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

Thank you, everybody, for joining us here at the UBS Healthcare Conference. I'm Dan Leonard, the life science tools, services and diagnostics analyst at UBS. And we're happy to be joined by Stevanato Group for our next fireside chat. Franco Stevanato, the CEO; Ricardo Butta, President of Americas; and Lisa Miles with Investor Relations. Welcome all of you.

Thank you. Thank you, Ben.

We're coming out of earnings season here. So I figure the best way to start off is maybe Franco, Ricardo, whoever wants to take it, could just offer up the key highlights from Q3 results.

Practically in the Q3 result, there were some strong positive element in this quarter because we started from the greenfield plant that we are -- is one of the most strategic investment that we are doing at Stevanato Group. We are continuous to progress in terms of validation with our customers and also to install new high-speed line in all our plants, both in Europe and in Fishers. Also, the greenfield plants that we have in Latina turned profit in terms of gross margins this quarter. And for what is related to one of the major challenges that the industry was affected in 2024 related to the destocking, we are starting to see positive signals from the market, in particular, for certain small customers that have reactivated more regular order in the second part of 2024. A big international customer that has started to share new forecast for 2025. So all overall, this quarter is moving in the right direction.

And Dan, if I may, as a reminder, we were able to grow 2% on a consolidated basis despite a 38% drop in revenue from vials. So even though we are managing the destocking headwinds, we continue to see growth across the rest of the product categories, particularly in high-value syringes, IVD and DDS as well.

Correct. We are building capacity, in particular, on Nexa syringes with our customer, Alba syringe with our customer, syringe with bypass and cartridges are ready to fill. So we are active in 2 big programs for auto-injector space that will help us to deliver revenue in the next years from now.

Okay. So an active quarter on the business development front?

Correct.

Franco, that comment that a large international customer has shared a forecast for 2025, how meaningful is that? Is that standard course of business at this time? Or is that something you're really looking at as a positive signal?

Usually, we see the way that we work with our customers that we have the multiple year contract, then we have the 12-month forecast and the 1 or 2 quarter confirmed order. When the customer is more, they have the tendency to confirm 1 quarter. When the customer is international, like I say, more complex for us, international customers are customers that they are in the different therapeutic drugs. They have different plants spread in the different region or around the world, in particular, in Europe and U.S. This customer, they're starting to reactivate. They are soft in demand here in 2024, but when we share the new forecast for 2025, in particular, the quantity per quarter, we are starting to see positive signal. So what is the message we would like to ask you? We are not back to normalized prepandemic situation, but all our customers are starting to increase their [ forecast ] on a quarterly basis.

Okay.

Dan, if I can add a bit of color here. Of course, we talk to customers on a daily basis, right? And when we talk to these big global customers beside the forecast and the projections, we clearly get some more reading and intelligence into what is going on with their inventory levels and so on. And we start to see them really going back to what is considered normal. In some cases, even they went a bit overshooting and going low with the inventory levels. And so I think the signals we are picking up yet small customers is easier and they have much better visibility on their inventory levels, but also with the big ones, we start to see some good trends.

Okay. And that actually does tails well with my next question. I was curious from a destocking trend perspective. if the trends were -- any difference between small customers, large customers, customers that were COVID heavy versus those that weren't. Are there any meaningfully different trends amongst the different customer cohorts as you evaluate them?

So small customers already placed more regular order in 2024. Bigger customers that -- also bigger customers have also the vaccine production in their product portfolio, they are more sharing -- they are soft in demand in 2024, they're sharing the forecast in 2025. So we see that quarter-by-quarter positive, they are going to -- in the direction to be back on prepandemic situation. Just to give you some order of magnitude, the vial market have the size of approximately 13 billion unit consumption per year. It's growing approximately 2% per year. And today, most of this customer started from end of 2020, '21, they build a huge inventory. They build approximately 1 year of inventory for all the therapeutic drugs plus they build inventory for COVID treatment. So we are using all the '23 '24 today to go back to sort of normalized situation.

I think the difference between the big ones and the small ones is the small ones, they have 1, 2 sites, and so it's a much easier job to have the inventory under control. When you talk about big customers, global network, they have a lot of nodes and not always they have an integral view of where the inventory sits, and that is what made their life a bit more difficult over the past quarters.

Okay. And Franco, you talked about the greenfield plant in Fishers having generated its first revenue. How would you characterize the inbound customer interest you've seen in that facility in comparison to your initial expectations?

Actually very high, meaning when we started to build that site, we had a few customers in mind actually customers that come to us asking for a solution in U.S. domestic solution. But since we started to bring it up and to talk about it, we saw a much higher level of interest that we expected, both because of where the world is going in terms of the regional trends and wanting to be in the region for many reasons on the supply chain, on the cost, sustainability, everything but also because of this uptake in the biologics space. So clearly, there is a lot of demand in the market today. And people want to have a solution that is based on multiple nodes. So they also having a setup in U.S. serving the U.S. market is great interest for customers.

If I can add a little bit more, when in 2020 many U.S. Customers, they ask us to become domestic in United States because they say -- we used to validate our Italian plant for a high-value product, in particular, for Nexa, Alba syringes vial to fill they say [indiscernible] we want to become domestic because we -- the big growth, it would be there. So today, there are some positive effect if we have decided to list the company in New York to reinvest most of the primary in U.S. in order to become domestic United States. So this was very well appreciated by our customers. And the fact that we are building a campus in Fisher that is quite unique because in this campus, we can do bulk via ready-to-fill via, easy field product, they are to injector is a really accounts post that they can offer the full integrated solution for our [ bio ] customer. So we -- this have helped even more to give the perception that we are the right partner for the U.S. market based in U.S.

Okay. Is it possible to track anything like a capture rate or better somehow quantify the implications and the impact that it's had on your discussions with customers in the U.S.?

Well, capture rate, I don't even know what the definition is, but what I can say...

I only heard that term recently...

Maybe a flying guess. But what I can say is that when you look at the capacity that we are going to have installed in Fishers across all the products that Franco mentioned, already today, we see a very good coverage. So that is giving us a lot of optimism for the future of the site.

Yes. Also here, the investment you're doing in Fishers in high buffer and high value product, also the investment that we will do in Europe for high value product. Most of this capacity that we put in place are really covered by long-term contracts with our customers. And if you look also our business model of our value proposition, we have in U.S. one tech center in Boston, where we approach our customer early stage and we offer immediately our integrated solutions. To both big bio customer to small new startup, there when we go commercial, we show immediately our plant in Fishers. So this helped to immediately go to all our existing U.S. customers to deliver the program from now to next 3 years, but to be involved to their new program from now to the next 5, 10 years. Today, we are deeply involved in new program for high-volume cartridges, high-volume syringes, sophisticated Alba technology. You also program out injector. So where will not be deliver revenue today, but we are doing the validation stability right now for the next year, make an example, comparison. We were involved in GLP-1 by our big insulin customer 8 years ago, and we are starting to build a huge capacity right now. The fact that we are -- our tech center based in Boston, and now we have this new hub based in Fishers, we are going really to continue to invest in the long term, also beyond the next 2, 3 years.

Okay. If I can say one thing that this setup we have in Boston, I think, is critical because it's a way to pull customers in early stages and somewhat be designed into their solution when they go commercial, but it's also giving us a lot of visibility ahead of time so that we can plan our capacity head of time, right? It's not that we are at the last minute getting if you are a contract for a customer and we scramble -- bring it up. We have a lot -- we have 5, 7 years of North somewhat.

Okay. I mean, is it fair to say in your business, do you typically have a lot of visibility and a lot of long-term visibility and the period we're coming out of now is the anomaly more than anything?

Correct. This destocking is related to vial was a surprise for all the industry. When you deliver to pharma customer, primary packaging is the primary container that is in contact with the drug is in the interest of the pharma company even more in the interest of the patient. Let's assume that on vaccine on insulin on anticancer product. Customers sometimes used to purchase several hundreds of billion of primary packages every year. And we had to produce from several plants of Stevanato Group to deliver to many plants of this pharma company. The priority #1 for the pharma companies to secure the product because they cannot have any risk to don't do the injection to a patient. So this is why we can say that we are one of the most safe industry where the forecast is the priority of the market. COVID was, again, like I said, a surprise for everybody because immediately, we build huge stock for COVID and non COVID therapeutic drug. And today, all the industry were facing a sort of destocking issue, but is really something exceptional never happened before in the past. We never had such experience.

Okay. So truly a one-off. And another item that was talked about a lot on the third quarter call is the restructuring in your engineering division. Can you give us an update there?

Yes. If you allowed me to go back on 2020, 2021. So this company, engineering division is strong because we have -- is a market leader in glass forming is a market leader in inspection system and also market leader in assembly technology. This division more than doubled in the last 3 years in the middle loss of the COVID also in the middle, if you remember, in 2022, 2023, there was a bigger supply chain shortage of electronic component. So practically, we increased revenue complexity. We launched also a new high-speed line in the Denmark plant. What happened in 2023, in particular, in the plant is [ so late ] in Denmark, we face a big increase of order of special machine and this assembly technology even more the new generation of assembly technology throughout injector. These have caused to other congestion and some delay on delivery of this line to our customers, in particular for such a sophisticated product. So practically, what we have done today under the leadership of our new COO. We have done an optimization plan in order first to face the temporary challenges, temporary challenge delivery, the line to our customers in order really to do the full acceptable test in time. The second action that we put in place, we wanted to review the size of our footprint. Today, most of these special technology sitting in Denmark. We are going to increase our capability also in Italy in order to have 2 locations that can both produce each product. So these are the 2 big actions that we do. And we have performed, so what we call, onetime investment in order to increase this side and further streamline our supply chain in order to reduce the cost of this line and to do much more revenue marginality. Today, we are on track. What was our target in Q3, we're on track. We delivered some handful number of lines. And our goal is to use the next Q4, Q1 and Q2 next year to go back to the normal marginality. If I can add another also market perspective of this division. This engineering division have a high expectation of growth because the pharma market is stronger in the demand, in particular, on assembly technology because there is more and more increase in demand for auto-injector. And this type of technology that we sell to our major customers is perfectly fitting. And also in terms of inspection machine, the fact that we have this particular technology and inspection, there is more and more growth demand -- growing demand on an inspection machine.

I want to add one. It's not only about the market growing, but when a pharma company decides to install -- to buy our technology, install that machine in one site, typically, that becomes the standard for the company. They don't want to have different technologies, different suppliers, different machines within the same site or across site, they want to have one standard. And so what we are seeing and we will continue to see our repeat orders because they want the same technology deployed across the entire network. So that gives us a lot of confidence that once we have gone through this improvement plan on the execution side, the demand continues to be there and strong.

Okay. I mean has anything changed in your view on the strategic importance of coupling the engineering division with the rest of your business?

No. Because we watch this engineering division in 2 angle. One is a business unit that is growing, is performing, is generating good marginality. And for each product we produce, we are always #1, #2. So this is -- that we have strong leadership position. Even more, what is important is that the internal, we call internal engine of Stevanato Group, what does it mean? For example, we win today a big contract for multi-hundred million cartridges ready to fill that we have to deliver to our big customers in the next year, all the new technology of high-speed washing siliconization, new type of distalization and assembly is developed by our engineering division. So we -- the fact that since decades -- we developed the technology for us. It's building a sort of competitive advantages in terms of productivity, quality and also fast to market. At the end of the game, we can gain faster, more contract. This is valid for the glass, is valid also -- we can replicate this on our out injector because most of the time, the technology is developed by the internal engineered region. So we consider this like an internal competitive advantages.

And then another item from the Q3 call, you showed that illustration of the timescale on when a new plant becomes breakeven and profitable and then very profitable. I've gotten questions from investors around where does Fishers sit along that curve and how quickly is Fisher is going to ramp? I don't know if there's any kind of color you could offer on that.

That's a good question. Clearly, we are trailing compared to Latina. Latina, first of all, it was a brownfield. So when you do a brownfield, you get to revenue faster. Fishers is a greenfield. We had to start building the site before being able to bring in clean rooms and lines and everything. And also when you look at the scale, it's 2 different scales. Fishers is a much bigger setup than Latina, so it will take longer for us to fill it with lines and go from there to qualification and validation with customers. We started to ship commercial volumes already in Q3, which is a great milestone to achieve. We will continue to deploy lines through end of '26, syringes first and then vials and injectors with the idea to start really utilizing the site in full '27, '28, at that point, clearly, it will create a lot of value, but it's going to be a process for the next several quarters.

Okay. So the capacity will be fully established in 2026?

By the end of -- it will be fully deployed in terms of capacity, then you have to go through validation with customers, which takes time and then you ramp. And so it's going to take -- I think we will get into '28 by the time we are completely utilized.

Okay. And another question I often get is, what is the CapEx for Stevanato look like post Fisher? So when does it get back to a normalized capital spending level?

We were facing this '22 -- '23 to '24 big CapEx cycle. Also in 2025, we have a program of investment, because we are starting the capacity is also true that the big building between the brownfield in Europe and the greenfield plant, it's already done. So our goal is to go to sort of a normalized situation on 2027.

Maybe one comment there is when you look at our network, there is more than Latina and Fishers in the network. And there is capacity available in other locations, capacity meaning a space that we can go and utilize for bringing up additional manufacturing lines to say that we can continue to expand and grow volumes without going through heavy investments as we have done so far in those 2 sites because the buildings are already there. We just need to bring in the lines.

Okay. Somewhat related question, how do you see margins developing over the next 12 to 18 months?

Yes. So I think as we've continued to highlight, we would anticipate that margins will continue to expand as we grow our high-value solutions. And so if you look particularly in the fourth quarter, where you see a big step-up in margin that's predominantly driven by an increase in high-value solutions of committed orders that we already have in our backlog today and obviously, volumes on that as well. But also keeping in mind that as Latina progresses and we benefit from economies of scale. And as Fishers continues to improve, grow revenue and also gain efficiencies that should obviously help margins as we go into '25, '26. And as we think about '27 with our target adjusted EBITDA margin of 30%, we think of things such as by the time we get to '26, while destocking should be in the rearview mirror, we should return the Engineering segment to profitable growth. And obviously, the economy of scale that we will see generated other Fishers and Latina. So as we think about that long-term trajectory, those are the 3 main components, and obviously, growth in high-value solutions that will drive that margin expansion.

Okay. And just a point I want to touch on there, Lisa. You mentioned destocking is in the rearview mirror in 2026. And so it is your view that destocking is still a theme as we roll into 2025?

Sure. And we've already said that as you look into 2025 at the moment, the greatest swing factor to growth for us will be the pace and recovery in vials. And so I think as Franco and both Ricardo have mentioned, we are all cautiously optimistic, and we are starting to see positive signals in the market. But at the current time, I think that a cautious stance is warranted.

And once you hit that 30% adjusted EBITDA margin, what's the natural margin lift annually from the mix shift to high-value solutions over time? What type of tailwind is that in aggregate?

So that's not something that we have shared, and so we can take that away and look to see if that's a useful disclosure.

I've got 75 bps a year on my note card here. I'm not sure where that came from -- maybe it was a planted number. In terms of then the other drivers of your long-term growth outlook, I'd love to touch on them one by one. So first off, GLP-1s. Can you remind on the total exposure Stevanato has to GLP-1s? And how important is that therapeutic category to your growth?

Yes. We start to be involved by our insulin customers many years ago, in particular, was through new requirement around syringes next, in particular, syringes with bypass, bulk cartridges and cartridge ready to fill. This was related to our BDS segment. In parallel, we received order -- a repetitive order for high-speed line for assembly from drug delivery system, where on GLP-1, we are evolved today with a long-term contract with our customers.

There is one point I want to make on GP1 because I think in the mind of people, there is this almost one-to-one linkage between GLP-1 and obesity. And so everyone is concerning what is going to happen if someone like a patient, which is a most like consumer, right, is not continuing with the obesity therapy in reality. More and more GLP-1 is being planned for other therapeutic areas. You talk about cardiovascular, sleep apnea, bone density, osteoarthritis. And so that market is going to grow irrespective of what happens basically. And so for us, what is important is to be with the customers that have that technology in their portfolio and whether obesity goes up or down or may be a factor or not, but we are going to continue to have a substantial growth in that project.

Another topic, the revision to NX-1 in Europe were finalized a year ago. How would you frame the importance of that regulatory framework to Stevanato as a growth driver?

We already are working together with our customers and our easy field configuration, in particular for vial and cartridges is going in this direction. Today, if you look at the main goal around the new requirement of our next one is really to enhance the sterility of the drugs for the patient. So all the process of the pharma company, all the process of the pharma, the supply, the pharma company, have really to put embrace a process that can really reduce any type of risk of stability and easy field technologies go perfect in this direction. The fact that you can deliver to customer, this vial in not to glass configuration where the customer is just going to open the next tab and to do the feeling is the best way today if you look at the traditional process of the pharma company is the [ nesting ], handling, washing siliconization and tunnel for sterilization. There is a lot of metal contact with the glass. This is where the process has to face some improvement. So this is why easy field is the right answer to this new requirement. In fact, it's where most of the pharma company, when they started to change their process, they go immediately with this, what we call flexible technology for filing. From an engineering side, like I mentioned before, we have this new inspection machine that have particular capability through a particular algorithm to detect any type of cosmetic defect also in the drugs. This also can help to reduce any type of force rejection rate. And it is that in the glass, there are some leakage of chips and cracks that can allow the passage of oxygen and to use testability. So where we are proactively work with our customers today.

Okay. And maybe this is the time to ask about the importance of vaccine to your growth algorithm. It's a question I've been getting more and more over the past week, specifically?

Yes. So if you look at revenue in fiscal 2023, revenue from vaccines was approximately 11%, spread across the geographies, especially in EMEA. And so as we think about the Trump administration coming in, I think it's early to speculate, we need to see what the appointments look like. However, on Wednesday of last week after the election, the transition team did say that they're not really in the business of looking to, say, entirely limit vaccines. So if people want to get vaccines, that's their prerogative. So I think we need to see how things play out. But I think from a U.S. perspective on vaccines, somewhat limited exposure.

From my small site I have 4-kids and 4 grandparents, so I already performed vaccination to all of the guys in order to do my small contribution though.

In that 11% is a global number you mentioned?

It is, yes. Okay. And we do report that number each year and it will be in our 20-F again this year.

I'm sorry, it'll be under what?

20-F, our annual SEC filings.

Got it. Okay. Maybe with 5 minutes left here, we'll go -- I have a couple of more esoteric questions. We cover West Pharma as well, and they have a relationship with Corning and aluminosilicate glass. And I think you have borosilicate glass and not to get into all the technicalities of different glass types. But just how should investors consider any evolving competitive dynamics amongst the different glass suppliers over time, any comments?

So we have -- and by the way, collaboration in the industry is quite common. So sometimes we do partnership with Thermo Fisher, sometimes we do, for example, we license our [ risky ] technology also to our competitor. Today, what we see -- we had used to have also collaboration with Cord in the past when they launched the new Valor technologies. Also, we have a very active, intense collaboration with West because when we are in the new program, we supply the syringes, they supply the container closure. Today, what I can tell you, based on our type of exchange with the market, we don't see that our products go in competition to this partnership. It's very rare. We never had any chance to see this partnership competing with us. Usually, on syringes, we compete with Becton Dickinson on vial and cartridges, our main competitor is a shot.

Okay. Another niche-ier question I have here, there's been a lot of interest lately in bypass versus dual chamber syringes. So could you please remind me of Stevanato's competitive position?

Yes. we start to develop this technology for our main customer, both through the engineering division because we develop for us and also for our competitor, the glass forming double chamber via double chamber cartridges, today, double chamber syringes. So we are active through our engineering division to deliver this line, both to us and to our competitor. And we have a market leadership position since more than 20 years. Usually, customer is purchasing this type of primary package, one had to store liquid powder or liquid-to-liquid separately, and they just mix before the injection. In the last years, we see that both on cartridges from 1 ml to 5 ml also, 10 ml sometimes, if syringes from 1 mL up to 5 ml, more and more a requirement for bypass easy field product. As we are today, we are building up capacity, both in the plants of Latina and the plant of Fisher, huge capacity today for Syringes with bypass. But if I can add, our manufacturing lines are modular. So to do the bypass is about adding one more module to the line. And pull it out if you don't need bypass. So we are not introducing rigidity into our system. We are simply deploying one more module as long as it is needed, but there is a lot of flexibility in the setup.

Okay. If you can maybe summarize a little bit also Lisa should already shared with you. 2024 was a challenge for Stevanato for all the industry. Also, we have some painful headwind that obliges us a couple of times to review our guidance. But what is important to reassure that there are some temporary headwinds like vial destocking, we are in the big heavy cycle of investment of these 2 greenfield plants already planned a share with all our investors, they said that it was about the most intense years. And also in the engineering division because of the increased order that we receive from our customers, we have to lose some revenues a little bit of marginality. But if you look also beyond '24, '25, beyond '26, the vial destocking, it will be behind. We will gain a lot of benefit from the greenfield plant that we are building for our customers and the engineering segment at the mid of next year, will be back on track. So the market landscape where an environment where Stevanato is working to work in the next 10 years is amazing. Biologics is growing 15%. Pharma is growing high single digit, and all our value proposition is well perceived by our customers. So we are optimistic and enthusiastic for what we are doing. And also, we are going to confirm that in 2027, our 30% of EBITDA is our percentage of high-value solution range to 45% is going to be comfier.

Final question in the last minute here. Any change in dual sourcing from your customers' perspective as a result of the pandemic wanting to diversify supplier risk or anything along those lines?

Was already in their strategy to have all dual sourcing. Still today, they are doing. What maybe they further reinforce the requirement to have a partner with a geographical competence was spread. So Europe, they want to have all the full capability, U.S. they want full capabilities. So on the top double source, their partner must have a global footprint where we can really serve the same product different locations.

Okay. Well, your expansion in Fishers then was very well timed. With that, we'll leave it. Thank you. Franco, Lisa and Riccardo. Thank you all for participating.

Thank you. Thank you, everyone.

Thank you, Dan.