Stevanato Group S.p.A. (NYSE:STVN) Q2 2023 Earnings Call Transcript

Stevanato Group S.p.A. (NYSE:STVN) Q2 2023 Earnings Call Transcript July 28, 2023

Stevanato Group S.p.A. misses on earnings expectations. Reported EPS is $0.13 EPS, expectations were $0.14.

Operator: Good afternoon. This is a Chorus Call conference operator. Welcome and thank you for joining the Stevanato 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 Instructions] At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice President, Investor Relations. Please go ahead, ma’am.

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. 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 SEC. 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 now, I hand the call over to Franco Stevanato for opening remarks.

Franco Stevanato: 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’re 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 solutions. This keeps us on track to achieve our mid-term target for revenue from high-value solutions in the high 30% range in 2026. Our investment 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’re benefiting from growth in biologics, which has a projected compounded annual growth rate of approximately 15% through 2027 and is currently our fastest growing end market. Our differentiated EZ-fill products are ideally suited to meet the mission-critical needs of biologics. And our pipeline of projects is heavily weighted towards this market. Over the last several years, we have laid the foundation to drive sustainable, long-term organic growth, and we believe we are well positioned to capitalize on the many secular tailwinds as we continue to create and drive shareholder value. Thank you. I will now hand the call over to Franco.

Franco Moro: Thank you, Franco. Starting on Page 7. Our second quarter results were highlighted by 9% year-over-year revenue growth, and an adjusted EBITDA margin of 26.7%. During the second quarter, strong demand for our high-value EZ-fill products led to an increasing mix of high-value solutions, which represented approximately 33% of the total revenue. For the second quarter, new order intake totaled EUR 240 million compared to the EUR 252 million last year, excluding COVID-19 related orders, new order intake increased 4%, compared to the same period last year. As of June 30th, our backlog of committed orders totaled approximately EUR 939 million. Both the new order intake and backlog were temporarily inflated during the pandemic 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. 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 three of the full 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 EX-fill, Nexa and Alba products are specifically designed to address even for the most demanding biologics.

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-19, revenue from biologics accounted for 26% of BDS segment revenue compared with 19% in 2022 and 16% for 2021. This increasing revenue from biologics also dovetails 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, GLP1s and biosimilars will continue to drive durable, organic growth. Please turn to Page 9 for an update on our capital projects in the US and Italy, as we advance these facilities 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 Italy. We’ve started our initial performance qualifications for the first EZ-fill lines and we remain on track to begin customer validation activities later in the year. In Latina, Italy, staffing plans are progressing as expected and customer validation activities are well underway, as we prepare for commercial production by the end of the year. As a reminder, our expansion 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, create natural barriers to entry. This, coupled with our deep technical expertise, unique integrated capabilities, and ability to deliver high performance products at scale, positions us to capitalize on strong customer demand and expand our market share in growing end markets, like biologics. Lastly, we recently published our 2022 sustainability report. It highlights our efforts to pursue efficient and innovative solutions, while fostering a culture that values health and safety, 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 EcoVadis, recognizing our efforts in sustainability. Our goal is to continue growing and supporting customers, while making a positive impact everywhere we work and do business. Thank you. I will hand the call over to Marco.

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Marco Dal Lago: Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the second quarter of 2022, unless otherwise specified. Starting on Page 12. For the second quarter of 2023, revenue increased 9% to EUR 255.3 million 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-19 decreased 89% over the prior year and accounted for approximately 1% of revenue in the quarter. Despite this drop-off, we have been successfully backfilling it with revenue from new and expanding customer projects.

Excluding revenue from COVID-19 and the effects of currency, second quarter revenue increased 20%. For the second quarter, gross profit margin was impacted by temporary inefficiencies as the company brings its new 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 by the increase in high-value solutions. The rise in industrial costs unfavorably impacted gross profit margin by 140 basis points. Excluding these startup costs, gross profit margin would have been 32.3% in the second quarter of ‘23, compared with 32.1% for the same period last year. These headwinds are expected to abate as capacity comes online.

We currently expect that they will continue into 2024 when operations commence in Indiana. In the second quarter of 2023, operating profit margin was 17.6%. Excluding startup costs 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 EUR 6 million contract modification tied to COVID-19. Adjusted EBITDA increased 10% to EUR 68.2 million, and adjusted EBITDA margin was up 30 basis points to 26.7%. On the bottom line, for the second quarter of 2023, net profit totaled EUR 34.3 million, and we delivered diluted earnings per share of EUR 0.13. Excluding startup costs, adjusted net profit was EUR 37 million and adjusted diluted earnings per share increased 17% to EUR 0.14 over last year.

Moving to segment results on Page 13. For the second quarter, revenue from the Biopharmaceutical and Diagnostic Solutions segment increased 9% to EUR 204.8 million, compared with the same period last year. Growth on a constant currency basis was also 9%. Revenue from high-value solutions increased 20% to EUR 84.2 million, and revenue from other containment and delivery solutions increased 2% to EUR 120.6 million. As expected, margins in the BDS segment were impacted by the startup of new plants and higher depreciation, which was partially offset by the increase in high-value solutions. This led to a gross profit margin of 31.6% and operating profit margin of 19.8% in the second quarter of 2023. Revenue from the Engineering segment increased 11% to EUR 50.5 million driven mainly by strong sales in visual inspection lines.

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% for the second quarter of 2023. On Page 14. As of June 30, 2023, we had a net debt of EUR 120.4 million, and cash and cash equivalents of EUR 61.2 million. As expected, capital expenditures were EUR 138 million in the second quarter, and we remain on track with the expansion of our capacity in high-value solutions to meet customer demand for ready-to-use drug containment. For the second quarter of 2023, net cash generated from operating activities was EUR 24.4 million, which reflects our current working capital needs to support organic growth in the business.

Cash used for the purchase of property, plant and equipment, and intangible assets was EUR 93.7 million, which resulted in negative free cash flow of EUR 69.1 million. Lastly, on Page 15, guidance. We continue to expect revenue in the range of EUR 1.085 billion to 1.115 billion. Adjusted diluted EPS in the range of EUR 0.58 to EUR 0.62. And lastly, we are slightly increasing adjusted EBITDA guidance. We realized some improvements in utilities which are coming in lower than forecasted. And as a result, we now expect adjusted EBITDA in the range of EUR 291.8 million to EUR 303.8 million. This will not, however, have an impact on reported EBITDA as this effect will be offset by marginally higher non-recurring startup expenses mostly related to training in Latina and Indiana.

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 EUR 13 million to EUR 14 million. And COVID-19, will represent about 1% to 2% of revenue down from our prior estimate of 2% to 3%. Thank you, I will hand the call to Franco for closing comments.

Franco Moro: In closing, 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 a robust demand. Our teams are executing against our strategic and operational priorities as we set the stage to capitalize 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 production 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.

Investing in R&D to maintain and accelerate our market-leading position. And lastly, building a multi-year pipeline of new opportunities by supporting our customers through scientific innovation to meet their evolving needs. Thank you. Operator, let’s open it up for questions.

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Q&A Session

Operator: Excuse me, this is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Patrick Donnelly from Citi. Please go ahead.

Patrick Donnelly: Great. Thank you, guys for taking the questions. Franco, maybe one just on a GLP1 landscape, you know, obviously a big focus for investors. Can you just talk about the competitive landscape, the backdrop certainly seems, you know, right for continuing to show really strong growth there. Just talk about what you’re seeing there, the competitive landscape. You know anything on market share and growth would certainly be helpful as well. But we’d love to chat a little bit about that market.

Franco Moro: Yeah. Thank you, Patrick. I want to start by saying that we are in diabetes care and GLP1s since many, many years, and you know that we have a leadership position in cartridges for pen. And we have a strong value proposition also for syringes for auto-injector and syringes for the GLP1. So, this is our current position that allows us to see good opportunities for us in the future for the same franchise of product. In terms of the competitive landscape, I have to confirm that we have different competitors in different space, because in syringes, we are the second player worldwide. 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 see more and more space for the conversion to the right configuration of cartridges in this specific case that is one other, the important driver we see, because we have the leadership position in this technology.

Patrick Donnelly: Okay, now that’s helpful. And then maybe just an update on China. You know, obviously that’s been a challenge backdrop across all of life sciences, certainly this quarter. You know, I know you guys paused development a bit last quarter. Can you just talking about the backdrop there, any change to the plans, how you’re thinking about that market would be helpful. I appreciate it.

Marco Dal Lago: Yeah, I’ll start. Marcus speaking. From second quarter, 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 the project names. For the future, I will leave to Franco.

Franco Moro: Yeah, I have to reiterate that there is no changes in terms of the long-term strategy for China and Asia Pacific, where we see a very important opportunities was for longer run, because it was one of the fastest growing market. We decided to pause a little investment in China, because we prefer to focus on the CapEx execution in the USA and Italy, where we have a 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 USA and Italy doesn’t mean that we changed our strategy for China.

Patrick Donnelly:

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

Paul Knight: 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 it 50% delivering in 2024? What’s your thought on Fishers?

Franco Moro: Hi, Paul. Yes, we confirmed 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 the opportunities coming from the US market. We expected to start revenue generation along the year most probably in the middle of the year and to ramp up module-by-module, because we are – we will start the first module and then we will spread the rest of the CapEx plan during the next two, five, four years to complete the cycle of the investment in Fisher in ‘27 according to the current plan. But is the modular approach and we will progress with this kind of a modularity.