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

All right. Good morning, everyone. Thank you for joining us. My name is Martin [indiscernible]. I'm from the life science tools and diagnostics team. It's my pleasure to introduce our next company, Stevanato Group. Just as a reminder on logistics. After the presentation, we'll have a Q&A. And if somebody has a question in the audience, you can raise your hand. Otherwise, you can submit it online. And with that, I will turn it over to the CEO, Franco Moro.

Thanks so much, and welcome to SG Group presentation. I'm glad to be here to give you an update and overview about our company, our business, our strategy. I see in the room people that we met also before, but also people that could be less familiar with Stevanato Group. So I'm delighted to give you more information. During our conversation, I could do some looking-forward statement in nature. So standard safe harbor statement apply. We are a provider of mission-critical solutions for the supply chain or pharma industry. Our company grew consistently along the last year's double-digit growth. And in 2022, we delivered 17% revenue growth year-over-year, with expanded EBITDA margin up to 26.8%. We are a global player, and we are supplying the vast majority of the pharma and biopharma industry. We are leaders or we have a leadership position in many product lines that are critical for the supply chain of pharma as are critical for safe delivery of treatment to patients. We are a company with more than 70 years of history, really close to the 75 because we have been founded in -- back in 1949. Our historical starting business was in glass packaging for different industries. But along the time, we reached a very important step at the end of last century when the company decided to have 100% focus on pharma. And it was a very important decision also to trigger the decision to expand our value proposition, including other capabilities on top of the glass primary packaging. We did that journey by acquisition and by organic growth. And very recently, more recently, in 2022 -- in 2021, sorry. We had our very important step entering in the environment of a public company. And we consider that day as the first day of a new cycle of growth for the company. We are a global player. We are present with our industrial footprint in all the main regions of the world. Obviously, EMEA is the main region today, but also the Americas and the growing area in Asia Pacific and China specific. We have 16 sites around the world, and we are investing in 3 main areas, in 3 main sites to expand our capacity for high-value solution, but it is something that I will cover later in our presentation. We play a mission-critical role in the pharma supply chain. We have different capabilities, broad range capabilities that we use to follow customer needs and to match their needs along the entire life cycle of their projects and programs. So we can stay with them from the early stage in project preclinic and clinical stage up to full commercial. In this journey, our products becomes embedded in the drug master file. So we built a strong link, durable link in between our products and solution together with the life cycle of the drug that may last not even for years, but also decades. Looking more in detail to what we do. At Stevanato Group, we look at our business in 2 segments: biopharmaceutical diagnostics solution and engineering. But the strength of our value proposition is the strong integration of the 2 segments. More closely, starting on the left, our core business is in primary packaging, glass primary packaging. We are leaders in that space. We have all main formats in term of syringes, vials and cartridges. Syringes are almost all sterile. But in cartridges and vials, we have been the inventor of the technology for ready-to-use vials and cartridges. And now we serve the market both ways, bulk configuration or steroid configuration. In drug delivery space, we started working as a CDMO, as well as a company that has its own platform of proprietary devices. Obviously, this part of the business is a growing area, and we target to become an important player in the few years. In Vitro Diagnostics, we delivered to customer plastic consumable for the standard diagnostic and also more complex items, more complex cartridges for the new systems in molecular diagnostic. Moving to the right. On the Engineering segment, we supply to customer machinery for their filling lines, in terms of digital inspection. We have a broad range of solutions starting from the bench top solution, up to the big machinery, highly automated high speed for the commercial production of filling lines. Serving the market of a drug delivery system, we supply the market also complex, very huge alliance for assembly of devices, maybe auto-injector or pen injector. At the same time, we maintain our historical leadership in the technology for the glass forming, that these are for the specific market that we used to serve since many, many years. In Biopharmaceutical service, back to the left, it's very important to have for us to develop also the possibility to serve the market with innovation and advanced technology. So we support our value proposition with our tech centers we have in Europe and in Boston in the U.S. that delivered analytical services or development services. I want to tell you more about the value of the integration of the 2 segments because it's a unique and differentiating factors in the competitive landscape that give us a lot of opportunities. The integration deliver benefit to customer and to the company. For the customer, we are able to provide to them a full solution, taking care not only of the products, but also of the technology to produce the product. This is a very important tool to speed up the evolution of products and also to match upside in demand or specific requirement of our customers. So we simplify the supply chain of Pharma company and make their life much easier. For the company, the integration is also very important because we are, at the same time, the user and the manufacturer of the technologies. So you can imagine that our team works intimately together, moving faster from the workshop floor in production back to the design office to improve the technology, in terms of higher quality of products and higher productivity. It's a very powerful tool that works every day in our factories. At the same time, we have another different advantage because serving the market with machineries for the filling line, we can have an insight and very early insight in the capital allocation strategy of Pharma companies, that is the signal of the future demand of containment solution. So we can anticipate what customer will need in the next future. It's so important that I wanted to try to give you a practical example of how this integration really works in the real life, how our value proposition is in action. I'm referring to an example of a big project, we have with Merck Serono, when the customer involved us in very important project linked to a biological drug that was designed for administration by pen-injector. We developed for the customer test protocol, custom test protocols to identify the best container solution that was in cartridges and prove to be our next cartridges. But in parallel, we could work with them to prepare the technology for the assembly of the device. They need to have a highly flexible lines because the same device, the pen has different configuration, depending on the therapeutic needs and the regiment of the administration for different patients. So overall, this is an example of how we can work as a single team together with the customer, taking care of all the needs of a big project and delivery value -- delivery results. Now I want to move to give you an overview about the market and about the strategy we have at Stevanato Group. In terms of the market, the growth of the market is driven by secular plans, secure tailwinds. I don't want to enter in each one of them, but I want to underline some of them. First, the increased number of worldwide population and aging population that is moving more and more, the need to drugs that may take care of chronic diseases. Then they are trying to -- I believe you have already, your view about that. They're trying to go towards more biologics drugs. Biologics drugs need specific containment solution, high-quality, high-performing containment solution. I will tell you something more in the next slides. At the same time, patients want to have a better life also under sickness condition. So the sudden administration of medicine is driving the fast growth of self-administration by injectors, pen-injector or auto-injector. And pharma company are really focusing more and more on their core business, that is the discovery, the development of new drugs. So we can take the advantage of their tendency to outsource more and more, what is not core for them and we can take care of their needs at scale with much higher efficiency and also productivity. In this fantastic environment of growth, we have the opportunity to leverage on our capabilities with a very clear strategic goals. One is global expansion. As I told you, we have already a global player, but we are expanding all our capabilities around the world, to increase also the capacity we have in production of high-value solution that, as I will tell you later, are driving also the growth and the profitability of the company. The high-value solution growth is the second pillar of our strategy and is around the demand driven by the growth of Biologics. For the same reason, is the third priority we have. We continue to invest in Innovation and R&D to expand our portfolio of high-value solution, and we are building a multiyear pipeline of new opportunities also in this case, overweighted in the Biologic space. Starting from global expansion is the capacity expansion that are supporting our organic growth. We invested a lot in the recent years for the EMEA region, in Italy at our headquarters that is close to Venice, in the north of Italy. But then we decided to have a second hub in Italy for the EMEA region. And it was -- it is in Latina that is very close to Rome and also crossed by one of the existing facility for back production. This huge investment for the second EMEA region hub is now already in commercial production in the last quarter of '23. But at the same time, we are ramping up and going ahead with our plan that is a multiyear plan to install module by module, more capacity and to fulfill the project. We have the same and a very similar strategy for the U.S., where we decide to invest heavily in Fishers, Indiana. This big project is now underway, we are close to have the first validation, in terms of new products for the new facilities. And we expect to have revenue generation along 2024. For the big effort, we are doing in the U.S. and in EMEA, put the condition to posing a little, the investment in China, not because we are changing our view of Asia Pacific as one of the strategic area, very fast-growing area. But we decided to have 100% focus on good execution on the big investment, where we have strong demand to meet, and there are big opportunity to expand the high-value solutions. Really, we saw a big acceleration in the demand that outpaced by far, our expectation at the time of the IPO. So, this is the reason why we accelerated in Europe and in the U.S., posing a little bit in China. Almost all our growth CapEx are demand-driven. Demand driven because we are setting the stage to give a customer what they are asking for. And almost all are dedicated to high-value solutions. High-value solutions includes the different products. But I want to start giving you a glance into the value that we can deliver to the customer and to the company. For the customer, high-value solutions are beneficial because of the superior quality, the superior scientific performances of this containment solution. In the meantime, we can have them to reduce total cost of ownership to have a shorter time to market, more flexibility. And also to derisk the entire supply chain of Pharma. But this high-value solutions are also so important for us because of the higher sales price associated to the solution and also much higher marginality. So it's the best situation to give the customer what they need and also to pass the growth and the marginality of the company. This evolution of the share of high-value solutions in our portfolio is consistent in 2019, the share of high-value solution was in the range of 17%. We closed at 2022 at 30%. Our guidance for 2023 are in the range in between 32% and 34%. And the trajectory is consistent also for the next years. But why, there is a so big success of a high-value solution? Because they are designed to match the needs of the best and fastest-growing area of the market that is Biologics. You know that the share of Biologics new approval of FDA grew a lot. Looking back to 2021, at that time, FDA approval -- new approval, was 28% related to Biologics. This percentage grew in 1 year, 2022 up to 40%. If we have a glance into the approval for potential blockbuster in 2022, there are 4 of them, all these 4 are Biologics. And Stevanato Group is present in 3 of these big potential blockbusters. Our exposure to Biologics is growing. If we compare the situation in the first half of 2021, our exposure in term of share of revenue was 16%. But last year, 23% in the same period, first half, we have reached 26% of our revenues, associated to Biologics. So a very fast growth in terms of high-value solution and exposure to Biologics that are more or less in parallel. Obviously, Biologics are part of a fantastic environment of growth that is not limited to Biologics. But compared to other areas, Biologics are growing faster, 50% expected growth in the next years. And in this huge and fantastic environment of opportunities, we have exposure to all the sub categories, mRNA applications, monoclonal [ pod ] and GLP-1s. The first 2 are expected to grow low double digit. GLP-1s, you are well aware that it's booming in high double-digit growth. But we have a very well-balanced portfolio opportunities and commercial business in this area. Biologics are part of a larger environment and big addressable market for us in the range of -- or exceeding $15 billion market that we can address with our different capabilities and with our integrated value proposition. So it's a huge market, full of opportunities. But luckily enough, there are not opportunity for everybody. This market has a very high barrier to entry. I want to name and the more important for us, the first is the know-how you need to enter the market. I'm not referring just to intellectual property, that's obviously part of the game. I'm also referring to industrial secrets, industrial know-how that you deserve several years, if not the case to build. Second, we have a unique value proposition. The integration of the 2 segments, the capabilities that we have in Engineering and in Containment Solution and Drug Delivery Device, this value proposition very broad, is unique in the market. It's a distinctive advantage, a winning factor in many, many cases. We operate in a highly concentrated market. In this market, the regulatory requirements and quality requirements are growing year after year. So it's an additional barrier for new entrants to cope with this new regulation. And the same burden of a regulatory requirement is also causing or setting the stage for very high switching cost, if a company would consider to have big changes in the supply chain. So it's another way to protect the existing business. Lastly, we are also talking about a very highly capital-intensive business. I hope that you can visit our facilities some time and you could feel how much is the technology and the value of this technology that we apply in our production. In closing I want to summarize the main messages associated to the presentation of our company. First, we play mission-critical role in the Pharma supply chain. We are part of a specific environment with a very strictly and high regulation that protects the market. It's a highly concentrated market with high barriers to entry. We have our unique value proposition, that is made by the integration of the 7, that I mentioned before. And we have a very clear operational and strategic priorities, and we are executing according to them. Demand-driven expansion in High-value Solutions will support opportunities for sustainable organic growth. And with that, I join my colleague Marco Dal Lago, the CFO of the company. I'm available for Q&A. Thanks so much.

Great. Thank you for the presentation. As a reminder, if anyone has a question, feel free to raise your hand. So as you highlighted in your presentation, Biologics is a key growth driver across a number of therapeutic areas. So can you talk about your history with GLP-1s, your current position and how you are participating in the market currently?

I didn't expect this question. So let me now -- let me think. I'd like to step back to refer the message that our High-value Solution designed for the full Biological space has not only for GLP-1s. We have plenty of opportunities also in other areas. But back to GLP-1s. I want to start saying that we are in the diabetes care since the case. So we are an established player in a market that is not new. We have been also one of the first to help customer back in 2010, to start the journey of GLP-1s, at industrial scale. So our involvement in GLP-1 is not recent. It's back for many reasons, the reason are associated to the fact that we continue to serve diabetes care in GLP-1s, being a leader in cartridges. Cartridges -- and you know that diabetes care is almost only pen cartridges today. And in the future, we expect to have a good proportion stay in pen injector also. in GLP-1s. So we have this production, historical production, and we have the leadership of decision worldwide in terms of this product, the cartridges. So this is the very important entry point for us. It's also true that we, in the future, we have opportunities not only in terms of cartridges, but in many respects, we can serve GLP-1s. Cartridges, as I said, already told, both in bulk and start configuration but also high-value syringes because there are the option to administrate GLP-1 drugs by auto-injectors. So we have also high-value syringes available. On top of that, we serve also the expansion of capacity in filling with our Vision Inspection System and with the engineered segment, we delivered also assembly line, both for pens and auto-injectors. So our exposure to GLP-1s is not specific to a single product line, but is much broader.

Okay. And you touched a little bit about this already, but, how large do you think this opportunity can be for you? Like how are you thinking about it long term? And what competitive dynamics are you seeing in the space?

Specifically referring to GLP-1s, is, again, something that is coming to Biologics. These kind of drugs are very high sensitivity. Sometimes there are issues related to the formulation, the high viscosity as a product. So the solution must be a very high-quality, high-performance solution. That is the driver for the expansion of a high-value solution in terms of volume, but also more importantly, in terms of the growth of the company. I think Marco, you can give them some figures around the value in terms of revenues and profitability.

Yes, our value solution, we have obviously higher price per unit associated and they are much more accretive products. In high value solution, the gross profit margin is ranging between 40% to 70%, while in other containment and delivery solutions, the gross profit margin is usually between 15% to 35%. And you have seen -- you have heard from Franco before the expansion we have in the share of revenue in a value solution. And this has been the main driver for margin expansions in recent years. We went up by over 600 basis points in gross profit margin and in EBITDA margin from 19% to 22%. And again, the main driver has been the mix shift to our high-value products.

And then speaking about the difference between high-value solutions and other offerings. The penetration rates in ready-to-use vials and cartridges are still quite low. So how do you see customer adoption unfolding for these formats going forward?

Yes, we are following the same trajectory that happened in different product lines many years ago because now syringes are almost all converted in sterile configuration, but the starting point was close to 0 at the beginning of the century. And the same trajectory was mirrored by stoppers and plungers, all these rubber components later on that are now more than 2/3 in sterile configuration. It's a process that takes time, takes time and this expansion of capacity, for instance, in GLP-1 for cartridges is an accelerator because when a company has to decide the big investment to increase the filling capacity for them is much easier to shift immediately, to switch immediately to high-value solutions' sterile configuration. And this is the reason why we have now accelerated the transformation in cartridges because of the decision of some big players to move immediately in that direction. Vials market is more fragmented, so we expect to follow the trajectory in some years.

And then how early do you typically engage with customers? And then how do you leverage your analytical labs in Italy and Boston when working with your customers?

It's a very good point. It's obviously a very important point for science and technology driven company like we are. We decided to expand our capabilities in tech center, having the second hub in Boston because it's the best way to engage the customer when they start reasoning about the formulation of the drug, and they have to select the best containment solution. It's the best entry point to build the legacy, to build a link with the drug life cycle, selecting for them the most suitable solution. We have a possibility to run tests to develop custom protocols if needed, as in the example I did before, but also to have all the analytical testing that is needed to prove the stability of the drug in the container. So it's a way to serve the customer and to complement our value proposition, as a single player able to take care of most of the need in a new project.

And then switching gears to your Engineering segment. Can you provide some more context, around exactly what do you do? And who are your end customers for Engineering products. You gave a customer example, you mentioned greater capability but can you elaborate on how Engineering strategically fits with the your BDS segment?