Stevanato Group S.p.A. Q3 FY2024 Earnings Call

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Stevanato Group Third Quarter 2024 Earnings Call. As a reminder, all participants are in a listen-only mode. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice President and Investor Relations. Please go ahead, madam.

Good morning, and thank you for joining us. With me today is Franco Stevanato, Chairman and Chief Executive Officer; and Marco Dal Lago, Chief Financial Officer. You can find a presentation to accompany today's results on the Investor Relations page of our website, which can be found under the Financial Results tab. As a reminder, 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 the 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 on March 7, 2024. Please read our safe harbor statement included in the front of the presentation and in today's press release. 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 analysis 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 these non-GAAP measures, please see the company's most recent earnings press release. And with that, I will now hand the call over to Franco Stevanato.

Thank you, Lisa, and thanks, everyone, for joining us. Today, we will review our third-quarter performance, provide an update on market dynamics, and discuss the ongoing initiatives to meet our objectives. For the third quarter, revenue was in line, but margins were below our expectations. As a result, we are lowering our full year 2024 guidance for adjusted EBITDA and adjusted diluted EPS. The main factors are higher costs in the Engineering Segment as we implement our optimization plan. And to a lesser extent, higher costs in the U.S. as we increase our validation activities. Let's start with Engineering. We are starting to see some initial benefits from the actions we have recently taken to improve execution and business performance. While it's still early days, we have successfully completed several complex projects in the third quarter for key customers that were previously delayed. As a reminder, we launched a business optimization plan designed to address the current challenges, improve the overall health of the business and position the segment to return to profitable growth. The main steps we are taking are focused on optimizing our engineering footprint in alignment with our product strategy, rightsizing the operational structure as we move some activities to Italy and harmonizing our industrial processes. Together, we believe this action will lead to an improved operational structure that can drive both cost savings and gains in productivity. Above all, we remain confident that this will position the Segment for long-term success. We believe that the demand landscape for the Engineering Segment remains favorable, underpinned by long-term tailwinds such as the rise in biologics and the adoption of drug delivery devices, higher regulatory standards like Annex One, and the trend towards ready to use systems. Let’s turn to vial destocking, which remains top of mind for many investors. Our thoughts on the recovery remain the same. We still expect to see vial orders begin to pick up at the end of this year, with a gradual recovery in 2025. We continue to see positive signals in the market, and during the third quarter, collaborations with our customers reaffirmed our view. Nevertheless, market dynamics are such that customers are working down inventories at different rates. Despite the current weakness in vials, we continue to see strong demand for our high-value solutions, which grew 18% year-to-date compared with last year. The continued momentum in biologics and the increasing trend towards high-performance primary packaging reinforces our investment strategy, as we expand our capacity for high-value solutions to match this customer demand. Moving to our capacity expansion projects on Slide 6. We continue to make relevant progress on the multi-year ramp-up of our expansion projects in Fishers and Latina. In both facilities, the ongoing installation of manufacturing lines and the customer validations are planned to be phased throughout 2025 and into 2026. In Fishers, we achieved a major milestone in the third quarter with the successful launch of commercial production, generating our first commercial revenue. During the quarter, we completed the installation of our second high-speed manufacturing line. We also started validation activities with several key customers, which are expected to continue for the rest of the year. In Latina, we are scaling production, improving utilization, and beginning to gain efficiencies. And, in the third quarter, the Latina project became profitable at the gross profit level. Marco will provide more details later on. Turning to Slide 7. We recently announced the launch of the Alliance for RTU, together with other industry players. It has generated a lot of interest across the industry, from customers to other industry stakeholders. The purpose of this initiative is to educate the pharmaceutical industry as customers consider a transition to sterilized vials and cartridges. Over the last thirty years, the syringe market has converted mostly to sterilized solutions. We believe that customers will continue to adopt ready-to-use vial and cartridge solutions, replicating what we saw in the syringe market. RTU solutions meet the growing industry demand for greater efficiency, faster production times, and enhanced product quality by simplifying the filling process and reducing contamination risks. Furthermore, a shift to ready-to-use products can facilitate compliance with Annex One. We are supporting customers through the assessment and decision-making process with scientific research through symposiums, webinars, and white papers. We continue to make tangible progress on our wider high-value solutions portfolio. We recently won a strategic supply agreement to support the first needle-free epinephrine nasal spray that received FDA approval. Under the agreement, we will produce our premium micro vials used in the neffy device. In summary, we are making good progress, and we remain focused on execution. Our growth investments are ramping. Latina was profitable in the third quarter and Fishers started generating commercial revenue. In Engineering, we are executing our optimization plan and completed several of the previously open projects in the quarter. And, while the effects of vial destocking are expected to gradually improve throughout 2025, we are starting to see some stabilization in vial demand as customers work down inventories. I'll now hand the call over to Marco.

Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the third quarter of 2023, unless otherwise specified. Starting on page 9. For the third quarter of 2024, revenue grew 2% and 3% on a constant currency basis to €277.9 million, driven by 6% growth in the Biopharmaceutical and Diagnostic Solutions Segment, which offset the expected decline in the Engineering Segment. Revenue from high-value solutions grew 17%, driven by high-value syringes, and to a lesser extent other product categories. High-value solutions represented approximately 36% of total revenue in the quarter, versus 32% last year. We are currently forecasting a strong fourth quarter for high-value solutions. So, for the full year 2024, we now expect that high-value solutions will represent approximately 37% to 39% of total revenue, versus our prior estimation of 36% to 39%. Gross profit margin decreased to 26.8% in the third quarter of 2024 due to the ongoing temporary impact from vial destocking, including underutilization of vial lines, as well as lower revenue from more accretive EZ-fill® vials. Inefficiencies and higher costs tied to the ramp-up in Fishers, Indiana as we scale our validation activities, and higher costs in engineering. For the third quarter, lower gross profit led to a decline in the operating profit margin to 14.8%. On an adjusted basis, the operating profit margin was 16.3%. For the third quarter of 2024, net profit totaled €30 million, and diluted earnings per share were €0.11. On an adjusted basis, net profit was €33.1 million, and adjusted diluted EPS were €0.12. Adjusted EBITDA was €63.7 million, and adjusted EBITDA margin was 22.9%. Please turn to slide 10. Before we review segment results, we thought it would be useful to dive deeper into the temporary inefficiencies that we typically experience during the start-up phase of a new manufacturing site, their impact on margins, and the expected gross profit trajectory. This slide illustrates the timing and phasing tied to a new manufacturing plant, as an example. For the new brownfield site in Latina, we acquired the building in Q1 2022. We started generating revenues from commercial production in Q4 2023. As Franco noted, in the third quarter of 2024 the site was a slightly positive contributor to the Group's margin. The current temporary inefficiencies that we are experiencing reflect the under absorption of expenses in the early phase of the project as well as the ongoing activities to support the multi-year capacity ramp-up. But as production capacity, productivity, and revenue progressively increase, we expect that the unfavorable impact will gradually abate, and we will benefit from higher utilization, better product mix, and scale. Let's review segment results on Page 11. For the third quarter of 2024, BDS segment revenue grew 6% and 7% on a constant currency basis to €233 million, driven predominantly by growth in high-value syringes and to a lesser extent, other products. Top-line growth of 6% was offset by a revenue decline of approximately 38% related to vials, and the drop was more pronounced in EZ-fill vials. Revenue from high-value solutions grew 17% to €100.4 million in the third quarter, while revenue from other containment and delivery solutions was €132.6 million and consistent with the prior year period. Gross profit margin for the BDS segment was tempered by the ongoing effects of vial destocking, including lower revenue from more accretive EZ-fill vials, underutilization, and the under absorption of overhead costs, start-up inefficiencies, and some higher costs. As a result, gross profit margin for the BDS segment decreased to 28% and operating profit margin declined to 16.9% for the third quarter of 2024 compared with the same period last year. For the third quarter of 2024, revenue from the Engineering segment decreased 15% to €44.8 million. Performance in the business was mixed with expected revenue declines in glass conversion and visual inspection, offsetting growth in Assembly and Packaging. Gross profit margin decreased to 15.6% and operating profit margin declined to 10.1% for the third quarter. The decrease in margin was driven by higher costs related to certain highly complex projects and expenses tied to our business optimization plan. As Franco noted, we are making progress with our optimization plan, but it will continue to take some time. We believe we have set the path for continued operational and financial improvement, which we expect will better position the segment to capture and execute future opportunities. Please turn to the next slide for a review of balance sheet and cash flow items. We continue to carefully manage trade working capital to support the growth of our business. As of September 30, inventory levels were higher compared to December 31, 2023, while contract assets decreased in part due to the advancement of projects in the Engineering segment. We ended the third quarter with cash and cash equivalents of €78 million and net debt of €284.3 million. Through a combination of our cash on hand, available credit lines, cash generated from operations, and our ability to access additional financing, we believe that we have available liquidity to fund our strategic and operational priorities over the next 12 months. As expected, capital expenditures for the third quarter of 2024 totaled €58.8 million, as we continue to ramp up in Latina and Fishers to meet market demand. In the third quarter of 2024, net cash from operating activities totaled €18.3 million. Cash used in the purchase of property, plant, equipment, and intangible assets was €47.8 million. This resulted in negative free cash flow of €28.4 million in the third quarter. Lastly, on slide 13, guidance. We are maintaining our revenue guidance for 2024, but lowering our outlook for adjusted EBITDA and adjusted diluted EPS. As Franco mentioned, our guidance now includes additional costs with the actions that are underway with our engineering optimization plan. And to a lesser extent, higher costs as we increase our validation activities in the U.S. For fiscal 2024, we still expect revenue in the range of $1.090 million to €1.110 billion. And we now expect adjusted EBITDA in the range of €257 million to €263 million, and adjusted diluted EPS in the range of €0.47 to €0.49. As we consider 2025, our thoughts remain unchanged, and we remain cautious in the near-term. We still expect that the pace of recovery in bulk and EZ-fill vials will be the largest swing factor in the level of growth next year. That said, we also continue to see strong demand, particularly for high-performance syringes and other product categories such as cartridges, IVD, and DDS. We also anticipate improvement in the Engineering Segment alongside the implementation of our optimization plan. As always, we intend to provide formal guidance in March. Thank you, I will hand the call back to Franco.

Thank you, Marco. In closing, while 2024 has presented many challenges, we are focused on execution and achieving our long-term objectives. We operate in growing end markets with favorable secular tailwinds, and we have several reasons to be confident in our strategic direction. First, we continue to deliver organic growth, driven by high-value solutions, the main pillar of our long-range construct. We are investing in the right areas to meet growing customer demand. Second, we expect to increasingly benefit from the new capacity in Italy and the U.S. as we advance our ramp-up activities and drive profitable growth. Third, the vial market continues to show positive signs. And we remain optimistic that as the demand continues to stabilize, we will see a return to historical market volumes and growth rates. Finally, in the near-term, we are implementing a clear and actionable plan to optimize the operations and improve execution in our Engineering Segment. These together, coupled with the strong fundamentals of our business and the high commitment of the team, set the stage for us to drive durable double-digit organic growth, expand margins, and drive long-term shareholder value. Operator, let’s open it up for questions.

Thank you. This is the conference operator. We apologize for the technical issues we experienced during the webcast. We will now begin the question-and-answer session. The first question is from Michael Ryskin at Bank of America. Please go ahead.

Hi. Thank you for the question. This is Avantika on for Mike. I understand that you will provide formal guidance for 2025 on the 4Q call, but the Street is modeling mid-to-high single-digit growth on the top line for 2025, and you reiterated your long-term construct of 11%. I understand that you've had headwinds in fiscal year 2024 from destocking in the Engineering segment, but is this a good starting point for 2025 as we stand today? Thank you.

Yes. Thanks for the question. Yeah, you are right. We will provide formal guidance next quarter. What we mentioned during the commentary is the summary of what we see today. I mean the uncertainty is related to the pace of recovery in EZ-fill vials and in bulk vials. This is the uncertainty. On the other side, we still continue to see favorable tailwinds, particularly in high-performance syringes, but also in other product categories like cartridges, in vitro diagnostic drug delivery systems. We also anticipate improvement in the Engineering segment alongside the implementation of our business optimization plan. Finally, we expect improved financial performances in Fishers and Latina, as we increase our capacity and increase our level of revenue, better leveraging the fixed expenses that are under pressure during the start-up phase. So in the end, we see a reasonable assumption.

Okay. Great. Thank you so much.

The next question is from Matt Larew of William Blair. Please go ahead.

Hi. Thanks for the question. I just wanted to ask about visibility to sort of destocking easing. I think last quarter you'd referenced maybe smaller customers in some countries getting back to ordering some positive conversations with larger customers. Just curious, if you had to bucket by customer group, what the conversations are like? And if sort of the number of each customer is making positive progress in each group has increased.

Thank you for your question. Based on our customer conversations, we would characterize the market as normalizing. While we see some positive signal, it's still a mixed bag. Customers are working through inventories at different rates. In terms of orders, we started to see gradual improvements in vial order in the second half of 2024, compared to the first half. But we're also seeing customer forecasts that indicate increased demand for vial in 2025. That being said, the timing and pace to recovery remain uncertain, but the work we are doing with our customers gives us cautious optimism in 2025.

Matt, just to clarify on your question, I think you were also asking about as it may relate to larger customers versus smaller customers, I think we can add some additional color on that, and I'll ask Franco to chime in here.

Okay.

Yes. We are starting to see orders coming through in smaller markets like Latin America in particular. And in our larger market, things are going in the right direction. We are seeing updates from customer forecasts that point to increasing buyer demand in 2025. So overall, we are starting to see positive signals month-after-month.

Okay. Thank you. And then if the sort of destocking issue is maybe a market issue, the engineering issues perhaps, to some extent, more internal or under your control. Just curious on sort of the new guide and also the outlook, how much of your ability to hit your expectations is under your control, whether that's the optimization program or completing projects versus things that are perhaps out of your control like earlier when you were waiting for components or dealing with customer changes?

So if you want, I can start to give you an overview or picture of the situation, and Marco can maybe drive more through the numbers, if it's okay. So in Engineering, we are starting to see some initial benefits from the actions we have recently taken. We launched an optimization plan designed to address the current short-term challenges, improve the footprint and position the segment to return to profitable growth. First, we have successfully completed complex projects in the third quarter for key customers. Second, we are focused on optimizing our engineering footprint in alignment with our product strategies. Third, we are improving operational structure that can drive both cost savings and gain in productivity. We believe we can return the segment to profitable growth by middle of next year, but some actions we are taking are expected to drive long-term results. The demand for the Engineering segment remains favorable today, boosted in particular by long-term tailwinds such as the rise in biologics, the adoption of drug delivery devices, and more and more the new regulatory requirements like Annex 1 and the trend towards ready-to-use systems.

Yes. Okay. Thanks.

And the main driver of the change of our guidance is related to Engineering in 2024 and in Q3 and Q4. So as Franco was saying, we are taking action in order to regain future profitability in a sustainable way, and this is the main driver of the change of our guidance this year. Besides that, we had also some changes related to the ramp-up costs for validation in Latina. But again, we are working hard to take future advantage with the action we are taking today.

Matt, just to wrap up on that point, you’re correct. The execution and Engineering aspects are mostly within our control. We are no longer experiencing the supply chain issues we faced after the significant wins we had in that segment at the end of 2022. As we move forward with our business optimization plan today, we view those actions as largely within our control.

Okay. Thank you for all the color.

The next question is from Larry Solow, CJS Securities. Please go ahead.

Thank you, and good morning or good afternoon. My first question is regarding BDS and its various components. You mentioned that vials were down 38%. Did that align with your expectations, or was it somewhat worse? Additionally, has there been any recovery in bulk products, even though it seems like RTU hasn't picked up? I'm looking for a bit more detail specifically on the vial issue.

Larry, Marco speaking, thanks for the question. So it's in line with our expectations. I mean, we changed our guidance after Q1. Basically, we expected and we can see also today a steady level of revenue in Q2, Q3 and Q4. We are down 38%, and the decrease is more pronounced in EZ-fill buyers that is impacting our margin because they are very accretive for us. We can see some good signals in orders intake that what Franco was mentioning. So we can see improvement in overall situation, but it's more for revenue to be generated in 2025 rather than in Q4 2024. So we see still a steady situation in 2024.

Got it. I appreciate the informative chart on the Latina ramp. I'm curious about the progress in Fishers as a similar ramp is expected a couple of years from now. Can you provide an update on Fishers and our current status there? Are we still operating at a loss? I assume that's the case. When do you think Fishers will reach breakeven and start generating profit? Is that targeted for 2026 or 2027? I would like your thoughts on this. Thanks.

I will begin with the margin question, and then Franco will provide additional insights from an operational and business perspective. Regarding margins, as illustrated in the graph, we have recently initiated commercial revenues. We are currently at a lower point in profitability due to our ongoing activities, including validation, customer testing, and ramping up production while validating the lines immediately after installation. We expect to see improvements in the next quarter. It's important to note that the Fishers plant is larger than the Latina facility and is a greenfield project. However, we believe we have reached a turning point, and we anticipate improvements quarter-over-quarter on both sides. This is why I previously mentioned that in 2025 and also in Q4, we expect positive financial performance from both Fishers and Latina.

Correct. I can further give some color about the capacity expansion that we are doing between Fisher and Latina. We continue to make progress in both greenfield plants. So in both facilities, the ongoing installation of manufacturing lines and the customer validation are on track today with a very high intensity of activity in a partnership together with them. In Fisher, in the third quarter, we start commercial production, and we started generating our first commercial revenue. During the quarter, we also completed the installation of our second high-speed manufacturing line, and we start the validation activity with several key customers. In Latina, we are scaling production. And this quarter, the plant become profitable at a gross profit level. So in conclusion, we continue to see strong demand for high-value solutions driven by the strong momentum in biologics. And this reinforced our decision to strategically invest, particularly in Fishers and Latina.

The next question is from Patrick Donnelly with Citi. Please go ahead.

Hi, everyone. Thank you for answering the questions. I have two inquiries, so I'll ask them both at once. Marco, can you discuss what you're observing regarding margins? It's clear that the engineering aspect has been a bit of a drag. It would be helpful to explain the various factors involved and your expectations moving forward. Franco, you mentioned the destocking situation. Can you share your confidence that it's mostly behind you? What risks do you see for another downturn, or do you feel, based on the order patterns, that this issue is resolved and we are entering a phase of stability and recovery? Thank you.

The destocking has been one of the most challenging issues we faced in 2024. I want to clarify that the vial destocking is just a temporary situation, representing an inventory normalization effect. It's not a matter of whether the vial market will recover, but when it will. Vials remain the most widely used containment format globally. To put it in perspective, over 13 billion vials are utilized annually to deliver treatments to patients across various pharmaceutical companies and therapeutic areas worldwide. We are confident that the end markets are healthy and that vial demand will eventually return to pre-pandemic levels. Currently, we are below the 2019 vial demand levels, which we see as a clear indication of an inventory normalization effect. Furthermore, we are observing positive signals from many of our customers, including smaller clients who are starting to reactivate orders in the latter part of 2024, and larger international customers who are providing new forecasts for 2025. We are cautiously optimistic that we are moving in the right direction.

And about engineering, if I got correctly, Patrick, you asked about engineering also. So as mentioned, after basically doubling the size of the segment in terms of people and the revenue from 2019 to 2023, we are facing some challenges we explained last quarter with some specific highly customized complex projects. We are in the good direction to fix them. As Franco mentioned, we have been able to complete some of them in the quarter. Nevertheless, we are taking action to optimize the segment, and we expect it will take another two to three quarters to fully normalize our profitability. This is embedded in our guidance, obviously. And this is an area where we are working hard and taking action in order to set the stage for the future growth.

The next question is from Jacob Johnson with Stephens. Please go ahead.

Hey, thanks. Good morning. Maybe sticking on the margin front. Your guidance would seem to imply a decent step-up in EBITDA margins sequentially. Just curious how to think about that in terms of gross margin expansion sequentially versus operating leverage?

It is mainly driven by gross profit margin in Q4. We expect to leverage better volumes. The mix is expected to improve in Q4. As you can see, we increased a little bit the guidance for high-value products because we are largely covered by firm committed orders from customers there. So the confidence is both on volumes and mix. And finally, we expect slightly better performances in Latina and Fishers in Q4 compared to Q3. So mainly business and operational improvement rather than cost reduction.

Got it. Thanks for that, Marco. And maybe just sticking on the cost side, you guys lowered the guide due to some incremental costs for engineering and Fishers. As we think about the kind of the return on those costs, just do those incremental costs maybe help accelerate the recovery in Engineering and the ramp at Fishers? Or just any way to think about where that money is going and the potential benefit from it?

Yes. Let's say, we are investing now to improve the situation and the profitability in the future. They are very different situations. I mean in Fishers, as you know, we are ramping up the production, validating the lines with customers. So this is driven by strong demand we see for the future, and customers are willing to validate the production to leverage our capacity in the future. In Engineering, we commented is more to execute our business optimization plan and be more profitable in the future.

Yes, I confirm we have decided to apply this decision right now in order to build a new platform to set in the future more cost-competitive in order to increase our productivity.

Got it. Thanks for taking the questions.

The next question is from Dave Windley, Jefferies. Please go ahead.

Hi. Thank you for taking my questions. I would like to gain a clearer understanding of our position in Fishers in relation to the illustrative slide you shared. Did I understand correctly that you are currently at the maximum operating loss there, and that with increased revenue, you expect that situation to improve? Also, how should we think about the incremental margin as revenue grows in Fishers? Thank you.

We started commercial production in Q3. So our expectation is to increase the revenues quarter-after-quarter with more validation, and more lines installed, and so on and so forth. So we expect to better leverage the fixed expenses as soon as our production will steadily grow. So this is our assumption. We believe we touched the lower point in this quarter with the higher cost associated with the validation and installation.

Correct. It's a very similar journey we had with Latina. Now we have installed also the second line. And also in parallel, we are performing again validation, and we started to deliver commercial revenue also with the second line. In the next quarter, we will continue with this path with the same, similar to what we already happened in Latina today. In the long run, Fishers will have even more wide product portfolio because we are going also to produce some Alba technology and some auto-injector technology. So in the long run, at a certain point, Fishers will be even wider and bigger than Latina.

The next question is from Dave Windley, Jefferies. Please go ahead.

Since that one didn't hit the mark, let me move to a different one, which concerns the additional costs for validation in Fishers and optimization in engineering. So you are adding costs related to these plans that were established earlier. Can you explain what has changed from your initial expectations that has led to these additional costs? For instance, in Fishers, is validation proving to be more difficult than you anticipated? Are you validating for more customers than you had expected? Similarly, in engineering, what is driving the extra costs associated with the optimization plan you previously outlined? Thank you.

The ramp-up activities are advancing as planned, and we are happy about the program. We have higher costs for Fishers that are related to validation. Sometimes it's taking longer depending on the customer approach, their process, and not every customer is the same with respect to the validation activities. We are targeting here, as you know, high-value products. So the requirements are often at a very high level. Anyway, we are very happy about the success we gained in validating the plant and the first line with the very important customers that are, by the way, already committed orders, so they are really willing to start with us.

In the Engineering segment, one of our key actions in the optimization plan is to reassess our operational footprint. We have made some adjustments to our operational structure and have relocated certain activities to Italy. This decision aims to lay the groundwork for future growth, enhance our productivity, and lower our costs. We have chosen to make this investment now to achieve better margins by 2025.

Got it. Thank you. Appreciate your question. Thanks.

The next question is from Paul Knight at KeyBanc Capital Markets. Please go ahead.

Hi, Franco. Could you talk about why Indianapolis is coming online faster? Was it customer request, customer payment? What were the dynamics from what we thought would be a later 2025 start-up?

No, we are in line with our expectation. I mean it was in our plan to start the commercial revenue about two to three quarters after Latina. So we are exactly in line with our plan. Obviously, now it's a matter of ramping up the revenue and the activities there and better leverage the fixed cost we have there. But in all honesty, we are exactly in line with our plan.

Remember, Paul, that Latina was a brownfield and Fisher a greenfield plant. The greenfield plant also from the moment that we decided during the IPO to do the greenfield plant, we received some additional orders like BARDA, also the other opportunity that we have enlarged the plant. So this is why we have this, let's say, a few quarters of difference between Europe and United States.

Okay. And then within the Engineering group, the turnaround there, is it done in terms of fixing operations in Northern Europe? Where are we from where you want to be with the efficiencies at engineering in Northern Europe, Denmark, I believe.

Our goal is to establish a center of excellence for each product. We initially plan to focus on achieving excellence in inspection systems in Denmark and Italy, particularly in Bologna. This strategy is already in motion, but we will need a few quarters to see it fully realized. We anticipate returning to certain levels of profitability by the middle of next year.

And the last question would be the start-up of hiring and training people in front of capacity starting like Indiana, like Latina. What do you think that's had a 100 basis point impact on gross EBITDA margin? Is it 200? Or is it kind of a range of 100 to 200? Can you kind of give a formula or a data range on personnel costs, training costs?

What I can tell you, Paul, is that we are having in this quarter, negative gross profit in the combination of Fisher and Latina. So the graph is illustrative, but we are not still at overall, the combination of the two in positive gross profit margin. And since we are targeting high-value products here, we expect the final gross profit margin will be above the average of the company. So you can see the magnitude of the delta we are suffering today with the ramp-up of the two facilities. But again, we are doing it for future profitability covered by customers' demand.

You're welcome.

The next question is from Dan Leonard, UBS. Please go ahead.

Thank you. I have a follow-up to Jacob's question from earlier. I'm just trying to better understand the Q4 sequential margin expansion. I mean, I'm looking at a 500 basis point sequential gross margin improvement from Q3 levels into Q4. Is that number correct? And it does seem inconsistent with historical incremental margin. So I was wondering if you could help me better understand the buckets that would drive that.

Yes, thank you for the question. We are aiming for over $320 million in revenue in Q4. Our committed orders provide strong coverage, and we expect a favorable product mix. This is why we have raised our guidance for high-value products in Q4. Again, we are primarily supported by these committed orders from our customers. The combination of a good mix and increasing volumes is anticipated to improve our fixed expenses. Furthermore, we expect to see enhanced financial performance in both Fishers and Latina as we grow revenue and manage fixed costs. All these factors give us confidence in meeting our Q4 guidance.

Okay. I think I understand a bit better. And just a quick follow-up, Franco, I was wondering if you could better dimension that comment you made that vial demand is below 2019 levels, by how much? And I'm trying to better understand the magnitude of revenue lift possible if demand merely returned to 2019 levels.

Yes, Marco speaking. As we disclosed clearly, we are down 40% to 48% compared to last year in vials, and this is coming after a year when we declined the COVID business that was mainly biased by €80 million to €90 million in 2023. So it's the combination of two years of decline that is putting us in a condition that we are below 2019 demand. What to expect for the future, I think we disclosed all the variables in place between large customers and smaller customers also by geographical area. Obviously, it's not easy today to put together the combination of all the probability and give you precise guidance about 2025, and this is the main uncertainty we need to assess and to address for 2025.

You're welcome.

The next question is from Curtis Moiles, BNP Paribas Exane. Please go ahead.

Thank you for taking my questions. Just looking at the fiscal year guidance, the range that you have out there for the implications for Q4, it looks like it's kind of anywhere from a 1% decline to a 5% increase in Q4. So, I kind of wanted to get a better idea of what the moving parts are there. Are you expecting an improvement in BDS and engineering? Or is one going to do better than the other? Or any other color will be helpful.

For Q4, the expectation is to improve mainly in the BDS segment, where we are basically leveraging the high-value products, the higher volumes and the ramp-up of Fishers and Latina. So it's mainly about the BDS segment improvement.

Okay. That's helpful. And then also just going back to the destocking. You're calling out vial orders expected to improve or pick up by the end of the year. Should we expect any kind of impact on revenue in Q4? Or is that going to be delayed until 2025 at the earliest?

Again, as Franco was saying, we are gaining traction in orders. We see some improvement and not yet the normalization of the level of orders in vials. Orders are mainly for the beginning of 2025 rather than Q4 '24.

And if I may also reiterate my confidence about our long-term strategy and what eventually is behind 2024 in order to isolate the situation. 2024 was challenging for Stevanato Group, and we faced some temporary painful headwinds this year. Bio destocking took the industry by surprise and will turn around. This is important that we need to be clear. We are also in a cycle of high investment in Fisher and Latina, but we are doing this investment for the future. In engineering, this is within our control, and we feel confident that the action we are taking will deliver results. On the other side, we see sustained demand for high-value solutions, in particular, on syringes. At the end of the day, the fundamentals have not changed. The demand landscape is robust, and we have long secular tailwinds. In short, we are positioned for profitable growth. So, from our perspective, as we consider 2026, we would expect that while destocking will be behind us, we will gain leverage from scaling our new operation in Latina and Fisher and the Engineering segment should return to profitable growth. This gives us continued confidence in our ability to achieve an adjusted EBITDA margin of 30% and high-value solutions in the range of 40% to 45% in 2027. This is the belief that we have today with the leadership team.

All right. Thank you.

Operator, do we have any other questions?

Ms. Miles, there are no more questions registered at this time.

Thank you very much. We want to thank everyone for joining us today, and have a wonderful day.