Ladies and gentlemen, good evening, and welcome to the post results investor conference call of Zydus Wellness Limited for quarter two, FY 2022. If any participant is connected on both the webcast and the audio bridge, you are requested to mute the audio from the webcast to avoid any echo. To ask a question, participants are requested to click on the link for instructions to dial into the audio call to ask their questions. I now hand the conference over to Mr. Tarun Arora, CEO of Zydus Wellness Limited. Thank you, and over to you, sir.
Good afternoon, and welcome to the post results teleconference of Zydus Wellness Limited for quarter two, FY 2021-2022. We have with us Dr. Sharvil Patel, Chairman, Mr. Ganesh Nayak, Director, Mr. Nitin Parekh, Group CFO, Mr. Umesh Parikh, CFO for Zydus Wellness Limited, in the conference. While the economy was still facing significant headwinds in terms of revival during the first half of the quarter gone by, after a very challenging second wave of COVID-19, the company has showed unwavering determination and kept close vigil on all the nodes of business in order to minimize the impact on people and business. With the improved consumer sentiments and strong on-ground execution during the quarter, the business witnessed good momentum as a result of which the company posted a year-over-year growth of 12.2% in terms of total income from operations.
The category of glucose powder and prickly heat powder witnessed decline during the quarter in terms of optics due to poor season and limited consumer mobility. Our brands, Glucon-D and Nycil hence got impacted due to these headwinds led by the category while holding on to the market shares. The sales growth for overall business without these brands is substantially higher. At the same time, the company faced significant inflationary pressure in key raw materials and packaging materials. As the result of which our gross margins were down year-on-year by 571 basis points as percentage to net sales. While the company continued to build up the inventory of key raw materials at an opportune time to lock in favorable rate, the company has also taken few calibrated price increases across the impacted brands, which would start reflecting in the current quarter.
As we kick off our journey of next phase of transformation, the transformation 2.0, we would like to share a few important updates on this front. The transformation 2.0 is being planned around broadly two growth levers. One, creating a simpler organization structure and achieving cost reduction. Here, the first part we are looking at reorganizing our Nutralite business for enhanced efficiency and better execution by integrating the sales force into one entity, that is Zydus Wellness Products Limited, for better customer service with specific focus on retail and food service channels separately. Integrating our cold room and ambient warehouses for better efficiency. We are also looking at reduced cost to serve through distributor disintermediation and organized retail. The second part of this transformation 2.0, the digital transformation.
The digitization of processes across value chain, which will help the company to be future ready. It would include use of business analytics tools, integrated business planning, employee friendly, HRMS tools, freight management tool, and sales force automation software, all of which would help automate several key processes. All these are at various stages of development and implementation. Let me take you through the highlights of the consolidated financial performance of Q2, FY 2021-2022. During the second quarter of FY 2021-2022, our total income from operations grew by 12.2% to INR 3,837 million. EBITDA was up by 12.6% year-on-year to INR 305 million.
PBT before exceptional items was up by 385.4% year-on-year to INR 211 million. Net profit was up by 120.4% year-on-year at INR 215 million. With that, let me share some of the highlights of operations for the quarter gone by. We continued our thrust on marketing initiatives to grow the categories and increase market share of our brands during the quarter. To narrate a few, on the Glucon-D front during the quarter gone by, the business was impacted negatively because of the adverse weather conditions and early monsoon in some parts of the country. Glucon-D ImmunoVolt continued to deliver steady business. It was supported with TV campaign during the quarter. On the Complan front, during the quarter gone by, core Complan witnessed a double-digit growth.
Complan was relaunched after a gap of four years with enhanced proposition, improved chocolate taste, new packaging, along with new campaign to promote the brand. The new Complan focuses on all-around growth with 2x faster growth and improvement in memory and concentration. This is supported with clinical data. On sweeteners front, Sugar Free brand launched its new thematic campaign, "Fitness Ka Pehla Kadam," featuring leading Bollywood actress Katrina Kaif as its new brand ambassador. This was amplified by 360-degree media campaign on TV, print, digital across the country. Sugarlite continued its triple-digit growth during the quarter across all channels. The growth was supported through consumer promos and impact properties in media, especially on TV and digital, along with on-ground engagement activities to build trials and expand reach of the brand.
On the Nycil front, while the offtake remained positive for the brand, the internal sales remained under pressure due to high channel inventory build-up prior to the lockdown. On the Everyuth front, the brand continued to grow in strong double digits, supported by ATL campaigns on flagship scrub portfolio and digital inputs on the entire range. The post-lockdown recovery has been significantly better as compared to the last year. We have also launched an all-new range of body lotions with an aim to play in the leave-on space in skincare category. On the Nutralite front, during the quarter gone by, the brand witnessed a strong double digits growth in both institutional and retail business. The current institutional portfolio was relaunched as Nutralite Professional Range. Nutralite Choco Spread, which was available in modern trade and e-commerce channels, was extended to general trade channel as well.
The launch was supported by a TV campaign. As per the MAT September 2021 report of Nielsen and IQVIA, Glucon-D has maintained its number one position with a market share of 58.2% in the glucose powder category. Complan has a market share of 5.4% in the health food drink category. Sugar Free has maintained its number one position with a market share of 96.2% in the sugar substitutes category, which is an increase of 181 basis points over the same period last year. Nycil has maintained its number one position with a market share of 34.5% in the prickly heat powder category.
Everyuth Scrub has maintained its number one position with a market share of 39.2% in the facial scrub category, which is an increase of 543 basis points over the same period last year. Everyuth Peel-Off has maintained its number one position with a market share of 77.3% in the peel-off category. Everyuth brand is now at number five position with market share of 6.5% at the overall facial cleansing segment, which comprises of all the face wash, scrub, and peel-off and other masks. Going ahead, on the positive side, we see subsided second wave, improved consumer sentiments and upcoming festive season. However, the unabated inflationary pressures could restrict this momentum. We stay committed to navigate this with decent business growth and balanced bottom line.
We do expect some of our initiatives, like simplification of our sales organization with specific channel focus, channel-wise focus for our Nutralite brand, would help us, to perform better in the coming quarters. Thank you, and we will now start the Q&A. Over to the coordinator for Q&A.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Participants who wish to ask a question may click on the audio question icon mentioned on the webcast and follow the instructions to join the question queue. An operator will announce your turn once you join the queue. Ladies and gentlemen, we will wait for a moment while the queue assembles. The first question is from the line of Tejas Shah. Please go ahead.
Hi, team. Season's greetings, and thanks for the opportunity. So, first, on growth, you spoke about the challenges that we had. If you can give some sense on slice and dice in terms of channel mix this quarter on growth and also urban rural mix. Though rural is not that much relevant. Still, if you can give some color on metro versus non-metro.
Sure. I think one of the things that we've seen is that growths are uneven, really speaking, and this, like I mentioned to you, in my speech, if we really look at non-seasonal portfolio, the growth is much, much higher than reported at a brand portfolio level. When I look at channel-wise level, we've seen, for example, e-commerce seeing a triple-digit growth. It contributes at an overall business level, business at 7%. Our international business has grown at high double digits, contributes about 5% of the portfolio at an overall level. Even modern trade has seen a high growth levels and is recovering. Though the base is not fully sorted to pre-COVID levels, but that's also seen a good growth.
Going back to traditional trade and dissecting it to the urban and small town plus rural, which is the super stockist business, we've seen about non-seasonal portfolio about 3x-4x growth. So largely the direct urban has been very low. Growth has been the rural and the small towns which have driven the growth. It's a kind of mix which is very uneven from a growth point of view. We are seeing rural or small towns responding well to growth. They are driving the growth much more. In the urban space, it's the e-commerce, it's the emerging channels which are driving the growth. The food service, HORECA, has seen a good growth recovery.
The traditional urban retail is still on a lower path.
Okay. Sir, you spoke about making some pricing interventions. If you could split the growth in terms of broader volume growth and price and mix impact?
Overall, we have taken a price increase of about.
4.2%.
4.2%, of which all of it is not reflecting in our numbers yet because some of it will flow over to the next quarter. About 2.5% is what is already reflecting in these numbers. Largely it's led by Nutralite. We are obviously planning forward to take across other portfolio, but this is the current quarters.
Sir, last almost three quarters now we are maintaining. In fact, four quarters we are maintaining high mid-teens to high-teens kind of growth or double-digit, on safer side. Now as we go in second half of this year, the base is also slightly aggressive. How are you looking at demand scenario to sustain this momentum, at least having double-digit revenue growth?
For us, you know, there are challenges because we have to. In the inflationary situation, there are risks because we are sitting with a high base like you rightly pointed out. As we have to take aggressive price increases to overcome the gross margin pressure, input cost pressure, we could see some challenges. We are still hopeful of delivering a double-digit growth going ahead also. I would have preferred a much higher growth, but I think it may be still possible. This clear growth momentum, we'll have to see if it can happen across all channels. Urban general trade, direct distribution, while it's sitting on a good base, still seems to be a little bit continuing to be under pressure.
E-commerce modern trade will continue to contribute to growth. International will continue to deliver on growth. I do actually hope that monsoons, with the recovery in monsoon in the quarter gone by should also keep the rural momentum up. These initiatives should help us get better, you know, way to net worth.
Sure. Sir, last on margins, you spoke about taking pricing interventions only Nutralite. Is that correct that I heard?
Largely the impact that you see of the price increases is Nutralite, but we are acting across the portfolio. With the relaunch of Complan, we have taken small price increase which will reflect. Taking price increase in Sugar Free and Everyuth as well. All of these will reflect in the coming quarter.
Ceteris paribus, if raw material stays where they are and they don't inch up from here, are we covered to protect our margins from this base?
I do believe so. In the coming quarters, we should be able to maintain our margins, if the raw materials do not go up.
Okay. That's all from my side. Season's greetings to the team, sir. Thanks.
Thank you.
Thank you. Next question is from the line of Praveen Sahay. Please go ahead.
Thank you for taking my question. My question is related to Complan. As you had mentioned in the Complan, double-digit growth. I can see their market share is at around 5.4%, and that's quite, you know, consistent for quarters in the past quarters. You mean to say that this category itself is growing at double-digit and so are we, you know, faster than the industry?
Therefore, for us, we have now seen continuously over the last three or four quarters a double-digit growth. If I look at the last quarter reported by Nielsen, it is only 4.9% for the category. My view is they do not fully capture the whole, at least Complan's growth, and we are engaging with them to either reflect rightly for us or correct the category because we don't see any reason why, you know, our growth should not reflect in them. My view is maybe there will be a certain correction at some point in time from their side, because our growth is now consistent for the last three or four quarters.
Okay. It seems that Praveen Sahay's line has dropped, Sir. Just a moment. Praveen?
Did you get my question? Yeah, yeah. It's all. Thank you.
Thank you very much.
Yeah, Praveen, does that answer your question?
No, in between I dropped off so that.
Let me just repeat for quickly on what you'd asked. I said, look, we are seeing a double-digit growth over last three, four quarters, so we are seeing a consistent growth. Last quarter, Nielsen has reported a growth, category growth of 4.9%. By that logic we should have seen some market share growth, which is not happening. We are engaging with them. It may be that they're not fully reflecting our growth or the category growth, one of which they need to correct because our numbers are more secular in nature.
Okay. Okay, great. Next question is related to Sugar Free or sweetener category. There also in the Sugarlite segment you said triple digit growth you had delivered. Is it fair to assume your contribution from the Sugarlite is increasing?
That's right. Sugarlite is building up and it's in line with what milestones we had kept for it. It is the share of Sugarlite at our overall sweetener space is increasing, which is a good use.
What is the milestone? Like, if you can
There is no market share, but internal milestones, as in we had kept a certain set of targets for most of the NPDs, the way we measure it is in terms of milestones we keep at quarterly or annual levels. It's tracking well on that, and we believe it can become the future large brand for us.
Okay. Any color on the contribution on your total pie of a sweetener?
That's a little early to comment on that right now. I think in the next few years we'll be able to give a full traction on that.
Okay. Thank you. Thank you for taking my question. I'll come in the queue.
Thank you. Next question is from the line of Kaustubh Pawaskar. Please go ahead.
Good evening, sir. Thanks for giving me the opportunity. My first question is on your Transformation 2.0 . You just mentioned in your initial comment and emphasize on, you know, simplifying the structure, and there will be some cost synergies because of it. Any target you have, you know, set up that because of this Transformation 2.0 you will be, you know, saving this much amount in terms of through efficiencies?
Yes, we do have a certain kind of synergy benefit targets, but we do see a better customer service, more efficient process and a certain cost takeaway which we can take to our margins.
Okay. The related question to that is that currently, you know, we are hovering at around 7%-18% margin, operating margins. Now with this Transformation 2.0 , your, you know, your revenue mix is also changing in the portfolio with some of the high margins products, you know, those contribution are expected to scale up. Considering that, should we expect your margins, operating margins to reach close to 20% by over the next two years, two to three years?
That's really what we are targeting in the next couple of years to cross that 20% EBITDA margins.
Thanks. What is our aspiration for the international business? Currently it is 5% of our revenues. Any plans for the international business, whether you would be launching you know a certain number of products every year, you will be expanding your reach. Any thought process on that?
It's an all organic play. We are at an annualized level; we are about 3%-4%. For the quarter, we did 5% because we have a mix between Q4, Q1, where the numbers are different on the base domestic business. Our wish list is to take it to 8%-10% level. We are looking at expanding more countries and more products. For example, we've just launched a no sugar added Complan in the Middle East. We are also exploring more products. The top five countries which we have shortlisted will contribute bulk of our business and we will build further on it.
For example, we have just in the process of setting up a subsidiary in Bangladesh, which we believe can be a good potential future growth opportunity for the international.
Thanks. Just one more on the price increase point. You mentioned that you have taken 4.5% kind of a price increase in your portfolio. How much more price increase do you think you have to take to pass on the current level of, you know, raw material increase? I can say that the inflation is kind of there and it might firm up further. At, you know, current level of inflation, what kind of price increase is it required?
I think another 3% should help us, you know, manage this cost inflation, some of which we have already rolled out and will reflect in the next quarter results hopefully.
Okay. Thank you, sir. Thanks.
Thank you very much. Our next question is from the line of Aalok Shah. Please go ahead.
Yeah. Hi, thank you for giving me this opportunity. My first question is on Nycil and Glucon-D. Can you highlight the key states where the erratic monsoon would have led to the subdued sales?
Hello? Is my voice audible?
Yes, you are audible.
I think, Tarun, are you on mute?
I think.
I think so maybe it's Sharvil here. I think it's mainly to do with West Bengal and then some part of Northeast.
Got it. This would be the likely two states, which anyways are only skewed for these two categories, right?
Yeah. This last year you saw the cyclone and as well obviously the whole peak of COVID with lower summer. I think two years these two brands have had an effect. Nycil obviously did a little better in last year, but this year obviously it couldn't.
I think as the situation normalizes and we have normalcy in terms of the peak seasons that we have, we should see a better traction going forward.
Got it. Actually, no, the question is that, how do we plan to de-risk, right? From you know, largely being focused on two states to going more into more states. What are the steps that we are taking for that?
You know, there is good traction in Bihar now. We have a very good business in Bihar and some of the parts of UP. I think Glucon-D is on that track. Nycil has a good balance. Nycil doesn't have complete SKU, and we are trying to see how do we build up the South market for many of these brands, and also the West. Because of the whole distribution alignment that has happened and even the distribution increase that has happened, we are seeing good traction in West and South. The early signals, good signals have been in Bihar and some of these other states. I mean, we are seeing good traction coming in other places also, but that will require a few years before things normalize.
Also, seasonal and non-seasonal, we believe Complan, and Sugar Free and Everyuth and Nutralite can offset some of the seasonal biases that are there today. That's the whole work that we're doing. Earlier we had talked about a second summer and how do we build for some of these brand for second summer. Obviously we have not had that opportunity in the last two years, but as things normalize, we'll get to see some new extensions. The season can be extended towards the second half also.
Got it. Thank you. My second question is on the ad spends. While you know we are doing a lot of adjustments and product launches.
Yes.
You know, the ad spend rate for the current quarter was slightly lower than on a YOY base and on a usual run rate also. Anything to call out over here, or we'll catch up as we get into second half of the year?
I think on the ad spends, you what you say is right, but I think we are being more judicious in terms of where we can spend. Obviously everything has not been back to normal, and we have had high impact activities. Like if you see for Sugar Free and Complan, we have had those important activities on KBC and others. I think we're being more targeted towards it. With more normalcy back, and more metros and others showing better trends, we'll see this improving. A lot of times it is also driven by relaunches or new strategies, so Complan had that. Similarly, we are working on Sugar Free also. I think somewhere the ad spends will now increase once we see traction on some of these brands on the tier one and metro side.
Got it. My last question is on the upcoming product launches. Anything that you know we should watch out for in a category, or you think it will continue to remain more secular across all?
No. I think Everyuth will see good traction with new launches, and we are very excited about it. I think the brand has shown good buoyancy this year and all lines are moving well, and we are seeing new launches there, specifically with the winter range. Similarly, the whole Nutralite franchise where we entered into the milk-based products with butter, ghee, also mayonnaise, choco spread. I think you'll see that category on food services expand significantly for us. Sugarlite is an introduction there. Chocolates is something that we introduced, and we are seeing a few more introductions in the sweetener basket, which will add to the overall business side of it. Going forward, I think all of these are the likely introduction that you'll get to see over.
Some already happened and some that will happen over the next 12 months.
Got it. Thank you very much for this. Happy Diwali to you and everyone.
Happy Diwali.
back at Zydus.
Thank you very much. Participants, we have lost the connection for the management. We'll just wait for a few moments while the management connects. Just a moment please.
Sir, we have lost the voice.
We-
I think we have the-
Okay. We have the line reconnected now. Our next question is from the line of Shirish Pardeshi. Please go ahead.
Yeah. Hi, good evening, Sharvil, sir, Umesh Parikh, and Tarun. Thanks for the opportunity. I have three questions. The first question is on the Complan. We have done this relaunch. Is that the conscious strategy which we are trying to bring in the change in formulation and trying to price up the pyramid?
No, there is no fundamental change in formulation. We have just improved the taste, so there is a minor shift in the flavor thing. Our clinically proven formulation, there's no fundamental shift. We do believe that, you know, we've enhanced the proposition, which is based on clinical data, to focus on all around growth, not just the physical growth of 2x faster height, but also memory and concentration, which is clinically proven.
I think if I can add to what Tarun is saying here, we also have launched, for us, you know, we're segmenting the market also, and we have launched a high-value product, in the prescription side also, which will again build on the credibility and at the same time improve the profitability of the brand. It's very early days and, you know, last one and a half year we have not seen, the clinic movement as much as we wanted. As things have normalized, we believe that that will add an additional thrust in terms of upscaling the value on Complan also and also segmenting it, right.
Got that. The whole question is around we are in the range of about 5%-5.5% market share. What is it that we need to do to get to our older share of 8%-8.5%?
To answer that, I think there are three or four things that we have got. I think one of the important thing was the proposition needed to be enhanced to have a full growth, you know, proposition for the consumers. Where today's consumer is much concerned about the mental development as much about the physical development, and this new proposition addresses that. There were some concerns about the taste acceptance of the consumers, which we have addressed. In the last one and a half year, we've also upped our distribution focus. We are also reaching out because as the category is getting more and more segmented and role of the influencers and the doctors advocacy is playing a role.
Direct doctors advocacy on the base Complan as well as using the other segments, like the toddler, which Dr. Sharvil just mentioned. These all put together should help us gain share. We already see a momentum on the brand and, in terms of our internal growth. I think market share should also catch up as we, you know, move forward.
Yeah. Thank you, Tarun. I did the related follow-up on that, which is the largest distributor brand? I'm sure Nutralite is not the comparison, but could be Nycil or Revive. Is the Complan distribution ahead of that?
From a direct distribution, I think Complan will be amongst the most distributed, but most available brand as captured by Nielsen today is Nycil. Nycil and Glucon-D are in similar zone, but in last one and a half years, due to Glucon-D being under pressure, peak season, Nycil is available in almost 1.5 million outlets.
Okay. My second question is on Sugar Free. I think we have done lot of variation over last six, seven, eight years, and I think we now successful intervention which is happening. I mean, I understand you don't want to give the number. Other than the pure Sugar Free format, what are the new things which you can expect? Because you are being a market leader and now you are almost cross 96% market share. I mean, fundamentally, you have the challenge to grow the category. I think the new formats, what we have tried, what is it that we can do further?
I think fundamentally, we have to overcome consumers' resistance to try and shift. It's a habit changing thing where we have both the headwinds and tailwinds, and we are working on both. Addressing riding on the tailwinds, which are clearly in the focus of healthier alternatives, which you know, Sugar Free fits in. Overcome the headwinds which are led by concerns on sweeteners. We are addressing both of them together. Sugar Free Green, we got good early success when we launched in 2017, but it plateaued. Now we've relaunched and we expect that it should help us overcome these resistance that consumers have of adoption.
Between this and some of the food categories that we are evaluating, I think we should take the Sugar Free brand in next few years to the next level that we aspire it to.
That's exactly what I was asking you, Tarun. Is that more than Sugar Free we need to have some flanker brands or maybe something which can get into the adjacencies. Is that the-
Yes.
attempt which will strengthen the core platform?
That's correct. We're already testing our learning the chocolate space with e-commerce. We'll probably expand that in next few quarters. There are a couple of other spaces which we are evaluating, too early to share at this stage. We'll have to do enough homework because I mean, for our size, we have enough number of categories. I also want each category to have better productivity. Whatever we get into, we'll do enough learning because it takes a whole amount of organizational energy to launch more products and to win in those products. We are doing homework on those and do a step approach.
Okay. Just last question from my side. What is our saliency coming from e-commerce and modern trade? I'm sure with the relaunch, you would definitely have the focus on these two channels.
E-commerce itself, quarter gone by was at a total business level, 7%. Domestic retail, it was almost 8.5%. This has beaten off our own internal estimates. E-commerce continues to drive at a very, very aggressive pace. My guess is e-commerce and modern trade put together, and as some of these platforms are also doing a convergence at the back end and front end, sometimes whichever way you want to look at it, they put together could become 20% of our domestic business, on a sustainable basis.
Thank you, Tarun, and all the best to you and the team.
You know, whoever comes in next will have to be better.
Thank you very much. Participants, if you wish to ask a question, you may click on the audio question icon on the webcast and follow the instructions to join the question queue. Anyone who wishes to ask a question may click on the audio question icon appearing on the webcast and follow the instructions to join the question queue. Mr. Arora?
Yes. If there are no more questions, we could
We're just waiting, sir. We don't see any more participants joining in the question queue now. If you would like, we can wait for a minute or two more.
I think your system is not working well. I have been disconnected three times now, so I do feel that you guys need to sort this out.
Yeah, even we've struggled.
I do take it up with this poor team because that is a horrible way of managing it. Yeah, we can end if there's, because I think maybe a lot of people got disconnected also. It'd be even nicer. I got disconnected three times.
Yeah.
Thank you everyone.
Can we close?
We don't have any questions in queue.
Thank you everyone. Wishing you all a happy and safe Diwali, and see you next quarter.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Zydus Wellness Limited, that concludes today's conference call. Thank you for joining us, and you may now disconnect your lines.