Stevanato Group S.p.A. (NYSE:STVN) Q4 2023 Earnings Call Transcript March 7, 2024
Stevanato Group S.p.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Lisa Miles: Good morning and thank you for joining us. With me today is Franco Stevanato, Executive Chairman; Frank Moro, CEO; and Marco Dal Lago, CFO. 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 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. Please also take a moment to read our Safe Harbor statement included in the front of today’s presentation.
The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law. Today’s presentation may contain non-GAAP financial information. Management uses this information in its internal analyses of results and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures, please see the company’s most recent earnings press release. And with that, I will now hand the call over to Franco Stevanato for opening remarks.
Franco Stevanato: Thank you, Lisa. 2023 was very positive for us. We closed out another solid year with 10% growth or 11% on a constant currency basis. We continued to successfully execute our near-term objectives of advancing our capacity expansion projects and growing our mix of high-value solutions, while still delivering double-digit growth. At the same time, during 2023, we navigated some macro challenges in a dynamic environment of inflation uncertainty, ongoing supply chain issues and industry-wide curity ongoing supply chain issues and industry white cast fit from favorable secular tailwinds which we expect will continue to drive demand for our high-value solutions. While at the same time, we have been investing heavily in expanding capacity to meet the market demand.
We expect that these investments will drive organic growth in the midterm as we efficiently leverage our invested capital to exploit the opportunities in front of us. The fundamentals of our business remain strong. We operate in high-growth end markets like biologics, where we see a broad range of opportunities. As the global leader in pen cartridges and with an enviable market position in prefillable syringes, we are well positioned to capitalize on the growth in biologics and the trend towards the set administration of medicine. My recent visits with several of our largest customers, game continued optimism that we are on the right path, customers favor our unique value proposition of integrated end-to-end solutions, our global footprint, our one quality standard and our differentiated product set.
We are focusing on driving future growth through solid execution and we believe we have the right strategy, the right product portfolio and the right team to succeed as we work toward creating and driving long-term shareholder value. Thank you. I will now hand the call over to Marco.
Marco Dal Lago: Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to year-over-year changes unless otherwise specified. Starting on Page 7, we delivered double-digit growth in the fourth quarter which was slightly below our expectations and put us at the low end of our 2023 guidance range. However, the differences in fiscal 2023 actual results and our 2023 guidance were mostly due to lower vial volumes as customers work down inventories, they stockpile during the pandemic. The higher inventories are not limited to COV-19-related customers but also customers with non-COVID-19 applications who built up stock to mitigate supply chain uncertainty and manage long lead times at the high of the pandemic. We believe this is a temporary imbalance of supply and demand across the industry.
We are starting to see some early indications of market improvement but our 2024 guidance assumes a lower recovery in vial demand, resulting in a growth rate of 9% to 12% for fiscal 2024. Looking beyond 2024, we are maintaining our midterm targets of low double-digit growth starting in 2025. In 2027, we still anticipate high-value solutions in the range of 40%, 45% and an adjusted EBITDA margin target of approximately 30%. Let’s turn our attention to fourth quarter results on Slide 8 which will be a focus of my comments. Fourth quarter revenue was a little bit below our internal expectations by about €5 million which was evenly split across the segments. Nevertheless, total revenue increased 10% to €320.6 million or 11% on a constant currency basis, driven by growth in the biopharmaceutical and Diagnostic Solutions segment tied to higher volumes and increasing mix of high-value solutions.
Growth was offset by a decline of approximately €33.8 million related to COVID-19. Excluding COVID-19, revenue growth in the fourth quarter would have been 24%. We have been managing their offer revenue related to COVID-19 while at the same time, growing our mix of high-value solutions. In the fourth quarter of 2023, we generated record sales from high-value products which represented 37% of total revenue. As expected, gross profit margin for the fourth quarter of 2023 decreased to 31.8% As a reminder, the fourth quarter of 2022 was an exceptionally strong quarter and included 2 benefits that did not repeat. First, we recognized higher revenue and profit from easy field virals which led to a more favorable mix within high-value solutions.
And second, we instituted some additional price adjustments to recover inflationary costs from prior periods, predominantly in the BDS segment. These 2 effects were the largest contributors to the step down. This was partially offset by the increase in high-value solutions. Gross profit margin was also unfavorably impacted by the currency translation and continues to be tempered by short-term inefficiencies tied to the start-up of new facilities including higher industrial costs, depreciation and naturally lower utilization during the ramp-up phase. For the fourth quarter of 2023, SG&A and R&D expenses were lower compared with the prior year, mainly due to a lower accrual for our performance-based management bonus program. In addition, we have prudent short-term cost management initiatives to counterbalance the temporary headwinds.
Operating profit margin decreased 160 basis points to 20%, mainly due to lower gross profit and the decrease in other income. On the bottom line, for the fourth quarter of 2023, we generated net profit of €45.2 million or $0.17 of diluted earnings per share. adjusted net profit of €47.1 million or adjusted diluted EPS of $0.18 and adjusted EBITDA totaling $86.7 million, reflecting an adjusted EBITDA margin of 27%. Let’s review segment results on Page 9. The biopharmaceutical and Diagnostic Solutions segment delivered strong growth in the quarter despite a steep decline in COVID-19 revenue and industry-wide inventory destocking. For the fourth quarter of 2023, BDS segment revenue grew 12% and 14% on a constant currency basis to €260.6 million, driven by growth in our core drug containment solutions business.
In the fourth quarter of 2023, revenue from high-value solutions grew 37% to €119.4 million, representing 46% of segment revenue. This was offset by a 3% decline in revenue due to other containment and delivery solutions. Gross profit margin decreased to 33.6% in the fourth quarter of 2023, mainly due to lower easy field vials volumes, currency translation and short-term inefficiencies tied to the start-up of new plants. Additionally, lower vial volumes have led to short-term underutilization on some lines. For the fourth quarter of 2023, Engineering segment revenue totaled €60.6 million which was consistent with the same period last year. For the fourth quarter of 2023, gross profit margin for the Engineering segment decreased 10 basis points to 21.1% compared with the same period last year.
We are managing through a large volume of work in progress. Our main priority in 2024 is executing on these projects and shortening our lead times. On Page 10, as of December 31, 2023, we had cash and cash equivalents of €69.6 million and net debt of €324.4 million. Capital expenditures were $94.7 million in the fourth quarter and €453.3 million for the full year which was in line with our expectations. Our investments in expanding capacity in high-value solutions are essential to meet expected market demand. For the fourth quarter of 2023, cash flow from operating activities was €10.2 million which reflects our current working capital needs to support organic growth. Cash used for the purchase of property, plant and equipment and intangible assets was €87.1 million which resulted in negative free cash flow of €76 million.
Over the past few months, we strengthened our balance sheet with 3 new midterm loans totaling €110 million and that drew down approximately €60 million. We believe we have adequate liquidity to fund the needs of the business and we will continue to explore additional financing options to support future growth. Lastly, on Page 11, we are introducing our full year 2024 guidance. We currently expect revenue in the range of €1.180 billion and €1.21 billion, adjusted EBITDA in the range of €314.1 million to €329.5 million and adjusted diluted EPS in the range of $0.62 to $0.66. In 2024, we estimate that CapEx will range between 25% and 28% of total revenue based on the midpoint of our revenue guidance. Our full year 2024 guidance assumes the following: the second half of 2024 will be stronger than the first half.
The 2024 will be stronger than the first half, while engineering will remain flat as we focus on executing on our current work in progress. High-value solutions in the range of 35% to 37% on total revenue. And lastly, we are estimating a currency headwind of approximately €7 million to €9 million. Also, consistent with prior years, we expect a step down in revenue in the first quarter compared with Q4 2023. We currently expect the revenue in the first quarter of 2024 will be flat to slightly down compared with the same period last year. In Q1, this assumes mid-single-digit growth for the BDS segment and the revenue decline in the engineering segment compared with the first quarter of 2023. Overall, as the pandemic continues to wane, we are still operating in a dynamic environment with the ongoing inventory normalization.
Despite this, we believe that 2024 will still be a year of growth and our midterm outlook remains unchanged. Thank you. I will hand the call to Franco.
Franco Moro: Thanks, Marco. For fiscal 2023, we achieved double-digit top line growth and increased our mix of high-value solutions to 34% of total revenue, up from 30% last year. During the year, we made meaningful progress in our capacity expansion and enhanced our integrated value proposition. Nevertheless, we also faced the challenges that we continue to manage. On Slide 14, as previously disclosed, we see a convergence of factors impacting the engineering segment. Over the last 24 months, we benefited from strong demand for engineering machinery but we have been challenged with timely execution mostly due to the long lead times for electronic components and the time needed to shore up the resources to deliver on the upsized demand.
As we discussed last quarter, we believe that we are on the right path to better balance resources with demand but it will take some time. We believe the most attractive path is to prioritize execution and bring these projects to completion. This may negatively impact segment growth in the short term but we believe this action will better position the business for long-term success. Turning to the BDS segment on Slide 15. Despite the headwinds from destocking, the underlying demand for biologics continues to rise. In our BDS segment, revenue from Biologics, excluding COVID-19, represented approximately 28% of the segment revenue, up from 19% last year. We believe the slower recovery in vial demand is temporary. We currently expect that the path to normalization will continue throughout 2024.
And we are cautiously optimistic that order flow will begin to pick up in the second half of the year. Longer term, we see many opportunities in the adoption of our ready-to-use buyers and cartridges. Today, less than 5% of the vial and cartridge market has converted to a ready-to-use format — compared with 95% of the syringe market. Customers increasingly see the advantages of leveraging our ready-to-use configurations to reduce supply chain risk, enhance quality and expand flexibility. In fact, based on market data, the number of fill and finish lines capable of processing sterilized buyers and cartridges is estimated to have increased 32% in 2023. We also believe that changing regulatory landscape will galvanize adoption over the next decade.
The diversity in our product portfolio is helping us navigate the lingering impacts from COVID-19. So why short-term higher demand has been lagging, demand for other glass products, particularly syringes, continues to be robust. In fact, in 2023, biologics drove a record year in sales of high-value syringes such as Nexa. Turning now to backlog and new order intake on Page 16. New order intake increased 44% to approximately €342 million in the fourth quarter. And as a result, we exited the year with backlog of approximately €945 million, heavily weighted towards biologics because we often experience quarterly fluctuation in backlog and order intake, we believe that annual analysis of these metrics provides a more accurate view of demand trends.
So beginning in fiscal 2024, we will provide backlog and order intake on an annual basis rather than quarterly. On Page 17; our capital projects are multiyear investments that have a multiyear volume and revenue ramps. In Latina, we launched commercial syringe production in the fourth quarter and we expect a steady ramp over the coming years. In addition, we will be installing a ready-to-use catheter lines as part of a long-term project to support a customer transition from back to stabilized cartridges. And these lines are expected to supply commercial volume beginning in 2026. In Fishers, customer validation activities will continue into 2026 as planned. We remain on track to begin commercial production later this year but do not anticipate a meaningful revenue contribution until 2025 when we’ll begin ramping up production for GLP-1s and other biologics.
The Fisher facility is currently expected to hit full productivity by the end of 2028. On Slide 18, we continue to refine our integrated offerings to enhance our value proposition. Our technology excellence centers in Boston and Italy serve as the front line in supporting early-stage drug development. We recently launched non-GMP Fill-and-finish services for small batch operations. These services allow customers to identify any possible interaction between the drug and the container system during and after the fill-and-finish process. Our centers foster early customer engagement which helps us gain a strategic foothold supporting them throughout the entire drug life cycle. In closing, on Slide 19, our number one priority in 2024 is flawless execution of our operational priorities.
As we consider 2025 and beyond, we remain bullish on our medium-term targets. We still expect to achieve low double-digit revenue growth in 2025 through 2027. And in 2027, high-value solutions in the range of 40% to 45% and an adjusted EBITDA margin of approximately 30%. Our confidence is underpinned by what we are seeing around us, including strong secular tailwinds, continued growth in biologics and an increasingly strong competitive mode, we believe we are well positioned to fully capitalize on our investments to drive durable organic growth, expand margins and deliver long-term shareholder value. Operator, let’s open it up for questions.
Lisa Miles: Operator, before we jump into questions, I have one clarification regarding this morning’s press release. I would like to correct an error as it relates to backlog for fiscal 2022. It should be $957 million, not $944 million as stated in this morning’s press release; we apologize. Okay, we are ready to open up. Thank you.
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Q&A Session
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Operator: [Operator Instructions] The first question is from Patrick Donnelly with Citi.
Patrick Donnelly: Maybe a couple on stocking to start. Just can you talk about the concentration you’re seeing in terms of products and customers? Is it pretty broad-based? Or is it more concentrated with a few of the higher end customers? And then just the visibility that you have into when this is going to end and kind of the recovery path there.
Franco Moro: Yes. Thank you. It’s a very good point and taking part of the statement in Marco’s commentary, impact of this situation is not only about the main player that had good shares of the market in COVID but by consequence and due to the risk on the supply chain, many others built you just talk here be it — you just talk your question, we see as a general situation with some high points but it’s not highly concentrated in a few players. In terms of the visibility, as we stated, is now not easy to state which will be the inflection point but we are receiving information interaction with customers that support our idea to have some improvement in the second half of this year and with the situation going to normal in the next period.
Patrick Donnelly: That’s helpful. And then maybe just on the margin outlook. This year obviously weighed down a little bit, ’24 weighed down a little bit seemingly by some of the stocking piece. Can you just talk about the moving pieces this year, what the headwinds look like? Because again, you reiterated the midterm targets. Obviously, the out-year expansion should be pretty strong. So is it — there’s a nice inflection in margins when the destocking piece eases and there’s an inflection higher. Can you just talk about the headwinds there and then maybe break out the moving pieces on margins this year?
Marco Dal Lago: Okay. Yes. Thank you. For 2024, we see adjusted EBITDA margin at the same level of this year at our center point about gross profit margin, we can see overall a slight reduction compared to 2023 with — we expect to slightly improve the profitability in Engineering segment. And on the other side, we see a slight decline in BDS segment, mainly due to underutilization on the bias line or some lines in bios. And basically, our ramp-up cost in the 2 new facilities that we are still ramping up in 2024.
Operator: The next question is from Jacob Johnson with Stephens.
Jacob Johnson: Maybe just first on the Engineering segment. You mentioned outsized demand there but you’re pointing to a flattish year. Certainly understand kind of the supply chain challenges in that segment. But I guess I’m curious kind of on the demand environment there, how do your expectations for that engineering segment and the demand you’re seeing today compared to maybe your Investor Day last year or whatever point you want to point to? Just we’ve seen a number of fill-finish capacity announcements recently. So I’m just curious if that’s improved even further more recently.
Franco Moro: Yes. Thanks for the question. The slight answer is that we see demand in line with the expectation we delivered at our Capital Markets Day. In the meet the single-digit growth as abroad. Obviously, we are talking about a business that’s based on projects. So we are used to see some fluctuation in quarters and years. But I want also to drive your attention to the fact that comparing the 2 last year ’23 to ’22, we enjoyed a very healthy growth of the segment in the range of 26%. So the partially changing in the growth rate for the next year is part of a journey that is really positive and the success of our solution in the market to serve our main attention in serving the customer at the best.
Jacob Johnson: Got it. And then I guess just my follow-up. One of your competitors on their call a couple of weeks ago mentioned the opportunity from this NX-1 regulation in Europe. I think in your deck, you mentioned kind of an increased shift to ready-to-use vials and cartridges due to regulatory landscape. So I guess I’m kind of curious your view on NX1 and what that could mean for Stevanato.
Franco Moro: It’s a very, very good point because if we refer to our innovation, our products, one of our main innovation in the easy fill in the sterile market for cartridges [ph] and Videra’s linked to our new technology [indiscernible]; that is addressing the risk of a particle contamination in filling lines because we reduced a lot the possible impact with our new secondary packaging, innovative and secondary packaging that is possible applicable also to the syringe market. So the increasing expectation term of quality are one of the main barrier to entry for our market and the fact that we are playing on innovation inside this market is one of the reasons we are confident in the future while new products.
Operator: The next question is from Matt Larew of William Blair.
Matt Larew: I just wanted to ask on destocking again. So with the first quarter guided flat to down year-over-year to reach the full year guidance even if it’s back half loaded, it does require a step right back up in the second quarter, I would think. Others in this space, as you alluded to, has sort of talked about stocking ending by the midpoint of the year as well. So just curious what level of visibility do you have to that rebound after the first quarter? And is the guidance supported by actual orders that are in schedule for production or more based on customer conversations around when inventory might get worked down?
Franco Moro: Yes, for sure, it’s a mix. I start giving you an angle on the market. And referring to bias that is only a portion of our business. Yes, we see some forecast improving for the next quarters but not immediately. And as I said before, we expect to have more in — after the year-end. In terms of the visibility, I have also to stress that our visibility is also linked to the needs for other product lines and linked to this expectation from customers, we are also relying on the ramping up of the new facility, specifically Latina in 2024. That will be more and more during the year, obviously.
