Q3 2021 Stevanato Group SpA Earnings Call

Hello, everyone and a warm welcome to the Stefan Nazi third quarter earnings call. My name is Tonight, and I'll be coordinating your call today.

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With that I have the pleasure attending over to head of Investor Relations at seven Nazi Lisa miles. Please go ahead Lisa.

Good morning, and thank you for joining US with me today is focused Devin hurdle executive Chairman Franco Mora, Chief Executive Officer, and Chief operating Officer and me.

Go to the Argos Chief Financial Officer.

I'd like to remind everyone that a number of statements being made today will be forward looking in nature.

Remember that such statements are only predictions.

Actual events and results may differ materially as a result of risks we face, including those discussed in our registration statement on form S. One which was filed with the SEC on July 16th 2021 we.

We encourage you to review the information contained in our earnings release today in conjunction with our associated SEC filings and F. One 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 presented in this document please see the company's most recent quarterly earnings press release, and with that I'll hand, the call over to Frank as Devin auto for opening remarks.

Thank you Lisa we are pleased with another successful quarter, our strong financial result that reinforces the solid fundamental of our business the long term demand and our leading position and growing market.

What do you mean focus on delivering an integrated end to end product portfolio supported by a Washington D. If he cannot lead to kind of process in saturday's.

All of which are designed to meet the rising need they'll work off from them across the entire life cycle from preclinical through commercialization, we continue to make brokers to water.

Growing our industrial footprint to meet the demand for our high value solution as a costume and move up the value chain investing the research and development to maintain and accelerate our market leading position to increase the pipeline and all the appropriate talent solutions like Alba next up in our drug delivery system.

Ponting geographically U S and China and building them. Once you have a pipeline of opportunities heavily weighted in the growing biologic market.

We are investing in the business to deliver sustainable organic growth that we believe it will drive increased shareholder value.

Before I hand, the call over to Frank who I want to thank you all all what employees for the extraordinary.

Over the last 18 months.

Their remarkable work during a global pandemic help ensure business continuity support our customers and grow our business. So in the third quarter, we awarded a $6 7 million euro discretionary bonus to our employees is that thank you.

Thanks, Michael.

Our third quarter featured the over delivery on the top line, thanks to strong space for both segments and better than expected results from the engineering segment.

These give us confidence to raise our full year revenue guidance for 2021, and the bottom end of the ranges for adjusted diluted EPS and adjusted EBITDA.

For the third quarter, we had the strong order intake of 310 million euros and the backlog of committed orders totaling 834 million euros.

We believe that the strength of our resolve and robust backlog are indicative of favorable customer demand and the growing markets in which we operate.

The positive momentum new order intake and backlog and set the stage for fiscal 2022 and beyond.

An important pillar to our long term strategic plan is those bonding to rising demand for our high value solutions in.

In the third quarter high value solution represented approximately 23% of total company revenue.

B is the on high visibility with our backlog, we expect an increase the revenue from high value solutions in the fourth quarter.

The trajectory for how high value solution is unchanged from the 2021 forecast. We've previously provided we still expect that they will contribute approximately $205 million you rose to 210 million euros for the food here 2021.

Let's turn our attention to strategic investments in capacity building the especial our footprint in the United States marks an important step in boosting our presence in one of the fastest growing markets. We broke ground in Indiana, and we are recruiting hiring and training for key managerial position.

We expect the contraction we lost approximately 18 months, followed by stocked up and validation in 2023 with a revenue generation with sometime between late 2023 in early 2024.

The plant is designed to expand production for how long is it feel pressed to revise vials and syringes. This meets the stringent quality and performance of requirements needed for biologics and high value treatment.

These products offer significant benefits to customers by reducing time to market lowering risk and most importantly, reducing the overall total cost of ownership.

Indiana Harbor strengthen our presence in this important region, where we expect to support customers from design and development through commercialization.

The new facility will also house, our North American generic after sale support services.

This adds to our existing manufacturing facility in California, and our Boston base Technology Center that provides vital scientific analytical support to customers.

At the same time, we are expanding our production facilities in Italy. Thanks to our current path for that starting in 2016, we haven't been able to meet increased demand and drive double digit revenue growth.

We recently or perhaps you're on a liza two new lines tied to high value solutions in our <unk> facility. The first is dedicated to easily fill syringes and the second to premium is it feel bias.

As we approach 2022, we are striving to maximize production of our high value product through continuing our expansion and optimization of our industrial footprint.

Construction is well underway O&M, you'll be using in Italy, where we are heading a new glass forming lines to boost the easy field capacity. This includes the planned addition of two new lines devoted to EDC as soon and one dedicated line for premium wildlife syringes.

These efforts aim to meet the increasingly on demand for premium products.

We expect that these will have a significant boost production out with the enbridge capacity demands why the U S and China project.

Wait.

Our ongoing investment we like Pos benefit from sector of the mine plants as customer, bringing new treatments to market that are required product, which are further up the value chain.

Our integrated end to end solution capsule that we the our high growth high value solutions are important elements to creating and driving shareholder value.

During the last couple of months there hasn't been much discussion of constraints on global supply chains to date, we have not experienced significant supply chain issues, but we have taken precautionary steps to increase the amount of a roadmap paydowns on land and in some cases, we are keeping more inventory available in the show.

Tam logistical costs have created some temporary pressure on our cost structure, which has been partially offset by a recent operational efficiencies.

Dealing with the rising input costs that is a near term challenge that we are managing carefully white conquer with gas from a negotiated individually in general our longtime carved out to include the cost escalation clauses that allow us to pass on certain cost increases.

This is down a regularly and we adjust our pricing accordingly.

Reality is that no one is immune to these pressures and this creates an environment where price increases are largely impacted by our customers.

We are actively monitoring the situation and we will continue to manage our operation diligently in this dynamic environment.

While the pandemic continues to dominate headlines COVID-19 there remains a day and we ended to our business. We are currently working with customers as they can see the future transition to single dose vaccine formats, we can't support the amey model of distributional, whereas EPS, a single dose vial or ceilings in fact today.

We are already supplying single dose syringes for Covid vaccines. In addition to a range of multi dose buyers around the world Risa.

Recent use of appear to treat Covid first onset of symptoms is a welcome development, we know that prevention and cure the all mark So if it goes the health care system and keeping people healthy.

We believe that Covid vaccine and the oral treatment will play complementary roles in managing the pandemic.

Our relationship, but we'd be comparable to that our flu vaccine and tamiflu.

Key takeaway. According to most experts is that the appeal is expected to supplement not replace the comment Colgate vaccination of airport.

Even without the contribution from Covid, we achieved robust double digit growth in the third quarter, we believe that our existing food toward coupled with our successful track record in supporting by senior rollout keypads are squarely positioned to remain a top player in the overall vaccine market.

In summary, our third quarter was highlighted by strong sales and solid order intake and robust backlog and continued progress of our investment innovation and capacity expansion plans.

We operate in growing markets and we continue to meet the demand expectations of our clients with another good quarter. All the financial operating results are behind US. We are pleased that we did trajectory of our business and the foundation for the future.

We learned that the call over to Marco to discuss our third quarter results in more detail.

Thanks Franco.

We are pleased with delivering solid third quarter results.

Using our revenue guidance for the year.

For the third quarter revenue increased 37% to $214 5 million driven by strong growth in both segments.

As a leading player in vaccine we are proud to support the fight against Covid.

As expected approximately 16% of consolidated revenue in the third quarter was link to these ongoing paid window.

The solid fundamentals of our business and the robust demand for our core products helped us deliver 25% year over year growth excluding call either.

For the third quarter revenue from high value solution grew 29% on absolute basis and represented approximately 23% of consolidated revenue.

This was lower by one percentage point compared to the prior year period due in part to total company revenue increasing more rapidly than anticipated.

As Frank noted, we currently expect revenue to increase from my value solution and then improved mix.

While we may experience normal quarterly fluctuation in mix, we still believe that our long term growth trajectory of double digit organic growth the shift to a value solution and expanding EBITDA margin remains the same.

Total company gross profit increased 34% to $63 3 million ore. Despite I guess saves from engineering segment, which has a lower margin.

As a result gross profit margin was 29, 5% employee recognition rewards is an important part of the store and I took culture and we awarded a $6 7 million euro discretionary out of cycle bonus to our employees for their extraordinary fourth employee.

Critical Nisha reward is an important part of the store and I took culture and we awarded a $6 7 million euro discretionary out of cycle bonus to our employees for their extraordinary effort.

The bond, which was already included in our full year guidance that we provided last quarter.

This was the primary reason for lower operating profit margin diluted earning per share and EBITDA margin in the quarter.

This resulted in a net profit of $18 6 million reorder or seven cents diluted earning per share on a GAAP basis.

As noted in a reconciliation table of this mornings press release and adjusting for certain items in the third quarter.

Adjusted operating profit margin was 17%.

Adjusted net profit totaled $26 4 million euro or.

Or a time sense adjusted diluted earnings per share.

And adjusted EBITDA margin was 24%.

Moving onto segments, the resolve starting from biopharmaceutical and diagnostic solutions segment.

Third quarter revenue increased 31% to $172 8 million reorder compared to the prior year.

Revenue growth was driven by a 29% increase in high value solutions and the 32% increase in AR that contain remember the very solution over the same period last year.

Third quarter gross profit margin of 31, 2% was lower compared to prior year, mostly due to product mix.

This segment is expected to benefit from an increased contribution in a value solutions in the fourth quarter operating profit margin of 18, 1% in the third quarter was tempered by mix and the discretionary bonus for the third quarter adjusted operating profit margin for.

The Bts Sag went to was 21, 3% compared to 21 point to last year.

Moving to the engineering segment, which delivered strong financial and operational results.

For the third quarter Engineering segment revenue derived from third party sales increased 67% to 41.8 million compare to the third quarter of last year.

This segment recorded a strong sales from premium products in glass converting and Israeli spectrum machines.

Gross profit margin for the third quarter was 15, 4% compared to 11.9 in the same period last year. This also delivered operating profit margin of 7.1, that's fine.

This includes the unfavorable impact of discretionary bonus for the third quarter adjusted operating profit margin for the engineering segment increased two 9% compared to 0.6% last year.

Let's turn our attention to balance sheet and cash flow.

Our balance sheet is stronger than ever bolstered by our primary proceeds from the IPO.

During the third quarter Weird is primary net proceed from the IPO of approximately 380 million Judah.

As of September 30, we had positive net financial position of 153 million in cash and cash equivalents totaled 428 million.

For the third quarter net cash generated from operating activities was $17 9 million.

And adversely impacted by income tax payment of approximately $13 7 million and increased working capital to sustain our growth.

The cash paid for capital expenditures totaled $28 6 million during the quarter to support our expansion plan.

This resulted in a negative free cash flow of $9 9 million for the third quarter 2021.

We currently expect to spend less on Capex in fiscal year 'twenty one than previously forecast.

This is primarily related to timing and some of these will be realized in fiscal year 'twenty two.

Changes in our capital spending plans for 2021 out of currently not expected to impact our expansion plans validation timing or commercialization of new lines.

In a nutshell, we believe that our cash future generation cash from operating activities and the availability under our existing debt facilities will be adequate to address future liquidity needs and capital allocation plan.

Our capital allocation plan is a critical element to our long term growth strategy.

We prudently manage capital with the primary aim of driving organic growth.

Our top three priorities remain unchanged.

First the investment in capacity expansion and focus on growing our capacity now what I value solution to satisfy market demand.

Second we are investing a recession development to boost our competitive advantage to drive growth in our high value solution products.

And third opportunistic M&A to broaden our offering technical Knowhow and international footprint.

Following the quarter end the company completed two transactions as we sharpen our focus on our long term strategic objectives.

Third the company paid approximately $7 million reorder to purchase the remaining 35% minority interest in Denmark based <unk>, VM automatic which specialize in assembly and packaging machines, and serialization to the pharmaceutical and copper and manufacturing industries.

SPM is playing a meaningful role in broadening out what I 14 specialized assembly and packaging.

Second the company entered into an agreement to sell its remaining minority interest in Swiss Fillon.

It provide a fill and finish services to the pharmaceutical and Cowen and truck manufacturing industries for a net gain of approximately 12.3 million reorder or five cents per dilute the shares.

Our adjusted guidance exclude this gain on sale.

We intend to invest the net proceeds from the transactions to support our organic growth plans.

And finally guidance.

Based on the company's year to date financial results and the high level of visibility from backlog, we are increasing our revenue guidance and raising the bottleneck of ranges for adjusted earning per shares and adjusted the beat there.

We now expect.

Revenue in the range of $825 million in order to 835 million.

Adjusted diluted earnings per share in the range of the 45 cents to 47 cents.

Adjusted EBITDA in the range of $214 million in Europe to 217 million.

And with that let's open it up for questions operator.

Yeah.

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Our first question today comes from Paul Knight of Keybanc. Your line is open. Please go ahead.

Franco can you talk about the Italy expansion it seems like.

These are line extensions.

Come online relatively quickly is it due to this increased backlog.

If you could talk about those expansions.

Yeah.

Here you again Paul.

Yeah, we are bridging their capacity as banks you on the waiting for the availability of our plants in U S and China at the time that we started with the program.

Cynthia and now we are progressing according to our plan. We are meeting the demand of our customer and user expansion will a little harder to keep continuing in meeting. This demand we are in line with our program.

And Marco this out of cycle bonus.

This occurred in prior years.

Oh.

<unk>.

Is it baked in our guidance last quarter, but it is a.

Discretionary out of cycle board to recognize of therefore down from their employees in the last 18 months.

So it wouldn't necessarily be something to build into a model for future years.

Now we are treating us any many other positive item for us.

Non recurring items.

Overall in the IATA offsetting one another and neutral impact in there.

EBITDA.

And adjusted EBITDA level.

In the quarter of course, so we are somehow.

So now he's been the reported P&L, but we're creating as a nonrecurring item. So this is not in our adjusted EBITDA and adjusted operating profit.

Thank you.

Welcome.

Thank you Paul.

We do ask that you do stick to a maximum of one question and one follow up should you have any further questions. Please press star one to re register and re enter the queue.

Our next question comes from Patrick Donnelly with Betsy Patrick Your line is open. Please go ahead.

Hey, guys. Thanks for taking the questions.

Maybe one on the Covid from you know obviously last week, we had we had an approval that cause some noise in this space certainly in terms of the durability of the Covid tailwind in some people's expectations. So can you just talk through your visibility.

Into not only <unk>, but into 'twenty two on the Covid front, what your expectations are in this last week changed.

Yes, sure a very important topic Patrick.

You know that we are linked to the majority of the play and it <unk> seem that space. So we have a good visibility okay with them, we know very well that we are at the very beginning of a booster for the administration and there is a lot of people around the world that way.

For the first the shortcut vaccine, we feed the triangle to move up from a multi doors the buyer to single dose forms, but we are in good position.

We can deliver Amy for them all to deliver it or the administration, but at the end of <unk>.

I remember that the Covid is a tailwind for our business, but our business independent from Covid. So we our focus to serve the customer.

According to their needs, but DSO, our focus even outstanding the <unk> solution that will drive the growth of the company.

Okay. That's helpful. And then maybe just on the <unk> Guide you know I think it's implying more kind of mid single digit growth was there anything one time in <unk> last year that makes the comp a bit off it's probably one for Marco just want to talk through again like guidance.

What conservative levels, and then again, if the comp had anything anything weird in there. Thank you.

Yes, yes.

At Ekati the item in this period for about two <unk>.

G&A expenses, yes, it was related to an old acquisition, we have done that.

Back in 2016, so we had a car that does not occur in the last year.

And we put some specific call or in our press release about that.

And Patrick I, just wanted to confirm that we have answered your question I think there was.

We may have missed.

Yes, it was little more on the revenue side in terms of did you guys see any I know engineering was strong at <unk> 20 last year was there anything.

One time in <unk> last year in terms of the revenue anything that got pushed into <unk> last year that would make the comp a bit harder on the revenue side for this for you.

Not in the generic part of the business. We recognized last year in Q4, we had some important revenues related to.

In vitro diagnostic molding projects. So we recognize the bigger avenues in a project last year in Q4, but in media segment Tuck in engineering.

I consider it.

Our ordinary course of business.

Thank you Patrick our next question comes from John Kreger with William Blair. John. Please proceed.

Hey, guys good morning.

At least good morning in Chicago, where I am.

<unk> for you I believe in your slides you talked about.

Orders in the third quarter, but about 310 million euros can you just talk about how that compared to your expectations and what that tells you about the mix of the business in the coming year or two either kind of COVID-19 versus non COVID-19, our high value solutions versus versus other thanks.

Yeah, it's a very interesting point.

The driver for the increase in backlog is the strong demand that we see in the market and that these demand match exactly with our value proposition and the high value solution that we bring it to the customer.

In terms of all the days of both financial calendar over part of the answer to Marcos.

Yes, sure rides, we're keeping on increasing our clogger, we ought to.

830.

834 media.

End of the quarter, yes.

Very strong visibility on the saltwater and Franco was saying these are a few minutes ago.

We have a clear visibility on Q4 growing.

Daniel shallow shelf soar.

The trajectory in the medium term.

It remains unchanged and we are a believer in according to a lot of fallout because that could be some temporary mix effect in the quarter, but the.

But in the medium term is.

I think the unchanged from our side.

Okay. Thank you and then a quick follow up in your prepared remarks, you mentioned supply chain pressures can you just elaborate a bit on that where are you seeing pressure is it raw materials and labor or is it something else. Thank you.

Very good topic I like most companies, we're managing through the current condition.

Our supply chain robustly, because they go to market.

Market for supplier and different facilities around the all the geographies in the meantime, we consider the situation we have taken precautionary steps increasing their roadmap keto, Amanda and keeping some mooring inventory theyre not that specific topic that is under pressure the overall.

Situation that we are managing to continue to meet the customer demand.

Okay. Thank you yet just the early.

The effect in Q3 eight beside the mix. So we were hit by some logistic costs, but they're not in a relevant way, especially is not that material with respect of them at the overall numbers, but we had about 1 million.

Got logistic cost of that in that aspect.

Okay. Thank you.

Thank you John.

Our next question comes from David Windley of Jefferies. David. Please proceed.

Hi, Thanks for taking my question good afternoon to you all.

On the following up on John's bookings backlog question would you be able to break that down for us.

In terms of what coverage you have for the fourth quarter and then in 'twenty, two and how much of the backlog stretches into 'twenty three.

Thank you David for the question.

Let's say we call therefore, the bottom part of the revenue range for the year with the ore that we have in our backlog for 2021 in Q4.

And we can tell you that doesn't matter of fact, we have more than $600 million for Atlantic 'twenty, two and beyond.

So we are providing the guidance for 'twenty 'twenty during the next earning call.

But we start from a good position for quite some time.

Got it. Thank you for that I think you mentioned in the prepared remarks.

That that you were in fact already supplying.

Some I may have missed it single dose or low dose format.

Glass for Covid vaccines at this stage.

Is that I understand your comments about around readiness and flexibility to basically do what clients want you to do I guess I'm, just trying to get a feel for whether it's.

Single dose formats are being manufactured for commercial distribution or is that still kind of development and validation work can you can you help us with what stage of.

Commercialization.

That those volumes are going to.

Yes. Thank you for this question.

You'll note that we are engaged with the majority of the players. So there are different approaches.

And each customer has a different strategy, but for sure we are delivering both the candle form.

And we are in validation phase of some time, but we have already started the commercial production for them.

Both support and if I could if I could just tag onto that are are those.

High value solutions, where those clients are pulling those through for Covid vaccine is a high value or is that also a mix of of your products.

We already stated that the mix of product in COVID-19 businesses, representing more or less the same distribution that can in the standup isn't it let's say so we don't see any big significant difference.

Okay. Thank you.

Thank you David.

Our next question comes from Derik Debruin of Bank of America. Your line is open Derek. Please go ahead.

Hi, Good day, Thank you for taking my call.

Just we've gotten a lot of questions from investors on obviously the size of your commentary and just wanted some clarity or the contract that you have with customers take or pay contracts I mean, they are obligated to buy minimum volumes.

And I guess is there any way for them to.

Renegotiate those or change them should their sales projections change.

He is a very good question.

Know that each commercial agreement these negotiated individually, but in general we embed the India agreement, though also redaction of cancellation fees or minimum quantity, but these are case by case situation, but we don't have the agenda at all.

A range of method that is.

Suitable for every customer.

Great and then just one follow up on the diagnostics products in the Bds Bds segment.

Is there anything that's notable in terms of where you're involved in.

And those products, meaning are you involved in any specific Kobe diagnostics is there anything on the molecular side that is growing outside just a little bit more color on whats involved in diagnostics segment, and how we should sort of think about that growth contribution in.

In that business.

Yeah, the Covid impact.

The diagnosis basis controversial because if we.

Some are higher requests for them.

Do you think a diagnostic but at the meantime.

The standard treatment set up further for the slow down of activity in the hospital. So we don't see overall and net.

The impact in a single direction in that area.

Thank you.

Thank you Derek.

As a reminder, if you do want to ask a question on todays call. Please press star followed by one on your telephone keypad now with your request to speak flag icon, if you've joined us online.

The next question comes from Jon <unk> of UBS John Please go ahead.

Hi, Thanks for taking my question.

I was wondering just in a little bit on the supply chain commentary, if you could talk a little bit on pricing and what is your ability to maybe pass through some of the increased cost onto customers.

Yeah.

So important point.

Hey.

I mentioned before the situation is a negotiated individually, but in general we embedded in the agreement that closes for escalation of prices in case, all but increased cost third flooring that their cost of like logistic of raw materials utilities, we are monitoring carefully the evolution of.

Costa transfer and apply type clothing.

Got it and as a follow up maybe can you talk just a little bit about the <unk> performance across the different regions in EU U S and APAC.

You'll notice that we don't disclose the precise figures in different geographies, but you cannot have a flavor because you'll know that.

U S.

Our very strong market for us.

Yes, we can experience some fluctuation quarter over quarter, but the trend.

We remain unchanged. So we are growing very very rapidly in Asia Pacific.

We are growing the same may not for Medicaid vendor in this quarter, we slowed down a little bit but all of that all those are the two markets, where we expect to grow that more social based on the backlog that we have in our hands.

All of that all we are growing in every and each area.

South America, North America, Europe, and especially in Asia Pacific as Luke was saying.

Thanks for taking my question.

Alaska.

Thank you John.

We currently have no further questions registered Hey, this concludes the Stefan RK third quarter earnings call. Thank you all for joining we hope that you have a great rest of your day you may now disconnect your lines.

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