Ladies and gentlemen, good day and welcome to the UPL Limited Q3 FY 2025 earnings conference call. As a reminder, all participant lines will remain in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal the operator by pressing star, then zero on your touch-tone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anurag Gupta, Head of Investor Relations. Please go ahead, sir.
Thank you, Ryan. Good day, everyone. Thanks for joining us today for the results for the third quarter and nine months ending 31st December 2024. The presentation, press release, and the financial statements have been made available on the website, and we take it that you have read the safe harbor statement. From the management team, we have with us today Vice Chairman Rajendra Darak, CEO of our Global Crop Protection Business, Mike Frank, CFO Anand Vora, CEO of our India Crop Protection Platform, Ashish Dobhal, CFO of our Seeds Business, Advanta Shashidhar , CEO of our Seeds Business, Advanta Bhupen Dubey, CEO of our Specialty Chemicals Business, or Superform, Raj Tiwari, Farokh Hilloo, Chief Commercial Officer, and other members of the leadership team. We will start with Anand and Mike presenting the performance for the quarter, followed by the Q&A. With that, I now hand it over to Anand.
Anand, over to you.
Thank you, Anurag. A very warm welcome to all of you who have joined us today. The global crop protection market continues to see recovery, with the demand coming from across key regions. Channel destocking is largely over in major markets, and we consider this financial year, FY 25, as a year of recovery. The business performance for the third quarter shows a good bounce back and provides us confidence in maintaining our guidance on revenue, EBITDA, and operating cash flows for the full year. This is also corroborated by the year-to-date robust performance, which has sequentially improved over the past three quarters. Before we dive deeper into the financial performance, I would like to share updates on our two recent corporate actions. The first one is our rights issue, which was a success, with the issue being oversubscribed two times.
The allotment of $100 million, or INR 844 crores, representing 25% of the rights issue price, was received in December 2024. Additionally, the rights issue committee met on 24th January and approved the first call on the partly paid equity shares for another INR 844 crores. The record date for which was fixed for 30th January 2025. We expect to receive the first call money by the end of March 2025. The next update is on Advanta Enterprises Limited. We have signed a definitive agreement with Alpha Wave Global, under which they will invest $350 million, $100 million as primary investments in the company, and $250 million as secondary through purchase of shares from UPL Limited for an approximate 12.44% stake in the company. This marks the second investment in the enterprise by a global investor in the span of two years.
As an update, we are awaiting clearance from the Competition Commission of India, or the CCI, for a final go-ahead. We expect to receive the CCI approval by the end of February or mid-March. Now, let me take you through some of the key financial highlights for the third quarter. Revenues stood at INR 10,907 crores in Q3, a strong 10% growth versus last year. This was led by a 9% growth in volumes, a 5% in pricing, offset by a 4% decline due to Forex. The contribution for the third quarter stood at INR 4,476 crores, a strong 66% growth on a year-on-year basis. The contribution margin stood at 41%, which is nearly a 1,400 basis point jump over that of the previous year. This significant growth was driven by a better product mix, especially with the differentiated and sustainable segment, overall cost improvement, and normalization of rebates.
SG&A spend was INR 2,313 crores compared to INR 2,272 crores last year. The EBITDA for Q3 stood at INR 2,163 crores, a 4x increase over that of the previous year. The EBITDA margins were 19.8%, an increase of around 1,600 basis points from 4.2% in the last year's same quarter. Profit after tax, adjusted for exceptional items, associate income, and minority interest showed a healthy INR 828 crores as compared to a loss of INR 1,217 crores in the previous year. Let me share some of the key components leading to the net profit of INR 828 crores. We had a healthy EBITDA of INR 2,163 crores against INR 416 crores in the same period of the previous year. Depreciation and amortization at INR 689 crores was marginally higher than that of the previous year. Finance costs at INR 704 crores was marginally lower due to a drop in working capital and resultant reduction in borrowing.
Effects of foreign exchange losses stood at INR 108 crores, a sharp reduction from INR 613 crores in Q3 of the previous year, which, as you must be aware, included the Argentina devaluation. Income tax during the current period under review. The company has received a CIT appeal order for assessment year 2016-2017, providing a favorable judgment. Consequent to this judgment, the company has reversed the provision amounting to INR 592 crores, which was created in the previous year due to uncertainty over the allowability of some of the eligible expenditure. So, for this quarter, we are seeing a tax credit of INR 499 crores against previous year's tax credits of INR 59 crores. On associate companies and joint ventures, we have a charge of INR 278 crores, largely on account of losses from Sinagro and Orígeo, the two Brazilian associate companies. Moving over to the key financial highlights for the nine months.
Revenue for nine months stood at INR 31,064 crores, up by 7% year-on-year. Volumes were up by 14%, whereas we saw a price reduction by 5% and an exchange impact of 2%. Contribution stood at INR 12,239 crores, was up year-on-year by 13%, largely due to product mix, cost improvement, and revaluation normalization in the third quarter. SG&A at INR 7,356 crores were up by 1%. The EBITDA for nine months stood at INR 4,884 crores, a strong 36% growth versus last year, driven largely by higher contribution and productivity enhancement initiatives. EBITDA margins at 15.7% were up by 340 basis points over the previous year, which was at 12.3%. Based on the year-to-date performance and Q4 forecast, we are confident of delivering the stated guidance of 50% growth in EBITDA this year.
Profit after tax year-to-date was break-even, a significant improvement versus September 2024, and driven by the strong EBITDA in Q3 and the tax reversal as mentioned earlier. Moving on to working capital, net debt, and free cash flows as of the end of December 2024. I'm pleased to share that our working capital in December stood at INR 13,280 crores, INR 6,000 crores lower versus that of the previous year. This positive development was achieved through continuous focus on inventory management and tight credit control and improved collection. In number of days, net working capital stood at 107 days, lower from 155 days in the previous year, a reduction of 48 days. Inventory stood at 109 days, a reduction of 31 days, while payables at 111 days were lower by 7 days versus that of the previous year. The receivables at 109 days lower by 24 days versus the previous year.
We also saw a reduction in non-recourse factoring by 1,726 crores on a year-on-year basis, equivalent to 14 days lower than that of the previous year. As regards our debt situation, our gross debt reduced by $815 million year-on-year, that is INR 5,930 crores. As of December 24, the gross debt stood at $3.53 billion. In INR terms, 30,244 crores. On net debt, I would like to highlight that we reduced $745 million versus the same period last year, and also by $264 million versus quarter ending September 30th, September 2024. This is for the first time in a recent period where our December net debt was lower than that of the previous quarter. This was mainly due to significant improvements in our working capital management.
Overall, in the first nine months, our net debt was higher by $363 million, which is significantly lower than the $1.7 billion increase in net debt during the same period in the previous year. Cash and bank balance as of 31st December was $511 million, about INR 4,374 crores, as compared to $580 million in the previous year. It is to be noted that the net debt amounts and the cash balance include $100 million, that's INR 844 crores we have received towards the rights issue, which, as you know, the allotment was completed before December 2024. With this continued focus on working capital improvement, we are on track to achieve our target of $300 million-$400 million of operating free cash flow.
With this, I hand over to Mike to take us through to UPL Corporation Global, UPL's global crop protection business, and where Mike will provide more details. Over to you, Mike.
Thank you, Anand. Hello, everyone, and welcome to our third quarter FY 25 earnings call. It's great to connect again with all of you. Before we review the quarter, I'd like to share my thoughts on the crop protection market. The global crop protection market continues to rebound as farmer and dealer buying patterns are now reset. Channel destocking is largely complete in most major markets, and we continue to see normalized ordering patterns with good farm gate demand and a healthy balance between channel stocking and farm gate usage. With active ingredient prices now stable at the current levels, our considerable focus on process efficiencies has significantly contributed to improving product and EBITDA margins. Additionally, we continue to remain focused on profitably increasing our market share, as evident from our industry-leading volume growth.
This continues to demonstrate the effectiveness of our customer engagement model and the value in our offerings. I'm pleased to highlight that our focus on operational excellence has positively impacted working capital, specifically through inventory optimization, tighter credit controls, and reducing receivable terms. The year-to-date success that we have had with working capital improvement will help us drive towards achieving our full-year free cash flow guidance. Let's now turn to the quarterly performance. Our third quarter results show a strong bounce back and give us confidence to maintain our FY 25 guidance on revenue, EBITDA, and free cash flow for the full year at the group level. This is also supported by our strong nine-month performance, which has sequentially improved over each of the past three quarters. I'm pleased to share that our third quarter revenue was up by 15% versus last year.
Growth was led by continued higher volumes across key regions such as Latin America and Europe. Among major segments, fungicides continued with a robust performance. In Brazil, Mancozeb volume was the prime driver, and in Europe, Proxanil was a contributor to our growth. Our insecticide portfolio in the third quarter was driven by higher Acephate volumes in Brazil, partially offsetting the pricing challenges in the first half of the financial year. Herbicide growth benefited from rebate normalization versus the previous year, mainly in North America. However, we also had volume growth in this segment across a few regions, led by strong in-season demand for our products. Revenue growth in our NPP business was driven by a mix of improved pricing as well as higher volumes, led by biostimulants in both Europe and Brazil, and additionally, growth was supported by biocontrol volumes in Europe.
Our contribution margin for the third quarter has shown a remarkable turnaround and demonstrates our ability to earn margins in the current environment. Overall, margin improvement has been led by improved product mix, mainly in the differentiated and sustainable segment, COGS improvement, and lastly, normalization of revaluation, primarily in North America and Brazil. I'm pleased to highlight that with this strong performance, our year-to-date contribution margin has grown by 470 basis points. Importantly, we grew our differentiated and sustainable volume by 16% versus last year, led by Mancozeb-based three-way Evolution in Brazil and Acephate-based Feroce, also in Brazil. We also witnessed a strong margin improvement in our NPP portfolio. We are encouraged by this trend and the continued strong adoption of our products by our customers.
Turning to SG&A, our focus on productivity enhancement initiatives has led to a reduction in overheads of around 5% in Indian Rupee terms in the third quarter versus last year. Moving to our regional performance for the quarter, in Latin America, our revenue grew by a robust 12%, led by higher volumes but offset by exchange impact in Brazil. Brazil was led by Mancozeb as well as Acephate-based Solo and mixture products. Growth in Evolution and Feroce also led to improvement in the overall differentiated volumes. In other parts of Latin America, volume-led growth was partially impacted by continued pricing pressure. North America continues to experience strong demand for our products, with channel inventories and rebates normalized in the region. Among key AIs, herbicides such as S-Metolachlor had good volume growth. Overall, the region grew by a strong 67% versus last year.
Europe's revenues were up by 23%, driven by strong volumes in fungicides such as Proxanil, which is a premium product offering for preventative and curative disease control in potato crops. Additionally, our NPP products had a strong growth versus last year in Europe, driven by volumes while also delivering margin expansion. The rest of the world was down by 4%, primarily from pricing pressure. Regions such as Africa, Australia, and China faced some headwinds in this regard. Now, turning our outlook for Q4 and the full year FY 25, we expect headwinds related to softness in ag commodity prices to continue and prices of key AIs to remain stable and range-bound.
In spite of this, and as demonstrated in Q3, the tailwinds from our refreshed inventory, our strong focus on operational excellence and efficiency, all combined with robust grower demand for our products, we believe this will power our ability to compete aggressively and deliver on our EBITDA and cash flow commitments in Q4 and for full year. The team remains focused and disciplined on SG&A, and we are further evaluating efficiencies in our operating model. Overall, we continue to focus on our energies on margins, which have started to improve from the third quarter. This is expected to continue in the fourth quarter, with second-half margins outperforming the first half of the year, mainly due to the reasons I highlighted earlier. Our new product launches for this financial year remain on track, and we expect to deliver $85 million from these NPLs.
Our attention on cash generation remains a priority, and we are further optimizing our inventories and other working capital items as seen in our results. So, in summary, I see this quarter as a period of recovery with strong volume-led growth, lower headwinds in general for pricing, and overall COGS improvement, resulting in superior EBITDA. The key highlight, however, remains the significant improvement in our working capital. I want to thank our team for the dedicated efforts and our valuable channel partners for our strong overall performance in this quarter, and I'm confident we will deliver on our financial commitments in the fourth quarter. I'll now hand it back over to Anand, who will take you through the updates of our other platforms. Anand, over to you.
Thank you, Mike. Let me also provide a quick update on our other three platforms. That's the UPL Sustainable Agri Solutions, the India Crop Protection Business, Advanta Seeds, our seeds platform, and the newly formed specialty chemicals and manufacturing platform, Superform Chemistry Limited. I'll start with UPL SAS, which we saw a recovery in Q3 with revenues at INR 535 crores, up by 44% year-on-year, driven primarily by higher volumes. This has been achieved through high liquidation of inventory, cautious placement closer to the season, and lower inventory return. Additionally, our growth was also supported by higher NPP volume, that's the natural plant protection products, as well as selective post-emergent herbicides, along with steady Rabi placement, which continues to indicate good consumption of our offering at the ground level. At contribution margins, we improved by 530 basis points to 16.9% versus 11.5% in the previous year.
This accretion was driven by new launches, better pricing, and superior product mix. Our platform SG&A was INR 114 crores, nearly flat versus last year, driven by overall cost efficiency, while our EBITDA is still in the red at negative INR 24 crores for the quarter. It is a significant improvement versus last year, where it stood at negative INR 70 crores. On working capital side, normalized inventory levels and tighter credit control helped improve receivables and overall lower working capital requirements. For the nine-month period, revenues stood at INR 2,552 crores, 6% higher than last year, 500 basis points higher contribution margin versus that of the previous year, and EBITDA at INR 348 crores is over 100% higher than that of the previous year. EBITDA margin at 13.7% was 650 basis points higher than that of the previous year.
We expect to sustain growth in the fourth quarter with margins in line with year-to-date figures and overall better cash flow versus that of the last year. Moving on to our seed platform, Advanta Seeds. After a rather challenging H1, the seed platform saw good improvement in the third quarter with a robust revenue growth of 11% versus that of the previous year. This was supported by a mix of higher volumes and better pricing, along with favorable FX impacts. The key growth drivers were grain program in Argentina, sunflower in Argentina and Europe, and corn in India. Overall, despite good growth in revenue, we maintained flat contribution margins with margins contracting by 615 basis points, primarily due to unfavorable cost mix as well as lower recoveries due to higher input costs.
EBITDA was down 15% versus last year at INR 223 crores due to lower contribution margins and conscious strategic investment in R&D and marketing we have been making to support our growth. We continue to maintain focus on margin improvement and cash generation in this segment, and are confident that this momentum is expected to yield favorable results in the fourth quarter as well. To sum up, we have delivered a strong third quarter with a good improvement across all key indicators. Our revenue growth at 7% in nine months is on the higher side of our stated guidance. Further, our EBITDA growth in nine months has been 36%, and we are on track to deliver 50% growth in EBITDA over that of the previous year, considering our forecast for Q4.
With our success so far in reducing our gross and net debt versus last year, we are confident of achieving the operating free cash flow guidance of $300 million-$400 million. Further, with the rights issue amount of $200 million, roughly about INR 1,600 crores, and the Advanta seed proceeds of $350 million expected within this year, we expect the net debt to EBITDA ratio to be around 2 for the full financial year. With this, I hand over back to the moderator, and we are ready to take questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use their handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question comes from the line of Abhiram Iyer from Deutsche Bank. Please go ahead.
Hi. Congratulations to the company on a strong set of numbers. I had two questions. One was, could you let us know what your incremental cost of debt is at the moment? And the second question is, pertaining to your upcoming perpetuals, has the company taken any plan of action to address these?
So cost of debt is roughly around 7%. That's the average across all the debt instruments. We have bonds, and we have bank loans. On the perpetual, we keep a close watch, and we'll be taking, as you know, most of our cash flows come in Q4, the operating cash flows. We have raised the rights money, and we are also expecting cash inflow on the Advanta monetization. So we'll be taking a decision closer to the, I would say, next couple of months, we should be taking that decision.
Thank you very much.
Thank you. The next question comes from the line of Siddharth Gadekar from Equirus. Please go ahead.
Hi. So congrats on a very strong performance. Can I ask three questions? First, on the rest of the world, the revenues or the rest of the world revenues have declined by 22%. Can you just give a breakdown of what has driven this growth in the rest of the world?
Mike, would you take that?
Sure. So on the rest of the world, from a crop protection standpoint, our revenues were down, not by that magnitude. I would say, obviously, the rest of the world is a very large region for us. We did see some softness in the business in China as well as Australia in the third quarter. And in a few African countries, as we wait for some tender business to materialize, we also had seen that get pushed from Q3, our Q3, and now we're expecting them in Q4. So yeah, so for the rest of the world, from a global crop protection standpoint, the business was down a little bit based on those issues, and I would say continued pricing headwinds for some of our products. Maybe it would be good to hear from Bhupen on the seed business as well.
So let me take this further. Basically, you saw that most of the currencies got impacted, and as the dollar strengthened immediately after the nomination of Trump, we did see some impact, largely coming in currency, especially, as you know, we report in INR. So that is one of the major reasons also for the sharp decline. As Mike rightly alluded, in dollar terms, we did not see as much drop, but in INR terms, we saw a significant drop.
Just a second question is on the cost side. We have just highlighted that over the last 12-18 months, we have improved a lot of our processes. So can you just quantify what is the quantum of improvement on the cost side because of our process efficiencies and reduction in SG&A?
Raj, will you take that? The cost efficiencies and other things on the production manufacturing side?
Well, I mean, that's a continuous exercise. On the manufacturing side, we have substantially done work in terms of reducing the cost, of course, because of raw material, but also because of the variable cost optimization. We have also optimized our fixed cost in the factory, both in terms of headcount as well as in terms of power, which is utilities, right? But on UPL crop, Mike, you have some more colors to give?
Yeah, the other part of the question was just on SG&A efficiencies. And so this has been an area across the enterprise where we've been, I think, really diligent in looking at our target operating model and finding ways to become more efficient. A lot of those efforts are now complete, and our current run rate should be in effect going forward. That being said, we're always looking for additional ways to drive efficiency, whether it's from AI tools or other things. So our views, we're never finished. From an SG&A standpoint, we're always looking for more ways to become more efficient, but we're quite pleased with the progress that we've made over the last 18 months and giving us a new level of cost that really allows us to compete in the marketplace.
So the last question is for Anand. Given the kind of net reduction that we have seen in this quarter, are we still sticking with the same $300-$400 million free cash flow, or there could be some upside to that?
No, I think we saw a good reduction in the working capital, and we still have some ability, as I mentioned earlier, that even our non-recourse is at lower than last year. And we had guided for $1 billion of non-recourse securitization. So that should give us an ability to raise further free cash flow. But at this stage, we are sticking to the $300 million. Whatever upside comes, of course, we'll be using that to repay the debt also.
Thank you so much.
Thank you. The next question comes from the line of Somaiah from Avendus Spark. Please go ahead. Somaiya, if you can please unmute from your end and ask your question.
Yeah, sure. Thanks for the opportunity, sir. So first question is on the pricing part. After six to seven quarters, we are seeing a positive growth on the pricing front. So you can give some color on that. So this is, I mean, you've been saying prices are being kind of stabilizing. So we have now been able to take price hikes. So the trajectory has moved from more of stabilization to now kind of a growth mode. And how do you see it going forward next quarter?
Mike, would you take that?
Yeah. Sure, so look, from an overall pricing standpoint, we did see positive progress in Q3. That was largely based on comparing last year's Q3, where we had abnormal rebates and some high-cost inventory returns, so I would say if you look at our overall price performance in the quarter on a product-by-product basis, we're basically seeing now relatively flat pricing, so we're getting some price lift based on mix, and so as we drive more of our sales to our differentiated and sustainable product portfolio, that's giving us a mixed lift in price, but generally speaking, across the portfolio, prices have largely stabilized, and we're not in a cycle yet where we're seeing prices tick up.
Got it. Also, on the different regions, if you can just give a color on, is the channel inventory getting over? Is it same across regions as the status? Or is there a differentiation between, say, U.S. and LATAM? And also in terms of pricing climate between both these regions, is it similar or is there any difference?
Yeah. So from an inventory standpoint, as we talked about in the prepared remarks, we believe that for the most part, in most regions, the destocking has been complete. And there's good balance between what dealers and distributors are buying and what they're selling then to the farmers. And so there's always going to be some exceptions to the rule based on price or timing of when a season takes place. But generally speaking, we now believe we're in a balanced supply to the channel and the channel sales to the growers. And so the destocking is largely complete. I would say from a pricing standpoint, again, in the post-patent segment, those prices have been reset. They really started to reset over 12 months ago. Again, we're seeing relatively stable pricing now across the post-patent business.
In the differentiated and sustainable portfolio, which is our high-value segment, again, we're seeing very strong volume growth. We're seeing good demand for those products. We're seeing our margins continue to grow in that segment. But that's more a result of cost of goods improvement and efficiency efforts, whereas, again, prices are relatively stable in that segment as well.
Got it. So just one last question from my side. Answer on CapEx outlook, how we are thinking about?
I think we have put some strength this year. As of date, we have spent about INR 1,200 crores of CapEx, which includes the acquisition of, it is a small acquisition, as you know, from Corteva of the Dithane brand. But so against a budget of INR 1,800 crores, which we had set at the beginning of the year, we hope to be below that, about INR 1,500-INR 1,600 crores. So there would be some cash flow protected out of the CapEx spend, what we had budgeted for. I guess for the next year's guidance, we'll review based on what happens by the end of this year, and then we'll take a call on the next year.
Thank you.
Thank you. The next question comes from the line of Ankur Periwal from Axis Capital. Please go ahead.
Yeah. Hi, sir. Congratulations on a good set of numbers, and thanks for the opportunity. First question on the overall competitive intensity, especially in Latin America, let's say Brazil. We have shown a YTD growth here, but if you can pass comment in terms of the pricing competition there and the pricing uptick that we have seen, which geography would have contributed to this 5% year-on-year growth that we saw in this quarter?
Yeah. Thank you, Ankur, for the question. Again, the pricing uptick in this quarter is really a result of the normalization of the rebates and the elimination of high-cost inventory, which was really liquidated to a large degree last year at the same time. So from a product-by-product basis, our prices are relatively stable in the market. But of course, with fresh inventory and now that we're running with lower inventory levels, that is also helping improve our margins. Now, from a competitive intensity standpoint, I would say every market has a high degree of competitive intensity. I don't think that Latin America or Brazil is unique in that way. In every market, as you can see from our volume performance, we are growing volumes. I think we are growing volumes at a faster rate than the industry. And so we're very much focused on profitably growing our market share.
We've been successful doing that based on really our customer engagement model. In Brazil, as you know, we have a number of models where we work with the co-ops very closely and large distributors and dealers. We also have the Orígeo platform, which is a partnership with Bunge, where we go direct to very large growers in the Mato Grosso area. That model is also proving to be successful. So our unique approach in each market with a really strong focus on how do we engage with customers to create value for them and for farmers, that model is playing out, and it's helping us with our market share growth.
Sure. Thanks for that. And just a second bit, there is a minority interest that number from a negative has turned positive. And similarly, the associate share profit, there is a sharp jump there, Q1 FY as well as FY24. Just some thoughts there on how to look at both these line items going ahead and for FY26?
So basically, on the associate, we report, at least for our two major associates in Brazil, that is Sinagro and Orígeo, we report with a quarter delay. So last year, of course, was first year. And as you know, this year, the season also started a bit late. Last year, we had a small profit, which is reflected in the numbers. Whereas this year, due to delay in the season, we had losses both in Sinagro and in Orígeo, which we hope to recover as the season comes, as we report for December quarter in next quarter, as well as for the full year in the subsequent quarter. We expect to recover part of these losses which we have incurred. So largely, these are because of our losses in our Brazilian associate.
Sure. And just on the minority as well. Thank you.
Yeah. I mean, on the minority interest, obviously, we have to, whatever is the last gains or losses, we have to keep them. There's a minority interest, as you know, in various of our platforms. We do have shareholders like in case of UPL, KKR and we have ADIA, TPG, which owns 22%. And in case of our seed platform, it's KKR. And in case of India, you have Brookfield, KKR, and ADIA, TPG with 9% holding. So throughout, they would be sharing the losses as well as the gains.
Sure. Thanks for that and all the best.
Thank you.
Thank you.
Thank you.
The next question comes from the line of Himanshu Porwal from Seaport Global. Please go ahead.
Hi. Good afternoon and congratulations on strong earnings. I had a couple of questions. So first is with regard to the perpetual callables. I think I might have missed them when you were answering somebody's question. If you can please provide a guidance on the likelihood of these being called in February. And secondly, if you can confirm and clarify the amount of rights issue proceeds that have already been completed. Because I see headlines of around $400 million being approved, but I guess not all of it has been conducted yet. So those are my two questions. Thank you.
Sure. So let me take the second one first, and that probably partly should answer the first question itself. On the rights issue, you're right. We made a $400 million rights issue. And in Indian context, you're allowed to call for part payment towards the proceeds of the rights issue. So on allotment, we called for 25% of the rights issue, which is $100 million. Equivalent is INR 844 crores. We have also, the committee has also called for the first call of another $100 million as of 30th of January was the book closure date. And this decision was taken by the committee on 24th January. And we expect to get the money in by March.
In our business, Q4 is when we see a large part of our cash flow from the operations being coming through as we get our receivables, money against our receivables, as well as we sell for what we have sold in LATAM as well as in U.S. and Europe. So we are closely monitoring the situation, and we expect to soon come up with the announcement as regards to the perpetual, whether we will go for repricing or we will call them back. So that's as of now our position on perpetual.
Understood. That's all clear. Thank you very much.
Thank you. The next question comes from the line of S. Ramesh from Nirmal Bang Equities. Please go ahead.
Thank you very much and good evening. Congratulations on the good results. So if you were to look at your net-net-to-equity guidance of 2X, does it include the perpetual bonds on the debt side, and are you excluding the factoring? And what are the rating agencies considering to calculate the net debt? Are they including the perpetual in their net-net-to-equity calculation?
No. So, Ramesh, thanks for joining in. Perpetual bonds are part of net worth, so they are not included in the debt. As regards your non-recourse securitization, the rating agencies add them back as debt. As far as the banks are concerned, they don't consider that as debt. So what we are telling you is what the bankers look at, which is the simple calculation of net debt to EBITDA, where non-recourse securitization doesn't form a part of the debt.
Okay. Now, a question to Mike. In terms of the structure of the industry, if you look ahead and consider that you would have to depend pretty much on volume growth, what is the sense of comfort you have in terms of capturing most of that on the top line and maintaining working capital discipline to achieve a stable and improving ROC? How do you see that for the industry and for UPL?
Yeah. Thanks so much. So look, I think as we look forward over the next 12+ months, I think from an industry perspective, there's going to continue to be pressure on the price side. At this point in time, our base case planning scenario is that we won't see a change in the export price out of China. Obviously, that could change at some point. It's not a sustainable scenario where there's overcapacity and prices are basically being sold at or around the cost of goods. And so at some point, that will likely change. But in our base case scenario, we're not assuming that in our planning. And so I would say there's a, if that plays out, I think from a pricing standpoint, there's going to be a limitation to the ability to see much change in price.
Again, if you also overlay the fact that grower economics right now are stressed, I think the growers are really looking for every opportunity to look for how they can save money and really invest in high-quality, high-value products, which again, I think that's where we're also winning from a market share standpoint. To your second point regarding working capital, obviously, that's been a large focus of us this year. And it's really around our process improvements and using new tools, both AI and data and analytic tools to really hone in on demand forecasting, lining up our production with a more just-in-time approach so that we are delivering products to our customers right when they need it. And so we're going to continue with that discipline. So I believe the working capital benefits that we gained this year will continue as we go into the next season.
Thank you. Just one last thought. As you look at the gross contribution and the growth in EBITDA margin, how much of this is sustainable, and to what extent will you be able to continue to gain from the decline in input costs? How do you see that?
Yeah. Again, from a base assumption standpoint, we have seen that we're in a fairly stable environment right now where cost of goods as well as the export prices that we track out of China are running quite stable. Obviously, if there's an increase or decrease in input costs, we're seeing some active ingredients get priced up a little bit or priced down depending on which way the raw materials are going. And so again, that's our planning scenario as we go forward. Based on that and based on the good work that we've done across our plants from Raj and his team, really looking at ways that we can debottleneck or increase yields, we're able to compete aggressively in the marketplace.
As you've seen in our margins in Q3, we really believe that this is the margin profile going forward with the opportunity, as we think about the next 12 and 24 months, to continue to drive our new product launches, which are primarily in the differentiated and sustainable segment, which we know have a higher overall margin profile. Yeah, that's how we look at our margin profile going forward.
Thank you very much, and wish you all the best.
Thank you.
Thanks. The next question comes from the line of Steve Byrne from Bank of America. Please go ahead.
Yes. Thank you. Mike, your comments about the NPP in the slide deck really captured my attention. I was curious to hear your view on what would you rank as the primary drivers of the increased demand for your NPP products? Is it the regulatory path and registration of these NPP products? Is it just more streamlined? Is that a key driver? Is it the distribution channel sees these products as an attractive bolt-on? They can put them into their routine applications. Or is it at the grower level where these products like the biostimulants have a yield benefit? How would you rank those as driving the growth in these products?
Yeah. Hi, Steve. Good to hear from you. Firstly, it all starts with the grower. If the grower doesn't see value in the products and technologies, then ultimately, nothing else matters. And I think in our NPP business, the strength of our portfolio, the capability of our sales organization, and the investment that we've made in helping train our sales team, providing them the right tools that they can walk in and talk to our dealers and our farmer customers about the value of biostimulants, that has really helped us drive that segment. And we've seen that every quarter this year, and we believe we're going to see it again in Q4. Now, secondly, the other part of our portfolio in NPP that's growing our natural plant protection is our biocontrol products.
And so, as you mentioned, the regulatory framework in many regions, not Europe, but many regions outside of Europe, has a fast track for biocontrol products to enter the marketplace. And so in those markets, like Brazil, for example, we're seeing really strong success of new technologies that we've introduced in the last couple of years, including a technology and a product called Nimaxa, which is a three-way fungicide for control of nematodes. We've just got that same product registered in the U.S., and so we're now starting to commercialize that product in North America. So it's a bit of a combination, Steve, but it all goes back to the grower. We've got to prove to the grower that these products add value from an agronomic and economic standpoint. And as we do that, we're seeing real success across our sustainable platform.
Thank you for that, Mike. And one more for you, and that is, in the U.S. market, are you seeing any increased interest from either the wholesale or the retail distribution channel to be more interested in, say, private label products or potentially more interested in something other than the primary branded products that they have contracts with? Is there increased interest in that? And is that an opportunity for you because you provide the certainty of supply that if they were to just go directly to generic actives out of China, there may be less certainty on the supply, particularly with tariffs?
Yeah. That's a good question, Steve. As you know, the distribution network in the U.S. and North America is very consolidated. There's five or six large players, each of them having some segment of their crop protection business in what you would call a private label approach, whether that's 10% of their sales or up to maybe 25% of the sales, depending on the strategy of the distributor. We've always viewed that as an opportunity. I would say that segment is growing slightly. It's not transforming in terms of the % of the market. Again, I think each of the distributors looks at it a bit differently. And so where there's opportunity, we are growing that part of our business. Again, I think it's based on the quality of our products, the fact that we can compete aggressively on price. And lastly, maybe the uncertainty over tariffs from China.
All of those things contribute, I think, to the ability for us to continue to grow that segment. Now, in addition to that, though, we're also very interested and continue to drive our branded sales in North America. And we have a number of new products that we've launched in the past few years and many products in our pipeline that are coming forward. And so we'll continue to have a mix in North America of branded products that are going to create value for our customers and for us, as well as compete in that more B2B market for that private label business.
Very helpful. Thank you.
Thank you, Steve.
Thank you. The next question comes from the line of Abhijit Akella from Kotak Securities. Please go ahead.
Yeah. Good evening. Thank you so much for taking my question. On the Other Comprehensive Income, there is a negative item of about INR 578 crores. Just to confirm whether that is related to the impact of rupee depreciation on the USD loan book that we have?
Last part of it is that.
Okay. Got it. Thank you. And with regard to the scenario in Brazil, if I may, a question for Mike maybe. The bankruptcies we've heard about of numerous distributors in Brazil, is that having any significant impact on our business or on the industry? And if so, if you could please elaborate on that.
Yeah. Thank you, Abhijit. So we did experience in the second quarter some Chapter 11 bankruptcies that did have an impact on our business. One of our large distributors went into Chapter 11 in our second quarter, and we announced at that time an ECL of approximately $8 million as a result of that Chapter 11. Since then, it's been quiet, I think, Q3 for us. I don't know that we've had any of our distributors file Chapter 11. The market is in Brazil right now. The soybeans are approaching the harvest season. There's a good crop that's coming. The fact that the local currency has devalued against the US dollar actually helps the farmers a little bit when they go to commercialize their soybeans.
We're expecting coming out of harvest, which is going to happen in the next 30-60 days in Brazil, that there's going to be fairly good liquidity at the grower level. And when growers have good liquidity, they're going to pay their bills with dealers and distributors. And then that, in turn, helps provide liquidity across the market. So I think there is still some risks. What we see is that banks are being more cautious in terms of their lending into the ag community. But generally, we're expecting this to normalize. And again, I think at the heart of your question, we're not seeing any additional bankruptcies that we experienced in Q3 or, of course, are expecting in Q4.
Thank you very much, Mike. That's really helpful. And just one last quick one for Anand, if I may. On the employee cost, please. There's a significant decline in employee cost quarter on quarter. So is this a good run rate to model off of for subsequent quarters?
We have restructured some of our operations, and that has resulted in a reduction in the employee cost. I would say it's a good benchmark. Although if we do well in Q4, we might see some of the bonus provisions coming through, in which case the cost can go up so marginally. Otherwise, this should be a good benchmark.
Thank you, Anand. All the best.
Thank you very much.
Thank you. The next question comes from the line of Bhavya Gandhi from Dalal & Broacha Stock Broking. Please go ahead.
Yeah. I thank for the opportunity. So if you can just help me understand the cash flow that we are going to generate out of Advanta debt repayment? Basically, I'm looking out for year one, year two, year three, gross debt and net debt, if you can help me understand that?
Anand, let's go step by step. This year, we will have $200 million coming from rights issues, about $350 million coming from Advanta monetization, of which, as I mentioned earlier, $100 million will be primary issuance, which money will be used by Advanta for its CapEx or for its own growth initiatives, and $250 million is going to be secondary sales by UPL Limited, which will entirely go towards repayment of debt, so we are talking about $450 million, rights plus Advanta monetization, plus another $300 million free cash flow coming from operations, so all these three, that is $450 + $350, will go towards repayment of debt. As you know, we have one scheduled repayment of loan, which is expected in September of 2025, of $250 million.
We have the perpetuals, which are up for repricing or repayment between February and May of this financial year, which we will decide later in February also. We have, in next financial year, $200 million additional coming from the rights issue, plus the free cash flow, which will be generated during that financial year. And towards the end of in March 2025, sorry, in April or May 2025, we have another 7, another yeah, we have close to about by 2026, we have close to about $750 million, and 2027, we have $900 million. So I would say immediately, sometime in 2025, September, $250 million is what is stable. And again, as I mentioned earlier, this year, it certainly should have close to $750 million of free cash flow available.
Raj, can you sum it up, sum the number and provide the gross or net debt levels for maybe next one or two years?
Intention is, the way we look at it, is we are first targeting to go net debt to EBITDA to below $2. And we expect to remain between, I would say, next year between $1.5-$ 2 or maybe go a bit lower than $1.5, which means if you're talking about $1 billion EBITDA this year, then our net debt should be at about $2 billion next year. And the following year, with EBITDA further growing, we are looking at debt of anywhere between, I would say, $1.5-$2 billion.
Okay. And would it lead to any improvement in the average cost of borrowing, which is at 7%?
That is a function of except for our bonds, most of our debt is linked to the SOFR rate. Now, if the SOFR rate comes down, it would not only reduce our term loan debt, which is linked to SOFR, but also our working capital cost. So both will come down because most of our borrowing, except for our bonds, are linked to the SOFR rate.
Roughly, what would that rate be?
We have a spread of anywhere between at the moment, we have spreads of about 200 to, I would say, 225 basis points. Let's put it 175- 225. That's the spread which we have. SOFR is currently at about 4.5 or 4.6. So now if SOFR comes down, then you will see the reduction, the spread. We expect the spread to improve about 35- 50 basis points, I would say, sometime by mid of July or August, because when we got downgraded from investment grade to BBB to BB rating, we did see the spreads on our existing loan go up by 35- 40 basis points. We agreed to that increase on condition that if we come back to below net debt to EBITDA of $2, then the same would be rolled back.
Based on our financial results of March 2025, we are quite hopeful of going below $2, and we intend to approach the bank to reduce it by that 35-40 basis increase which we have given to them.
Got it. Just one more thing, if I can squeeze in, if you can just mention the CapEx trajectory for maybe next two, three years.
I mean, generally, we guide for one year. Our CapEx is there in the range of about $250 million-$300 million, split, I would say, almost equally between product registration and investment in new capacity. I think we would be maintaining those around that $250 million-$300 million. But you'll get some more color of that at the Capital Market Day when we announce the annual results and we give guidance for the next financial year.
Okay. Fair enough. Thank you so much. That's it from my end.
Thank you.
Thank you. The next question comes from the line of Love Sharma from JPMorgan. Please go ahead.
Hi. Thanks, Anand. I think more of a follow-up from the previous question. If you could just highlight, I think in some of the bank loans, you also had these covenants, which probably you had some relaxation available from still left by 2025 or 2026. If you could update what is the status there? And I think just similar to the previous question, given the sizeable maturity which we have from next year mainly, the thought process would be to refinance, I believe, at some point. If you could just indicate what is the ideal way for you to refinance through bank markets or using potentially through public bond markets as well? Thanks.
Yeah. Thanks, Love. So I think the second question first, I mean, yes, we have some payments, and we are closely watching. I mean, till the nomination of Mr. Trump, we saw nicely the rates coming down. But now with the inflationary rhetoric which we are hearing, rates have spiked back. We still talking to some of our bankers. We are expecting at least 1%-1.25% reduction during this calendar year. So we'll be closely watching that. The good part is the spreads have come down considerably. So that's positive. And I think with our cash flows also improving, we are expecting some further improvement, which in other words means reduction in the spread.
So probably we will look at, as you know, it depends on how the markets are, but we would look at either a bond or a term loan, whatever is most favorable and what gives us flexibility of repaying. So that's what we would be considering. The first question was related to?
I think you have the bank loans. Again, you had some of the.
Oh, yeah. Yeah. Yeah. That's right. Sorry.
Relaxation.
Correct. Correct. Love. So on the bank loan, Love, what we had agreed for when we agreed for a 35-40 basis points increase, we said that for March 2024, net debt to EBITDA of about 4.5, for March 2025 at 4, and for March 2026 at 3.5.
Okay. Okay. But what you just mentioned, so in case you achieve, let's say, something like 2x for March 2025 itself, then that gives you the rollback on 35-40 basis points of repricing which you had.
That is correct.
Okay. Understood. Thank you, Anand. Very useful. Thank you.
Thank you.
Thank you. The next question comes from the line of Rohit Nagraj from B&K Securities . Please go ahead.
Thanks for the opportunity and congrats on a good set of numbers. Two questions. First thing that we've seen a very serious tightening of working capital over the last few quarters. If the competitive intensity increases incrementally, is there any chance of it getting loosened, or is it an irreversible process? And this will be the normative working capital that we will be following incrementally. Thank you.
Yeah. Rohit, I'll maybe answer that from a global crop protection standpoint. So with the working capital gains that we've made on a year-to-date basis have really come from both inventory management as well as shortening terms on our invoices, our DSOs. I think we're at a level where both are sustainable and probably additional opportunity on DSOs. And so we're going to continue to focus on that. Again, part of that is how do we match up our deliveries to customers so that they get it right before the season, and so we can shorten that time from when it's sitting in the warehouse to the time it moves to their customer. So that's an opportunity for us to continue to align our production scheduling.
And then just generally, I think the challenge in the industry and the margin pressure that the industry is seeing. I would expect to see some continued reduction in overall DSOs across the industry as everyone's trying to manage working capital, everyone's dealing with interest cost. And so I would expect to see over the next one or two seasons some continued improvement at the industry level, which of course allows us to participate in that as well. So I think we're at a sustainable level with some opportunity to continue to improve.
Got it. And second question is on the margins front. Given that I assume most of the efficiencies are already embedded in current margins, there is little scope for further improvement. Obviously, it's a continuous process nonetheless. But in terms of incremental scope to expand the margins, it's relatively limited. Is that assessment correct? Thank you.
I would say with our current portfolio and the cost assumptions we have and the pricing assumptions, that's generally correct. However, our innovation pipeline is very strong. As we talked about, we have approximately $85 million of new product launches this year. Those products are going to scale up again over the next three to five years. We've got more new products coming next year and the year after that. And our new product launches are heavily skewed to our differentiated and sustainable portfolio, which has a significantly higher margin profile. So I would expect that the growth that we see in our business going forward, especially from these new products, they're going to come at a higher margin, which is going to have a positive impact across our margin profile.
Fair enough. That's helpful. Thanks a lot and all the best.
Thank you.
Thank you. Ladies and gentlemen, due to time constraint, we take the last question from the line of Nitin Aga rwal from DAM Capital. Please go ahead.
Hi. Thanks for taking the question. Mike, on the contribution margin, for just taking the point that you mentioned about the contribution margins, so with the mix that you have in mind, which can change with the higher contribution products coming through, I mean, to what is the extent of gross contribution margin expansion that we can see in the best of the cases as we go forward? It's like 100-200 basis points, or is it a minimal sort of contribution increase or margin increase over where we are, where we finished the year at?
Yeah. So I would say in any given quarter, the mixed profile is going to have some impact. And as we look at our Q4 that we're participating right now, we actually have a strong mix of our differentiated sustainable portfolio. So from a Q4 standpoint, we would expect margins to continue to be strong as they were in Q3. And then I would say, as Anand answered earlier, on May 13th at our Capital Markets Day, we'll provide more color on how we see the business evolving in FY 26 and beyond. And so that is part of our working process right now. As I mentioned earlier, we know we've got a strong pipeline of new innovative products that are heavily skewed to the differentiated sustainable portfolio. And so I would expect as we get ready for our Capital Markets Day, we'll have more shape and color on that.
Overall, there'll be margin accretion, I would expect, as we think about the future.
Thank you so much.
Thank you, Nitin.
Thank you. Ladies and gentlemen, we have one participant, which is from line of Krishan Parwani from JM Financial. Please go ahead.
Yeah. Hi, sir. Congrats on the shared numbers. Just two clarifications. First, Mike, I think you mentioned that de-stocking is near complete. So how do you see CY25 or FY26 panning out in terms of overall volume growth? Would it be high single digits, or how do you see it?
Yeah, so assuming we're right on the restocking being largely complete, I think from a volume standpoint in the next 12 months, or call it FY26 in our business, I think at the industry level, it's going to be mid- to low-single-digit volume growth. Again, our objective and what we're seeing this year with our market share gains, I think that momentum will continue to propel us, but at an industry level, I think it's going to be a little bit less than the number you suggested.
Got it. And secondly, the interest cost coming down to INR 730 crores this quarter, I can see that that includes the INR 98 crores of profit arising from hedging. So is the rest of the benefit on account of debt reduction, or your interest cost has also gone down?
I mean, Krishan, you would appreciate that. I mean, with the price table coming down overall, the hedging cost of it, which is the differential of the interest rates between different countries, those would come down as we see the drop in top line for the full year. So that's one. But also with the interest rates, we saw them at least for the first nine months. There was a reduction in the interest rates we saw, and which in turn resulted in reduced what we call the forward margin, forward hedging cost. So that helps us to bring down the cost. This is essentially a function of what is the interest rate differential between the two geographies.
We try to remain, as we have always said, fully hedged, but we also seek opportunities if there are, like for instance, in Brazil, if we sell against customers which are, there are customers who buy always sold in real, but they're linked to the dollar of the day, then we have a natural hedge available there. So besides some of the countries we have really reduced, I mean, currencies are stabilized. You saw Argentina. I think the hedging costs have come down significantly lower. Similarly, we have seen some reduction in Turkey. In Russia, we don't sell much, but whatever we sell, we try to sell it against the ruble denomination. So these are some of the initiatives which we have taken and which have helped us to bring down the hedging costs.
Great. Great. Thank you so much, Anand and Mike, for answering my questions. Wish you all the best for the coming quarter. Thank you.
Thank you, Krishan.
Thank you. Thank you.
Thank you. Ladies and gentlemen, that concludes our question and answer session. I now hand the conference over to Mr. Anand Vora for his closing comments.
Thank you very much for joining us on this call. If you have any follow-up questions, feel free to reach out to Anurag Gupta or myself, and we'll be happy to answer them. Thanks once again for joining us on the call.
Thank you. On behalf of UPL Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line.