Earnings Call Transcript - STVN Q2 2023

Operator, Operator

Good afternoon. Welcome and thank you for joining the Stevanato Group Second Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in 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, Investor Relations. Please go ahead.

Lisa Miles, Senior Vice President, Investor Relations

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 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 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.

Franco Stevanato, Executive Chairman

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’re 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 growth. 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 mid-term target for revenue from high-value solutions in the high 30% range by 2026. Our investment in growth platforms is 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’re 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 EZ-fill 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.

Franco Moro, Chief Executive Officer

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 EZ-fill products led to an increasing mix of high-value solutions, which represented approximately 33% of the total revenue. For the second quarter, new order intake totaled EUR 240 million compared to 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 30th, 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 involved in three 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 unique storage and packaging requirements that our 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 increasing revenue from biologics also dovetails 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-1s and biosimilars will continue to drive durable, organic growth. Please turn to Page 9 for an update on our capital projects in the US and Italy, as we advance these facilities toward operational readiness. In Fishers, staffing plans remain on track and our technical and managerial staff have returned to Indiana after many months of immersive training here in Italy. We’ve started our initial performance qualifications for the first EZ-fill lines 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 and safety, as well as diversity, equity and 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.

Marco Dal Lago, Chief Financial Officer

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 startup 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 these to continue into 2024 when operations commence in Indiana. In the second quarter of 2023, operating profit margin was 17.6%. Excluding startup costs of the new plants, adjusted operating profit margin was 19.1%. This compares to 19.6% in the same period last year, which benefited from a EUR 6 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 startup 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 startup of new plants and higher depreciation, which was partially offset by the increase in high-value solutions. This led to a 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 an operating profit margin of 15.5% for the second quarter of 2023. On Page 14. As of June 30, 2023, we had a 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 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 that are coming in lower than forecasted. 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 non-recurring startup 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. And COVID-19 will 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.

Franco Moro, Chief Executive Officer

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’m 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, Operator

Excuse me, this is the Chorus Call conference operator. We will now begin the question-and-answer session. The first question is from Patrick Donnelly from Citi. Please go ahead.

Patrick Donnelly, Analyst

Great. Thank you, guys for taking the questions. Franco, maybe one just on the GLP-1 landscape, you know, obviously a big focus for investors. Can you just talk about the competitive landscape, the backdrop certainly seems, you know, right for continuing to show really strong growth there. Just talk about what you’re seeing there, the competitive landscape. You know anything on market share and growth would be certainly helpful as well. But we’d love to chat a little bit about that market.

Franco Moro, Chief Executive Officer

Yeah. Thank you, Patrick. I want to start by saying that we have been in diabetes care and GLP-1s for many, many years, and you know that we have a leadership position in cartridges for pens. We also have a strong value proposition for syringes for auto-injectors and syringes for the GLP-1. This is our current position that allows 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 spaces, because in syringes, we are the second player worldwide. In cartridges, I have already said that we are the leader, and there are other important competitors 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 opportunities for the conversion to the right configuration of cartridges, which is an important driver for our growth because we have a leadership position in this technology.

Patrick Donnelly, Analyst

Okay, now that’s helpful. And then maybe just an update on China. You know, obviously, that’s been a challenging 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.

Marco Dal Lago, Chief Financial Officer

Yeah, I’ll start. Marco speaking. From the 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, where we have fluctuations quarter-after-quarter depending on project names. For the future, I will leave to Franco.

Franco Moro, Chief Executive Officer

Yeah, I have to reiterate that there are no changes in terms of the long-term strategy for China and Asia Pacific, where we see significant opportunities for the long run because it is one of the fastest-growing markets. We decided to pause some investments in China because we prefer to focus on capital expenditure execution in the USA and Italy, where we have very interesting opportunities in the near term. So, the fact that we decided to put all our attention in the short term in the USA and Italy doesn’t mean that we changed our strategy for China.

Operator, Operator

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

Paul Knight, Analyst

Hi, 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?

Franco Moro, Chief Executive Officer

Hi, 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 programs for the commercial volume that we transfer from Europe and the opportunities coming from the US 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 capital expenditure plan during the next two to five years to complete the cycle of investment in Fishers by '27, according to the current plan. But this is a modular approach, and we will progress with this kind of modularity.

Paul Knight, Analyst

Okay. And then my – I think the most frequent investor question right now is, you know, 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?

Franco Moro, Chief Executive Officer

But there’s a little you’re right, we are not addressing a single therapeutic area, we are talking about the opportunities we have in biologics, where our solution matches actually the needs of our customer. So obviously, we see opportunities that are embedded, and our expectation is to continue to have healthy growth in the following years. For '24 next year, it's too early to release any specific information, but we are investing eagerly in high-value solutions because we consider the biological space as the main driver of our growth in the future; it also provides the possibility to convert the market for our vials, having the cartridge in that space even faster than in general. But we arrive with our expectation to support the growth for the years. No major changes in that.

Operator, Operator

The next question is from David Windley from Jefferies. Please go ahead.

David Windley, Analyst

Hi. Thanks for taking my question. In high-value solutions, can you comment on or maybe peel apart the demand for particular products within your groups of products? 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?

Franco Moro, Chief Executive Officer

Yes, it’s a very interesting question, but I have to say that both are seeing very strong demand even higher than expected for the right cartridges and also for Alba and Nexa. Both of these product lines are associated with the biologics and auto-injectors or pens. So, we are happy to report that our value proposition, our portfolio of solutions is not overweight in a single product line, but is a well-balanced portfolio of solutions that drive growth in biologics. There is nothing specific that we consider more important; we have many different opportunities.

Operator, Operator

The next question is from Marco Dal Lago. Could you detail kind of what comprises industrial costs? What types of costs are you including in that descriptor, please?

Marco Dal Lago, Chief Financial Officer

Yes. Thanks, David. So, the reported gross profit margin has been impacted by the non-recurring startup cost related to the prelaunch of the commercial revenue in Fishers and Latina. So we are training our people to secure the success of the ramp-up, and these are treated as non-recurring expenses. Without that, we would have reached 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 capital expenditure we have been doing since the beginning of 2022. Obviously, the offset of that is about the shifting towards high-value solutions where we are gaining profitability. We have shared several times that we are gaining 100 basis points of standard gross profit margin whenever we increase 4%, and that shift shares high-value solutions. So, it’s consistent with the plan we designed in the past. And those are the two main headwinds we are facing.

David Windley, Analyst

Okay. Very helpful. Thank you. Last question for me. Kind of similar to Patrick’s question around the environment in life sciences. Destocking has been a theme. 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 customers bleeding down their own inventories? Are they overstocked in inventory of your containment products, such that, you know, order patterns are not only lower but are actually undershooting current demand?

Franco Moro, Chief Executive Officer

Yeah. We see a different approach or better practices in terms of transferring product costs and flowing for equity to commit the orders as a general approach. And regarding vials, if – and you may recall that COVID was almost all of the vial business. We also see the situation you were referring to—some inventories that the customers had to deplete to use. So we expect that during the next quarters, the situation will relax in this term; that is only related to vials, because COVID-19 outside of vials was a minor part of the business. So partially it’s back to normal practices generally speaking, and then there is COVID fading specifically in vials.

David Windley, Analyst

Thank you. Franco, so you said, I think you were saying in the coming quarters, do you have an estimate on how much longer you think it'll be before customers have returned to normal levels?

Franco Moro, Chief Executive Officer

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

Operator, Operator

The next question is from Derik de Bruin from Bank of America. Please go ahead.

Derik de Bruin, Analyst

Hi, good morning. Hey just to follow-up on Dave’s question on the gross margin. What’s the—how should we think about progression into 3Q and 4Q?

Marco Dal Lago, Chief Financial Officer

Well, David. For the year, we are confirming excluding non-recurring expenses and margin expansion compared to 2022 in both segments, in BDS, in particular, driven by the shifting towards high-value solutions, partially offset by the higher depreciation and some inefficiencies associated with the ramp-up in Latina. In the Engineering segment, we expect to expand margin also. If we include the non-recurring expenses, we expect a slight decline in the gross profit margin in 2023 compared to 2022.

Derik de Bruin, Analyst

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

Marco Dal Lago, Chief Financial Officer

Yeah. At the moment, we expect Capital Expenditures to remain at significant levels in 2024 to continue with Fishers and our operations. In our model today, we expect for there to be an important year for CapEx, and we anticipate starting to normalize in 2025 and turning to positive free cash flow.

Derik de Bruin, Analyst

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? It was just sort of an unusual market comment that sort of kept coming up. Just sort of your thoughts on is there anything unusual going on in the end market right now?

Marco Dal Lago, Chief Financial Officer

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. I haven’t seen in the next three or six months any slowdown. But I can also—

Franco Moro, Chief Executive Officer

Yeah, Derik, I can complement what Marco said. We don’t have the view you reported because in our interactions with customers, we are planning according to their needs for the future, and we have a very significant opportunity for growth in that space. Additionally, you can recall that we have specific insights into CapEx decisions about the customer because we are serving them with our Engineering segment. The fact that we are improving our business in Engineering is an indication that we base our expectations on very solid ground.

Operator, Operator

The next question is from Drew Ranieri from Morgan Stanley. Please go ahead.

Drew Ranieri, Analyst

Hi, thanks for taking the questions. Franco, let's start with you. You mentioned in your remarks that you’re noticing new opportunities in the US market, and I understand the growth in biologics and GLP-1s. Could you provide more details on this and explain how it might lead to new customer relationships or any considerations for future growth?

Franco Moro, Chief Executive Officer

Drew, you know that we are in almost all the Big Pharma. So, when addressing a new customer, we have sufficient large customers today to have insight into their needs, supported by our established portfolio of opportunities that we are leveraging with our tech centers, not only through our CapEx for their commercial volume in the future. Our decision to accelerate investment is based on very good insights into customer needs, and we are executing with our modular approach, ready to adjust to those in terms of possible future upside.

Marco Dal Lago, Chief Financial Officer

Well, for 2023, you are right, we decreased a little bit our guidance for COVID. Nevertheless, we are confirming the overall guidance because we can shift to another therapeutic area. What we see today is organic double-digit growth in both segments in this environment, so this is how we are thinking about our guidance for the year. About 2024, it’s a bit premature to communicate any guidance.

Operator, Operator

Ms. Miles, gentlemen, there are no more questions registered at this time. Do you perhaps have any closing comments? I apologize, but we have a last-minute registration from Matt Larew from William Blair. Please go ahead.

Matt Larew, Analyst

Okay, yeah, thanks. You know could you help me just frame 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 that the modular approach, maybe how much of that will be available immediately relative to sort of that 2027 or longer-term timeframe?

Franco Moro, Chief Executive Officer

I can say that, if you compare the 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 cartridges. There is a split obviously between the different facilities, but we cannot deliver metrics about that. In terms of the modularity, we talk about the expansion of Fishers in a range of four to five years, depending if you include '23 or not. It’s not a completely regular ramp-up, but is well-distributed along those years.

Matt Larew, Analyst

Okay, thanks. And then is there any indication in terms of, you know, 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 five years ago, 10 years ago and some sort of payback periods for those types of investments?

Marco Dal Lago, Chief Financial Officer

Well, what we can tell you is that we are investing in EZ-fill mainly, almost everything is EZ-fill, and most of it is high-value solutions. So we expect a pretty high return. When looking at our past data in EZ-fill plants here in Piombino Dese, the internal rate of return is well above 20%. Our goal is to replicate this level of return for the two new Greenfield facilities.

Operator, Operator

There are no more questions at this time.

Lisa Miles, Senior Vice President, Investor Relations

Thank you, operator. We want to thank everyone for joining us today for Stevanato Group’s second quarter financial results. We look forward to speaking with you in the future. Thank you.

Operator, Operator

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