Stevanato Group S.p.A. Q2 FY2021 Earnings Call

Good morning and thank you for joining us. With me today to offer prepared remarks is Franco Stevanato, Executive Chairman; Franco Moro, Chief Executive Officer and Chief Operating Officer; and Marco Dal Lago, Chief Financial Officer. We are also joined by Mauro Stocchi, Chief Business Officer; and Paolo Patri, Chief Technology Officer. I’d like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in our registration statement on Form F-1, which was filed with the Securities and Exchange Commission on July 16, 2021. We encourage you to review the information contained in our earnings release today in conjunction with our associated SEC filings and F-1. 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 presented in this document, please see the Company’s most recent quarterly earnings press release. And with that, I’ll hand the call over to Franco Stevanato for opening remarks.

Thank you, Lisa. Good morning and thank you for joining us. Today, I’m going to kick off with some key highlights at the investment consideration for Stevanato Group. First, I’m pleased with our financial results for the second quarter and first half of fiscal year 2021. Revenue for the first half of 2021 grew 33% and adjusted EBITDA increased 58% over the same period of the last year. Our operating performance reflects our long history of more than 70 years serving the pharma, biotech, and life science industry. The core of our DNA is science and technology. Our unique analytics and engineering capability have helped solidify our position as the market leader worldwide in pen cartridges and EZ-Fill vials. We serve top blue-chip, global, high-growth biopharma, pharma, and diagnostic customers. We have a strong track record for customer support and service, which has translated into a customer retention rate of 97%. Over the last 70 years, we have grown the business through constant investment in technical and scientific innovation, geographical expansion to better serve our customers and solidify our position in the pharmaceutical value chain. The proceeds from our recent IPO will be invested to drive sustainable long-term organic growth. Our top three investment priorities are: one, geographical expansion; two, research and development to sustain and accelerate our high-value solutions; and three, selected M&A, which share the same fundamental goal of creating and driving long-term shareholder value. On behalf of the Board, we are proud of the positive steps the management team has taken to advance the Company position in the market, and we are confident in their ability to execute against the Company’s long-term strategic plan. Franco, Marco, Mauro, and Paolo bring deep expertise, decades of experience, and an unparalleled commitment to achieving our growth objectives. We believe we have the right team in place to drive vision and strategic pillars over the next 10 years. The family, the Board, and the management team are keenly aligned with the goal of building long-term shareholder value. Our mission is simple: delivering patient-centric solutions to support our customers' needs to meet the increasing market demand driven by a positive macro environment. Stevanato Group remains at the heart of the pharmaceutical value chain now and for decades to come. And with that, I will hand the call over to Franco Moro, Chief Executive Officer.

Thanks, Franco, and good morning. For the second quarter, we delivered solid year-over-year operating and financial results, highlighted by double-digit revenue growth. More importantly, the key performance indicators of future growth came in particularly strong. We continue to make steady progress in transitioning our revenue to an increasing mix of high-value solutions, which accounted for 24% of total revenue in the second quarter. Our high-value solutions include our higher-margin products focused on pre-sterilized vials, cartridges, and syringes. The solution offers an increasing value to our customers with four key advantages: reduced time to market, lower total cost of ownership, increased quality, and improved flexibility. Our focus and much of our future investment will be dedicated to growing the mix of high-value solutions. The second quarter was also highlighted by strong order intake. We handled the second quarter with a new order intake of €278 million and a total backlog of €739 million at June 30. We define our backlog as customer-committed orders. The current backlog provides significant visibility into future revenues. This gives us confidence in our ability to achieve our revenue guidance for 2021. We are pleased with the positive momentum in new order intake and backlog. These are indicative of the favorable trends in the market today. This trend has paved the way for our consistent double-digit growth over the last 10 years. And today, we are focused on executing against our strategic investment plan to take advantage of the longer-term demand. So today, I want to talk about our expansion and investment framework. This is an important element to driving sustainable, accretive growth in the near and long term. With that in mind, I will provide context around our historical investment strategy, how that translated to growth, and our plan to replicate this strategy in the years ahead. In 2016, we launched an expansion initiative that has been yielding double-digit growth over the last few years and continues today. We accelerated our investment in Italy and abroad, which served as the catalyst to meet the significant increase in demand precipitated by COVID. Yet at the same time, we are still able to significantly increase production in other core products outside the vaccine space, particularly in vials and cartridges. For example, our investment also allowed us to remain number one in the insulin pen cartridge market. I will highlight key methods and capacity increases tied to this effort. First, in our EZ-Fill pre-fillable sterile syringes. When compared to our production output in 2016, we expect to double the number of syringes produced in 2021 and up to triple the syringe output in 2023. Secondly, in our EZ-Fill sterile vials and cartridges, the numbers are even more impressive. In 2021, we expect to produce up to 11 times more sterile vials and cartridges compared to 2016. And in 2023, we expect to produce up to 19 times sterile vials and cartridges compared to 2016. Our investment initiatives are targeted to the production delivery of more accretive high-value solutions. Equally important, this is in direct response to customer demand. The approximate CapEx on the EZ-Fill expansion between 2016 and 2021 was roughly €220 million, and we will continue investing. The recent acceleration of organic growth demonstrates our proven track record in optimizing our capital investments. At this stage of our lifecycle, we see unprecedented demand. In the near term, we have made timely investments in our capacity to enable us to stay ahead of our customers’ rising demand for our high-value solutions, and we expect to invest in a similar manner in the future. We are supplementing our ongoing expansion with a new EZ-Fill line and converting space to dedicate to our high-value solutions. An important element of our investment strategy is anticipating customer demand to make the right investment at the right time. This has been our approach in the past, and it continues today. Based on current trends, we believe now is the time to invest in expanded capacity globally for our EZ-Fill solution. Our current expansion plans in the U.S. and China are proactively addressing where we believe we will continue to experience high levels of customer demand. From a CapEx perspective, we currently plan to spend approximately €300 million for our plants in the U.S. and China. This will expand our existing footprint in these geographies and enhance our proximity to customers in attractive end markets. As many of you already know, the U.S. market is highly sophisticated, and the pace of growth in biologics is at record speed. We believe that we are well-positioned to become a larger player in the market. From a timing perspective, we expect to break ground in Indiana in the fall of 2021. We anticipate construction will take approximately 18 months, followed by startup and customer validation in 2023. At this pace, we are currently targeting revenue generation to begin around the end of 2023 or early 2024. In China, the backdrop is very different. There is a predominance of biosimilars, and the biologics market is just emerging. Our goal is to take advantage of market timing to be among the first movers. We are estimating that construction will begin in early 2022, which puts our estimated revenue generation in the second half of 2024. We are approaching these new investments with the ambition to replicate this strategy, discipline, and execution as with past investments. Our overall approach of increasing capacity, embedding scientific technological advancement in our portfolio, and broadening our servicing and geographical reach is the cornerstone of driving value to our customers. We are also boosting our efforts in research and development with a significant emphasis on service capabilities. These investments are evident in our technology centers in Boston and Italy. The scientific analytical services developed in our technology centers are helping us gain an early entry point with our customers. We expect this will help expand our presence in the pipeline of new biologic drugs. In parallel, these efforts are aimed at expanding our own portfolio of proprietary solutions across all product lines. Above all, we believe that the current underlying trends and macro environment set the stage for favorable tailwinds for decades to come. We currently see a confluence of events coming together, with an urgent need to tackle the challenge of an aging population, the increasing complexity of health condition and comorbidity rates, and the significant shift in patients seeking to manage their conditions and access care closer to their home environment. We believe we are well-positioned to capitalize on these trends. Our priority is to support our customers in creating and delivering patient-centric solutions, which is central to our philosophy and vision. I will hand the call over to Marco to cover the financials in more detail.

Thanks, Franco. For the second quarter, total company revenue grew 26% to €204 million and 28.5% on a constant currency basis compared to the same period last year. Top line increases were driven by growth in both segments and all geographies. As Franco noted, our focus remains on expanding the sales mix of our high-value solutions in the portfolio. For the second quarter, high-value solutions accounted for approximately 24% of total company revenue. We currently expect the full-year contribution from high-value solutions to range between 25% and 26%. The COVID-19 pandemic continues to be a tailwind and has increased demand for our drug containment solutions. We are playing a meaningful role in the fight against the pandemic, and our products are supporting the vaccination rollout around the world. In the second quarter, we estimate that approximately 15% of gross revenue was linked to the pandemic. The key takeaway is that, excluding COVID, we still achieved robust double-digit growth in the second quarter compared to last year. This is a result of solid demand for our core products and the shift to high-value solutions. For the rest of the year, we expect the contribution from the pandemic to remain consistent. We currently estimate that gross revenue attributable to COVID will range between approximately 13% and 17% for 2021. For the second quarter, total company gross margin improved 100 basis points over last year to 31.2%, mainly thanks to our focus on high-value solutions. Also, in the second quarter, adjusted operating profit margin improved 240 basis points to 19.1% and adjusted EBITDA grew by 90 basis points to 25.7%. It was due to gross margin expansion and efficient cost management and certain overhead expenses. In parallel, we continue to increase investment in R&D activities compared to the same period last year as we aim to sustain and accelerate the pipeline of high-value solutions. Operating profit of €47.6 million and EBIT of €61 million include a one-time benefit of €8.6 million gross profit, which is €4.4 million of net profit or €0.02 of diluted earnings per share. The majority of this is related to the termination of a stock incentive plan. As a result, second quarter diluted earnings per share was €0.14 and adjusted diluted earnings per share were €0.12. Moving on to the segment results, starting with the BDS segment. Second quarter revenue increased 23% in our Biopharmaceutical and Diagnostic Solutions segment compared to the prior year, despite unfavorable foreign currency translation. On a constant currency basis, year-over-year revenue growth was 26%. This segment benefited from a revenue increase of 27% in high-value solutions and 21% in our containment and delivery solutions over the same period last year. Second quarter gross margin and operating margin improved compared to the 2020 period, principally due to the increase in more accretive high-value solutions and improved efficiencies. For the second quarter, revenue derived from third parties in the Engineering Segment grew by 50% to €29.1 million over last year. This segment experienced growth across all business lines, including visual inspection machines, assembly and packaging systems, and glass converting machines. Margin expansion in the quarter compared to the prior year period was driven by an increase in after-sales activities to support customers and improve synergies across our manufacturing network. Moving on to balance sheet and cash flow items. We ended the quarter in a solid financial position. At June 30, 2021, cash and cash equivalents totaled €100.8 million. For the second quarter, cash from operating activities increased to €54.1 million. We continue to prioritize investment in our future growth, and as such, capital expenditures totaled €23.7 million during the quarter. Free cash flow in the second quarter was €31.3 million. At June 30, our net debt ratio improved to 1 compared to 1.3 at the end of March 2021. Our leverage between net debt and trailing 12 months EBITDA had improved to 1 compared to 1.4 at the end of 2020. We define net debt as current and non-current financial liabilities, minus other current financial assets, financial receivables, and cash and cash equivalents. In a nutshell, we believe that our cash, future cash generation from operating activities, availability under our existing debt facilities, and the proceeds from the IPO will be adequate to address our future liquidity needs. In terms of capital allocation strategy, our approach remains measured and disciplined. To recap, our top three priorities are: first, much-needed expansion to increase capacity, especially in our high-value solutions where demand is high; second, investment in research and development to sustain and accelerate our high-value solutions pipeline and to maintain our market-leading position, offering the highest quality products; and lastly, a selective, prudent approach to M&A to complement our existing book of businesses. We view M&A in the context of driving organic growth. This has been our approach in the past, and it remains the same today. We see no major gaps in our portfolio, but we believe there are markets that are natural extensions of our current core competencies. And finally, as highlighted in this morning's press release, we established full-year 2021 guidance. The Company currently expects revenue in the range of €820 million to €830 million. This will represent a year-over-year growth between 24% and 25%; adjusted diluted earnings per share in the range of €0.43 to €0.47; lastly, adjusted EBITDA in the range of €212 million to €217 million, which will represent a growth between 32% and 35% over the prior year period. And with that, let’s open it up for questions.

Congratulations on the quarter. The backlog trend looks very strong. Can you talk about the core business in terms of ex-COVID? Can you talk about demand for the high-value-add solutions and the color around that backlog?

Thank you for your question, Paul. The trends we are experiencing are indeed positive, and we aim to maintain a strong backlog while adjusting our capacity to meet customer demand. Regarding the backlog, it consists of committed orders, and this clarity helps us utilize our capacity efficiently. We are also investing to increase capacity in anticipation of further demand from customers. As for the impact of COVID-related demand, this year has certainly been affected by it, but we have some visibility for next year as well. Looking ahead, we expect to transition to normal business regarding vaccines, and we have been a prominent player in the vaccine sector for many years.

Do you have capacity, or is it tight right now in terms of customer demand?

I want to reiterate that the capacity we have for our high-value solutions is the most important asset for the future because the COVID situation proved that our high-value solutions are really suitable not only to match their technical specifications of the drug but also to have a faster response to the upside in demand. Our internal engineering capability is an amazing differentiating factor in terms of the competition because we took to be faster than anybody else to match the demand. In terms of the constraints that you mentioned, we have to take care of our CapEx to adjust our capacity in advance according to the demand coming from the market, but we are in a very good position and we deploy this additional capacity around the world. We are ready to move also the high-value solution, the EZ-Fill capacity, not only in Europe as we are now, but also in the U.S. and China.

Hi. Thank you for the results this morning. I appreciate you taking my question. I wondered if you could comment a little bit on how COVID is influencing your high-value solutions sales, is there much overlap there? And how do you expect that to evolve?

Thank you, David, for the question. In this stage, I have to refer to the message that we are not newcomers in the vaccine space. We are working with the biggest players in the market, and thanks to our intimacy with such customers, we can adjust our production for the future. In terms of the technicalities linked to our high-value solutions, we have shown that the drug containment solutions are the best choice for the significant demand linked to the COVID chain and the supply chain for vaccines. So, we think that after this year and the next year, the vaccine for COVID will land us at the end in a more or less normal business for vaccine treatment.

On your backlog, I don’t believe I have a number for the comparable Q2 of 2020. If you’d be willing to give that, I’d love to get it. But the spirit of the question is that your backlog growth year-over-year is substantial in the first quarter, and then it looks like it’s sequentially double digits from the first quarter of this year to the second quarter. And you’ve already mentioned visibility is quite high. It seems like your visibility to this year’s revenue based on backlog is substantially better than what it probably was last year. So, I guess, I wanted to understand how conservative your revenue assumptions are for this year and/or how much of that backlog is giving you greater visibility into 2022, if you understand the question, hopefully.

Yes. I hope we understand your question. I give you the general full picture, and then maybe Marco may comment about the financials. For sure, the visibility is very high and the demand is very strong. Demand is very strong because the market is growing, and we anticipate some investments to allow us to provide the right answer to our customers. Nevertheless, our business has some factors that impact the timeline, which is linked to building the right supply chain with the right level of robustness for us and our customers, the lead time in production, and all the planning activities that allow us to have a very robust response to our customer and to meet their expectations. For sure, now it is very easy to say that the coverage for this year is very high and good. There is a possibility of having an upside. We believe that the guidance we provided is fair, not too prudent, not too aggressive; it is a fair expectation for this year.

Just to complete the answer, David, last year, in the same period, we had about €396 million of backlog. As you know, we went up to €605 million at the end of 2020, €665 million at the end of Q1, and we are now at €739 million. So, we have much better visibility, as Franco was saying, between the sales already realized and the anticipated sales coming from backlog in the second half of the year, and we cover by 94%. We are starting to build the backlog for next year.

Thank you. I was hoping you could offer some insight into your conversations with customers on the COVID business, and how far in advance you’re having discussions nowadays. Are you talking about customer demand needs for 2022, 2023? Any insight you could offer.

It’s very important. Thank you for the question. It’s very important to say that we built intimacy with our customers over many years, leveraging our manufacturing platform and also the scientific technologies we offer that are embedded in our integrated offering. So, we try to work with them in anticipating their needs. For sure, there is also some visibility about the expectation for ‘22 and maybe also for ‘23 in terms of general view. But, it is very early to state what will really happen because of the transition to multi-dose vials to single-dose vials, the potential transition to syringes, and all the uncertainty linked to the boosters and so on. So, we have good visibility, but we can also state that there is a full visibility about the COVID impact in the next few years.

The normalized tax rate is 24%. I said normalized because in the first quarter, we had a one-time positive event. We reached an agreement with the Italian tax authority, benefiting from €5.5 million of tax savings due to the patent box, according to the Italian tax law. But, the normalized one is 24%.

Thank you. Good morning. Thanks a lot for the details on your capacity expansion plans. I have a couple of questions on this topic. First, what is your current average level of capacity utilization across your network? I’m aware that COVID might have helped utilization, but how long did it take for the capacity added over the last five years, since 2016, to reach the current utilization level?

It’s a very good question. We are expanding our capacity in response to COVID. After COVID started, we accelerated some investments to be faster. Thanks a lot to our colleagues in engineering because they helped us to provide an amazing and faster response to this emerging need. In terms of utilization, we used to plan accordingly to standard practices to have enough downtime for preventive maintenance, or the stuff that makes our supply chain robust and ensures certainty for our customers. So, we are at a very good level of utilization worldwide, both in vials and in EZ-Fill sterile configuration. We maintain this high level of occupation. But answering your question about how much time we needed to reach this level of utilization, this is the very tricky point and the very interesting point of our setup. We don’t need that much time, because we have engineering capacity now. When we have to expand capacity, we are very fast. So, we don’t need long time to establish the capacity and then ramp up the utilization. We are much faster than anybody else because we can tune the expansion of the capacity closely to the emerging need.

Thank you. And if you could put a number on that utilization level, just accounting for the necessary downtime and changeover. Typically, in the industry, full is defined at around the low-80s. Would you say it’s 60%, 70%, 80% utilized? If you could put a number to that, that’s what I’m looking for.

Depending on different production lines, we are in the range of 80% to 85%.

Maybe to stay on the facility expansion topic. Can you just talk about what the spend is going to look like over the next few years? I know you talked about Indiana, revenue generation in ‘23, China may be more ‘24. I guess, over the next two years, how should we think about the spend, and the impact on margins until they’re fully ramped up?

I’ll give you the picture, Patrick. Thank you for your question. Marco may have to add more color on financials. The idea is, as you mentioned, to have the first revenue generation coming from the U.S. plant late ‘23, beginning of ‘24, and at least six months more to have the first revenue generation in China. The total amount of money we are ready to invest to expand our high-value solution network and manufacturing is in the range of €300 million. We’ll deploy this total investment, more or less, in 2.5 to 3 years. We expect, in the long run, to have revenue generation in the range of €300 million. These are two figures that are comparable, but they are different. But as you know, many things can also be adjusted and tuned at the best during the execution of these investments. So, 6 to 7 years from now, it’s not easy to say. But for sure, we are in the right position to start this investment. We have already started doing something in the U.S. And at the beginning of next year, we will have some news about China. Marco, if you can provide more detailed financials, it would be helpful.

Yes, just to complement. First of all, we are replicating investment we have already done in Italy with EZ-Fill. We know very well the technology and the steps to be done in order to prepare the two new facilities. Measuring the return of our investment, we experienced a very good internal rate of return here in the investment in Italy, north of 20%. Also, in China and the U.S., we are targeting high-value EZ-Fill products, so we expect high-teens internal rates of return in these two new plants. These are our expectations. So, product line by product line, we are not experiencing different gross margins. If we sell high-value solutions, we experience the same level of margin between COVID and non-COVID products, same for the solutions. I wouldn’t say we have a different margin profile related to COVID. Sometimes the mix is pushing more toward high-value solutions, but apple to apple, we are not experiencing different margins.

Good morning, everyone. I’m calling in for John Kreger today. Congrats on the quarter. Thank you for taking the questions. So previously, there were a lot of talks about COVID vaccines moving to single-dose vials. Is that still the case based on what you’ve heard, or do you think the anticipated large-scale rollout of booster shots in the U.S. will likely keep it in the multi-dose format?

Thank you for the question. It’s very interesting, and we are monitoring this evolution with our customers to adjust the supply chain for future needs. I can ask Mauro to provide more details about our relationship with the major players in the vaccine space to give you the complete picture.

Sure. Thank you, Franco. Yes, just to come back a bit to what we said during our roadshow, actually, one of the reasons why we are in such a good and intimate relationship with the customer is because we have them starting from the development phase with our solutions to reach the patient in a faster way. Now, as Franco mentioned before, it is really too early to tell the future of COVID. What we can say is that continuing partnering with our customer is providing some indications of which major trends could be in the future. From multi-dose to single-dose is something which is for sure happening, and at the same time, we are evaluating some syringe solutions in order to have a single dose ready to go to the market for the customer. There are a lot of moving parts in the market today. But what we can say is that we are well positioned to respond to this emerging trend, specifically thanks to our engineering part of the business, which is responding very fast to this kind of customer request and market movement.

Understood. Thank you. And just one follow-up question on the capacity front. Can you review your ongoing facility expansion projects outside of the U.S. and China? And where do they stand right now?

The capacity expansion, we are investing also in vial production in our network of facilities around the world. We have some expansion also in the plastic business in the U.S. and smaller investments in Europe. But now, we are really focused on expanding our high-value solutions platform that will deliver the best answer to the needs of our customers. So, for the next year, we are really focused on the execution of our investment in the U.S. and China. Meanwhile, we are bridging this capacity with some investments also in Italy that will help us to move production from Italy to the new geographies in the next three to four years.

Hi, everyone. Thanks for taking the questions. Just to go back on the backlog for a moment, it sounds like you have good visibility for this year, maybe some partial visibility for 2022. Just as you look at the backlog today, can you discuss or break down what backlog is from broadening your current customer relationships versus new partnerships, new customers or just geographic expansion?

For sure, you touched a very important point, and this is the pipeline. Most of the current backlog is linked to established commercial production because you know very well that in our market to develop a new project, you need some time, but we are really early engaged with our customers in some very important projects. And also in this case, I think Mauro may add some color on that.

Thank you, Franco. Yes, we are really proud of our present pipeline, specifically in the biotech space and biosimilar space because this is what is sustaining and providing visibility and growth for the future. We can say that one of the main reasons for our position in the drug pipeline today has been the critical support that our services through our tech in Boston and in Italy were able to provide to customers to help them choose the right drug containment solutions from the beginning. So, we are really growing a lot in this, supporting our customer in scientific and technology-related areas. In the past five years, we have more than doubled the molecules we are involved in today. We can say that with our today 1,100 different projects, different molecules, we are well positioned to grow in the future in this high-value segment.

Yes, we don’t provide the details. But in any case, as in the past, we continue experiencing that about 15% of our overall sales are represented by Engineering, 15% by in vitro diagnostics, and DBS together, and the remaining 70% is related to container closure systems. We are consistent with this growth. We are growing in each business line and product line. We are growing more rapidly in high-value solutions, where in the first half of the year we went up 37%, and on a constant currency basis, we would have gone up by 33% year-over-year. So, this is where we are growing more rapidly, consistently with our plans.

Yes. Good morning. This is Franco Stevanato speaking. I want to take one minute to give the internal feedback from the Board and the management team and also our customers after this important event of the IPO of Stevanato Group. The Board and the management team are extremely happy and motivated for what we have done, because it’s an important step for Stevanato after 70 years. Our customers are extremely happy to see Stevanato Group continue to be present in the pharmaceutical industry and to keep investing in the pharmaceutical industry, and we will proceed. Today, our organization is fully committed to execute our strategy to continue to grow together with our customers. Our big focus is to build the right investments in proximity to all our customers worldwide. The fact that we have the trustee that will allow us more financial flexibility is even more important and well perceived by the customer. I also want to thank all of you because in these months we learned a lot to apply more discipline in providing numbers, also to deliver them in the right way for the shareholders and even more for the external shareholders. Today, our big focuses are the customers, the employees, and the new investors that have trusted Stevanato Group. This is a new exercise and new era for Stevanato, but it’s a very nice moment for us. Thank you.

And that concludes Stevanato Group’s second quarter 2021 earnings. Thank you for joining us. We appreciate your support.