Q2 2022 Stevanato Group SpA Earnings Call
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Good afternoon. This is the chorus call conference operator, welcome and thank you for joining the Stefan Auto group second quarter Financial results Conference call. As a reminder, all participants are.
Listen only mode. After the presentation, there will be an opportunity to ask questions should anyone need assistance during the conference call. They may sticking with an operator by pressing star and zero on their telephone at this time I would like to turn the conference over to MS. Lisa miles SVP of IR. Please go ahead with them.
Good morning, and thank you for joining US with me today is <unk> chairman Frank in Morrow, CEO and Mark onto Lago CFO 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, such statements are only predictions actual events and results may differ materially as a result of risks we face, including those discussed in item three D entitled risk factors in the company's annual report on form 20-F for the fiscal year ended December .
<unk> 31, 2021 filed with the SEC. We encourage you to review the information contained in our earnings release today in conjunction with our associated SEC filings and our latest 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 todays 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.
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 earnings press release and with that I'll hand, the call to Franco's Devin auto for opening remarks.
This has been an exciting sort of all of us to step on Alto <unk>.
Last month, we celebrate the firsthand <unk> IPO.
And we continue to successfully execute against our long term strategic plan to drive sustainable organic growth.
Increase our mix of high value solutions and expand EBITDA margin.
We're creating a track record of third format that include meeting or exceeding our financial objectives. Since we have been reporting as a public company. We are currently operating in an environment of a booster demand with attractive end market characterized by a durable multiyear driver.
Yeah.
We have set the stage to capitalize on favorable macro tailwind of aging population pharmaceutical innovation the growth in biologic.
Turning toward our sourcing and certain munis today as shown on may be seen.
Our business philosophy is rooted in science and technology, driving Comstock innovation to support customer and improve patient lives around the world to a singular focus on product and service for the pharmaceutical industry.
In June we published our first us to tune ability to report and why we got off to the start of this is Jeremy I am proud of what we have accomplished as a global provider to the pharmaceutical and biotech industry. We are committed to embedding sustainability throughout our policy and practice to make a positive impact for all of us.
Called around the globe. Thank you for your continued support and I will now hand, the call over to Franco model.
Starting on slide seven for the second quarter of 2022, we delivered double digit revenue growth and expanded gross profit margin.
Bill Sean from high value solutions.
The corporate levels accounting for approximately 30% of total company revenue.
That's up demonstrate our ability to successfully execute in a challenging environment and we are pleased to be raising our full year guidance.
For the second quarter.
New order intake was approximately 252 million euros, bringing a new order intake for the first half of 2022 to 576 million compared to 529 last year.
At the end of the second quarter.
Our committed backlog.
Kris 37% over last year.
Topping 1 billion euro.
Turning to slide eight for an update on our priority capital projects.
In the United States the growth in biologics and the upcoming wave of Biosimilars.
As to the shape of our industrial class in Indiana.
Since our last call we completed the foundational work on our new facility.
Part of the <unk> on the building.
We remain on track for commercial operation in late 2020 or early 2024.
In Italy, we are making solid progress on our capacity expansion efforts.
Construction is nearly complete on our new building in Colombia not David.
In addition, two of our three planned on new lines for 2022 are operational including one is it too soon in July and one line dedicated to our premium Argos syringes.
We expect to operationalize and neither is it feels to me as your line in the fall.
And in China.
We are nearing the end of the design phase and still anticipate a revenue generation in the second half of 2024.
We are firmly focused on the execution of these priority projects as we expand our global industrial footprint to meet the rising demand and the evolving needs of our customers.
In our meetings with investors over the last several months, we received many questions on industry collaborations partnerships, which is our standard practice.
On slide nine we want to address how we think about our framework for collaboration and partnerships specifically in that containment and driving delivery systems.
First the foundation of any framework is understanding our customer needs.
Fostering customer intimacy of keeping them at the heart of everything we do we must anticipate market trends.
Customers tackle the greatest challenges.
These guys have R&D capital investments and partnership agreements all of which broaden our capability set.
Our long term strategy consider market trends and matching the needs of customers in the case to come.
In drug containment.
Auto was the first to market with wash 30 lives a ready to use via thank cartridges.
One is our <unk>.
<unk> platform.
Today, only about 5% of the buyer market and less than 5% of the cottage market.
Transition to ready to use format.
We see a real desire by customers to transition to ready to use format to gain efficiencies improve quality increase the speed to market reduce.
Total cost of ownership.
Customer demand is driving our strategy.
For our market, leading <unk> platform, our collaborations including face and service agreements.
We also license, our IP and technology to other industry players.
This is important to customers because it establishes a gold standard in the industrial process with the same technology platform and processes for ready to use of vials and cartridges.
It also gives customers the ability to source from multiple suppliers using the same platform, which is also supported by the vast majority of our feline finish line producers.
By doing this we serve as a market enabler to best support our customers needs and galvanize the transition.
In the drug delivery space partnerships help us broaden our product portfolio.
We can bring the power of our integrated capabilities to deliver a complete solution to customers.
For example under.
Our agreement with <unk>.
We are harnessing the full breadth of services to deliver the doctors ultra injector.
Our comprehensive set of services.
From a manufacturing engineering plastic injection molding cottages and syringes inspection and assembly.
By leveraging our robust network of partnerships and investing DDS platforms.
Help our customers advanced patient care, while at the same time capitalizing on the long term clients of the self administration of treatment.
To sum this all up the primary goal for every partnership is to bring real value to our customers.
This means constantly innovating to quality to the next level, improving efficiencies streamlining processes and simplifying the industrial process to deliver more value for their money.
We believe this approach will help cement our role as the leading partner of choice for pharma and biotech play, yes for decades to come.
Turning to the comments geopolitical crisis and European gas prices on page 10.
We are monitoring the situation closely and it is something we must manage.
Energy costs have increased in the last six months, but we are working directly with customers keeping them informed and adjusting our prices accordingly.
From a supply side.
The vast majority of our natural gas usage in Europe is in Italy for our glass conversion operations.
As press reports indicate.
The Italian government has taken swift action to lower dependence on Russia.
Signing gas agreements with other countries to diversify supply.
Given our mission critical role in the pharmaceutical supply chain, we believe that we would be eligible for priority status similar to our designation during COVID-19.
And lastly on page 11, I want to commend our team's effort in sustainability.
Our 2021 sustainability report provides complete transparency nonfinancial reporting to our stake holders.
Most importantly, it creates the foundation for setting future targets.
The report consider the company's financial results.
And I like the ESG performance of the group.
Our report is subject to limited assurance and was prepared in accordance with the global reporting initiative standards.
It demonstrates our commitment to sustainability.
I will hand, the call over to Marco.
Thanks Franco.
Starting on slide 13 revenue for the second quarter increased 15% and 11% on a constant currency basis over the prior year to $234 2 million driven by growth in both segments.
Today, we are pleased to be rising guidance based on our year to date strong performance in our core business, which is offsetting revenue declines related to kavita.
An improve outlook in the engineering segment and favorable currency effects.
For the second quarter of 2022 revenue related to call with continued to decline and represented approximately 9% of revenue compared to 15% for the same period last year.
Excluding call it and the favorable impact from currency.
Revenue in the second quarter would have grown approximately 17% compared to the same period last year.
Gross profit margin in the second quarter of 2022 increased 60 basis points to 31, 8% driven by the favorable mix in DDS segment and expanded gross profit margin in the engineering segment.
Turning to SG&A compared to the prior year increases in G&A expenses, reflecting investments to support the growth of the business and the cost associated with the public company status. As a reminder, the biggest year over year change was due to a onetime benefit in the second.
Quarter over last year for the termination of an equity incentive plan for.
For the second quarter of 2022, the company recorded approximately $6 million in other income for a contract modification, which reflects a decrease in COVID-19 related business.
We believe that the modification represents a fair and equitable arrangement to support the changing needs of our customer Eric Flex changes have avenues loss production time, costing core and process to reallocate capacity.
With the rise of new Covid, 19 volume and different markers of efficacy in various vaccine customers are making appropriate adjustments to their capacity plans.
We believe that customers Santee mercy and offering our customer flexibility is an important element to supporting therefore over the long term.
For the second quarter operating profit margin was 18, 7%.
And on an adjusted basis 19, 6%, excluding certain start up costs in the U S.
This resulted in a net profit of $30 6 million or 12 science of diluted earnings per share.
As expected the number of weighted average shares outstanding were higher in the second quarter of 2022 compared to last year.
Adjusted net profit was $31 9 million and adjusted diluted EPS were up 12% or so.
The second quarter, adjusted EBITDA was 61 $8 million and adjusted EBITDA margin was 26, 4%.
Please turn to slide 14 for segment results.
Despite the year over year decreasing coffee revenue.
The biopharmaceutical and diagnostic solutions segment still posted growth.
In the second quarter revenue from external customers in this segment increased 8% to $188 6 million compared to the same period last year and approximately 3% on a constant currency basis.
Revenue from high value solutions increased 46% over the same period last year to $70 1 million and represented approximately 37% of Bds segment revenue.
Our revenue from other containment and delivery solutions was down 6% to $118 5 million.
Overall mix shift led to higher margins compared to the prior year for the second quarter gross profit margin increased 80 basis points to 33, 7% and operating profit margin grew 100 basis points to 23, 6%.
The engineering segment delivered another solid quarter of financial results, driven by strong customer demand and growth in all business lines.
For the second quarter revenue derived from external customers increased 57% to $45 6 million compared to the prior year.
For the second quarter of 2022 gross profit margin improved to 22, 3% and operating profit margin increased to 15, 5%.
Margin expansion was driven by contributions from more aggressive projects and after sales activities as well as ongoing business optimization efforts to improve operational efficiencies.
On slide 15, we continue to maintain a strong balance sheet and as of June 30, We had a positive net financial position of $109 4 million in cash and cash equivalents of $314 9 million.
For the second quarter cash generated from operating activities was $42 2 million.
As expected increase working capital reflects ongoing investment in the business to long term sustainable growth, we continue to keep more inventory on hand.
For supply security as we aim to prudently balance the needs of the business in the current supply chain environment.
We are advancing progress on our global expansion plan, which will result in capital expenditure of $77 5 million during the second quarter.
As expected Capex spend was the main driver behind the negative free cash flow of $33 7 million.
On slide 16.
We are raising our full year guidance, which considers a number of factors.
First we are forecasting a decrease in revenue from call with us.
This is being offset by strong demand in our core business, which has allowed us to overcome this headwind.
Our full year guide Thats now assumes approximately 10% of total revenue will be related to call. It down from our previous forecast in the low teens.
Yeah.
Second our increased full year revenue guidance assumes favorable currency effect of approximately $18 million for 2022.
This compares to our initial guidance, which assumes favorably impact of just over $3 million for the year.
Our team in a net change to our full year revenue guidance.
$15 million from favorable currency impact.
Third.
An improved outlook for our engineering segment.
We now expect double digit revenue growth in fiscal year 2022 over the prior year.
From our original guide us or by single digits.
Lastly, our guidance still considers the effect of inflation.
As a result, we now expect.
Revenue in the range of 955% to 90 $965 million compared to prior guidance of $945 to $945 million.
Adjusted diluted EPS in the range of 51 to 53 sensor.
Up from our prior guidance of 49% to 51%.
And adjusted EBITDA in the range of $253 3 million to $258 three medium.
Compared with prior estimates of 248% to $253 million.
Our assumed capex span the range remains unchanged in absolute dollars.
I will pass the call back to Franco model for closing comments.
In closing on page 18.
We are operating in an environment of strong demand growing end markets and multiyear secular drivers.
Above all we are satisfying customer needs by driving innovation, providing.
Providing average fab our end to end the capabilities that support them through the entire drug in a life cycle.
We remain focused on operational excellence and the successful execution of our four strategic and operational priorities.
Including.
Advancing our global capacity expansion in the U S, China and Italy.
Growing the mix of high value solutions.
Investing in R&D to advance our premium primary packaging and drug delivery systems.
And lastly.
Building, a multiyear pipeline of new opportunities by supporting our customers through scientific innovation to meet their evolving needs.
These priorities are specifically designed to capitalize on market clients to drive long term sustainable organic growth expand EBITDA margins and build shareholder value.
And with that let's hope it up for questions.
Thank you. This is the chorus call conference operator, we will now begin the question and answer session.
Anyone who wishes to ask a question you May press star and one on their touchstone telephone to remove yourself from the question queue. Please press star two.
Please pick up the receiver and asking questions anyone who has a question you May press star one at this time.
The first question is from Paul Knight with Keybanc. Please go ahead.
<unk> Branco Morro on the engineering growth that we're seeing this year.
Should we take that as a leading indicator for us.
More.
More high demand.
The demand in the future. So what's your read on this strong engineering growth.
Hi, Paul Yes sure.
The increase of business and engineering as Seattle.
What can happen later on for Bds segment.
Our customers are investing because we are in a growing environment in healthcare and pharma business, we see amazing initiative, our customers will derive mostly linked to biotech and biosimilar.
Also good to have a more opportunity for our high value solution in the future. So I confirm that this trend and we are matching our customer needs in time all of our innovation in time, although standardization level of services around the world that is also linked to the expansion of our initiative.
In China.
And the last question would be you.
You, obviously guiding down Covid. This year do you have any initial thoughts on 2023.
Yeah.
No in terms of the business, we see steel as Tom level.
<unk> about the future and Colby, we continue to see the transition to single dose via that you cant remember.
Go to neutral or positive for us in term of the business, but it's too early to speculate that by next.
Next year or that meet the long term for sure. The trend is in line with Douglas Dictation to seed this business the landing somewhere in the regular business for vaccine.
Okay. Thank you.
Okay.
The next question is from Justin <unk> with William Blair. Please go ahead.
Hi, good morning.
Natural gas prices real quick can you clarify what the priority status means for you in any way you can quantify the likely impact your margins in the coming quarters.
Things don't necessarily go according to your plan.
Yes sure.
The same that as I told in my.
Commentary.
The most of our USA J in Italy in time or gas because of our glass converting operation in Italy. Our government is taking lot of action to mitigate the risk of shortages and if we look at the path of when the pandemic is part of that will immediately receive a day.
Because the nation as a spatial business because we are part of the pharmaceutical.
So I changed so we receive a special attention from the government. So in term of shortages, we are not afraid in time all of the gas prices.
We monitor the clients are regular and we pass on these costs to our customers.
The situation in Germany, where the major of our energy consumption is supplied by electricity.
More than 95% and the ocean.
Country, there are initiatives on the Goldman to think about the pharmaceutical supply chain with a special attention. So we are confident that we will now impact in time operation done more of.
Although the impact of the utility cost on our Cogs micro may complement my.
Answer, yes sure Franco.
To remind that in 2021 are utilities on our cost of sales was less than 5%. So we had an increase.
It is now above 5%, but slightly above that percentage on our total manufacturing cost.
Yeah.
So as Franco will say, we are passing either price to customers. So we don't expect an impact in our P&L from flat shown in 2022.
Okay. Thanks, that's very helpful and have you seen any changes in customer ordering pattern.
Back customers.
Have been building inventory in the past two years and therefore, it might start to see some impact from customer Destocking going forward just wanted to get a sense of that.
We cannot report about the significant changes that you haven't seen that our order intake is very strong the demand is very strong obviously in this environment.
Customer wanted to have a secure supply so they continue to look in the mid to long term and the intimacy, we have with them as partners to shape, our progression in capacity that I confirm it.
Mostly focused on high value solution because the demand in this area is very very strong.
Okay. That's fair thank you.
The next question is from Derik de Bruin with Bank of America. Please go ahead.
Hi, Good morning, Thank you for taking my question.
I've got two.
So the first one is.
30%.
High value solutions in the quarter was a couple of points ahead of where we were how do we think about that number exiting 2022.
Yes. It is a very good news first of all because the confirmation that the demand and really the customer pull in answer to speedup in providing the water they need some time of benefits coming from our high.
High value solution.
We considered the possibility to have some quarterly fluctuation.
By quarter because.
Two planning of our pivot is also customer demand.
We look at the next two quarters.
<unk> see.
<unk>, a consistently increasing time, all absolute value for a high value solution that is partially compensated in time our shares.
By the stronger demand also for other product lines that are not.
<unk> solution like in January we made sure before so it's fair to look at.
Full year landing somewhere in between 28% to 29% of the shares.
And we will keep you updated in the next award in the same time for the longer run for the longer line.
See consistent additional growth in the next years landing in mid thirties.
<unk> 2006.
Great. Thank you and just on the.
So the contribution from this year Youre, 10% guide for total revenues essentially in.
Implies roughly I don't know if $50 million in the back half.
The year, so that it seems like that would be a step up from Q2 levels am I reading that correctly or.
Sure.
Can you sort of explain the dynamics or the demand in the back half of the year.
Your numbers are accurate.
Our guidance is covered basically by our backlogs are the committed dollars. Thus we can see.
This is what we plan today, we don't expect further contract modification and so this is what we have in our guidance fully covered by our backlog.
Got it.
Thank you very much I appreciate it.
Eric.
The next question is from Patrick Donnelly with Citi. Please go ahead.
Hey, Thanks for taking the questions Marco maybe one for you on the margins, obviously, a lot of moving pieces between the pricing FX and supply chain gas pricing some of the mixed shift with high value could you just talk about kind of the gives and takes on the margin piece as we work our way through this year and then kind of the broad setup.
As we go into 'twenty, three with with some of those factors.
Okay.
Okay.
Okay.
About the guidance.
As we mentioned we expect the center point in the range of 960, <unk> announced we expect double digit organic growth in both segments.
And we expect to expand the gross profit margin in both segments compared to 2021.
More call out about January we can add some quarterly fluctuation depending on project mix.
But all overall the trajectory is keeping on improving the gross profit margin.
About <unk> of the shifting toward high value solution is helping as you can see you mentioned also rightly the fact that.
For us.
Being able to pass through our cost in price increase without Rd margin is a little bit dilutive for our gross profit margin.
If you imagine that 30% gross profit margin as we have in Bds segment.
3% inflation is diluting 100 basis points of our gross profit margin. So the shifting toward high value solutions is expected to more than offset these so we are confident to keep on improving our gross profit margin in both segments.
Yes.
That's helpful. And then maybe one on the high value solutions continues to be really strong growth. There can you just talk about the various drivers or whether it's the product side or certain customer bases that are kind of continuing to drive that elevated growth there.
Okay.
Yes.
Frankly that is not really new but.
The.
Demand of our customers is particularly stronger in biotech and Biosimilars because here, we play with both the pillars of our value proposition in terms of high value solution because on one side we provide.
The best answer to this scientific or requirements of our molecule.
Highly sensitive and needs a special containment solutions that preserve the integrity of this kind of treatment.
On the other side of this company are more keen to focus on their core business as it is the new molecules new treatment and sometimes they are a smaller company not only be pharma that don't want or they don't have internal.
Capacity and they wanted to limit their expanded to any capex or so.
High value solution in time, all easy feel a ready to use format are the best answer in term of total cost of ownership of reduction flexibility speed to market.
I cannot to measure specific therapeutic area, because biological biosimilar for many therapeutic areas and we are focused on the two main needs of the customer scientifically requirements savings total cost of ownership reduction.
Okay.
The next question is from Steven Couche with Jefferies. Please go ahead.
Hi, This is Steven on for Dave Windley.
Thank you for taking my questions I guess the first one is I wanted to clean up that 6 million Euro.
Contract modification from the Covid contract.
Okay.
Most of the times, we hear these and they're straightforward.
Straightforward take or pay fees, it sounds like it might be a little bit different.
At $6 million sort of net of the expenses and that's all in the other income or are there costs associated with the modification that might have shown up in bds.
Yes. Thanks for the question first of all we consider the agreement the <unk> agreement.
Yeah.
The agreement to replace is a business we will divert.
If the current or the changer.
So it's somehow compensating.
The lost revenue lost production time.
And cost occurred in the process of reallocating capacity. So it's not something not related to the business is really tied to the cost we add.
In this period.
This agreement, we don't expect this change meaning relevant way, our full year guidance with respect of profit.
Okay, and sorry, just to just to reiterate that 6 million feet did not show up.
Either revenue or cost did not show up in DDS, yes for the quarter.
Now it is in our <unk> segment, but is it fair compensation of course, the core then need to reallocate capacity.
That's correct that did not come through as it came through in the other income line.
Okay perfect. Thank you and then maybe the second one.
FX, obviously, helping the full year outlook.
Can you maybe give us a framework.
The flow through of FX to the EBIT or EBITDA line.
And I guess another way of asking that is are your expenses.
On an FX basis relatively matched with your with your revenue exposure.
Yes. Thank you for the question. Yes, you are right. We have also a relevant part of cost denominated in U S. Dollar debt is the main driver of the changes both in the top line.
But also costs. So we estimate an impacting favourably impact on the EBITDA, but keeping in mind that is.
Modest.
Compared with the topline increase so we estimate we have about.
A 25% to 30% impact compared to the.
$80 million of beta.
AD revenue sharing.
<unk>.
The differential we have in the model is having.
100, <unk> revenue denominated in dollars 70 Fi cost are denominated in dollars.
Dollars.
Yeah.
Okay perfect. Thank you very much.
The next question is from Jon <unk> with UBS. Please go ahead.
Alright, Thanks for taking the question maybe just another one on the EPS growth continued to be strong there and maybe specific to the the lines that you're bringing online in Italy with the three new lines. This year I think two of them are online one in the fall are you starting to see that impact there from those two lines now and that's why the HCS.
Approaching that 30%, 30% and then how does the new line in the fall come on.
Accelerated penetration.
Putting more capacity in place is something that we started the year.
So you see this impacting different proportion quarter by quarter, depending of not only the availability on the line, but also the progress in time, all the validation activity. So I can confirm that we have seen some good impact upon the two lines that we have put the running.
In the quarter and we expect to have a minor impact.
Compared to the total capacity in the last part of the year, because we expect to have the line already in the last part of the year, but then the capacity utilization cannot be immediately on the percent of because we have to run also de validation activities. So.
If you look at the biggest scenario you can see that our investment in capacity for iPad Solutia are matching the demand of the customer that is very high and.
We are progressing in our investment accordingly, and we seek constant improving our share of our <unk> solution in the portfolio.
Thanks, and just a follow up on the regional performance any color you can provide there and did you see any impact from the China Covid lockdowns on the business, there or with the capacity expansion that you're building up.
Yes in the second quarter, we experienced slow down your revenue in Asia Pacific, mainly driven by call with <unk>.
Slowed down and as you mentioned the slowdown in the environment also in our customers' factory.
We consider it obviously.
Ferrari effect, we continue to count on Asia Pacific for our growth.
Yeah.
Okay. Thanks for taking the question.
As a reminder, if you wish to register for a question. Please press star one on your telephone.
For any further questions. Please press star and one on your telephone.
Gentlemen, Ms miles there are no more questions registered at this time.
Thank you operator, we can conclude today's call and I want to thank everyone for joining us today, and we look forward to talking with you in the future.
Ladies and gentlemen, thank you for joining the conference is now over and you may disconnect your telephones.
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