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

Good morning, everyone. Welcome to the 2023 Bank of America Healthcare Conference, live from the Encore Hotel here in Las Vegas. I'm Derik De Bruin, the Senior Life Sciences and Diagnostics Tools analyst. I cover the sector with my colleague, Mike Ruskin. And our next company up today is Stevanato Group. And with us from Stevanato is Riccardo Butta, Head of Americas; and Lisa Miles, IR. I think Riccardo is going to do a little bit presentation and then we'll have some Q&A. So with that, Riccardo.

Thank you, Derik, for the introduction. Good morning, everyone, and welcome here at our session for this conference. We are glad to have you here and listen to the introduction of our company and potentially learn more about our growth strategy and trajectory for the years to come. Of course, I will be making some forward-looking statements based on our understanding of the market environment and our business and those may be subject to change over time, so the safe harbor statement applies here. When you look at our company, Stevanato Group is a leading global provider of drug containment and drug delivery solutions for the pharma and biotech space. We come with a longer track record of double-digit growth and delivering on commitment to our customers. Thanks to the partnership with many, many customers around the world that we have more than 700 customers active today. More importantly, we work with 80% of the top pharma companies in the market and we are a market leader today in cartridges for all the diabetes care applications. We are #2 in prefilled syringes, and we are #2 in our ready to use vials as well. Last year, we closed our year at EUR 984 million of revenue growing 17% year over year compared to '21. We deliver the 26.8% adjusted EBITDA and we accumulated a backlog of orders for EUR 957 million going into '23. If you go to the next one, when you look at our company, you can look at it with those 2 major segments: one is the BDS, Biopharma and Diagnostics segment that in 2022 accounted for 81% of our total revenue. And the other one is the engineering business for 19% of our revenue. In reality, we go to market with a unique value proposition that is centered around the integration of those 2 businesses to build a set of capabilities, product, processes, services that cover the entire spectrum of the lifecycle of a molecule from the early stage of R&D, clinical activities through to scale up and the commercial manufacturing. And you'll see there a bit to the composition of the portfolio. We're busy with cartridges, vial syringe as I said, but we are also bringing up platforms around the drug delivery devices. We have 3 proprietary platforms: pen injectors; auto injectors and wearables, and we are leading the market on the other side with our automation solutions for glass forming for a visual inspection of filled containers, automated assembly solutions for devices and packing and serialization for the same. What is not shown there, but is extremely important is the tech centers. We have 2 tech centers: one is in Boston, U.S.; one is in Italy, and those are labs where we work with our customers more on the R&D side, using scientific and analytical technologies and methodologies to help customers pick the right drug containment and drug delivery solution for the new molecules in the pipeline. That is important for them to make sure that they derisk the path to market, but it's extremely important for us as well because we basically get designed into the new molecules of our customers. We are into the regulatory filing in the drug master file and that means that we have a very long term relationship and engagement with these customers throughout the life of the pharma products in the marketplace. So very sticky relationship given as a baseline of business and a lot of visibility into our growth trajectory. The company comes with over 70 years of history and its history about meeting commitments to customers, delivering innovation and delivering value. We were founded in 1949 and we achieved the major milestones back in '71 when we brought to market the first instance of the glass forming technologies and processes that are still at the core of our business today. Over the past 20 years, we worked harder to turn the company to a global leading solution provider, as I said, and we are focusing in driving growth with our customers and bringing more and more innovation to the marketplace around the 4 pillars. One of course is our people, our organization. That is the core of everything. Footprint is very important. We have been going into more and more regions and more and more countries with our solution. R&D, we continue to push the envelope from an innovation standpoint and bringing new products to market to serve the -- particularly the high end of the marketplace today. And on top of that we have been working with quite a bit on M&A activities to add complementary capabilities to our setup around what is the core business and continue to evolve our solution particularly around the engineering you saw the offering there and around the delivery devices. If you go to the next one, I talked a bit about the footprint. The footprint -- The global presence is extremely important to us and is extremely important to our customers. Today we are present in 9 countries with 16 sites with a diversified portfolio of capabilities. But what we're really trying to do is to have the same solution in every single region and that is where we are investing today. We are investing in expanding capacity in Italy into different locations. We are doing a greenfield in Fishers, Indiana that will be up and running by the end of the year and down the road we are planning already for further expansion in China, and all of this around our portion of high value solution in our portfolio. So that is where we are investing. This is important for us. Of course it's important for our customers. More and more customers want to have a regional solution and want to have redundancy in the supply chain to have a more resilient supply chain and by having multiple nodes in the market able to deliver the same products to customer with the same technology and the same quality system is really becoming a differentiator today. And on top of that, of course being local and embedded in the supply chain of our customers allow us to have a much shorter, more efficient supply chain, but also a more sustainable one, which is now a very important consideration as we look forward. When you look at our market today, we see a number of trends that are shaping the marketplace. Some of them are demographic trends and are common across all the players in the healthcare space. And so you talk about aging population, prevalence of chronic diseases like diabetes, obesity, cardiovascular. There is clearly a push in several regions to bring more and more quality care solutions to a larger portion of the population, and that combination of those 2, and combination of the increased access to vaccines and vaccination programs, is clearly driving the overall consumption of healthcare up and driving the market up. And then there are certain trends that are a bit more pharma specific, if you like, a bit more linked to our own business. There is a major push to -- on call to biologics and biosimilars. And there is also a trend about moving the care and the point of care from the hospital environment to the home care and self-treatment. And that is where we come into play with our high value solutions both on the containment side, as well as on the drug delivery side because if you want to push for self-administration, you need to make sure that patients have a way to do it. Given those trends and the growth that is there, we are focusing our effort to capitalize of course on the growth both from a strategic standpoint as well as with our operations. I talked a bit already about the expansion. I will not go over that again. But when you look at high-value solution, we are investing a lot there to bring to market products that can meet the most stringent requirements of the biotech companies in terms of performance, in terms of range of operations, and also in terms of quality. Those drugs are particularly critical in terms of our ability to protect them and to deliver them in a safe and effective way to patients and are also extremely expensive in some cases and so it makes sense to do our best to deliver those solutions to our customers. So when you talk about syringes, for example, we are making a major push with our Alba platform, with our Nexa platform. You talk about vials and cartridges, there is a big investment going around EZ-fill and EZ-fill Smart and so on and so forth. That is where we are putting our focus in terms of bringing up capacity and serving our customers. Of course, we continue to invest in R&D across the entire spectrum of our portfolio both organically and through partnerships. That is a very important element of our solution. And as I said earlier, we work side by side with our strategic customers as well as the emerging biotech companies to be embedded early on in their pipeline into their assets as they go to market and with that build the pipeline that will give us the runway for the years to come in terms of growth. We want the growth to be sustainable, clearly, and we want the growth to be profitable. That is why we are pushing on the high-value solution piece. Now everyone is seeing the same -- market the way we try to differentiate and we so far succeeded in differentiating the marketplace has to do with the integration of the different pieces of our solution, product, processes and services. And that is happening as we speak. If you take an auto-injector as an example, an auto-injector is a relatively complex device with a number of components in there. You have syringes. You have [ model ] components. You have meta components. You have sub-assemblies. We need to bring up a lot of automation to go to market with an injector. And it's not about one or the other component, is the system level performance and the integration of these components and managing the interfaces and making sure that you are solid on the interfaces, particularly when you scale to high-volume and you want to make sure that you deliver on the performance consistently, irrespective of the variability in the process. And we control the design of the syringes. We control the design of the device. We control the process to form the glass. We control the process to assemble the devices. So we have all the levers to be able to do that in front of our customers. And that is exactly what we did with [indiscernible] a while back. We worked with them within our tech center to identify the right solution -- the right containment solution for them. We went out developing that one in scaling with our Nexa platform, and then we deliver to the customer an automated setup for assembly of devices that will give them the right flexibility so that they could reuse the same CapEx investment over a number of different therapies and solutions. So this is a bit how we create value for our customers. We differentiate in the marketplace. If you go to the next one, Lisa, the market is -- the market in front of us is big in our estimates and our intelligence when we looked at it in 2022. We are standing in front of a $15 billion market. Of course, you see there are -- it's a different size, different growth rates across the different pieces of our business. But all in all, it's a very nice addressable market that we can attack, and we have the right solution to do that, particularly once again with the high-end range of our portfolio. That high-value solution -- if you go to the next one, Lisa. The high-value solution piece is creating a lot of value for our customers, and you see some of the advantages captured here. Of course, we work with customers to identify the optimal solution and therefore, make sure that we optimize the total cost of ownership, and we bring an advantage there in terms of pure economics. But it's not only the cost, it's the quality of those products, the way we preserve the drug as it is delivered to patients. And a lot is about derisking. It's derisking the time to market and derisking the supply chain on an ongoing basis. And the fact that this creates value for our customers is clear by the numbers. You see the trajectory there. We went from a percentage on our total revenue of 17% in '19, '20 to 25%, up to 30% in 2022, meaning there is a lot of attention and interest in the marketplace for our own high-value solutions. That is good for our customers, and it's good for us as well, of course. So you see as we progress and we bring up the share of high-value solution in our business, the revenue goes accordingly. As I said, we grew 17% last year. We are planning to grow double-digit this year as well. And as I said, again, it's not only about driving the top line, but it's also about margin expansion, and that is what happened '21 to '22 with the gross margin and the EBITDA, and we will continue to do that for the years to come. That is one growth pillar. The other one, clearly, is the penetration into the different geographies. As I said, we are bringing up capacity in the different regions of the world, particularly for the high-value solution piece of our business. And when you look at the distribution today, there is work to do on one end, and there is an opportunity on the other hand because we are definitely underpenetrated in U.S. That is why we are investing in Fishers. We are underpenetrated in China and the whole APAC region. And so if you think about that, we could actually add another layer of growth simply by capturing more of the business within those markets, which we plan to do. To close, we -- the way we look at our company is -- for us, is a growth company that brings a strong foundation to continue to deliver value to our customers and to our shareholders for the long run. We are a leading provider in our space in our business, and we cover the entire life cycle of the product. We come with a long history and therefore, also a track record of delivering on our commitments to customers and to all the players in the ecosystem. We work with the top customers in the space and we sit in front of a very attractive market that is growing at a nice rate. Reality is we want to overdrive that growth, and we are doing that by clearly developing our organization to be ready for that by investing in expanding the footprint and ultimately by driving the right level of innovation with our products in the marketplace. With this, I conclude my presentation. I thank everyone for the attention. I think we are ready for Q&A, we look forward to the conversation.

So starting off, I mean, I think it's worth pointing out that your margin expansion between 2019 and 2022, that wasn't driven by COVID, right? That was -- I mean that was all driven by the organic of the business, and also your revenue growth projections for this year -- for double-digit growth include a significant headwind from COVID rolling off and going on with it. So it is just overall growth and is not like -- it's not like your business was juiced during the pandemic, and now you've got to pay for it. It is growth on it.

Yes. Indeed, it is because when you look at the COVID percentage of -- our business today is minor, we said it's 4% in Q1, is going to be 2%, 3% over the entire year. And yet, we grew double digits. So clearly, there are -- there is an underlying strength of the business there. And there is additional capacity that we are bringing online to support that. So it's the combination of those things.

And just to add to that, you're correct, we had an EUR 80 million headwind in '23 for COVID as it relates to last year. And secondly, the marginality in the COVID business was largely reflected from a high-value solution perspective of the corporate average. So it wasn't more heavily weighted towards a high-value solution. So we did not experience the margin cliff as a result of that.

And there was some -- you had your earnings call last week, and I think there were some -- people were worried coming out of it just because the second quarter guide was a little bit below on it and that what people were thinking. So can -- so it seems like your biggest, not say roadblock, but your biggest bottleneck right now is just how fast you can bring on capacity? Is that basically the way to say? I mean you've been able to backfill what it is. And so, your confidence in the back half of the year accelerating is because you've got new capacity coming online?

Yes. And in reality, you can see the capacity coming online as we speak. We opened our new building in Piombino Dese, our headquarter, a few weeks ago. And so we are ramping production as we speak. We are going into qualification with our customers in Q3 in the other site in Latina near Rome, and that will be operational in Q4. So by now, that piece of the scale-up is totally derisked. We are renting and that should accelerate our growth in the second half of the year. And then as we go into '24, we have Fishers coming online, and it will continue like that.

So is it -- I guess, is all the capacity that you're bringing online now already spoken for? Or is there some flexibility to go up if you need?

I guess in Fishers, we -- if you look at the rationale for the investment there, it wasn't driven by one or the other customer, by one or the other molecular therapy. It was -- we saw the market and we saw this wave of demand coming across the biologics and biosimilars, and we decided to invest there. The reason I say so is because when you look at the total capacity that we are going to have installing Fisher, some of it is already allocated, if you like, and some of it is available. But our approach is to go modular, meaning the building will be there, and then we'll go adding one line after the next as we see the market growing. So we should be in good shape there.

And your model is a little bit cleaner than some of the other companies that sort of serve the space. I mean for -- basically for every euro you spend on CapEx, it's roughly a euro return in revenue, correct? And -- so that brings the question of like how many euros are you spending on CapEx right now?

Well, as you know, in Fishers, it's about $500 million. There's a portion of that, that is tied to the BARDA investment as well. And so yes, you're right, in Fishers, which is a multiyear project, and [ glass lines ] are in the current phase, likely to go in, in 2026. So full production by 2028. So you're looking at about $500 million of CapEx there. And yes, it's roughly correct, dollar for dollar.

And the cash flows have been -- obviously, you've been spending a lot of money doing this like. At what point does the cash flow start to normalize and you breakeven?

It should be normalized meaning close to breakeven next year and then go back up positive in '25.

It's a little bit interesting. I mean a lot of your -- a lot of the people in the audience are familiar with West just because they've been public a lot longer. But where is -- where are your penetrations in prefilled syringes and in the glass vial business when we sort of look at the high-value solutions? It's like where are we in sort of the ramp of those products?

Of course, if you look at the average rate, the numbers we showed that today, what we refer to as high-value solution is in the 30%, 30-plus percent. It varies a lot between, syringes and cartridges and vial. Syringes is the majority of it already today is high-value solution, meaning is preferring syringes sterilized, ready-to-use components. And then you go on the opposite extreme vials is probably 5% of the market. So it's very little compared to the capacity. And by the way, we are bringing up capacity to support what we think will be the market growth there. Cartridges, we just started now with a couple of applications. So I think there is a big difference between the 2. You average out is 30%, but there is a big range.