Stevanato Group Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 13 speakers on the call.

Operator

Afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the 7 Auto Group's First Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions.

Operator

0 on their telephone. At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice President, Investor Relations. Please go ahead, madam. Good morning,

Speaker 1

and thank you for joining us. With me today is Franco Stefonado, Executive Chairman Franco Moro, Chief Executive Officer and Marco Di Lago, Chief Financial Officer. A presentation illustrating today's results can be found on the IR section of our website. As a reminder, some statements being made today will be forward looking in nature and our only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in Item 3d entitled Risk Factors in the company's most recent annual report on Form 20 F filed with the Securities and Exchange Commission.

Speaker 1

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.

Speaker 1

And with that, I'll hand the call over to Franco Stefonado for opening remarks.

Speaker 2

Thank you, Lisa, and thanks for joining us today. Our solid first quarter results confirm the positive momentum exiting 2022. They illustrate the strength and the fundamentals of our business as we advance our multi year strategic plan to capitalize on rising demand and to drive durable growth. Our experience in delivering high quality, high performing products makes us a partner of choice with customers. Our long history of embedding science, technology and industry expertise to to drive continuous advancements has led to highly differentiated product portfolio.

Speaker 2

We work alongside our customers to drive innovation by supporting them in the early stage development through the entire life cycle of the drug. Our mission critical products Our build into the regulatory filings creating a captive customer base. We operate in growing end markets with strong secular tailwinds. We have an increasing presence in biologics, which is the fastest growing market segment. We see ample opportunities in treatment classes such as GLP-1s, monoclonal antibodies, mRNA application and biosimilars over the next several years.

Speaker 2

Our presence in GLP-1s dates back to 2010. We believe that we are well positioned to further support customers in the upcoming ways of new indication for GLP-1s. While this presents a significant opportunity for us, it is just one of the many favorable tailwinds within the growing biologics market. Above all, our global footprint, differentiated product portfolio and integrated end to end solutions offer customers a unique value proposition. This provides us with sustained competitive advantages.

Speaker 2

We believe we are ideally poised to seize the opportunities in front of us to drive long term organic growth and Biz shareholder value. I will now hand the call over to Franco.

Speaker 3

Thank you, Franco. Starting on slide 7, We are off to a good start with the Q1 results, highlighted by 12% revenue growth and an adjusted EBITDA margin of 26%. Strong demand for our Easyfit products has driven the shifting revenue towards more accretive high value solutions, which represented approximately 32% of revenue in the Q1. For the Q1, new order intake decreased to approximately €236,000,000 compared to last year. This was due to the expected drop in COVID-nineteen orders and the normalization of customer ordering patterns as global supply chain stabilize.

Speaker 3

At the end of the first quarter, Our backlog of committed orders totaled approximately €955,000,000 Turning to page 8. During the quarter, we announced an agreement with Thermo Fisher to launch a fully integrated supply chain for our proprietary on body delivery system. The collaboration leverages the power of our integrated capabilities by bringing together our on body drug delivery device, our ready to use adhesive cartridges and our assembly lines, while Thermo Fisher will provide fill and finish and final assembly services. The collaboration offers pharma customers a proven end to end supply chain to support clients from drug development to commercialization. We also signed an agreement to develop and manufacture our Alba Prefillable Syringes for Resipharm's soft mist inhaler.

Speaker 3

The combination of our Alba Syringe and ResiPharm's innovative technology delivers sensitive biologic more efficiently and provides enhanced stability and safety. Our ABDA platform is purpose built for biologics because it significantly reduces any potential interaction between the drug and the container. On page 9, the self administration of medicine and pharmaceutical innovation are creating demand for our products. Consequently, We expect that continued advancements in biologics, including mRNA applications, monoclonal antibodies, the newest class of GLP-1s and biosimilars, will drive durable organic growth over the long term. While GLP-1s have been an established treatment for diabetes for many years, They are demonstrating remarkable results in weight management.

Speaker 3

This is driving significant demand for obesity treatments. Diabetes and obesity affect a significant portion of the world's population and rates of incidents are expected to climb. According to the World Obesity Federation, An estimated 38% of the population was considered overweight or obese in 2020. This is projected to rise to 51% by 2,035 if current trends prevail. Moving to page 10.

Speaker 3

Today, the majority of injectable treatments for these diseases use either a pan device or auto injector for self administration. In the case of a pan device, The doses can be modulated and the device can be used more than once. The pen uses a glass pen cartridge and it is the standard delivery format adopted globally for diabetes care. For single use auto injectors, The standard format is a syringe. As the market leader in pen cartridges, we have built a leading franchise supporting diabetes management.

Speaker 3

Our established role in the diabetes market helped anchor our position as one of the primary suppliers in the GLT-one market for obesity treatments. In fact, we are present in both commercialized GLT-one products and new programs under development, including biosimilars. The range of products we supply today includes bulk cartridges, easy fill cartridges and high value syringes. On the engineering side, We are also supplying lines for vision inspection and lines for assembly and packaging. We expect that GLP-1s will continue to contribute to growth in the coming years.

Speaker 3

Most importantly, our opportunity set is not limited to any single class of treatment. As Franco mentioned, we see broad opportunities across biologics, which a brief update on our capital projects. In both the U. S. And Italy, progress is advancing largely as expected.

Speaker 3

As we mentioned last quarter, we accelerated our expansion plans in Indiana in response to higher demand for high value solutions, driven principally by the growth in biologics. The first production lines are on-site. We are actively bringing on staff and validation activities are still expected to begin in the Q1. In Latina, Italy, validation is still expected to begin this summer, followed by commercial production in the 4th quarter. In summary, on page 12, we are making substantial progress.

Speaker 3

First, we are shifting of revenue mix toward high value solutions. 2nd, we continue to build strategic collaboration to leverage our strengths and meet customer demand. 3rd, we believe we are well positioned to capitalize on favorable industry trends such as the expected increase in GLP-1s. And finally, we remain on track with With that, I now hand the call over to Marco.

Speaker 4

Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the Q1 of 2022 unless otherwise specified. Starting on page 14. For the Q1 of 2023, revenue increased 12% to 230 $8,000,000 or 11% on a constant currency basis, principally driven by growth in both segments and the shift to high value solutions. We are making relevant progress growing our mix of high value solutions, Which increased 25 percent to $76,700,000 in the Q1 of 2023 and represented 32% of revenue.

Speaker 4

As expected, revenue from COVID-nineteen decrease 57% over the prior year and accounted for 4% of revenue in the quarter. For the Q1 of 2023, gross profit margin increased 20 basis points to 32%, mainly driven by more accretive high value solutions and to a lesser extent margin improvement in the engineering segment. As expected, this was offset by the increase in industrial costs and higher depreciation as our new plants come into service. We expect these temporary inefficiencies will continue throughout 2023 and This is assumed in our 2023 guidance. Operating profit margin in the first quarter decreased 80 basis points to 17.1%, mostly due to the higher SG and A expenses to support growth initiatives.

Speaker 4

Excluding start up costs on the new plants, Operating profit margin was 18.3% in the Q1 and consistent with the same period last year. For the Q1 of 2023, net profit totaled $28,300,000 and we due to the unexpected strengthening of the Mexican peso against the euro and the U. S. Dollar. Excluding start up costs, adjusted net profit was $30,400,000 and adjusted diluted EPS of $0.11 Adjusted EBITDA increased 15% to $61,900,000 and adjusted EBITDA margin was up 50 basis points to 26%.

Speaker 4

Moving to segment results on page 15. For the Q1, revenue from the biopharmaceutical and diagnostic solutions segment increased 13% or 12% on a constant currency basis to $195,500,000 over the same period last year. Revenue from high value solutions increased 25% to 76,700,000 revenue from other containment delivery solutions increased 7% to 118,800,000 gross profit margin increased 80 basis points to 33.7% in the Q1 of 2023, mainly driven by the growing mix of more accretive high value solutions. For the Q1 of 2023, operating profit margin for the BDS segment decreased to 19.8% mainly due to higher SG and A cost to support growth initiatives. For the Q1 of 2023, revenue from the engineering segment increased 7% to $42,400,000 driven by strong sales in visual inspection and assembly and packaging lines.

Speaker 4

For the Q1 of 2023, gross profit margin for the Engineering segment increased 30 basis points to 21.7 percent driven by higher margins in all product families and ongoing business optimization effort. Improvement in gross profit margin and higher led to operating profit margin of 15.2% in the Q1 of 2023, an increase of 140 basis points over the same period last year. On slide 16, as of March 31, 2023. We had net debt for $46,500,000 and cash and cash equivalents of $158,800,000 For the Q1 of 2023, net cash generated from operating activities was $37,100,000 and reflects our current working capital needs to support the growth in the business. As expected, capital expenditures for the Q1 of 2023 were $113,200,000 as we expand our industrial footprint amid rising customer demand.

Speaker 4

This was the main reason for negative free cash flow of $91,000,000 in the Q1. We believe that our cash on hand coupled with our loan agreements Provides us with adequate liquidity to found near term growth. Lastly on Page 17, We are reiterating our full year 2023 guidance. We continue to expect revenue in the range of $1,085,000,000 to 1,115,000,000 adjusted diluted EPS in the range of $0.58 to $0.62 and adjusted EBITDA in the range of $290,500,000 to 302,500,000 Our 2023 guidance assumes that for the Q2 of 2023, revenue is expected to grow in the range of mid single digit to high single digit compared with the same period last year. Revenue will be stronger in the second half of twenty twenty three compared with the first half of the year.

Speaker 4

High value solutions will represent approximately 32% to 34% of revenue. COVID-nineteen will represent approximately 2% to 3% of revenue. And lastly, We are estimating a currency headwind of approximately €13,000,000 to €14,000,000 Thank you. I hand the call to Franco for closing comments.

Speaker 3

Thanks, Marco. In closing, we are operating in an environment of favorable demand with attractive end markets characterized by strong secular tailwinds. We are executing against our strategic and operational priorities to capitalize on demand and support customers across the entire drug life cycle. We continue to make relevant progress as we advance our global expansion plans to increase our capacity in high value solutions and enhance our proximity to customers, grow our mix of high value solutions as customers turn to ready to use formats and move up the product value chain, invest in R and D to maintain and accelerate our market leading position and build a multiyear pipeline of new opportunities by supporting our customers through scientific innovation to meet their evolving needs. And lastly, we will host our 1st Capital Markets Day on September 27 in New York City.

Speaker 3

So

Operator

Soren 2. The first question comes from Derek de Ruling of Bank of America. Mr. Sudebo, your line is open, sir.

Speaker 5

Sorry, I was on mute. Thank you. Sorry. Good morning. Thanks for taking my question.

Speaker 5

So I appreciate the incremental color on the GLP-one. I think one of the questions that we've gotten from investors is, Obviously, these have been around for a while and you've been building capacity and providing this market for a while. How should we think about What potential incremental demand going here? I mean, are the capacity that you're building right Is it completely booked as it is for products or is there some flexible opportunity should demand go a little bit higher? Just trying to understand what's embedded in

Speaker 6

Derek, it's a little bit challenging to hear you. I think your question relates to the incremental capacity that we're building as it relates to GLP-1s. Is your question tied to the types of products that we're implementing as it relates to the capacity or could you clarify that?

Speaker 5

Yes. Basically, I was asking the capacity that you're bringing on, What is is the capacity occurring bringing on line mostly is already filled or is there some incremental Or is there room for the growth? Basically, I'm just trying to figure out what

Speaker 7

is it means that the GOP lines

Speaker 5

have been around for a while. I'm just trying to figure out What is already embedded in your guide versus what could be incremental to the business given this class of drug seems to be doing a little bit better?

Speaker 7

Thank you, Derek, for the question. I have to start, I think that all the growth opportunity we have in front of us are not linked specifically to any single therapeutic area. And we are investing in high value solution because we see in the biologics space the most important opportunity that's not only for GLP-one, but includes also other area of technologies like monoclonal antibodies, mRNA application, and then we look also to a dispensing in the biosimilar space for Biologics. That said, obviously, also GLP-one opportunities are embedded in our plan for the year and in our CapEx execution to have enough capacity to match customer demand in the years to come, and we are executing accordingly.

Speaker 5

Thank you. A little bit of clarity on the 2nd quarter guidance mid to high single digit revenue growth that was below sort of like where the consensus estimates were and we were. Can we sort of talk about pacing of revenues in the back of the quarter? I mean, you have a really tough comp in the 4th quarter. Just the way the guide reads, it's a little bit more back end loaded.

Speaker 5

Can you just talk about how we should think about pacing for the rest of the year in

Speaker 8

Yes, very good morning. In the second half of the year, we expect higher revenue than in the first half, similarly to what we have done last year. This year, in particular, we can see stronger revenue in second Also due to the visibility we have in our backlog and in the forecast from our customers. And on top of it, you know very well, we are toning capacity in Italy that will be generating further revenue in the 2nd part of the year. So this is what we can see Today, we reiterate our guidance for the full year.

Speaker 8

We expect the 2nd quarter mid single to high single digit growth compared to last year's same period.

Speaker 5

Great. Thank you very much.

Speaker 6

Thank you, Eric. Operator, next question please.

Operator

Yes, ma'am. The next question is from Paul Knight of KeyBanc Capital Markets.

Speaker 8

Yes.

Speaker 9

This would probably be for Marco Del Lago. The question I have When I look at COVID revenue in past periods, was that evenly distributed through all product lines or was it within the biopharma and diagnostics solutions

Speaker 8

group. It's totally referred to the BDS segment. The main As expected, we can see a slowdown in COVID as anybody else. And we reiterate our guidance to have between 2% 3%

Speaker 9

Okay. So high value solutions was where most COVID would go where revenue was recognized, Marco?

Speaker 8

In COVID business, we haven't experienced Different mix compared to the rest of the company between high value and other containment delivery solution. So we expect that the

Speaker 9

Okay. Got it. And then Regarding the outlook on GLP-1s, Franco, What is there any estimate that you believe you have in terms of market share for this developing market of GLP-1s?

Speaker 7

Yes. You know that all the estimates for this business line in just the one talks about multi €1,000,000,000 overall business. And Important for us is that in this business, we have the right mix of products that are cartridges and bags for dual configuration and easy fit configuration and also syringes that are needed for the auto injector. The current situation is overweighted in terms of cartridges and bycarpages because it is more coherent with us. And just one is something that is commercial since many years.

Speaker 7

It's not completely new. We expect the evolution of this market going direction of high value solution, both for easy filler cartridges and high value syringes. That said, we expect to have a fair share of these market opportunities because we are the leader in the market for tank cartridges. We are the 2nd most important player in the cylinder space. So we expect to have a 1st share of these opportunities and our visibility is giving us good prospect in the direction.

Speaker 9

Okay. And then lastly, Franco, is the When will Latina and when will Indiana in your opinion be generating revenue?

Speaker 7

We are on track with our plans. So we expect to have a commercial sales from Latina in the last quarter of this year and validation activity in Fisher Indiana under completion In the last part of the year to have our first arriving regeneration in the 1st part of 'twenty four.

Speaker 5

Okay. Thank you.

Speaker 6

Thanks, Paul. Sherry, can we have the next question please?

Operator

The next question is from Patrick Donnelly from Citi.

Speaker 10

Hi, good morning. You have Lizzie on for Patrick. So just one more question on the second quarter guide. How should we think about margins? And then for the back half of the year as well.

Speaker 10

Should we think of second half margins as higher than first half along with our revenues you discussed before? Thanks.

Speaker 8

Thank you for the question. In the second part of the year, we expect to keep on having the similar mix we had in Q1. We are our guidance is between 32% to 34% on High Value We realize some better opportunity to leverage our fixed expenses and second part of the year due to the higher revenue. On the other side, we expect some inefficiencies related to the start up cost of the new facilities in Indiana and in Latina in Italy. But overall, we plan to expand our

Speaker 10

Last quarter, you were pausing for now and then resuming planning and development in 2024. Is that still the right way to think about it, just given there's so much demand in the U. S. And Europe, I guess, for GLP-1s. And that's it for me.

Speaker 10

Thanks.

Speaker 7

I believe that We confirmed that what we said also during the last call, we are allocating our capital where we See the best opportunity and closer need of our customer. So we decided to accelerate investment in Italy and in future in Indiana because there is the opportunity to leverage on the strong demand there. In China, we remain a strategic target for us in terms of market, and we decided to have to post the investment for a while, And we still expect to take the decision for a new start of the initiative sometime in 2024.

Speaker 10

Great. Thank you.

Operator

The next question is from Tim Daley of Wells Fargo.

Speaker 11

Great. Thank you. So, I did want to dig a bit into market Next on self injectables. So I appreciate the color and the commentary around 7 Auto's number one position in pen cartridges and I think you mentioned you're number 2 in auto injectors. I believe Wegovy and Ozempic are single shot injectors, so kind of that auto injector number 2 position.

Speaker 11

Just given the attitudes around waste, environmental, plastics, etcetera. Does this market like allow itself or does the drug allow itself to be utilized pen cartridge approach for a multi dose injector or just any color there around This is a very attractive market. It just happens to be here. That's your number 2 position, but your number 1, and any potential for this segment to change in terms of the delivery mechanism. Thanks.

Speaker 5

Yes.

Speaker 7

So to all, I have to reiterate that GRP-one is something that is commercial since while the introduction of the 3rd GLP-one was approved by FDA in 2,005, and we are in the business from 2010 for the Altria one. So There is a current situation that is more linked to the format for delivery adopted in the beginning, where the only format for our cartridges was the bulk one. And the pen injector has been the 1st delivery system adopted globally as it's still the dominant one. It doesn't mean that the new treatments are not targeted different delivery formats, trying to adjust to the pension needs and preferences. And for us, it's very important to be able to serve both formats, pen injector with the cartridges and easy fill cartridges that are for multiple use and also auto injector with syringes that are for single use at the moment with the current technology.

Speaker 7

It's also important for us that auto injector needs very high quality syringes with special performances in terms of mechanical resistance and also the lighting force to letter, the auto injector works well. And our strength, it will be present both formats. And there is the reason why we are not targeting one single opportunity, but we are ready to serve our customers and both we.

Speaker 6

Tim, the only thing I want to add to that is that we are seeing different approaches by different customers. And it's also important to point out that there are different approaches regionally as well.

Speaker 11

All right. No, I do appreciate all that color. Thank you so much for all that. And then just curious on the order intake in the quarter. Just curious, can you give us a net new business growth rate on ex COVID basis to help us understand kind of the book to bill dynamics.

Speaker 11

When we take COVID out of the revenues, we take COVID out of the orders. Thank

Speaker 4

you.

Speaker 6

Was your question new order intake ex COVID, Tim? Sorry, it was a little.

Speaker 11

Just trying to get to book to bill on a clean kind of non COVID basis.

Speaker 7

Yes, we are looking at this Trying about order intake, but I want to express that order intake and backlog are good indicators of the demand, but it's not the only way we visibility into the customer needs because we have always talks with customer and also discussion about the long term agreement, material agreement. The visibility in fairness is In this sense, much higher, much deeper than only what is committed orders because of backlog and order intake is only for we consider only committed orders. Sometimes the customer has to wait for issuing the committed order because they don't have already set the supply chain time where they wanted to fill container. So committed orders are and order intake are good indicators, but we have much better visibility and this visibility that allow us to plan the future in our CapEx.

Speaker 11

All right, great. Thank you so much for the time.

Operator

The next question is from Dave Windley of Jefferies.

Speaker 12

Hi, good morning. Thanks for taking my questions or good afternoon in your case probably. I wanted to follow-up on Tim's question on the committed orders. So if I look at the magnitude of COVID revenue in last year and this year, which would have been in the kind of $22,000,000 last year and maybe $9 ish $9,500,000 $10,000,000 this year. I'm guessing that the order of magnitude for COVID would have been something around those numbers.

Speaker 12

Your change in orders year over year is $88,000,000 So it would seem like the majority of the change in orders year over year probably comes from the non COVID region, the changes in timing of orders. So I wondered if you could peel that apart a little bit, confirm what I'm thinking and maybe talk about What's happening in your order flow aside from COVID ex COVID? Thanks.

Speaker 8

Yes. Thanks, David, for the question. Marco speaking. Last year, we won about 41,500,000 fresh orders in the Q1 related to COVID. This year the amount is 0.

Speaker 8

If we look at the situation excluding COVID, Yes, we had $282,000,000 last year and $235,000,000 this year, but it's normal for us and in quarter And as Franco was mentioning, this is not the sole indicator we have to measure The demand coming from the market. So we experienced fluctuation, but this is not the only indicator we

Speaker 12

Got it. And related to that, you're talking about stronger growth in the second half. Can you talk about the visibility that you do have to that? Sure.

Speaker 8

Either in committed orders or other? Yes. Considering the Q1 revenues and the committed backlog only, we are covered for about 80% of the

Speaker 7

for reaching our guidance. So David, we can confirm that this is a pretty normal situation at this time of the year. Yes, nothing that is different from the past that you don't consider the different situation we experienced during COVID, It's a very normal situation for the Q1.

Speaker 12

Got it. Great. Thank you. On the cost side, highlighted some additions in SG and A costs and BDS. I Suspect those are higher as you get closer to opening facilities in Latina and Indiana.

Speaker 12

You can correct me if I'm wrong there, but I'm wondering if that continues to ramp as we get closer commercial revenue in those facilities or have we seen a step function that now is more flat as we proceed through the year?

Speaker 8

We expect SG and A will be better leveraged in the 2nd part of the year. We are increasing SG and A expenses mainly Driven by the fact that we restart meeting customers doing fair exhibition and we are also strengthening the organization in G and A expenses with the regional organization and the public company status. Nevertheless, we

Speaker 12

Okay, great. I'll leave it at that. Thank you.

Operator

Thanks, Dave. The next question is from John ORB of UBS.

Speaker 11

Hi, hello. This is Ted Chi calling in for John. So very good HVAC growth this quarter. Can you talk a little bit more about the traction with customer on HVAC? What is the typical timeline for introducing new products?

Speaker 11

And what are the drivers to get to this long term mid-thirty percentage target. Thank you.

Speaker 6

Just to confirm, your question is around high value solutions and some of the drivers to get to our near term target of the high 30 percent?

Speaker 11

Yes, that's correct. And also what's the typical time you're going to be seeing

Speaker 7

Yes, the main driver for the growth of higher value solution is the fast growing area of biologics where we have very strong demand related strategy to invest in high value solution is really something that matches the needs of our customers And the fact that we decide to accelerate our investment both in Europe and Italy and in the U. S. It's because we have active programs with our customers that are in direction of the adoption of as a new standard in that space and high value syringes like Nexa syringes for injectors and other syringes that is a perfect answer to the needs of high sensitive biologic molecules.

Speaker 11

Thank you. If I could just give you one more. Can you talk a little bit more on pricing? What kind of inflationary pressure are you experiencing in the quarter? And any pushback from customers on those pricing dynamics?

Speaker 11

Thank you.

Speaker 6

May I ask you to repeat the question one last time?

Speaker 11

Yes, sure. So can you talk a little bit more on pricing? What kind of inflationary pressure are you experiencing in the quarter? And are you receiving any pushback from customers on the pricing dynamics?

Speaker 8

We can see inflation as anybody else. There are different level of inflation depending on the items. For example, we had a bit of relief in energy cost and gas price in the Q1, but on the other hand, cost of labor is growing. So our methodology is the same we applied last year, planning in advance more in advance compared with last year, but we

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