EPL Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Resilient core, one deep wound: Excluding the COVID-lockdown-hit EAP region, revenue grew 11.4%, but EAP itself fell 6.4%, dragging consolidated growth to 4.1%.
• Europe margins collapsed to single digits: Input cost hardening, energy inflation, wage pressure and COVID-driven production outages in Germany pushed Europe to what management calls an unacceptable level, triggering an all-out recovery push.
• Price and cost levers are now in motion: The company doubled or tripled the intensity of price increases, and early polymer softening began in June, with benefits expected to flow through in Q3.
• Brazil is the next growth bet: A new Greenfield entity is incorporated, a factory site is locked in near a key customer, and first commercial delivery is targeted by the end of FY23, backed by a ₹130 crore board-approved investment.
• What to watch next quarter: Whether the sequential margin improvement in Europe and Americas actually materializes, the pace of China lockdown easing, and any sign that price increases are sticking ahead of the expected commodity softening.

The EAP Drag: China Lockdowns

• Timing of the hit: The real operational impact of China's COVID lockdowns landed in Q1, not Q4, with April and May being the most severe months as both EPL's plants and customer locations shut down. Severity reduced each passing month.
• Revenue mechanics: EAP revenue declined 6.4% YoY, and this single region masked broad-based strength elsewhere: MSR grew 13.4%, Americas 20.4%, and Europe 10.5%. Excluding EAP, the consolidated business grew 11.4%.
• Unmet demand in Europe: Europe's 10.5% growth would have been higher if not for operational challenges, because the German plant could not run at peak demand when as many as 28 people were down with COVID at one point.
• Q2 outlook: Impact from COVID disruptions will continue in Q2, but intensity is reducing; isolated lockdowns remain prevalent in China, so things are expected to look sequentially a little better, not fully resolved.

Kripalu: "I do not want to comment on sequential decline but I want to tell this that real impact of China happened in Q1, not in Q4."

Margin Stress & the Recovery Plan

• Europe margin collapse: Margins in Europe fell to single digits in Q1, driven by input commodity costs that hardened versus Q4, general inflation-related cost increases including wages, specific energy-related cost inflation in Europe, and production challenges in Germany from COVID absenteeism.
• Americas margin pressure: EBIT margins worsened sequentially despite healthy sales growth, due to general inflation-related wage increases and some specific operational issues in the region.
• Input cost trajectory: Polymer costs continued to rise through May; softening really began only in June, so Q1 still absorbed upward cost tweaks. Because of inventory lag, the benefit of softening is expected in Q3, not Q2.
• The recovery toolkit: Management has doubled or tripled the intensity of price increases, which are now happening every month across different customers and geographies, coupled with cost-saving programs and a "war on waste" effort that has already produced a sequential jump in gross profit margin.
• The contractual catch: A portion of the business is contractually linked to input costs, so when commodities soften, pricing to those customers will also come down. Management's aim is to lead with pricing on the way down and retain some margin before prices adjust.

Kripalu: "We believe that the single digit margins in Europe that happened this quarter is not acceptable, so we are doing whatever it takes..."

Growth Vectors Beyond Oral Care

• Non-oral care outpacing: Non-oral care grew 11.7% while oral care grew only 3.2%, and management expressed confidence in growing both BNC and pharmaceuticals, citing a big opportunity in aluminum-to-laminated tube conversions, with momentum from the CACL acquisition and organic efforts.
• Platina tracking well: Q1 was strong for Platina volumes, and the plan to more than double Platina volume in FY23 is on track.
• Pipeline richness: The business development pipeline is described as very rich, with significant volume expected particularly in beauty & cosmetics and pharmaceuticals. Management believes future growth rates will be better than the past based on this pipeline, plus conversion opportunities, Brazil, and M&A for step-change in new geographies.
• Laminate inventory normalization: Laminate sales dipped 22% YoY because the company built inventories during COVID and now needs to reduce them over time; sustainable laminate conversion is happening at a higher accelerated rate, causing month-to-month fluctuations in intercompany sales as inventory adjusts.

Brazil: The Next Greenfield Bet

• Project status: The new entity in Brazil has been incorporated, a factory location has been finalized close to a key customer, the project is code-named "Patient," and recruitments for factory operations are in progress. The board approved a ₹130 crore investment after the project met internal payback thresholds.
• Customer anchor: The investment decision was evaluated based on the commitment of one customer, but management says several other customers are also keen. First commercial delivery is expected by the end of FY23.
• Materiality ambition: Management hopes Brazil will become material to total revenue over time, though they will wait and see how capacity fill evolves.

Capital Allocation & Profitability Ambition

• Capex guardrails: FY23 capex will be more or less equal to depreciation, with the Brazil project treated separately as a strategic Greenfield investment.
• Cash priorities: First call on cash is business and growth; whatever cash is available thereafter goes to consistent dividend payments.
• Profitability ambition: The combination of pricing, cost-saving initiatives, and softening commodities is expected to get the company back to the kind of profitability it had, with the aim of gaining back some of what was lost. Management stopped short of confirming a return to pre-COVID 20-21% EBITDA margins, citing the mathematical translation loss from inflation.
• Europe margin pathway: The aspirational goal remains mid-teens, but the first objective is to get back into double digits, then gradually into the early teens.

Kripalu: "Honestly it would be very hard for anyone to forecast 9%-9.5% inflation in Europe, energy costs not just doubling even beyond that anyone would have found it hard to forecast this even a quarter or two ago."

Guidance & Commitments

Key Metrics