Stevanato Group Q2 2023 Earnings Call Transcript

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July 28, 2023

There are 12 speakers on the call.

Operator

Afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Stefanado Group Second 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

Call. At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice President, Investor Relations. Please go ahead, madam.

Speaker 1

Good morning and thank you for joining us. With me today is Franco Stefanato, Chief Chairman Franco Moro, Chief Executive Officer and Marco Delago, Chief Financial Officer. Presentation illustrating today's results can be found on the IR section of our website. Some statements being made today will be forward looking and our only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed Investor Relations section of

Speaker 2

the call today. Thank you, Mr. Chairman. Thank you, Mr.

Speaker 1

Chairman. Thank you, Mr. Chairman. Thank you, Mr. Chairman.

Speaker 1

Call. I urge you to review the information contained in our earnings release in conjunction with our SEC filings and our latest Form 20 F. Conference Call, except as required by law. Today's presentation may contain non GAAP financial information. Management uses this information in its internal analysis 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.

Speaker 1

For a reconciliation of the non GAAP measures, conference call. Please see the company's most recent earnings press release. And now, I hand the call over to Franco Stefonado for opening Tax.

Speaker 3

Thank you, Lisa. We are pleased with another quarter of solid operational and financial performance as we continue to build on our track record and execute against our objectives. We are making progress on all fronts As evidenced in today's results, we continue to achieve our near term growth target of high single digit to low double digit growth. We are successfully responding to market demand, which in turn is driving our mix shift towards high value conference. This keeps us on track to achieve our mid term target for revenue from high value solution in the high 30% range in 2026.

Speaker 3

Our investments in growth platforms are currently going as planned as we expand capacity for high value solutions to satisfy strong customer demand in key end markets like Biologics. And lastly, we are benefiting 7 and is currently our fastest growing end market. Our differentiated easy fill products are ideally suited Over the last several years, we have laid the foundation to drive sustainable long term organic growth, and we believe Q2. Thank you. I will now hand the call over to Franco.

Speaker 4

Thank you, Franco. Starting on Page 7. Our 2nd quarter results were highlighted by 9% year over year revenue growth and an adjusted EBITDA margin of 26.7 percent. During the second quarter, strong demand for our high value new EasyFuel products led to an increasing mix of high value solutions, which represented approximately 33% of total revenue. For the 2nd quarter, new order intake totaled €240,000,000 compared to the €252,000,000 last year.

Speaker 4

Excluding COVID-nineteen related orders, new order intake increased 4% compared to the same period last year. As of June 30, our backlog of committed orders totaled as customers placed signed orders further in advance. Customers have since returned to pre COVID business practices. Let's turn to Page 8. Pharmaceutical innovation is driving advancements in more complex biologic drugs and paving the way for new therapies that address chronic diseases, comorbidities and more challenging disease management.

Speaker 4

In 2021, approximately 28% of all FDA approvals were biologics. This rose to approximately 40% of approvals in 2022. Of the 2022 FDA approvals, We are in 3 of the 4 potential blockbusters, all of which are biologics. Biologics are a broad category of products Often administered by injection, they can be challenging to stabilize and administer due to their complexity, sensitivity and viscosity. As a result, biologics have a unique storage and packaging requirements that our easy fill Nexenamba products are specifically designed to address even for the most demanding biologics.

Speaker 4

Over the last couple of years, biologics have been an important growth driver for our business. Year to date and excluding revenue related to COVID-nineteen, revenue from Biologics accounted for 26 15% for 2021. This increase in revenue from biologics also that pays with the timing of our targeted capacity expansion. The key takeaway is that we currently see strong secular tailwinds in biologics, creating downstream demand for high value products. We expect that continued advancements in biologics, including mRNA applications, monoclonal antibodies, GLP-1s and biosimilars We'll continue to drive durable organic growth.

Speaker 4

Please turn to Page 9 for an update on our capital projects in the U. S. And in Italy as we advance this facility towards operational readiness. In Fishers, staffing plans remain on track and our technical and managerial staff have returned to Indiana after many months of immersive training here in Tele. We've started our initial performance qualifications for the 1st easy fill lines and we remain on track to begin customer validation activities are well underway as we prepare for commercial production by the end of the year.

Speaker 4

As a reminder, our Pension is modular. It is linked to real customer demand and the visibility we have through our long term commercial agreements. We work directly with customers to assess their capacity needs and we align our expansion plans accordingly. New capacity typically requires several years to plan, build, validate and launch for commercial production. The intensity of capital investments and the rigorous quality and regulatory requirements created natural High Performance Products at Scale positions us to capitalize on strong customer demand and expand our market share in growing end markets like Biologics.

Speaker 4

Lastly, we recently published our 2022 sustainability report. It highlights as well as diversity, equity and inclusion. We measure our progress through the GRI standards as a framework for transparency and accountability. I want to congratulate our team for receiving a bronze medal from Equadis, recognizing our efforts in sustainability. Our goal is to continue growing and supporting customers

Speaker 5

Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the Q2 of 2022, unless otherwise specified. Starting on Page 12, for the Q2 of 2023, revenue increased 9% to 2 $155,300,000 or approximately 10% on a constant currency basis, driven by growth in both segments. We are pleased with the consistent progress in growing our mix of high value solutions, which represented 33% of total revenue compared to 30% for the same period last year. Revenue from COVID-nineteen decrease 89% over the prior year and accounted for approximately 1% of revenue in quarter.

Speaker 5

Despite this drop off, we have been successfully backfilling it with revenue from new and expanding customer project. Excluding revenue from COVID-nineteen and the effects of currency, 2nd quarter revenue increased 20%. Facilities into service. As a result, gross profit margin decreased 90 basis points to 30.9% due to the expected rise in industrial costs and higher depreciation. This was partially offset profit margin by 140 basis points.

Speaker 5

Excluding these start up costs, gross profit margin would have been 32.3% and in the Q2 of 2023 compared with 32.1% for the same period last year. These headwinds 24 when operations commenced in Indiana. In the Q2 of 2023, operating profit margin It was 17.6%. Excluding start up cost of the new plants, adjusted operating profit margin was 19.1%. This compares to 19.6% in the same period last year, which benefited from a €6,000,000 contract modification tied to COVID-nineteen.

Speaker 5

Adjusted EBITDA increased 10% to $68,200,000 and adjusted EBITDA margin was up of 30 basis points to 26.7 percent. On the bottom line, for the Q2 of 2023. Net profit totaled €34,300,000 and we delivered diluted earnings per share $0.13 Excluding startup costs, adjusted net profit was $37,000,000 and adjusted diluted earnings per share increased 17% to $0.14 over last year. Moving to segment results on page 13. Team.

Speaker 5

For the Q2, revenue from the biopharmaceutical and diagnostic solutions segment increased 9 Percent to €204,800,000 compared with the same period last year. Growth on a constant currency basis was also 9%. Revenue from high value solutions increased 20% to €84,200,000 and revenue from other containment delivery solutions increased 2% to EUR 120,600,000 As expected, margins in the BDS segment Jones. This led to a gross profit margin of 31.6% and operating profit margin of 19.8% in the Q2 of 2023. Revenue from the Engineering segment increased 11% to €50,500,000 driven mainly by strong sales in visual inspection lines.

Speaker 5

Gross profit margin for the engineering segment increased 20 basis points to 22.5%, driven by higher sales in more accretive product lines and ongoing optimization efforts. This led to operating profit margin of 15.5 percent for the Q2 of 2023. On Page 14, as of June 30, 20 23. We had net debt of $120,400,000 and cash and cash equivalents of 61 €200,000 As expected, capital expenditures were €138,000,000 in the second customer demand for ready to use drug containment. For the Q2 of 2023, net cash generated from Operating activities was €24,400,000 which reflects our current working capital need to 4th organic growth in the business.

Speaker 5

Cash used for the purchase of property, plant and equipment and intangible assets was 93,700,000 note, which resulted in negative free cash flow of €69,100,000 Lastly, on Page 15, guidance. Julien. Adjusted diluted EPS in the range of $0.58 to $0.62 And lastly, we are slightly increasing adjusted EBITDA guidance. We realized some improvements in utilities, which are coming lower than forecast. And as a result, we now expect adjusted EBITDA in the range of €291,800,000 to €303,800,000 This will not, however, have an impact on reported EBITDA as this effect will be offset by marginally higher nonrecurring start up expenses, mostly related to training in Dana.

Speaker 5

Our 2023 guidance assumes that CapEx will range between 35% to 40% of 2023 Revenue. High Value Solutions will represent approximately 32% to 34% of forecasted revenue. A currency headwind of approximately €13,000,000 to €14,000,000 in COVID-nineteen, we represent about 1% to 2 Taco for closing comments. In closing,

Speaker 4

we are pleased with our year to date financial results. The fundamentals of our business are strong and we operate in growing end markets characterized by an environment of robust demand. Our teams are executing against our strategic and operational priorities as we set the stage to capitalized on customer demand for our integrated products. I'm proud of the progress we continue to make every day as we remain laser focused on completing the current phase of our expansion in Italy and the United States as we prepare for commercial transaction in the coming months, meeting customer demand and growing 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 lastly, building a multiyear pipeline of new opportunities by supporting customers through scientific innovation to meet their evolving needs.

Speaker 4

Thank you. Operator, let's open it up for questions.

Operator

The first question is from Patrick Donnelly from Citi. Please go ahead.

Speaker 6

Great. Thank you guys for taking the questions. Franco, maybe one just on the GLP-one landscape, obviously a big focus for investors. Can you just talk about the competitive landscape? The backdrop Job certainly seems ripe for continuing to show really strong growth there.

Speaker 6

But can you just talk about what you're seeing there, the competitive landscape, Anything on market share growth would certainly be helpful as well, but we'd love to chat a

Speaker 2

little bit about that

Speaker 4

market. Yes. Thank you, Patrick. I Want to start by saying that we are in diabetes care and GLP-1 since many, many years. And you know that we We have a leadership position in cartridges for pen.

Speaker 4

And we have a strong value proposition also for syringes for auto injector and syringes for the GLP-one. So this is our current position that allow us to See good opportunities for us in the future for the same franchisor product. In terms of the competitive I have to confirm that we have different competitors in different space because in syringes we are the 2nd player In Cartridges, I have already said that we are the leader. There are other competitors that are Important for us, but as we see in all other markets addressing biologics. It's important to say also that in this space, we The more and more space for the conversion to the sterile configuration of cartridges in this specific case that is one of the important driver we see because we have the leadership position in this technology.

Speaker 6

Okay. No, that's helpful. And then maybe just an update on China. Obviously, that's been a challenge backdrop across all of life sciences certainly this quarter. I know you guys paused development a bit last quarter.

Speaker 6

Can you just talk about the backdrop there? Any change to the Plans, yes, how you think about that market would be helpful. I appreciate it.

Speaker 2

Yes, I'll start, Marco speaking. From Q2, we are down a little bit. We are around 9% of our revenue generated in Asia Pacific. The reduction in Asia Pacific compared to last year is mainly driven by engineering that where we have fluctuations quarter after quarter depending on project. For the future, I will leave to Franco.

Speaker 4

Yes, I have to reiterate that there is no changes in terms of the long term strategy for China and Asia Pacific, where we see very important opportunities also for the longer run, because it's one of the fastest CapEx execution in the U. S. And Italy, where we have very interesting opportunities in the near term. And so The fact that we decided to put all our attention in the short term in the U. S.

Speaker 4

And Italy doesn't mean that we changed our That is it for

Operator

China. The next question is from Paul Knight from KeyBanc. Please go ahead.

Speaker 7

Hi, Franco Moro. Could you talk to how quickly will Fishers Indiana bring revenue. Will you expect to have 50% of capacity generating revenue was at 50% delivering in 2024. What's your thought on Fishers?

Speaker 4

Hi, Paul. Yes, we confirm that we are in line with the expectation to have that in the first half of next year The advancement of our validation programs for the commercial volume that we transfer from Europe and new opportunities coming from The U. S. Market, we expect to start revenue generation along the year, most probably in The middle of the year and to ramp up module by module, because we will start the first module and then we will Spread the rest of the CapEx plan during the next 2, 5, 4 years to complete the cycle of investment in Fisher in 20 27 according to the current But it's a modular approach and we will progress with this kind of modularity.

Speaker 7

Okay. And then my I think the most frequent investor question right now is you've been guiding to around 10 2nd quarter. And long term organic growth with the emergence of GLP-1s with I think what has been surprising number of biologic approvals last year this year, what are your thoughts about that long 10% potential growth rate.

Speaker 4

But, Sverdol, you are right. We are not Addressing a single therapeutic area, we are talking about the opportunities we have in Biologics, where our solution matches exactly The needs of our customer. So obviously, we see opportunities that are embedded in our expectation to continue to have a healthy growth in the years. And this is something about the 24 next year. It's too early to release any specific information, but we Are investing so heavily in a high value solution because we consider biological space as the main driver of our growth in the future.

Speaker 4

Because also the possibility to convert the market for biocellin The Cartagena in that space even faster than in general. But we are in line With our expectation to support the growth for the years. Nothing, no major changes in that.

Speaker 8

Thank you.

Operator

The next question is from David Windley from Jefferies. Please go ahead.

Speaker 9

Hi, thanks for taking my question. In High Value Solutions, can you comment on or maybe peel apart the demand for particular products within or groups of products within high value solutions. So for example, are you seeing more of the push from standard to Pre sterilized or are you seeing more uplift in your higher end products like Nexa Dexter and Alba.

Speaker 4

Yes, it's a very interesting question, but I have to say that Both, because we see very strong demand is even higher than expected for sterile cartridges and also for Alba Nexa because both these products line, all of 3 These product lines are associated with the biologics and auto injector or pens. So We are very happy to say that our value proposition, our portfolio of solution is not overweight in a single product line, but as a well balanced portfolio of solutions that address the growth in Biologics. There is nothing In specific that we consider more important, we are happy to say that we have many different opportunities.

Speaker 9

Okay. Maybe a question for Marco. When you talk about higher industrial costs, could you detail kind of what comprises industrial costs? What types of costs are you including in That descriptor, please.

Speaker 2

Yes. Thanks, David. So in your reported gross profit margin, We have been impacted by the non recurring start up cost related to the pre launch of the commercial revenue in FISCHUS and in Latinas. So we are training our people to secure the success of the ramp up. And these are treated as non recurring expenses.

Speaker 2

Without that, we would have done 32.3% in gross profit margin. Another important difference compared to last year is about depreciation, where we have about 80 basis points more than last year due to the CapEx we have been doing since the beginning of 2022. Obviously, the offset of that is about the shifting to our high value solution, where we are gaining profitability with a Patrick, we shared several times that we are gaining 100 basis points of standard gross profit margin Whenever we increase 4% our the shift the share of I value solutions. So It's consistent with the plan we designed in the past. And those are the 2 main headwinds we are facing.

Speaker 9

Okay. Very helpful. Thank you. Last question for me, kind of similar to Patrick's question around the environment Some amount of customers bleeding down their own inventories. Are they overstocked in inventory of your containment products such that order patterns are not only lower We're actually kind of undershooting current demand.

Speaker 4

Yeah, we see a different approach Or better back to normal practices in terms of transferring forecast and flowing forecast into committed orders as a general approach. And Pat, in Viad, if and you may recall that COVID was almost all prior business. We see also the situation you were referring to. So some inventories that The customer has to deplete to use. And so we expect that during next quarters, the situation will relax In this term, but it's only related to vials, because COVID-nineteen out of vials were a minor part of the business.

Speaker 4

So Partially is the back to normal practices, generally speaking, and then there is COVID Trading, specifically in buyers.

Speaker 9

Thank you, Franco. So you said I think you were saying incoming quarters. Do you Have an estimate on how much longer you think it'll be before customers have kind of returned to normal levels?

Speaker 4

I want to stress that I'm referring only to Vias, and we expect it to be sometime 24, back to the current normal situation also in Ballas. It's too early to say more than that because obviously our customers are planning 24, and we will deliver better, more precise information later on.

Speaker 10

Great. Thank you for the answers.

Speaker 4

Thank you.

Operator

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

Speaker 8

Hi, good morning. Hey, just to follow-up on Dave's question on the gross margin. What's the how should we think about progression into 3Q and

Speaker 2

2. Well, David, Derek, for the year, we are Confirming, excluding non recurring expenses and margin expansion compared to 2022 in both segments, presentation and some inefficiency associated to the ramp up in Latina. In Engineering segment, we expect to expand margin also. If we include the non recurring expenses, we expect a slight decline in the gross profit margin 2023 compared to 2022.

Speaker 8

Got it. Okay. That's Can you remind us on your CapEx spending as you sort of as new capacity comes online in Q4. How should we think about CapEx as a percentage of sale ramping down in 2024, 2025?

Speaker 2

Yes. At the moment, our expected cash flow will be negative in 2023, driven by CapEx. Thanks. In our model today, we expect to have still important level of CapEx in 2024 to go on with FISCHERS. And in our model, we expect some time to restart the project in China in 2024.

Speaker 2

So it will be another important year for CapEx, and we expect to be close to breakeven at free cash flow level. For 2025, we expect today the CapEx should start normalizing and turn to positive free cash flow.

Speaker 8

Great, very helpful. And then just one final question. Another company in the primary drug Packaging Injectable Space reported yesterday and on their call they kept talking about some potential customer timing issues, Yes, particularly in the second half. Are you seeing anything in terms of customers delaying projects or timing or anything along It was just sort of an unusual market comment that sort of kept coming up. I'm just sort of your thoughts on is there anything unusual

Speaker 2

We are well covered by our backlog. Our backlog today is covering more than 90% of our center point of the guidance. I haven't we haven't seen In the next 6 months, any slowdown, but I can also

Speaker 4

Gerica, I can complement what Marco said. I say that we don't have the view you reported because in the interaction we have with We are planning according to their need for the future, and we have a very important opportunity for growth in And also you can recall that we have a specific insight in CapEx This season about customer because we are serving them with our Engineering segment. The fact that we are improving business in engineering is an evidence that we base our expectation on a very solid ground.

Speaker 8

Thank you. Thanks for the answer. That was very helpful. Have a great day.

Speaker 1

Thanks, Derek. Operator, next question please.

Operator

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

Speaker 11

Hi, thanks for taking the questions. For Franco, maybe first, you said in your prepared remarks that you're seeing kind of new opportunities in the U. S. Market. And I can appreciate the growth you're seeing in Biologics and GLP-one specifically, but can you give a little bit more detail on this and just maybe how that could Potentially translate into actual like new customer relationships or anything that we should be thinking about in terms of future growth?

Speaker 4

You know that we are in also almost all the big pharma. So talking about new customer. We have enough big customer today to have insight in their needs on an established portfolio of opportunities that we are supporting with our tech centers, not only with our CapEx Thanks for the commercial volume in the future. So we invest are investing in the U. S.

Speaker 4

Because we Thanks to serve dozens of different opportunities, mostly in the biotech space. We continue to increase our pipeline on new opportunities. And for the short term, you may recall that part The utilization of this new facility will come from the transfer of some commercial volume for the European plants to the new U. S. Plant.

Speaker 4

So the short answer is that And we are executing on with our modular approach, ready to adjust also in Time of possible future upside.

Speaker 11

Got it. Thanks. And maybe for Marco, When you're kind of backing out COVID for the year and specifically the back half, I mean, it looks like your guidance is calling for a back half acceleration. So can you help us kind of parse this out in terms of what we should be thinking about for BDS and for engineering in the back half of the year and maybe heading into 2024, if you'd like to give just high level details there. Thanks.

Speaker 2

Well, for 2023, you are right. We decreased a little bit our guidance for COVID. Nevertheless, we are confirming the overall guidance because we can shift to our other therapeutic areas. What we can see today is an organic double digit growth in both segments in this moment. So this is how we are thinking our guidance for the year.

Speaker 2

About 2024 is a little

Operator

Ms. Myles, gentlemen, there are no more questions registered at this time. Do you perhaps have any closing comments? I'm sorry, we have a last minute registration, sorry, for Matt L'Heureux from William Blair. Please go ahead.

Speaker 10

Okay. Yes, thanks. Could you help me just frame up a couple of metrics around Fishers and Latina? Maybe just remind us How much HVES capacity expansion they're going to provide on a relative basis? And then given it's a modular approach maybe how much of that will be available immediately relative to sort of that 2027 or longer term timeframe?

Speaker 4

What I can say is that if you compare current capacity in The view of our industrial plan, we expect to more than double capacity for syringes And to multiply several times our production capacity for easy field vials and cartridges, There is a split obviously in between the different facilities, but we cannot deliver metrics about that. In terms of the modularity, We talk about the expansion of Fisher in a range of 4, 5 years, depending if you include the 23 or not. And you can look at not completely regular ramp up, but is well distributed along

Speaker 10

Okay. Thanks. And then as a follow-up, there's anything in terms of expected payback period or returns on capital for some of these newer capacity expansions highly focused on HVES relative to perhaps CapEx investments you might have made 5 years ago, 10 years ago and some sort of the payback periods for those type

Speaker 2

Investments. Well, what we can tell you is that we are investing in EasyFill mainly, Almost everything is Efil. And most of them are high value solutions, so we expect pretty high return. When we look at our past data in Izyfir plant here in Pio Mino Deze, the internal rate of return is well above 20%. And our goal is to replicate this level of return for the 2 new greenfield facilities.

Speaker 2

Okay. Thank you.

Operator

There are no more questions at this time.

Speaker 1

Thank you, operator. We want to thank everyone for joining us today for Stefan Auto Group's 2nd quarter financial results And we look forward to speaking with you in the future. Thank you.

Operator

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.

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