EPL Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Growth returns, led by mix shift: Excluding COVID-hit EAP, revenue grew 12.1% (12.7% CC) as personal care and beyond categories now drive 47% of business, while oral care growth lags.
• Margins finally inflect: After six quarters of decline, EBITDA grew double digits; ex-Brazil setup costs, margin rose 91 bps YoY to 16.6% as cost-saving efforts and delayed price hikes materialized.
• Brazil is imminent and de-risked: The fit-for-purpose plant is in customer trials; commercial billing begins Q4 with a trickle, ramping from Q1 FY24 for a customer management calls "hungry and waiting."
• Europe volume softness is temporary: A key customer postponed orders in the seasonally soft Christmas quarter, hurting leverage; management expects a bounce-back in Q4.
• What to watch next quarter: Whether Europe volumes rebound as promised, the pace of gross margin expansion as high-cost inventory clears, and the initial commercial dispatch from Brazil.

Demand & Volume Environment

• Oral care growth is bifurcated: Some players face category pressure, but EPL's portfolio of customers includes brands gaining strongly; premiumization continues, driving higher revenue per tube in India.
• AMESA volumes intact: Management sees no softening in overall oral care volumes or total AMESA volumes; order books remain healthy and month-to-month performance shows no stress.
• Personal care and beyond is the growth engine: Beauty, cosmetics, and pharma are outpacing oral care; a good part of incremental growth comes from new customers and new business, not just existing relationships.
• Customer stickiness limits share swings: Disruptive shifts of significant volume from a competitor are rare; growth comes primarily from growing with existing customers and capturing a higher share of innovation, new formats, and new brands.

Kripalu: “So not easy. This business has high stickiness with customers. ... Once in a while, you get disruptive shift of a significant volume from a competitor to us. And in the rare occasions, we may also lose something. So by and large, what happens is, you grow with your existing customers and hold on to them as best as possible.”

Margin Recovery Mechanics

• The inflection point: After six quarters of EBITDA decline, double-digit EBITDA and PAT growth arrived in Q3; excluding Brazil setup costs, EBITDA margin rose 91 bps YoY and 33 bps sequentially to 16.6%.
• Raw material tailwind is partial and lagged: RM cost rose 7.5% YoY because polymer prices climbed through Q2 before softening; sequentially RM cost is down 80-90 bps, but high-cost inventory held in Q3 means the full benefit of the price drop has not yet flowed through to gross margin.
• Price hikes finally landed in the Americas: Price increases that did not come in previous quarters have now all been secured, contributing to margin expansion in the region.
• Europe volume leverage hurt margins: The volume-related challenge in Europe during Q3 impacted overall P&L performance through loss of scale and operating leverage.
• Mid-teens margin ambition is medium-term: Management "absolutely believes" both Europe and Americas can reach mid-teens margins or thereabouts, but the timeline is deliberately open: it will happen in the medium term, not the very distant long-term, but could be one quarter, two quarters, one year, or two years.

Kripalu: “All I can't tell you is that whether it will happen in one quarter or two quarters or one year or two years exactly, but it won't be in the very distant long-term. It will be in the more medium term where we will absolutely aim to get back to those levels.”

Brazil: The Next Growth Leg

• Plant status: Customer trials are now underway; photographs of the plant were included in the investor deck. Commercial billing is expected to start next quarter (Q4 FY23) with a trickle of volumes, with substantive volumes and ramp-up beginning from Q1 next fiscal.
• The customer proposition: The Brazil volume is 100% share gain; the customer is currently supplied by another vendor, and EPL is setting up a fit-for-purpose plant to supply them. Management describes the customer as "hungry and waiting" and ready to absorb output the moment production begins.
• Americas margin accretion: The Americas region will soon start benefiting from the Brazil investment, which is expected to be accretive to regional margins.

Kripalu: "I can tell you that the customer is hungry and waiting and will lap up to the moment we are able to produce it."

Regional Performance & Outlook

• All regions expected to improve: Management expects every geography to perform better over the next couple of quarters, with China likely doing better as COVID disruption fades.
• Europe M&A as a scale lever: Management sees M&A as a possible route to leapfrog in scale in Europe; has looked closely at a few targets but either strategic fit or price was not right. Vigilance for opportunities remains, in Europe or elsewhere.

Kripalu: “I think that's a great question. And listen, we remain hungry for strategic M&A that will be growth and margin accretive. So we remain hungry. We have looked at some companies. And ultimately, we also have to get the right value for money.”

Pricing & Raw Material Dynamics

• Polymer prices are softening, but not uniformly: On a landed cost basis, polymer prices are not down 10% YoY; RM cost rose 7.5% YoY because prices climbed through Q2 before softening. Sequentially, RM cost is down 80-90 bps.
• High-cost inventory overhang: Some high-cost inventory was still held in Q3; the full benefit of the sequential price drop has not completely reflected in gross margin expansion yet. A little bit of cost reduction will happen going forward as that inventory clears.
• Pricing renegotiation approach: Where contractually required to pass on polymer price corrections, EPL will do so, but conversations will aim to be holistic to retain other inflation-related pricing, both for contracted and non-contracted customers.
• No quantification of non-contracted price hikes: Management declined to quantify price increases achieved with non-contracted customers, stating they are not in a position to do so.

Competitive Position & Market Share

• Likely share gains: Growth has more than kept pace with the industry; EPL's growth in India and globally is ahead of competitors who have announced results.
• Albea comparison is imprecise: Management does not have fresh data on Albea because it is not published; the two companies are of similar scale with different geographic strengths, but no revenue comparison can be made.
• Innovation wins: Fresh commercial orders for Neo Seam technology (360-degree printing) were received in Europe and Americas, signaling customer appetite for differentiated formats.
• Sustainability as a moat: EPL received a CDP rating of A- (leadership band), improved from B last year, and the Ellen MacArthur Foundation accredited EPL with a positive rating on progress toward reduce, reuse, and recycle targets.

Guidance & Commitments

Key Metrics