Q3 2024 Stevanato Group SPA Earnings Call
It should be simple science Ordinary things, not so blind You want to hear the truth, but ask for lies Kiss the night goodbye, and you're denied
Speaker Change: Thank you for watching!
Speaker Change: Good afternoon, this is the Coruscant conference operator.
Speaker Change: Welcome and thank you for joining the Stevanato Group third quarter 2024 earnings call.
Speaker Change: As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone.
Speaker Change: At this time, I would like to turn the conference over to Ms. Liza Miles, Senior Vice President and Investor Relations. Please go ahead, madam. Thank you.
Liza Miles: Good morning and thank you for joining us. With me today is Franco Stevanato, Chairman and Chief Executive Officer, and Marco Lago, Chief Financial Officer.
Speaker Change: 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
Speaker Change: As a reminder, some statements being made today will be for looking in nature and are only predictions.
Speaker Change: Actual events and results may differ materially as a result of the risks we face, including those discussed in Item 3D entitled Risk Factors in the company's most recent annual report on Foreign 20-F, filed with the SEC on March 7, 2024.
Speaker Change: Please read our Safe Harbor Statement included in the front of the presentation and 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.
Speaker Change: Today's presentation may contain non-GAAP financial information.
Speaker Change: 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 in our results, and providing meaningful period-to-period comparisons.
Speaker Change: For a reconciliation of these non-GAAP measures, please see the company's most recent earnings press release. And with that, I will now hand the call over to Franco Stevanato.
Speaker Change: Thank you for watching!
Franco Stevanato: Thank you Lisa and thanks everyone for joining us. Today we will review our third quarter performance, provide an update on market dynamics and discuss the ongoing initiatives to meet our objectives.
Speaker Change: For the third quarter, revenue was in line but margins were below our expectations.
Franco Stevanato: As a result, we are lowering our full year 2024 guidance for adjusted EBITDA and adjusted diluted EPS. The main factors are higher costs in the engineering segment as we implement our optimization plan.
Speaker Change: and, to a lesser extent, higher costs in the U.S. as we increase our validation activities.
Speaker Change: Let's start with the engineering. We are starting to see some initial benefits from the actions we have recently taken to improve execution and business performance.
Franco Stevanato: While it's still early days, we have successfully completed several complex projects in the third quarter for key customers that were previously delayed.
Franco Stevanato: As a reminder, we launched a business optimization plan designed to address the current challenges, improve the overall health of the business, and position the segment to return to profitable growth.
Franco Stevanato: The main steps we are taking are focused on optimizing our engineering footprint in alignment with our product strategy, right-sizing the operational structure as we move some activities to Italy, and harmonizing our industrial processes.
Franco Stevanato: Together, we believe this action will lead to an improved operational structure that can drive both cost savings and gains in productivity.
Franco Stevanato: Above all, we remain confident that this will position the segment for long-term success.
Franco Stevanato: We believe that the demand landscape for the engineering segment remains favourable.
Franco Stevanato: underpinned by long-term tailwinds such as the rise in biologics and the adoption of drug delivery devices, high regulatory standards like Annex 1 and the trend towards ready-to-use systems.
Franco Stevanato: Let's turn to Vial De Stocchi, which remains top of mind for many investors. Our thoughts on their recovery remain the same. We still expect to see Vial orders begin to pick up at the end of this year, with a gradual recovery in 2025.
Franco Stevanato: We continue to see positive signals in the market, and during the third quarter, collaboration with our customers reaffirmed our view.
Franco Stevanato: Nevertheless, market dynamics are such that customers are working down inventories at different rates.
Franco Stevanato: Despite the current weakness in buyers, we continue to see strong demand for our high-value solutions, which grew 18% year-to-date compared with last year.
Franco Stevanato: The continued momentum in biologics and the increasing trend towards high-performance primary packaging reinforces our investment strategies as we expand our capacity for high-value solutions to match this customer demand.
Franco Stevanato: Moving to our capacity expansion projects on slide 6.
Franco Stevanato: We continue to make relevant progress on the multi-year ramp-up of our expansion projects in Fishers and Latina.
Franco Stevanato: In both facilities, the ongoing installation of manufacturing lines and the customer validation are planned to be phased throughout 2025 and into 2026.
Franco Stevanato: In Fishers, we achieved a major milestone in the third quarter with the successful launch of commercial production, generating our first commercial revenue. During the quarter, we completed the installation of our second high-speed manufacturing line.
Franco Stevanato: We also started validation activities with several key customers, which are expected to continue for the rest of the year.
Franco Stevanato: In Latina, we are scaling production, improving utilization, and beginning to gain efficiencies. And, in the third quarter, the Latina project became profitable at the gross profit level. Marco will provide more details later on.
Franco Stevanato: Turning to slide 7, we recently announced the launch of the Alliance for RTU, together with other industry players. It has generated a lot of interest across the industry, from customers to other industry stakeholders.
Franco Stevanato: The purpose of this initiative is to educate the pharmaceutical industry as customers consider a transition to sterilized vials and cartridges.
Franco Stevanato: Over the last 30 years, the syringe market has converted mostly to sterilized solutions. We believe that customers will continue to adopt ready-to-use vial and cartridge solutions, replicating what we saw in the syringe market.
Franco Stevanato: R2 solutions meet the growing industry demand for greater efficiency, faster production times, and enhanced product quality by simplifying the filling process and reducing contamination risks.
Franco Stevanato: Furthermore, a shift to reduced products can facilitate compliance with Annex I. We are supporting customers through the assessment and decision-making process with scientific research through symposiums, webinars, and white papers.
Franco Stevanato: We continue to make tangible progress on our wider high-value solutions portfolio.
Franco Stevanato: We recently won a strategic supply agreement to support the first needle-free epinephrine nasal spray that recently received FDA approval. Under the agreement, we will produce our premium microvials used in the NFI device.
Franco Stevanato: In summary, we are making good progress and we remain focused on execution.
Franco Stevanato: Our growth investments are ramping. Latina was profitable in the third quarter and fishers started generating commercial revenue.
Franco Stevanato: In engineering, we are executing our optimization plan and completed several of the previously open projects in the quarter.
Speaker Change: And, while the effects of vial destocking are expected to gradually improve throughout 2025, we are starting to see some stabilization in vial demand as customers work down inventories. I now hand the call over to Marco.
Marco Lago: Thanks Franco. Before I begin, I want to clarify that all comparisons refer to the third quarter of 2023, unless otherwise specified.
Marco Lago: starting on page 9.
Marco Lago: For the third quarter of 2024, revenue grew 2% and 3% on a cost-on-currency basis to $277.9 million.
Franco Stevanato: driven by 6% growth in the biopharmaceutical and diagnostic solutions segment, which offset the expected decline in the engineering segment.
Franco Stevanato: Revenue from high value solutions grew 17% driven by high value syringes and to a lesser extent other product categories.
Franco Stevanato: iValue solutions represented approximately 36% of total revenue in the quarter versus 32% last year.
Franco Stevanato: We are currently forecasting a strong fourth quarter for high-value solutions.
Franco Stevanato: So, for the full year 2024, we now expect that high-value solutions will represent approximately 37-39% of total revenue, versus our prior estimation of 36-39%.
Franco Stevanato: Gross profit margin decreased to 26.8% in the third quarter of 2024 due to
Franco Stevanato: The ongoing temporary impact from vial destocking, including underutilization of vial lines, as well as lower revenue for more accretive, easy-fill vials.
Franco Stevanato: Inefficiencies and higher costs tie to the ramp-up in fisheries in Indiana as we scale our validation activities.
Franco Stevanato: and Iger Kost in engineering.
Franco Stevanato: For the third quarter, lower gross profit led to a decline in operating profit margin to 14.8%.
Franco Stevanato: On an adjusted basis, operating profit margin was 16.3%.
Franco Stevanato: For the third quarter of 2024, net profit totaled $30 million and diluted earnings per share were $0.11.
Franco Stevanato: On an adjusted basis, net profit was $33.1 million and adjusted diluted EPS were $0.12.
Franco Stevanato: Adjusted EBITDA was $63.7 million and adjusted EBITDA margin was 22.9%.
Franco Stevanato: Please turn to slide 10.
Franco Stevanato: Before we review segment results, we thought it would be useful to dive deeper into the temporary inefficiencies that we typically experience during the startup phase of a new manufacturing site.
Franco Stevanato: their impact on margins and expected gross profit trajectory.
Franco Stevanato: This slide illustrates the timing and phasing tied to a new manufacturing plant, as an example.
Franco Stevanato: For the new brownfield site in Latina, we acquired the building in Q1 2022.
Franco Stevanato: We started generating revenue from commercial production in Q4 2023.
Speaker Change: As Franco noted, in the third quarter of 2024, the site was a slightly positive contributor to the group's margin.
Franco Stevanato: The current temporary inefficiencies that we are experiencing reflect the under-absorption of expenses in the early phase of the project, as well as the ongoing activities to support the multi-year capacity ramp-up.
Franco Stevanato: But as production capacity, productivity and revenue progressively increase, we expect that unfavourable impacts will gradually abate and we will benefit from higher utilisation, better product mix and scale.
Franco Stevanato: Thank you for watching!
Franco Stevanato: Let's review segment results on page 11.
Franco Stevanato: for the third quarter of 2024.
Franco Stevanato: BDS segment revenue grew 6% and 7% on a constant currency basis to $233 million, driven predominantly by growth in high-value syringes and to a lesser extent other products.
Franco Stevanato: Top-line growth of 6% was offset by a revenue decline of approximately 38% related to vials, and the drop was more pronounced in easy-fill vials.
Franco Stevanato: Revenue from high-value solutions grew 17% to $100.4 million in the third quarter.
Franco Stevanato: while revenue from other containment and delivery solutions was $132.6 million and consistent with the prior year period.
Franco Stevanato: Gross profit margin for the BDS segment was tempered by
Franco Stevanato: The ongoing effects of vial de-stocking, including lower revenue for more accretive easy-fill vials, underutilization and the underabsorption of overhead costs.
Franco Stevanato: and start-up inefficiencies and some higher costing features.
Franco Stevanato: As a result, Gross Profit Margin for the BDS segment decreased to 28% and Operating Profit Margin declined to 16.9% for the third quarter of 2024, compared with the same period last year.
Franco Stevanato: For the third quarter of 2024, revenue from the engineering segment decreased 15% to $44.8 million.
Franco Stevanato: Performance in the business was mixed with expected revenue declines in glass conversion and visual inspection, offsetting growth in assembly and packaging.
Franco Stevanato: Gross Profit Margin decreased to 15.6% and Operating Profit Margin declined to 10.1% for the third quarter.
Franco Stevanato: The decrease in margin was driven by higher costs related to certain highly complex projects.
Franco Stevanato: and expenses tied to our business optimization plan.
Speaker Change: As Franco noted, we are making progress with our optimization plan, but it will continue to take some time.
Speaker Change: We believe we have set the path for continued operational and financial improvement, which we expect will better position the segment to capture and execute future opportunities.
Franco Stevanato: Please turn to the next slide for a review of balance sheet and cash flow items.
Franco Stevanato: We continue to carefully manage trade working capital to support the growth of our business. As of September 30th, inventory levels were higher compared to December 31st, 2023.
Franco Stevanato: while contract assets decreased, in part due to the advancement of projects in the engineering segment.
Franco Stevanato: We ended the third quarter with cash and cash equivalents of 78 million and net debt of 284.3 million.
Franco Stevanato: Through a combination of our cash on hand, available credit lines, cash generated from operations, and our ability to access additional financing,
Franco Stevanato: We believe that we have available liquidity to fund our strategic and operational priorities over the next 12 months.
Franco Stevanato: As expected, capital expenditures for the third quarter of 2024 total $58.8 million, as we continue to ramp up in Latina and Fishers to meet market demand.
Franco Stevanato: In the third quarter of 2024,
Franco Stevanato: Net cash from operating activities totaled $18.3 million
Franco Stevanato: Cash use in the purchase of property, plant equipment, and intangible assets was 47.8 million.
Franco Stevanato: This resulted in negative free cash flow of 28.4 million in the third quarter.
Speaker Change: Thank you for watching!
Franco Stevanato: Lastly, on slide 13, Guidance. We are maintaining our Revenue Guidance for 2024, but lowering our Outlook for Adjusted Bid and Adjusted Diluted EPS.
Speaker Change: As Franco mentioned, our guidance now includes additional costs with the actions that are underway with our engineering optimization plan.
Franco Stevanato: and to a lesser extent, higher costs as we increase our validation activities in the U.S.
Franco Stevanato: For fiscal 2024, we still expect revenue in the range of $1,090,000,000 to $1,110,000,000.
Franco Stevanato: Thank you for watching!
Franco Stevanato: And we now expect...
Franco Stevanato: Adjusted bid in the range of $257 million to $263 million and adjusted diluted EPS in the range of $0.47 to $0.49
Franco Stevanato: Thank you for watching!
Franco Stevanato: As we consider 2025, our thoughts remain unchanged, and we remain cautious in the near term.
Franco Stevanato: We still expect that the pace of recovery in bulk and easy-fill vials will be the largest swing factor in the level of growth next year.
Franco Stevanato: That said, we also continue to see strong demand, particularly for high performance syringes and other product categories such as cartridges, IVD and DDS.
Franco Stevanato: We also anticipate improvement in the engineering segment alongside the implementation of our optimization plan.
Franco Stevanato: As always, we intend to provide formal guidance in March.
Speaker Change: Thank you. I will end the call back to Franco.
Speaker Change: Thank you for watching!
Franco Stevanato: Thank you Marco. In closing, while 2024 has presented many challenges, we are focused on execution and achieving our long-term objectives. We operate in growing end markets with favorable secular tailwinds, and we have several reasons to be confident in our strategic direction.
Franco Stevanato: First, we continue to deliver organic growth, driven by high-value solutions, the main pillar of our long-range construct.
Franco Stevanato: We are investing in the right areas to meet growing customer demand.
Franco Stevanato: Second, we expect to increasingly benefit from the new capacity in Italy and in US as we advance our ramp-up activities and drive profitable growth.
Franco Stevanato: Third, the buyer market continues to show positive signs.
Franco Stevanato: And, we remain optimistic that as the demand continues to stabilize, we will see a return to historical market volumes and growth rates.
Franco Stevanato: Finally, in the near term, we are implementing a clear and actionable plan to optimize the operations and improve execution in our engineering segment. This together coupled with the strong fundamentals of our business and the high commitment of the team.
Franco Stevanato: Set the stage for us to drive durable double-digit organic growth, expand margins, and drive long-term shareholder value. Operator, let's open it up for questions.
Speaker Change: Thank you, this is the Costco Conference Operator. First of all, we apologize for the technical issues we had on the webcast from our side.
Speaker Change: We will now begin the question and answer session.
Speaker Change: Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. To remove yourself from the question queue, please press star and 2. Please pick up the receiver when asking questions.
Speaker Change: In the interest of time, please limit yourself to one question and a follow-up only. Anyone who has a question may press star and 1 at this time. The first question is from Michael Ryskin, Bank of America. Please go ahead.
Speaker Change: Hi, thank you for the question. This is Avantika on for Mike. I understand that you will provide formal guidance for 2025 on the 4Q call, but the street is modeling mid to high single-digit
Speaker Change: digit growth on the top line for 25, and you reiterated your long-term construct of 11%. You know, I understand that you've had headwinds in fiscal year 24 from DSALP in the engineering segment, but is this a good starting point for 25 as we stand today? Thank you.
Speaker Change: Thank you for watching!
Speaker Change: Yes, thanks for the question. Yeah, you are right, we will provide formal guidance next quarter.
Speaker Change: What we mentioned during the commentary is the summary of what we see today. I mean the uncertainty is related to the pace of recovery in easy field vials and in bad vials. This is the uncertainty.
Speaker Change: On the other side, we still continue to see favorable tailwinds, particularly in high-performance syringes, but also in other product categories like cartridges, in vitro diagnostic drug delivery systems.
Speaker Change: We also anticipate improvements in the engineering segment alongside the implementation of our business optimization plan.
Speaker Change: Finally, we expect improved financial performances in Fishes and Latina as we increase our capacity and increase our level of revenue, better leveraging the fixed expenses that are under pressure during the startup phase.
Speaker Change: Thanks for watching!
Speaker Change: So, in the end, we see a reasonable assumption.
Speaker Change: Thanks for watching!
Speaker Change: All right, great. Thank you so much.
Speaker Change: The next question is from Matt Leroux of William Blair. Please go ahead.
Matt Leroux: Hi, thanks for the question.
Speaker Change: you referenced maybe smaller customers in some countries getting back to ordering some positive conversations with larger customers just curious if you had to bucket
Speaker Change: by customer group, what the conversations are like, and if sort of the number of each customer is making positive progress in each group has increased.
Speaker Change: Thank you for your question.
Speaker Change: Based on our customer conversations, we would characterize the market as normalizing.
Speaker Change: While we see some positive signals, it's still a mixed bag.
Speaker Change: Customers are working through inventories at different rates.
Speaker Change: In terms of orders, we started to see gradual improvements in vial order in the second half of 2024 compared to the first half.
Speaker Change: but we're also seeing customer forecasts that indicate increased demand for Vial in 2025.
Speaker Change: That being said, the timing and pace to recovery remain uncertain.
Speaker Change: But the work we are doing with our customers gives us caution-optimism in 2025.
Speaker Change: Thanks for watching!
Speaker Change: Matt, just to clarify on your question, I think you were also asking about, as it may relate to larger customers versus smaller customers, I think we can add some additional color on that. And I'll ask Franco to chime in here. Okay.
Speaker Change: Yeah.
Franco Stevanato: We are starting to see
Speaker Change: or they're coming through in smaller market like Latin America in particular.
Franco Stevanato: and in our larger market, things are going in the right direction. We are seeing updated customer forecasts that point to increasing buyer demand in 2025. So, all over all, we are starting to see positive signals month after month.
Speaker Change: Okay, thank you. And then if the sort of the stocking issue is maybe a market issue, the engineering issues perhaps to some extent more internal or under your control. Just curious on sort of the new guide and also the outlook.
Speaker Change: you know, how much of your ability to hit your expectations is under your control? Whether that's the optimization program or completing projects versus things that are perhaps out of your control like earlier when you were waiting for components or you know, dealing with customer changes.
Speaker Change: If you want I can start to give you an overview of the picture of the situation and Marco can maybe drive more through the numbers if it's ok.
Speaker Change: So, in engineering, we are starting to see some initial benefits from the action we have recently taken.
Speaker Change: We launched an optimization plan designed to address the current short-term challenges, improve the footprint, and position the segment to return to profitable growth.
Speaker Change: First, we have successfully completed complex projects in the third quarter for key customers.
Speaker Change: Second, we are focused on optimizing our engineering footprint in alignment with our product strategies.
Speaker Change: Third, we are improving operational structures that can drive both cost savings and gain in productivity.
Speaker Change: We believe we can return to the segment to profitable growth by middle of next year.
Speaker Change: But some actions we are taking are expected to drive long-term results.
Speaker Change: The demand for the engineering segment remains favorable today, boosted in particular by long-term tailwinds such as the raise in biologics, the adoption of drug delivery devices, and more and more the new regulatory like Annex I and the trend towards ready-to-use systems.
Speaker Change: Thanks for watching!
Speaker Change: Yeah, right, the main driver of the change of our guidance is related to engineering in 2024 and in Q3 and Q4 so as Franco was saying we are taking action in order to
Speaker Change: regain the future profitability in a sustainable way and this is the main driver of the change of our guidance this year. Beside that we had also some changes related to the
Speaker Change: ramp-up cost for validation in Latina
Speaker Change: But again, we are working hard to take future advantage with the action we are taking today.
Speaker Change: And Matt, just a final close-out comment on that.
Matt Leroux: You're correct, it is really largely within our control as it relates to the execution and engineering. We really are no longer suffering from the supply chain challenges that we felt early on after the record wins that we had in that segment in late 2022.
Speaker Change: So as we advance our business optimization plan today, those actions are, we would characterize them as largely within our control.
Speaker Change: Thanks for watching!
Speaker Change: Okay, thank you for all the color.
Speaker Change: The next question is from Larry Solo, CJS Securities. Please go ahead.
Larry Solo: All right, thanks and good morning, good afternoon. I guess the first question is on BDF, some of the moving parts. You mentioned vials were down 38%.
Larry Solo: Was that kind of in line with your expectations or was that still a little bit worse and just within that, has bulk started to come back at all? It doesn't sound like the RTEU has, but I'm just curious a little bit more granularity on the vial piece.
Marco Lago: So Marco is speaking. Thanks for the question. So it's in line with our expectations.
Speaker Change: I mean we changed our guidance after Q1, basically we expected and we can see also today.
Speaker Change: steady level of revenue in Q2, Q3, and Q4.
Speaker Change: We are down 38% and the decrease is more pronounced in easy field buyers. That is impacting our margin because they are very effective for us.
Speaker Change: We can see some good signals in orders, in take-up, that was what Franco was mentioning.
Speaker Change: We can see improvement in overall situation, but it's more for revenue to be generated in 2025 rather than in Q4 2024. So we see still a steady situation in 2024.
Speaker Change: Thanks for watching!
Speaker Change: Where we stand today, I imagine, you know, are we still losing money there? I assume so. When do you kind of think that fissures can turn break-even and actually start reaching a profit? Is that like a 26, 27 target? Any thoughts on that?
Speaker Change: Thank you for watching!
Speaker Change: I start with the margin question then Franco for sure will complement on the operational and business point. So from the margin standpoint of view as you can see the illustrative graph we are now we have now started the
Speaker Change: revenues in commercial ways.
Speaker Change: in the lower point of our profitability because of the activities we are putting together with validation, with customer testing, and the ramp-up of the production, validating the lines.
Speaker Change: immediately after the installation. So, we expect improvements in the next quarter.
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Speaker Change: Bearing in mind that fissure is a larger plant compared with Latina.
Speaker Change: The financial performances in Fishers and Latina are expected to be on the positive side.
Speaker Change: Thank you.
Speaker Change: Okay maybe I can further give some color about the capacity we are doing between Fisher and Latina.
Speaker Change: We continue to make progress in both the greenfield plants. So in both facilities, the ongoing installation and manufacturing line, and the customer validation are on track today with a very high-intensity activity with a partnership together with them.
Speaker Change: In Fischer, in the third quarter, we started commercial production and we started to generate our first commercial revenue. During the quarter, we also completed the installation of our second high-speed manufacturing line, and we started validation activity with several new customers.
Speaker Change: In Latina, we are scaling production and this quarter the plants become profitable at a gross profit level. So, in conclusion, we continue to see strong demand for high value solutions driven by the strong momentum in biologics.
Speaker Change: and this reinforced our decision to strategically invest in particular in Fisher and in Europe.
Speaker Change: Great, thank you Franco, I appreciate that.
Speaker Change: The next question is from Patrick Daly, Citi. Please go ahead.
Patrick Daly: Hey guys, thank you for taking the questions. I have two, maybe I'll just ask them both at once. Marco, just on the margin side, can you just talk about...
Patrick Daly: You know, what you're seeing there, obviously the engineering piece dragged a little bit. It would be helpful just to talk through the moving pieces there and expectations going forward.
Patrick Daly: And then, you know, Franco obviously talked a little bit about the destocking piece.
Patrick Daly: Can you just talk about the confidence level that it's mostly in the rear view behind you guys? I mean, what would be the risks of that, you know, another leg there or are you guys feeling based on the order patterns, you know, very confident that's over and we're in some level of stability to recovery? Thank you guys.
Speaker Change: Oh
Speaker Change: The stocking was one of the most painful headwinds that we had in 2024. And I would like to start also in order to clarify that the value of the stocking is just a temporary dynamic.
Speaker Change: This is a temporary inventory normalization effect. This is not a question if the vial market will recover, it's a question when the market will recover.
Speaker Change: VIA are still the most adapted containment format globally.
Speaker Change: Every year, just to give you an idea, approximately more than 13 billion vials are used to deliver treatment to the patient, and this is through all the different pharmaceutical companies, all through the different therapeutic areas in the different regions around the world.
Speaker Change: So, we have a strong confidence that the oil markets are healthy and via demand will return to its pre-pandemic volume.
Speaker Change: Just to give you another information, today we are below 2019 Vial Demand Level and to us this is clearly an inventory normalization effect.
Speaker Change: On the top of this, we continue to see positive signals from many of our customers, both small customers that are reactivating orders in the second part of 2024 and bigger international customers that are sharing new podcasts for 2024.
Speaker Change: So, step by step, we have a cautious optimist that we are going to the right directions.
Speaker Change: We are facing some challenges, we explained last quarter, with some specific, highly customized, complex projects.
Speaker Change: We are in the good direction to fix them. As Franco was mentioning, we have been able to complete some of them in the quarter. Nevertheless, we are taking action to optimize the segment.
Speaker Change: and we expect it will take another two to three quarters to fully normalize our profitability. This is embedded in our guidance, obviously, and this is an area where we are working hard and taking action in order to set the stage for the future growth.
Speaker Change: The next question is from Jacob Johnson Stevens, please go ahead.
Speaker Change: Thanks for watching!
Speaker Change: Hey, thanks. Good morning. Maybe sticking on the margin front.
Speaker Change: Your guidance would seem to imply a decent step up in EBITDA margins sequentially. Just curious how to think about that in terms of gross margin expansion sequentially versus operating leverage.
Speaker Change: It is mainly driven by gross profit margin in Q4.
Speaker Change: We...
Speaker Change: expect to leverage better volumes.
Speaker Change: The mix is expected to improve in Q4. As you can see, we increased a little bit the guidance for high-value products because we are largely covered by
Speaker Change: firm committed orders from customers there. So the confidence is both on volumes and mix.
Speaker Change: And finally, we expect slightly better performances in Latina and fishes in Q4 compared to Q3. So, mainly business and operational improvement rather than cost reduction.
Speaker Change: Thank you for watching!
Speaker Change: Thanks for that, Marco. And maybe just sticking on the cost side, you know, you guys lowered the guide to some incremental costs for engineering and fissures. As we think about the kind of
Speaker Change: The return on those costs, do those incremental costs maybe help accelerate the recovery in engineering and the rampant fissures, or just any way to think about where that money is going and the potential benefit from it.
Speaker Change: Thanks for watching!
Speaker Change: Yeah, let's say we are investing now to improve the situation, the profitability in the future. They are very different situations, I mean in fisheries, as you know, we are ramping up.
Speaker Change: the production, validating the lines with customers. So this is driven by strong demand we see for the future and customers are willing to validate the production to leverage our capacity in the future. In engineering, as we commented, it's more to...
Speaker Change: execute our business optimization plan and be more profitable in the future.
Speaker Change: Yes, I confirm. We have decided to apply this decision right now in order to build a new platform to set in the future more cost competitive in order to increase our productivity.
Speaker Change: Thank you for watching!
Speaker Change: Got it. Thanks for taking the questions.
Speaker Change: Thank you. Bye-bye.
Speaker Change: The next question is from Dave Vindley, Jeffries. Please go ahead.
Dave Vindley: Hi, thanks for taking my questions. I was hoping to understand a little bit better how
Dave Vindley: Larry kind of asked this question but where where we stand in Fishers related to the the illustrative slide that you provided
Dave Vindley: Did I understand you to say that you're at a kind of maximum operating loss there and with increased revenue you would expect that to get better? Did I understand that correctly? And how should we think about incremental margin?
Dave Vindley: as that revenue improves in Fishers. Thank you.
Speaker Change: You know, we started commercial production in Q3.
Speaker Change: So, our expectation is to increase
Speaker Change: the revenues quarter after quarter, with more validation, more lines installed, so on and so forth. We expect to better leverage fixed expenses as soon as our production will steadily go up. So this is our assumption.
Speaker Change: We believe we touched the lower point in this quarter with the higher cost associated with the validation and the installation. Correct. It's very similar.
Speaker Change: the journey we had with Latina. Now we have also the second line. Also in parallel, we are performing again validation and we started to deliver commercial revenue also with the second line. In the next quarter we will continue with this path with the same.
Speaker Change: similar to what already happened in Latina today.
Speaker Change: In the long run, Fischer will have an even wider product portfolio because we are going also to produce some ALBA technology, some auto-injector technology. So in the long run, at a certain point, Fischer, in the long period, will be even wider and bigger than Athena.
Speaker Change: Thanks for watching!
Speaker Change: Okay.
Speaker Change: So, when you talk about gradual recovery,
Speaker Change: in vials in 25. Can you help to define what that means?
Speaker Change: Should we...
Speaker Change: You know pick a point in the second half of 25 and kind of assume somewhat of a straight line from here to there
Speaker Change: of the destocking negative impact lessening from here to there, or again, I'll just say it again, what does gradual recovery in 25 translate to for us?
Speaker Change: Let me just quickly start. I think as Marco commented
Speaker Change: earlier.
Speaker Change: that the largest swing factor that we have for growth next year is really going to be tied to the timing and pace of recovery in vials.
Speaker Change: and so as you know that there is a sufficient amount of capacity on the market today and so customers are not necessarily compelled to place orders as quickly as they may have historically.
Speaker Change: and so as we move into 2025 I think that it would be early to speculate kind of the timing and pace of that and I just don't think we're in a position today and Marco or Franco could add additional color if they'd like.
Speaker Change: we have a constant exchange with our customers in particular at the end of the year and we see that
Speaker Change: Month by month, they are going to increase their way that they give more transparency on the forecast for 2025, not only the small customers, but also big international organizations.
Speaker Change: But still we want to have a caution optimism that 2025 will be the year that we will recover. We want to be prudent to understand when it will be the right normalization.
Speaker Change: Thanks for watching!
Speaker Change: I could just...
Speaker Change: Sorry.
Speaker Change: Sorry.
Speaker Change: Go ahead, Dev.
Speaker Change: So those are, you're adding costs, these are, you know, plans that were in place before and you're adding costs related to those. Can you talk about what, you know, what has deviated from your previous expectation that requires those additional costs? For example, in Fishers is
Speaker Change: validation proving to be more challenging.
Speaker Change: than you previously expected? Are you validating for more customers than you previously expected? And similarly, in engineering, what is requiring the additional cost relative to the optimization plan that you set out before? Thank you.
Speaker Change: The ramp-up activities are advancing as planned and we are happy about the program. We have a higher cost for features related to validation.
Speaker Change: And some time is taking longer depending on customer approach, their process, and not every customer is the same with respect to the validation activities.
Speaker Change: We are targeting here, as you know, high value products, so the requirements are often very level. Anyway, we are very happy about the success we gained in validating the plant in the first line with the very important customers.
Speaker Change: that are, by the way, already committed to order, so they are really willing to start with us.
Speaker Change: For what is related to the engineering segment, one of the main actions that we are taking in our optimization plan is to review our footprint. For example, we have done some right-sizing of our operational structure and we have moved some activity to Italy. We have decided to move with this type of decision in order to build the product.
Speaker Change: the floor for the next growing in order to increase our productivity and reduce our cost. We have decided to do this investment right now, today, in order to gain and to be back on more regular marginality for next 2020, in the middle of next 2025.
Speaker Change: Thank you.
Speaker Change: Got it. Thank you, appreciate the extra question. Thanks.
Speaker Change: Thank you.
Speaker Change: The next question is from Paul Knight, KeyBank Capital Markets. Please go ahead.
Speaker Change: Thanks for watching!
Paul Knight: Hi, Franco. Could you talk why Indianapolis is coming online faster? Was it customer request, customer payment? What were the dynamics from what we thought would be a later 2025 startup?
Paul Knight: Thanks for watching!
Speaker Change: two, three quarters after Latina, so we are exactly in line with our plan. Obviously, now it's a matter of ramping up the revenue and the activities there and better leverage the fixed cost we have there.
Speaker Change: But
Speaker Change: For honesty, we are exactly in line with our plan in order to...
Speaker Change: Remember, Paul, that Latina was a brown field and fisheries are green field plants.
Speaker Change: And the Greenfield plants also, from the moment that we decided during the IPO to do the Greenfield plants, we received some additional orders like BARDA, also the other opportunity that we have enlarged the plant. So this is why we have this, let's say, few quarters of difference between Europe and the United States.
Speaker Change: Okay, and then within an engineering group...
Speaker Change: Thank you.
Speaker Change: The turnaround there, is it done in terms of fixing operations in Northern Europe? Where are we from where you want to be with the efficiencies at engineering in Northern Europe, Denmark, I believe.
Speaker Change: So today, our goal is to build
Speaker Change: center of excellence for each product, and already our original idea is to have for inspections the system to have excellence in Denmark and also in Italy in particular, in Bologna.
Speaker Change: So this plan is in place and it will require also a few quarters in front of us. Our expectation is to be in the middle of next year, to be back on certain marginality.
Speaker Change: Thanks for watching!
Speaker Change: The last question would be the startup of hiring and training people in front of capacity starting like Indiana, like Latina.
Speaker Change: What do you think that's had? A 100 basis point impact on gross EBITDA margin? Is it 200 or is it kind of a range of 100 to 200? Can you kind of...
Speaker Change: give a formula or a data range on
Speaker Change: What I can tell you, Paul, is that we are...
Speaker Change: having in this quarter negative gross profit in the combination of Fisher and Latina.
Speaker Change: So, the graph is illustrative, but we are not still at overall the combination of the two in positive gross profit margin.
Speaker Change: And since we are targeting high-value products here, we expect...
Speaker Change: the final gross profit margin will be above the average of...
Speaker Change: the company. So you can see the magnitude of the delta we are suffering today with the ramp-up of the two facilities but again we are doing it for future profitability covered by customers demand.
Speaker Change: Okay, thank you.
Speaker Change: Thank you for watching!
Speaker Change: The next question is from Dan Leonard, UBS. Please go ahead.
Speaker Change: Thanks for watching!
Dan Leonard: Thank you.
Dan Leonard: I have a follow-up to Jacob's question from earlier. I'm just trying to better understand the Q4 sequential margin expansion. I mean I'm looking at a 500 basis point sequential gross margin improvement from Q3 levels into Q4. Is that number correct? And it does seem inconsistent with historical incremental margin, so I was wondering if you could
Dan Leonard: you know, help me better understand the buckets that would drive that.
Speaker Change: Yes, thanks for the question.
Speaker Change: Thank you for watching!
Speaker Change: We are targeting at the center point more than 320 million of revenue in Q4. We are largely covered by committed orders.
Speaker Change: And the mix is expected to be pretty good and that's the reason why we increased the guidance for high value products in Q4. And again, we are covered by...
Speaker Change: committed orders from customers.
Speaker Change: The mix and the growing volumes is expected to help the better levels of fixed expenses and the mix. And on top of it, we are expecting better...
Speaker Change: performances from the financial point of view, both in Fishes and Latina, as soon as we step up with the revenue and the coverage of fixed expenses. So the combination of these events is giving us confidence in delivering the guidance for Q4.
Speaker Change: Thanks for watching!
Speaker Change: Okay, I think I understand a bit better. And just a quick follow-up, Franco, I was wondering if you could...
Speaker Change: Better to mention that comment you made that vial demand is below 2019 levels, but by how much? And I'm trying to better understand the magnitude of revenue lift possible if demand merely returned to 2019 levels.
Marco Lago: Yes, Marco is speaking.
Speaker Change: We disclose clearly we are down 48-40% compared to last year in bias and is coming after a year when we decline
Marco Lago: the COVID business that was mainly biased by 80 to 90 millions in 2023. So it's the combination of two years of decline is putting us in a condition that we are below 2019 demand.
Marco Lago: What to expect for the future? I think we we disclose of the variables in place
Marco Lago: between large customers and smaller customers, also by geographical area. Obviously not easy today to put together the combination of all these probability and give you precise guidance about 2025. This is the main uncertainty we need to assess and to address for 2025.
Speaker Change: Thank you for watching!
Speaker Change: Okay, thank you.
Speaker Change: You're welcome
Speaker Change: Thanks for watching!
Speaker Change: The next question is from Curtis Moyles, BNP Paribas-Xaine. Please go ahead.
Speaker Change: Thanks for watching!
Curtis Moyles: Thank you for taking my questions. Just looking at the 50-year guidance, you know, the range that you have out there for the implications for Q4, it looks like it's kind of anywhere from a 1% decline to a 5% increase in Q4, so I kind of wanted to get a better idea of what the moving parts are there. Are you expecting an improvement in BDS and engineering, or is one going to do better than the other, or any other color will be helpful?
Speaker Change: Thank you for watching!
Speaker Change: For KIFOR, expectation is to improve mainly in BDS segment.
Speaker Change: where we are basically leveraging the high value products, the higher volumes, and the Trampaco fishes in Latina. So it's mainly about the BDS segment improvement.
Speaker Change: Thanks for watching!
Speaker Change: Okay, that's helpful. And then also just going back to the destocking, you know, you're calling out vial orders expected to improve or pick up by the end of the year. Should we expect any kind of impasse on revenue in Q4 or is that going to be delayed until 2025 at the earliest?
Speaker Change: Thank you for watching!
Speaker Change: Again, as Franco was saying, we are gaining traction in order. We see some improvement and not yet the normalization of the level of orders in vials.
Speaker Change: Orders are mainly for beginning of 2025 rather than Q4 2014.
Speaker Change: 24. So 24 was a challenger for Stevanato Group. We faced some temporary painful headwind this year. Via the stocking took the industry by surprise and will turn around. This is important that we need to be clear.
Speaker Change: We are also in a cycle of high investment in Fisher and in Latina, but we are doing this investment for the future.
Speaker Change: In engineering, this is within our control, and we feel confident that the action we are taking will deliver results.
Speaker Change: On the other side, we see sustained demand for high-value solutions, in particular non-syringes, NEXA and ALBA, and cartridges 3-2-3.
Speaker Change: At the end of the day, the fundamentals have not changed, the demand landscape is robust and we have long secular tailwinds. In short, we are positioned for profitable growth.
Speaker Change: So, from our perspective, as we consider 2026, we would expect that, while the stocking will be behind us, we will gain leverage from scaling our new operation in Latina and in Fisher, and the engineering segment should return to profitable growth.
Speaker Change: This gives us continued confidence in our ability to achieve and adjust the bid-dumb margin of 30% and high-value solutions in the range of 40% to 45% in 2027. This is the behavior that we have today with the leadership team.
Speaker Change: Thanks for watching!
Speaker Change: Thank you.
Speaker Change: Operator, do we have any other questions?
Speaker Change: As a reminder, if you wish to register for a question, please press star and 1 on your telephone.
Speaker Change: Once again, if you wish to ask a question, please press star and 1 on your telephone.
Speaker Change: Ms. Miles, there are no more questions registered at this time.
Liza Miles: Thank you very much. We want to thank everyone for joining us today and have a wonderful day.
Speaker Change: Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your telephones.
Speaker Change: Thank you for watching!