Ladies and gentlemen, good day, and welcome to the UPL Limited Q2 FY 2023 Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there'll be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Miss Radhika Arora. Thank you, and over to you, sir.
Thank you. Good day, everyone. Thanks for joining us today for the results for the Quarter and Half Year Ended 30th September 2022. On this call, we will be referring to a presentation that is available on our website, and we take as having read the safe harbor statement. From the management team, we have with us today Group CEO Jai Shroff, Group CFO Rajendra Darak, CEO of Global Crop Protection Business Mike Frank, Global CFO Anand Vora, Chief Supply Chain Officer Raj Tiwari, and our Global Chief Commercial Officer Farokh Hilloo. We will start with an overview from Jai and Mike, followed by a financial update from Anand. With that, let me now hand it over to Jai. Over to you, Jai.
Thank you, Radhika. Pleasure to talk to all of you, and good evening, good morning. I'm delighted to share the excellent performance of our business with all of you. We had a robust 18% growth in revenue and 35% growth in EBITDA. We are encouraged with the growth in all key markets except Europe, and the 20% growth in all these markets just shows the ability of our team to really focus on improving margins. The EBITDA improvement is a key focus area for us, and the company is focusing on cash generation in the following quarters. We have committed to reduce our debt by $400 million through cash generation, a net debt reduction of $400 million.
We also have announced a strategic realignment of our businesses where we have separated our Advanta Seed business and our AgTech business in India to really show the true value of these in these businesses. We have got important shareholders like ADIA, TPG, Brookfield and KKR to invest in these businesses and to show how valuable these platforms are. Today, Advanta is one of the largest seed companies in India and in Asia and around the world, and so is our AgTech platform, one of the largest platforms. The net cash generated through this strategic alliance will be about $260 million, which will go toward debt repayment. Altogether, including the share buyback, we are talking about a net reduction of $650 million by end of 2023.
Looking at the second half of the year, we remain in position to continue our growth and continue to commit to price improvement and volume growth. Given the backdrop of the challenging year we had, we believe that UPL will continue to grow towards the rest of 2023. In line with global governance standards, we have had some long-serving board members who have contributed significantly towards the growth of the company. Some of them will be retiring and making way for new board members. I want to thank each one of the board members towards contributing towards the growth of UPL, and particularly with the introduction of new members also, such as Carlos Pellicer and Raj Tiwari, who will join the board of UPL.
With that, I would like to hand over to Mike for his comments.
Thank you, Jai, and hello, everyone. I'm pleased to share our Q2 results, which have seen strong improvement versus last year, despite continued uncertainties and volatility in the current macroeconomic environment. I'm really proud of the discipline of our sales process, led by our on-the-ground agile team, our strong customer relationships and supply chain excellence that have helped us deliver this performance, despite headwinds from global inflationary pressures, geopolitical uncertainties and unfavorable weather conditions in key markets. In Q2, we continued with our strong growth, supported by improved price realizations in herbicides and tailwinds through strong ag commodity prices. The key regions, as Jai mentioned, that drove the growth in this quarter were Latin America, North America, India and our rest of world region. In fact, each of these regions posted a growth of 20% or more versus the previous year.
We have achieved very strong margin improvement in Latin America, which comprises over 50% of Q2 revenue, thus leading to overall margin accretion. We also continued with our strong performance in North America, supported by our growing product offerings and through effective key account management with U.S. distributors. Europe had flat revenue due to Euro devaluation and other macro challenges. However, given the current environment, we believe our growth in the region has been impressive in Euro terms, which has grown about 13% versus the previous year. Moving to the financial results, I'm pleased to report our strong performance led by disciplined pricing with increases across most of our portfolio, and that has led to significantly improved contribution margins. Our revenue has grown by 18%, as Jai mentioned, and EBITDA is up by 35% on a year-on-year basis.
Our contribution margins grew by 27%, with margins now around 42%, which is an impressive 290 basis points higher than last year, again, driven by our multi-pronged approach of improved pricing, our focused product mix and portfolio rationalization. This has all helped us in improving business quality, specifically in Latin America and our major region for the quarter. Led by strong improvement in overall contribution margin, our EBITDA margins improved by 278 basis points versus last year, helping in strong bottom line expansion of 28% year-on-year despite higher finance and hedging-related costs. In terms of market access, we continue to build on our capabilities and continue to hold strong positions as a preferred partner. For example, with Orígeo now approved in Brazil, we see the opportunity to expand our market penetration.
Year to date, as you can see, we've increased our overall inventory levels as we anticipate a strong second half. We've been very disciplined in our approach of timing our sales closer to the application season, working in partnership with our channel to ensure we meet the demand as it happens. We anticipate a significant reduction in our inventory levels as the second half of the year evolves. Taking a quick look at regional performance for the quarter. In Latin America, we achieved a strong 20% growth led by our herbicides portfolio and improved pricing. Brazil was the key growth region, driven by robust demand for post-emergent herbicides and strong price realizations. This was further supported by Evolution, which is our new product in the fungicide segment.
We also had nice growth in Argentina and Andean countries to provide overall lift for the region this past quarter. In North America, revenue grew by a strong 24% on the quarter, led by improved price realization in our herbicide segment and strong row demand and channel support. All of this despite dry weather conditions in western U.S. impacting specialty crops and the rice market. As I mentioned, in Europe, our revenue was flat versus last year due to the Euro devaluation. However, in euro terms, we achieved impressive growth despite these challenges of unfavorable weather, product bans, and the ongoing conflict in the region. Among key subregions in Europe, growth was strong in Germany and in many central European countries.
In India, our Q2 growth of 22% was led by herbicides, primarily glufosinate products, new insecticide launches in paddy and cotton crops, NPP biosolutions, and the crop establishment segment. This was supported by improving pricing in key products. Going forward in India, we expect the market to be supportive with favorable pricing of key crops such as rice and wheat. We are confident of our strong growth in the second half, driven by newly improved pyrimisulfan in rice and three-way mixture herbicides for sugarcane, along with NPP biosolutions and seed treatment products in key rabi crops of wheat, potato, and cumin. In the rest of the world segment, we delivered 22% growth, driven by significant volume increases and improved price realizations. Strong growth was achieved in Southeast Asia and Australia, as well as Southern Africa, driven by our broad portfolio in those regions.
Among other major markets there, Japan was flat despite significant devaluation of the Japanese yen against the INR. We remain committed to our reimagining sustainability initiatives, under which we have launched the Gigaton Carbon Goal. This past quarter, we launched it in Rwanda, Kenya, and other Western and South African countries in collaboration with the FIFA Foundation, which was after our successful launch in Europe in Q1. Before I hand it over to Anand, our Global CFO, I'd like to highlight that we are well poised to deliver strong growth for the full year on the back of our strong order book. We therefore maintain our FY 2023 guidance of 12%-15% growth in revenue and 15%-18% growth in EBITDA. Our strong first half performance, along with anticipated robust demand for our solutions portfolio and product optimization in H2, will further support our guidance.
We are confident of delivering our second half growth on the back of increased market share and improved realizations. Further, we shall continue to be diligent with SG&A despite being in an inflationary environment across various expense items. Lastly, we're also committed in the last part of the year, and we remain very focused on working capital management, which will help us in reducing net debt for the year, as Jai just mentioned. I'd like to further congratulate our team for their resilience, their dedication, and the unified focus in delivering such a strong performance in this quarter despite the challenges on several fronts. I'll now turn it over to Anand to take a deeper dive into the financial performance.
Thank you. Thank you, Mike. A warm welcome to all of you who have joined us today. I'll begin by discussing the key financial highlights for the second quarter and first half of the year, followed by an update on working capital and debt position. At the outset, I'm very happy to share that we have delivered a strong all-round operational performance in the first half of the financial year 2022-2023, marked by robust top-line growth and significant improvement in EBITDA margins. On the performance of quarter two, our quarter two revenues were at INR 12,500 crores, representing a healthy growth of 18%, primarily led by better price realization as the key crop prices continued to remain strong. A price increase of 21%, exchange benefit of 4% was partly offset by the negative volume variance of 7%.
More importantly, it is heartening to see that our contribution margins improved by 290 basis points to 42.6%, leading to a robust growth of 27% in contribution profit to INR 5,324 crores. As Jai alluded to earlier, the improvement in contribution margin was on account of our conscious focus on driving quality growth by shifting the product mix in favor of high-margin products, rationalizing our product portfolio, and negotiating better credit terms. Robust growth in contribution margin coupled with efficient OpEx management resulted in 35% growth in EBITDA to reach INR 2,768 crore. The G&A expenses as a percentage of sales remained steady. We continue to invest in building teams and capabilities to grow our differentiated and sustainable portfolio and bolster our go-to-market and product innovation capabilities.
Finance costs increased by 80% to INR 644 crores, primarily due to significant increase in benchmark rates globally. With finance costs, the interest expense grew to INR 535 crores this quarter versus INR 284 crores in Q2 of last year. The increase in benchmark rates by almost 400-800 basis points over different, in different geographies over the same period last year attributed to the sharp increase in interest costs. Overall, despite the increase in finance costs, hedging costs, and FX impact, the strong growth in operating profitability coupled with lower tax rates helped us to deliver robust net profit of 28% at INR 813 crores. Moving on to H1 results performance. Consolidated revenue grew north of 20% to INR 23,300 crore.
Improved product realization, which were higher by 20% and favorable forex rates helped lead to this growth. Volumes were flattish in H1 as our emphasis on quality growth meant that we had to forego certain orders of low-margin products with extended credit terms. Having said that, we are confident of delivering healthy volume growth in the second half of the year, led by strong demand outlook. On the operating profitability front, we delivered EBITDA growth of over 30%, with margin expanding by 140 basis points to 21.9%. Improved realization and efficient cost management aided us in delivering a better margin profile despite various external factors.
Effective tax rate for the first half of the year stood at 12.2%, and we shall remain within the guided range of 15%-18% for the full year, as mentioned earlier. On the whole, our net profit during the first half grew robustly by 29% to INR 1,690 crore, despite higher interest costs and hedging costs. As regards working capital, as you are well aware, due to seasonality of our business, the working capital increases through the year and decreases substantially in the last quarter. Ending H1 with higher working capital, especially the inventory levels, which are primarily higher because of the following. We had global sales in H1 and a strong demand outlook for H2.
The uncertainties in supply chain and logistics and our decision to sell closer to the season and thereby offering lower credit terms on sales to improve the receivable days. As a result of these factors, we have seen an increase in working capital of $962 million, in INR terms, about INR 8,495 crores, over the working capital at the beginning of the year. However, against this increase, the net debt adjusted for buyback and dividends, which are money given to the shareholders, by end of H1 was $734 million, in INR terms, INR 7,500 crores, implying a cash generation from operations of $228 million in H1.
Going into H2, we typically have seen 75%-80% of cash conversion of the increase in working capital which happens in H1. It should translate into cash flow of $750-$800 million, roughly about INR 6,100-6,500 crores in H2. Further, in addition to the reduction in working capital, we received $75 million, approximately INR 6,600 crores in October on account of settlement of our insurance claim in Chile and South Africa. Taking these two factors, the release of working capital and the insurance claim, plus the incremental profits of H2, will lead us to deliver the reduction in $400 million of net debt as we had guided at the beginning of the year.
Moreover, the net fund inflow of $260 million from the recently announced restructuring of business should facilitate a further debt reduction, taking the total debt reduction for the year to $650 million. It's worth noting that this stated debt reduction of $650 million is including the buyback of shares and of $150 million done at the beginning of the year. In summary, the debt position, the net debt position as of March 2022 of around $2.5 billion will be reduced by approximately $650 million, less about $150 million of share buyback, so roughly about $500 million, thereby taking the total net debt to approximately $2 billion.
With this expected reduction in net debt, the net debt to EBITDA ratio will stand below 1.4x by the end of the financial year. With that, I ask the operator to begin the Q&A session. Thank you.
Thank you. We will now begin the question answer session. Anyone who wishes to ask a question may press star and one on your desktop telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. We have the first question from the line of S. Ramesh from Nirmal Bang Equities. Please go ahead.
Good evening, and thank you very much. The first point is, you mentioned about the improvement in product mix and portfolio rationalization and lot of it. You know, usually from the
Cannot hear you. Cannot hear you very well.
Mr. S. Ramesh, please switch to speaker phone and come on the handset mode. It appears that Mr. S. Ramesh has dropped from the queue. We move on to the next question. We now invite Abhijit Akella from Kotak Securities. Please go ahead.
Yes. Hi. Good evening. Thanks for taking my questions. Just wanted to, you know, get some clarity on the net debt guidance for the end of the year. We are talking about $650 million of debt reduction, compared to the levels of last year's March, you know, March quarter, which I believe was about $2.5 million, $2.5 billion . $1.85 billion, you know, the target that we should be looking at by the end of FY 2023.
Just wanted to confirm if, you know, the guidance includes any significant increase in factoring that you might be looking forward to in the second half, or you think you can, you know, more or less get there without taking recourse to an increase in factoring.
Abhijit, as I mentioned, yes, $650 million would be the gross debt reduction. Of that, about $150 million, as you know, we have used for buyback. Roughly we are talking about a $500 million reduction in debt from the $2.5 billion at the beginning of the year. We are targeting around $2 billion or a little bit lower than $2 billion by end of the financial year. On your second question, which was on factoring. As we had said at the beginning of the year, we would target to remain around the $1.6 billion level, which was what we did last year.
If at all, it could go up by about $50 million-$100 million more, but it will certainly be lower than the increase in sales or the growth in sales that we would have. In other words, our increase, growth in factoring will be lower than the growth in sales. We are trying to work towards seeing that it will be at that $1.6 billion level, which is the same level as last year.
Just to understand, as of September, the receivable sales were INR 6,671 crores, which is something like $800 odd million. You know, that will increase to about $1.6 billion by the end of the year.
That's right.
Okay. In terms of the you know, the cost of this factoring at this point in time, I mean, do you believe it is favorable enough for you to you know, significantly increase the factoring in the second half? You know, how do you see that situation?
As we had mentioned at the beginning of the year, we will be curtailing our factoring in some of the geographies where the costs are higher, significantly higher, where the benchmark rates have jumped significantly. For example, in Brazil, the benchmark rates have gone up by almost 800 basis point over that of the last year. Certainly we will reduce our factoring in those regions, those countries, but we will compensate by increasing our factoring in countries like U.S. or Europe, where we still get money at LIBOR plus 150 basis points to 200 basis points. This is almost equal to the cost of borrowing, which we do otherwise on working capital. Virtually we are getting non-recourse risk-free money at the same price that we get as a working capital funding.
Sure. It's helpful. Thanks, Anand. Just one last question from me before I get back in the queue. Just on the volume growth for this quarter, it was about -7%. I understand we've strategically decided to focus more on driving higher margin sales, you know, with better quality of, you know, credit period and everything. But is there some apprehension that we might be giving up a little bit of market share in some of our markets? Or, you know, how does VK see that situation looking like for you?
Yeah. It's Mike here. I'll take the question. No, we're still very focused on maintaining and growing our market share in really all of our key geographies. Again, as we commented, we are timing our sales to channel and to customers closer to the market, and so we are anticipating that we'll see more volume growth in the second half. But our teams are very focused on ensuring that we maintain and grow market share. It's one of the attributes I think of UPL. We've got a very strong portfolio. We're launching over 80 new products this year. It all bodes well to, I think, where we'll end the year from an overall market share perspective.
Okay. Thank you so much, and wish you all the best.
Thank you.
Thank you.
Thank you. We have the next question on the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi, thanks for taking my question. On Mike, on the gross margin improvement that we got in this quarter, if you can just probably spend some more time on what the major factor is driving the improvement in the gross margins and our contribution margin, and how should we look at the contribution margin improvement for the second half of the year?
Yeah. As I mentioned, the gross margin improvement was really primarily, you know, it was really across our portfolio, but from a meaningful standpoint, it was really in our herbicide segment. I would say it's underpinned by the strength of our supply chain and the efficiency of our supply chain, relative to the market we competed against. We saw the opportunity to, you know, take appropriate price increases, where we could and, overall, that's why you saw the incredibly strong margin improvement in Q2. Now, going into Q3, we think the trend will continue. The growth on a year-over-year basis may not be as strong in Q3 and Q4, but we anticipate we'll continue to see margin expansion in both quarters ahead of us.
Thanks. Secondly, on the overheads, you know, has there been any easing off on the, on the inflationary pressure on freight and other expenses?
Yeah. I'll take part of overheads, and then I'll ask Raj to talk a little bit about freight and other logistics costs. About half of our overheads are employee costs, and obviously the inflation on employee costs have run higher this year. You know that with inflation around the world, that trend will likely continue. We're very focused on managing overall headcount numbers, managing all of our controllable SG&A where we can. I think we're seeing strong discipline from an overall SG&A management perspective. We will continue to see SG&A growth, as we anticipate the second half of the year. Raj, could you talk about freight?
On logistics, you know, actually the prices have come down significantly. However, when we talk about the prices, we talk about the landed price in the respective country. Because of the currency depreciation, that has taken a lot of, you know, savings out of logistics, you know, because of the currency depreciation. Yes, in U.S. dollar terms, there has been a lot of, you know, lowering of cost in freights.
Okay. Secondly, Anand, on the Forex losses that we sort of report below the bottom line. What is the nature of these Forex losses? These are all realized losses or these are notional losses?
Well, part would be the cost of taking the forward cover, but large part would be the mark-to-market.
Okay. Is there any particular currency against which these, you know, because the quantum of loss is pretty high this quarter. Is there any particular currency, any currency pair because of which the-
There we did see some impact coming because of the euro depreciating, the Japanese yen depreciating. Brazilian real, yes, there was an additional cost because as you know, we hedge our advanced orders that we get. There's the cost of hedging there. Yeah, largely, I think otherwise the real was okay. We did get some impact there also. As I said, some of these are mark-to-market, so there will be reversal as we move into the following quarters.
Thank you.
Thank you. We have the next question on the line of Jay Shah from Capital PMS. Please go ahead.
Hello?
Yeah. Am I audible? Yeah. Congratulations on a great set of numbers. I just wanted to understand that, since there is a lot of, you know, China plus one tailwinds that are happening across the world, I just want to ask management in terms of de-risking the supply chain, how are we, you know, trying to de-risk ourselves from these geographical uncertainties? Are you focusing more on procuring from, say, countries like India, where, you know, you can have at least a visibility of the supply chain better so that you can fulfill the contract? Are we doing something to de-risk the supply chain from our end?
Thanks. Yeah, so UPL is probably the most backward integrated player globally in our sector. Over the years, that has been a continuous process. We also have built a very strong supply network in India over the last four or five years, and are one of the largest buyers from some of the specialty chemicals and manufacturing companies in India. This is a constant process, and if you look at it from a global platform of companies who we compete with, our peer group, we would be the least dependent on China from all of them. While we are not completely independent, we don't want to be completely independent. China has a strong manufacturing platform.
While we keep reducing our dependence as a single source out of China, we are constantly building capacity in India and also working with Chinese companies also to add capacity and specific partnerships. We think we are pretty balanced as far as our supply is concerned. As UPL continues to grow, we keep adding capacity, and a lot of our CapEx does go towards backward integration on key raw materials for our industry. For AgChem area, but not only for the AgChem area, our specialty chemicals platform goes a lot into other sectors like pharma and other sectors which are also growing in India a lot. That whole sector is. You know, that's a constant effort from our side.
Okay. Got it. Just following up on that, when you say that you're buying a lot from these Indian companies and you have a good base in India, then how does the chemical synergy and the technology work? Does the R&D department of UPL work with these vendors, or these are all generic in nature and the technology is available to everyone? Like when you say specialty, then how does the specialty technology, you know, how do the vendors get access to it? Like, do we have a
Very closely. The vendor development activity doesn't happen in one meeting. It is years of working. We have years of partnerships and almost into perpetuity. UPL is one of the largest buyers of specialty chemicals in India. In fact, if you look at the top ten specialty chemical companies, UPL would be their, one of their leading customers. It's an ongoing, very close relationship with them where we work on technology improvements. We also look at their carbon emissions, help them with their, you know, waste treatment, energy reduction. We work with them across the platform to help them to be more competitive and share the benefits of all the efficiency and technology development.
Okay. Thank you so much for the answers and all the best for the future.
Thank you. We have the next question from the line of Vishnu Kumar from Spark Capital. Please go ahead.
Yeah. Thanks for your time. My first question is on the price increases. In the fourth quarter of double digit numbers that you've been doing, have we reached an end to the price increases or is there some more still pending?
Well, yeah. I think if you look at. Firstly, if you step back and look at the broad ag marketplace, because of, you know, a number of reasons, including lots of weather challenges in North America and Central Europe this past year. You know, heat and lack of rains and then too much moisture in parts of Southeast Asia and other regions, as well as the conflict in Ukraine. I mean, the anticipation right now is ending stocks for key grains are gonna be near record lows, which is why we're seeing very strong prices for grains and food products. We believe that that's gonna continue. It's gonna take, you know, more than one normal crop to rebalance those ending stocks. Grain prices are high.
Feedstocks to produce AgChem products has also been high. That's led to the, you know, inflationary nature of our business and our ability to price into the marketplace. You know, whether we're at the peak of the price, it all depends on, you know, how things evolve from here. I would say right now we believe we're in a stable environment, where most of our feedstocks have stabilized from a cost standpoint over the last several months. Again, I think from a pricing perspective, if you do it just on a year-over-year basis, we can anticipate price increase for sure in Q3 over last year's Q3, and again, we would expect it in Q4.
Now, whether there's additional upside in pricing, you know, I think that'll depend on, you know, what happens to grain prices, and also what happens to feedstocks from this point forward.
At least on feedstocks, are there softness that has already started? Would that mean that we will keep it as for a margin or we will start passing it on to the customers, let's say, if the market probably becomes a little soft?
This is Raj here. You know, of course, there is some softening on the feedstock. Actually, when we talk about the prices on the ground in the respective countries, this softening is not reflecting because of the currency, you know, because of the, you know, currency depreciation largely, I mean, except for U.S., right? Because it's just, you know, dollar to dollar. Otherwise, you know, whatever softening we see, actually there is a softening. Reality is on ground, you know, it has not been able to come out. Therefore, the customer, you know, doesn't get the benefit of a lower cost because of the depreciation in the currency. That's one. Also the interest cost.
You know, in the you know, the cost of capital has actually gone up. That is also impacting. That's where the state is in.
Got it. In terms of the volume decline of 7%, is this more to do with Brazil, where as you are highlighting that we are taking some corrective steps, or is it across all the regions? If you could just give some a bit more understanding on this -7% decline.
Yeah. So it's not across all regions. It's primarily in Latin America, and even more specifically, it's in Brazil. Again, where we're timing the movement of our products into the channel close to the new season. Again, we'll see the impact of that benefit Q3. If you look outside of the Americas, our volume growth was in the mid-single digit range. We did see volume growth outside of the Americas, but in the Americas you know that drove the minus 7% across our portfolio.
Got it. One final question on the working capital again. My question on the pricing was essentially trying to ask that a lot of the working capital demand this year has been because of the price growth, and we have to fund for that. If we are more or less done, say, like, in terms of price increases and let's say the current commodity prices sustains, then a lot of working capital could get released next year and you may not require so much in terms of the working capital. Is that the right understanding for next year? Also, additional question on this, any incremental changes that we have done in Brazil, like we understand it's high volume, low margin, high working capital days you're giving up.
Anything that we can anticipate as a positive surprise next year or anything that is currently ongoing in terms of reducing the working capital load that we are currently taking in this region?
Vishnu, I mean, I thought this result is itself a positive surprise with the margins that we have made. Having said that, looking into the future, I think, we are very conscious, the entire leadership team, business, finance, everybody is conscious that, this sort of working capital is unsustainable. We are taking several measures to reduce the working capital. Like you saw that, you know, we have seen a bit of inventory build up, which has happened by end of H1, but that's basically because we are going to supply closer to the usage. We have shared with you our joint venture with Bunge where, you know, that's another step where we will see a reduction in working capital.
Several measures are being taken in almost all regions, I would say, to see how we can bring down our working capital. You know, while price, of course, if it comes down, there'll be less, but then, you know, I guess it would be also the volume will continue to grow as we grow our business. There are measures being taken and we are working towards seeing how we can bring down our overall working capital as we move forward.
Got it, sir. Thank you.
Thank you.
Thank you. We have the next question on the line of Abhiram Iyer from Deutsche Bank. Please go ahead.
Hi. Thank you for taking my call. I just wanted a bit of clarification on the net debt reduction. You mentioned that basically the target is $650 million, and whereas from the perspective of factoring, this is gonna increase from the current levels of $800 million to around $1.6 billion. I mean, I'm just trying to figure it out from, say, the rating agency's perspective, which includes factoring asset one way or the other. I know it's non-recourse. Would this mean that effectively the combined levels would actually be higher than what they are currently?
What do you mean combined levels will be higher? I mean in factoring, no. No. Year to year it will be the same. Last year we were at $1.6 billion, and this year also we'll be at $1.6 billion. So yeah.
Okay.
There will be no increase in factoring. Yeah.
Got it. Got it.
If one has to look at from March to March.
Yeah.
No incremental spend.
Got it. There will be no currency effects there because of the shift in geographical segments for factoring that you mentioned?
No. We look at in dollar terms only.
Got it. Yeah. That was my question. I'll get back to you.
Thank you.
Thank you. We have the next question from the line of Rohan Gupta from Nuvama Wealth Management. Please go ahead.
Yeah. Hi, sir. Good evening, and thanks for the opportunity. Sir, first question is on our volume decline, especially in current quarter, where we have seen almost.
Slight volume growth in the first half, while the entire growth in top line has been driven by the price increase. Despite that, we have been able to improve the EBITDA margin by almost 140 basis points. That, if my understanding is right, is mainly driven by the improved product mix. When we see the prices stabilizing or declining, raw material prices really start declining, do you see higher margin growth and EBITDA margins will be much higher than the current trading?
Yeah. Hi, Rohan. It's Mike here. So yeah, your understanding is right. I mean, we obviously on a first half basis, our volumes are about flat, maybe down 1%. The growth in our business and the growth in EBITDA is attributed to the price increases. You know, I think on the second part of your question with regard to if we see raw materials decrease in cost, you know, will that have a margin positive margin impact on our business? Like, again, I think it depends on the timing, and it depends on the product.
Some products, which are, you know, extremely competitive and are priced on a cost plus basis, today and in the future, you know, if the costs come down, then prices will come down and margin percent margins will be maintained, but absolute margins will kind of fall in line. As we sell more and more of our product portfolio in differentiated and sustainable products, those products are less likely to be cost plus, and they're really priced on the value that they generate, and so they'll be less price sensitive. It'll be a bit of a mixed bag. I would say if feedstocks come down or raw material costs come down, I wouldn't anticipate that that would be a long-term opportunity for margin expansion.
Maybe in the short term as the market adjusts, there could be some benefit, but not in the mid to longer term.
Okay. Got it. Sir, secondly, in terms of our guidance, once again, flat volume growth in first half, while you have mentioned that the company is doing the rationalization of product basket and focusing more on the upstream product and high value added product. Does it mean that when we started giving the guidance, I mean, in Q1, we were looking at 7%-8% kind of volume growth. However, the pricing growth has been separate and that has been driving top line growth. Do we still look at a full year volume growth in the range of 7%-8%, or-
Yes. On the full year, we would anticipate volume growth in the mid-single digits. That would be more where I would expect to see volume. Again, if you look at the first half, there's really only one country where we've seen volume decline, which is in Brazil. Again, we believe that a lot of that's gonna be made up in the second half. Yeah, I think, you know, don't misread into the volume story. You really need to look at the whole year picture. Again, I think from a total market perspective globally, if you think about the product that gets applied on the ground, which is really. That's all that really matters.
You know, we're likely gonna see, you know, maybe 3%-4% increase in the total global marketplace from a volume perspective at most. Again, there's been many markets that got impacted because of the weather conditions, and so it may not even be that high overall. We would anticipate to have volume growth in excess of the global market.
We can safely expect that full year volume growth should be mid-single digits, irrespective of the prices going down.
Yeah, we would expect to see overall volume growth across our entire year in the mid-single-digit% range.
Okay. Got it. Our third question is on this debt level and cash level. Both these, which you have just mentioned, I mean across the various business verticals which we have created now, how the debt and cash will be positioned around, and the net debt level which you are talking about. I understand you are talking about the UPL level. So how the debt and cash will be distributed among various entities which we are creating now? No. We are looking at an overall group at this stage, and we are committing based on the overall group level. If you see, we have just.
While we have segregated, UPL Corp was always a separate company and, where UPL Limited owned 78%, 22 was with Aditya Birla & TPG, which as you know, in the restructuring we have now pushed it down to UPL Cayman. Advanta and those were separate divisions. They were not separate entities. And UPL SAS, which is Sustainable Agri Solutions, is our India business, was again a division. But again, we will look at the overall at the group level, and our commitment to the rating agencies is at the overall group level. This is, Advanta and UPL SAS will be having no debt and no cash. Should we understand? No.
They will have some debt, some cash, but this all would be consolidated at UPL Limited level because as we know, we will continue to own 91% of UPL SAS and 86.7% of Advanta Enterprises. Okay. Just last one my side and I'll come back to you. There's been acquisition of Kudos Chemie, say, INR 237 crore kind of spent. A little bit more on this, what kind of revenue, and this and it is in a specialty chemical part of the business. We see that again in your restructuring comments, you have mentioned that the specialty chemical business also will get a thrust from the management.
It is something in line with that and this acquisition of Kudos Chemie, which is primarily in a, I think, specialty chemical catering to beverages and pharma ingredients are not related to our agricultural chemical intermediate business. Are we looking in that direction that a lot of more investment can happen in these kind of opportunities?
Exactly. When we look at our manufacturing platform, part of UPL, it's about a $2 billion manufacturing platform, which caters to crop protection and specialty chemicals. Over the last two or three years, we've been investing in building the specialty chemical platform, which has many uses, which will be used as intermediates for our traditional crop protection business. But also in the other areas for pharma and for other areas which we have seen a huge demand for a lot of intermediates. Kudos is very, we bought it for maybe fifteen cents in the dollar. It's a huge infrastructure with a 100-acre site in the industrial park.
Today to set up a new plant costs a lot of money. We got a ready-made site, and we will add in about a year's time, we will see a lot of production moving, new products coming out of there, which will cater to mainly the non-ag sector, but mainly the specialty chemicals which caters to so many, based on critical raw materials which you know, UPL is already making. Value-added products and others. This segment we expect continue to grow. It's already a INR 14,000 crore-INR 15,000 crore business, and we believe that will continue to grow. When you look at the segment valuations, then you can realize how big that business is.
Like we talked about Advanta and the UPL SAS. We are unlocking value for shareholders and looking at different ways to make sure that the market understands the value of some of the assets within some of the very exciting businesses which exist within the UPL suite.
The revenue potential of this investment of INR 37 crore, can you please confirm? Like, I mean, you mentioned that definitely got this deal that-
Very large, actually. It will continue to grow for many, many years. I mean, right now we're not giving out any numbers because we will have. It could grow to INR a few thousand crores in a few years.
Oh, okay. Thanks, sir. Thank you so much for answering the question.
Thank you. We have the next question from the line of Aditya Jhawar from Investec. Please go ahead.
Yeah. Hi. Thanks for the opportunity. My first question is, you know, Alan, is there a scope to increase the proportion of sustainability loan to lower the interest cost? Or are you evaluating some refinancing options to lower the interest cost?
We in fact just concluded about two weeks back a $1,050 million loan at about 320 basis points to 325 basis points lower than what was the cost of acquisition loan. You know, the challenge is not in terms of our spreads keep coming down. The issue is really the speed at which the benchmark rates or the SOFR or LIBOR rates have gone up.
Yeah.
That's what has created this sort of increase. The good part is this is applicable to everyone. Therefore, you know, you will see everybody increasing the prices in order to recover the extra cost of borrowing.
As on March end, it was, the sustainability loan was about 42% of the total loan. What is the number right now?
The 1,050 we took wasn't a sustainability loan, but we took a plain vanilla loan with again a five-year. We took part of it into three years just to reduce the cost of borrowing. We could borrow at about the acquisition loan was at about 160basis points, 165 basis points, 170 basis points plus LIBOR. We got this loan at about LIBOR+ 145. The three-year we got it at LIBOR+ 125.
Out of the total debt, 30% is a fixed rate. Is that right?
Yeah. The bonds are at the fixed rate.
Fixed rate. Okay. Okay. Now just, you know, second question is on the volume decline of 7%. As you know, Mike mentioned that on a full year basis, we might see a mid-single-digit volume growth, and we are talking about already, you know, higher teens price increase. Is there a, you know, possibility of raising the revenue guidance upwards? Currently we are at, what, 12%-15%.
We, you know, factoring in these two things, the price increase and a mid-single digit volume growth, and so far we have delivered over 22% kind of a growth.
Aditya, I mean, it's simple math, but generally we refrain from changing the guidance, as you know. We did this time at the end of first quarter where we upped it, and I think we would like to retain it at the same level.
Okay. Perfect. That's it for me. All the best.
Thank you, Aditya.
Thank you. We have the next question on the line of Swetha from Ace Lansdowne. Please go ahead.
Hello. Hi, good evening, everyone. Hope you're doing well, and congratulations on this set of numbers. I just had one question regarding your debt reduction. I just wanna know what exactly would be the plan of the company going forward to curtail the debt. Would it just be on the reduction, the factoring, or is there any other thing?
There are a lot of initiatives that we have taken, as I was sharing earlier to answer one of the questions. What we are doing is we are reducing the credit terms which we offer to our customers, one. Two, we are trying to sell closer to the season or the time of consumption, which thereby also helps us to reduce the cost, reduce the credit terms. It also helps the distributor as he has to invest less as far as his working capital is concerned. It's a win-win for both. Besides this, we are of course, you know, seeing how we can bring down our costs, our G&A expenses.
We are also, you know, taking up internally a project on improving our forecasting, what we call forecast accuracy, which should help us to plan our inventories better. These are some of the initiatives that we have taken. I did also mention that in Brazil we have a joint venture now with the-
Correct.
Where, you know, whatever we sell to that joint venture company, we get paid within 180 days, which is... In absolute it just sounds a little... It's a big number, but otherwise we've been selling at about 200-220 days plus, because in Brazil we generally sell on crop terms, which means that depending upon the crop life cycle, we have to offer that level of credit days to the customer. Several of these initiatives have been taken, both in, I mean, in most of our regions, and therefore this should help us to bring down our working capital.
All right. Thank you so much. Have a lovely day ahead.
Thank you.
Thank you. We have the next question on the line of S. Ramesh from Nirmal Bang Equities. Please go ahead.
Thank you and good evening. First question is, Mike mentioned in his opening remarks about product mix improvement and portfolio rationalization. Can you put this in context in terms of some specific product segments, including biosolutions, sustainable? And secondly, you mentioned about the improved performance in LatAm, in terms of EBITDA margins being higher. If you can put it in the context of what was the differential in the LatAm margin compared to blended margin and what is the improvement in share to be helpful?
Yeah. As I mentioned, from a product mix standpoint, we really geared our supply chain and our sales organization to really focus on higher margin products. You know, this will be an ongoing effort. I think it's part of the discipline that we need in our business. I think we're starting to see some of the green shoots based on that focus. I would say that that's gonna continue. I mean, we aren't exiting complete segments or specific AIs. We're just really looking across our portfolio, where can we rationalize SKUs? Where can we combine formulations? And how can we become more efficient to really serve our customers?
Because at the end of the day, you know, our objective is to provide solutions, whole acre solutions to our customers. We really like our broad portfolio strategy, so we're gonna continue to have that strategy, including the biosolutions, but we will gear things more towards higher margin products. In terms of margins, we don't provide that on a region-by-region basis. I would say, you know, traditionally, the LatAm region has had lower margins, including this year. On average, they would be a bit lower. We saw a significant improvement. In fact, the biggest improvement we saw across our global business this past quarter was the margin performance from our Latin America region. It's not quite at the global average, but it's getting closer, which is really good.
The second thought is if you're looking at the global average volume growth of 3%-4%, you said UPL will possibly be able to grow faster. How would you do that? Is there an increase in market share or you're creating new segments? Can you please explain that?
I mean, it's really focused on, you know, penetrating with the products that we have across our portfolio, as well as the 80 new product launches that we're bringing to the marketplace this year. You know, some of the products. Just give you a couple of examples. We have a new three-way fungicide, Evolution in Brazil that is gonna be a significant product for us. We're gonna gain like significant share in that entire marketplace this year, and I think we have a multiyear opportunity to gain share with Evolution. Likewise, we're just now entering for the first time the soybean herbicide market in the US with a really good two-way herbicide that's called Preview, that's also patented.
Again, that's a whole new segment for us that, you know, we'll participate in for the first time. I think based on product performance, that'll be a very strong product starting with Q4 sales as it gets positioned for next spring in the U.S. The third and final product I'll highlight is a new bio nematicide called Nemixa. This is from our collaboration with Chr. Hansen. We just actually in the last two weeks got regulatory approval in Brazil for this product, and we're expecting it shortly in North America. These are three examples of where, you know, we're entering in a big way with some new products and technologies that will help us grow market share.
In addition, there's our traditional markets where we are expanding capacity and have growing positions from products from glufosinate to Clethodim to S-metolachlor. These are some of our largest AIs where we continue to debottleneck our plants, invest in capacity, and continue to grow our market share with AIs such as that as well.
Okay. Is it possible to throw some light on the target market size for Evolution and the new soybean herbicide to it?
Well, yeah. The soybean rust market is one of the largest markets in Brazil. We believe with our product Evolution, we've got the premier product in the marketplace now. Yeah, we're not breaking out kind of product market shares, you know, by country, but this will be one of our significant growth drivers throughout the rest of this year and into the next couple years.
Then one last thought. You simply mentioned you're introducing new products and weeding out some old products. FMC typically talks about 3%, you know, attrition and then addition of products on top of that. If you had to look at the 20%-21% innovation rate, what is the kind of attrition in old products and what is the kind of, you know, growth in new products, this year, based on your current numbers?
Yeah, it all depends on the market segment. I would say, you know, based on the product portfolio that we're introducing this year, it's probably around at 70% of our new product sales would be incremental sales. You know, again, taking the Evolution as an example, that will cannibalize some of our older products in the marketplace, whereas a product like Preview is a brand-new segment for us. On average, I would say with our current product launches this year, about 70% of their sales are incremental sales. About a 30% cannibalization rate.
Okay. Thank you very much. That was very useful. Wish you all the best.
Thank you.
Okay.
Thank you. That was the last question. I now hand it over to Mr. Anand Vora for closing comments.
Thank you everyone for joining us today on this quarter's recent results and first half results call. If you have any follow-up questions, please reach out to Radhika Arora or Mandar Kapse, or you can also reach out to myself and we'll be happy to take the questions and provide you the whatever data and information you require. Thanks once again on behalf of all of us here at UPL for joining us on this call. Thank you.
Thank you. On behalf of UPL Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.