Stevanato Group S.p.A. (NYSE:STVN) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Stevanato Group’s First Quarter 2023 Financial Results Conference Call. As a reminder all participants are in listen-only mode. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice President, Investor Relations. Please go ahead, madam.

Lisa Miles: Good morning, and thank you for joining us. With me today is Franco Stevanato, Executive Chairman; Franco Moro, Chief Executive Officer; and Marco Dal 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 are 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. 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 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. For a reconciliation of the non-GAAP measures, please see the company’s most recent earnings press release. And with that, I’ll hand the call over to Franco Stevanato for opening remarks.

Franco Stevanato: Thank you, Lisa, and thanks for joining us today. Our solid first quarter results confirm the positive momentum exiting 2022. They illustrate the strength in 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 drive continuous advancements has led to highly differentiated product portfolio. 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 are built 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 GLP1s, monoclonal antibodies, mRNA applications and biosimilars over the next several years. Our presence in GLP1s dates back to 2010. We believe that we are well positioned to further support customers in the coming ways of new indication for GLP1s. 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.

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

Franco Moro: Thank you, Franco. Starting on Slide seven. We are off to a good start with the first quarter results, highlighted by 12% revenue growth and an adjusted EBITDA margin of 26%. Strong demand for our EZ-fill products has driven the shift in revenue towards more accretive high-value solutions which represented approximately 32% of revenue in the first quarter. For the first quarter, new order intake decreased to approximately €236 million compared to last year. This was due to the expected drop in COVID-19 orders and the normalization of customer ordering patterns as global supply chain stabilize. At the end of the first quarter, our backlog of committed orders totaled approximately €955 million. Turning to Page eight.

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 are ready to use EZ-fill cartridges in our assembly lines, while Thermo Fisher will provide fill and finish and final assembly services. The collaboration offers pharma customers have proven end-to-end supply chain to support clients from drug development to commercialization. We also signed an agreement to develop and manufacture Alba pre-fillable syringes for Recipharm’s soft mist inhaler. The combination of our Alba syringes and Recipharm’s innovative technology delivers sensitive biologics more efficiently and provides enhanced stability and safety.

Our Alba 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 GLP1s and biosimilars will drive durable organic growth over the long term. While GLP1s has been an established treatment for diabetes for many years, they are demonstrating remarkable results in weight management. This is driving significant demand for obesity treatment. Diabetes and obesity affect a significant portion of the world’s population and the 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 2035, if current trends prevail. Moving to Page 10. Today, the majority of injectable treatments for these diseases use either a pen device or auto-injector for self-administration. In the case of a pen 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. Our established role in the diabetes market helped anchor our position as one of the primary suppliers in the GLP1 market for obesity treatment.

In fact, we are present in both commercialized GLP1 products and new programs under development, including biosimilars. The range of products we supply today includes bulk cartridges, EZ-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 the GLP1s will continue to contribute to growth in the coming years. Most importantly, our opportunity set is not limited to any single class of treatment. As Franco mentioned, we see broad opportunities across biologics which is driving demand for high-value solutions. On Page 11, a brief update on our capital projects. In both the U.S. and Italy, progress is advancing largely as expected. 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 actually bringing on staff and validation activities are still expected to begin in the fourth quarter. In Latina, Italy, validation is still expected to begin this summer followed by commercial production in the fourth quarter. In summary, on Page 12, we are making substantial progress. First, we are shifting our revenue mix towards high-value solutions. Second, we continue to build strategic collaborations to leverage our strengths and meet customer demand. Third, we believe we are well positioned to capitalize on favorable industry trends such as the expected increase in GLP1s. And finally, we remain on track with our capacity expansion in the U.S. and Europe as we aim to build durable organic growth.

With that, I now hand the call over to Marco.

Marco Dal Lago: Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the first quarter of 2022, unless otherwise specified. Starting on Page 14. For the first quarter of 2023, revenue increased 12% to €238 million 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% to €76.7 million in the first quarter of 2023 and represented 32% of revenue. As expected, revenue from COVID-19 decreased 57% over the prior year and accounted for 4% of revenue in the quarter. For the first quarter 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&A expenses to support growth initiatives. Excluding start-up costs on the new plants, adjusted operating profit margin was 18.3% in the first quarter and consistent with the same period last year. For the first quarter of 2023, net profit totaled €28.3 million, and we delivered diluted earnings per share of €0.11. This included an unfavorable impact to diluted EPS of approximately €0.01 recorded in finance expense 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 €30.4 million and adjusted diluted EPS of €0.11. Adjusted EBITDA increased 15% to €61.9 million, and adjusted EBITDA margin was up 50 basis points to 26%. Moving to segment results on Page 15. For the first quarter, revenue from the Biopharmaceutics and Diagnostic Solutions segment increased 13% or 12% on a constant currency basis to €195.5 million over the same period last year. Revenue from high-value solutions increased 25% to €76.7 million and revenue from other containment and delivery solutions increased 7% to €118.8 million. Gross profit margin increased 80 basis points to 33.7% in the first quarter of 2023, mainly driven by the growing mix of more accretive high-value solutions.

For the first quarter of 2023, operating profit margin for the BDS segment decreased to 19.8% mainly due to higher SG&A cost to support growth initiatives. For the first quarter of 2023, revenue from the Engineering segment increased 7% to €42.4 million driven by strong sales in visual inspection and assembly and packaging lines. For the first quarter of 2023, gross profit margin for the Engineering segment increased 30 basis points to 21.7%, driven by higher margins in all product families and ongoing business optimization effort. Improvement in gross profit margin and higher absorption of SG&A costs led to operating profit margin of 15.2% in the first quarter 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 €46.5 million and cash and cash equivalents of €158.8 million.

For the first quarter of 2023, net cash generated from operating activities was €37.1 million. That reflects our current working capital needs to support the growth in the business. As expected, capital expenditures for the first quarter of 2023 were €113.2 million as we expand our industrial footprint amid rising customer demand. This was the main reason for negative free cash flow of €91 million in the first quarter. We believe that our cash on hand, coupled with our loan agreements provides us with adequate liquidity to fund 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 billion to €1.115 billion. Adjusted diluted EPS in the range of €0.58 to € 0.62 and adjusted EBITDA in the range of €290.5 million to €302.5 million.

Our 2023 guidance assumes that for the second quarter of 2023, revenue is expected to grow in the range of mid-single digits to high-single digits compared with the same period last year. Revenue will be stronger in the second half of 2023 compared with the first half of the year. High Value Solutions will represent approximately 32% to 34% of revenue. COVID-19 will represent approximately 2% to 3% of revenue. And lastly, we are estimating a currency headwind of approximately €13 million to €14 million. Thank you. I hand the call to Franco for closing comments.

Franco Moro: 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 format and move up the product value chain. Invest in R&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 first Capital Markets Day on September 27 in New York City. So stay tuned for updates over the next few months. And with that, let’s open it up for questions.

Q&A Session

Operator: [Operator Instructions] The first question comes from Derik De Bruin of Bank of America.

Operator: The next question is from Paul Knight of KeyBanc Capital Markets.

Operator: Next question is from Patrick Donnelly from Citi.

Operator: The next question is from Tim Daley of Wells Fargo.

Operator: The next question is from Dave Windley of Jefferies.

Operator: Next question is from John Sourbeer of UBS.

Operator: This ends the Q&A session. Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.