-stocking. It's a market where there's still a huge opportunity for us to grow our business based on our current share position. I think a lot of our competition is de-emphasizing some of those markets because they're very fragmented. I think our ability to go to market and serve small holder farmers is second to none. Which is a lot of the rest of the world market. So, our performance across much of Asia and China and across African continent was really strong last year including in the fourth quarter. And maybe just a comment on the flooding we're seeing in the southern parts of Brazil, obviously that's very concerning. Thankfully none of our employees were directly impacted. Our partners in the channel also none of their assets were greatly impacted. So, we're paying attention to it. I think it's more of a humanitarian issue at this point in time and likely won't have a significant impact on crop production. There is some minor crops that have been grown in the region, but this is not major season for row crops. So, we are not expecting an impact on the overall crop row production in Brazil next year. Second thing on the over-capacity issue in some of your major molecules. You specifically mentioned glyphosate, clethodim, and S-metolachlor. Any recent developments in terms of rationalization in China or are there still capacities being added there? How do you see those molecules going forward and what percentage of your revenues do those contribute?

You know that S-metolachlor and glyphosate, these are very large molecules for us. We have large capacity, but we are also a significant player. Our captive volumes itself is large. Going forward, I mean, I really don't know what will happen in China, there has to be some consolidation of volumes or some shutdown of the volume because the world doesn't need that much of capacity, especially on glyphosate. On S-metolachlor, there doesn’t seem too much overcapacity. It is, largely in line with market needs. Yeah, so I think someone raised a point on the cost position of China and whether generics are making money or not. Now, whether somebody is making money or not, but, you know, out of our top 15 molecules, that we make, we are very, very cost competitive as compared to China. This is based on the data, which is the export data from China. Vis-à-vis that, we are very, very competitive. And, therefore, going forward on a normalized basis, margin should not be a concern.

Attendee

Thank you. One last thing from my side, just any further rebates or inventory write-downs that we should expect in fiscal 25, and also the overhead reduction plan, has that completely played out in the 4Q numbers, or is there more to come in coming quarters?

Yeah, so on rebates and high-cost inventory, as we discussed earlier, there will still be some liquidation of high-cost inventory coming into FY25. We believe most of that, or all of that, should really clear in the first half. And, again, I think from an overhead standpoint, you know, we made a commitment during FY24 that on a comparable basis, we would reduce our cost in FY25 by $100 million across the group, and we're on path to do that. Yeah. Hi, sir. Rohan here from Nuvama Institutional Equities here tonight. Sir, first question is on the debt reduction, which you mentioned, with a roughly 50 percent kind of EBITDA growth, which you are looking for this year, almost at INR 8,000 crore kind of number. We are talking about almost INR 3,000 to INR 4,000 crore rupees kind of debt reduction. Are you assuming any further capital raise here, because only from the operations, probably this number doesn't justify that we can reduce the debt up to that extent, or it's only primarily coming from the working capital?

So, it's a mix of both working capital and through the EBITDA, but this $300 to $400 million does not include any proceeds from rights issue or any other capital raise.

Attendee

Sorry, to raise this question on this forum, but in terms of capital allocation, we have seen that two years back, almost we came with a buyback offering to the investors while we were still quite a leveraged company. Now, we have seen that last one and a half years have been troubled for the industry, and we are again here probably looking for the fundraising opportunity, contrary to what we have done two years back. Do we learn something from here that probably a strong balance sheet is always the need of the hour, and does it change the strategy of the company, or the mindset of the board that we have been always looking for the acquisitions on the cost of the leveraging balance sheet and also, do we expect that going forward maybe over the next two to three years we can have a stronger balance sheet with less leverage going forward, or we still will have a focus on growth rather than balance sheet.

So, Rohan, I think we saw the presentation by all the four verticals, and you see all of them spoke about focus on improving the margins and reducing the working capital or generating free cash flow. So clearly this year the focus is going to be on generating free cash flow and the $300-$400 million of free cash flow which we expect to generate in FY25 will be used to reduce the debt. Also, as far as the rights issue proceeds are concerned, the objective is to repay the debt. So clearly the focus is on debt reduction. I think I would just only say that while with whatever we did, the buyback and other things, nobody anticipated the markets to, you know, sort of drop so rapidly and because as Mike, Jai mentioned, that this was an extremely unusual situation. We have not seen in the last 30 years such a scenario. So, I think clearly the entire management is now focused on improving the margins and reducing the working capital and generating free cash flow to repay the debt.

I think just to add to that, the focus is to, as you alluded in your question, is to make a strong balance sheet and really focus on our portfolio of companies, if you look at the whole portfolio, there are a lot of businesses, our differentiated product business, our Advanta seeds, even specialty chemical side, these businesses are generating high ROCEs. The idea is to really focus on growing those businesses.

Attendee

Also, is there any asset monetization because we have now made some structural changes with the four companies in our vertical, so is there any asset monetization opportunity along with the rights issues that you are also evaluating?

Yeah, so I think the idea of creating the platforms is to give the management teams very clear opportunity to grow their business and the idea is also to look at monetization opportunities for each of the platforms.

Attendee

Thank you.

Attendee

Rohit Nagaraj from Centrum Brooking. So, first question is on the collections. So, we have focused on collection. How is the industry reacting to it? Whether other people are offering more credit period and if so, particularly from Chinese players, will it have impact on our volumes maybe next year? Thank you.

You are right. That's a good question. We are focusing on collections. That's a very important piece for us. So, in the industry you would see there are three, four types of players. There are some players who had started focusing on collection two years back. There are some players who are working on it now. There are some players who had done it three to four years back. But we are very clear this is the path that we have taken. And we have very strong brands in India. Having said that focusing on collections would not mean a reduction in volumes.

Attendee

Anything on the global level?

The way I think about it is the whole supply chain went through a challenging 12 to 18 months here. It has really reset everything. If you think about working backwards from the grower, they typically want their inputs when they need them. They may procure the products two to four weeks in advance, but they don't really want it until a week or 10 days at the most depending on the region. In the past when interest rates were low, the suppliers, we were trying to get access to the shelf early so we were competing against our competitors to get access to the distribution shelf. We would be negotiating with the dealers up to six months in advance of when they needed to have it ready to sell to the grower. The retail channel also had a lot of challenges working through their high-cost inventory over the last 12 to 18 months. The whole retail channel and distributors also wants to buy their product as close as they can to when the grower is going to need it. That's bringing a lot of discipline. We also want to supply it close to when the channel wants it and when the grower wants it. For us to manage our supply chain we want to manufacture it as close as we can to when we need to ship it. When we think about improving our working capital, everything is coming together. I think Jai talked about discipline that is coming in channel because the channel wants to order it close to when they need it. Suppliers are managing their working capital. It’s always going to be bumpy as this is a big transition. We have been very clear with our channel partners in terms of how we want to serve them close to when the market is. We're lining up our supply chain to support that. That's one of the opportunities for us to release working capital through our international crop protection business. Second question is last year Q4 we had a setback because there was a sudden spurt of supplies from China. What has been the situation in the last four months of this year? Have we seen a similar kind of situation or is it better in terms of large quantities supplies from China? Thank you.

Yeah, so look, I would say it's not better in the sense that even since Q4 of last year the average selling price out of China has come down. Now, as Jai mentioned in the past really five or six months the price has been very stable. But it's stable at a very low level. So, from a planning process we're anticipating that those prices will persist through our next fiscal year. So that's kind of our base assumption. As Jai said at some point in time, we may see price increases out of China because at least based on current feedstock prices there's not a lot of room for prices to go down. But we're not in the business of predicting China. So, we're anticipating that this is the new normal and we're pricing accordingly and if in the future if there's some consolidation or prices go up then we'll be able to participate in that but again that's not baked into our guidance for next year.

Attendee

Thanks.

Attendee

Yeah, Nathan here. In seeds business was Q4 a bit exceptional because contribution margin has gone down to 48% as compared to normal 55%. And the second thing is related to R&D, what's the long-term thought process whether that 15% spend remains and what's the lead- leg relationship for coming out with products over growth?

So, regarding portfolio gross margin on the Q4, it has been impacted compared to what we were looking for. There's a natural low gross margin happening as we expand in lower value regions. There was some extraordinary sales that helped us on the top line, but impacted on the percentage wise, but we should be getting back on track on the volume. It's also important to understand what are the regions that we are serving in Q4. Mainly regions where we are having lower gross margins serving in Q1 or Q2. That would be on the gross margins. On the R&D, definitely, we are spending project wise. There's important aspects on the R&D that once you commit to a given operating there's no way back to create savings because operation will be done. So, we have been operating extremely consciously on what we are deploying, but definitely R&D is the core of our business and we will continue investing. I mentioned the importance of time, but time is nothing unless there's investment in improving our genetics. So, R&D will always be an area where we will, continue investing because that will create the pipeline for us to continue going in the future.,

Attendee

So sustainable margins will remain 55% plus for this FY25.

Yes.

Thank you very much. No more questions, then we can meet outside. Thank you.

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