Stevanato Group S.p.A. (STVN) Earnings Call Transcript & Summary

Good morning. This is Paul Knight, the life science analyst at KeyBanc. It's a pleasure to have today the management team from Stevanato Group. With us today is Franco Stevanato, the Chairman of the company; Franco Moro, the CEO; and Marco Dal Lago, Chief Financial Officer; and Lisa Miles, who is Head of Investor Relations. The format is if you have questions, you can enter them on the chat or you can e-mail [email protected]. KeyBank, K-E-Y-BA-N-K.

So with that, I guess I would start out with the first question for you, Franco Stevanato, and that is if you could kind of do the history of the firm and where you sit relative to the names that I think other investors are familiar, specifically, West and Schott and Becton, Dickinson.

Sure, Paul. Thank you very much. So first of all, good morning, everybody. Stevanato Group is a company that has a special legacy, it was founded in 1949. It's a company that since the end of 1980, we focus all our efforts on the pharmaceutical space. We are a leader in value container solution for the pharmaceutical, in particular, for injectable space. Stevanato had the origin in Italy. We have started to have the first operation plant in Italy. But in the last 2 decades, we try more and more to become global to move our production plant more in proximity to our customers. Today, we have a footprint, we are present in 9 different countries with 16 plants. So the characteristic of Stevanato is that we've built in the last 20 years, our business model around science and technology for the pharmaceutical industry. In fact today, we are able to deliver to them via cartridges, syringes on the ready-to-fill format. And also, we have a strong pipeline in drug delivery system. A strength that we have built in the last 4 years in Stevanato that makes us a little bit different to other competitor is that, that we develop the engineering in-house. So all the type of equipment that we produce for us and for our customers are developed by our engineering division. This allowed Stevanato to have even more productivity and to be able to serve a good product with a good quality. So who we are. So if you compare Stevanato, usually our peers is West. West is a company that is focused on science and technology that is delivering a rubber container solution for the pharmaceutical industry. We base our business model that we produce this glass container with a particular size all around. This is one of the characteristic that allowed Stevanato to be recognized like important part. We have decided to do the IPO last year for the simple reason that we are looking to further expand our investment. Today, we are building a greenfield plant in Indiana, one greenfield plant in China in order to be more in proximity with our customers worldwide.

And the next question I would have for Franco Moro is, Franco, the industry participants like Danaher have been optimistic about growth even with COVID comparisons. What or how many years ahead do you feel you see customer demand? I know you're doing engineering work, are you seeing 3 years in advance or more of therapy approvals?

It's a very important question linked to the nature of our business. For sure, we have a very high visibility in the short term due to our backlog. But we have very good visibility also for the future because we have a robust pipeline of projects that engage our customer with our own capabilities in an early stage of their project, maybe different clinical phase of a single project. And the base of our view on the future is that high diversification of this pipeline that is most focused on biotech because of the high performance and the high level of suitability of our high-value solution for this specific part of the business that imply having so high sensitiveness of molecules. So in terms of the time frame, we can look at. You know that if you started from the Phase I, you can have more than 5 years in front of you before reaching the final commercial volume. If you are engaged in Phase III, there is a short-term period of time, as a matter of fact, the timing you need to reach the commercial phase, we also designed that is a very high barrier to entry this business because if you have to build the trust with the customer to make the journey together with them. So in terms of overall visibility, I can't have that where we speak about BDS, the time frame could be even longer something between 5 and 10 years for their delivery system. But as an average, our pipeline is targeted as midterm 4, 5 years to reach a significant volume at commercial level.

And I think although the industry used to be when it was serving the drug part of the market was lower growth, more price competitive in this period of biologics ahead of this, Franco, is this a fundamentally higher level of profitability and less competition when you're in the biologics marketplace?

So sure, the level of competition is lower because the complexity of the solution you have to provide to the customer is much higher. So at the end, is the scientifical needs of the customer that make the decision in choosing one solution or another one. What we have in our portfolio in terms of quality, in terms of performances is very high and has a few comparable in our space. I want to name just a couple of our brands, that is Nexa and Alba syringes. These kind of special syringes proved to be at top level in terms of matching the needs of biotechs because we are able to provide a customer solution that minimize the risk of interaction between the containers and the drug, at the same time, minimize the risk of having particles coming from the coating going into the drug. So there is -- this type of contamination is very, very low. There are some specific niches like ophthalmology that has a very high sophisticated requirement in terms of quality. So answering your question, yes, we are focusing on biotech because we believe that our size and technology provide the best solution for the customer. On top of that, our sterile configuration vial may have additional advantages when we target the cost reduction, total cost of ownership reduction for our customer, removing part of their effort in the filling line to make this as a service provided by our own. But this is something that I think we can talk over more during the meeting.

Franco, we've heard from others in the industry as well that the preferred method by biotechnology developers is prefilled, ready-to-use syringe. Why is biotechnology wanting that to be the preferred delivery method?

It normally is because it's the safer way to deliver the treatment to patient with a very robust that we had to control the dosage and an easier way to -- for the administration also when there are the nurses that have to provide this kind of service. So it's the preferred because it's the easiest the syringes, but in the meantime, it is also the more complex in terms of technology, in terms of feature that you have to secure for a customer, as I said before, in terms of preserving the integrity of the molecules. And also for the stability in the distribution chain, very often, we are talking about all cold chain distribution. That is something that we do to have the right solution in hand. And also during the recent past in mRNA technology, we had very high success improving that the glass is still the best solution to have a safe and effective delivery system for such drugs.

And with the... while reviewing your S-1 that was filed about a week ago, Marco, we look at square footage of Stevanato capacity globally. And then when you look at the potential capacity expansions in the United States, China and even Italy, it appears that your square footage would increase by at least 40%. Is that an indicator of revenue capacity as well within 3 or 4 years is looking at square footage and those plans a way to help gauge potential?

Yes. For sure, we are increasing our capacity, our people and the initiative solution. Most of them are our -- part of our high-value solutions products, where we can see expansions in the years to come. This is for sure an indicator, as Franco mentioned in time, we are doubling the capacities in syringes comparing 2022-2023. We are creating capacity 3x for EZ-Fill vials in the same period of time. So this is how we want to grow double-digit organically year-over-year and especially in our high-value solution that are the products that are more attractive for us and where we can see high demand from the market.

But sorry, just now to complement the answer. -- the comparison, the ratio of expansion is in between '22 and '25 really, we had a slightly different ratio comparing '16 to '23 that we provide also in the previous earnings call. But at the end, I think that the indicator you mentioned, Paul, is something you can refer to, but due to the different quarters of utilization that is for high-value solutions, the ratio as overall in the company cannot be applied immediately because the current setup includes many plants where we have back production. And in the future, the expansion is for EZ-Fill high-value solutions. So the ratio and the revenue per square meter or per foot square is something that we will evolve with more profitability for the same space.

Okay. And you're expanding today in Italy. Are you not? I know United States is late 2023, perhaps in revenue, but Italy capacity being expanded now, correct?

Yes, now may not because we started now because it's part of the plan that we started many years ago, we are executing accordingly, but because the demand is much -- is higher than expected a few years ago. Now we are accelerating some investments and also adding some more capacity compared to our initial plan. But the reason is that the demand is very high, is very high in high-value solutions. And just to give additional flavor about that, our Alba syringes are assuming so strong demand that it will multiply several times the capacity in the next few years. And a couple of years ago, these very strong success was expected in a lower level. And now we are very happy to say that we have to accelerate a lot.

And a question that we've had here in the last couple of days is regarding COVID vaccine demand. I know you've been guiding to above par likely growth there. Are we starting to see a move to lower dose vials yet in for COVID vaccine, Franco? Great. Can you hear me now?

Yes.

So the question is, are you seeing the trend yet in lower dose formats for COVID vaccines?

Yes. The trend is there, and the COVID vaccine will move into single-dose format, both vials and syringes. Currently, the most of the vaccine is projected to be still in vial. But we have also planned with our customer to move to syringes. For us, that this transformation could be from neutral to positive in terms of financial because we can serve the customer both formats. And then there is multiple variables that come in, in terms of different price per unit, but a much higher productivity for the line and different other factors we need to different geographies. But we expect to have from neutral to positive impact in our business.

And based on your customer demand, your engineering work, what are you seeing in the future? Are you seeing the emergence of mRNA therapeutics, more mRNA vaccines and cell therapy? What's your outlook based on early-stage customer work?

We are engaged with more than 90% of the different vaccine program for COVID, and we are an established player in the vaccine space as indicated. So for us, the 2 kind of technology, let's say, the traditional one and the new ones are -- may receive a good answer in terms of our portfolio product both ways. As I mentioned before, it was very interesting for us to prove that the glass container solution are really suitable even when the cold chain distribution and storage is a need for the drug. That is the partner that is a mRNA gene therapy. And is not only important for the vaccine for COVID itself, but is a good sign of the suitability of our solution for the gene therapy that is an emerging market out of the franchise of COVID, the franchise of vaccination.

I think it's important to underline the fact that COVID represented only 6% of the revenues in 2020, and we went up more than 15% in '21, also excluding COVID from the equation. We expect more or less same revenues in percentage in 2022. But with the backlog we have and the demand we can see, we are not so, I would say, obsessed by COVID revenues because it's only part of the business and the minor one. We have a long-term record growth of double-digit organic, much before COVID. So we are looking at the opportunity, but we are not obsessed by COVID revenues.

Within your high-value solutions business, Marco, what's your customer retention rate?

Well, high-value solution, one customer leaving us in recent years. So in high-value solution, we are keeping on better serving our customers. You can see the share of revenues that keep on increasing year-over-year. We are almost at 25% in 2021. We are targeting high 20% in '22, and we have a medium-term goal to reach 30% by 2026. This is obviously has been the profitability of the company. You can see particularly within BDS segment, we have been able to go up 350 basis points in 2021 compared to 2020. And so this is the direction we want to take in order to better serve our customers and improve our profitability.

And I remember around your IPO last year, you were -- operating margin expansion was not going to occur as you did this investment. Any new thoughts on operating margins going forward?

Well, as you know, we established the guidance for 2022 with respect of our expected EBITDA. Just to remind that our guidance are between EUR 935 million to EUR 945 million with respect of revenues, with an adjusted EBITDA ranging between EUR 248 million and EUR 253 million. So we are keeping on improving our EBITDA margin, and the main driver is the shift into our high-value solutions.

Do you think, Franco -- Franco Moro, do you think you're gaining market share in the industry?

We -- sure, the final lending is to -- we will increase our presence in the market, but because -- it's not because we are shaving share of the existing commercial products from some other competitor. But because we focus on the part of the market that is the fastest growing. So by consequence, in the near term, we will increase the share, but not with the competition on the established commercial product. But as a result of our pipeline in the new target, new treatments, and thanks to the advanced technology and advance solution that we can deliver to the market. So at the end, the share will increase, but it's not because of the competition where the market is already established in terms of commercial product.

And then the other is regarding your capacity expansion question came in, and that is timing on U.S. and China, is that still on schedule? I think U.S. was late '23 perhaps. Could you talk about capacity expansion?

Yes, yes. We are very glad to say that not only in Italy, but also in U.S. and China, we are on track with our strategic investment. We decided to optimize the expenditure in CapEx during the last part of '21 also because we were working on achieving the best result in terms of large incentives, but we are on track. All the activities on the critical path are in line with the expectation and not just referring to construction work, but was also referring to very important topic like hiring people, starting the new organization in the U.S. And we are having a very good result in this direction. So we are on track. I confirm that we expect to have the first revenues end of '23, later '23 and '24 in U.S. In China, we decided to move more or less 6 months or later. So we expect to have a commercial revenues mid-'24.

And Franco Stevanato, I know that you have been leading acquisitions in your career at Stevanato, you've mentioned that organic is top priority right now. But ultimately, you see additional merger and acquisition opportunity for you and the industry?

So for sure, with our function internally, we continue to monitor opportunity to increase our portfolio, additional competence. But today, the big focus in the organization is really to execute the growth with our customers. So all the organization, all the company today are working hard in order really to build up capacity, execute the contract with our customers because we have a strong pipeline building the last year with our customer and to move, increasing of the demand in Indiana, in Italy, in China together is going to require a lot of attention and execution. So the big focus is this because if we -- when we will execute this will allow the Stevanato to grow in the double digits next year based on our core competence. This is the priority #1.

And we see a lot of capacity expansions in the contract manufacturing industry. We don't see as many companies in the containment solutions industry. Is it because higher barriers to entry and what Stevanato and others do?

Yes, you're right. Our product, there is a lot of know-how around is full production because first, we have the validation and registration in the different drug master side all the regions around the world. The fact that we may have to manage the glass with particular coating, with particular sterilization and the type of investment is extremely high, but it's all they know how to have behind this type of product that makes a very high barrier. It's the reason why when you're able to begin, you have wonderful growth with our customers. But the barrier to entry in terms of learning is difficult for any type of potential income.

And then last question that I've seen is regarding the -- regarding the announcement by Pfizer and Sanofi and others about increasing their mRNA efforts as a focus. Is mRNA excluding vaccine significant? mRNA for other vaccines, mRNA for therapeutics, is that becoming a significant part of your business or your backlog at this juncture?

Yes. For sure, it's not for the very short term because this kind of technology are applicable are now in place for drug that will come into the market in the next few years. But as I mentioned before, for us, it's very important to have the scientific support for our customer that we provide by our tech center in Italy, in Boston, to prove the suitability of our solution with the specific needs of these technologies that very often are linked to the complexity of the molecules and they needed to have a very special condition of the cold storage and distribution. So the success we have in mRNA for COVID, as I told you before, is not only because of the COVID business that it is a very minor part and maybe also temporary, but it is for the longer run, entering the gene therapy that is a fast-growing market, and we have a high focus on that. And I reinsure the message that to be in the right spot at the right moment that we are spending a lot of money in R&D, but also we are serving the customer with our tech center. That is a very, very powerful entry point for us.

And then the last question is gene therapy, the most demanding product for storage and delivery, Franco?

At the moment, is most challenging. We are counting the technology linked to the cell therapy, too. But really, the cell therapy is a little behind in time of maturity of the technology in terms of the treatment. So we are also analyzing that space to understand if there is adjacencies that can allow us to expand our portfolio of solutions. But in that space, it's really related to state anything in terms of business.

Great. With that, thank you very much for your time today. Just let me check for other questions. And okay, we're good on questions. And so thank you very much, everybody, from the Stevanato management team. I know you have some further meetings today. I appreciate your time.

Thank you, Paul. Thank you.