Advanta Limited Q1 CY 2015 Earnings Results Conference Call. April 24, 2015

Transcription

1 Advanta Limited Q1 CY 2015 Earnings Results Conference Call ANALYST: MR. VIJAYARAGHAVAN RESEARCH ANALYST-IDFC SECURITIES MANAGEMENT: MR. CLAUDIO TORRES- GLOBAL CHIEF EXECUTIVE OFFICER- ADVANTA LIMITED MR. MANOJ GUPTA- GROUP CHIEF FINANCIAL OFFICER- ADVANTA LIMITED Page 1 of 13

2 Moderator: Vijayaraghavan: Ladies and gentlemen, good day and welcome to the Advanta Limited Q1 CY 2015 earning conference call, hosted by IDFC Securities Limited. 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. Should you need assistance during the conference call, please signal an operator by pressing * and then 0 on your touchtone phone. Please note that this conference is being recorded. I would now hand the conference over to Mr. Vijayaraghavan from IDFC Securities. Thank you and over to you Mr. Raghavan! Thank you, Karuna. A very good afternoon to everyone. Thanks for joining us today. I would like to welcome the management of Advanta Limited and thank them for giving us the opportunity to host this call. Representing Advanta Limited management team, today we have with us Mr. Claudio Torres, Group CEO, and Mr. Manoj Gupta, Group CFO. So, we will begin the call with initial remarks from the management team about the performance for the first quarter and business prospects going forward. So over to you Sir, if you could start with the initial remarks then we will follow it up with Q&A! Let me start by welcoming everyone for the call today. As you have seen, our results from revenue point of view are a little below versus three months last year, but I would like you to pay attention to the profit which is a little higher than last year and this is in line with our expectations as we are focusing on most profitable crops and regions. Inspite of having lower revenue, we are achieving a higher level of gross profits mainly because we have been exiting some of crops and focusing on much profitable geographies. Page 2 of 13

3 From the revenue point of view, there is a material impact due to the parity mainly coming from Australia. Overall our revenues are in line with our expectations. We are moving our business into a branded business which has different timing or different phasing of deliveries to end growers and distributors. So this business has not yet phased in the first quarter but goes through the distribution channel into the second quarter. We feel pretty comfortable with our results so far and in line with our expectations and we feel the second quarter and half of the year is going to be normalized in terms of sales and earnings. From business point of view, we are pretty much comfortable with all our geographies except the two geographies i.e. Thailand where there is a continuation of drought and hard conditions and we are trying to manage that in a decent way and the other one is the European countries, Ukraine and Russia where inspite of political unrest we were able to make sales over the last quarter. So those are the two main areas where we are facing some headwinds. In our previous call there were questions relating to new registrations in Russia, so we achieved two new registrations for Sorghum and expecting the third registration to be in line in February In Australia, we are very pleased with canola business. In the US our Sorghum sales are up to the expectation. Asia and Africa is slightly below the expectation as of now. Argentina has not started yet. In Brazil, we are expecting good business because of the initiatives taken place in that region. So in all the business is looking comfortable and we are looking for a very successful year. Thanks very much. Thanks Claudio. Just to add to what Claudio was saying, this is our first quarter which is generally leaner in comparison to Q2 and Q4. This is just a beginning of the year where we are preparing ourselves for the next three quarters focusing on production, inventory and marketing. Page 3 of 13

4 Moreover, it is a preparation time for us for achieving best of the quarters going forward. Our results are more similar to the last year with Rs. 55 Crores of EBITDA versus Rs. 49 Crores and we have a good start for this year. It is a simple quarter for us with not many challenges to deal with, the challenging thing is to see the seed availability, how the demand has been generated and how the orders are coming in. We do not see any issue except the two pointers which Claudio has indicated one is Ukraine and Russia and another one is bit of Thailand, but we are comfortable for the business of all the other territories. So that is what qualitatively both Claudio and I wanted to add. Claudio anything else you want to cover? Vijayaraghavan: I would like to add one point that our end focus is how to manage the company as profitable with all the logistics around the world. You may start seeing these actions on inventories with better cash utilization and cash flow cycles. We have a good portion of requirement for Sorghum in US and in South America production is coming up as expected with improved quality. So, we are in a good position through the rest of the year. Also to add what Claudio has been saying, we are ramping up our presence of SAP and implementing material planning tool, to plan the supply chain and sales forecast well. We are enhancing SAP net which will help the company in near future. Sir, I have few questions. Firstly, how do you see things going forward given the soft commodity prices falling? Do you see any major shift in crop acreages particularly key geographies like Australia, Thailand and North America. Secondly, if you could talk a little more about geographic expansion initiatives which has been a kind of progress for the last two years. As you said it will take a little more time to play out, so what is the status and when do you think these initiatives will start contributing to the business in Europe and South Asian countries. Page 4 of 13

5 Thanks for the question. There is no doubt that low commodity prices are affecting the industry as a whole but it is affecting us in a different way. For example, in US Corn has been affected mainly and a relatively better or a little more positive impact in Sorghum. So we are concentrated in the US and in the past years we have seen some good play wins on Sorghum. Chinese imports of Sorghum has been ramping up. We see some good momentum in the US and Mexico for Sorghum even if the commodity prices are under pressure. In Mexico, there has been positive impacts. In South America, yes there has been some impact, but we are growing our position in Corn. We do not have tropical Corn there materially but majority sub-tropical Corn and is working relatively good. We have not seen such an impact of Canola in Australia except in some of the regions because of less humidity. We are having very important growth in canola versus last year, back there were a couple of reasons that we were not demonstrated in line with our expectations. In Southeast Asia, we are not seeing the impact because we are growing from a much lower base. In Indonesia, because of quality issues last year which has been broadly addressed we expect to grow this year. In Thailand, which is our main market for subtropical corn we are facing some issues because of drought and some climatic conditions. In Europe, there is a political uncertainty but I do not think that is the major thing for us. We are also expecting some good news from surrounding countries like Cambodia but they are minor markets. African expansion is moving as per expectations gradually. We always say that Africa will be a more long-term business and we have been having good results from Africa. We are expecting an increase of about $1.5 million business from Asia-Africa versus last year. We are also very much focused on Brazil and some expansion in the northern part of South America. Brazil now is an area of focus and we are going to see much more focus there due to the huge corn market. We have put in a new management team in place, so I feel extremely excited about business in Brazil. Australia is a mature market for us and with more Page 5 of 13

6 geographical expansion by the addition of new technology as I was saying in my initial remarks is also working good for us. India is doing well as we are growing and developing new studies for business growth in some of the new crops. It is one of the important markets for us and is expected to grow positively. So I think that would be a brief summary to answer your questions. Vijayaraghavan: If you could also give us update on the status of Nutrisun project in Argentina? What are the developments and are we close to make any business out of it? No. We are not having any significant business out of Nutrisun. In Nutrisun, we need to increase the yield of seed per hectare while producing and we are putting all our breeding efforts to make that happen. We are working together to solve this issue which is to increase the amount of seeds produced per hectare, so that our product can be a competitive one. Vijayaraghavan: Vijayaraghavan: This is to Mr. Manoj. This quarter on a year-on-year basis our other operating income has seen a good amount of increase. Any particular reason? Is there any one-off? This is just a distribution of operating income within a year. Overall we do not see a significant increase except the Indian sales going up. The royalty expected out of the Indian sales could be more but it will not be such a big increase versus last year. It is just the timing. In regard to Employee cost should we assume that the current run rate will be maintained because there has been an increase of 20% on a yearon-year basis. Page 6 of 13

7 On the employee cost, we are changing a few things and the new alignments are being done. We have added a few new functions like marketing strategy, marketing communication cell and corporate communications. We have also relocated our headquarters to an international destination and new geographies are added. We are also working on a 20:20 strategy. As you already know it takes 7 to 10 years to do R & D, we are taking up the projects for R&D right from this year for which there could be some commitment on the expenses that company has taken. So all these have been invested towards Internationalization of Advanta. Manoj, if I may add to your reply also, if you take a look at our full year December and then if you wait for us to reach December 2015 you will see that the employee expenses in absolute value have been increasing but if you compare our expenses or the gross margins or the expenses over EBITDA those ratios are going down. So, we have been considering all of those things as variable expense. Moderator: Thank you. We have one question from the line of Veena Patel from I- Wealth Management. Please go ahead. Good afternoon everyone. I have a question pertaining to this quarter s performance because if you look at the same quarter last year the results were on a better side. So what were the reasons for de-growth in the sales for this particular quarter? Claudio will you take that one? Yes. I briefly explained in the opening remarks of our call today. To sum up, one is the parity impact because our first quarter is heavily loaded in Australia where we are selling canola and we have a parity effect over there. From business point of view there were two areas i.e. Thailand and Ukraine where we discussed about some of the implications. The Page 7 of 13

8 third one is in the US where because of change of our business model, revenues are coming more towards the second quarter. These are the main reasons, but if you look at last quarter, revenues have been below, margins are low and in Australia we have $ 2 million business from another crop that we do not have this year because we excluded it for having very small margins. So, it is a composition of all those things. So Claudio, which were the two events that have impacted our performance? Can I help Claudio here? Go ahead. Ms. Patel, we have many subsidiaries outside of India where the functional currency is not Indian Rupees, but it could be Australian Dollars, US dollars, Brazilian real or any other currency. When you convert all those revenues and EBITDA ultimately we being an Indian company listed on BSE and NSE we have to report them at an average conversion rate. So, average conversion rate versus last year has converted our revenues to a lower number by almost Rs.10 Crores which is about US$ 2.5 million. A very minor timing difference is there which Claudio was saying in his opening remarks that the transition in US from the private label business to the branded business is a different one and therefore the Q1 sales have moved to Q2 sales. So, it is only a timing difference which is hardly a million. As I said previously, this quarter is a very, very small quarter for us and over Rs Crores revenue of last year it contributes only 15%, so it is just the beginning of the year and we have not anticipated any major changes in sales this quarter. Therefore this is pretty much of a quarter which is stable versus last year and due to parity, there are some changes which could be seen as a lower of sales. But I want you to pay attention to two important things that our gross margin has improved from 48% to 52% which is 4 basis points Page 8 of 13

9 better. The reason for this is we have a better Sorghum branded sales, better Canola sales and sale of high profit contributing products over the last year which is good news. Sir, these kind of gross margins are sustainable for the rest part of the year, because it is just a start of this quarter? Ms. Patel, this is an outcome of better sales prices, the factor of cost of goods sold and the factor of sales mix. In general we see our prices are going up, COGS is going down, we have better quality of seed health and therefore we believe that our GM percentages will be better than last year. Mr. Gupta, which are the better quarter for us. Is it Q2 and Q4? This year we are expecting Q2 and Q4 because the way we have seen our expectations on sales and budgets, it seems to be Q2 and Q4, which is April to June and October to December. Sir, you were mentioning in your initial commentary that you have been working on supply chain management and material planning etc., so will this help us to improve our working capital cycles and especially the inventory and the receivables? Yes. That is exactly our top most area because actions and strategies were taking in place and you will see the change over a period of time as the agriculture business is a long cycle, but yes that is the objective we are pursuing. Mr. Gupta, what kind of capex we can look for this particular year? We are not a capex oriented business but we are more working capital intensive. So, we do not expect a lot of capex. We are setting up our plant in Indonesia, which is in cooperation with the tollers who will run Page 9 of 13

10 it for us. In addition, we are upgrading some of our production facilities in Thailand, Australia, Argentina and hence we expect to spend about $7 or $8 million this year. As mentioned in my initial remarks, we are spending more Capex on our software and information technology, upgrading production planning system, material management system to improve the sales forecast. As you have rightly questioned the other time, will it help to manage the working capital, I would not say it will reduce the working capital, but it will make the working capital process very efficient. What kind of capex will be towards this kind of software upgradation? We are implementing software in two of our major businesses. One is Australia, which is the biggest business for us and another one is Thailand, which is one of the most profitable business for us in Advanta portfolio. The third one is material planning, production planning software, so all these put together we could spend about $1.5 to $2 million in one to two years. If I understood correctly, since yesterday s Annual General Meeting that we have been focusing now gradually towards the GM crops from the hybrids, so currently, as on today, what kind of percentage of our sales to come from GM crops? So, let me clarify that one. Are we pursuing, are we investing heavily in GM crops and are we going to transform our entire portfolio into GM? The answer is no. The right approach for us is whenever we have a market and the growers require the technology we will bring it to them in partnership with technology providers. Today, a big portion of our canola is GM and a good portion of our subtropical Corn in Argentina and in Brazil we start growing with GM. Also, we are entering in the Southeast US with GM temperate Corn. We have very very minor sales in the Philippines of our GM Corn because Philippines is a GM market Page 10 of 13

11 for Corn, so those are the markets and as I was telling you anywhere where the growers do demand that technology we will deliver solutions to our growers. Claudio you just mentioned about a shift in the strategy in the US market from the private label to the branded business. So how is this ratio of sales between private label and branded business in US on an annual basis? So, you have to pardon me on that one because I cannot give you on top of my mind what is the percentage private versus branded today. I mean the sales mix in the US market? It is only the US market and somehow the Mexican market as well. So, why we do that because when we produce the seed for someone else to sell of course margins are smaller and we need to invest to bring better technology, better genetics into the market. Also the fact of going directly to growers through distribution, you are much closer to the markets and growers and you can better understand their needs. A big portion of our Sorghum is used in the daily product in the Southeast US and we are pushing very harder with some of the big producers to start using Sorghum. So you need to work much closely with them through a private label business and overall our gross margins are much more in this than private label business and we are a company that can believe in technology to our growers, so private label business is not a proper business for us. Claudio, if I heard it correct, you just mentioned about the Sorghum is one of the crop where we want to shift to the branded business, are there any other crops that are also in the mind of the management as per the US market is concerned? Page 11 of 13

12 So, Sorghum in the US was the only crop that we are using in the brand of label approach, I would say the majority of our crops and all the other things are branded. All crops will be shifting towards the branded business? No. Already we have done this. We have a branding strategy and we go with different brands in different markets except the US Sorghum. Private label means that I produce seed and I sell it to you so you can sell it in your own brand. Right. Every crop, every region outside of that is fully on our branded business. So we use our Advanta brand, Alta brand, Pacific seeds brand and Golden Brand. Claudio with the kind of the initiatives that you have been taking and strategies that you are putting into place, so what kind of growth that we can look forward with a horizon of around three to five years? That is a very tricky question to answer because sometimes we cannot fully, disclose our strategy as we are giving a lot of lights and indications to our competitors but if I can take this risk to say that we are expecting around four times gross margin growth over the next 5 to 6 years. Thanks Claudio and wish you good luck. Moderator: Thank you. As there are no further questions from the participant I would now like to handover the floor back to the management for their closing comments. So, just as a closing remark, thank you all for joining us today. Thank you for all your questions. I am very pleased that the questions in every call are more improved and indeed of our business. I am very pleased to Page 12 of 13

13 receive those questions because there is much more interest from investors community and much better understanding of our strategy and much better understanding of Advanta being a global company, which is focusing on all regions in the world in several crops and not specific crops in only one region, which is the main differentiation factor. We are running a quite challenging industry. There are a couple of things that we cannot manage but those are equal to anyone else. So, the strategies are in place, team is working in each of the regions and we are seeing good traction. The focus of our objective was to draw much more profitable business and you can see that on the improved gross margins, improved ratio of expenses of our gross margin, improved EBITDA, lower capital requirements and better management of inventory. We are investing on the right areas which is improving visibility and therefore helping us to increase efficiency, so all in all, we are on a good track. We are moving as we plan and we have been achieving those milestones and benchmark as the way we plan it. We are very confident that we are on the right track and we will deliver according to the expectations. So thanks very much and Manoj, if you want to add some more comments, please go ahead. Moderator: As I said this is just the beginning of the year and as you have heard in the conversation for last one hour we are expecting a good year and we see that our strategies are aligned more and more, more towards geographies, more towards our product sense so in medium-to-long-term we could see a good alignment and good business build up. Thank you very much Sir. Ladies and gentlemen, on behalf of IDFC Securities Limited that concludes this conference call. Thank you for joining us. You may now disconnect your lines. Page 13 of 13