Okay, everyone, thanks for joining us. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. Happy to have Riccardo and Lisa here from Stevanato to join us. If there are questions in the room, I guess feel free to kind of raise your hand. But maybe, Riccardo, we can start. We were just kind of chatting a little bit about the whole de-stocking piece. Obviously, been very topical for you guys, among others. Maybe just refresh us, I guess, where we are in this cycle. What's the right way to think about what areas of the business? Obviously, the vials piece, but what areas of the business it's impacting, what you're hearing from customers now, and the visibility into the path forward here?
Definitely is an actual topic. So happy to talk about it. Maybe before talking about what we hear from customers today and what part of the business is impacted, I think it's good to go back a bit and understand what really happened in our perspective, because that will help to explain what we see going forward. If you go back during the COVID period, the way I characterize it is looking at customers. There are probably three different buckets of customers, three categories of customers that ended up buying a lot of volumes, particularly around vials. The first one is customers that were busy with COVID vaccines and actually were successful in going to market. So they consumed part of these volumes.
Eventually, they were taken by surprise by the sudden drop, but they used quite a bit of what we shipped to them and other players as well in the space. There are customers that tried to go to market with a COVID vaccine and they failed. They bought a lot of stuff but didn't use any of it or very little. A third category of customers are customers that had nothing to do with COVID but just wanted to protect themselves and their supply chain from shortages or fragility there. They decided to buy quantities to be safe. Clearly, they are the ones that started to deplete the inventory across a number of different therapies and probably moved faster than others.
But when you look at it, the reason why I talk about these three categories is in reality, there isn't one single mode of operation or activities to go down with the inventory. Everyone is moving at a different speed. Everyone has slightly different situations, and that is what we see in these days. We see customers coming back, maybe more so in certain regions than others. We see clearly a lot of movement in Latin America. We see movement in the U.S., less so in Europe, but we see customers coming to us with solid forecasts for 2025 and with POs supporting those forecasts for the first one to two quarters. The reason why they don't come with one year of POs, of course, is because in the meantime, the lead times went down.
The lead times are now in the range of three to four months, so there is no need for them to place POs for the longer term. But clearly, we see that happening and we see that happening more so with smaller, relatively smaller players. Better now? Yes? Sorry, guys. Because they had a simpler job in terms of understanding their inventory situation compared to the big organizations with many, many nodes and maybe without an integrated S&OP process, but the reality is we see that movement is not going to be a step function. We are positive as we go into 2025 that this trend will continue and gradually we'll go back to normal.
Yeah, and I guess when you think about the pace of the recovery, the visibility you guys have, it sounds like, again, early 2025, start to see the orders pick back up. What's the right way to think about the pace and just the approach back to, let's call it, normalized growth rate in these markets?
Again, we learned in the past quarters that it's very difficult to forecast on behalf of our customers. Our assumption is that it will take probably the entire year for things to go back to normal if we are surprised on the upside, great. But that is what we are planning for right now. And we are working accordingly to start up lines to bring in people and everything, but it will take a few quarters.
Okay. And then I think it was Franco at one of the recent conferences talked a little bit about some of the larger international customers. You're even seeing some ordering into 2025, maybe a year out. I guess what are you guys hearing from customers? Is that kind of firming up a little bit on the visibility, where it's some encouraging signs? Is it early encouraging signs? What's the right way to think about just the tone out there?
Yeah, again, product by product, right? If you talk about vials, yes, we see some encouraging signs. But as I said, we need to confirm. When you talk about the other product presentations, it's on the other end, meaning syringes, clearly, there is a lot of demand. Cartridges is a very stable market linked to the diabetes care and now GLP-1 space as well. And we see a shift from a bulk to ready-to-use, which is very interesting for us because clearly there is more value there. And on other more specialty niche products like microvials, we see incredible demand outstripping our capacity. So I think the only question really that we have going into 2025 in terms of demand is around the vials.
Yeah. And I guess on the vial side, and you touched on it a little bit, Riccardo, is just, are the customers changing the behavior in terms of how much inventory they want on hand given the lead times? What are you hearing there? Are they going back? Is it pre-COVID? Is it even more different than that? How are you hearing customer behavior there?
I think that is, I would say, like pre-COVID in that the customers clearly know that the lead times are down, the range of three to four months. And so they don't need to place orders longer than that. The other thing that we saw and we hear with some customers, they know that the lead time is like that. And so they are taking a more aggressive stance on their inventory levels compared to the past. In the past, they used to carry some safety. Now maybe they are going on the other extreme, some of them at least. And so that clearly is not helping with the destocking in the short term. And eventually, I think they will come back to what is normal. But yeah, the two factors are shorter lead times for sure, and some customers wanting to carry less inventories than what they did historically.
Yeah. And also, I know inside vials, there's a bit of nuance between bulk, maybe even parts of EZ-fill. How are you seeing those pace differently in terms of customer conversations, expectations moving forward? Just touch on that a little bit.
Yeah. So clearly, again, back to the COVID period, customers bought a lot of both, both EZ-fill and bulk vials. What we see is that they are working harder to bring the bulk volumes down more than EZ-fill for a number of reasons, including the fact that it's still 95+% of the total volume. So that, again, is not helping us in these days because there is more value for us in the high-value solution ready to use EZ-fill than in bulk. But at the end, it will stabilize on both fronts.
On EZ-fill vials, what is important to note is that the concern there or the effort there is not as much to bring customers back to the pre-COVID period because the volumes were still small, but more to push the market conversion so that we can bring more customers and more applications and more molecules into the ready-to-use. So yes, it's coming out of the destocking to some extent, but more importantly, is make sure that we continue to drive the market conversion.
Yeah, that's helpful, and maybe staying on the high-value solutions piece, obviously, been a great part of the Stevanato story going back for a few years here. Maybe just kind of talk through what that transition looks like, where we are on the high-value solutions piece in terms of the makeup of the business and where we should expect to go to over the next year or two here?
I think if you look at the numbers, the percentages that we present, we have been, I would say, successful in that transformation or conversion. We are already in the range of what, 36%?
Yeah, for the full year, we increased our target to 38-39.
I think that is a good progress. It clearly is moving at different pace across the different pieces of what we call high-value solutions, meaning the syringes is full steam and actually is for us to be able to support the ramps of our customers. Vials ready-to-use, we discussed. Cartridges is picking up a lot of momentum, particularly because there are one or two big customers that decided to invest in that direction and start shifting a bit from bulk to ready-to-use. That is creating huge demand. Then there are components like microvials. I said microvials, when you look at epinephrine and naloxone, there is a lot of demand that we are trying to capture with our capacity ramps. Devices, we are growing extremely fast. The only question really, once again, in terms of growth and conversion is vials.
Yeah. And probably a good time to talk about some of the facilities. I think you touched on it a little bit there. We have Latina, and then we have Fishers. Maybe we can start on Latina. I guess where are we in terms of that ramp? And what's the right way to think about kind of the products that are going through there? And then we can shift to Fishers, perhaps.
Yeah, certainly. Yeah, Latina clearly started a bit earlier than Fishers. The brown field is not a green field. So our ability to get going with the installation was better, faster. So we are already shipping commercial volumes since several quarters. And we start to see the effect and the benefit and the positive impact on our performance. So Latina is on a good trajectory. And again, volumes there are mainly around syringes. That is where we focus the attention to start. And now, as we progress, we will continue to scale up syringes and then focus on ready-to-use cartridges. So that is the mix that we are going to have in Latina. When you look at Fishers, as I said, we started a bit later, much more complex infrastructure to bring up. The positive news is that the infrastructure project is completed.
We have already some lines installed at the site. We have already several customers that validated us on those lines, although we have a lot of work to do in the coming two years. We went commercial, meaning we started to ship commercial volumes in Q3, and now, as I said, we have a couple of years in front of us to complete the bring-up of all the capacity and start our progress with the validations and fully utilize the site, so end of 2026 is our target to be done with all the installations, and then it will take a few more quarters to be at scale with all the customers on all the lines, but that is the time frame that we are looking at.
Okay. That's helpful. And I guess with Fishers, again, to your point, it was nice to see commercial volumes starting to come through there. What are the kind of hurdles, to your point, maybe it's the end of 2026 that you're done with the installations, then a little more ramping up and we can get into the margins. But I guess what are the key things you guys are continuing to progress on there in the next year plus to get those installations done? And any risk of push-outs to the timeline, how confident are you guys?
Yeah, so I think there are two pieces there. One is in our control, which is delivery of all the glass forming and sterile equipment. It's in our control because to a large extent, we manufacture that equipment. And then if you want engineering, process engineering, quality engineering work to do the qualifications that we own, I think we have a high degree of confidence there. The part that is a bit more of a variable is the validation lead time with customers. Every customer is different. Some customers do it in a few months. Some customers take up to nine months. And so a lot will depend also on the mix of products, mix of customers, and how we go with their quality organization to validate the lines. But I don't think it's going to be a tremendous, how to say, variability, right?
We know more or less who the customers are and what they expect, so.
Yeah. And maybe to that point with Fishers in particular, I guess as you guys are bringing this capacity online, how much of it is kind of spoken for, booked out while you're bringing it online versus kind of chase the business as the capacity comes on?
No, on the syringes side, I think we are extremely well positioned in terms of commitments. We can put qualifiers around the word commitment, but I think we have very good visibility in terms of how the capacity will be utilized for what customers, what products. We are bringing up also some EZ-fill vials line that there is a bit more uncertainty, but we have a couple of years in front of us to close that gap, and we have two device programs also going into Fishers, both of them already committed with agreements and investments and POs from customers, so I think we are in good shape overall.
Okay. And the margins, given the Fishers ramp, have been in focus just in terms of, to your point, as you're doing these installations, not quite at scale in terms of the margin story. So what's the right way to think about when the margins in Fishers start to be accretive to the company? Because again, it is good revenue that's there. It's just a matter of getting up to scale. So we'd be curious to talk through that a little bit.
Yeah, sure, Patrick. So while we have not really put a stake in the ground in terms of when it will achieve profitability at the gross profit margin level, we did highlight that we think we're probably at the kind of worst performance in terms of gross profit margin, and we're kind of close to the inflection point on starting to see those inefficiencies become less of a drag on the gross profit margin, and so as you know, Latina turned profitable at the gross profit margin level in the third quarter, and as Riccardo noted, Fishers is a larger build. It's a greenfield, so it will have a slightly different pacing and phasing as it relates to that. But that being said, we do anticipate that as you look to next year, Fishers will continue to scale, and as a result, margin will continue to improve.
We would anticipate that we'll hit that gross profit margin, call it break-even, probably sometime in the coming quarters, in late 2025 or 2026.
Okay. That's interesting, and then I think it was about a year ago or in the last year or so, you guys kind of reprioritized a little bit in terms of some of the capacity expansions, pushed Fishers forward, pushed China maybe back a little bit. Now, with all the various elections, maybe it was even smarter in hindsight, but how are you thinking about the China opportunity? What's the right way to think about that facility? How committed are you? Was it just a matter of, "Hey, we need to prioritize the resources here," given the demand that Fishers could deal with, and China was just a little bit secondary? What's the right way to think about that?
Yeah. China is a major market, a lot of business there already today, and huge potential for growth. So for us, the interest in that market is the same. It's not changed compared to what we had in mind one year ago, two years ago. It's only a matter, as you said, of focusing our resources, both financial resources and human resources, to what was prioritized. And we decided to put the focus on Europe first, US then, and China third. So that is the priorities we are going through, right? But if you look at our site, there is a great site. It's one of the ones with the best performance. So good solution. There is a lot of interest. Good relationship with customers is a matter of sequencing.
Is there much, in terms of local competition over there, how do you think about the landscape? Obviously, you guys being maybe more European. I don't know if you dodged some of the tensions between the U.S. and China, which are seemingly increasing. How do you see that market just broadly with the various moving pieces here?
In reality, if you look at our strategies years ago, we started to invest in the regions to move exactly around that potential risk. You look forward, we'll have Fishers serving the U.S. market. We'll have our site in Brazil for LATAM, Europe for Europe, China for China. Yes, there is always a bit of volume moving from one region to the other because we don't have all the products in all the regions. But the majority of the customers and the volumes will come from within the region. We should be in a decent shape there.
Okay. And I guess to close the loop on some of the facility investments, the CapEx and free cash flow piece are kind of increasingly in focus with investors. I guess now that Latina and Fishers are kind of flipping commercial and maybe winding down a little bit as we go forward, at least the next year or two on the CapEx side, maybe just refresh us as to where we are today and what's the right way to think about some of the longer-term impacts on the CapEx side for you guys?
Yeah, sure. Thank you for the question, Patrick. So the trajectory hasn't changed versus what we laid out at Capital Markets Day. There will still be a relevant level of CapEx that will be in the picture for fiscal 2025 as we continue to install manufacturing lines. But as we look out to 2027, we would anticipate, based on kind of what we know today and no additional project opportunities, that we would return from a CapEx perspective back to high single, low double digit as a percentage of revenue.
Okay, and then the cash flow piece. I know I think it was next year you guys are kind of flipping a little more profitable. Maybe just talk through the cash flow trajectory as we move forward here.
Sure. So we are in the process of, I would say, tying up the loose ends of our final strategic and business planning for next year. And so as you may imagine, CapEx is one of the biggest swingers, if not the most important swinger to free cash flow. And so we will provide an update, obviously, on the March call.
Okay. And then engineering. Obviously, it was a little bit noisier in 3Q than typical. Maybe just talk through, I guess, what you guys saw. You have some of these optimization efforts ongoing. Maybe just pull the curtain back a little bit on engineering. What we saw, what the right way to think about the go-forward is.
Yeah. So engineering, when you look at, again, if you go back to the origin of the phase we are in today, right, we grew a lot with engineering. Even if you look at, leave the revenue aside for a second, you look at headcount, we doubled our headcount over three years. So that gives you a measure of how much we grew with that business and that organization. And we have a very good solution when it gets to all the pieces, but particularly around inspection and assembly for devices. And with the push to biologics and with the push of GLP-1, we had a major order intake over the past several years. So we brought in a lot of business, which is a testament of the quality of our solution, of course. But it was in itself already a challenge, would have been a challenge.
And we got impacted by the shortages with the electronic supply chain, pushing basically all the programs to the right side because we couldn't complete the assembly of those machines and go into testing. And so we ended up with a number of programs stuck one on top of the others. And we started to have bandwidth limitations on the people side to be able to complete all these programs on time. And that is what caused a bit of delays with programs and customers that we are trying to address now. We are working to address with this plan that you hinted to, pulling a number of levers. We have strengthened the program management, supply chain management, so that we have a better handle on the programs. And we limit surprises, first of all.
We are bringing up additional resources in Italy to complement what we have in Denmark because Denmark is a bit the hotspot today. That is where many of these programs are based. So we remove that bottleneck. And at the same time, we start to drive some cost efficiencies because, of course, the labor cost in Italy is different than what you have in Denmark. And ultimately, we are bringing the pressure down by shipping some of the systems that were in the works because over the next couple of quarters, that is something that we started to do, making the workload manageable for the entire organization. So the combination of all these things, some of them already playing and giving results now, some of them will bring results over the longer term. But that is what we are doing with it. That is the plan.
We are optimistic in terms of the results. Keep in mind that two more things that are relevant for engineering. Some of the programs that we worked on in the past years were the first off for certain machines. The next ones that we have in the pipe are more replicas. It's less invention and more execution. It will be easier for us to go and do these replicas also using the setup in Italy. At the same time, which is a positive for us, we continue to see, despite these challenges that we had, we continue to see a lot of interest from customers for our solutions. They want to order the second and the third and so on because everyone is trying to standardize around a certain platform. We became the platform for many customers.
Yes, we have challenges, but those challenges have not impacted our outlook from a revenue top-line standpoint.
Okay. So it sounds like engineering a lot more in your control. And again, even with this, I guess it would be reshoring back to Italy. How do you think about just the timing of how long a disruption, kind of a change like this could kind of stretch? What's the right way to think about where we are for you guys on this engineering piece?
In reality, if you think about relocating some of the activities to Italy, it's not a big challenge because in Italy today already, we have a presence both in Piombino, where the headquarters is, and Bologna, which is one of the major clusters for automation in Europe, I would say, not only in Italy. We have already resources, right? Remember, Denmark is busy with inspection and assembly. Italy is busy with glass forming and inspection in Piombino and with assembly in Bologna. So we have already the infrastructure. We have already the resident knowledge. We just need to add more people, which is what we are doing. So it will be sort of rebalancing. In the short term, we'll add people, period, and then we start to phase some resources down in Denmark and bring up more in Italy, right? But it's not a greenfield. That is what I'm saying.
Okay. Okay. That's helpful. And you touched on the GLP-1s a little bit earlier. Would love to dive into them a little more. Always topical with you guys, just given the size of that market. I think at the investor day, you sized it at $12 billion in 2023, going to $56 billion a few years out. Maybe just kind of walk through where you guys play in this market, the right way to think about that. Again, it's cartridges in the pen injectors, but not the pen injectors themselves. I mean, it would be helpful just to talk through the nuances of your exposure there, and then we can dive into the market a little bit.
Yeah. So yeah, I don't know where the numbers are coming from, but Lisa can comment.
They were external estimates that we compiled based on various Wall Street numbers and industry numbers. As you've seen, those numbers have since evolved as well.
But in terms of our solution, when we go to market with our value proposition, we talk about having an integrated solution, products, processes, and services. And GLP-1, I think, is a great example of how we leverage everything. When you look into products, yes, syringes, yes, cartridges, barrels, which is where the GLP-1 has been for the past many years. But now we see a big push to go to ready-to-use cartridges. Vials, I think in the past few quarters, we saw at least one major player making the decision to start using vials as well as a presentation for certain markets. So all of that is part of our offering, and we are busy there. Devices, we recently signed two agreements, one for a pen injector, one for an auto injector. So same as above.
And these are for innovators, of course, but we are also busy with our proprietary platforms, both injectors and pens with biosimilars. We are scaling up capacity and volumes there. On the process side, of course, glass forming, also for our competitors, inspection. Everyone is buying inspection machines for filled containers. And for some customers, we also provide automation solutions for the final assembly of devices. So we are covered there. And services with our tech center in Boston, particularly, we are working a lot with newcomers to the space to help them navigate the process to decide what is the right solution in terms of primary packaging standpoint. So I think we are exercising the entire value proposition on GLP-1.
Yeah. And obviously, in GLP-1s, there's kind of monthly tracking, and everyone keeps a very close eye on the volumes, obviously big numbers. What's the right way to think about your guys' growth relative to pure, not pill count, volume, whatever you want to call it? Are you guys kind of tracking around there? Is it outsized? What's the right way to think about just the growth tied to the overall volumes we all see on these GLP-1s?
Yeah. That's a great question, Patrick. We have framed it this way that as part of our long-range plan, we look to 2027, getting back to that double-digit growth. All of this would already be baked into that model because we have long-term commercial agreements, particularly tied to these programs. It is part of the building blocks of our long-term plan. As it relates specifically to your question, that's not a data point that we've historically provided, but we have framed it that it is all included. It is, I think, thinking about growth in the long-range plan. I think it's important to put it in the context of biologics because it's really not just GLP-1s that are driving this. We do see significant growth across other categories.
Even if you think about our Fishers investment, we're talking dozens and dozens of customers, not just a handful of customers.
Okay. And do you guys, when you think about, obviously, everyone kind of looks at the big players here, I mean, do you guys get specced into a degree? Is there a risk of kind of shift on the market share? Is there any sense of those large GLP players wanting to insource, or are they happy to, given the percentage of COGS that you guys make up, happy to use high-quality inputs from yourselves?
So starting from the second part of the question, we don't see the big players wanting to insource more. Actually, if anything, they want to outsource more because they have their hands full on internal activities already. So that is not a risk for us, not in the foreseeable future, for sure. In terms of confidence in the volumes, risks, because of the large numbers in play here, we have framework agreements spelling out more or less over the next five years what we are going to do, product by product. Probably where there is the least coverage is, once again, vials because vials is a generic product. You can use it for GLP-1. You can use it for whatever. It is not tailored to a specific application. And so we don't even see the need there to have that kind of arrangement.
If the volumes are not used on one application, it would be used on the other ones. But everything else, whether it's devices, syringes, cartridges, bulk, ready-to-use, everything is more or less covered by some sort of agreement that gives us a good level of protection.
Another question we get on the GLP side, as I know you guys do, is kind of this risk of orals at some point kind of converting over. What do you hear from customers, and what would that transition mean for you guys? How do you see the market developing over multiple years as maybe that modality comes into play a bit?
Yeah. It's difficult to say clearly that our customers are working on a solution with oral as opposed to injectables. Maybe we see these numbers circulating around 20% of the total volume as a possibility, which is fine. I mean, at the end, there are companies working on a one-month therapy as opposed to a once-per-week therapy that is also going to impact the volume somehow. I was at a conference a few weeks ago on GLP-1 in Indianapolis, actually, and customers started to talk about the fact that the GLP-1 could go into sleep apnea, could go into osteoarthritis, could go into cardiovascular. So at the end, it's more than obesity, for sure. So yeah, I think even if oral comes around in this 20% in a few years, based on our conversations with customers, the volumes that we have agreed to bring up are covered.
If anything, you talk about what is the level of upside starting from that baseline, not taking out.
Okay. Okay. And then, obviously, as we sit here in kind of early December, a lot of eyes turning to 2025. I know you guys have talked very high level about it. But as we think about the trajectory back towards the LRP, particularly on the revenue growth side, is it kind of fair to think about a little more of a gradual view as some of the destocking continues to lift? We talked obviously about the engineering piece. Maybe just talk about high-level, those moving pieces as we work our way into 2025 and that path towards the LRP.
You're right. We definitely have provided some commentary on 2025, and I think that remains the same. That as we look at 2025, right now, the largest factor to growth next year will be the pace and speed of recovery on both bulk vials and EZ-fill vials. I think streets sitting out there right now at kind of mid-single-digit. On our last earnings call, when asked the question, we said, "Yes, that's reasonable." Do we see a path of double-digit growth next year? Sure, if things were to break our way, but at this moment in time, we think a cautious approach is warranted given just the low visibility that we have experienced through the destocking over the last, call it, eight quarters.
But as we think about the long-range plan back to 2027, we believe, right, as you get into 2026, vial destocking should be in the rearview mirror. The engineering improvements are well within our hands and within our control, and we have an optimization plan. So not only do we anticipate that we should return to those profitable growth levels that we were historically at, we aim to gain additional efficiencies out of our optimization program. And then thirdly, I think it's important to take into consideration the ongoing ramp-ups in both Fishers and Latina. So what is previously a drag on margin will now become an economy of scale for us.
And so those three things are really some of the major elements of getting us back on track to that long-range plan of low double-digit growth, adjusted EBITDA margin target of 30%, and high-value solutions in the range of 40%-45% by 2027. I think all of this is also underpinned by the big macro trends that we see. Obviously, growth in biologics, obviously, pharma innovation, certainly the trend towards the self-administration of medicine. All of these elements really are the building blocks that take us back to the LRP.
Yeah. Maybe in the last minute here, Lisa, you talked about kind of that margin trajectory. 4Q, I think, is in the high 20s, maybe 28% or so on the EBITDA margin side. Can you just talk about the moving piece? I assume EZ-fill is a big piece of that, just that mix side. But anything else to flag on the 4Q margin bridge that we should be thinking about and then just that launching-off point into 2025?
So as you know, our fourth quarter has historically been seasonally strong, a lot of it just based on customer ordering patterns. So as we look to the fourth quarter, there are two big elements that are driving that margin. It is volume and mix. First, the growing volumes in Latina as we continue to ramp that up as now it has achieved profitability, the gross profit margin level. And secondly, we see already within our backlog a record quarter for High-Value Solutions, as we mentioned on our earnings call. And so our previous full-year target for high-value, I think, was 36% to 39%. We have raised it to 37% to 39%. So all that is already in backlog. And so that gives us the confidence that we will see that margin step up in the fourth quarter.
Okay. All right, Riccardo, Lisa, thank you guys so much for coming.