...for our next session. My name is Mike Ryskin, on the Bank of America Life Science Tools and Diagnostics team, and we're thrilled to host Stevanato Group. Joining us is Marco Dal Lago, Chief Financial Officer, and we also have Lisa Miles from Investor Relations. Marco, Lisa, thanks for coming.
Thanks.
Thank you.
I guess just to kick things off, I mean, you reported 1Q results just last week.
Mm-hmm.
Any opening remarks you wanna make about how the quarter played out or just sort of your, your latest thoughts for the year?
Yeah, we see this temporary headwind more pronounced than anticipated, especially in vials and in EZ-fill vials, more pronounced than expected. Nevertheless, we believe the fundamental of our business remain intact. We are well positioned for leveraging the future growth in biologics with our differentiated set of products and integrated value proposition.
Just to add, Mike, as you know, we continue to see long secular tailwinds, aging populations with more complex health conditions, the trend towards the self-administration of medicine, which is driving obviously demand for things like syringes and cartridges, for auto-injectors and pen injectors, as well as innovation in pharma and growing biologics. So we feel ideally positioned to capture those future opportunities that we see in the market ahead of us.
Great. I mean, that's a great place to start, and that's sort of gonna be how the conversation is gonna be structured. You know, you've got the near-term headwinds and the long-term tailwinds, and how do those interact. So let's start on the destocking. You know, you talked about vials, EZ-fill vials. Any sense of when you saw these issues pop up as you went through the quarter? Because you reported 4Q results, and you gave us sort of your initial view in early to mid-March, and then this is early to mid-May. So is this a relatively sudden development? And just any color on, you know, where, when, things like that.
Yeah, we have a regular forecasting process internally, talking with, with customers. And, when we released the guidance on March seventh, we were pretty confident about the, the outlook. Nevertheless, we have... We went through immediately in April, in Q2, through a new cycle of forecasting, going through each customers with our sales guy, and we receive a updated forecast from our customer with lower volumes compared to prior expectation. So basically, this is, how is the, the process is working, and unfortunately, we experienced much more headwind than anticipated for 2024. We see some good news or some good signal with some large customer starting planning for 2025, but in our guidance now, we embedded, flat level of revenue at the same level of, Q1, also for Q2, Q3, and Q4.
So it means, for example, Q1 was 43% lower than last year in vials, but we don't see now for 2024, ramping up in the second part of the year. We expect some orders growing toward the end of the year, but with revenue to be materialized during 2025. This is the view we have today about the stocking issue.
Okay. That-
The good, the good news, in my opinion, that in spite of the drop of 43%, in vials, we have been able to grow 2% in BDS segment, mainly thanks to the fact that we are growing in syringes, we are growing in cartridges, but also in drug delivery system and diagnostic. And the good things is that syringes is switching more and more to our high-value syringes from standard syringes. So all the, the trend we anticipated for the midterm are confirmed, and we have this temporary headwind with respect of the form-fill-finish vials that was the most commonly used during the pandemic. And this is the reason why in the industry we have this kind of temporary situation.
Okay. That's really helpful. Do you have any sense of just how much excess inventory there is in the system, whether in terms of number of vials or dollars? Just sort of what gives you confidence in that outlook in terms of when it's gonna be worked throughout the system?
Honestly, the tool we have is talking with customers and receiving from them the forecast for the next period of time. It's hard for us getting into their level of inventories and knowing exactly in each single location what they have. You know, they are also leveraging their CMO network, so they can have some inventories also in the CMO factories. Anyway, based on this forecast, again, there are some large customers starting planning from—for 2024, and we see sooner or later the situation will be normalized.
Okay.
I guess I would just add that we are seeing additional bright spots that we've discussed previously on some of our prior earnings calls, but in smaller markets that tend to manage inventories more tightly, where we are starting to see some pickup in those orders, but not enough to move the needle on vials. However, these markets do tend to be leading indicators for recovery. So, you know, I think overall, as we put the entire picture together, you know, we feel cautiously optimistic that bulk vial will start to pick up towards the tail end of this year, followed by EZ-fill vials.
Okay... That's helpful. And then if we look at some of the results from your, your peers or other players in the packaging ecosystem, and I think you, you know which ones we're talking about, some of them have also seen inventory headwinds, some of them have also seen specific customer order delays. You know, the timing on these is sometimes a little bit different, the magnitude is different, but you're also talking about vials versus elastomers versus, you know, integrated systems. So are, are all of these-- are we seeing the same issues just from different angles, or are these different issues with different customers? Just sort of, can you give us a better sense of what's happening from a, from a customer level, from a pharma level?
Yeah, in vials, the number of customer is pretty big. So it's a situation well spread, in our view, among the different customer. It probably depends on specific situation, specific agreement with single customers. But, honestly, we don't have a view of what West is saying or other players are saying.
We are all facing the same situation. It's hard for us to predict exactly when will be the inflection point and the demand will start ramping up. But it's a temporary situation. We strongly believe it's a temporary situation. Telling exactly well when the situation will be normalized is not easy to predict, in our opinion.
Okay. And then the other factor, one of the other factors that contributed to the change in the fiscal year guide, was you talked about. You had one order delay from a major customer-
Right.
which, you know, it looked like it slipped out of the second half and is now in the beginning of 2025. Seems like that's a pretty major move for just one customer. You know, any additional color you can provide there without naming who it is?
Yeah, we disclosed during last week also, the amount of the impact. I mean, the EUR 55 million reduction is for 65% related to vials reduction. About 25% is related to this specific opportunity that has been postponed for customer reason. We cannot control basically a later commercialization of the product. It's still an open opportunity, but it will not be materialized within the end of this year. So that's why we had to review our guidance.
But you, you have confidence it'll come back in 2025? It's a, it's a temporary delay, not-
This is, this is still an open opportunity.
The answer is yes.
Yep.
I would add, Mike, even if this customer elected not to place these orders longer term, we could obviously backfill this capacity in 2025. Given the type of product that this is, there's not sufficient time today to backfill it for 2024.
That's a really good point. Thanks, Lisa. Appreciate that. Moving on to some of the other topics, can we talk about some of the tailwinds and some of the drivers that still leave you feeling encouraged about the long term? I'll start with, you know, regulatory environment, Annex 1, that's gotten a lot of traction in recent months. How do you see the opportunity to benefit there, and how do you see that playing out over time?
Sure, that's a great question. We've discussed Annex 1 starting at our Capital Markets Day in late September. We actually view Annex 1 as a galvanizing event to help drive adoption for ready-to-use vials and cartridges. One of the main considerations from our perspective are some of the higher regulatory hurdles as it relates to particle contamination and just stricter rules around, you know, quality and integrity of the drug product. So we do believe that this will be a much longer-term tailwind. In fact, we have discussed one particular customer that is already in process of switching from a bulk cartridge to an EZ-fill cartridge over a many-year period. And so we view Annex 1 certainly as a key tailwind, but we do view it as multi-year in nature.
Annex 1 is, you know, in Europe, but you're a global company with global customers.
Mm-hmm.
How do you think about customers adopting it or sort of incorporating into their... meaning your customers or sponsors, adopting it, for global products?
I think that's another great point and probably highly likely. As customers do manage a global industrial footprint, it stands to reason that they would be more inclined to move in that direction for their global footprint. It gives them a lot more flexibility as they think about, you know, where they're filling and where they're shipping.
Like you said, it's still relatively early, but do you see other agencies following suit? You know, any conversations with the FDA or anything that's changed in the, you know, last 6-9 months?
Probably too soon to speculate as it relates to the regulatory environment and other changes that may come through.
Okay. All right. I'm gonna have to ask a couple of GLP-1 questions. You know, we're not gonna get into too much specifics, but, you know, can you speak to, how much of that, of that ramp has been, built into your prior outlook? And just sort of, you know, what your expectations are, going forward.
Well, first of all, we are involved in GLP-1 since about 10 years for diabetes care. We are very well positioned to take the opportunity because we can provide to our customers each format they can need with respect of the glass packaging. We provide. We are market leader in cartridges, as Lisa was saying, we can move to EZ-fill vials, cartridges, driver cartridges. We have some project in place for that. We can provide syringes. Nexa syringes, due to mechanical resistance, are really suitable for auto-injector. We can provide dual-chamber syringes, so we are very flexible in glass packaging, in serving our customer and all their needs.
But on top of it, we can also leverage the engineering segment with our visual inspection machines that are suitable in this period, where we expect capacity for fill and finish will be growing in the following years. And similarly, for assembly and packaging lines for drug delivery device, like auto-injector and pen injector, we have the company in Denmark that is really well-positioned in this kind of supply. And so all overall, we can provide a really differentiated set of product to leverage the opportunity. About the numbers, we disclose our presence in biologics rather than going drug by drug. We see it as a big opportunity, but we will not leverage only GLP-1 in the years to come. I think we want to leverage all the biologic space from mRNA to monoclonal antibodies or biosimilars, too.
If I may just add, so today we are providing for GLP-1s, high-value syringes, bulk cartridges, EZ-fill cartridges, as well as, as Marco noted, visual inspection and assembly and packaging equipment on the engineering side. So as we think about it longer term, Mike, we have baked into our near-term guide into 2027, the expectation of what our commercial contracts look like in terms of volume. So, you know, we basically assumed a certain level of volume as it relates to GLP-1s, tied to the commercial arrangements that we do have, and that's baked into the guide.
Okay, that's helpful. Among those, you know, high-value syringes, bulk cartridges, EZ-fill cartridges, is there... You know, how does your mix in GLP-1s compare to your overall company mix? Are you overexposed or underexposed to one part?
You mean on a product basis?
Yeah. Yep.
The common situation is that, most of the time we are talking about high-value products.
Yep.
So it will help the mix shift to high-value products. Again, we have opportunities in all the opportunities. Concrete execution plan in each-
Yeah
... of the format. Obviously, we don't disclose exactly how much is syringes, how much is, cartridges, how much is, dual-chamber syringes, but we are, active in projects in all the formats.
Okay.
We are flexible in case the market is moving-
Yep
... to one product or to the other. We can leverage, in any case, the opportunity.
Okay. I want to touch a little bit on, CapEx and some of your investments to expand capacity. This is also an ongoing debate in terms of balancing-
Mm-hmm
... some of the near-term and then the long-term demands, just given the lead time you need to expand capacity. So you've invested heavily in CapEx in recent years. I mean, I think that was part of the reason for the IPO-
Yeah
... in the first place, was to raise capital to, to make those investments, particularly in high-value solutions. You know, how far forward are you making those investment plans, and how do you balance, the need for all this demand that's coming down the pipe with some of the near-term pressures on, you know, excess inventory and destocking and, you know, some of the volatility with customers?
Yeah, obviously, we invest for the medium to long term. We have decided, as you said, to go public because we, we can see a lot of growing opportunities. To do that, we want to keep a safe balance sheet, not to be too much leveraged. Today, we have very strong balance sheet, and so we can leverage the opportunity to grow. We started those investment back in 2021, immediately after the IPO. We had to readjust a little bit the priorities because, you know, we have more demand from customers in North America and Europe, so we put on hold China. But to go to the point, we believe we started investing at the right time, so before starting talking about GLP-1s, for example, and we are now well positioned to leverage the growth.
About the financial profile of these projects, we are targeting very ambitious target. You know, we invested a lot in EZ-fill in the past, in Piombino Dese, that was on the single plant for those kind of products, with internal rate of return higher than 20%. We are targeting similar return in Fishers, and in Latina. So we believe this is the best way to deploy our money, because we are growing organically in high-value products, and product we are among the best in class and where we are. We know what to do, basically. But CapEx, we are executing according to our plan. We started in Latina commercial production Q4 of 2023, and we are keeping on increasing the capacity, installing more lines. In Fishers, we started producing syringes some months ago.
We have been validated from a large customer recently.... More lines are coming in the next month. So we are on the right track, and we have a precise planning for installing lines and having validation from customer. Obviously, looking at the short term-
Mm-hmm.
It's a big effort. I mean, we need to train people, to validate customers, to install lines. So in the short term, it obviously is a headwind for us if we look at the P&L of this quarter or next quarter, but it's a very important setup for us to leverage the future growth.
Okay. A couple more on CapEx real quick. You know, you historically, your CapEx as a percent of revs has been about 10%, maybe high single digits-
Yeah.
or low double digits.
Yeah.
You know, are you covered now from a CapEx perspective in terms of the extra CapEx you've put in the last couple of years? Or is it still gonna be elevated for a little bit of time?
Yeah, we see the 2022, 2023, and 2024 phase as an exceptional period of time.
Mm.
We built a facility in Fishers, very big, to host lines that will be ramped up until 2028. So we did a big investment in this period of time. Medium term, we plan to go back to the level of 2019, 2020, where we are investing around 10%. It was 14% at that time, but because we accelerated to generate revenue-
Mm-hmm.
-that was more than 20%, more than previous year in 2020, the same in 2021. So this is the ratio, about 10% CapEx, for a high single-digit, low double-digit growth. Obviously, if we want to accelerate, we need to invest more.
Okay.
Just to add on that, that our recent CapEx, close to 90% has been for growth investments.
Okay.
It's also important to note that those growth investments are very much tied to customer demand. As an example, during the IPO process, we had initially anticipated Fishers to be about EUR 150 million in CapEx project. But based on customer demand, we did accelerate the investment in Fishers, and so, you know, really predicated by what we're seeing in the market. In Fishers, what changed was, you know, bringing in additional syringe capacity as well to support those customer projects that we see coming.
Okay. Just exactly on that point, Lisa, you know, how do you forecast your CapEx needs? Is it based on, you know, locked-in contracts? Is it based on conversations with customers? You know, if we look through your filings and we look at backlog or, you know, contractual obligations, is that a good proxy for future CapEx needs?
It's a very good question. Thank you for that. Let's say most of our CapEx are contractualized. This means we have an agreement with the customer at the end, especially for the acceleration we have been asked to do from main customers. This is a good opportunity to, to lock them for, with multi-year agreement in place, and so we are pretty confident it's on track, just a matter of execution and keeping the plan in order to, to leverage the future growth.
Okay. And you already talked about CapEx normalizing a little bit, but you also did recently complete a secondary offering.
Mm-hmm.
You know, can you talk about... You know, do you feel comfortable from a cash needs perspective for the next 12, 24, 36 months? Is, does that provide you enough cover for, for near-term CapEx needs?
So for near CapEx, we are in a good position. I mean, we expect for 2024, a negative free cash flow between EUR 90 million and EUR 130 million, and we have cash on hand around EUR 185 million. So we are fully covered for the year, with more cash for 2025. Where in 2025, we are targeting positive free cash flow. So we are covered, but we are also flexible. We have all the backup tools in case we need decide to invest a little bit more. We have all the flexibility to do that.
Okay.
I mean, today, the leverage is, but it is small. We have a net financial position that is EUR 186 million negative. We have room, obviously, to, to, to be flexible and further increase a little bit the, the leverage that is below one-
Okay.
much below one.
So, am I reading correctly that if you do need more cash, you're more gonna go to debt markets versus equity markets?
We don't expect in the short term, but it's something that in the journey of Stevanato, the shareholder will be more—I mean, the Stevanato family wants to remain the anchor shareholder of the company. But at the same time, we see so many growing opportunities that in the future, there will be other offering. This is the plan we have. We went public in 2021 with only a small portion of floating.
Mm-hmm.
With the follow-on offering, we are at 16% today of the shares floating. So it's another important tool for the strategic growth of the company, where we see many, many opportunities, long term, to keep on growing and expanding to our high-value products.
Okay, makes sense.
Mm.
Any questions in the audience before we keep going? ... Okay.
[audio distortion]
Oh, repeat the question.
You know, three to five years, [audio distortion]
The question was for the webcast: Can you just, for the next three to five years, can you talk about what type of top-line growth and earnings growth is sustainable?
Yeah. We go back to September when we did our Capital Markets Day. All the trajectory we explained there remain unchanged in our view. So we are targeting toward 2027 a low double-digit growth, more pronounced in BDS than in engineering. We are targeting high-value products as a percentage of total revenue between 40%-45% by 2027, and we are targeting an adjusted EBITDA margin around 30%, three zero. The main reason for that is the mix shift to our high-value products. And, you know, we expect also by 2027 to mitigate a lot what I was describing before. I mean, the fact that we are now spending a lot of money ramping up the two new facility and validating the plant and convince the customer to validate the plant.
So the plant, the single line more than the plant, the products. So we are pretty confident on the trajectory, and we don't see any changes. Besides this temporary headwind with respect to the vials, in the medium term, we don't see any change.
Okay. You touched on the engineering segment, so I wanna make sure we squeeze that in. That was also part of the change, a small part of the change, I believe, of 10% to the fiscal year outlook, was some moving pieces within engineering. Sounds like it's a combination of execution, some customer-specific items, some operational pieces moving around. Could you just expand on that a little bit, on the current situation?
Mm-hmm.
You know, sounds like you do expect it to return to growth, but below the total company LRP. Just walk us through that.
Yes, we are very confident on the demand coming from the market, for the reason I was describing before about the fill and finish capacity and the drug delivery device base. And also in glass forming, we are leader in technology. We see positive trend. We are, to be 100%, frankly, focusing on execution. We grew extremely rapidly in recent years. Only third parties, we moved from EUR 98 million in 2019 to 206 in 2023, so it's a compound annual growth rate in excess of 25%. Similarly, we increased the production for internal needs to feed the Latina, Fishers, Piombino Dese with the glass forming machine. So we went up extremely rapidly.
In combination with that, we had some difficulties and shortage in electronic components, so we are now in a situation where we have to execute many, many contract. The workload is,
Mm-hmm
... very high. So while we see a growing trajectory, we believe in 2024, the focus must be in executing, making our customer satisfied, and execute properly in Fishers and Latina in order to do not miss any opportunity of generating revenue in those plants.
Okay.
For the demand coming from the market, we are pretty positive for the reason we mentioned before, and due to the fact that we believe we have a great technology.
Okay. All right. Got about a minute left, so, our standard closing question is: What do you feel is most underappreciated or misunderstood about Stevanato Group? What would you like to correct?
Well, after three years as public company, I think the model is well understood. What we want to underline again is our unique integrated value proposition, leveraging the ability to have engineering beside the products, so we master both the process and the products, keeping on improving the quality of the product and the cost through technology, and this is an important differentiating factor for us. And on top of it, as mentioned, we believe we are extremely well-positioned to leverage the future growth in high-value product, thanks to the technology we have, and also due to the fact that we believe we invested at the right time to create this setup and leverage this opportunity.
Great. Thanks so much. With that, thanks, everyone, for joining.
Thank you.
Thanks for having us.
Thank you.
Thanks, Marco.