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

All right. Thank you, everybody, for joining us today, 7:00 a.m. on a Friday morning. We've made it to the final day. So I'm Drew Ranieri, one of the medical device analysts here at Morgan Stanley. It's my pleasure to have Stevanato Group with us today. From the company, we have CEO and Chairman, Franco Stevanato and Head of IR, Lisa Miles. So thank you both for being here today. Before we get started this morning, just the disclosures, if you want to read them go to the website or ask your sales rep, I doubt that you will do either of those, but just have to get that out there.

But now let's get on to more exciting things. So Franco, just maybe to start from a high-level perspective, the company has seen recently a little inconsistent performance, at least relative to kind of street expectations year-to-date. It's now been about two or three months since you took over as CEO. So just talk to us about, first, your priorities as CEO, what you expect to change? What does Stevanato need to do better from a company perspective? And another one is just how do you feel about the company's position in future opportunities?

Drew, thank you for your question. So when I -- I think this role of CEO, and by the way, I'm excited to be back on this role because I joined the company in '98. I have done a career through the commercial department. And also, I was appointed CEO in 2010 until Franco joined the company. So the first thing that we have done altogether, we build a group up to 30, 40 leader of the company. We are furthermore focused Stevanato Group on our priority that are the priorities that are fundamental in order to execute our investor plan. Today, we have a big growing demand in biologic. We are deeply involved in the bigger strategic investment like Fisher, Indiana, where we're starting to build capacity for syringes and for vial for our American customers. We are building a greenfield plant in Cisterna in order to serve our bigger customer always in biologics space. And particularly, we are focusing more and more the organization to execute our industrial plan. The only thing that we have done, not differently, but we have further reinforced the execution of engineering because this, on the engineering company in the last three to four years, more than double the size of the company, even more the complexity. So today, we are more focusing in order really to optimize all the manufacturing process inside of the engineering in order to deliver all the commitment that we have with the customer. So nothing changed. We want to just execute the industrial plan that we shared at the Capital Market Day last year. So furthermore, we are squarely focused to deliver the contract and the syringes for our major customers.

Got it. Great. And there's a lot to dig in there. So maybe just first, the industry destocking has been painful for the industry, obviously, and a bit more recently for the company. There's a lot going on here. So maybe just help us better understand the general destocking dynamics that you have been seeing. It's become a little bit more visible in impacting the business. But why should we believe that these are temporary or structural? And I mean, is there any risk that it gets worse before it gets better in your view?

So here, we're confident, Drew, because during pandemic, all our major pharmaceutical customer, we're talking about vial customers worldwide are close to 2,000 customers that are used vial on a worldwide basis. During pandemic, they build a big stock in order to secure their therapeutic drugs and also a lot of customers build a lot of stock in order to be ready for the COVID vaccination. So we say that they bid more than one year of stock. And this is -- we are still facing this destocking issue because they went automatically the pandemic, the COVID vial, there was not any more request for vial. Practically all of us not only about all the actor in the industry of primary packaging, we find that we have an issue because the demand is soft. Today, where we are. We are at the -- in the second part of 2024, we have started to see positive signs in the industry. What does it mean? In particular, in a small sized customers or in certain customers Latin America, where they have more lean supply chain, they are starting to reactivate the orders. And we are starting to see that the big organization they have -- they are starting to involve us in a more standard normalized forecast starting from 2025. So we think that at the end of 2024, we are starting to see that there will be more -- will go more close to a normalization. So it was extremely painful these two years. But again, what is important to know in this room that the vial industry is not concerned if the market will be back, it's when it will be back because the size of the vial market is approximately 13 billion vial consumption per year growing in low double digit. It's a very flexible primary packaging can move from 2 ml up to 30 ml. Practically all the therapeutic drugs in the market, they are using the vial. So it's still one of the best primary packaging configuration for injectable.

And maybe just a follow-up there on the 30 billion unit...

13, 1-3.

Yes, excuse me. Can you remind us what your share is? I don't know if you've ever talked about that before.

So we have -- we play a good role here because we are one of the market leader worldwide in delivering the forming technology for the industry for vial. And we are present in the biggest pharmaceutical company for vial. So maybe we don't disclose the full market share, but we have a big presence. We are one of the established players in the vial industry. For bulk, we're market leader worldwide for the EZ-fill vial that this is this new trend for the market where pharmaceutical company, they're starting to outsource washing, siliconization, sterilization to play like Stevanato because they're going to receive better quality of the product.

Got it. And it sounds like you're confident that the stocking headwinds are going to normalize -- will normalize. But just maybe give us a little bit more detail on maybe some of the customer conversations you're having with your larger customers and the visibility you have, that there is a clear pathway of getting back to normalization.

So today, we need to separate what are the maybe more smaller customer, when we call smaller customers are customers that have only one plant or one filling line where there -- usually the supply chain is very lean. These customers have started to reactivate more normal order like we were in prepandemic situation. Big organization where they have multiple plants, multiple sites, many filling line, usually, they keep very higher inventory, more than six months in the average. We discussed some -- the demand is still soft in 2024. But now we are still -- we are already in the middle of planning for 2025. We are starting to see more normal forecast in the 2025. So this is why we are starting to see positive sign going in the direction to go back to the prepandemic level.

And is there anything that you can share in terms of end market or geography for some of these forecasts?

In Latin America, we started to see some reactivation. Certain big customers, both in Europe and also U.S., they're starting to engage us in a more regular forecast, both directly or through their CMO.

Got it. Despite kind of the vial growth being pressured, syringes have been really a great driver for the company and offsetting that. So talk a little bit about what's driving the significant syringe demand. I mean we have seen some modest headwinds pop up in the industry, but it hasn't really affected the business. But just talk to us kind of really where you're seeing the syringe demand and kind of your confidence on sustainability or acceleration from here?

Today, we are active, and we see the growth particularly in biologics, and this is why we are heavily investing capacity in Europe on the plants in Italy and the two plants in Piombino Dese and Latina and now we are heavily investing capacity in Cisterna. And now we have started to add more and more high-speed line for syringes. The market is biologics. And we are serving this biologics market through our Nexa technology syringes. Nexa technology is a particular syringes that is fitted in particular in what basically we called out injector space. And we see more and more growth demand in biologic as well also we are focused to grow together with our major customer. Also, we see a growing opportunity, what we call Alba technology for certain high potent drugs where our technology is very sophisticated because have a very small release and its type of subvisible particle for silicon. It is perfect for certain type of very strong molecule. So it's where Stevanato is investing today and where we are facing a nice double-digit growth both in Europe and United States. So all biologics, biosimilar is an industry that is growing a lot.

And that was double-digit growth for syringes specifically or one of the individual product lines?

We are growing on syringes, both in Nexa and also in Alba with a good percentage, yes.

And Drew, just to give you a little bit more color on that. The BDS segment in the second quarter grew 9%, while vial revenue was down 40%. And so you can appreciate that in the complete offsetting factor that was primarily syringes and some other product areas. So we're seeing significant growth in that syringe area. If you look at what the market trends are, syringe growth is roughly low double-digit year-to-year based on external data.

Today, if you look at all the investments that we have done since the 2022 and '22 up today are practically all fully dedicated to our high-value solution program, in particular EZ-fill product syringes is the major -- most of this investment we have done already covered with big program with our customers. So today, the focus coming back to your first question, the focus with our -- for Stevanato Group is to execute, build up capacity on a worldwide basis for our major biologic customer because the market is growing. It's growing a healthy way through certain maybe important new therapeutic drugs so it's well spread with many customers and have so many type of therapeutic drugs.

And maybe just on the high-value solutions. In the second quarter call, you raised the high-value solutions mix guidance for the year 2Q was 40%. In the back half, it looks like it steps down a little bit, but are you more cautious about the specific business or product group? Are you cautious or conservative here in terms of the high-value solution mix and the visibility that you have?

So if you look at the last -- from 2020 to today, we were always able to grow double digit and high-value product. I think the trend is there, and we are going to confirm in 2027, we will landed in this 40% to 45% of part and parcel of our revenue, high-value product. For sure, if you're going beyond this 2027, our target, if you look also the investment that we are doing, practically 90% or even more of our investment are fully dedicated high-value product. So we are confident that we will continue to grow in the next year to come. And the program are there. The program are growing and also even more the pharmaceutical industry is going to appreciate this product. Now is the reason that together, Stevanato Group together with the leadership team and the Board to select the best investment that we want to do in the next years.

Got it. And with coming over to the U.S. for the conference, it sounds like you're also going to be seeing some of the other facilities here in North America and South America. So maybe just speaking to Fishers first, but kind of what's left on the validation activities for the new facility? I mean, we're now in the third quarter. Have you started to see actually your first commercial revenue coming out of the facility?

Yesterday, we have installed a second, third high-speed line for syringes. So we are on track with our investment and also with all the installation, qualification, validation. We have already started in Q3 to deliver commercial product for our major customers from Fisher. So we are on track both for validation and ramping up capacity and also both to deliver commercial revenue. And what we will do in the next 12 months, we will continue to install capacity for -- practically we have commitment with our customer that would actually, we serve from Europe but also, we are at the new capacity that we are adding with the new capacity that we are investing here in Fisher.

And Drew, to address your question on validations, we still anticipate that validations will continue into 2026. A multiyear investment will be a multiyear ramp. So we would anticipate Fishers will hit full productivity sometime in 2028.

Yes, sometime in 2028. Can you talk a little bit more about what that ramp actually looks like, like how we should be thinking about it maybe from a phasing perspective? I know you might have thrown out numbers like a year or so ago or maybe longer than that in terms of capacity or maybe I'm making that up. But just anything you can share on kind of the ramp of what you're looking for?

Maybe I can start in terms of ramp. In terms of ramp we are going to install a high-value solution program in terms of syringes Nexa, syringes Alba. We're going to add capacity for vial ready-to-fill, also bulk vial or because we have the BARDA agreement in order to install capacity. Also, we have two big programs from drug delivery system. So all overall, these are the first cycle of investment is going to be at the end of 2028. And if you remember, Marco Dal Lago he were sharing -- we do that to EUR 1 CapEx is going to correspond more or less EUR 1 of revenue, we see where we are working. And the goal is from now to 2028, really to serve all the biologic U.S. customer from this plant, this is the goal. What is the difference between Stevanato to other competitors with these plants in Fisher that we are the first one that are able to serve our bio customers not only primary packaging in EZ-Fill configuration, most of the drug delivery system. So practically, our customer in terms of full service can have the full integrated service from this plant. We are quite unique in this moment in the world.

Got it. And maybe just to touch on Latina also, but it's now your second largest hub in Europe. maybe kind of walk us through the multiyear ramp strategy here and kind of a similar question to Fishers. It's just any kind of metrics you can provide on reaching full capacity?

Practically in Europe, we serve our syringes was originally from the plant in Piombino Dese and now the plant is big because this huge plants serve every year billions of container of syringes to our customers. We have decided also to build the second half also for risk mitigation because we want to have more high level of quality standard hub in order to better serve a secure supply chain. We were already present in Latina because we used to sell the pen cartridges for insulin for our major customers and we have built a brownfield plants where we are building up capacity for Nexa syringes, syringes with bypass. Also, there is more and more growing demand in the biologics space or what we call cartridges ready-to-fill. We are deeply involved in a multi-hundred million of cartridge ready-to-fill for one big customer in particular, that they want that Stevanato it will sell from this hub also this new product.

Maybe switching gears to the engineering business for a moment, but the business growth was down about 20% year-over-year in the first half. Maybe walk us through kind of like how the -- how engineering got there? And really, what's your pathway for recovering and getting this back on a growth trajectory?

This is where the business unit where really we work a lot in this -- in particular in the last six months because the engineering division from 2020 to today have more than doubled the revenue because we are sitting in a good product, but the growing demand of inspection system because of the increase of the requirement from the pharmaceutical industry grow a lot. We already two years ago, two years ago, we developed a very sophisticated technology that we're able to help the pharma customer to reduce the first rejection rate for that product. In parallel, in Denmark, we have also developed a very complex sophisticated technology for assembly, the Drug Delivery System. So both are areas that are growing. So we receive a big increase of order from our customers also in the middle of in 2021, '22 of COVID, also a big shortage of electronic component. So this was the first really issue that had built a sort of delay for Stevanato on delivery. Then on the top of this, certain big biologic customers have purchased from Stevanato in particular, from the plant in Denmark where today, we are focused really to make extremely efficient, very high-speed complex line. And this line, the first line that we are developing the first of a certain number of series of line that we delivered to our customer is today where we are facing some complexity. So what we have done under the leadership of Ugo Gay, the new Chief Operating Officer and also Raffaele Pace that used to be the business unit leader in the past and now it's back on track. We practically we bid one big organization focus on delivering this line and to fulfill also this long-term year commitment with our customer. Even more, we are applying some new cross fertilization program between the plants of Italy and Denmark in order really to move to a standardization of all our operations. So we are building the new basis for the new complexity of the company because this company moved from 100 million, close to 300 million. And now we are facing the new also management able to manage this new complexity even more to approach the new growth in the next year to come. This is where we have seen some headwind in particular, on the engineering this year. So it's due for this big growth and the fact that we are delivered, in particular from the plant in Denmark, this complex new sophisticated line.

Got you. And with some of the progress that you've made in engineering and kind of resetting the business and recovering I mean, is it more in a position to be a help growth for next year? Or is next year still going to be a bit of a reset?

The plan that we have done together with all our colleagues, it will require three to four quarters from -- during the month of August because we need to deliver this big line, we need also to plan this -- we call this standardization program or operation level. We are also to review all the supply chain between the plant of Italy and in Denmark. This is we require a few quarters from now to also 2025.

I think at the Capital Markets Day, you were talking about engineering, growing somewhere in the mid- to high single digits from a market perspective. Is that kind of the level that we should think about for the business on a normalized basis, looking ahead? Or should you be able to take more competitive share and push that even higher?

I confirm this number. The market is growing with this percentage our demand on the engineering side is robust. Also to take consideration the way that we invoice in engineering division is through [ constitution ] when we -- through certain stage, we're going to invoice. So each quarter can change a little bit. So the trajectory is intact '24, a little bit of '25 because we have done some slowdown in delivery this line. We were -- we have reduced our growth, but we don't see changement in the trajectory also in the engineering division also the demand and the contract we see behind in inspection system in the assembly for drug delivery system is robust. So if you look at the market today, biologics space is growing. Is growing a lot on Nexa syringes and cartridges ready-to-fill. Each syringes is cartridges going to require one pen or injector or some pen. So this is why also all the pharma company are hungry to install this technology for assembly. And Stevanato Group that is the original historical customer for this assembly technology for our insulin customer is perfectly fit with our product. Customers like our product.

And as you're looking at the opportunity over the next few years, it sounds like assembly might be the most significant growth driver for the engineering business, maybe followed by visual inspection? Or is there any way to can maybe...

Yes, we expect to grow on inspection. We expect to grow in assembly and also in aftersales in the engineering division because more and more we grow also, we have opportunity to increase our aftersales division.

Maybe with just thinking about 2025 for a moment, I have to ask, but in the long-range plan called for low double-digit revenue growth current consensus is I think a touch under 10%. But just I doubt you want to bless numbers today. Feel free if you want to do that though. But just help us maybe better understand some of the puts and takes for next year, we'll still have a bit of vial destocking, at least normalizing, you have syringe demand. Engineering still sounds like it's going to be maybe coming on the upswing here, just help us with any other puzzle pieces what we should be thinking about?

Just to give more helicopter view answer, then we go into 2025 because now we are in the middle of the planning for 2025. We come from a season five year that also if you're going to exclude the COVID, we were in double-digit growth. We also reinforced our marginality, increase our percentage high-value product. If you're going to look also what we shared at Capital Market Day, we don't see issue in the medium term to maintain the low double-digit growth because we have the commitment, we have the agreement. We are just to build capacity for our customers. We are still prudent in 2025 because the biologic demand is robust, but we are monitoring carefully the restarting of the vial destocking. And like I mentioned to you, the fixing of the engineering that will require a few three quarters. So we are a little bit prudent at this moment to confirm if you be in double-digit growth in 2025 or not. But we are in a sort of mixed situation that we see very positive sign biologics. That is really be seen in last quarter, demand was good on biologics, but we need to clarify this vial restarting order also the engineering.

So not ready to confirm, but you're optimistic about some of the challenges.

We are extremely optimistic on the medium term because we see the involvement of our customers on securing long-term capacity. We are a little bit prudent to see, in particular, for the first part of 2025, this reactivation of vial demand. Also, it would be normal to all the customers or they will more trend so that we want to be sure that we are going to fix everything in the engineering division, in particular, in the plant in Denmark.

Drew, as we think about 2025, as we mentioned on our last earnings call, the largest swing factor to growth will be the pace and speed of recovery in vial destocking but if we look into '25, obviously, if things were to break our way, we absolutely see a path to double-digit growth. But at the current time, we think, as Franco noted, it's more prudent to take a more cautious approach.

Got it. Understood. And I love asking CEOs CFO type questions. But just with the long-range plan on the second quarter call, you did reiterate the LRP EBITDA target of 30%. And I mean we all look at what's happened in 2024. It's become -- the ramp has become a little bit steeper, more steeper. Just walk us through kind of your confidence level, what gives you comfort that you're going to be able to kind of achieve that target despite the ramp looking much more steep today?

Also this is when we have also -- we are reviewing our planning for '25, '26, '27, we want really to truly understand if this number is confirmed. Also, the 30% of EBITDA that is strictly connected with 40%, 45% of high-value product, we want to be able to deliver to the market in 2027, give us confidence that we can achieve this 30% of EBITDA because what will happen in 2027? So we will be -- destocking issue, it will be behind in particular, there will be more reactivation for vial also ready-to-fill because it's a vial ready-to-fill that hit our marginality in 2024. The engineering to be fixed, even more, we will have this new greenfield plant up and running. And today, we are in the middle of 2024 that these bigger greenfield plants, really, they are asking a lot of cost of ramp-up. So one will have this facility delivering syringes Nexa, syringes Alba, cartridge ready-to-fill will be commercial from industrial point of view to deliver many millions of drug delivery system. We are confident that this number will be achievable for Stevanato Group.

Got it. Maybe just actually to touch on R&D for a moment. But just kind of curious, like what innovation is coming out of Stevanato? You're spending about 3% to 4% annually on R&D, you have Nexa, you have Alba. But what's kind of on the horizon from a BDS standpoint or engineering standpoint that you'd highlight?

In our industry, there is not a breakthrough technology that is not tomorrow that the vial to be squared. So in our industry, there is only evolution. So we are more investing in new type of sterilization technology, new type of siliconization, new primary packaging that is more in line with the new sustainability requirement. We also invest in new technology for cutting, for forming. So there is many actions that we are doing in order to further reinforce our process strictly connected the product we deliver to our customers, for example, they were deeply in volume with a large volume cartridges with our customer up to 20 ml. So this we are going to develop all new technology, new technology of siliconization, sterilization. And also, for example, we are developing for these big customers, this new industrialized high-level -- high-speed line for cartridges ready-to-fill. So we are more and more invested in order to evolve our product, in order to deliver what we call a full sophisticated ready-to-fill primary packaging, where allow the pharma customer to do only the filling is where we are really building our competitive advantage in Stevanato and this is the key of the integration, the continuous improvement between forming, the engineering division and our BDS segment. So there is no one big idea, but there's many ideas that is going to improve or enforce our product.

Got it. And just to touch on CapEx, spending EUR 300 million to EUR 335 million this year about 30% of sales roughly, I guess, now that we're kind of getting to the tail end of the CapEx spend, just how should we be thinking about it for next year? Or is there any plans to become a little bit more modular and increase kind of your CapEx spend versus what you've...

Today, we think -- we expect it to be more in the regular normalized situation of CapEx spending in 2027. When we will finish our first mixed cycle of investment, particularly we're talking about the two greenfield plants that really have absorbing a lot of cash. So that is to be normalized. It's also true that our approach in the last 20 years was modular. Stevanato in the last 20 years to build many greenfield plants. Now today, we are present with 18 plants in nine different countries. Also, we have space to growth in Fisher. We have space to growth in Italy. We have space to growth in Mexico. So I hope to don't stop in 2027 to dream growth for the pharma company. But we think that in 2027 will be more in a normalized situation.

And that was more high single digit, low double-digit percent of sales. So we shouldn't expect that percentage next year will still be elevated above the historical average.

Well, we're still in the budgeting process for next year. So we'll provide that guidance in March.

Well, certainly, we'll see because I wasn't really prepared to give you the answer.

I appreciate that. We only have a few minutes left, and I want to just touch on a couple of other topics. But just maybe on the China expansion, you paused the facility expansion in China. What do you need to see to maybe refocus CapEx dollars back into China? Like what should we expect maybe over the next 12, 24 months?

Asia, in general, is a high potential environment for biosimilar. This is why we were looking to build also greenfield plants for EZ-fill product in China. It's also true that we serve from our plants in China, both international customers and local customers. One of our big international customers have decided to reallocate their capacity in the last couple of years, particularly from the plants in Europe. So this is a reason why we have decided to prioritize the investment in Europe because of the clear demand to deliver the line to our customers. On say that, I'm -- we are strongly convinced that to be present in Asia that we are already present in Asia is a strategic because the market is growing. They have a very -- they are extremely hungry to take a very strong position in biosimilars. So we want to be there we don't want to wait and to lose opportunity in the next years. Today, the big focus is Europe, United States. We have a presence there that we can easily serve from our plants in China, our plants in Europe, Asia but if you look at the growing market in China and India and Korea, we must be there because there will be a big opportunity in the next 10 years.

We have a minute left or so. But maybe what's something that's underappreciated about the Stevanato story that you're not getting asked about or people are ignoring?

So sometimes when I -- what I have -- we have difficulty to explain that the demand in the biologics space is no matter if today, we are living this destocking painful situation on vial. We are in an environment where the demand is secure every year. What does it mean? So if you look -- if you split it by therapeutic drug, anesthetic vaccine, insulin, anticancer product and GLP-1. So we are in an amazing industry, where every year, it will grow or either in high single digit or most probably for new biologic, low double-digit. So it's very nice the environment where Stevanato is playing. It will play in the next 5, 10 years. These areas sometimes we have difficulty to explain because I receive many questions from investors if there will be the demand for sure, there will be the demand. There will be more and more growing demand because people is going to live up to 100 years. There are more billions of habitant all over the world. There is more attention on to the health care system. So we are really an amazing industry today.

We'll close it there. But Franco, thanks for joining us. Lisa, thanks for coming up as well. But thanks for the time.

Thank you. Thanks for the time, and thank you for your time.