Q2 2024 Stevanato Group SpA Earnings Call
Yeah.
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Good afternoon D C CCAR School conference operator.
Speaker Change: Welcome and thank you for joining the Stefan auto groups second quarter 'twenty to 'twenty four earnings call. As a reminder, all participants are in listen only mode.
Speaker Change: After the presentation, there will be an opportunity to ask questions should anyone need assistance. During the conference calls they may signal, an operator by pressing star zero, Oh that telephone at.
Speaker Change: At this time I would like to turn the conference over to MS. Lisa miles Senior Vice President Investor Relations. Please go ahead Martin.
Speaker Change: Good morning, and thank you for joining US with me today is Franco stepping out, though executive Chairman and Chief Executive Officer, and Margo to Lago Chief Financial Officer.
Speaker Change: Because on the advancement of our assembly and packaging technologies.
Speaker Change: At the same time, we're implementing across the site plan to better support our visual inspection teams in Downmarket, there were technical specialists in Italy.
Speaker Change: This will also increase the standardization of our technologies and processes across the engineering segment.
Speaker Change: While these initiatives include expenses that will impact our 2024 financial performance than.
Speaker Change: They will help us optimize our operational structure maximize efficiencies and secure the success of ongoing projects.
Speaker Change: This is one of the primary areas of responsibility of Hugel Guy our Chief operating officer, who joins turn onto group in March.
Hugel Guy: <unk> brings over 20 years of experience in the industry, having held both commercial and operations leadership positions at organizations such as the authority.
Speaker Change: Long term, we believe the demand landscape for engineering remains favorable.
Speaker Change: Thirdly is the industry moving to secure supply chains at manufacturing capacity for fast growing biologics.
Speaker Change: But we also see an increasing shift to upgrade infrastructure to better align with the requirements under our next one.
Speaker Change: In addition to improving our execution in the engineering segment, we're still navigating through the effects of vial de stocking, we see positive signals in the market with order starting to materialize in certain smaller markets such as Latin America.
Speaker Change: Of total revenue in the quarter.
Speaker Change: The increasing high value solutions was favorable to gross profit margin.
Speaker Change: These offset lower revenue from easy fill vials, which adversely affected the mix within high value solutions.
Speaker Change: Gross profit margin was also tampered by three headwinds.
Speaker Change: First the higher than anticipated costs in the engineering segment at the biggest effect on gross profit margin in the second quarter.
Speaker Change: Second the impact from via desktop king, causing the underutilization of our via lines.
Speaker Change: And lastly.
Speaker Change: Inefficiencies tie to the ramp up of phase of our new facilities.
Speaker Change: As a result of these temporary headwinds gross profit margin decreased to 26%.
Speaker Change: It is important to point out that we believe that this headwinds are temporary and will gradually subside and in turn we expect the step up in margins.
Unknown Executive: With the actions we have ongoing, we believe that we can drive the necessary improvements to bring this project to completion through a combination of our cash on hand. On the other hand, we currently anticipate that our growth may be tempered by the current headwinds.
Speaker Change: Tammy.
Speaker Change: Adjusted EBITDA in the range of 264 million to 272 million and adjusted diluted EPS in the range of 48 to 50 cents.
Tammy: As we can see the future trajectory of our long term growth construct.
Speaker Change: That remains unchanged.
Speaker Change: We believe.
Speaker Change: We have the right ingredients in place to return to double digit growth.
Speaker Change: And expand margins as outlined at our capital markets day.
Speaker Change: Looking to next year in the Bds segment, we have positive momentum in high value solutions, particularly in syringes, which is a favorable tailwind.
Speaker Change: On the other side, we currently anticipate that our growth may be tempered by the current headwinds.
Speaker Change: This includes the pace of recovery embark and does it feel virus, which is the largest factor.
Speaker Change: And the timing of the effect of the corrective actions, we are taking for the engineering segment.
Speaker Change: We will continue to update you on our progress, but we will provide formal guidance in March.
Unknown Executive: Demand is robust, and we have a portfolio of products that are ideally suited to meet customer needs.
unknown: Hey, good morning. Thanks for taking the questions.
unknown: Maybe just on the engineering business. You know, this business grew rapidly over the past few years. We've heard, you know, about some weakness around capital equipment demand in the current environment. Do you think this is largely supply chain issues and within your control? Or is there any softening in demand that you're seeing for engineering, of course?
Speaker Change: For 2025.
Speaker Change: Okay.
unknown: Got it. Thanks for getting the questions.
Speaker Change: Well, if I can further giving them some more element.
Speaker Change: <unk>.
Speaker Change: Complex lineup Montclair at a fairly.
Speaker Change: New technology that our bigger customers.
Unknown Executive: Paul, if I can further give you some more elements, this complex line that Marco is referring to are new technologies that our big customers, in particular for assembling technology and inspection, where the average lead time is up to 20, 24 months. So we have faced some challenges at the latest stage of a certain test at the end of May and June. It is also important to specify that these projects are the first of a kind of machinery for our customer that is part of a long-term multiple line equipment.
Sean: In particular on the Assembly technology on these space, Sean, whereas the average lead times up to 2024 months. So we have faced now some challenges at the latest stage of acceptance test at the end of May and June. It also is important to specify that this project at the first of a kind of machinery for our customer at a part of our <unk>.
Sean: <unk> done multiple line achievement, so what what do you see one side, you'll see a big increase in demand on certain just <unk> got to just say to field automatically our same customers asking to also to deliver new high Sophisticate. The line for Assembly 40 Spansion. These are the first line and our organization.
Unknown Executive: So what do you see? If one side you see a big increase in demand on syringes next on cartridges straight to field, automatically our same customers are asking to also to deliver new high sophisticated line for assembly and for inspection. These are the first line and our organization, Danmark, is facing some temporary challenge, but under the new leadership of Hugo Guy, they already put in place all the action in order to recover and to be back on track in the next few quarters.
Sean: Dan market is facing some temporary challenge, but under the new leadership of Hugel Guy.
Sean: In place all the action in order to recover and to be back on track in the next few quarters.
Sean: And then.
Speaker Change: Second question is Latina, which seems to I know you add a lot of another opening down there recently.
Speaker Change: What was the transfer of expansion was from what.
unknown: That had been planned two years ago.
Unknown Executive: Yes, Paul. Practically, Latina was, we have decided that it became the second big hub in Europe in order to serve our customers for our Nexus ranges. And this is why, by the way, if you compare Latina with Fisher, we are two, three quarters ahead. Today, we already have many customers, we are generating commercial revenue. Today, one of our major anchor customers has decided to increase capacity in Latina for this new technology, for these cartridges ready to fill.
Unknown Executive: You know that we are market leader on cartridges, both on cartridges bulk and also in technology. Today, we see that there is more and more demand from these cartridges ready to fill from all the biocustomers. In particular, these big customers want to have big capacity in Europe, in particular on the site of Latina. This is a reason for this further expansion.
Unknown Executive: conservative approach also in bringing in new customized projects. And this is the main reason why we are reviewing our guidance for FISCA 2024.
unknown: Okay. Okay. Thank you. Um, and then just on CapEx, they took up the high end of the range there, I think the $335 billion. This obviously was expected to be another big year of CapEx following last year. Um, you know, but just given, I think Fisher's validation, maybe a little bit ahead of at least street expectations, would you just provide us with sort of an outlook on CapEx?
Unknown Executive: Yes, we are on target with our CapEx plan for the year. So we reiterate our guidance for the year between 300 million and 335 million.
Speaker Change: While orders will begin to pick up at the tail end of 2024, starting from <unk>. So we're starting to see all overall positive sign from the market.
Speaker Change: Great. Thank you for that and.
Speaker Change: And the guide update today, you laid out for the fiscal 'twenty four.
Speaker Change: High value solutions now you expect that to take over take up 36% to 39% of the total sales and that's that's making progress towards your 2027 target, but <unk> was already 40%. So I'm wondering if that fiscal 'twenty four target could even be higher.
Speaker Change: Yeah.
Speaker Change: He says our guidance today about 2024, so we reiterate our in absolute value.
Speaker Change: Revenue from high value solutions, we can see strong demand as mentioned in the high value of syringes huh.
Speaker Change: Compared to initial guidance as mentioned, we have seen pronounced the right docs shown in us that I'd vials, but all overall, we confirm our guidance in total.
Speaker Change: That's obviously going down engineering, we have we are of course, so quickly increased the percentage on revenue.
Speaker Change: About the midterm view, we feel confident to get to 40% to 45% by 2027 with a cut off in the coming year or so as mentioned by Franco we see temporary.
Franco: Are they the vials destocking. So we expect to start growing the buyers board of football Kansas there either.
Speaker Change: So other product lines.
Speaker Change: And not only about new products.
Speaker Change: Alright, thank you.
Speaker Change: Okay.
Speaker Change: The next question is from Patrick Donnelly of Citi. Please go ahead.
Speaker Change: Hey, guys. Thanks for taking the questions.
Patrick Donnelly: Two upfront Franco maybe just quickly on the stocking piece can you just talk about visibility and what you're hearing from customers just expectations on that front as we work our way through the year and then second just on the China facility, how to think about the timing and the commitment to that region would be helpful. Thank you guys.
Speaker Change: So just to clarify your question Patrick It was a little hard to hear you. Your first question was on Destocking in asking about visibility into our customer forecast and the second question related to China and the timing on China is that correct.
Speaker Change: Yes.
Speaker Change: So regarding the stocking just to give some number the buyer market. The bulk buy a market is a market that are of size around the 13th <unk> biased theory of consumption. The sub number approximately for the pandemic.
Speaker Change: We are starting to see some issue with the Destocking in 2023 also this year. So I think that we are entering the second year, where we are facing this destocking issue today, what do we see that.
Speaker Change: Practically all our customers international customers on customer <unk> for Covid buyer Yo support all the other pillar <unk> Doug no.
Speaker Change: Our customers are moving this situation of the stocking we're starting like I mentioned before to see particularly smaller customers, where they have more lean supply chain and activation of order what is more related to international customers. We are starting to they're still soft in the demand on 'twenty 'twenty four I just started to discuss.
Speaker Change: Forecast for 2025. So this the reason why we are starting to see all overall positive sign on the vial market.
Unknown Executive: Regarding China, the fact, by the way, China, Asia Pacific for Stevanato is still and will remain a strategic market, because we see a very big opportunity, in particular in biosimilars in the next year to come. It's also true that in Stevanato Group, we are very flexible in terms of follow the demand requested by our customers, and also where our customer is addressing the request, and our model to make investment are modular.
Speaker Change: Regarding China.
Speaker Change: By the way, China Asia Pacific for Savannah is Hela, we remain a strategic market because we see a very big opportunity, particularly in biosimilars in the next year to come.
Speaker Change: The eastern onto group, we are very flexible in terms of follow the demand are requested by our customers.
Speaker Change: Well our customers accept that I've seen the request to our model to make investment are modular. So particular, one of our measure anchored customer they have just reallocated that need.
Unknown Executive: So in particular, one of our major anchor customers, they've just reallocated their needs from Asia, and they've asked us to further reinforce our capacity in the plants of Latina. This is why we have partially reallocated our investment; we are increasing capacity in Italy. Also, because the capacity that we have in China today is sufficient to serve and satisfy the market.
Speaker Change: Needs from Asia, they've asked us to further reinforce our capacity into the plants of Latino. These theories of why we are partially we allocate our investment that we are increasing capacity in Italy. You also because what we the capacity that we are in China today is sufficient to service satisfy the market.
Speaker Change: The next question is from David Windley of Jefferies. Please go ahead.
David Windley: Hi, hopefully you can hear me.
Speaker Change: I wanted to ask I'm trying to understand the guidance a little bit.
unknown: Hi, hopefully you can hear me. I wanted to ask you something; I'm trying to understand the guidance a little bit.
Unknown Executive: perspective, because we have all the structure in place, we have quality in place, information, technology, controlling, logistic planning, and we are we generated a small amount of revenue in the first half of the year. Differently, for the second part of the year, we plan to ramp up significantly Latina and start generating some commercial revenue in the future. So this is one of the drivers of growth, and everything is embedded in our guidance basically to repeat what we were able to do last year.
unknown: Got it. Um, maybe a BDS and engineering.
unknown: Yes, we
unknown: in thinking about your longer term margin target, uh and the the change so so we've kind of come to understand that Viles, I think you said, and Viles maybe overall.
Speaker Change: We had 27 about 30% and sustained high value range of high value solutions product between 40% to 45% you see where we are target to date. We are we are growing a lot on the syringes and access we are growing we have a good pipeline on outback technology, we have a lot of meat.
Speaker Change: Small program sorry.
Speaker Change: The ranges with bypass it also we have a big program on cost efficiency to fill with some anchor customer, but do we see more and more of a trend on the industry that cottages will turn into ready to be so all overall, we are confident that the number that we shared with you.
Matt: Okay, and then Matt.
Speaker Change: We've seen these appear in the virus Destocking, we are taking a chance to be back on track for the engineering and compared to the capital markets day, we see strong.
Franco: Strong demand in syringes Franco for saying that.
Speaker Change: The conversion the acceleration of the conversion of.
Speaker Change: Cob fiduciary to setup, so we out of safety and salaries costs soar.
Matt: Is it feed by us, but we are confident to drive that growth in the same direction.
Speaker Change: Thank you.
Matt: Okay.
Speaker Change: Next question is from Larry Solow of CJS Securities. Please go ahead.
Larry Solow: Great. Thank you.
Larry Solow: All my questions I guess just to follow up on David's question on the vial. So it does feel like you have seen some positive signs and maybe you were hopeful for some of those positive signs that we're starting to see but it also feels like you're not maybe a confident are certain that we get a recovery in 'twenty.
Speaker Change: Maybe some recovery but.
Speaker Change: Is it fair to say that maybe you're a little bit.
Matt: Less confident or you just don't want to necessarily stick your neck out and make a guide for 'twenty five yet but.
Speaker Change: On the same respect, though it doesn't feel like your confidence is diminished at all in the overall.
Matt: Potential of vials and that we will get back to levels. You thought you would get to maybe just a little bit further out is that kind of fair to sum that up that way.
Speaker Change: And we are confident.
Speaker Change: <unk> market is there is the necessary format for the industry.
unknown: For 2025, there is uncertainty about the timing of the inflation point because
Speaker Change: For 2025.
Matt: Certainty about the timing of the inflection point because.
Speaker Change: Hi.
Matt: We are monitoring it about this a little bit early to say that the January cycle, we'd be at the Atlanta aloft.
Matt: We expect.
Speaker Change: Today, we have a constant dialogue with our customers because we are involved with our customers not only via mini program. We can move to strangers on cost as you did this program. So today.
Speaker Change: We have an intense discussion that supply chain level, because also as one of their main concern is to reduce it to normalize the level of stock. So all overall the trend is positive we see positives signing small customer like I mentioned before that theyre going back to normalize the bigger customers more willing to have complex supply chain. There are multiple sides of this.
Matt: Is something that we are more prudent not to date on a constant intimate discussion that we have practically every week with our customer today.
Speaker Change: And you mentioned some stuff on a little update on the cartridge market can you just give us any more color.
Speaker Change: Manufacturing capabilities capacity had been built out a little bit by some of your customers last year, but.
Speaker Change: Seeing some destocking there too.
Speaker Change: Smaller market, so probably not but could you just give us any anything anything there or any update there.
unknown: Larry, just to clarify the question, you're asking if we're also seeing destocking effects in cartridges?
Speaker Change: Sorry, just to clarify the question you're asking if we're also seeing destocking effects and cartridges.
unknown: Or just any update, not just Stocchi, just any update qualitatively, you know, in terms
Speaker Change: Or just any up not destocking, just any update qualitatively in terms of.
Matt: Yes.
Speaker Change: We we don't we have no sign for change went into demand with our customers.
Speaker Change: We see strong demand on Nexus to ranges and we see an increase in demand over comp did you say two field for sure in Carthage field. We are put in place high speed line that this is something that will generate more revenue in a later stage because our engineering individual using a complex phase to build the technology for internal use.
Speaker Change: So, but all overall the demand is robust and in biologics is really strong in this momentum.
Speaker Change: If I may just quick last question just on cash flow expectation.
Speaker Change: I think your cash balance was about $75 million currently.
Speaker Change: It looks like I think so can you just give us any thoughts on that in light of your Capex plans.
Speaker Change: Will you need to raise any more maybe.
Speaker Change: Any more financing this year any.
Speaker Change: Any thoughts on that thank you.
Speaker Change: So is national we have.
Unknown Executive: 78 million in cash on hand, we have availability on credit lines, and we have positive free cash flow from cash flow from operations. So we believe we are in the position to finance the growth at least for the next 12 months. And then, you know, looking ahead, we are still working on the plan for 2025. We are working on the budget to see a detailed plan for CAPEX in 2025.
Speaker Change: $78 million of cash on hand, we have availability on credit lines and we are.
Speaker Change: We had positive free cash flow from cash flow from operations. So we believe are in the position to finance the growth at least for the next 12 months.
Speaker Change: And then you know looking ahead, we are still working on the plan for the plant at 185. So we are working on the budget to see a detailed plan for Capex in 'twenty.
Speaker Change: We still have the balance sheet is more leveraged just so we can leverage the opportunity to further invest in <unk>.
Speaker Change: High value product.
Speaker Change: Obviously provided the internal rate of return is I got it in our cost of capital.
Speaker Change: Okay, great. Thank you very much.
Dan <unk>: The next question is from Dan <unk> of UBS. Please go ahead.
Speaker Change: Yeah.
Dan: Thank you.
Speaker Change: You made a comment that you are seeing an increasing shift to upgrade infrastructure to better align with Anna next one requirements could you elaborate a bit more on that.
Brad: Yes, Brad.
Speaker Change: Our next one is a new recommendation that practically all of it all is asking all the pharmaceutical industry to try to put in place. Some promises that avoid any type of risk to put in danger of distributor of the product.
Speaker Change: But I think all of which are down sort of stepping up the group on this our easy feel configuration, because we are going to be serving no glass to glass configuration for what customer is happy really to avoid any type of generation of plastic which can be tactical from glass.
Speaker Change: Ammunition Awesome article that came from during the Wuxi sterilization and eating program. So these theories of why we think that in the medium term the adoption of easy feel by Ken had given out to in order to boost our revenue on the top of this issue.
Speaker Change: Moving to our engineering segment is going to require more sophisticated, especially on line with a particular artificial intelligence.
Speaker Change: And improve the process.
Speaker Change: So all overall our next one in the medium term, we think that will be favorable for us to another group.
Speaker Change: Sure. Thank you and then as a follow up you mentioned that some of the Capex shift from China to Latina was the result of a regional capacity preference change from an anchor customer could you discuss that a bit more is that due to concerns from that customer.
Speaker Change: <unk> about bio secure or anything specific you could point to thank you.
Speaker Change: Oh I'm, sorry, we don't have the internal details from the customer.
Speaker Change: We know that's usually our global customer they want to secure a global footprint that he said he survived most probably at the site.
Speaker Change: Make some modification from one region to another one but we don't have more elements.
Speaker Change: In our hand.
Speaker Change: Okay. Thanks Franco.
Franco: You're welcome.
Speaker Change: The next question is from Curtis models than third party bags on please go ahead.
Curtis: Oh, yes. Thank you for taking my questions first one I just wanted to come back on the gross margin for the engineering segment I think I heard you say that you took kind of the biggest impact of the higher costs. In Q2 does that mean that in the second half of the year, we should see that gross margin bounce back to a more normalized level or what are you expecting there.
Speaker Change: Back to sequential improvement for the projects in engineering, we took things second quarter on those.
Unknown Executive: We expect a sequential improvement for the projects in engineering. We took the second quarter on those big projects. Nevertheless, we expect it to be some quarters before going back to normal profitability in engineering. We'll have to navigate and complete the projects and satisfy our customers. To do that, we need to put more effort and more people on the field in order to satisfy the customers.
Speaker Change: Those big projects.
Speaker Change: Nevertheless, we expect the stay.
Speaker Change: Some quarters before going back to the normal profitability in engineering, we still have to navigate and complete the.
Speaker Change: The project and satisfy our customers and to do that we need to put more effort and more people on the field in order to satisfy the customers.
Unknown Executive: Today, if I can also give some operational clarification, under the leadership of Ugo Guy, the new Chief Operating Officer, and not only Ugo, but also Raffaele Pace, whom most of you met at the past event, we are really, we are back, and we are building a clear program in order to really review all our footprints, to optimize all our factories, and even more to prepare the engineering division for the next future growth with our customers. So these are all the actions that we are putting in place. There is clear governance, in particular starting from Denmark, and we expect to have the first result in the next few quarters ahead of us.
Speaker Change: Today, if I can also give some operational clarification on.
Speaker Change: The leadership of all go Guy the new Chief operating officer, and not only we will all sort of fairly positive that most of you you made in the past in the past the event that we are really at the back of the building a clear program in order really to review all our footprint to optimize all our fabs.
Speaker Change: Three even more to prepare the <unk> division for the next future growth with our customers. So these are all the actions that were put in place. There is a clear governance in particular, starting from the end market and we come to to have the first the result in the next few quarters in front of us.
Speaker Change: Okay. That's helpful. Thank you and then the second question again, you were talking about earlier, how you are postponing the extension.
Speaker Change: China and shifting over to lithium I think.
Speaker Change: Does that kind of indicate to us that youre going to come in at the lower end of our full year capex range of $335 million or nothing really changing there.
Speaker Change: It's not a it's not changing the guidance for Capex, we expect.
Speaker Change: Between 300 to 300 certified the answer.
Speaker Change: He is not making a big difference in 2024 audit or any impact that we would be consider for 2025 guidance.
Speaker Change: Okay. Appreciate it thank you.
Speaker Change: Yes.
Unknown Executive: If I can say, maybe if there is no more questions, some final word. Today, all the organization is squarely focused to face these temporary challenges. But in the meantime, also, we are excited in the company because we are also working for the future. So there is a high concentration on the motivation in the company to deliver, in particular, with this new Greenfield plant. This amazing program that we have around Carthage straight to field.
Speaker Change: If you can say maybe if there is no more questions on final word today all the organization is squarely focused to face. These temporary challenges, but also in the meantime also we are excited in the company. Because we are also working for the future. So there is a high concentration on the motivation in the company to deliver.
Speaker Change: With these new Greenfield plants.
Speaker Change: Amazing program that we have around the country to say to feel today or the organization a matter. It is in Europe, United States pieces that would be good to deliver the long term agreement.
Unknown Executive: Today, all the organization, no matter if it's in Europe, United States, this is the big goal. To deliver the long-term agreement business plan that we have in the community with our customers. This is the only thing that we have tried to do every day.
Speaker Change: This brand is to be able to convince them into our customer. This is the only thing that we are trying to do every day.
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Speaker Change: The next question is a follow up from Paul Knight of Keybanc. Please go ahead.
Speaker Change: Hi.
Marco Wharf: Marco Wharf, Frank on the third party Inter company line item.
Paul Knight: Whats in that it seems have obviously been huge as well is that internal supply of inspection systems for yourself what is that exactly.
Speaker Change: And Paul we have that the glass forming machines.
Speaker Change: Our engineering segment is providing to Fisher and Latina to expand our capacity.
Speaker Change: Okay completely makes sense. Thank you.
Speaker Change: Welcome.
Speaker Change: That was the last question.
Speaker Change: Yeah.
Speaker Change: Ladies and gentlemen, thank you for joining the conference is now over you may disconnect. Your telephones. Thank you.
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