EPL Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Margin recovery begins, but from a painful base: EBITDA margin ex-Brazil setup cost improved 119 bps sequentially to 16.3% as pricing and cost-saving programmes started to bear fruit, though currency devaluation ate up a sizeable portion of the benefit.
• Currency is the new margin villain: The rupee's depreciation against the dollar largely offset the softening of polymer prices this quarter, and while FX is contractually passed through, the lag created a material margin headwind.
• Brazil is the growth option that keeps getting bigger: The plant shell is nearly complete and equipment is on the water, but the real story is that inbound interest from local and global players has intensified since the announcement, raising the project's ambition.
• EAP is stabilising, not yet recovering: Revenue returned to slight growth at +1.5% after a -6% Q1, and management calls the worst behind it, but the zero-tolerance policy continues to suppress day-to-day business.
• What to watch next quarter: Whether the sequential margin improvement extends as input costs roll over, the pace of FX pass-through catching up, and any commercial disclosures on Brazil's anchor customer and revenue potential.

Margin Walk: The Currency Squeeze

• Input costs peaked in Q2: The consumption cost of polymers and aluminium cocktail hit its highest point this quarter because inventory consumed in July-September was purchased 3-5 months prior when raw material prices were at their peak.
• Currency ate the polymer relief: Polymer prices softened, but the rupee's depreciation against the dollar was so large that it largely offset the benefit, leaving landed material costs elevated.
• FX pass-through is a timing problem, not a permanent loss: For contracted customers, landed prices are a function of landed cost including FX, so the company is never out of pocket apart from the pace lag that occurred this quarter.
• Freight costs are easing: Freight costs are coming down compared to the last three quarters, which will help improve EBITDA margin in coming quarters.
• Gross margin dipped sequentially: The polymer price decline was offset by dollar rate increases, making Q2 the peak quarter for material consumption prices.
• Other expenses rose: Higher material cost, power and fuel costs, and disruptions in power supplies in Europe and AMESA regions pushed other expenses up sequentially.
• Management's margin metric is per-tube profit, not percentage: The absolute aim is to restore profitability measured as EBITDA per tube, because percentage margins carry translation losses from currency devaluation.

Kripalu: "I do not think this management team is going to rest till we get back to the levels of the profitability that we enjoyed say for any percentage losses due to transmission, so I just want to be very, very clear about that."

Regional Performance: A Tale of Four Geographies

• Sequential EBITDA improved across all regions: Management pushed back on an analyst's claim of broad sequential margin decline, stating only AMESA had a small dip while other regions improved versus June.

Brazil: The Next Growth Engine

• Construction is on track: The plant shell is almost ready and equipment is on the high seas, with commercial production committed to commence by the end of this fiscal year.
• Customer interest has intensified: Since the announcement, queries and interest from multiple local and global players have increased materially, raising management's excitement about the opportunity.
• Anchor customer secured: The company is entering Brazil on the back of contractual customers with an anchor customer commitment already in place.
• Financials remain undisclosed: Management is not in a position to give revenue or margin potential at this stage; the internal business case targets a good quality payback in line with the nature of the business.
• Capex will scale with demand: As and when there are developments, capex will go up beyond the currently committed amount.

Kripalu: "Ever since we made the announcement and started the investment and our plant is kind of at least the shell of the plant is almost ready now and equipment is on the high, the amount of queries and interest that we have seen from multiple other local and global players is very, very encouraging."

Category & Mix Shift

• Personal care and beyond is taking share: The category grew 17.7% and its H1 revenue share improved to 47.8%, up 220 bps YoY, while oral care grew only 6.7%, predominantly affected by EAP weakness.
• Pharma is a regional success story, not yet a global one: The category has grown half-yearly and is doing really well in AMESA, particularly in India where conversions are taking place, but the business remains relatively small in other regions and has work to do to unlock larger opportunities.
• Innovation pipeline is commercialising: The first commercial order was received for Neo Seam Tube technology, which minimises the visual impact of the side seam, and a Dia 16 spin breaking tube with special tamper-evidence design was developed.
• Platina adoption is broadening: Two additional brands in personal care and beyond have adopted the Platina solution, adding to the five oral care brands already using it, and the company is on track to double Platina volume in FY2023.

Sustainability as Competitive Advantage

• APR recognition in the US: Two Platina variants received recognition from the Association of Plastic Recyclers: Platina PRO ME, which provides a metallic look to an eco-friendly tube, and Platina PRO Vision, a transparent tube, both fully recyclable.
• EcoVadis ambition: A company-wide effort has been launched to achieve gold rating on EcoVadis.
• Stated long-term ambition: To become the most sustainable packaging company in the world, which management believes will be a sustainable source of competitive advantage laying the foundation for long-term profitable growth.
• Awards for innovation: The company was awarded for its anti-counterfeit tube and Platina eco-friendly tube.

Guidance & Commitments

Key Metrics