Stevanato Group SpA (STVN) 2023 Q2 法說會逐字稿

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Stevanato Group's Second Quarter 2023 Financial Results Conference Call. (Operator Instructions)

At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice President, Investor Relations. Please go ahead, madam.

Good morning, and thank you for joining us. With me today is Franco Stevanato, Executive Chairman; Franco Moro, Chief Executive Officer; and Marco Dal Lago, Chief Financial Officer. A presentation illustrating today's results can be found on the IR section of our website. Some statements being made today will be forward-looking in nature and are only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in Item 3D entitled Risk Factors in the company's most recent annual report on Form 20-F filed with the SEC. We encourage you to review the information contained in our earnings release in conjunction with our SEC filings and our latest Form 20-F. The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law.

Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analyses of results and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures, please see the company's most recent earnings press release.

And now I hand the call over to Franco Stevanato for opening remarks.

Thank you, Lisa. We are pleased with another quarter of solid operational and financial performance as we continue to build on our track record and execute against our objectives. We are making progress on all fronts as evidenced in today's results. We continue to achieve our near-term growth target of high single-digit to low double-digit growths. We are successfully responding to market demand, which in turn is driving our mix shift towards high-value solutions. This keeps us on track to achieve our midterm target for revenue from high-value solutions in the high 30% range in 2026. Our investments in growth platforms are currently going as planned as we expand capacity for high-value solutions to satisfy strong customer demand in key end markets like biologics.

And lastly, we are benefiting from growth in biologics, which has a projected compounded annual growth rate of approximately 15% through 2027 and is currently our fastest-growing end market. Our differentiated easy field products are ideally suited to meet the mission-critical needs of biologics and our pipeline of projects is heavily weighted towards this market. Over the last several years, we have laid the foundation to drive sustainable long-term organic growth, and we believe we are well positioned to capitalize on the many secular tailwinds as we continue to create and drive shareholder value.

Thank you. I will now hand the call over to Franco.

Thank you, Franco. Starting on Page 7, our second quarter results were highlighted by 9% year-over-year revenue growth and an adjusted EBITDA margin of 26.7%. During the second quarter, strong demand for our high-value easy field products led to an increasing mix of high-value solutions, which represented approximately 33% of total revenue. For the second quarter, new order intake totaled EUR 240 million compared to the EUR 252 million last year. Excluding COVID-19-related orders, new order intake increased 4% compared to the same period last year. As of June 30, our backlog of committed orders totaled approximately EUR 939 million. Both the new order intake and backlog were temporarily inflated during the pandemic as customers placed signed orders further in advance. Customers have since returned to pre-COVID business practices.

Let's turn to Page 8. Pharmaceutical innovation is driving advancements in more complex biologic drugs and paving the way for new therapies that address chronic diseases, comorbidities and more challenging disease management. In 2021, approximately 28% of all FDA approvals were biologics. This rose to approximately 40% of approvals in 2022. Of the 2022 FDA approvals, we are in 3 of the full potential blockbusters, all of which are biologics. Biologics are a broad category of products often administered by injection. They can be challenging to stabilize and administer due to their complexity, sensitivity, and viscosity. As a result, biologics have a unique storage and packaging requirements that are EZ-fill, Nexa, and Alba products are specifically designed to address -- even for the most demanding biologics.

Over the last couple of years, biologics have been an important growth driver for our business. Year-to-date and excluding revenue related to COVID-19, revenue from biologics accounted for 26% of BDS segment revenue compared with 19% in 2022 and 16% for 2021. This increase in revenue from biologics also that is with the timing of our targeted capacity expansion. The key takeaway is that we currently see strong secular tailwinds in biologics, creating downstream demand for high-value products. We expect that continued advancements in biologics, including mRNA applications, monoclonal antibodies, GLP-1, and biosimilars will continue to drive durable organic growth.

Please turn to Page 9 for an update on our capital projects in the U.S. and Italy, as we advance this facility towards operational readiness. In Fishers, staffing plans remain on track, and our technical and managerial staff have a return to Indiana after many months of immersive training here in Italy. We've started our initial performance qualifications for the first EZ-fill alliance, and we remain on track to begin customer validation activities later in the year.

In Latina, Italy, staffing plans are progressing as expected and customer validation activities are well underway, as we prepare for commercial production by the end of the year. As a reminder, our expansion is modular. It is linked to real customer demand and the visibility we have through our long-term commercial agreements. We work directly with customers to assess their capacity needs and we align our expansion plans accordingly. New capacity typically requires several years to plan, build, validate, and launch for commercial production.

The intensity of capital investments, and the rigorous quality and regulatory requirements, create natural barriers to entry. This, coupled with our deep technical expertise, unique integrated capabilities, and ability to deliver high performance products at scale, positions us to capitalize on strong customer demand and expand our market share in growing end markets, like biologics.

Lastly, we recently published our 2022 Sustainability Report. It highlights our efforts to pursue efficient and innovative solutions, while fostering a culture that values Health & Safety as well as Diversity, Equity, & Inclusion. We measure our progress through the GRI Standards as a framework for transparency and accountability. I want to congratulate our team for receiving a bronze medal from EcoVadis, recognizing our efforts in sustainability. Our goal is to continue growing and supporting customers, while making a positive impact everywhere we work and do business. Thank you.

I will hand the call over to Marco.

Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the second quarter of 2022, unless otherwise specified. Starting on page 12. For the second quarter of 2023, revenue increased 9% to EUR 255.3 million or approximately 10% on a constant currency basis driven by growth in both segments.

We are pleased with the consistent progress in growing our mix of high value solutions, which represented 33% of total revenue compared to 30% for the same period last year. Revenue from COVID-19 decreased 89% over the prior year and accounted for approximately 1% of revenue in the quarter. Despite this drop-off, we have been successfully backfilling it with revenue from new and expanding customer projects. Excluding revenue from COVID-19 and the effects of currency, second quarter revenue increased 20%. For the second quarter, gross profit margin was impacted by temporary inefficiencies as the company brings its new facilities into service.

As a result, gross profit margin decreased 90 basis points to 30.9%, due to the expected rise in industrial costs and higher depreciation. This was partially offset by the increase in high-value solutions. The rise in industrial costs unfavorably impacted gross profit margin by 140 basis points. Excluding these start-up costs, gross profit margin would have been 32.3% in the second quarter of '23, compared with 32.1% for the same period last year. These headwinds are expected to abate as capacity comes online. We currently expect that they will continue into 2024 when operations commence in Indiana.

In the second quarter of 2023, operating profit margin was 17.6%. Excluding start-up costs of the new plants, adjusted operating profit margin was 19.1%. This compares to 19.6% in the same period last year which benefitted from a EUR 6.0 million contract modification tied to COVID-19. Adjusted EBITDA increased 10% to EUR 68.2 million, and adjusted EBITDA margin was up 30 basis points to 26.7%. On the bottom line, for the second quarter of 2023, net profit totaled EUR 34.3 million, and we delivered diluted earnings per share of EUR 0.13. Excluding start-up costs, adjusted net profit was EUR 37 million, and adjusted diluted earnings per share increased 17% to EUR 0.14 over last year.

Moving to segment results on Page 13. For the second quarter, revenue from the Biopharmaceutical and Diagnostic Solutions Segment increased 9% to EUR 204.8 million, compared with the same period last year. Growth on a constant currency basis was also 9%. Revenue from high value solutions increased 20% to EUR 84.2 million; and revenue from other containment and delivery solutions increased 2% to EUR 120.6 million. As expected, margins in the BDS Segment were impacted by the start-up of new plants and higher depreciation, which was partially offset by the increase in high value solutions. This led to gross profit margin of 31.6% and operating profit margin of 19.8% in the second quarter of 2023.

Revenue from the Engineering Segment increased 11% to EUR 50.5 million driven mainly by strong sales in visual inspection lines. Gross profit margin for the Engineering segment increased 20 basis points to 22.5%, driven by higher sales in more accretive product lines and ongoing optimization efforts. This led to operating profit margin of 15.5% for the second quarter of 2023.

On Page 14. As of June 30, 2023, we had net debt of EUR 120.4 million, and cash and cash equivalents of EUR 61.2 million. As expected, capital expenditures were EUR 138 million in the second quarter, and we remain on track with the expansion of our capacity in high value solutions to meet customer demand for ready-to-use drug containment. For the second quarter of 2023, net cash generated from operating activities was EUR 24.4 million, which reflects our current working capital needs to support organic growth in the business. Cash used for the purchase of property, plant, and equipment, and intangible assets was EUR 93.7 million which resulted in negative free cash flow of EUR 69.1 million.

Lastly, on Page 15, guidance. We continue to expect revenue in the range of EUR 1.085 billion to EUR 1.115 billion, adjusted diluted EPS in the range of EUR 0.58 to EUR 0.62. And lastly, we are slightly increasing adjusted EBITDA guidance. We realized some improvements in utilities, which are coming lower than forecast and as a result, we now expect adjusted EBITDA in the range of EUR 291.8 million to EUR 303.8 million. This will not, however, have an impact on reported EBITDA as this effect will be offset by marginally higher nonrecurring start-up expenses, mostly related to training in Latina and Indiana.

Our 2023 guidance assumes that CapEx will range between 35% to 40% of 2023 revenue. High value solutions will represent approximately 32% to 34% of forecasted revenue. A currency headwind of approximately EUR 13 million to EUR 14 million. In COVID-19, we represent about 1% to 2% of revenue, down from our prior estimate of 2% to 3%. Thank you.

I will hand the call to Franco for closing comments.

In closing, we are pleased with our year-to-date financial results. The fundamentals of our business are strong, and we operate in growing end markets characterized by an environment of robust demand. Our teams are executing against our strategic and operational priorities as we set the stage to capitalize on customer demand for our integrated products. I am proud of the progress we continue to make every day as we remain laser focused on completing the current phase of our expansion in Italy and the United States, as we prepare for commercial production in the coming months. Meeting customer demand and growing our mix of high value solutions, as customers turn to ready-to-use formats and move up the product value chain. Investing in R&D to maintain and accelerate our market-leading position. And lastly, building a multi-year pipeline of new opportunities by supporting our customers through scientific innovation to meet their evolving needs. Thank you.

Operator, let's open it up for questions.

(Operator Instructions) The first question is from Patrick Donnelly from Citi.

Franco, maybe one just on the GLP-1 landscape. Obviously, a big focus for investors. Can you just talk about the competitive landscape? The backdrop certainly seems ripe for continuing to show really strong growth there. But can you just talk about what you're seeing there, the competitive landscape? Anything on market share or growth would certainly be helpful as well but we'd love to chat a little bit about that market.

Yes. Thank you, Patrick. I want to start saying that we are in diabetes care and GLP-1s, since many, many years and you know that we have a leadership position in cartridges for pen, and we have a strong value proposition also for syringes for auto-injector and syringes for the GLP-1. So this is our current position that allow us to see good opportunities for us in the future for the same franchise of products. In terms of the competitive landscape, I have to confirm that we have different competitors in different space because in syringes, we are the second player worldwide. In cartridges, I have already said that we are the leader. There are other competitors that are important for us. But as we see in all other markets addressing biologics.

It's important to say also that in this space, we see more and more space for the conversion to the right configuration of cartridges in this specific case that is one of the important driver we see because we have the leadership position in this technology.

Okay. No, that's helpful. And then maybe just an update on China. Obviously, that's been a challenged backdrop across all of life sciences certainly this quarter. I know you guys paused development a bit last quarter. Can you just talk about the backdrop there? Any change to the plans? How you're thinking about that market would be helpful. I appreciate it.

Yes. I'll start. Marco speaking. From second quarter, we are down a little bit. We are around 9% of our revenue generated in Asia Pacific. The reduction in Asia Pacific compared to last year is mainly driven by engineering that where we have fluctuations quarter after quarter depending on the project mix. For the future, I will leave to Franco.

Yes. I have to reiterate that there is no changes in terms of the long-term strategy for China and Asia Pacific, where we see very important opportunities also for the longer run because it is one of the fastest-growing markets. We decided to pause a little investment in China because we prefer to focus on the CapEx execution in the U.S. and Italy, where we have very interesting opportunities in the near term. And so the fact that we decided to put all our attention in the short term in the U.S. and Italy, it doesn't mean that we changed our strategy for China.

The next question is from Paul Knight from KeyBanc.

Franco Moro, could you talk to how quickly will Fishers, Indiana bring revenue? Will you expect to have 50% of capacity, generating revenue? Was it 50% delivering in 2024? What's your thought on Fishers?

Paul, yes, we confirm that we are in line with the expectation to have that in the first half of next year, the advancement of our validation program for the commercial volume that we transferred from Europe and new opportunities coming from the U.S. market. We expect to start revenue generation along the year, most probably in the middle of the year and to ramp up module by module because we will start the first module, and then we will spread the rest of the CapEx plan during the next 2, 5, 4 years to complete the cycle of investment in Fisher in '27 according to the current plan. But is that our approach, and we will progress with this kind of modularity.

Okay. And then my -- I think the most frequent investor question right now is you've been guiding to around 10% long-term organic growth with the emergence of GLP-1s with, I think, what has been a surprising number of biologic approvals last year this year. What are your thoughts about that long-term 10% potential growth rate?

First of all, you are right, we are not addressing a single therapeutic area. We are talking about the opportunities we have in biologics where our solution matches exactly the needs of our customer. So obviously, we see opportunities that are embedded in our expectation to continue to have a healthy growth in the years and this is something about the '24 next year. It's too early to release any specific information, but we are investing so evenly in a high-value solution because we consider biological space as the main driver of our growth in the future where -- because also the possibility to convert the market for biologic cartridge in that space even faster than in general. But we are in line with our expectation to support the growth for the year. Nothing -- no major changes in that.

The next question is from David Windley from Jefferies.

In high-value solutions, can you comment on or maybe peel apart the demand for particular products within our groups of products within high-value solutions? So for example, are you seeing more of the push from standard to pre-sterilized, or are you seeing more uplift in your higher-end products like Nexa and Alba?

Yes, it's a very interesting question, but I have to say that both because we see very strong demand even higher than expected for the right cartages. And also for Alba and Nexa because both these product line -- all of these product lines are associated with the biologics and auto-injector or ANS. So we are very happy to say that our value proposition, our portfolio of solution is not overweight in a single product line, but has a well-balanced portfolio of solutions that address the growth in biologics. There is nothing in specific that we consider more important, we are happy to say that we have many different opportunities.

Okay. Maybe a question for Marco. When you talk about higher industrial costs, could you detail kind of what comprises industrial costs? What types of costs are you including in that descriptor, please?

Yes. Thanks, David. So in reported gross profit margin, we have been impacted by the nonrecurring start-up costs related to the relaunch of the commercial revenue in Fishers and in Latina, so we are training our people to secure the success of the ramp-up. And these are treated as nonrecurring expenses. Without that, we would have done 32.3% in gross profit margin. Another important difference compared to last year is about depreciation where we have about 80 basis points more than last year due to the CapEx we have been doing since the beginning of 2022. Obviously, the offset of that is about the shifting to our high-value solution where we are gaining profitability with the metric we shared several times that we are gaining 100 basis points of standard gross profit margin whenever we increase 4% or the shift -- the share of high-value solutions. So it's consistent with the plan we designed in the past. And those are the 2 main headwinds we are facing.

Okay. Very helpful. Last question for me, kind of similar to Patrick's question around the environment in Life Sciences. Destocking has been a theme and for you in your order pattern, you're talking about order patterns returning to normal. Does that include -- do you believe that, that includes some amount of customers bleeding down their own inventories? Are they overstocked in inventory of your containment products such that order patterns are not only lower, but are actually kind of undershooting current demand?

Yes. We see a different approach or better back to normal practices in terms of transferring forecast and flowing for recasting committed orders as a general approach. And -- but in vials, and you may recall that COVID was almost all vials business, we see also the situation you were referring too. So some inventories that the customer had to deplete to use and so we expect that during next quarters, the situation will relax in term, but it's only related to vials because COVID-19 out of vials that were a minor part of the business. So partially is the back to normal practices, generally speaking, and then the COVID fading specifically in vials.

Franco, so you said, I think you were saying in coming quarters. Do you have an estimate on how much longer you think it’ll be before customers kind of return to normal levels?

I want to stress that I’m referring only to vials and we expect it to be sometime in '24 back to the current normal situation also in vials. It's too early to say more than that because, obviously, our customers are planning '24, and we will deliver better, more precise information later on.

The next question is from Derik De Bruin from Bank of America.

Just to follow up on David's question on the gross margin. What's the -- how should we think about progression into 3Q and 4Q?

Well, Derik, for the year, we are confirming -- excluding nonrecurring expenses and margin expansion compared to 2022 in both segments. In BDS, in particular, driven by the shift in to our vial solution, partially offset by the higher depreciation and some inefficiency associated to the ramp-up in Latina. In Engineering segment, we expect to expand margin also. If we include the nonrecurring expenses, we expect a slight decline in the gross profit margin in 2023 compared to 2022.

Got it. Okay. That's helpful. Can you remind us on your CapEx spending as you sort of -- as this new capacity comes online in '24, how should we think about CapEx as a percentage of sales ramping down in ‘24, ‘25?

Yes. At the moment, our expected cash flow will be negative in 2023, driven by CapEx. For -- in our model today, we expect to have still important level of CapEx in 2024 to go on with Fishers. And in our model, we expect some time to restart the project in China in 2024. So it will be another important year for CapEx, and we expect to be close to breakeven at free cash flow level. For 2025, we expect today the CapEx should start normalizing and turn to positive free cash flow.

Great. Very helpful. And then just one final question. Another company in the primary drug packaging, injectable space reported yesterday and, on the call, they kept talking about some potential customer timing issues, particularly in the second half. Are you seeing anything in terms of customers delaying projects or timing or anything along those lines? Just -- it was just sort of an unusual market comment that sort of kept coming up. I'm just sort of your thoughts on, is there anything unusual going on in the end market right now?

Well, first of all, Derik, we want to underline the fact that we are well covered by our backlog. Our backlog today is covering more than 90% of our center point of the guidance. We haven't seen in the next 6 months any slowdown, but I can…

Yes, Derik, I can complement what Marco said. I say that we don't have the view you reported because in the interaction we have with customers, we are planning according to their need for the future, and we have a very important opportunity for growth in that space. And also, you can recall that we have a specific insight in CapEx decision about customer because we are serving them with our Engineering segment. The fact that we are improving business in engineering is an evidence that we based on our expectation on a very solid ground.

The next question is from Drew Ranieri from Morgan Stanley.

For Franco, maybe first, you said in your prepared remarks that you're seeing kind of new opportunities in the U.S. market and I can appreciate the growth you're seeing in biologics and GLP-1 specifically, but can you give a little bit more detail on this and just maybe how that could potentially translate into actual like new customer relationships or anything that we should be thinking about in terms of future growth?

You know that we are also almost all the big pharmas. So talking about the new customer, we have enough big customer today to have insight in their needs on an established portfolio of opportunities that we are supporting with our tech centers, not only with our CapEx for the commercial volume in the future. So we invest -- are investing in the U.S. because we expect to serve dozens of different opportunities, mostly in the biotech space. We continue to increase our pipeline of new opportunities. And for the short term, you may recall that part of the utilization of this new facility will come from the transfer of some commercial volume for the European plants to the new U.S. plant. So the short answer is that our decision to accelerate investment is based on a very good insight on customer needs, and we are executing with our modular approach ready to adjust also in terms of possible future upside.

Got it. And maybe for Marco. When you're kind of backing out COVID for the year and specifically the back half, I mean, it looks like your guidance is calling for a back half acceleration. So can you help us kind of parse this out in terms of what we should be thinking about for BDS and for engineering in the back half of the year and maybe heading into 2024, if you'd like to give just high-level details there?

Well, for 2023, you are right. We are decrease a little bit our guidance for COVID. Nevertheless, we are confirming the overall guidance because we can shift to our other therapeutic areas. What we can see today is an organic double-digit growth in both segments in this moment so this is how we are thinking our guidance for the year. About 2024 is a little bit early to communicate any guidance.

(Operator Instructions) Ms. Miles, gentlemen, there are no more questions registered at this time. Do you perhaps have any closing comments? I'm sorry, we have a last-minute registration -- sorry, for Matt Larew from William Blair.

Could you help me just frame out a couple of metrics around Fishers and Latina. Maybe just remind us, how much HVS capacity expansion they're going to provide on a relative basis? And then given it's a modular approach, maybe how much of that will be available immediately relative to sort of that 2027 or longer-term time frame?

I can -- what I can say is that if you compare current capacity in the view of our industrial plan, we expect to more than double capacity for syringes and to multiply several times our production capacity for EZ-fill vials and cartages. Even there is a split obviously in between the different facilities, but we cannot deliver metrics about that. In terms of the modularity, we talk about the expansion of Fishers in the range of 4, 5 years, depending if you include the ‘23 or not. And you can look at is not a completely regular ramp-up, but it's well distributed along those years.

Okay. And then as a follow-up there, anything in terms of expected payback period or returns on capital for some of these newer capacity expansions highly focused on HVS relative to perhaps CapEx investments you might have made 5 years ago, 10 years ago, and some sort of the payback periods for those type of investments.

Well, what we can tell you is that we are investing in EZ-fill mainly, almost everything EZ-fill, and most of them are high-value solutions so we expect pretty high return. When we look at our past data in EZ-fill plant here in Piombino Dese, the internal rate of return is well above 20% and our goal is to replicate this level of return for the 2 new greenfield facilities.

There are no more questions at this time.

Thank you, operator. We want to thank everyone for joining us today for Stevanato Group's Second Quarter Financial Results, and we look forward to speaking with you in the future. Thank you.

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.