UPL Ltd
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UPL Ltd
Earnings Call Analysis
Q2-2024 Analysis
UPL Ltd
This quarter presented significant challenges that led to a sharp revenue drop, which was exacerbated by a myriad of factors including price declines across regions, high-cost inventory liquidation, sales returns, and rebates. Herbicides like glufosinate, glyphosate, clethodim, and metolachlor, particularly in North America and Brazil, were the main culprits, responsible for 70% of the total quarterly revenue decline. This resulted in a 20% decline in revenue, a 30% decrease in contribution, and a severe margin compression of 470 basis points. Furthermore, EBITDA took a substantial hit with a 56% year-on-year decline. Despite these setbacks, an adjusted view considering one-time impacts paints a slightly better picture of the underlying business health, with contribution margin ticking upwards by about 100 basis points compared to the previous year, a promising sign as market conditions begin to normalize.
The company has claimed a victory with a 9% growth in its differentiated and sustainable segment, marked by a rise in volume steered by innovative products like Evolution and Paroc. This pushed the revenue from this segment up to 36% from 27% a year earlier, showing an encouraging trend towards higher value, sustainable solutions. Additionally, the NPP Biosolutions segment posted a 12% growth in dollar terms, with higher volumes and better margins, and is forecasted to maintain its performance throughout the year. Regional performance was mixed, with Latin America and North America experiencing downturns due to pricing pressures and channel destocking, while other regions saw modest growth. Europe faces continued challenges but anticipates recovery in the second half of the year.
The company is weathering the storm with strategic adjustments, aiming for a better performance in the latter half of the year as major regions approach their primary cropping seasons. They expect the current high channel inventory to diminish over the next 6 to 8 months, with stable farm gate demand. On the operational front, a prudent cost reduction effort is expected to yield approximately $100 million in savings over two years, with significant savings kicking off from October. The management's confidence is underlined by their anticipation of at least 50% in savings being realized within this year, setting the stage for what they project will be a robust recovery in EBITDA going into the second half of the financial year.
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Ladies and gentlemen, good day, and welcome to UPL Limited Q2 FY 2024 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Radhika Arora. Thank you and over to you, ma'am.
Thank you. Good day, everyone. Thanks for joining us today for the results for the quarter and half year ended 30th September 2023. The presentation, press release and the financial statements have been made available on the website, and we take as having read the safe harbor statement. From the management team, we have with us today, Vice Chairman, Rajendra Darak, CEO of Global Crop Protection business, Mike Frank; CFO, Anand Vora; Chief Supply Chain Officer, Raj Tiwari; Chief Commercial Officer, Farokh Hilloo; Mr. Bhupen Dubey and Ashish Dobhal, the CEO of our Advanta business and UPL SAS, respectively, and other members of the leadership team. With that, let me now hand it over to Anand.
Thank you, Radhika. A very warm welcome to all of you all. I'll begin by discussing the key financial highlights for the second quarter and first half ended 30th September, followed by an update on working capital and debt. The global agrochemical market continues to navigate through a difficult sale impacted by the high channel inventories globally as well as the elevated pricing pressure. In particular, the destocking exercise had a significant impact in the U.S. and Brazil, both being among our larger markets. Our second quarter performance too was impacted by the market wide headwind and erratic weather in certain markets such as India and some other parts of Asia parties. As a consequence of these factors, our revenue for the second quarter were down by 19%. A large part of the decline was due to lower realization. Having said that, we did see positive volume growth in our international Crop Protection business, which is quite encouraging given the current market scenario. The volume growth in the international business was driven by good performance of our high-margin differentiated and sustainable portfolio, which grew 9% year-on-year, led by strong volume, which were up by 17%. This is quite noteworthy amid the current industry downturn. The share of our differentiated and sustainable portfolio now represents 38% of the crop protection revenue at the group level versus 30% in the previous year. At the consolidated level, contribution margins declined by 265 basis points to 39.9% in Q2. This compression in margin was due to liquidation of high-cost inventory, higher than usual sales written and replace to support the channel partners. Considering the above factors as transitory, in one way to exclude its impact, contribution margin for H1 would have been higher by approximately 300 basis points versus last year. Some of the above transit factors are expected to continue in H2 as well. Led by the organization-wide cost-reduction initiatives, our fixed overheads for Q2 came down by 3% versus last year. This reduction was achieved despite the FX translation impact of rupee depreciation in $1 of 3%. As informed in the last quarter, our cost reduction initiative of $100 million to be delivered over the next 2 years is currently under execution, and we are on track to realize the cost savings of $50 million for this year. Bulk of this savings for this year will be realized in H2. On the operating profitability front, we reported an EBITDA of INR 1,573 crores in Q2, representing a decline of 43% for that of the previous year, largely on account of double-digit drop in contribution profit. However, adjusting for the transit factors impacting the contribution margin, the drop in EBITDA for Q2 and H1 would have been significantly lower. Before we move on to the items below the EBITDA, I would like to briefly touch upon the performance of 2 of our platforms, UPL SAS, the India to protection platform and Advanta Enterprises, a global seeds platform. Advanta continued to see healthy growth in Q2 as revenues grew by 10% to INR 107 crores, INR 1,070 crores, and the contribution profit grew by 13% over that of last year. On the full for H1, Advanta delivered strong performance by 17% growth in revenue and 25% growth in contribution profit and EBITDA. Looking ahead, Advanta remains on track to achieve the FY '24 guidance. Performance of the India Crop Protection business, UPLS in Q2 was impacted by high channel inventory, heretic monsoon in August and September month and higher-than-usual sales return and also due to lower acreage for key crops such as cotton and pulses, which formable, large part of UPLS revenue. Given the above headwinds, revenue contracted by 36% in Q2 versus last year, our EBITDA declined by 88%. However, led by new launches, a strong product portfolio for the Rabi crop and lower sales return, the performance of PLFs in H2 will be much better than that of H1. Coming now to the financial costs.Net finance costs rose by 18% due to significant increase in interest cost on borrowings this increase in borrowing cost was mainly driven by the benchmark rates rising by 400 basis points year-on-year. The benchmark reference rate there is that of SOFR, which as you all know, is a replacement to the LIBOR rates. The average cost of borrowing for the quarter stood at approximately 7% per annum. FX loss for the quarter, that is the foreign exchange loss for the quarter was INR 229 crores, largely in line with Q1. The FX loss is mainly attributable to the hedging cost of balance sheet exposure in Brazil and the significant currency devaluation in certain countries such as Argentina, Russia and Turkey, where the cost of hedge was significantly higher at unviable to hedge these currencies. Losses from associates and JV rose by approximately INR 175 crores versus that of last year. This was primarily on account of significant decline in profitability at Syn Agro, one of our associate companies in Brazil, given in the severe market downturn in this region. The exceptional costs for the quarter largely included 17 payments, which were required to be paid as per regulations in certain countries. Overall, the decline in EBITDA, combined with higher finance costs, losses from the associates and other system concerns and exceptional items resulted in a net loss of the minority interest of INR 189 crores for the quarter and INR 23 crores for H1. On working capital front, the working capital base increased by 25 days year-on-year to 149 days. The increase is primarily on account of sharp drop in payables and production in factoring. Payable days were much lower versus then of the last year due to the reduced manufacturing activity in H1. Overall, we are expecting the working capital cycle to normalize in H2, ending the year with a working capital of around 65 days, which is in line with that of the previous year. To give an update, to give an update, our net debt increased by $197 million versus last year due to decline in factoring, which was lower by $86 million and also due to increase in working capital given the lower payables. The payables were down by $526 million versus the same last year. Going forward, as we look ahead to the second half of the year, we are confident of delivering progressively much improved profitability in H2. Given the adverse transitory impact of the inventory repricing adjustments in H1 and the expected impact in H2. The guidance for the full year has now been revised to a flattish revenue growth over that of the previous year and EBITDA is expected to be in the range of flat to negative 5% versus that of the previous year. On the balance sheet from, considering the revenue and the EBITDA impact, we are taking initiatives to improve our cash flow, which will allow us to reduce our gross debt by $500 million by end of the year. Some of the initiatives that we propose to take to reduce the loss that are slowing down on our CapEx, which is expected to be lower by $50 million versus that of the previous year. Using the existing cash result of $200 million to pay down the debt, pay down the gross debt and the improved cash generation from operations in H2 should help us to reduce the gross debt by about $500 million at the end of this financial year. With that, I would like to hand over the call to Mike, who will take us through the performance of the international crop production business in greater details. Over to you, Mike.
Thank you, Anand, and hello, everyone. As highlighted by Anand, we have been facing a tough market environment over the last few quarters. While ag-chem demand at farm gate remains strong, the global agrochemical industry continues to go through a challenging phase. Specifically, there's been a significant price decline versus last year for most post-patent products and distributor destocking has occurred in virtually every geography, especially material in Brazil, North America and Europe. Despite this, I'm pleased to highlight that we've increased our market share with overall higher Q2 volumes this year, demonstrating our portfolio strength and our commercial strategy. Moving to results. Our second quarter revenue and margins were negatively impacted by price declines in every region higher cost inventory liquidation as compared to our current replacement costs as well as sales returns and rebates that we use to support our channel partners. Among key products, herbicides, such as glufosinate, glyphosate, clethodim and metolachlor, especially in North America and Brazil accounted for 70% of our total quarterly revenue decline. Among other regions, Europe continued to face challenges due to channel inventory and product bans. Overall, in Q2, our revenue dropped by about 20%, while contribution was down approximately 30% and margin compression of quartered 470 basis points. The EBITDA for the same period declined 56% year-on-year. However, if you adjust for onetime impacts, as highlighted earlier, our contribution margin is up about 100 basis points versus Q2 of last year, which augurs well as we refresh our inventory and the market starts to normalize. Further, I'm happy to share that we have grown our differentiated and sustainable segment by 9% through strong volume increase, the growth has come by newer products such as Evolution and Paroc. This has also resulted in improved product mix from 27% differentiated and sustainable revenue last year to 36% in this quarter. Additionally, our NPP Biosolutions has grown by 12% in U.S. dollar terms through higher volumes, along with improved margins on a quarter-over-quarter basis. And we expect this strong NPP BioSolutions performance to continue for the rest of the year. Let us now look at the performance of our regions in Q2. In Latin America, our revenue was down by 20% due to significant price decline. Brazil was especially affected due to market degrowth with high channel inventory related challenges, specifically in herbicides, key AIs impacted were glyphosate, clethodim and glufosinate. However, outside of Brazil, the rest of Latin America had volume-based growth across our portfolios. In North America, herbicides continue to face challenges due to a sharp decline in AI prices, along with channel destocking and tactical purchases by distributors. Herbicides, including glufosinate, metolachlor and clethodim accounted for about 75% of total revenue decline driven by lower volumes as well as pricing pressure. We expect the channel inventory to normalize in the U.S. by mid-calendar year 2024. In Europe, revenues declined by 8% in Q2 versus last year due to continued channel inventory destocking and product banks. Among major portfolios, herbicides and insecticides were most impacted. That said, we expect upsides in NPP BioSolutions and in herbicide volumes in H2, leading to an overall recovery in the Europe region. The rest of the world was marginally up by about 2% in Q2, led by very strong volume growth across this Rest of the World region, specifically in parts of Asia and Africa.Moving forward, we anticipate Q3 to remain weaker than last year due to continued channel destocking, specifically in Brazil and the price reset in the post-patent segment across geographies. Overall, we expect channel inventory normalization as we come through the second half of the year. On the pricing front, most post-patent AI seem to have bottomed out in Q2, and we expect them to stabilize at or slightly above this level for the remainder of the year. Overall, we are executing well in this challenging market and making changes in our operating model and cost structure that will further improve our business quality going forward. Finally, we are confident of an improved second half performance versus the first half of the year as key regions such as North America, Latin America and Europe enter into the major cropping seasons. As mentioned earlier, the high channel inventory is expected to subside in the next 6 to 8 months with farm gate demand remaining strong throughout this year. And as part of our overhead reduction actions, we are on track to reduce approximately $100 million over the next 2 years with major savings this year starting to accelerate from October.We are confident of delivering at least 50% of total savings this year. With the above actions and stronger volumes, we foresee our EBITDA growing in the second half of the financial year. With this, we'll now open it up for a question-and-answer session.
[Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Siddarth Gadekar from Equirus.
Just my first question was on the glufosinate side. So how should we look at the North America market, given that Basis has launched glufosinate in terms of incremental realization growth and volumes? And secondly, how do we plan to utilize our assets given the lower capacity that has been created in glufosinate because of Al- glufosinate?
Yes. Siddarth. Thanks for the question. As I mentioned in my comments, glufosinate has been one of the challenging AI this year as the prices come down significantly in this segment. Now as well as that, though, our costs have also come down. So, the way I think about this from a FY '24 standpoint, this is really a year where we're rightsizing the amount of glufosinate that we're producing. We've adjusted the price in the marketplace in North America. We've taken our price down significantly to be very competitive in the marketplace. And so, we expect that overall, with these lower prices of glufosinate that we will likely see some level of volume increase just from a price elasticity standpoint. And so, we are set to take advantage of that as we enter into this next season. So I think the glufosinate business will be challenged throughout this year. But as we get into next year, I would expect it to improve. From an al glufosinate standpoint, we don't expect outside of China for there to be much out with glufosinate sold this year. And so, in North America, this is still going to be a straight glufosinate business that we're participating in.
Okay. Got it. Sir, and secondly, in terms of our net debt, how should we look at our net debt numbers now going through the fourth quarter? Or is it too early to give any guidance on the net debt numbers?
Anand Vora. As we, as I mentioned in my commentary, we are looking at reducing at a gross level of at least $500 million as compared to that as of 31st March 2023. So largely, as I mentioned, this should come out of improved performance of H2 whatever we have seen the buildup of debt in order to finance our working capital in H1 as well as to partly fund some of the small losses. We expect much better performance in H2. So, there should be better EBITDA realization in H2. At the same time, we are looking at, as we mentioned, given the guidance for sales to be flattish by the end of the year. And if we are maintaining our number of days of working capital at 65 days, we don't see any incremental funds required to fund working capital.With the overall cost base coming down, we expect some reins out of working capital also. That's the second aspect. And third is, we are looking at various other items of working capital, largely the loans and advances and other aspects to see how we can further argument our cash flows. So, these are some of the factors. Some of the components of cash items which we are looking at, which should help to bring down the gross debt by about $500 million by end of this financial year.
And in that factoring will be similar to last year?
As of now, we have guided for the same at about 1.4 billion levels, but we are evaluating various options. If we will reduce factoring then probably to that extent, there could be a replacement by short-term borrowings. But let's, for a moment, assume factoring to be at the same level as $1.4 billion.
The next question is from the line of Saurabh Jain from HSBC.
Thank you so much for the opportunity. Given that you have revised down our revenue and EBITDA guidance, I think it implies almost like an 18% growth in the second half on the revenues and also almost 28% to 30% growth on the EBITDA. So, do you think that you earlier alluded to the fact that North America, Europe, LatAm, the high inventory is likely to subside only over the next 6 to 8 months, but on a very gradual basis. And the second half is more of LatAm and North America and Europe heavy seasons. So, can you help us understand 18% revenue growth, does it look like more ambitious? And this kind of growth, would it already be visible in the third quarter or it would be more like a fourth quarter loaded growth?
Yes, absolutely, Saurabh. Thanks for the question. As I mentioned earlier, we are expecting volume growth in Q3. But overall, on a Q-over-Q basis, we still don't expect Q3 to exceed Q3 of last year. Now when we get to Q4, obviously, we're starting to do calendar year. And I think a lot of the destocking is going to be behind us. And in Europe and Latin America and U.S. distributors are going to be stocking up for the upcoming season. And so, we would expect very strong volume growth to come back in our Q4.We don't expect prices to strengthen, but we also expect to see strong performance out of our differentiated and sustainable portfolio. And so all of that into the mix would mean that we are expecting both revenue growth and EBITDA growth in our Q4 over the Q4 of last year.
Okay. And this also implies like an EBITDA margins of more than 21%, reaching those kind of margins, do you see that kind of possibility because these are more like some normalized margins that we have done historically also. So, these kind of margins, I understand you have the cost saving plan, but it does not add up too much on the profitability. So can there be, can you explain some drivers to this too much of a good performance on the profitability as well. That can be helpful.
Yes. And so I think there's 2 things to take into consideration on that. So firstly, the cost reduction program will deliver in the range of $50 million of SG&A savings. And so that will have a positive impact. And then secondly, as we get into Q4, in particular, we're also going to be selling fresher inventory. As the price reset happened out of China, for the first 2 quarters of this year and partly into Q3, we're still liquidating higher cost inventory relative to our current replacement cost. And so, when we get into Q4, we're also going to see the benefit of that lower cost inventory, and that will help expand our margins as well. So yes, so all of those taken into account, we would expect to see strong EBITDA margin growth in Q4 as well.
Okay. That is helpful. One last question, a related question I have with this. Is the high-cost inventory liquidation that is largely done? Or are we still carrying some high-cost inventory with us on the books?
Yes. It's not completely behind us. We're still liquidating some of that high-cost inventory. Our feedstocks really started to come down in the first quarter of the year. Raj, maybe you can say a few more words about that. But we'll continue to be liquidating our inventory. I mean if you think back to it, we started the year with about just around 100 days of inventory. So a lot of that has been liquidated, but we're going to continue to liquidate it as we go through Q3 in particular. Raj, do you want to make some comments on that as well?
No, Mike, you absolutely explained prior. So, we have nothing more to add.
The next question is from the line of Damodara from Equitas Capital. Please go ahead.
Yes. Just one question from my side. Most of my other questions have been answered. So, on a credit trading side, so one of the rating increase which has put you on negative watch. And one of the trackers that we have for long rate is achieving net debt-to-EBITDA of 3.5 by FY '24. And the lower end of your EBITDA guidance puts you at a very close range for that. So how confident are you of meeting your credit rating? So, I ask you one question from my side.
Thanks, Dana. This is Anand here. So we, as I mentioned, we are working towards the reduction of gross set by about $500 million. We have identified a few areas where we will work on to see how we can reduce this by about $500 million. Clearly, for us also, it's important and entire senior management is committed to ensure that we retain our investment-grade. And we are in such a tech as well as Moody's and S&P. And considering the overall industry dynamics and the headwinds that the industry is taking, but we feel fairly confident that we should be able to reduce our gross set by about $500 million and thereby meet the rating agencies' requirements.
The next question is from the line of Sanjeev Pandiya from Lancers Impex. Sanjeev, you may go ahead with the question.
Yes. Can you hear me?
Yes. Please go ahead.
Sir, could you give us some qualitative comments on your relative standing as far as the other global integrated producers are concerned, particularly, let's say, FMC, Adama, et cetera. As the market replaced back, we might see higher market share come from those who are projecting higher volumes, but somebody has to lose out. So, what kind of players do you think we'll lose out? And why? I mean, will capital cost, will factoring cost will debt play an important role? And would we see different attitude by the banks towards which of the weaker players?
Yes, Sanjeev, maybe I'll take a first shot at that. So look, I think if you divide our portfolio in the 2 big segments, firstly on the post patent side, our volume increases in our share gain in that market is primarily going to come versus the Chinese producers. And so, in that segment, we're not as much head-to-head against the other global companies that you're referring to. And so yeah, I think the market share will come from the Chinese producers. Based on our portfolio and our superior market access, in our differentiated and sustainable business, again, that's today, it's a smaller part of our business. And so, I think from a material standpoint, while we are gaining share, as you saw in the results, our volumes were up in that segment, 17% this quarter. And so based on the destocking, we're definitely gaining share in that segment. But again, based on the size of it, I don't think we're taking market share necessarily from one specific player. And so yes, I don't think about it in those terms in terms of having material impact on any specific other global producer.
The next question is from the line of Aditya Khemka from InCred Portfolio Management. Please go ahead.
Just 2 questions. Firstly, on the call, you said that you might get some off-patent market share from the Chinese players. And currently, the pricing from the Chinese players have been extremely aggressive. So, what is it that we believe that they would get lesser aggressive? Or will we get more competitive in the next few quarters? And how would you win the market share back? If you could just elaborate on that a little bit. The second question I have is on the debt. So obviously, we are guiding for a $500 million gross debt reduction. What would that translate to in terms of net debt reduction. So other than using our cash reserves, how much cash would be, do we plan to use some operations to reduce debt? Thank you.
Yes, I'll take the first part of that question. And again, I think it's somewhat of a continuation from the last question we got. If you think back over the last several years, we've made significant investments in getting closer to growers and getting market access. And so, in virtually every market with maybe the exception being China, of course, we would have superior market access versus our competitors in China. And so it will be that leverage, that access, the strength of our portfolio that we'll use to compete aggressively in the marketplace. Of course, in addition to that, in most of our active ingredients that we're basic in, we also still have a competitive cost competitive advantage versus our competitors in China. And so we'll continue to be aggressive in the marketplace to allow us to run our plants at capacity, leverage that cost position and then use our market access to compete and ultimately gain share. So that's really the strategy in our post patent segment. On top of that, as part of our cost management and our operating efficiency, we're also really looking at how do we lean out our overall go-to-market approach in our post-patent segment. And so, by doing that, it also allows us ultimately to be more competitive in the marketplace. And so, I think all of this comes together, and it's proving out this year on a year-to-date basis where we believe we're gaining share in the marketplace, and we clearly saw that in Q2 with volume increase across the board. Anand, I'll let you take the second part of the question.
Yes. So obviously, on the second part of the question, I think if one has to look at last year, that's financial year '23. In H2, we generated close to about $1.2 billion of cash from September to March. And as you would know, Q4 for last year was not -- we didn't give that good result. So, considering this year, H2, we do believe that the improved performance and other things, we should be able to generate a bit more cash flows from considering a normalized operations in H2 like of the previous years. We do believe that we should be able to generate a bit more than EUR 1.2 billion of free cash flows or cash flows to pay off the debt.Besides that, you see last year, we had a cash balance of about $700 million. We certainly are looking at releasing at least $200 million to $225 million out of that, which would further help us to bring down the gross there. Addition to that, as I mentioned earlier, we are looking at reducing, slowing down our pace of CapEx and from the guided CapEx spend of about $300 million to $325 million, we are looking at reducing it by at least $50 million. So that is the other piece, which we are looking at. Incurring were slowing down on our M&A pieces activity. And in addition to that, we are as I said, we are looking at each and every item of our balance sheet and seeing how we can release some of the cash which may be stuck in either taxes or VAT and other associated other items of current assets. So, these are some of the initiatives that we are looking at to see to deliver this $500 million bet gross debt reduction and thereby ensure that we retain our investment-grade rating at the same time, keep our balance sheet strong despite a difficult year.
The next question is from the line of Varun Ahuja from BlackRock. Please go ahead.
I think most of my questions have been answered. Just one, getting a bit more detail on the gross part reduction of $500 million. I'm just trying to understand how you're managing the debt reduction from the perspective of higher working capital usage. So whether the debt reduction is going to come from freeing up some of the bank lines so that you can have greater flexibility for your working capital usage? Or whether you are looking at some opportunistic long-term debt reduction, including the public publicly cage, which can effectively reduce that much faster than the amount of debt that you can buy back. So that will be my first question. And then secondly, if you can throw some light on the unutilized revolver lines that you may have through the bank and the cost of funding for the game. Thank you.
Sure. I think it's going to be a mix of both long-term and short-term debt, which we'll be looking at repayment. As you know, we have certain bonds which are outstanding. We also have the acquisition loan, which, of course, some of them, we have now swapped them into sustainability loan, but the benefit which we have with these loans is that they can repay at a short notice. So that gives us the flexibility. And thirdly, of course, is the bank lines, which we have. Clearly, we will be using the cash generated to pay off the expensive debt and which could be a mix of both the bonds as well as the loans which we have, which are long term. So, we'll use a mix of both this. At this stage, I think since this is not just affect the current situation is industry phenomenon where every player in the industry has impacted. I'm sure you would have seen the guidance is coming from companies like FMC as well as by Corteva and some of the other players. So, we do believe that this is transitory in nature. Things should improve as we move forward. And so, at this stage, we continue to have almost all the bank lines which we had last year. In fact, we are getting more lines from the bank. That's not a challenge as far as we are concerned. Most of the banks are supportive, and they understand the industry dynamics. So, at this stage, all the lines which we had, which you are referring to as revolver lines, they continue to be available to us.
I guess the question on unutilized line, the quantum, if you can guide. And also, if I can include another one, I do understand you're mentioning that you're committed to again has opened to agencies and all that. But I'm curious that why is are you rating that important? Because the sense I have is we don't have any lines that would be linked like bank line that should be linked to the rating. So, I just wouldn't you at this point in time, which is where the business environment is a bit tough. Why didn't you think about also balancing the shareholder returns versus just maintaining the IG rate increase. So, I'm curious how you're thinking about that.
I think, of course, shareholders' returns are equally important, and we have been we declared the dividends even this year and those we are paid. So small shareholders they're taken care of. We do believe that maintaining investment grade would be something which also the investors with BT Pryor debt would look at it because that does help to bring in some level of governance better loans especially from a financial management point of view. And it's as the entire senior management, we do feel committed having got the IG rating to maintain the IG rating, while we continue to improve the performance and as well as both in terms of debt returns as well our returns to the debt investors as well as to the equity investors. So, I think for us, both equity investor returns are equally important, but maintaining IG is also something which we would like to retain.
The next question is from the line of Tarang Agarwal from Old Bridge Asset Management. Please go ahead.
A couple of questions from my side. The first one, what's the absolute volume of inventory that the business would be sitting on 30th September 2023 versus 30th of September 2022?
Yes. So Tarang, the absolute inventory there in the slide, but I repeat it for you, it's about INR 18,246 crores as of 30th September '23 and '19, it was in the previous year, it was INR 19,467 crores.
So, I understand that the prices have come off significantly. So that's why I referred to the volume of inventory.
Okay. Raj, do you want to take that? I think it's about 10% higher, but Raj, go ahead.
Yes. In terms of volume, it would be about $50 million to $60 million more as compared to last year.
In percentage terms, that would be?
Okay. I would have set in terms of percentage on how much it would be, but it would be around 10% higher, roughly around that number.
Okay. And second, I just wanted to see how conservative are you or what is the probability for you to meet your guidance of a flat revenue growth for FY '24 as things stand today? And if that were to be the case, you're essentially looking at a sharp volume-led growth in H2 over the same period last year.
Maybe. Yes, look, I think [ all that food ] talk about it from a global commercial perspective and Ashish to give some light on that question from an India perspective, too.
Yes. From an India perspective, this is right. I think ST is going to be volume. ST is also is a more stable half for us because we have wheat where we have a very strong portfolio. And I think wheat, I think the degrees of weather are relatively less. With that, we also have clearly where there also we have better [ some rain ] again is a crop which is not too dependent on rain [ study ]. We have a very stable at and this is definitely led by volume growth of our post patent products. And also, we have 4 new launches coming up in H2 with all sides.
Yes. So from a global standpoint, I think there are a couple of points that gets us to think that you would be reasonably well high on the wasting side of it in H2. And that's primarily because our H1, we have seen that customers across geographies have been extremely reluctant and slow in filling up whatever they have used in the first half? And the second thing that drives us to feel that the volumes would be in our favor is when we are the major geographies, let's say, North America, Brazil, Latin America, we are also noticing that the planting wherever it has happened has happened at the same infrared of last year or maybe in certain geographies slightly more. So, the agriculture across the globe is pretty supportive, except for a few countries Mike spoke about in the initial stages, like where is there a bit of a drought and that's the challenge. But if you look at the major geographies, I think they are all good as far as the acreages of the cross-selling. So these are the 2 factors where we feel that and the farmers, the growers are going to use the material stern data, the distributors will talk up again. They might not stack with the same drive and the stores that they have been doing in the past, but they would definitely need to do that. So that's the reason why we feel a little optimistic on the volumes maintenance.
And maybe I'll just add one more perspective on that. And so, if you look at specific markets like North America, our volume degrowth year-to-date has been very significant as distributors and retailers want to put inventory into their warehouses much closer to the season versus in advance of the season, which they've been doing the last few years. And so again, I just think when you look at the fundamentals and you recognize that grower demand continues to be strong, eventually, we're going to see a new order pattern, which we believe is going to start playing out in Q3, especially in our Q4 and into Q1 and Q2 of next year. And so I think just the order patterns are pushing back, which is why we have a lot of confidence that we're going to see the volume growth we're expecting in the second half of the year.
[indiscernible]
Tarang, your voice is breaking. We can't hear you.
Am I audible right now?
Yes. Sorry, we can't hear you very well.
The next question is from the line of Vishnu Kumar from Spark Capital.
So the competition FMC and Corteva have mentioned that Brazil market specifically seems to be a bit of a challenge for the year for the fourth quarter and highlighted certain issues. Now where are we seeing the market basically on Brazil because for the second half, [ Brazil ] a very key market.
Yes. Are you asking on the global level or...
The global -- I mean, other companies are highlighting -- in fact, one of the key reasons they are downgrading numbers apart from the inventory destocking also talking about and a very negative view on Brazil. So are we deferring or we still think there's an opportunity there just to understand what are we differently seeing there?
Yes. No, thank you for the question. Well, so firstly, as you may know, Brazil is right now in their planting season for soybeans, they're big crop. And we are expecting to see a record area planted this year, around 45.5 million hectares or in that range. And so far, at least in the south part of the country and the rains have actually been higher than normal. And the weather in the central to north of the country is near normal. And so we're expecting to see a very strong demand for herbicides, insecticides and fungicides to go over top of that crop. And some of that inventory is already sitting in distribution, but some of that will also come in season. And so yes, so we're optimistic that as growers start using crop protection products for this upcoming season, there will be a demand pull from distributors back to suppliers like UPL.And so that's why if you look at our Latin America business overall, our volumes are up this year. And so we've got a very strong portfolio. Some of our new products, like I mentioned, for OS and Evolution are performing very well and gaining market share in both the insecticide and fungicide market. And so we expect that to continue as the year plays out. And so yes, that's why we're optimistic generally for the opportunity in Brazil through the rest of this year.
Understood. Sir, if I look at your absolute inventory over the last 2, 3 quarters, we have been consistently going up, which is the other global companies have either been flat or lower. Is it partly because we have opportunistically bought a lot of stock and when we place the product in the market, we will probably be cheaper versus our competition. Is that the reason why our inventories relatively are higher, and that's where some of the second half confidence comes because our pricing may be lower than the others, if you could help us understand on this because our inventory positioning seems to be slightly different versus the others.
Yes. Well, firstly, we started from a much lower position. So if you look at where we started on April 1, we were in a much lower inventory position than the rest of the industry combined. So and then secondly, the second half of our business or the second half of our year is a much larger year. And so we build inventory as per our production and demand plans to service that larger second half of the year. So that's why our inventories are higher this year. It's normal in terms of the cycle where we start the year low and we build inventories through the first half. To be able to service the second half of the year. Now as we come through Q4, we would expect again to see our inventories reduce to similar levels to what we have from a days standpoint, days of inventory to what we had at the end of March last year.
And Raj here, in fact, Mike, as you alluded, we started the year with probably lowest inventory in the industry. We were at $1.7 billion. And even today, our inventory is lower than last year's inventory, of course, in terms of value, in terms of volume, our inventory is slightly higher, but we are prepared for a much bigger H2, and that's going to help us there.
Understood. So, in terms of taking the hit on either the distributor inventory, the reduction in pricing at the distributor level or at our level, can we say that most of the pain is already taken? Or we still expect that the Brazilian season is going to start or specifically in those particular markets, we still have some conversations with our distributor spending. So there could be some one-off events where we will still have to take the hit on the distributor inventory and our inventory there. And why not take it fully and raised off in 2Q itself?
Yes. No, that's a good question. So where we have certainty in terms of negotiations that have concluded, we have taken a provision. And so we are set for that, and we've taken that pain in. That being said, we do expect to see some more negotiations play out through the second half. So just as you said, a lot of it is behind us, probably not all of it. So, as we continue to work with our key distributor customers, specifically in North America and Brazil, we could still see some impact in the second half, but that's yet to be negotiated.
Understood. And one final question if I squeeze. You mentioned that there is a slightly differentiated way in farmers approaching more in terms of just in time. This obviously puts pressure more on the larger companies like us. Does is this model going to be forever that or it's just a 2-, 3-quarter window where we see where the farmers or rather the end of line distributors will order more just in time and have lesser inventory with them? Or this is just a toner window for this just-in-time model?
Yes. So I think if you look back at the last couple of years, with the supply chain challenges coming through COVID and the Ukraine war distributors and at that time, interest rates were also much lower than they are today. So distributors were pleased to fill up their warehouses and they weren't thinking about just in time. Now we're on the other side of that where interest rates obviously are higher. And so everyone is trying to manage their working capital, including distributors. And there's less strain on supply chains. And so I think the assumption distributors have is that they can order in season like you're saying just in time and get products.Now historically, that comes with some risk because if you suddenly get a disease out rate or an insect outbreak, then if the distributor can't have the product available for the farmer customer, then they can lose an opportunity. So, look, I think the pendulum is probably swinging a little bit too hard towards this just-in-time idea. And eventually, it will come back to likely where we were pre-COVID where distributors traditionally try and end the season with anywhere from 20% to 30% ending inventory. I think that's where we'll get back to. But right now, they're trying to run it a bit more leaner than that.
Thank you. The next question is from the line of Rohan from Nuvama.
Sir, just a couple of questions. First is on our performance in India versus other global markets. We are seeing quite a contradictory performance where the global companies have seen a huge volume degrowth. Our [ Utica ], which is representation of a global market actually on have grown by 1% in volume terms. All the impact on top line is mainly price led. However, in India market, you have seen a volume loss by almost as high as 27%, which is quite a contradictory given that domestic markets have done reasonably well in the formulation market until the analysts, we are not too much in B2B. So if you can just give some explanation towards this.
Yes. Thanks for the question. This is Ashish here. So I think as compared to the global markets, it's a very interesting question. The structure of the India market is very different. I think it's a B2C kind of a business where we are the market leader. And I think even for some of the post-patent products, we set the benchmark in terms of prices. So, if you would see our price correction in India is way less as compared to the global markets because it is in India, the price that we would say, the competition remains 5%, 6%, 10% below that thing. So I think in India, this whole the way prices play out and is very, very different from more B2B structure. So, in India, even our B2B business, the small portion of B2B business we have has grown big. But we have try to make sure that we have not lost too much in terms of prices.So, our price variance has been relatively less as compared to our volume business because we are pretty sure that as and when this higher price inventory is liquidated, we would again then come back into business. So because if we reduce the for most of the post betting lands that we have, the only option for the competitor is to reduce it further. So I think it's a lose-lose game, and we have played it slightly differently as compared to the global markets. Now you will see the impact of that in Q3 where India has a very different commentary has comped to global in terms of Q3. I think starting from October, we would start to see an uptrend in most of the products for the India business.
The volume degrowth of 27%, I still didn't get back edition.
Yes. So I think that there are 2, 3 other factors for that. One was that in India, our strong pools are in cotton because the Indian industry is a big partner, is a big part of the Indian industry. So I think cotton is our and we are the leading company in cotton. The other product where we are leading is a segment on summer pulses that segment that we had created in the last 3, 4 years. And so starting what happened in both these crops is that in cotton, also our strong world was not. And in North, we would have heard about I would have heard about pinball because of the pinball on, that particular segment where we market leaders went down big time. And I think overall, the cotton segment in North was big time, it grew in the West, but West is relatively low chemical usage. Similarly for pulses in the April, May, June, the whole pulp segment being gram and Black brand segment, which is there in MP, Maharashtra, North Kanata, was totally washed off because of the drought conditions and after that read condition. So, I think that's a segment which we lost big time. We got a lot of returns because of that. The third piece, of course, is glufosinate. We were the only players until last year. This year, we had 13 to 14 generic entrants. And fortunate we did lose volumes on deposit, but that's once again, because we've tried to maintain a price parity and not started competing in terms of prices. We will once again see the impact. Now as the inventory has been washed out, we'll start seeing the impact of volumes rising again because that initial impact, each company in India would have some loyal distribution, and they do place some products there. But purely in terms of the brand equity that we have, we will start seeing the impact of now glufosinate going our brands going up once again in the third quarter and the fourth quarter because for the generic content, just to come in India and start straight selling the brand is not easy at all. So, we have incurred pain in the first half because of a very, very steep pulses where we have absolute leadership positions and the blue cosmic generic entries of 13 to 14 companies, which initially, they were able to place some, but we feel that they've not been able to liquidate all these products.And that also explains some of the indifferent results that we would have as compared to some of the other companies because we are a little bit of a cotton and a purely company as compared to that rise company, a company having a business portfolio right would apparently look a little bit better.
Your presentations have also mentioned that in the domestic market further where EBITDA margins have come down from almost 20% to 12%. You mentioned that it is all mainly led by the inventory git. If it would not have been there, then our contribution margins would have only been 100 bps lower. So it seems that roughly close to as much as INR 200 crores to INR 220 crores markdown or inventory write-down you have taken. Do you see that there is still any scope for inventory write-down or it's all over and the raw material prices have they started going up. So, what kind of inventories we are sitting and can we expect some margin gain here?
The inventory valuation only has been INR 100 crores is what we reported, not INR 200 crores.
Okay. Sir, just second next question is on our debt numbers. So Anand, sir, though you were getting the earlier answer to a question. Sir, can you repeat the net debt number? I mean, after $500 million, I understand that you mentioned $300 million will be basically cash reduction. So net debt repayment only will be $200 million. Can you just clarify that?
No. We are talking about gross debt reduction. And as I said, we had a $700 million cash sitting as of 31st March 2023. And this, we said we will bring it down to $500 million. So about $200 million of that cash will be used to pay off the close debt. Basically, what we are seeing is that we will reduce our gross debt by $500 million, which should flow down to the net debt reduction also. So net debt reduction will be $300 million actually. To that extent, yes, if you were to reduce your right from $700 million to $400 million.
And out of that $50 million we are talking about, we have reduced from the CapEx number and balance will be primarily coming from the working capital reduction because we are looking no growth in full year and a very small amount can come from the free cash flow generation in second half. But largely, it's the working capital reduction only we are to reduce $300 million net debt.
No. I mean if you look at what we are talking about the numbers with a very good robust H2, you should see some good cash realization coming out of H2 besides the working capital also. The margin improvement, the volume growth which we are talking about, all those things, Mike also alluded upon that we are selling more of differentiated and sustainable products, which are better margin products. So all those factors should bring in additional -- the higher EBITDA, which we refer to as some of this middle ballmark estimate of 21% to 23% EBITDA for H2. So that should generate additional cash, which should help us to also pay off the debt. So there are several things we are working on, and this will help us to bring down our gross debt by $500 million, what we are aiming to achieve.
Fine enough, sir. And just one further clarification. So we are talking about $100 million cost reduction as well of that, roughly, you are looking $50 million to be achieved this year.
That's right.
Okay. Out of that, only first half, I think we have only seen some $8 million, $9 million of reduction.
We start till the second half. We announced this initiative at the end of quarter 1. The execution has begun. As we said, we have taken the initial steps, and we have $9 million already come in by end of Q2, and we should see a large part of this coming in H2.
The next question is from the line of Abhijit Akella from Kotak Securities.
Just with regard to the outlook for the second half of fiscal '24, region-wide if you could please just share your perspective on which regions you would expect to show year-over-year growth out of your portfolio just on the second half of the year.
Yes. So, I would say on the second half of the year, we'd expect growth in every region with potentially the exception of the North American region. So again, yes, so across Latin America, as we said earlier, I mean, our performance in Brazil in the first half was down. In the rest of Latin America, it was actually up in the first half of the year. And so we've got a really good momentum. And so we would expect that to continue. Europe had generally a good start to the year. But as we see volumes get pushed to the second half, we'll be able to participate in that. And so that should benefit us on a year-over-year basis. And in the rest of the world, again, we've got very good momentum, strong volume growth on a year-to-date basis. The only things that are concerning right now are some dry conditions in parts of Australia and parts of Southeast Asia. But overall, we would expect growth in that region as well for the second half of the year. North America, we would expect Q3 to be somewhat similar to Q3 of last year. And then Q4, again, because of the price erosion that we've seen in the market and with our portfolio, in particular in North America. I think Q4 will be a challenging quarter just on a comparative basis. And so we may not see growth in North America in Q4.
Got it. That's very helpful. And just one other thing I was hoping to understand, you expect destocking to continue for another 6 to 8 months, as you mentioned at the beginning of the call. And yet in the second half of this financial year, we're expecting strong volume growth for ourselves. So I'm just trying to reconcile those 2 statements and see how they might tie in together.
Yes, that's a good question. So look, I think if for the most part, in a lot of regions, the destocking is mostly behind us. That would be true in the rest of world region. It will be true in most parts of Latin America with the exception of Brazil. We think it's largely true in Europe by this point in time. So I think it still comes then down to some more destocking that we would expect to see as the year plays out in Brazil and in North America. I think, again, it's almost on an active ingredient by active ingredient basis. And so it's really hard to look at it even across the entire marketplace. But when we look at our portfolio and the products that are critical to us, we would expect in North America, in particular, to see the inventory have some impact through the next 6 to 8 months.In Brazil, we're hoping that the impact of the inventory is largely behind us by the end of this fiscal year. So again, it's a little bit on a product-by-product and market-by-market basis.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Just one question. When you look through the next few quarters, at what stage you see the industry and for the matter, our portfolio starting to get into positive value growth from a from pricing perspective.
Good. I think that's a good question for up, our Chief Commercial Officer. Do you want to take a first step of that?
Yes, I can, Mike. Thank you very much. Well, I think like we have had several rounds of discussion internally and in one of the meetings also, Jay also had mentioned that we should now accept the fact that this is well the new normal. And we would expect the volumes to grow. We would expect the business to grow, but the prices might improve marginally, but they are definitely not going anywhere close to the prices of 2021 and 2022 that we had seen. Because there is so much of excess capacity that has come up in China that we and this is really a lopsided balance at this particular point of time as far as economics is concerned, we have got so much more capacities versus the demand globally. So, the prices are not going to go up anytime soon, but we expect the business to show an improvement. That's more or less from my side.
And if you can, sir, extend further, the fact that we're looking for the environment, but we will not be getting pricing growth. What implications does it have for the gross margin divesting for the business?
Well, I think the gross margins would come back to where it was earlier. For the simple reason is that we are also seeing the compression on the raw material prices. The cost of raw materials have also come down. So, our overall manufacturing cost has come down. So, we do not see a compression on margins going forward. We expect that to expand to the normal state that it was earlier, but it's not the prices are not going to go to the levels that they were.
Very helpful. And if I can squeeze in one more. On the interest cost, now interest cost as a proportion of our EBITDA is a much higher comp than they used to be, say, a couple of years back, even after in the post-acquisition period. How are you looking at that interest cost component versus introducing the savings of that on our EBITDA?
Sorry, the interest cost is -- I mean, you're saying interest cost as a percentage to EBITDA.
And it's become a much larger component than it used to be earlier.
Listen, yes, we do expect -- I mean, until last year, interest costs we averaged 4%, then we saw the suffer going up. So while we continuously have been reducing debt, if you see last year also, we reduced by $400 million. We are looking at the reduction of this year also by $500 million. So I'm looking at where the interest rates are, and from what we are seeing from global from what are we hearing from the Fed and bravos other central banks. We don't seem to think that or we don't seem to believe that the interest rates would come down in a hurry. So, the only way to bring it down is to reduce our debt. And as you see, we have also taken up the initiative to reduce our debt by about $500 million, the gross level. So that looks seems to be the only way at this juncture to bring down our interest cost is by reducing the debt. We do try to get better credit terms on our purchases of raw material, considering the size of operation that we run today.But these are some of the few tools which are available to us. We are not very much in favor of structured products and other things because some one way or the other, they eventually turn out to be much more expensive. So, keeping it simple, we are looking at reducing our gross debt to bring down our interest costs.
We have the last question from the line of Mark Tan from Saudis Investments.
Just 2 questions from me. The first question is with regards to product reduction. I remember you mentioned that the environment has caused the interest cost to be quite high. We do start to see that on cost reduction is actually under 14 rate loans? How do you think about the USD bonds and infrastructure? That's the first question. The second question is, can you elaborate a bit more on the authorizing situation? Because I think first half, the factories amount has come down. So on the call, where you also mentioned that you expect your working capital to be stable, but potentially you might reduce a bit of the sector rising. So just wondering, can you comment a bit about the receivables going to be product operating cost? And why are you choosing to fertilize license they are utilizing more to improve your cash flow? That's the 2 questions.
Sorry, I didn't get the first question, Mark, if you can repeat the first question, I didn't understand.
So gross debt reduction, we start to see targeting those [ projects ] or we do actually be looking to divest some of the U.S. points as well? That's the first question.
Yes. We look at what is the, listen, divesture of the buying back of the bonds requires a procedure to be followed where we have to announce as a part of our liquidity management to announce and give a fair chance to all the bondholders to this, and it's a process which can be a bit lengthy process. As compared to that, the loans, which today, as you see the bonds are at a fixed LIBOR rate and we have issued it and the cost of it is much lower, whereas the loans are more expensive because they're linked to the LIBOR, and we can repay it whenever we want. So that prepayment option is available to us. So we would look we would evaluate both and see what is best possible considering also the tenure of the bonds as well as the loan tenure. So that's something which we will look at. And based on the cash flow generation as to what should be paid off, that's one. Two is, again, that doesn't mean we are ruling out paying of the bonds. Second is on your point on the nonrecourse securitization. That tool is always available to us. We have the banking limits in place for nonprice securitization. However, as you know, the rating agency considers that it has a debt. And therefore, and that's again a short-term debt. So, we would look at the options on to see whether we borrow on working capital if we can get it cheaper and which is really for a very short term, vis-a-vis the nonrecourse securitization. Although our preference is for nonrecourse securitization because it also gives us takes care of our credit risk of our customers. So that's a preferred option for us. However, since the rating agencies consider that as a short-term debt and adds up to our overall borrowings. We are, we remain indifferent and whatever is best and what helps us to release the maximum cash flow, we'll use those tools available to us.
Are you able to share the sectorizing cost on really share number?
All right. So it's the same about 150 to 200 basis points above and so forth. So these are so far linked nonrecourse securitization deals which we have at our disposal. And some of the banks do charge a similar rates for short-term borrowings also.
And I assume it's quite comparable to shorten borrowings, okay?
The additional thing is you get your risk cover. So that's the additional benefit of non-securitization because citation. Thank you. Since this is the last question, thank you very much all of you all for joining us on this call. If there's any follow-up questions to be asked, please reach out to Radhika or myself, and we will be happy to provide you whatever information as well as the necessary answers. Thank you once again for joining us on behalf of all the management. Thank you once again for joining us on this call today.
Thank you very much. On behalf of UPL Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.