Stevanato Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 13 speakers on the call.

Operator

Good afternoon. This is the Corusco conference operator. Welcome and thank you for joining the Stephanato Group Second Quarter 2024 Earnings Call. As a reminder, all participants are in listen only mode. After the presentation, will be an opportunity to ask questions.

Operator

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

Speaker 1

Good morning, and thank you for joining us. With me today is Franco Stephanato, Executive Chairman and Chief Executive Officer and Marco Di Lago, Chief Financial Officer. This morning, you can find a presentation to accompany today's results on the Investor Relations page of our website, which can be found under the Financial Results tab. As a reminder, some statements being made today will be forward looking in nature and are only predictions. Actual events and results may differ materially as a result of the risks we face, including those discussed in Item 3 d entitled Risk Factors in the company's most recent annual report on Form 20 F filed with the SEC on March 7, 2024.

Speaker 1

Please read our Safe Harbor statement included in the front of the presentation and in today's press release. 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 engaging 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 will now hand the call over to Franco Stephanato.

Speaker 2

Thank you, Lisa, and thanks for joining us. Today, we will review our Q2 performance, provide an update on market dynamics and share some insights on the challenges and the ongoing initiatives to meet our objectives. For the Q2, revenue was a little bit better than our expectation, driven by 9% growth in the BBS segment, but margins fell short our forecast in the engineering segment, where delays led to higher costs on certain projects. We also incurred increased expenses related to the actions taken in the Q2 to address these delays. These factors combined are the main reason for the revision of our 2024 guidance.

Speaker 2

As you know, the engineering segment has experienced significant growth more than doubling its revenue over the last 4 years. We scaled our operations to support this large volume of work, but persistent delays in the supply of electronic components and the complexity of certain projects prevented us from delivery as planned. The challenges are mostly limited to our Denmark operation and are related to certain highly customized projects. Our number one priority today is to advance this large volume of work in progress and bring these projects to completion, but this will take some time. Moving to Slide 6.

Speaker 2

We are undergoing extensive efforts to optimize our engineering footprint, harmonize industrial processes and enhance our supply chain and logistics strategies. Let me give you a concrete example of these efforts. In Denmark, we consolidated activities of 2 different production sites into a single location so that the Danish team can focus on the advancement of our assembly and packaging technologies. At the same time, we're implementing a cross site plan to better support our visual inspection teams in Denmark with our technical specialists in Italy. This will also increase the standardization of our technologies and processes across the engineering segment.

Speaker 2

While these initiatives include expenses that will impact our 2024 financial performance, they will help us optimize our operational structure, maximize efficiencies and secure the success of ongoing projects. This is one of the primary areas of responsibility of Ugo Gall, our Chief Operating Officer, who joined Sternato Group in March. Ugo brings over 20 years of experience in the industry, having held both commercial and operations leadership positions at organizations such as Diasorin. Long term, we believe the demand landscape for engineering remains favorable. Not only is the industry moving to secure supply chains and manufacturing capacity for fast growing biologics, but we also see an increasing shift to upgrade infrastructure to better align with the requirements under Annex 1.

Speaker 2

In addition to improving our execution in the engineering segment, we are still navigating through the effects of vial destocking. We see positive signals in the market with orders starting to materialize in certain smaller markets such as Latin America. In larger markets, we still expect a more gradual recovery. Our customers are sharing forecasts that point to improving demand and they are beginning production planning. Accordingly, we are optimistic that vial orders will begin to pick up at the tail end of 2024 starting with bulk vials.

Speaker 2

Moving to our capacity expansion projects on Slide 7, it is important to note that we are working through these challenges in the midst of a large demand driven capital cycle. Last year, we successfully completed our Pimino diesel plant expansion and we are continuing our multiyear ramp up of our expansion projects in Fisher, Indiana and Latina, Italy. In Fishers, our validation activities are going as planned, and we are progressing through the first set of customer audits. During the quarter, we took delivery of our 2nd and third syringe lines and installation and qualification activities are underway. Most importantly, we are on track to launch commercial production and generate our first commercial revenue from Fishers in the Q3 of 2024.

Speaker 2

During the Q2, we hosted 40 customers for the opening of the new plant in Latina to give them a first look at our new high value solutions manufacturing facility. We expect to continue to expand our syringes production as part of our multiyear ramp up in Latina. We have 2 manufacturing plants at our Latina campus. As previously disclosed, the next phase in Latina is concentrated on the expansion of VisiFill Cartridges capacity to support the transition from bulk to ready to use products for an anchor customer. Activities tied to this project will launch next year.

Speaker 2

The expansion is designed to harmonize operations between the two sites. This includes the installation of new bulk and easy fill cartridge lines in the new plant and the upgrade of already operational lines in the original Athena plant. This approach is part of our wider strategy to enhance efficiency and production capacity, reduce lead times and expand our offer of premium solutions. As expected, the ramp up activities of our 2 new facilities are resulting in temporary inefficiencies on which Marco will elaborate further. With our teams focused on the execution in Latina and futures, we decided to further postpone any additional expansion in China for the coming 12 months.

Speaker 2

As a consequence, we're shifting some of this CapEx to Latina to accommodate a change in regional manufacturing preference for a large customer. Accordingly, we believe we have sufficient capacity to support the demand in the region. On Slide 8, in summary, we are confident that we can successfully navigate through the challenges in front of us and we are squarely focused on improving our execution. The core fundamentals of our business have not changed. The end markets we serve are healthy and growing.

Speaker 2

Demand for our products remain stronger. Our integrated solutions resonate with our customers, and we are operating in an environment with favorable secular tailwinds. We continue to see a durable profitable growth path in front of us, driven mainly by biologics. In fact, in the first half of twenty twenty four, biologics hit a record high of 35 percent of BDS revenues, which is creating strong demand, especially in high value solutions. I will now hand the call over to Marco.

Speaker 3

Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the Q2 of 2023, unless otherwise specified. And in the second quarter, foreign currency was immaterial, so all revenue comparisons exclude currency translation. Starting on page 10, for the Q2 of 2024, revenue increased 2% to 260,000,000. Euros This was driven by a 9% growth in the biopharmaceutical and diagnostic solutions segment, which offset the expected decline in the Engineering segment.

Speaker 3

Our product diversity helped expand our mix of high value solutions, which grew 23% in the 2nd quarter and represented approximately 40% of total revenue in the quarter. The increase in high value solutions was favorable to gross profit margin. This offset lower revenue from EasyFill Vials, which adversely affected the mix within high value solutions. Gross profit margin was also tempered by 3 headwinds. First, the higher than anticipated cost in the engineering segment had the biggest effect on gross profit margin in the 2nd quarter.

Speaker 3

2nd, the impact from vial destocking, causing the underutilization of our vial lines. And lastly, inefficiencies tied to the ramp up phase of our new facilities. As a result of these temporary headwinds, gross profit margin decreased to 26%. It is important to point out that we believe that these headwinds are temporary and will gradually subside. In turn, we expect a step up in margins.

Speaker 3

As we outlined during our Capital Markets Day, margin expansion is expected to be driven by the mix shift to high value solutions, the benefit of scale and better leverage of our fixed assets and operational efficiencies. For the Q2, lower gross profit led to a decline in operating profit margin to 10.8%, and on an adjusted basis, operating profit margin was 12.8%. For the Q2 of 2024, net profit totaled 20,600,000 and diluted earnings per share were 0.08 dollars On an adjusted basis, net profit was 24,500,000 and adjusted diluted earnings per share were 0 point 0 $9 Adjusted EBITDA was 54,000,000 and adjusted EBITDA margin was 20.8%. Moving to segment results on Page 11. For the Q2 of 2024, revenue from the BDS segment increased 9% to 222,400,000 mostly driven by growing high performance syringes.

Speaker 3

The diversity in our product portfolio helped drive 9% growth despite a 40% decrease in revenue related to vials. Revenue from high value solutions grew 23% to €103,400,000 in the 2nd quarter, while revenue from other containment and delivery solutions decreased 1% to €119,000,000 As expected, the increase in high value solutions benefited gross profit margin, but segment margins continued to be unfavorably impacted by the ongoing effects of destocking as customer inventories continue to normalize and start up inefficiencies in Latina and Fishers. As a reminder, these are natural inefficiencies that occur during the early phases of operations. These inefficiencies reflect the under absorption of expenses as volumes, productivity and revenue progressively grow to reach the target levels. As these facilities mature, we believe that this impact will decrease and that margins will improve accordingly.

Speaker 3

As a result, in the Q2 of 2024, BDS segment gross profit margin was 27.7%. This represented 390 basis point decrease compared to the prior year. For the Q2, operating profit margin for the BDS segment decreased to 14.5% from 19.8% in the same period last year. For the Q2 of 2024, revenue from the engineering segment decreased 26% to 37,200,000 euros As Franco noted, delays have led to higher costs on certain complex and highly customized projects in process. As a result, gross profit margin decreased to 10.3% and operating profit margin declined to 2.6% for the Q2.

Speaker 3

It's important to mention that we currently see strong continued interest in our innovative market leading technologies. With the actions we have ongoing, we believe that we can drive the necessary improvements to bring these projects to completion, improve the segment's financial performance and return to a profitable growth trajectory. Please turn to the next slide for a review of balance sheet and cash flow items. We continue to carefully manage trade working capital to support the growth of our business. As expected, our inventory levels increased in the quarter mainly due to the establishment of baseline inventories in our new plants in U.

Speaker 3

S. And Italy, including products that are expected to be delivered to customers in

Speaker 2

the future

Speaker 3

quarters. This was partially offset by collections of trade receivables. We ended the 2nd quarter with cash and cash equivalents of 78,100,000 and net debt of 238,200,000. Through a combination of our cash on hand, available credit lines, cash generated from operations and our ability to assess additional financing, we believe that we have adequate liquidity to fund our strategic and operational priorities over the next 12 months. As expected, capital expenditures for the Q2 of 2024 totaled €75,900,000 as our demand driven investments continue to ramp.

Speaker 3

In the Q2 of 2024, net cash from operating activities totaled €22,300,000 During the second quarter, we received proceeds of €3,000,000 for the sale of a building in Denmark as part of our initiatives to optimize our footprint and gain operational efficiencies. Cash used in the purchase of property, plant and equipment and intangible assets was €72,100,000 This resulted in negative free cash flow of €46,100,000 in the 2nd quarter. Lastly, on slide 13, we are updating guidance for fiscal 2024. Let me walk you through the changes. Starting with the Engineering segment, which is the main reason for the revision.

Speaker 3

We now estimate a revenue decrease of approximately 15% to 20% for fiscal 2020 4 compared with last year. Turning to the BDS segment. For fiscal 2024, we continue to anticipate mid single digit revenue growth compared with last year and we remain comfortable with the current for fiscal 2024, we for fiscal 2024, we now expect revenue in the range of 1,090,000,000 to 1,110,000,000 adjusted EBITDA in the range of 264,000,000 to 272,000,000 and adjusted diluted EPS in the range of $0.48 to 0 point 5 0 dollars As we consider the future trajectory, our long term growth construct remains unchanged. We believe we have the right ingredients in place to return to double digit growth and expand margins as outlined at our Capital Markets Day. Looking to next year, in the BDS segment, we have positive momentum in high value solutions, particularly in syringes, which is a favorable tailwind.

Speaker 3

On the other side, we currently anticipate that our growth may be tempered by the current headwinds. This includes the pace of recovery in bulk and dizzy fill vials, which is the largest factor and the timing of the effect of the corrective actions we are taking for the engineering segment. We will continue to update you on our progress, but we will provide formal guidance in March. We remain confident in our strategy and in our long term growth prospects going forward. Thank you.

Speaker 3

I will hand the call back to Franco.

Speaker 2

Thank you, Marco. In closing, on slide 15, we are maintaining focus on our long term objectives and we are confident in our strategic direction. Despite the headwinds, we are still delivering organic growth primarily in high value solutions. We are investing in the right areas and meeting customer demand. In the near term, we must deliver on our commitments and sharpen our focus on solid execution across our main priorities.

Speaker 2

This includes the ongoing expansion in Latina, our ramp up activities in Fisher and improving our project delivery in engineering segment. The fundamentals of our business remain stronger. We operate in a dynamic and growing market with favorable secular tailwinds. Demand is robust and we have a portfolio of products that are ideally suited to meet customer needs. We believe the business is well positioned to capitalize on these trends and we are determined to return to durable double digit organic growth, expand margins and drive long term shareholder value.

Speaker 2

Over the past few months, I had the opportunity to meet with many of our key stakeholders, including customers, employees and investors. As a CEO, I'm confident that we will achieve our long term objectives. Operator, let's open it up for questions.

Operator

Thank you. This is the Carlsco conference operator. We will now begin the question and answer session. The first question is from Jacob Johnson of Stephens. Please go ahead.

Speaker 4

Hey, good morning. Thanks for taking the questions. Maybe just on the engineering business, this business grew rapidly the past few years. We've heard about some weakness around capital equipment demand in the current environment. Do you think this is largely supply chain issues and within your control or is there any softening in demand that you're seeing for engineering equipment?

Speaker 2

Thank you, Jacobs. Franco speaking. So today, in order to put in a context the Engineering division, we more than doubled our revenue in the last years, in particular in the middle of the context of the pandemic and supply chain shortages. Today, we are behind schedule in some complex new projects, more than what we previously expected, and this is putting pressure in our performance on the business. Those temporary challenges are predominantly isolated to our Denmark operation on certain highly customized projects at the late stage of development, and we are taking strong action to improve and recover the situation.

Speaker 2

We are confident that we can successfully navigate through these temporary challenges in front of us in the next few quarters. And by the way, the portfolio of order in the engineering division is solidly strong with our bigger customer, in particular in biologics.

Speaker 4

Got it. Thanks for that, Franco. And then may I guess I'll ask one on Fishers. You guys talked about seeing commercial revenues in 3Q. Was this always what was kind of assumed in guidance or is this a slight benefit versus prior expectations?

Speaker 4

And I guess as we think about Fishers coming online in 3Q, should we think about those that initial contribution as being kind of modest? Thanks.

Speaker 2

Correct, Jakobs. Validation activity are progress as planned. So practically, we are on track to launch commercial production in the Q3 of 2024 and we expect it to generate commercial revenue also in the Q3 of this year. Today, the big attention, the big focus on all our organization is to perform validation and audit with all our U. S.-based customers.

Speaker 3

On the guidance, the revenue are embedded in our guidance we provided.

Speaker 5

Got it. Thanks for taking the questions. Thank you.

Operator

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

Speaker 6

Hi. 25? I mean, obviously this is a reorg year?

Speaker 3

We provided some colors Marco speaking, sorry, Paula. We provided some color about 2025 about our preliminary focus on next year. It's a little bit early to provide guidance. We will provide guidance as usual after Q4 earning call. What we can tell you today again is that we see strong demand in syringes in iValu, Nexa and Alba suitable for biologics and this is a good tailwind.

Speaker 3

On the other side, we see some uncertainty about the timing of recovery of the vials and the timing of the effect of the action we are taking for engineering. As Franco mentioned before, we see strong demand for our technology and engineering. Unfortunately, we are struggling to complete the testing on some highly customized project and this is impairing a little bit our ability to bring on new contracts and advance on the projects. So this is a little bit early to talk about specifically engineering for 2025.

Speaker 2

Paul, if I can further give you some more element. This complex line that Marco are referring are new technology that our bigger customer was in particular on the assembling technology and inspection where the average lead time is up to 20, 24 months. So we have faced now some challenges at the later stage of a certain test at the end of May June. It also is important to specify that this project are the first of a kind of machinery for our customer that are part of our long term multiple line equipment. So what you see, if you one side you see a big demand on syringes next on cartridges, say, to fill automatically our same customers are asking to also to deliver new high sophisticated line for assembly and for inspection.

Speaker 2

These are the first line and our organization, Denmark, is facing some temporary challenge. But under the new leadership of Ugo guy, they already put in place all the action in order to recover to be back on track in the next few quarters.

Speaker 6

And then second question is Latina, which seems to I know you had a lot of another opening down there recently. What was the transfer of expansion was from what Piedam Dino or what could you just give us an update on Latina? It seems to be a lot bigger expansion than it had been planned 2 years ago.

Speaker 2

Yes, Paul. Practically, Latina was we have decided that it became the 2nd big hub in Europe in order to serve our customer for our Nexa syringes. And this is why, by the way, if you compare Latina with Fisher, we are 2, 3 quarters ahead. Today, we are already some many customer, we are generating commercial revenue. Today, one of our major anchor customer have decided to increase capacity in Latina for this new technology for these cartridges straight to fill.

Speaker 2

You know that we have market leader on cartridges, both on cartridges bulky, also in technology. Today, we see there is more and more demand from these cartridges ready to fill from all the bio customer and particularly this big customer want to we have a big capacity in Europe in particular on the site of Latina. This is the reason for this further expansions.

Speaker 6

Okay, thanks.

Operator

The next question is from Matt Leerieu of William Blair.

Speaker 7

Last quarter when you took down guidance for destocking, you communicated that you were trying to be conservative there. And you did beat, I think, our expectations for the Q2 on BDS, and it sounds like you're maintaining that outlook largely for the year. Now that you've encountered issues in engineering, are you trying to take a similar approach now in terms of the way that you are communicating those challenges to investors?

Speaker 3

Yes, you mentioned they are 2 very different reasons for adjusting the guidance. We recognize we had to change the guidance twice in a year, but again for 2 very different reasons. Buyers destocking is affecting all the industry. And at the beginning of the year, we didn't detect the drop down for about 40% year over year in our buyers demand. And this is the specific reason why we had to review the guidance in Q1.

Speaker 3

Engineering is a different situation where as Franco explained, we more than doubled the size of the business. We are taking some highly customized projects. A matter of fact, we are delaying some acceptance from customer because they are really specific projects and customized ones. Matter of fact, we are spending more time to test the equipment. We had to add more resources in May June to complete the stuff.

Speaker 3

So matter of fact, we are spending more time with more people on those projects and this is affecting our profitability in the second quarter. At the same time, we took a conservative approach also in bringing in new customized projects. And this is the main reason why we are reviewing our guidance for fiscal 2024.

Speaker 2

Matt, if I can give some more color to the answer of Marco. So from our perspective, if you're going to isolate these temporary challenges, we will expect that the effects from buyer destocking will be behind us. Also, like Marco mentioned in his remarks, we will gain leverage from the scale of our new operation in Latin America and Asia, and the engineering segment should return to profitable growth in the next quarter. So we are excited that this will give us confidence in the future.

Speaker 1

Matt, one clarification. We don't expect the Engineering segment to return to profitable growth next quarter. It will be in the coming quarters.

Speaker 7

Okay. Okay. Thank you. And then just on CapEx, the took up the high end of the range there, I think, to 335,000,000. This obviously was expected to be another big year of CapEx following last year.

Speaker 7

But just given, I think, Fisher's validation maybe a little bit ahead of at least Street expectations, Could you just provide us with sort of an outlook on CapEx over the next several quarters here as you're starting to continue to fill out those facilities with lines?

Speaker 3

Yes, we are online with our CapEx plan for the year. So we reiterate our guidance for the year between €300,000,000 to €335,000,000 So everything is going according to the plan and we reiterate our guidance. It means that second half of the year will be slightly below first half of the year with respect of cash out, but we are not talking about big differences compared to the first half of the year.

Speaker 7

Okay. Thanks.

Operator

The next question is from Michael Hruskin of Bank of America. Please go ahead.

Speaker 8

Hello, good afternoon. This is John Kim on for Michael. Great to hear of the orders coming in, in Latin America and elsewhere you talked about the customers talking about the production planning coming in. Is that across the board, as in all regions? And then what sort of products can we expect to come after bulk vials?

Speaker 8

And if there's a timeline expectation for that destocking to happen, would appreciate those comments.

Speaker 2

So thank you for your question. We are still navigating through the effects of the market via destocking. We see today positive sign like I mentioned to you in the market with orders starting to materialize in certain smaller markets such as Latin America. In larger markets, we still expect a more gradual recovery, but our customer are sharing forecasts that point to improving demand and they are beginning production planning. This reinforced our confidence that vial orders will begin to pick up at the tail end of 2024, starting from bulk vials.

Speaker 2

So we are starting to see all overall positive sign from the market.

Speaker 8

Great. Thank you for that. And in the guide update today, you laid out for the fiscal 'twenty four that high value solutions, now you expect that to take over take up 36% to 39% of the total sales and that's making progress towards your 2027 target. But 2Q was already 40%. So I'm wondering if that fiscal 2024 target could even be higher?

Speaker 3

This is our guidance today about 2024. So we reiterate in absolute value that the revenue from high value solutions, we can see strong demand as mentioned in high value syringes. Compared to initial guidance, as mentioned, we have seen pronounced reduction in sterile vials. But all overall, we confirm our guidance in total numbers. Obviously, going down engineering, we have consequently increased the percentage on total revenue.

Speaker 3

About the midterm view, we feel confident to get to 40% to 45% by 2027 with the growth in the coming years. Also as mentioned by Franco, we see temporary the vials destocking. So we expect to restart growing in vials both bulk and sterile. We expect to show other product lines to ramp up and not only value products.

Speaker 8

All right. Thank you.

Speaker 3

Welcome.

Operator

The next question is from Patrick Donnelly of Citi. Please go ahead.

Speaker 9

Hey guys, thanks for taking the questions. I'll just ask you 2 upfront. Franco, maybe just quickly on the stocking piece, can you just talk about visibility, what you're hearing from customers, just expectations on that front as we work our way through the year? And then second, just on the China facility, how to think about the timing and the commitment to that region would be helpful? Thank you, guys.

Speaker 1

So just to clarify your question, Patrick, it was a little hard to hear you. Your first question was on stocking and asking about visibility into our customer forecast. And the second question related to China and the timing on China, is that correct?

Speaker 5

Yes, you got it.

Speaker 1

Okay. Thanks.

Speaker 2

So regarding destocking, just to give some number, the buyer market, bulk buyer market is a market that have a size around €13,000,000,000 buyers per year consumption. These are number approximately pre pandemic. We are starting to face some issue with the destocking in 2023 also this year. So practically, we are entering the 2nd year where we are facing this destocking issue. Today, what we see that practically all our customers, international customer, regional customer, they build huge inventory for COVID, Bialy, also for all the other therapeutic drugs.

Speaker 2

Now our customers are moving this situation of destocking. We are starting, like I mentioned before, to see, in particular, in smaller customer where they have more lean supply chain reactivation of order. What is more related to international customer, they are starting to they are still soft in the demand on 2024, but they're starting to discuss forecast for 2025. So this is the reason why we're starting to see all overall positive sign on the Bayer market. Regarding China, the factor by the way, China, Asia Pacific for Stefanato is still will remain a strategic market because we see a very big opportunity in particular in biosimilars in the next year to come.

Speaker 2

It's also true that in Stefonato Group, we are very flexible in terms of follow the demand requested by our customers. It's also where our customer is addressing the request. Our model to make investment are modular. So particular, one of our major anchor customer, they have just reallocated their needs from Asia. They've asked us to further enforce our capacity into the plants of Latina.

Speaker 2

This is the reason why we have partially reallocate our investment, we are increasing capacity in Italy. Also because what we the capacity that we are in China today is sufficient to serve and satisfy the market.

Operator

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

Speaker 10

Hi. Hopefully you can hear me. I wanted to ask, I'm trying to understand the guidance a little bit from some scratch math I've done here, it looks like you need about 27 percent EBITDA margins in the second half from 21 in the first half and then incremental margins of something in the mid-50s percentage to kind of hit this new midpoint of the range and clearly with the cost that you've incurred, the delays in projects or the complexity of some of these projects, your margins have been negatively affected, I mean, effectively your incremental margins have been negative. Just wanted to understand how you see the progression from first half to second half? Are you taking cost out of the business?

Speaker 10

It sounds like you're actually investing into, but again, wondering if you're taking cost out of the business that would help to support those high incremental margins to get to the much higher EBITDA targets in the second half? Thanks.

Speaker 3

Yes. Thanks for the question, David. We see a path similar to last year with respect of growth, sequential growing between Q2, Q3 and Q4. So basically we need to repeat what we have done last year. Overall, we are, let's say, we took the heat of the higher cost in engineering second quarter.

Speaker 3

We expect to grow particularly with the good mix in high value products, especially syringes. And we can leverage the ramp up of Latina. Anyway, to give you more comfort on this, in the first half of the year, the ramp up in FISCH and LATINA was painful from the P and L perspective because we have all the structure in place, we have quality in place, information technology controlling, logistic planning and we are we generated small amount of revenue first half of the year. Differently for the second part of the year, we plan to ramp up significantly Latina and start generating some commercial revenue efficiency. So this is one of the driver of the growth.

Speaker 3

And everything is embedded in our guidance basically to repeat what we have been able to do last year.

Speaker 2

David, if I can complement the answer of Marco, also we are making a lot of attention also under the leadership of Ugo Gai, this year the new Chief Operating Officer, to make a lot of attention in making a lot of improvement in efficiency internally in order to really to try to maximize and bring the full plans in Semonato Group, the full function, it will become extremely efficient. So this is an exercise that we are starting to put a lot of attention. By the way, it will be an ongoing activity also for the next year.

Speaker 10

Got it. Maybe a slight twist on the question. Would you be willing to give us some sense of split. I don't think you did that in the updated guidance. I'm sorry if I missed it, but the sense of split of revenue contribution for the year between BDS and Engineering?

Speaker 3

Yes, we let's say are in line with current consensus with respect to BDS around €930,000,000 that means mid single digit growth in PDS. In Engineering, we mentioned that we expect a decline between 15% to 20% compared to last year. Okay. And then if

Speaker 10

I could ask one last one that's more long term. In thinking about your longer term margin targets and the change, so we've kind of come to understand that high value vials are quite profitable for you. Vials, I think you said vials maybe overall were down 40%. Is the achievement of your longer term targets dependent

Speaker 5

on

Speaker 10

vials recovering the same percentage of your business that they were say a year or 2 years ago?

Speaker 2

David, today once we will scale up our 2 new greenfield plants in particular Latina and Fisher, we are confident that we'll continue to really to match our adjusted EBITDA target that we share in 27% about 30% and to stay in the high value range of high value solution product between 40% to 45%. This is where we are target. Today, we are growing a lot on the syringes nexus. We are growing we have a good pipeline on ALBA technology. We have a lot of mid small program on syringes with bypass.

Speaker 2

And also we have a big program on cartridges, say, to fill with some anchor customer, but we see more and more a trend on the industry that cartridges will turn into a ready to fill. So overall, we are confident that on the number that we share with you.

Speaker 9

Okay.

Speaker 3

But in the nutshell, in the medium term, we see this appear in the Vias destocking. We are taking action to be back on track for the engineering. And compared to the Capital Markets Day, we see reiterate strong demand in syringes, as Franco was saying, the conversion the acceleration of the conversion of cartridges to sterile. So we are offsetting some risk also in Hirsfield Vias, but we are confident to drive the growth in the same direction.

Speaker 10

Thank you.

Operator

The next question is from Larry Solow of CJS Securities. Please go ahead. Great.

Speaker 5

Thank you. A lot of my questions to ask. I guess just to follow-up on David's question on the vial. So it does feel like you've seen some positive signs and maybe you were hopeful for some of those positive signs that were starting to see. But it also feels like you're not maybe as confident or certain that we get a recovery in 'twenty five, maybe some recovery.

Speaker 5

But is it fair to say that maybe you're a little bit less confident or you just don't want to stick your head and neck out and make a guide for 25 yet? But on the same respect though, it doesn't feel like your confidence has diminished at all in the overall potential of vials and that we will get back to levels you thought you would get to, maybe just a little bit further out. Is that kind of fair to sum that up that way?

Speaker 3

So on that, we are confident the viable market is there. It's a necessary format for the industry. For 2025, there's uncertainty about the timing of the inflation point because we are monitoring it, but it's a little bit early to say that January 2 will be at the level of we expect.

Speaker 2

Today, we have a constant dialogue with our customers because we are involved with our customer not only in BioWare, many program, we can move to syringes and cartridge DDS program. So today, we have an intense discussion their supply chain level because also it's one of their main concern to reduce it to normalize the level of stock. So all overall, the trend is positive. We see positive sign in small customer, like I mentioned before, that they're going back to normalize. The bigger customer more when they have complex supply chain, there are multiple sites, this is something that we are more prudent.

Speaker 2

But there are a constant and intimate discussion that we have practically every week with our customer today.

Speaker 5

And you mentioned some stuff on a little update on the cartridge market. Can you just give us any more color? I know manufacturing capabilities capacity had been built out a little bit by some of your customers last year, but we've seen some destocking there too. It's a smaller market, so probably not. But could you just give us anything there, any update there?

Speaker 1

Larry, just to clarify the question, you're asking if we're seeing destocking effects in cartridges?

Speaker 5

Or just any up not destocking, just any update qualitatively in terms of

Speaker 2

We don't we have not signed for a change in demand with our customer. Most we see a strong demand on Nexa syringes and we see an increase in demand of Cartagena's A2 field. For sure, Cartagena's A2 field, we are putting place high speed line that this is something that will generate more big revenue in the later stage because now our engineering individual is in a complex phase to build the technology for internal user. So moment.

Speaker 5

If I can maybe just flip the last question just on cash flow expectations. I think your cash balance was about $75,000,000 currently. Looks like I think so. Can you just give us any thoughts on that in light of your CapEx plans and will you need to raise any more maybe any more financing this year? Any thoughts on that?

Speaker 5

Thank you.

Speaker 3

So as mentioned, we have $78,000,000 of cash on hand. We have availability on credit lines and we have positive free cash flow from operations. So we believe are in the position to finance the growth at least for the next 12 months. And then looking ahead, we are still working on plan for 2025. We are working on the budget to see a detailed plan for CapEx in 2025.

Speaker 3

We still have a balance sheet with a small leverage, so we can leverage the opportunity to further invest in high value products, obviously provided the internal rate of return is higher than our cost of capital.

Speaker 5

Okay, great. Thank you very much.

Operator

The next question is from Jean Leonard of UBS. Please go ahead.

Speaker 11

Thank you. You made a comment that you're seeing an increasing shift to upgrade infrastructure to better align with Annex 1 requirements. Could you elaborate a bit more on that?

Speaker 2

Yes. Practically, Annex 1 is a new recommendation that practically all overall is asking all the pharmaceutical industry to try to put in place some process that avoid any type of risk to put in danger of the sterility of the product. So practically, which is the answer of Stemannato Group on this, our easy fill configuration because we're going to be serving a no glass to glass configuration to our customer is helping really to avoid any type of generation of particle. It can be particle from glass, delamination or some particle that came from during the washing sterilization and heating program. So this is the reason why we think that in the medium term, the adoption of EasyFill via can help Stefano in order to boost our revenue.

Speaker 2

On the top of this, if you're moving to our engineering segment, it's going to require more sophisticated especially online with a particular artificial intelligence that can further detect and improve the process of the pharma company. So all overall, our next one in the medium term, we think that to be favorable for Stellanatto Group.

Speaker 11

Sure. Thank you. And then as a follow-up, you mentioned that some of the CapEx shift from China to Latina was the result of a regional capacity preference change from an anchor customer. Could you discuss that a bit more? Is that due to concerns from that customer about BioSecure or anything specific you could point to?

Speaker 11

Thank you.

Speaker 2

I'm sorry if we don't have the internal detail from the customer. We know that usually our global customer, they want to secure a global footprint that this Aries Dubai most probably have decided to make some modification from one region to another one, but we don't have more element that in our hand.

Speaker 11

Okay. Thanks Franco.

Speaker 2

You're welcome.

Operator

The next question is from Curtis Mollus of BNP Paribas. Please go ahead.

Speaker 12

Hi. Thank you for taking my questions. First one, I just wanted to come back on the gross margin for the engineering segment. I think I heard you say that you took kind of the biggest impact of the higher cost in Q2. Does that mean that in the second half of the year, we should see that gross margin bounce back to a more normalized level or what are you expecting there?

Speaker 3

Expect a sequential improvement for the projects in engineering. We took the 18 second quarter on those big projects. Nevertheless, we expect still some quarters before going back to the normal profitability in engineering. We still have to navigate and complete the project and satisfy our customers. And to do that, we need to put more effort and more people on the field in order to satisfy the customers.

Speaker 2

Today, if I can also give some operational clarification under the leadership of Ugo Gai, the new Chief Operating Officer and not only Ugo or Surafale Apache that most of you, you met in the past event. We are really with our back end, we are building a clear program in order really to review all our footprint, to optimize all our factory even more to prepare the engineering division for the next future growth with our customer. So these are all the action that we have put in place. There is a clear governance, in particular starting from Denmark, and we counted to have the first result in the next few quarters in front of us.

Speaker 12

Okay. That's helpful. Thank you. And then just second question, again, you were talking about earlier how you were postponing the expansion in China and shifting it over to Latina, I think. Does that kind of indicate to us that you're going to come in at the lower end of the full year CapEx range of $300,000,000 to 3 35,000,000 or is nothing really changing there?

Speaker 3

It's not changing the guidance for CapEx. We expect between €300,000,000 to €335,000,000 is not making a big difference in 2024, it's more an impact that we will be consider for 2025 guidance.

Speaker 12

Okay, appreciate it. Thank you.

Speaker 2

If I can say maybe if there is no more questions, some final word. Today, all the organization is squarely focused to face these temporary challenges. But also in the meantime, also we are exciting the company because we are also working for the future. So there is a high concentration, the motivation in the company to deliver, in particular with these new greenfield plants, this amazing program that we have around Cartridges, say to fill. And today, all the organization, no matter if it is in Europe, United States, this is the big goal to deliver the long term agreement business plan that we have with the commitment with our customer.

Speaker 2

This is the only thing that we have tried to do every day.

Operator

The next question is a follow-up from Paul Knight of KeyBanc. Please go ahead.

Speaker 6

Hi, Marco or Franco. On the 3rd party intercompany line item, what's in that? It seems have obviously been huge as well. Is that internal supply of inspection systems for yourself? What is that exactly?

Speaker 3

Mainly, Paul, we have there the glass forming machines that our engineering segment is providing to FISHER and LATINA to expand our capacity.

Operator

That was the last question.

Remove Ads
Powered by Quartr
Earnings Conference Call
Stevanato Group Q2 2024
00:00 / 00:00
Remove Ads