Earnings Call Transcript - STVN Q4 2022

Operator, Operator

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Stevanato Group’s Fourth Quarter and Fiscal Year 2022 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 and Investor Relations of Stevanato. Please go ahead, madam.

Lisa Miles, Senior Vice President, Investor Relations

Good morning, and thank you for joining us. With me today is Franco Stevanato, the 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. Such statements 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 more recent Annual Report filed on Form 20-F with the SEC. We encourage you to review the information contained in our earnings release in conjunction with our SEC filings and our latest Form 20-F. The Company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law. Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analyses of results and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures, please see the Company's most recent earnings press release. And with that, I’ll hand the call over to Franco Stevanato for opening remarks.

Franco Stevanato, Executive Chairman

Thank you for joining us as we close out another year of strong financial results. The collective efforts of our employees worldwide led to outstanding execution in 2022. We are building a track record of consistent delivery on our financial and operational objectives. We are well positioned against a backdrop of favorable demand, and the fundamentals of our business remain strong. As we enter 2023, we expect to benefit from the secular tailwinds in high growth end-markets such as biologics. We currently see important opportunities in front of us to support customers across a broad range of therapeutic areas including GLP1, monoclonal antibodies, and mRNA applications. We are currently seeing trends toward sustained, robust demand for high-performance drug containment, and we have modified our investment plans to maximize this opportunity. Notably, these opportunities enable us to exploit our unique value proposition of end-to-end integrated capabilities. We are gaining more traction in supporting customers’ needs in multiple product categories across both segments. Lastly, our management team and Board of Directors are fully aligned on capitalizing on our future growth prospects. We are laser-focused on fulfilling the needs of our customers and cementing our leadership position as a key partner in the pharmaceutical supply chain worldwide. We are investing in the business, our people, our products, our communities, and scientific innovation, which we believe should deliver durable organic growth to drive long-term shareholder value. I will now hand the call over to Franco.

Franco Moro, CEO

Thank you, Franco. Starting on slide 7, our fourth quarter results led to a strong finish in 2022, with double-digit growth, expanding margins, and a growing mix of high value solutions. We finished the year with record revenue from high value solutions, which represented approximately 30% of revenue for fiscal 2022. For the fourth quarter, new order intake totaled €237 million and we ended 2022 with backlog increasing 9% to €957 million. As expected, growth in backlog was partially offset by a lower level of orders to support Covid-19. Excluding Covid, our backlog increased 21% compared with last year, reflecting favorable demand for new customer programs. On slide 8, our first-rate execution in 2022 enabled meaningful progress against our four strategic pillars: First, we advanced the buildout of our industrial footprint to add capacity in premium products to meet demand and drive growth. We also signed an agreement with BARDA to further expand vial capacity in Fishers. Second, we continued to grow our mix of high value solutions in 2022. The shift to high-performance, high-value products has been led by pharmaceutical innovation. New classes of treatments require specialized drug containment to ensure the highest integrity of the treatment, and we remain ideally positioned to capitalize on this trend. Third, we continue to fuel innovation by investing in R&D and partnering with best-in-class players to fortify our market-leading position. In 2022, we launched our next-generation EZ-fill Smart™ platform and advanced our portfolio of drug delivery systems. Most recently, we entered into a partnership with Transcoject to expand our portfolio with COC and COP syringes. This allows us to offer the broadest available suite of market-leading glass and plastic syringes. And lastly, we continue to build our pipeline of multi-year opportunities in high growth end-markets like biologics. As we further advance these strategic imperatives in 2023, we expect that our efforts will yield sustainable organic growth in the years to come. On page 9, we are refining our capital spending plans to optimize our global footprint amid rising demand. In the U.S. and Europe, future demand has outpaced our expectations since our IPO et and our modular approach gives us the flexibility to adjust our plans accordingly. Over the last 18 months, we have worked alongside customers to better address their needs. With this added visibility, we are accelerating investments in Fishers to capitalize on the elevated demand outlook led by the expected growth in biologics. Concurrently, we are tapping the brakes on the phasing of our China expansion, so that we can prioritize our projects in the U.S. and Italy. Our refined CapEx plan for Fishers focuses investment in the U.S. market, where demand has been climbing for high-performance drug containment to meet the needs of sensitive drug classes such as GLP-1s, monoclonal antibodies, and mRNA applications. We have updated our industrial plan to adapt to these favorable market trends. First, we continue to see surging demand for syringes. To capitalize on this, we are adding approximately 60% more syringe capacity in Fishers compared with our initial plan. This includes Alba syringes which are purpose-built for biologics. Turning to vials, we expect to double the capacity in the U.S. for ready-to-use vials, as we prepare the commercial launch of our next-generation EZ-fill Smart™ platform. Let me crosswalk the changes to our expected CapEx for Fishers, starting with our initial planned investment. At the time of the IPO, we assumed CapEx for Fishers of approximately €150 million. In March of 2022, we entered into an agreement with BARDA to expand vial capacity for both EZ-fill and bulk vials. This is estimated at approximately €175 million. Most recently, we decided to invest an additional €175 million to further expand much-needed capacity for Nexa and Alba syringes. When you add it all up, the total CapEx for Fishers is approximately €500 million. This includes the portion of CapEx that is supported by BARDA. We remain on track to launch validation activities in Fishers in the fourth quarter of 2023, and we expect that the revenue will begin to ramp in a meaningful way in 2024. Moving to slide 10, in Piombino Dese, the new building is complete, validation activities are well underway, and we started our commercial batch production. In Latina, we completed the largest cycle of CapEx. The site is on track for validation activities over the summer with commercial production beginning in the fall. We anticipate temporary inefficiencies through the natural progression of start-up activities as volumes and revenue grow over time. With the favorable demand in the U.S. and Europe, we are slowing down our expansion in China. China is strategically important, but our existing operations are currently sufficient. We are prioritizing our CapEx projects in the U.S. and Europe where our customers have the most pressing needs, and we can provide the greatest value. With that, I’ll now hand the call over to Marco.

Marco Dal Lago, CFO

Thanks Franco. On slide 12, we ended 2022 with strong financial results. For the fourth quarter, revenue increased 26% to €292.1 million or 23% on a constant currency basis, driven by growth in both segments, the shift to high value solutions, and currency. Our top-line results for the fourth quarter were better than expected due to the recognition of revenue that was previously forecasted in Q1 2023. This includes revenue from certain engineering projects and COVID-19. As a result, revenue from COVID-19 was higher than our forecast and represented 12% of total revenue. We are making relevant progress growing our mix of high value solutions, which increased 31% to €87.2 million in the fourth quarter. For the fourth quarter, gross profit margin increased by 290 basis points to 34.3% due to higher revenue, a favorable mix, better leverage of fixed costs, and the recovery of inflationary costs. Operating profit margin in the quarter increased to 21.6% and included a benefit of €3 million in other income, related to a joint development project. Excluding start-up costs on the new plants, adjusted operating profit margin was 22.2%, compared with 18.8% in the same period last year. On the bottom line, this resulted in a better-than-expected net profit of €48.3 million, or 18 cents of diluted earnings per share, adjusted net profit of €49.6 million or adjusted diluted EPS 0.19 cents, and adjusted EBITDA totaling €81.9 million, reflecting an adjusted EBITDA margin of 28%, which was up 270 basis points over last year. Turning to slide 13, on a full year basis, revenue increased 17% to €983.7 million, driven by growth in both segments, the mix shift to high value solutions, and currency. On a constant currency basis, revenue grew 13% over last year. As expected, full year revenue growth was partially offset by lower revenue from COVID-19 which represented 11% of total revenue in 2022, compared to 15% in 2021. As revenue from COVID-19 rolls off, we have been successfully backfilling this decrease with new projects across a broad range of therapeutic areas. For 2022, high value solutions grew 41% to a record of €293.2 million and represented approximately 30% of revenue. Our solid growth, favorable mix shift, and operational efficiencies led to expanding margins for the full year. As a result, gross profit margin for 2022 increased 110 basis points to 32.5%, despite inflation. While we recovered nearly all of the inflationary costs through price adjustments, it had a dilutive effect on gross profit margin in 2022. For the full year, operating profit margin for fiscal 2022 was up 40 basis points to 19.6%. Excluding start-up costs on the new plants, adjusted operating profit margin increased to 20.2%, compared to 19.2% last year. This led to solid delivery on the bottom line with net profit of €143 million or diluted earnings per share of 54 cents for 2022. On an adjusted basis diluted EPS increased 17% to 56 cents. For 2022, adjusted EBITDA increased 21% to €263.6 million resulting in an adjusted EBITDA margin of 26.8%. Let’s move to segment results on Slide 14. The Biopharmaceutical and Diagnostic Solutions Segment once again delivered strong results for the fourth quarter and full year. For the fourth quarter, revenue increased 25% to €231.5 million, and 21% on a constant currency basis over the prior year. Revenue growth was mainly driven by a 31% increase in high value solutions and a 21% increase from other containment and delivery solutions. In Q4, gross profit margin increased to 37.3% due to strong revenue generation, the favorable mix, better leverage of fixed costs, and the recovery of inflationary costs. Operating profit margin for the Segment was 23.7% in the quarter. For the full year, revenue grew 15% to €799.7 million, and 11% on a constant currency basis, compared with fiscal 2021. Revenue from high value solutions grew 41%, while other containment and delivery was up 4% over the prior year. For the full year, gross profit margin for the BDS segment increased 120 basis points to 34.3%, and operating profit margin improved to 22.8%, despite inflationary headwinds. Financial results for the Engineering Segment were better than expected in the fourth quarter and revenue increased 30% to €60.6 million, mostly due to the timing and progression of projects. For the full year, revenue increased 23% to €184.0 million driven by growth in all business lines. For the fourth quarter of 2022, gross profit margin decreased 50 basis points to 21.2%, mostly due to project mix, and operating profit margin was 12.2%. For the full year, gross profit margin improved 230 basis points to 21.6% mainly driven by contributions from more accretive business lines, as well as ongoing business optimization efforts. As a result, operating profit margin improved to 13.8%. On slide 15, as of December 31st, 2022, we had a positive net financial position of €46 million, and cash and cash equivalents of €228.7 million. For the full year, net cash generated from operating activities was €103.3 million, reflecting increased working capital to support growth and higher inventories to mitigate supply chain risk. Meanwhile, cash used for investing totaled €243 million to support our expansion plans. This resulted in negative free cash flow of €137 million for fiscal 2022. In February of 2023, we secured two loans totaling €130 million for our ongoing investments in growth platforms. The first five-year loan was financed through BNP Paribas for €70 million. The second loan for €60 million was financed through Cassa Depositi e Prestiti. Both loans have a two-year drawdown so we can access the capital when needed. The loans shore up our balance sheet and provide us added flexibility for capital deployment. Our balance sheet is healthy, and we believe we have adequate liquidity to fund future growth. Turning to CapEx, on slide 16. In 2022, capital expenditures were €302.6 million as we continued to invest in our strategic global expansion. As Franco noted, we are focusing our efforts in the U.S. and Italy, to capitalize on rising demand. Consequently, we are forecasting capital expenditures of 35% to 40% of revenue in 2023, of which approximately €70 million is carry-over from fiscal 2022. For 2023, approximately 90% of our expected CapEx is tied to growth, and the remaining balance for all other activities including R&D. Let’s review guidance on page 17. For fiscal 2023, we expect Revenue in the range of €1.085 billion to €1.115 billion. This implies growth between 10% and 13%; excluding COVID, growth is estimated to be greater than 20%, adjusted diluted EPS in the range of 58 cents to 62 cents, adjusted EBITDA in the range of €290.5 million to €302.5 million. Our 2023 guidance assumes headwinds and tailwinds, and considers the following: First, we expect that our second half results will be stronger than the first half, and growth will be linear throughout the year. Our model assumes double-digit growth in the BDS Segment and high-single-digit growth in Engineering. Consistent with prior years, we expect a step down in revenue in the first quarter, compared with Q4 2022. We have assumed that high value solutions will represent approximately 32% to 34% of 2023 forecasted revenue. Revenue from COVID-19 is expected to decrease by approximately €80 million in 2023 versus 2022. We estimate that it will represent about 2% to 3% of revenue. And lastly, we are estimating a currency headwind of approximately €13 million to €14 million.

Franco Moro, CEO

Thanks Marco. Our strong financial results in 2022 demonstrate that we have the right strategy in place. We are operating in an environment of strong demand, growing end-markets, and multi-year secular drivers. With a favorable demand landscape, our capital allocation priorities are designed to meet current and future customer demand trends. The timing of customer demand requires us to invest several years in advance of commercial production to seize the opportunities in front of us. We have strong momentum entering 2023. With our unique integrated capabilities and market-leading portfolio, we are well positioned to drive durable organic growth and, in turn, increase shareholder value. And with that, let’s open it up for questions.

Operator, Operator

The first question is from Paul Knight of KeyBanc. Please go ahead.

Paul Knight, Analyst

Hi, Franco Moro. The growth in biologics you just mentioned, would it be the GLP1s that stand out or what therapeutics would you note in this increase in your CapEx?

Franco Moro, CEO

Hi, Paul. Yeah, you know that we are targeting more technological areas than a single therapeutic area because our solution addresses specifically the need for biologics. But you are right, we are targeting some areas that are fast-growing and more than expected really. One is GLP1 that is a strong driver for our demand and also I want to mention mRNA applications that during the pandemic became a real answer for effective treatments for diseases. So this is the main area, but we have a good pipeline of opportunities also in other therapeutic areas.

Paul Knight, Analyst

And regarding Fisher expansion, will that occur in terms of revenue generation over 2024 or will it take time to build that up into 2025 onward or so what would be the steps of revenue generation at Fisher? Thank you.

Franco Moro, CEO

I can confirm that we see the completion of the first steps for validation at the end of this year and we expect to have the ramp up of revenues during 2024. Obviously, we are talking about a modular investment that is a multi-year investment. It’s not just for a single year. So we expect that to develop our revenues not only in 2024 but even later as the project progresses.

Lisa Miles, Senior Vice President, Investor Relations

Thanks, Paul. So bring the next question please.

Operator, Operator

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

Patrick Donnelly, Analyst

Hey guys. Thanks for taking the questions. Maybe another one just on the capacity expansions there. Just shifting the resources towards areas like Fisher. Is it just that the demand is so strong here in the U.S. versus China that you wanted to accelerate that process? Is there a way to kind of think about revenue being committed or ahead of time as you guys build this out or is it going to be kind of as you build it out you’ll fill it? Just trying to get a sense for the shift here; obviously, you guys are excited about the opportunity. Just want to feel out what the demand looks like versus the China piece.

Franco Stevanato, Executive Chairman

Yes, you got it right that our decision of where we allocate the CapEx is market-driven, it’s demand-driven. So we see an acceleration in demand both in the U.S. and Europe. So we decided to accelerate the investment in both areas and in Fisher, obviously, but also in our EZ-fill platform and high value solutions. About China, second half of your question, we decided only to take some time to analyze the situation and to optimize our capital allocation. So, we remain strategically focused on the potential expansion in China. The market for the future will provide very interesting opportunities, and as I put in my prepared comments, we are tapping the brakes, and we expect now to have the future off the brakes sometime during 2024. But the strategic significance of the investment in China will remain the same as we mentioned at the very beginning.

Patrick Donnelly, Analyst

Okay. That’s helpful. And maybe one for Marco on the margin piece. Can you just talk about your expectations for 2023, how this will progress this year, and then also as some of this capacity comes online how we should think about the margin profile of that revenue just kind of thinking longer term as these things come online with those nice margin opportunities. Maybe talk 2023 and then a little longer term as Fisher comes online. Thank you, guys.

Franco Stevanato, Executive Chairman

Thanks, Patrick. So, for 2023, our plan is to expand further the margin in both segments in engineering and BDS. Without BDS, the main driver will be the shift into our high value solution. Now we are guiding between 32% to 34% of high value solutions on total revenues. On the other side, you are right, the margin expansion in BDS will be temporarily tempered by the startup cost in Fisher because to secure the success of the project we need to put people and costs in place that will be for 2023 more than proportional compared to the growth of the revenue. What we expect for the future is obviously the investment in high value solution to further expand as soon as the revenue generation normalizes compared to the infrastructure and the costs.

Patrick Donnelly, Analyst

Okay. Thank you guys.

Lisa Miles, Senior Vice President, Investor Relations

Thanks, Patrick. The next question please.

Operator, Operator

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

Derik De Bruin, Analyst

Hi, good morning. Thanks for taking the questions. Just expand a little bit on what Patrick just asked. Specifically on the gross margin, how should we think about that going from Q1 to Q4? Just is it that any sort of like color on just like – you expect Q1 to be up from the prior year level in 2022 and then to grow up about, just some color on the pacing just kind of the moving parts?

Franco Moro, CEO

Yes, we mentioned during the commentary remarks that we plan to grow the top-line quarter-after-quarter, and we expect also to expand the margin going quarter-after-quarter because of the better leverage of our expansions and because of the greater in-store capacity in these high value solutions collecting the sample in the second half of the year.

Derik De Bruin, Analyst

Okay. Great.

Franco Moro, CEO

And we actually plan to expand our margin compared to 2022, so.

Derik De Bruin, Analyst

Okay. Is that €80 million in COVID-19, is that a de-risk number for 2023? Basically, what’s the conservatism in that? You came in a little bit stronger in the fourth quarter on COVID than we had thought. So wanting to know if that €80 million number, how to think about that?

Franco Moro, CEO

The 2% to 3% revenue generation from COVID is what we can see today. Obviously, it’s not easy to predict future revenue, but what we can see today is that level of revenues. Importantly, I think it’s excluding COVID growth that is expected to be north of 20%.

Derik De Bruin, Analyst

Got it. And just one final one. You mentioned GLPs and mRNAs, can you give some color on what – how to sort of think about unit dynamics and incremental revenue from that? I mean, basically if you are thinking about a GLP1, what would be an average sort of like revenue contribution from a typical component just selling into it? How should we think about this in terms of revenues stepping out of from a unit cost basis?

Marco Dal Lago, CFO

I cannot disclose any specific prospect with a single customer. What I can say is that, if you look at the new FDA approval, in terms of potential – and we have data about the four main blockbusters for the next year. I can confirm that we are in three of these projects among four. So, we expect to have certain contributions, but at the same time the high diversification of our portfolio in terms of customers and therapeutic areas remains a factor to make our business resilient.

Lisa Miles, Senior Vice President, Investor Relations

Yeah, I just want to confirm, clarify your question; it seems like your question was asking related to things like GLP1, the average revenue per component. So, basically, what type of products would we be selling into those?

Marco Dal Lago, CFO

In this tunnel of the format, we are talking about biological molecules; the first option is to deliver bio-syringes. So we expect to have impact in this kind of product line. But that we are sure is to high value solution syringes because that we are targeting the needs of molecules that are highly sensitive. And so, we have good prospects including our next add of syringes in that space.

Derik De Bruin, Analyst

Thank you.

Lisa Miles, Senior Vice President, Investor Relations

Thank you. The next question please.

Operator, Operator

The next question is from Tim Daley of Wells Fargo. Please go ahead.

Tim Daley, Analyst

Hey, thanks. So, just wanted to touch on the kind of broader biosimilar tailwinds as this becomes a bigger dynamic in the United States. Just thinking about the value curve here, of the components that you sell, how would your biosimilar assets compare to the original assets? Like, what biosimilars be using next and all the syringes? Would there be a step down to more commoditized type of solution when it comes to biosimilars? Any help would be appreciated.

Franco Moro, CEO

The first comment is about the suitability of our product to biosimilars. We are in a very strong position because as we serve the originator that serves then a biosimilar component, like to de-risk their business using the same solution that’s approved to be the right one for the originator. The second point is that also for biosimilars, the cost of the container remains a minor part compared to the total cost of treatment. So there is no expected significant impact on the competitiveness of our solution because of a different competition on the treatment side. These are the two comments that are also based on our experience over the years.

Tim Daley, Analyst

Okay. I appreciate that. And then, secondly, thinking about raw material pricing and the security supply on the glass front, I believe you guys in November every year started new master supply agreements with new suppliers on glass tubes. How did that go? Was there any changes on the price fronts, cost fronts, supplier duration anything, anything changing I guess on that side of the things as we look forward into 2023?

Lisa Miles, Senior Vice President, Investor Relations

I just can’t clarify your question, Tim. I think you are asking specifically about glass tubing and as we are going into 2023, if there are any changes in pricing?

Tim Daley, Analyst

Right. Price costs in terms of your supply of glass tubing, correct.

Franco Stevanato, Executive Chairman

Yes, in the last part of the year, we are normally in the renewal process of a commercial agreement with a supplier. We see some impact of inflation even if there is a decrease in the cost of energy that is much less than the peak period in the middle of 2022. But we look at these increasing costs and we are back to recalculate the cost and pricing accordingly including the marginality in this case that is something we couldn't do 100% during 2022.

Tim Daley, Analyst

All right. Great. Thank you for the time. Appreciate it.

Lisa Miles, Senior Vice President, Investor Relations

Thanks, Tim. Bring the next question.

Operator, Operator

The next question is from John Sourbeer from UBS. Please go ahead.

John Sourbeer, Analyst

Hi, thanks for taking the question. So, the high value solutions growth was pretty solid in the quarter. I guess, just can you talk about what products are attracting – to name us lots of customers there and the company is approaching that mid-30% revenue target this year. Any thoughts on just where this is to go over the long term as a percent of revenues?

Marco Dal Lago, CFO

We remain confident in confirming that in the next few years, we will develop this share in the high range of 30%. So, we are on a good trajectory. For sure, we are investing to support these opportunities. But our strategy and our view of the future have not changed from what we communicated in the past. We are pretty confident that we can achieve it.

John Sourbeer, Analyst

Got it. And then, I guess, just a follow-up clarification on China. Are you providing a timeline on when you expect this capacity actually to come online? It sounds like a decision will be made in 2024, but just any additional color that you can provide around that as well.

Marco Dal Lago, CFO

As of 2024, we are still analyzing the situation to make a decision about restarting the project. I confirm that it will take some time in 2024 to start this project. In terms of revenue, we could be more precise, because now we are still in analysis of the situation.

Lisa Miles, Senior Vice President, Investor Relations

John, I just want to follow up as to your first question on high value solutions. Our target in 2026 is now high 30%. I want to be clear that it is now capped and that we anticipate that that will be well beyond to add capacity when high value solutions continue to come online.

John Sourbeer, Analyst

Got it. I appreciate the clarification there. Thanks. John, bring on the next question please.

Operator, Operator

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

David Windley, Analyst

Hi, thanks for taking my questions. Good afternoon. The pull forwards of revenue into the fourth quarter, I am wondering if you do want to quantify those and did they influence the percent of revenue from high value solutions at all? I am assuming certainly the engineering is not high value solutions; I wouldn’t think and maybe the COVID is not particularly rich on high value solutions. So just wondering if it’s the amount and if it impacted the HVS percentage metrics at all.

Marco Dal Lago, CFO

Yes, you are right, David, this is almost 57% on high value solution on total BDS revenues. So we are pretty happy with the progressions and it’s in line with our previous guidance for 2022. In 2023, we expect to further expand the share of high value solutions from 32% to 44% and as I was mentioning, we are raising a little bit our mid-term expectation to now high 30% by 2026. So we are active with the speed of the shifting.

Lisa Miles, Senior Vice President, Investor Relations

And David, I just want to clarify the guidance for high value solutions is 32% to 34% for next year. And you should anticipate quarterly fluctuations here and there.

David Windley, Analyst

Okay. Thank you. The next question is around the capacity expansion change in plans. In the earliest iteration of that Fishers plan, and you’ve confirmed this sense, it was about €150 million investment that was expected to produce about €150 million in revenue when fully ramped. Can we now expect that this Fishers plant could ramp to €500 million as the revenue? Is that still kind of the proportion of capacity productivity?

Franco Moro, CEO

Yes, I can confirm that it is a reasonable proportion. The nature of the investments is still for high value solutions including more EZ-fill vials and more syringes, Alba syringes. But the internal rate of return and the success of the financial success of the investment is very important for us, and at the end, yes, you are right that we expect to have the same ratio between €1 in CapEx and €1 in revenue. These are obviously a thumb rule but this is what we expect.

David Windley, Analyst

Yes, Franco, thank you. So that segues into the follow-up question on that, which is roughly how long would you expect it to take to get to full utilization on that facility thinking both from a revenue standpoint, but then also to the extent that your commentary today suggests that the build to full utilization does have some margin drag to it? How should we think about the time to get to normal margin? So kind of two-parter on that, please.

Marco Dal Lago, CFO

The target is multi-year, and that we pursue that module-by-module in the installation. So we expect to complete this phase of the investment of €500 million by the end of 2026 including the last validation. And then to ramp up we could expect to have at least two years more to have full utilization of the capacity because we have to spend time to validate different products and different customers. So, this is the time frame for the full utilization now, but as always our modular approach will allow us some flexibility in terms of possible acceleration or different tuning of the CapEx.

David Windley, Analyst

Okay. That’s very helpful. Thank you and good luck.

Lisa Miles, Senior Vice President, Investor Relations

Thanks, Dave. Bring the next question please.

Operator, Operator

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

Madeline Mollman, Analyst

Hi, this is Madeline Mollman on for Matt Larew. I just want to talk a little bit on the pricing on the supply side, but I just wanted to see how you are thinking about pricing from your perspective in 2023 and as COVID starts to roll off, do you have opportunities to take price to maybe you are discounting bulk orders, is something like that do you think there is room for pricing to improve in 2023?

Lisa Miles, Senior Vice President, Investor Relations

Madeline, I apologize. We were unable to hear the beginning of your question. Can you please repeat the question and perhaps speak a little more clearly for us?

Madeline Mollman, Analyst

Yes, sorry about that. I was just wondering how you were thinking about pricing in 2023 as COVID begins to roll off if there are going to be opportunities for you to replace large COVID bulk orders that may be more attractively priced smaller orders, something like that, how you are thinking about pricing in 2023 versus 2022?

Marco Dal Lago, CFO

So many times we do expect inflation like anybody else in 2023. We are pricing accordingly including in the margin into our pricing. So, we are shifting to our high value solution; this is the product we are keeping with respect to pricing.

Franco Stevanato, Executive Chairman

On top of that, you also remember that COVID business was mostly related to vials. So, we have a much broader range of products and the situation about vials is only part of the true picture for us.

Madeline Mollman, Analyst

Great. Thank you.

Lisa Miles, Senior Vice President, Investor Relations

Thanks, Madeline. Bring on the next question please.

Operator, Operator

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

Drew Ranieri, Analyst

Hi. Thanks for taking the questions. Just to start, I think it was David’s question, but can you just talk about the pull forward in engineering revenue in the fourth quarter? And is it possible if you could quantify what the pull forward was in terms of revenue?

Marco Dal Lago, CFO

Yeah, we have acceleration in our progress in some projects in Q4 more than expected to accommodate some customer requests. So, we are accelerating our revenues in Q4 for about €7 million to €8 million in engineering. As mentioned in my commentary, we had something similar happen to COVID. We have been able to deliver some products expected to be delivered in Q1, again to accommodate customer requests.

Drew Ranieri, Analyst

Got it. And then, just as we were thinking about guidance for the year, the commentary on a step down from fourth quarter into first quarter, understandably there are a few dynamics here, one is COVID, two is engineering pull forward that we were just discussing. So can you help frame what maybe an 8% decline would be sequentially from the fourth quarter to the first quarter, so we are kind of all on the same page about the full year progression?

Marco Dal Lago, CFO

What we can tell you today is that we expect stronger second half of the year and the evolution on quarter-after-quarter will be growing in 2023 similarly to what we have done in 2022.

Drew Ranieri, Analyst

Okay. And then, maybe just lastly on the backlog. With COVID revenue falling off, can you discuss how you are thinking about backlog for the year and potentially order intake, maybe what’s embedded in your 2023 guidance in terms of book-to-bill or anything that we should be thinking about there? In the past, you’ve quantified maybe what your backlog was for the current year and following year? So just wondering what your current backlog implies for 2023 and 2024. Thank you for taking the questions.

Marco Dal Lago, CFO

It’s something about the meaning of the backlog for us that is obviously an important indicator of the demand, but it doesn’t represent the full picture. The full picture about the demand landscape and also the demand trends is also different forecasts that we regularly discuss with our customers to look into their future needs in the short and the long run. Now we are back to something that is more similar to what was the situation before the pandemic. During the pandemic, the orders coming from customers changed and became longer. Now we are back to a situation that is normalized and very similar to the year before the pandemic. So, in many cases, we have some backlog from any other interaction with customers supporting our in the year.

Lisa Miles, Senior Vice President, Investor Relations

Thanks, Drew. Can we have the next question, please?

Operator, Operator

Ms. Miles, gentlemen, there are no more questions. This concludes our conference call. Thank you for joining. You may disconnect your telephones. Thank you.