Stevanato Group S.p.A. (NYSE:STVN) Q1 2024 Earnings Call Transcript

Stevanato Group S.p.A. (NYSE:STVN) Q1 2024 Earnings Call Transcript May 11, 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 thanks for joining us. With me today is Franco Stevanato, Executive Chairman; Franco 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 Securities and Exchange Commission on March 7, 2024. Please take a moment to read our Safe Harbor statements included in the front of the presentation and also 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 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 to Franco Stevanato for opening remarks.

Franco Stevanato: Thank you, Lisa, and thanks for joining us. Today, we will review our first quarter performance, address our guidance change, and provide an update on our markets and the dynamics we are seeing today. While first quarter results did not meet our expectations, the fundamentals of our business have not changed, and the demand landscape remains robust. We are tackling two challenges today, and our number one priority is execution. First, the impact from the industry-wide temporary destocking was more pronounced than previously expected, especially in the more accretive EZ-fill vials. Customers are still working down excess inventories that were stockpiled during the pandemic. This has resulted in a temporary softening in demand for both bulk and ready-to-use vials.

But, we believe once the market rebounds that vials will return to normalized market growth rates. Second, in the Engineering business, we enjoyed a period of record orders in the second half of 2022. This large volume of work and long lead times for components put stress on our organization last year. But, while external factors played a role, our execution simply could have been better. We’ve taken many actions over the last year. And we believe these steps will help us achieve a more optimized operational structure to maximize efficiencies to secure the success of projects going forward. I would like to take a moment to address our updated guidance. The temporary destocking is the main factor in our guidance change. Our updated guidance also assumes a recent postponement of expected orders for high-value solutions for a large customer that were forecasted to be shipped in 2024.

This was due to a change in the customer’s commercialization timeframes. But nevertheless, we have removed the forecasted orders from our guidance. Despite these factors, we remain confident about our long-term prospects, and we remain on the right path to achieve our near-term targets in 2027. Our unique value proposition of integrated offerings ideally positions Stevanato Group to capitalize on favorable secular tailwinds such as aging populations with more complex health conditions; pharma innovation, particularly in sensitive biologics; and the trend towards the self-administration of medicines. We operate in growing end markets, and we are well positioned in the fastest growing biologics segment. We believe we have a leading presence in GLP1s, underpinned by long-term commercial contracts.

And we see many opportunities primarily in biologics over the next several years. Above all, our global footprint, differentiated product portfolio and integrated end-to-end solutions offer customers a unique value proposition. This provides us with sustainable competitive advantages. 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 the first quarter of 2023, unless otherwise specified. Starting on Page 7, for the first quarter of 2024, revenue decreased 1%, and 40 basis points on a constant currency basis, €236 million. The Biopharmaceutical and Diagnostic Solutions Segment grew 2%, which partially offset the expected decline in the Engineering Segment. The revenue decrease in the first quarter was mainly driven by lower revenue related to glass vials in the BDS Segment due to the industry-wide destocking, which we believe is transitory. Our product diversity helped expand our mix of high-value solutions, which represented 37% of total revenue in the first quarter.

However, the product mix within high-value solutions was less accretive compared with the same period last year, mainly due to lower volumes from EZ-fill vials. For the first quarter of 2024, the lower revenue from EZ-fill vials was the largest factor in the gross profit margin decrease to 26.4%. In addition, the underutilization on vial lines, lower gross profit from the Engineering Segment, temporary inefficiencies in our new manufacturing plants and higher depreciation also impacted gross profit margin, but to a much lesser extent. Lastly, the prior-year period also benefitted from government grants that helped offset the spike in utility costs that did not repeat in the first quarter of 2024. This led to an operating profit margin of 10.7%.

And on an adjusted basis, operating profit margin was 12.3%. For the first quarter of 2024, net profit totaled €18.8 million, and diluted earnings per share were €0.07. On an adjusted basis, net profit was €21.5 million, and adjusted diluted earnings per share were €0.08. Adjusted EBITDA was €50.6 million, and adjusted EBITDA margin was 21.4%. Moving to segment results on Page 8, for the first quarter of 2024, revenue from the BDS Segment increased 2% to €198.9 million. Segment growth was impeded by the industry-wide vial destocking. And in the first quarter of 2024, revenue from vials decreased 43%. This was offset by strong growth in syringes and other product categories. High-value solutions grew 15% to €88 million in the first quarter, while revenue from other containment and delivery solutions decreased 7% to €111 million.

For the first quarter of 2024, the change in product mix due to the lower revenue from EZ-fill vials had the most profound impact on gross profit margin of 27.1%. Gross profit margin was also tempered by the underutilization of vial lines and associated labor costs, the temporary inefficiencies from start-up, higher depreciation, and government grants that did not repeat in 2024. As a result, operating profit margin for the BDS Segment decreased to 14.1%. For the first quarter of 2024, revenue from the Engineering Segment decreased 13% to €37.1 million due to lower sales from pharmaceutical visual inspection and assembly and packaging lines. As previously discussed, our main priority in 2024 is executing the large volume of work in progress and shortening our lead times.

We have hired additional labor resources to support these efforts, along with other important long-term projects in the pipeline. In the first quarter of 2024, gross profit margin from the Engineering Segment decreased to 17.3% due to lower marginality from certain projects in process. This led to an operating profit margin of 6.7% in the quarter. Please turn to the next slide for a review of balance sheet and cash flow items. In March, we closed our follow-on offering and raised net proceeds of €170.5 million. The proceeds will be used for our capital investment projects, working capital needs and general corporate purposes to ensure an appropriate level of operating and strategic flexibility. With the cash infusion from the offering, we ended the quarter with cash and cash equivalents of €186.3 million and net debt of €186.9 million.

We believe our cash on hand gives us adequate liquidity to fund our strategic priorities. As expected, capital expenditures for the first quarter of 2024 totaled €71.9 million, with approximately 88% tied to grow investment to advance our ongoing capacity expansion for high-value solutions. We continue to carefully manage trade working capital to support the growth of our business. In the first quarter, we benefited from strong collections of receivables, which drove cash generation. But as expected, our inventory levels increased in the first quarter, mainly due to the establishment of baseline inventories in our new plants, which includes products that are expected to be delivered to customers in the future quarters. In the first quarter of 2024, net cash from operating activities totaled €71.6 million.

Cash used in the purchase of property, plant and equipment, and intangible assets was €102.7 million. This drove negative free cash flow of €30.6 million in the first quarter. Lastly, we are updating our full year 2024 guidance on Page 10. As Franco mentioned, the combination of temporary soft vial demand and the postponement of a large customer order are the main reasons for taking a more cautious approach to our 2024 guidance. Our guidance now assumes a more gradual recovery in vials. We currently expect that vial orders will increase at the end of 2024 and into early 2025, with bulk vials expected to recover first. While our recent public offering had limited impact on dilution in the first quarter, our updated guidance includes the increase in weighted average shares outstanding.

For fiscal 2024, we now expect revenue in the range of €1,125 million to €1,155 million; adjusted EBITDA in the range of €277.9 million to €292.2 million; and adjusted diluted EPS in the range of €0.51 to €0.55. Thank you. I will hand the call to Franco Moro.

Franco Moro: Thank you, Marco. Starting on Slide 12, over the last several weeks, we have spent a lot of time with our customers as they continue to manage excess vial inventories. As Marco noted, we now anticipate a slower recovery in vials, particularly EZ-fill vials, which will unfavorably impact our mix of high-value solutions in 2024. It’s important to remember that the ready-to-use vials are currently a small portion of the market, and the vast majority of vials are in bulk configurations. We are the market leader in ready-to-use vials, and the temporary imbalance of supply and demand is having a pronounced impact for us, given our significant position in the market, coupled with the low volumes in the market today. In the near-term, we are carefully managing costs, and we have taken many actions on the labor side, including redeploying vial production staff, and improving efficiencies on maintenance activities, while some vial lines are idle.

At the same time, we expect to retain most of the staff who work on our vial production lines, despite the temporary underutilization. We believe this approach best positions us to be prepared for the recovery, especially considering the time it takes to recruit, hire and train new staff to achieve full productivity. We believe it’s the right thing to do for our business, and we do not want to take short-term actions that might compromise our future growth. Turning to the Engineering Segment, the actions that we initiated last year are just starting to yield operational improvements in the business. The combination of additional resources, ongoing optimization of our industrial footprint and streamlining internal processes are helping to improve the overall health of the business.

These actions are ongoing, but improvements will take time. We expect that in the long run, they will drive operational efficiencies and shorten lead times, which in turn, will benefit the segment’s margins. Longer term, we believe the demand landscape in Engineering remains favorable. For example, the self-administration of medicine is a growing trend, especially given the popularity of GLP1s, as patients become more comfortable with drug delivery devices like pen injectors and autoinjectors. This trend is generating customer demand for our assembly and packaging lines, and we are supporting many customers as they rapidly expand their device programs. Let’s turn to Page 13 for a brief update of our expansion projects. In Fishers, we remain on track to begin commercial production in the second half of 2024.

Customer-related validation activities are in full swing and will continue into 2026, as planned. In the meantime, we expect to deliver and install several more manufacturing lines in the coming months. Following the completion of our performance qualifications, customer validations will begin on these new lines. In addition, we are set to begin the build-out of our contract manufacturing capabilities in Fishers related to a drug delivery platform for multiple biologic indications for a large customer. Commercial activities related to this new CMO work are expected to begin in 2026. In Latina, ramp-up activities are ongoing as we continue installing and validating new lines into 2026. Commercial production launched last year, and revenue is expected to grow over the next several years.

I’ll hand the call back to Franco Stevanato for closing remarks.

Franco Stevanato: Thank you, Franco. In closing, Stevanato Group has cemented its leadership position as a mission-critical partner in the pharmaceutical supply chain. We have experienced significant growth, and we have been building the organization to support our long-term objectives. Our number one priority in 2024 is execution. We are laser focused on ramping up our new capacity to meet rising customer demand for high-value solutions such as our Nexa syringes and EZ-fill cartridges. We are also strengthening our processes and driving efficiencies across our global operations to best manage our future growth. These are exciting times. We offer a unique value proposition of integrated solutions and differentiated products that resonate with customers.

We operate in attractive end markets with long secular tailwinds. These factors favorably position us to drive durable organic growth, expand margins and deliver long-term shareholder value. Operator, let’s open it up for questions.

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