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

For our next session. My name is Mike Ryskin. I'm the Bank of America Life Science Tools and Diagnostics team. And we're thrilled to host Stevanato Group. Joining us is Marco Dal Lago, Chief Financial Officer. And we also have Lisa Miles from Investor Relations. Marco, Lisa, thanks for coming.

I guess just to kick things off, I mean, you reported 1Q results just last week. Any opening remarks you want to make about how the quarter played out or sort of your latest thoughts for the year?

Yes. We see this temporary headwind more pronounced than anticipated, especially in vials, EZ-Fill vials more pronounced than expected. Nevertheless, we believe the fundamental of our business remain intact. We are well positioned for leveraging the growth in biologics with our differentiated set of products and integrated value proposition.

Yes. We see this temporary headwind more pronounced than anticipated, especially in vials, EZ-Fill vials more pronounced than expected. Nevertheless, we believe the fundamental of our business remain intact. We are well positioned for leveraging the growth in biologics with our differentiated set of products and integrated value proposition.

Thats a good place to start -- [indiscernible] how the conversation is going to be structured. You've got the near-term headwinds and the long-term tailwinds and how do those interact. So, let's start on the destocking. You talked about the vials, as EZ-Fill vials. Any sense of when you saw these issues pop up as you went through the quarter because you reported 4Q results and you gave us sort of your initial view in March, early to mid-March, and then this is early in May. So, is this a relatively sudden development? And just any color on where or when things like that.

Yes. We have a regular forecasting process internally, talking with customers. And when we released the guidance on March 7, we were pretty confident about the outlook. Nevertheless, we have -- we went through immediately in April, in Q2 to a new cycle of forecasting. Going through each customer with our sales guy, and we receive updated forecasts from our customers with lower volumes compared to prior expectation. So basically, this is -- the process is working. And unfortunately, we experienced much more headwind than anticipated for 2024. We see some good news or some good signal with some large customers starting planning for 2025. But in our guidance, now we embedded a flat level of revenue at the same level of Q1 also for Q2, Q3 and Q4. So, it means, for example, Q1 was 43% lower than last year in vials. But we don't see now for 2024 ramping up in the second part of the year. We expect some orders growing toward the end of the year, but we revenue to be materialized during 2025. This is the view we have today about the destocking issue. The good news, in my opinion, that in spite of the drop of 43% in vials, we have been able to grow 2% in BDS segment, mainly thanks to the fact that we are growing in syringes. We are growing in cartridges, but also in drug delivery system and diagnostic. And the good thing is that syringes is switching more and more to our high-value syringes from standard syringes. So, all the trend we anticipated for the mean term are confirmed. And we have this temporary headwind with respect of the format in vials that was the most commonly used during the pandemic. And this is the reason why in the industry, we have this kind of temporary situation.

Do you have any sense of just how much excess inventory there is in the system, whether in terms of number of vials or dollars? Just sort of what gives you confidence in that outlook in terms of when it's going to be worked throughout the system?

Honestly, the tool we have is talking with customers receiving from them the forecast for the next period of time, it’s hard for us getting into their level of inventories and knowing exactly in single location what they have. They are also leveraging their CMO network so they can have some inventories also in the CMO factories. Anyway, based on this for customer, again, there are some large customers starting planning from for 2024, and we see sooner or later, the situation will be normalized.

And I guess I would just add that we are seeing additional bright spots that we've discussed previously on some of our prior earnings calls. But in smaller markets that tend to manage inventories more tightly where we are starting to see some pickup in those orders, but not enough to move the needle on vials. However, these markets do tend to be leading indicators for recovery. So, I think overall, as we put the entire picture together, we feel cautiously optimistic that bulk vial will start to pick up towards the tail end of this year followed by EZ-Fill vials.

Okay. That's helpful. And then if we look at some of the results from your peers or other players in the packaging ecosystem, and I think you know which ones we're talking about. Some of them have also seen inventory headwinds. Some of them have also seen specific customer order delays. The timing on these systems is a little bit different. The magnitude is different, but you're also talking about vials versus elastomers versus integrated systems. So, are all of these -- are we seeing the same issues just from different angles? Are these different issues with different customers? Or sort of can you give us a better sense of what's happening from a customer level, from a pharma level?

Yes. In vials, the number of customers is pretty big. So, it's a situation were spreading our view among the different customers. It probably depends on specific situation, specific agreement with -- with single customers. But honestly, we don't have a view of what West is saying and all other players are saying we are all facing the same situation is hard for us to predict exactly when we'll be the inflation point and the demand will start ramping up. It's a temporary situation. We strongly believe it is a temporary situation, telling exactly well when the situation will be normalized is not easy to predict in our opinion.

Okay. And then the other factor -- one of the other factors that contributed to the change of the fiscal year guide was you talked about you had one order delay from a major customer, which I know gets slipped out of the second half and is now in the beginning of 2025. It seems like that's a pretty major move for just one customer. Any additional color you can provide there without naming who it is?

Yes, we disclosed during last week or so the amount of the impact, I mean, the EUR 55 million reduction is for 65% related to vials reduction. About 25% is related to this specific opportunity that has been postponed for customer reason. We cannot control basically later commercialization of the product. We -- it's still an open opportunity, but not -- it will not be materialized within the end of this year. So that's why we had to review our guidance.

But do you have confidence that it will come back in 2025? As a... This is a way…

This is still an open opportunity and the answer, yes.

And I would add, Mike, even if this customer elected not to place these orders longer term, we could obviously backfill this capacity in 2025. There's -- given the type of product that this is, there's not sufficient time today to backfill it for 2024.

That's a really good point. Thanks, Lisa. I appreciate that. Can we talk a little bit, moving on to some of the other topics. Can you talk about some of the tailwinds and some of the drivers that still leave you feeling encouraged about the long term. I'll start with regulatory environment, NX1 that's gotten a lot of traction in recent in recent months. How do you see the opportunity to benefit there? And how do you see that playing out over time?

Sure. That's a great question. We've discussed NX1 starting at our Capital Markets Day in late September. And we actually view NX1 as a galvanizing event to help drive adoption for ready-to-use vials and cartridges. One of the main considerations from our perspective are some of the higher regulatory hurdles as it relates to particle contamination and just stricter rules around quality and integrity of the drug product. So, we do believe that this will be a much longer-term tailwind. In fact, we have discussed one particular customer that is already in process of switching from a bulk cartridge to an EZ-Fill cartridge over a many-year period. And so, we view NX1 certainly as a key tailwind, but we do view it as a multiyear in nature.

NX1 is in Europe, but you're a global company with global customers. How do you think about customers adopting it or sort of incorporating into there, meaning your customers or sponsors adopting it for global products?

I think that's another great point and probably highly likely. As customers do manage a global industrial footprint, it stands to reason that they would be more inclined to move in that direction for their global footprint. It gives them a lot more flexibility as they think about where they're filling and where they're shipping.

And do you see other -- like you said, it's still relatively early, but do you see other agencies following suit? Any conversations with the FDA or anything that's changed in the last 6 to 9 months?

Probably too soon to speculate as it relates to the regulatory environment and other changes that may come through.

Okay. All right. I'm going to have to ask a couple of GLP-1 questions. We're not going to get into too much specifics, but can you speak to how much of that ramp has been built into your prior outlook? And just sort of what your expectations are going forward?

Well, first of all, we are involved in GLP-1 since about 10 years for diabetes care. We are very well positioned to take the opportunity because we can provide to our customers each format, they can need with respect of the glass packaging. We provide -- we are market leader in cartridges. As Lisa was saying, we can move to EZ-Fill cartridges, driver cartridges. We have some projects in place for that. We can provide syringes, Nexa syringes due to mechanical resistance are really suitable for auto-injector. We can provide dual chamber syringes. So, we are very flexible in glass packaging in serving our customer and all their needs. But on top of it, we can also leverage the engineering segment with our visual inspection machines that are suitable in this period where we expect capacity for fill and finish will be growing in the following years. And similarly, for assembly and packaging lines for drug delivery device like auto-injector and pen injector, we have a company in Denmark that is really well positioned in this kind of supply. And so all overall, we can provide a really differentiated set of products to leverage the opportunity. About the numbers we disclosed our presence in biologics rather than going drug-by-drug -- we see it as a big opportunity, but we will not leverage on the GLP-1 in the years to come. I think we want to leverage all the biologics space from mRNA to monoclonal antibodies or biosimilars 2.

And if I may just add, so today, we are providing for GLP-1s, high-value syringes, bulk cartridges, EZ-Fill cartridges as well as Marco noted, visual inspection and assembly in packaging equipment on the engineering side. And so, as we think about it longer term, Mike, we have baked in to our near-term guide into 2027. The expectation of what our commercial contracts look like in terms of volumes. So, we basically assumed a certain level of volume as it relates to GLP-1s tied to the commercial arrangements that we do have, and that's baked into the guide.