All right, thank you everybody for joining us today, 7:00 A.M. on a Friday morning. We've made it to the final day, so I'm Drew Ranieri, one of the medical device analysts here at Morgan Stanley. It's my pleasure to have Stevanato Group with us today.
Good morning.
From the company. We have CEO and Chairman, Franco Stevanato.
Good morning.
And head of IR, Lisa Miles. So thank you both for being here today. Before we get started this morning, just the disclosures, if you wanna read them, go to the website or ask your sales rep. I doubt that you will do either of those, but just have to get that out there. But now let's get on to more exciting things. So, Franco, just maybe to start from a high-level perspective, the company has seen recently a little inconsistent performance, at least relative to kind of street expectations year to date. It's now been about two or three months since you took over as CEO. So just talk to us about, first, your priority as a CEO, what you expect to change, what does Stevanato need to do better, from a company perspective?
Another one is just, how do you feel about the company's position in future opportunities?
Drew, thank you for your question. When I take this role of CEO, and by the way, I'm excited to be back on this role because I joined the company in 1998. I have done a career in through the commercial department, and also, I was appointed CEO in 2010 until Franco joined the company. The first thing that we have done all together, we build a group of 20 to 40 leaders of the company, and we have furthermore focused Stevanato Group on our priorities that are fundamental in order to execute our industrial plan. Today, we have a big growing demand in biologics. We are deeply involved in the biggest strategic investment like Fishers, Indiana, where we're starting to build capacity for syringes and for vials for our American customers.
We are building a greenfield plant in Cisterna in order to serve our bigger customer, always in biologic space. Practically, we are focusing more and more the organization to execute our industrial plan. The only thing that we have done, not differently, but we have further reinforced the execution of engineering, because this, the engineering company in the last three to four years, more than double the size of the company, even more the complexity. Today we are more focusing in order really to optimize all the manufacturing process inside of the engineering, in order to deliver all the commitment that we have with the customer. Nothing change. We want to just execute the industrial plan that we share at the Capital Market Day last year.
Furthermore, we are squarely focused to deliver the contract and the syringes to our major customers.
Got it. Great. And there's a lot to dig in there. So maybe just first, the industry destocking has been painful for the industry, obviously, and a bit more recently for the company. There's a lot going on here. So maybe just help us better understand the general destocking dynamics that you have been seeing. It's become a little bit more visible in impacting the business, but why should we believe that these are temporary versus structural? And I mean, is there any risk that it gets worse before it gets better in your view?
So here, we're confident, Drew, because during pandemic, all our major pharmaceutical customer, we're talking that vial customer worldwide are close to 2,000 customer that are used vial on a worldwide basis. During pandemic, they build a big stock in order to secure their therapeutic drugs, and also a lot of customers build a lot of stock in order to be ready for the COVID vaccination. So we say that they build more than one year of stock. And this is. We are still facing this, the stocking issue, because then when automatically the pandemic, the COVID vial, there was no anymore request for vial, practically all of us, not only of us, all the actor in the industry of primary packaging, we find that we have issue because the demand is soft. Today, where are we?
We are in the second part of twenty twenty-four. We have started to see positive sign in the industry. What does it mean? In particular, in the small-sized customers or in certain customer, Latin America, where they have more lean supply chain, they're starting to reactivate the orders. And we are starting to see that the big organization, they have more, they are starting to involve us in a more standard, normalized forecast starting from twenty twenty-five. So we think that at the end of the twenty twenty-four , we are starting to see that there will be, the more we go more close to a normalization.
It was extremely painful, these two years, but again, what is important to know in this room is that the vial industry is not a concern if the market will be back, is when it will be back. Because the size of the vial market is approximately 13 billion vial consumption per year, growing in low double digits. It is a very flexible primary packaging, can move from 2 mL up to 30 mL. Practically, all the therapeutic drugs in the market, they are using the vial. So it's still one of the best primary packaging configuration for injectable.
And maybe just a follow-up there on the thirty billion unit volume.
Thirteen, one three.
One three, excuse me.
Mm-hmm.
Can you remind us what your share is? I don't know if you've ever talked about that before.
We have. We play a good role here because we are one of the market leader worldwide in delivering the forming technology for the industry for vial and we are present in the biggest pharmaceutical company for vial. Maybe we don't disclose the full market share, but we have a big presence. We are one of the established player in the vial industry. For bulk, we are market leader worldwide for the EZ-fill vial. This is the new trend for the market, where pharmaceutical company, they're starting to outsource washing, siliconization, sterilization to player like Stevanato, because they're going to receive better quality of the product.
Got it. And it sounds like you're confident that the destocking headwinds are going to normalize, will normalize. But just maybe give us a little bit more detail on maybe some of the customer conversations you're having with your larger customers, and the visibility you have, that there is a clear pathway of getting back to normalization.
Yes. So today we need to separate what are the maybe more smaller customer. When we call them smaller customer, are customer that have only one plant or one filling line, where usually their supply chain is very lean. These customer, they're starting to reactivate more normal order, like where we were in pre-pandemic situation. Big organization, where they have multiple plants, multiple site, many filling line, usually they keep very higher inventory, more than six months in the average. With this customer, the demand is still soft in twenty twenty-four, but now we are already in the middle of planning for twenty twenty-five. We are starting to see more normal forecast in the twenty twenty-five.
So this is the reason why we are starting to see positive sign that go in the direction to go back to the pre-pandemic level.
Got you. And is there anything that you can share in terms of end market or geography, for some of these forecasts?
In Latin America, we are starting to see some reactivation. Certain big customer, both in Europe and also U.S., they're starting to engage us in a more regular forecast, both directly or through their CMO.
Got it. Despite kind of the vial growth being pressured, syringes have been really a great driver for the company and offsetting that. So talk a little bit about what's driving the significant syringe demand. I mean, we have seen some modest headwinds pop up in industry, but it hasn't really affected the business. But just talk to us kind of really where you're seeing the syringe demand and kind of your confidence on sustainability or acceleration from here.
Today, we are active, and we see big growth practically in biologics, and this is why we are heavily investing capacity in Europe, in the plants in Italy, in the two plants in Piombino Dese, in Latina, and now we are heavily investing capacity in Cisterna. Now we have started to add more and more high-speed line for syringes. The market is biologics, and we are serving this biologics market through our Nexa technology syringes. Nexa technology is a particular syringe that is fitted, in particular, in what is we call the auto-injector space. And there we see more and more growth demand in biologics. As well, also, we are focused to grow together with our major customer.
Also, we see a growing opportunity in what we call Alba technology for certain high-potent drugs, where our technology is very sophisticated because it have a very small release and it's type of subvisible particle for silicone. It is perfect for certain type of very, very strong molecule. So it's where Stevanato is investing today, and where we are facing a nice double-digit growth, both in Europe and United States. So all biologics and biosimilars is an industry that is growing a lot.
That was double-digit growth for syringes, specifically, or one of the individual product lines?
We are growing on syringes, both in Nexa and also in Alba, with a good percentage, yes.
Got it.
Drew, just to give you a little bit more color on that, the BDS segment in the second quarter grew 9%, while vial revenue was down 40%.
Mm-hmm.
And so you can appreciate that, and the complete offsetting factor to that was primarily syringes and some other product areas. So we're seeing significant growth in that syringe area. If you look at what the market trends are, syringe growth is roughly a low double digit year to year-
Correct
... based on external data.
Today, if you look at all the investment that we have done since twenty twenty-two, on twenty-two up today, are practically all fully dedicated to our high-value solutions program, in particular, EZ-fill product and syringes is the major. Most of this investment we have done already covered with big programs with our customers. So today, the focus, coming back to your first question, the focus for Stevanato Group is to execute, build up capacity on the worldwide basis for our major biologics customer, because the market is growing. It's growing a healthy way, through certain, maybe important new therapeutic drugs. Also is well-spread with many customers and also many types of therapeutic drugs.
And maybe just on the high-value solutions. The second quarter call, you raised the high-value solutions mix guidance for the year. Q2, it was 40%. In the back half, it looks like it steps down a little bit, but are you more cautious about the specific business or product group? Are you cautious or conservative here in terms of the high-value solution mix and the visibility that you have?
If you look at the last from 2020 to today, we were always able to grow in double digit in high-value product. I think the trend is there, and we are going to confirm in 2027, we will land it in this 40%-45% of percentage of our revenue, high-value product. For sure, if you're going beyond this 2027, our target, if you look also the investment that we are doing, practically 90% or even more our investment are fully dedicated in high-value product. So we are confident that we will continue to grow in the next years to come and the programs are there, the programs are growing, and also even more, the pharmaceutical industry is going to appreciate this product.
Now is the reason that together we start to group together with the leadership team and the board to select the best investment that we want to do in the next years.
Got it. And, with coming over to the U.S. for the conference, it sounds like you're also going to be seeing some of the other facilities here, in North America and South America. So maybe just speaking to Fishers first, but kind of what's left on the validation activities for the, for the new facility? I mean, we're now in the third quarter. Have you started to see actually your first commercial revenue coming out of the facility?
Yes. Today, we have installed a second, third high-speed line for syringes, so we are on track with our investment and also with all the installation, qualification, validation. We are, we have already started in Q3 to deliver commercial product for our, one of our major customer from Fishers. So we are on track both for validation, ramping up capacity, and also both to deliver commercial revenue. What we will do in the next twelve months, we will continue to install capacity. We have commitment with our customer that would actually we sell from Europe, but also we are add the new capacity that we are adding, with the new capacity that we are investing here in Fishers.
Drew, to address your question on validations, we still anticipate that validations will continue into 2026. A multi-year investment will be a multi-year ramp, so we would anticipate Fishers will hit full productivity sometime in 2028.
Yes, sometime in 2028.
Yes.
Can you talk a little bit more about what that ramp actually looks like? Like, how we should be thinking about it, maybe from a phasing perspective? I know you might have thrown out numbers like a year or so ago, or maybe longer than that, in terms of capacity, or maybe I'm making that up. But just anything you can share on kind of the ramp of what you're looking for.
Maybe I can start in terms of product. Their products, we are going to install high-value solution program, their syringes Nexa, syringes Alba. We are going to add capacity for vial ready to fill, also bulk vial because we have the BARDA agreement in order to install capacity. And also, we have two big programs from drug delivery system. All overall, these are the first cycle of investment is going to be at the end of 2028. If you remember, Marco Dal Lago, he was sharing, we do that EUR 1 CapEx is going to correspond more or less EUR 1 of revenue. This is where we are working. The goal is from now to 2028, really to serve all the biologics U.S. customer from this plant. This is the goal.
What is the difference between Stevanato to other competitor with these plants in Fishers, that we are the first one that are able to serve our bio customer, not only primary packaging in EZ-fill configuration, but also the drug delivery system. So practically, our customer, in term of full service, can have the full integrated service from this plant. We are practically unique in this moment in the world.
Got it. And maybe just to touch on Latina also, but it's now your second largest hub in Europe.
Yes.
Just maybe kind of walk us through the multi-year ramp strategy here. And kind of a similar question to Fishers', it's just any kind of metrics you can provide on, on-
Yes
-reaching full capacity?
Yes. Practically, in Europe, we serve our syringes. It was originally from the plant in Piombino Dese, and now the plant is big because it's a huge plant. It serves every year billions of containers of syringes to our customers. We have decided also to build a second hub also for risk mitigation, because we want to have a higher level of quality standard hub in order to better serve a secure supply chain. We were already present in Latina because we used to serve pen cartridges for insulin for our major customers. And we have built a brownfield plant, where we are building up capacity for Nexa syringes, syringes with bypass. And also, there is more and more a growing demand in the biologics space, or what we call ready-to-fill cartridges.
We are deeply involved in a multi hundred million of cartridges ready to fill for one big customer in particular, that they want, that Stevanato it will sell from this hub, also this new product.
Maybe switching gears to the engineering business for a moment, but the business growth was down about 20% year over year in the first half. Maybe walk us through kind of like how engineering got there, and really, what's your pathway for recovering and getting this back on a growth trajectory?
This is where the business unit, where really we work a lot in this, in particular in the last six months. Because the engineering division from 2020 to today have more than doubled the revenue. Because we are sitting in a good product, but the growing demand of inspection system, because of the increase of the requirement from the pharmaceutical industry, grow a lot. And we already two years ago, three years ago, we developed a very sophisticated technology that we're able to help the pharma customer to reduce the false rejection rate for their product. In parallel, in Denmark, we have also developed a very complex, sophisticated technology for assembling the drug delivery system. So both are areas that are growing.
We received a big increase of order from our customers. Also, in the middle of in 2021, 2022 of COVID, it also a big shortage of electronic component. This was the first really issue that have built a sort of delay for Stevanato on delivery. On the top of this, certain big biologic customer have purchased from Stevanato, in particular from the plant in Denmark, where today we are focused really to make extremely efficient, a very high-speed complex line. This line, the first line that we have developed, the first of a certain number of series of line that we delivered to our customer, is today where we are facing some complexity.
What we have done under the leadership of Ugo Gay, the new Chief Operating Officer, and also Raffaele Pace, that used to be the business unit leader in the past, and now he's back on track. We practically build one big organization, focus on delivering this line and to fulfill also this long-term year commitment with our customer. And even more, we are applying some new cross fertilization program between the plants of Italy and Denmark, in order really to move to a standardization of all our operation. We are building the new basis for the new complexity of the company, because the company moved from 100 million close to 300 million, and now we are facing the new also management, able to manage this new complexity, and even more to approach the new growth on the next year to come.
This is where we have seen some headwind, in particular, on the engineering this year. So it's due for this big growth, and the fact that we are delivering, particularly from the plant in Denmark, this complex, new, sophisticated line.
Actually, and with some of the progress that you've made in engineering and kind of resetting the business and recovering, I mean, is it more in a position to help growth for next year, or is next year still going to be a bit of a reset?
The plan that we have done together with all our colleagues, it will require three to four quarters from now during the month of August, because we need to deliver this big line. We need also to plan this. We call this standardization program operation level. We have also to review all the supply chain between the plants of Italy and in Denmark. This will require a few quarters from now to also 2025.
And I think at the Capital Markets Day, you were talking about engineering growing somewhere in the mid to high single digits from a market perspective. Is that kind of the level that we should think about for the business on a normalized basis, looking ahead?
Yes.
Or should you be able to take more competitive share and push that even higher?
I confirm this now, but the market is growing with this percentage. Our demand on the engineering side is robust. It is also to take consideration, the way that we invoice in engineering division is through when we are through certain stage, we're going to invoice, so each quarter can change a little bit. So the trajectory is intact. 2024, a little bit of 2025, because we have done some slowdown in delivering this line. We have reduced our growth, but we don't see a change in the trajectory also in engineering division. Also, the demand and the contract we see beyond in inspection system, in the assembly for drug delivery system is robust. So if you look at the market today, biologic space is growing. It's growing what?
On Nexa syringes and cartridges to fill. Each syringes, each cartridges is going to require one pen auto-injector or some pen. So this is why also all the pharma company are hungry to install this technology for assembly. And the another group that is the original historical customer for this assembly technology, for our insulin customer, is perfectly fit with our product. Customer like our product.
Got you. And as you're looking at the opportunity over the next few years, it sounds like assembly might be the most significant growth driver for the engineering business, maybe followed by visual inspection, or is there any way to maybe-
Three areas. We expect to growth on inspection. We expect to growth in assembly and also in after sales, in the engineering division, because more and more we are growth. Also we have opportunity to increase our after sales division.
Maybe with just thinking about 2025 for a moment, and I have to ask, but in the Long-Range Plan called for low double-digit revenue growth. Current consensus is, I think, a touch under 10%. But just I doubt you want to bless numbers today. Feel free if you want to do that, though, but just help us maybe better understand some of the puts and takes for next year. We'll still have a bit of vial destocking-
Right
... at least normalizing. You have syringe demand, engineering still sounds like it's going to be maybe coming on the upswing here, which help us with any other puzzle pieces that we should be thinking about.
Yes. Just to give more, a helicopter view answer, then we go into 2025, because now we are in the middle of the planning for 2025. We come from a season, five years, that, also if you are going to exclude the COVID, we were in double-digit growth. We also reinforced our marginality, increased our percentage, high-value product. If you are going to look also what we share at Capital Markets Day, we don't see issue in the medium term to maintain the low double-digit growth, because we have the commitment, we have the agreement, we are just to build capacity for our customers.
We are still prudent in 2025 because the biologics demand is robust, but we are monitoring carefully this, the restarting of the buyer destocking, and like I mentioned to you, the fixing of the engineering, that will require a few three quarters. So we are a little bit prudent in this moment to confirm if we'll be in a double-digit growth in 2025 or not. But we are in a sort of mixed situation that we see very positive signs biologics, that is really busy. Last quarter, demand was good on biologics, but we need to clarify this vial restarting order, also the engineering.
So, not ready to confirm, but you're optimistic about some of the challenges?
We are extremely-
Mm
... optimistic on the medium term, because we see the involvement of our customer on securing long-term capacity. We are a little bit prudent to see in particular for the first part of twenty twenty-five this reactivation of vial demand, and also it will be normal to all the customer, or they will more attract. Also, that we want to be sure that we are going to fix everything in the engineering division, in particular in the plants in Denmark.
So Drew, as we think about twenty twenty-five, as we mentioned on our last earnings call, the largest swing factor to growth will be the pace and speed of recovery in vial destocking. But if we look into twenty twenty-five, obviously, if things were to break our way, we absolutely see a path to double-digit growth. But at the current time, we think, as Franco noted, it's more prudent to take a more cautious approach.
Got it. Understood. And I love asking CEOs CFO-type questions. But just with the long range plan on the second quarter call, you did reiterate the LRP EBITDA target of 30%. I mean, we all look at what's happened in 2024. The ramp's become a little bit steeper, more steeper. Just walk us through kind of your confidence level. What gives you comfort that you're going to be able to kind of achieve that target despite the ramp looking much more steep today?
Also, this is when we have also we are reviewing our planning for twenty twenty-five, twenty twenty-six, twenty twenty-seven. We want to really to truly understand if this number is confirmed. Also, the 30% of EBITDA that is strictly connected with the 40-45% of high-value product we want to be able to deliver to the market in twenty twenty-seven give us confidence that we can achieve this 30% of EBITDA, because what will happen in twenty twenty-seven? So we will be the destocking issue. It will be behind. In particular, there will be more reactivation for vial also ready to fill, because it's vial ready to fill that hit our marginality in twenty twenty-four. The engineering to be fixed, but even more, we will have this new greenfield plant up and running.
Today, we are in the middle of 2024, that these big greenfield plants, really, they are asking a lot of cost to ramp up. When we have this facility delivering syringes next, syringes, Alba cartridges, EZ-fill, will be of commercial from industrial point of view, to deliver many millions of drug delivery system, we are confident that this number will be achievable for Stevanato Group.
Got it. Maybe just actually to touch on R&D for a moment. But just kind of curious, like what innovation is coming out of Stevanato. You're spending about 3-4% annually on R&D. You have Nexa, you have Alba, but what's kind of on the horizon from a BDS standpoint or engineering standpoint that you'd highlight to-
In our industry, there is not a breakthrough technology. There is not tomorrow that the vial to be square. So in our industry, there is only evolution, so we are more investing in new type of sterilization technology, new type of siliconization, new primary packaging that is more in line with the new sustainability requirement. We are also investing in new technology for cutting, for forming. So there is many action that we are doing in order to further reinforce our process, strictly connect the product we deliver to our customer. For example, today we are deeply involved with the large volume cartridges with our customer, up to 20 ml. So this, we are going to develop all new technology, new technology of siliconization, sterilization.
Also, for example, we are developing for these big customers this new industrialized high-level, high-speed line for cartridges, ready-to-fill . We are more and more investing in order to evolve our product, in order to deliver what we call the full sophisticated ready-to-fill primary packaging, where allow the pharma customer to do only the filling. This is where we are really building our competitive advantage in Stevanato. This is the key of the integration, the continuous improvement between forming the engineering division and our BDS segment.
That's great to hear.
So there is no one big idea, but there's many idea that is going to improve and reinforce our product.
Got it. And just to touch on CapEx, spending EUR 300 million-EUR 335 million this year, about 30% of sales, roughly. I guess, now that we're kind of getting to the tail end of the CapEx spend, just how should we be thinking about it for next year? Or is there any plans to become a little bit more modular and increase kind of your CapEx spend versus what you've laid out previously?
Right. Today, we think we expect it to be more in the regular, normalized situation of CapEx spending in 2027, when we will finish our first big cycle of investment. Particularly, we're talking about the 2 greenfield plants that really are absorbing a lot of cash. So the idea is to be normalized. It's also true that our approach in the last 20 years was modular. Stevanato, in the last 20 years, built many greenfield plants. Now, today, we are present with 18 plants in 9 different countries. And also, we have space to grow in Fishers, we have space to grow in Italy, we have space to grow in Mexico. So I hope not to stop in 2027 to dream growth for the pharma company. But we think that in 2027, we'll be more in a normalized situation.
And that was more high single digit, low double digit % of sales. So we shouldn't expect that percentage next year, it'll still be elevated above the historical pattern?
We're still in the budgeting process for next year-
Right. Have to try.
So we'll provide that guidance in March.
Fortunately, Lisa was here because I was ready, prepared to give you the answer.
... I appreciate that. We only have a few minutes left, and I wanna just touch on a couple other topics, but just maybe on the China expansion. You paused the facility expansion in China. What do you need to see to maybe refocus CapEx dollars back into to China? Like, what should we expect maybe over the next twelve, twenty-four months, and
So Asia, in general, is a high potential environment for biosimilar. This is why we were looking to build also greenfield plants for EZ product in China. It's also true that we serve from our plants in China, both international customers and local customers. One of our big international customer have decided to reallocate their capacity in the last couple of years, particularly from the plants in Europe. So this is the reason why we have decided to prioritize the investment in Europe, because of the clear demand to deliver the line to our customers. That said, we are strongly convinced that to be present in Asia, like we are already present in Asia, is a strategic, because the market is growing. They have a very...
They are extremely hungry to take a very strong position in biosimilars, so we want to be there. We don't want to wait and to lose opportunity in the next years. Today, the big focus is Europe, United States. We have a presence there that we can easily serve from our plants in China, our plants in Europe, Asia. But if you look at the growing market in China, in India, in Korea, we must be there because there will be a big opportunity in the next ten years.
We have a minute left or so, but maybe what's something that's underappreciated about the Stevanato story that you, you're not getting asked about or people are ignoring?
So sometimes we have difficulty to explain that the demand in the biologics space is no matter if today we are living this destocking painful situation on buyers. We are in an environment where the demand is strong every year. What does it mean? So, if you split it by therapeutic drugs, anesthetic, vaccine, insulin, anticancer product, GLP-1, so we are in an amazing industry, where every year it will grow, or even in high single digits or most probably for new biologics, you know, double digits. So it's very nice, the environment where Stevanato is playing, it will play in the next five, ten years. This is sometimes we have difficulty to explain, because I receive many questions from investors, if there will be the demand.
For sure, there will be the demands. There will be more and more growing demand, because people is going to live up to hundred years. There are more billions of inhabitants all over the world. There is more attention on to the healthcare system. So we are really in an amazing industry today.
All right. We'll close it there, but Franco, thanks for joining us. Lisa, thanks for coming up as well, but thanks for the time.
Thank you. Thanks for the time, and thank you for your time.