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

Great. I think we can get started, everyone. Kallum Titchmarsh here from the Life Sciences team at Morgan Stanley. Really pleased today to be joined by Franco Stevanato, CEO of Stevanato; and Lisa Miles, Chief Communications and Investor Relations Officer. Just before we get started the exciting stuff. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. So thank you both for joining me here today.

Franco, maybe just to set the stage, can you talk about how 2025 has played out so far versus your initial expectations at the start of the year? Just beyond the numbers, what are you most proud of? And maybe talk about some of the challenges that you encountered that you perhaps weren't envisioning at the start of the year?

So first of all, thank you, and thank you for Morgan Stanley to host Stevanato Group for this important conference. So for what is related to 2025, we are on track with our target in terms of number. But even more 2025 for Stevanato Group is an important year because we are deeply focused on building capacity for our bio customers. Like we have started a few years ago to build a greenfield plant in Italy. And even more, we are approaching a big investment here in -- outside of Indianapolis in Fishers. So we are laser focused on executing this program, and we are on track. What does it mean on track? We have installed a lot of lines. The training of our operators is on track. The quality system is high. Also, we are proceeding with a lot of customer validation every week to -- for our U.S. customers. So this was the main goal. We have set some big priorities in Stevanato Group, and we are monitoring this every week, and we are proceeding in the right way.

Great. And I wanted to talk about product differentiation. So you're #1, #2 positions in many of your core business lines. What do you think the drivers of market leadership have been? Is it product differentiation, brand value, pricing, relationships? Just maybe talk through that, if possible.

Yes. So already at the beginning of 2000, we have decided to focalize Stevanato Group to serve the pharmaceutical company, biologic market in particular and everything that is around injectable. So we -- what does it mean? So we invest a lot in building state-of-the-art greenfield plants in the different areas around the world. Today, we are present in 30 state-of-the-art plants in nine different countries, including the new greenfield plants that we're doing here in United States. Also, we have boosted the research and development in terms of product and process in order to build superior quality through our internal technology. And today, one of the main factors when one big client is going to define a partner is when they have the same footprint with the same quality system with the same level of technology because the quality of our product is because of an injection that go directly into the patient is fundamental in order to enhance sterility for the patient. And today, we have built this leadership position. We are #1 worldwide on cartridges. We are the second player worldwide on syringes. We are the market leader on ready-to-fill because in the last 20 years, we are laser focused to invest in quality, in process, and we have patented a lot of products for our injectable customers. This has enhanced Stevanato to arrive where we are and even more allowed Stevanato to enter in the pipeline of this new molecule that our clients are launching in the market.

Great. And BDS, maybe let's transition there. Nice acceleration so far in 2025, and you raised the outlook last quarter to high single-digit growth, I believe, for the year. Maybe just talk through the drivers of that confidence boost and what you're seeing from customers right now.

Today, the dynamic from the biological market, I think all of us, we are perfectly aware, our big bio customers -- biologic customers, biosimilars are heavily investing in new capacity worldwide, also with a big focus in the last quarters in United States. They also have a rich pipeline of molecule in Phase II and Phase III. So today, through our tech center that is in Italy and Boston, we are approaching our customers at the early stage in order to be filing in the FDA together with the drug. And when the product got commercial, we are starting to sell with our big plants in Europe, in Asia, even more United States. So the dynamic of the pharma customer is very -- there is a lot of energy, and we are practically mirroring the investment in order to build the supply chain together with them in order to continue to allow growth in the same percent that we were able to deliver in the last year. So before to be a public company, the revenue of Stevanato Group was approximately EUR 0.5 billion. Today, the guidance is targeting to be close to EUR 1.2 billion, so a little bit less. But the nice future to be when our greenfield plants will be up and running in the next year.

And just on the destocking side, a lot of discussion about this through the industry. I think you commented earlier in the year, you expect that to fully normalize in 2025. Sitting here today, do you feel confident that's still the case?

Yes. So related to COVID was one of the most positive and painful events in the history of the pharmaceutical company because in 2020, most of the player like Stevanato, we received a lot of new orders related to COVID vaccine, also there is a lot of tension in the market to build stock for all the molecule, all the programs. Starting when unfortunately, COVID -- the exit of COVID was earlier compared to our expectation, practically most of our -- all our worldwide customers have a huge stock. So we are talking about more than 1 year on stock on the top of the stock of the COVID. So it took 2 years to clean up the inventory of our client. So we already started to see positive signal in second part of 2024. In 2025, we see that more and more we are passing through a normalization of order intake for our clients. So I'm going to confirm that within 2025, we'll be back to normalization.

Are there any small air pockets remaining within the destock?

The only air pocket is that there are today a lot of capacity in the market for buyer. So this imply that we need to be extremely efficient and to have a very speed relationship with our clients.

But when you look at where we are year-to-date in the first half of the year compared to last year, we were up 3%. And when we look at the order book for the back half of the year, we have a lot of confidence that we see the ongoing normalization within the market.

Great. On the high-value solutions side of the portfolio, that's also been growing pretty well recently, raised the outlook there, too. Can you just speak about the specific products that you're seeing success within that portfolio?

Today, we can say from the day that we have launched the IPO of Stevanato Group, the majority of our investments are fully dedicated to investing in capacity for high-value product. We are talking about Nexa syringes, we talk about Alba syringes, we're talking about cartridges EZ-fill, we're talking about also vial ready-to-fill. Also, we are developing a set of patents around our devices. So today, around high-value product, the big growth is on Nexa syringes because it's perfectly fitting for inserting the syringes in the auto-injector. Today, most of our clients, in particular, in the injectable space, they are developing a new modern way to self-administration of the drugs that are going to use this sophisticated auto-injector and most of the time, it is our Nexa syringes.

And yes, you touched on Alba briefly, I think highest performing syringe platform there. Can you just elaborate on how that differentiates from other syringes on the market?

Just to recap in order to explain why we are having this high success on Nexa syringes and Alba syringes, because we have -- we can offer to our client's superior quality, for Nexa that -- like I mentioned to you that the syringe Nexa is going to be inserted and not injected. We have patented a particular silicon inside that enables to do a better distribution of during the injection. Usually during the traditional syringes, you inject with a finger, when you have a pen, you push a button. So it's fundamental that there is a very homogeneous distribution through the pressure. The silicon injection that we do is going to enhance this characteristic. Seen as small details, but it's fundamental, in particular, when there is a patient who do the self-administration. Another superior quality that we offer in the syringes is much more resistant than normal syringes because you have to take into consideration these syringes are going to be assembled with 12 plastic components. And you cannot have any risk of breakage inside of the device for many reasons because this patient is obliged to have 1 or 2 injections per day. So the process that we have developed through our engineering division enhances this quality superior. But where is the difference compared to our competitor. Most of the time, we have to deliver several hundreds of millions or billions of products every year. And this is where we are able to enhance quality because Stevanato have hub in Italy, two hubs in Italy. We're going to build a big hub here, and we are serving all the clients. So we have a process that is extremely stable that is going to enhance this. These are small details but make the big difference in order to be in the big contract. Alba is even more superior quality because we launched Alba for certain ophthalmic products. But we see more and more of clients have a very high attention for what are some high potent drugs, in particular, MABs, monoclonal antibodies. They cannot have any risk that there are some particles of silicon that is going to mix with the molecule that can change the chemical composition of the molecule. So this particular plasma coating that we have patented and developed in the same silicon is one of the best superior syringes that is going to really reduce drastically the risk of some invisible particle can be injected. So this is going to be discovered by our clients because they put in stability of the molecule, but instability with tens of products worldwide. And this is another big tailwind for Stevanato where we will capture the future. It's only based on superior technical and quality competitive advantage that we offer compared to our competitors.

Understood. And obviously, there is high-value solutions mix that is really nice for gross margins as well. So maybe just talk us through the margin profile of these products versus the standard ones and how that kind of ties into the broader group as well.

So today, we have -- on the high-value product, our target of gross margin is between 40% to 70%. And we are on track on this trajectory. So more we are selling to big customer, high runner, we are more on the lower part of this range. More we are going to sell sophisticated product like Alba, we are more in the high range. On high-value product, our target of marginality is between 15% to 35% gross margin. So we can share with you that in the last 2 years, nearly the totality of our investments is focused investing capacity on high-value product, right? Because we want step-by-step in the next 5, 6 years to reposition Stevanato Group to a much more high sophisticated rich portfolio in high-value product.

How much room is there to push the margins of the products themselves higher? I mean it's raw materials a lot of the time, but I'm curious whether there's potential for that to push up.

About 40% to 70% gross margin is an outstanding number. We are really -- we can compare to the high standard on the industry. You have to consider that type -- the type of value proposition that we did with our customer is too secure not only related to the gross margin, what is the plus around this contract and high-value product. We secure a 5- to 10-year contract with the client. There is most of the time some CapEx contribution or some take-or-pay formula. So the -- if you look to see in a holistic way, the contract is very secure for Stevanato Group but also for the investor.

And I want to touch on biologics and GLP-1s.

About your question, also, I asked the same question to our sales force. Why don't we go to 100% of gross margin. They say, yes, but they don't do it. I don't know why.

Very good. So biologics, GLP-1s, a lot of discussion in recent years around that. Maybe just talk about where Stevanato is positioned in the kind of GLP-1 value chain and what you're seeing today?

So GLP-1 is for Stevanato Group, very nice tailwinds that will be -- very nice tailwinds in the next years or decades. What was the [indiscernible]? We historically serve our -- the top three insulin customer worldwide. We started to serve our client at the end of 1990 as a standard buyer. Then this client engaged us to serve cartridges, 1.5 ml to 3 ml for insulin. And through our tech center, close to 10 years ago, they give us the possibility to be registered and filed in this new opportunity. Today, 2025, I can say that we have done, I want to say in a very humble way, a very good job because practically, we are in with all our product portfolio. We sell GLP-1 on cartridges. We sell GLP-1 on cartridges EZ-fill. We sell GLP-1 on syringes. We sell GLP-1 on syringe with bypass on vial and also on devices, in particular, here in Fishers. And our Engineering division is involved in serving inspection machine and assembling technology for their device, what the so-called legacy project that we are starting to install this high-speed line to our clients. So we are extremely satisfied because we'll be able to capture this growth is a nice tailwind to our long-term number. What for me is extremely important to underline that we consider this like a very strong additional improvement in our revenue. The focus of our organization is to serve all the pharmaceutical market. What for me is important under Stevanato have historically the strategy to be the partner for all the biologic industry, not sitting in one, two molecule, one, two customers. Today, if you look at the pipeline that we have and we will translate in revenue in the next 5, 10 years are practically with most of our top clients in biosimilar that have in average in pipeline in Phase II or Phase III between 50 to 100 molecules. And most of these are injectables is where really Stevanato is focusing the growth. So we want to take opportunistically GLP-1 but also consider that we want also to spread our portfolio in order to be seen in many clients in order to share the growth and the revenue marginality and we have also a very safe mix of clients.

Do you keep an eye on the momentum behind the oral formulations for GLP-1s? Obviously, again, there's a huge market to push into on the injectables, but any thoughts on the oral side?

We captured in our long-term guidance in Stevanato Group that the oral -- we're always talking about additional incremental growth. It's not that the oral is going to take out existing market because injectable, it will increase in the next 10 years. Also oral, based on our estimation, it will take up market share position around 20%, more preferably 30% of the total demand of GLP-1. This is what we capture in our long-term number.

Great. And outside of GLP-1s, but keeping in the kind of biologics theme, I wanted to touch on cell and gene therapies, vaccines. Are you -- the market obviously is pretty dynamic right now with both of those products. But what are you seeing?

So today, we are laser focused on this -- like I mentioned to you, this product, everything that is around self-injector. We have a big position in MABs, monoclonal antibody, in particular for our originator clients, also biosimilars where Alba technology is perfectly fitted. And also, we -- practically, we try to sell all the different type of new molecule, like I mentioned to you, today, our top clients are building the capacity for their molecule for the future. So we are engaged with all our product portfolio nearly in the totality on the EZ-fill configuration. So monoclonal antibody, we are present in new type of therapy, and we develop customized technology or coating around the product in order really to have the best compatibility between the glass, the device and the medicine.

You obviously have good engagement with your customers. There's a lot of policy uncertainty at the moment and a lot of headlines flying around. What's the sentiment like across the groups that you chat with?

In terms of our customers?

Your customers, yes.

I think obviously, generally positive. And we've seen a lot of announcements by customers, particularly related to new investments in the United States for additional manufacturing capabilities. And in those discussions that we've been having with customers, they've been in terms of very positive kick starting those and looking at what we can do and how we can serve them in the future. So we view kind of current sentiment with customers in terms of the move towards U.S. manufacturing is positive. And we feel very strong about our competitive advantage in the fact that we have been ahead of the curve. We've got operations in Indiana ramping up now. And we also do have the ability to scale in Indiana with an additional building size that we currently have. So as we think about longer term and the expansion throughout Indiana, from our perspective, we feel as though we are in a very good position. And Franco, do you have more to add?

Yes, just to confirm that also in the last 4 or 5 years, the relationship with our clients evolved in a different way because we are -- they are engaging us at the early stage. We talk most of the time with the engineering division of the pharma company. Most of the time we talk with the people of manufacturing and R&D. And they are not watching Stevanato anymore like a single supplier of single product or either syringes or cartridge device. The campus that we are building in Fishers is one of the most modern campuses that we can serve in the biologics space because we can serve in the same client, we serve the syringes and the devices. We can serve the vials and the devices. So it's going to perceive Stevanato more like an integrated system player. It's exactly the direction that the big clients are looking, not anymore, a single supplier component, but the supplier of the full system.

We'll definitely touch on that in more detail in a bit, but I wanted to hit on engineering first. So there's some headwinds there this year. I think you talked about lower revenue in glass conversion and pharma vision inspection. Can you just elaborate on the softness you're seeing in those areas? Is it kind of temporary speed bumps or something more structural?

Yes, absolutely. Just to recap, the pharmaceutical industry is heavily investing. So the company -- the engineering division in the next 3 years have opportunity to always grow in the high single digit because, again, there is more and more an increase in demand of inspection machine. Even more there is an increased demand worldwide for technology, for assembly of this particular sophisticated devices. We take the part, the glass, that glass, where we produce the glass for me is the engine of Stevanato Group is where we develop the technology internally. And also, we sell to some of our competitors, but there's always a fluctuation, but it's not something that is relevant. The engineering division in '22 and '23, we received some record order of machine, for inspection machine, also related to our next one for assembling technology related to this increase in demand for self-administration of the product. Most of many clients asked to develop the new generation of machine, this high sophisticated line. All this technology, we plan to produce in Denmark plant. So there was a sort of conjunction of this complexity in order to deliver all this high number of lines. Also in parallel, if you remember, in '22, '23, there was also a big problem of supply chain constraints on certain electronic components. So practically what we have done, we have delivered what we call in 2024 optimization plan in order to use two sites, the site in Denmark and the site in Italy in order to be back up and to be able to produce the same product in the two production hubs. Today, we are on track because we are delivering most of the legacy project to our client. This will allow Stevanato to start to go with the order #2 and #3 because we are inside of some repetitive long-term contract. We are the first line where a little bit complex to deliver have caused some delay is where we have practically -- we have done some erosion on terms of revenue marginality. But now all of the programs are on track. What does it mean on track? Today, we are able to produce from these two plants. Also, we already delivered with success with this complex line.

Yes. So you noted several new orders that were forecasted for the second quarter that were pushed out. The issue does sound timing related. So when does that revenue come back in?

So what we guided to for those particular orders is we would anticipate that they would be secured in the back half of 2025. And so that is our current plan. And as Franco noted, most of these orders are repetitive orders that gives us the confidence that we think that they're going to come in. So you're correct. It is just a matter of timing, and we do believe they'll be secured in the second half of the year.

Great. And then just at the Investor Day, you said you see engineering is kind of a mid-single, high single-digit growth business. Not asking for like formal guidance here, but is it possible for engineering to get back to those levels maybe next year?

Yes, the trend is going in this direction because once we deliver what we call this legacy project, we start with the new order, automatically, we can go back to the same percentage in terms of revenue and also to improve the marginality because the new line we're going to produce in a more efficient way compared to the first prototype.

And Annex 1, a lot of discussion about that over the past couple of years. Just frame up what that is maybe for the new investors here and how you see that as a tailwind for your business?

Okay. So Annex 1, just to -- if you go -- allow us to go a little bit on the big picture, every 5, 10 years can be new regulation coming from Europe, from Japan, from the United States. They are asking, they are challenging the whole supply chain of the pharma company, including us, the supplier to put in place more evolution in term of process and product. I remember at the beginning of 2000, there was a very high attention on the breakages on the glass by the FDA. So practically, many pharmaceutical companies, they changed their filling technology. Also they asked to the supplier like Stevanato or others to improve the internal process, in particular, the vision control, fundamental control and cosmetic control. And next one, what is the critical requirement is to put in place a process that ensures there is not any risk of losses in sterility of the drugs. So practically, most of the pharmaceutical companies, they are doing an assessment of their process in order to see if the process in any step of the process, there are no risk, in particular on the glass due to breakages. What it will be answered imply for Stevanato to your question, that many clients, they are going to auto change their technology, in particular, when they are in the glass-to-glass configuration is where we can have a risk or they're going to what we call Ez-fill platform. So they are going to purchase the sophisticated high-speed line we call flexible line, where they are going just to fill under isolator the drug and they are outsourcing to partner like Stevanato for washing, siliconization, sterilization of assembly. So this is where we see a tailwind in the medium term for Stevanato. So more adoption on Ez-fill technology for vials, cartridges and syringes. For what is related to inspection machine, also, this is another element because the technology that we have in our inspection machine have particular algorithm or artificial intelligence that is going to better detect the first rejection rate of certain defect that can in the medium term, generate some loss of stability. Also, our clients, they are starting in the medium term to change all their platform of vision inspection. So it is where we plan to benefit in the medium term, thanks to Annex 1.

How early are we in that kind of conversion?

We are in the process today, just to make an example, just last week, a big client on insulin is looking to upgrade or retrofit or change all their platform for cartridges. And they are in this analysis. Usually, how does it work? They're going to require 6, 9 months to do an assessment because they're going to check the supplier. They're going to see what is the technology available. And then they are placing the order. Placing the order to the supplier is maybe 18 to 24 months to receive the new technology, 6 months to do the validation. So we are in the 2-, 3-, 4-year period. But then the beauty is that they are going to use cartridges to fill. And this is a customer that we serve since '98. So you can imagine. So in our pharma company, it takes time to enter. But when you are in, you are in for all the period of the life of the investment and the life of the molecule.

We would say we're probably in the second or third inning. So very early on. As Franco talked about, as customers look at and consider Annex 1, it may require some investments on their end as they look at flexible filling lines that have the capability of processing re-use containers. So we think this is considerably a long-term tailwind for us.

Fantastic. And on some of the investments, you touched on Fishers, Latina. Again, just give us an overview of what's going on there, latest. And do you have contracts and prior commitments from customers before you kind of lay down some of the CapEx?

Yes. So particularly Latina and Fishers, this investment that we launched a few years ago are focused to build capacity for high-value product. When we have high-value products, in particular, is most of the time are covered by 5 or up to 10-year contract. So practically, we have decided also at the leadership level, the Board of Directors to secure our investment with the contracts with our customer. So nearly the totality of the investment that we have done in Latina and in Fishers are covered by long-term contracts with our customers.

Fantastic. And you mentioned Fisher represents a $500 million revenue opportunity at full capacity sometime in 2028.

End of '28, correct?

Yes. What's the revenue potential for your Latina facility once fully ramped up?

So the investment in Latina is smaller compared to Fishers Phase 1 of Latina because this is what we have put in place. And then there will be another big important expansion because we're building capacity forecast [indiscernible] if you're going to exclude this, in the range of a few hundred million, a couple of hundred million of euro.

Understood. And I think net CapEx this year is expected to be EUR 250 million to EUR 280 million. How do you see this investment evolving in 2026 and 2027?

So we -- in Stevanato Group, we passed for an extraordinary cycle of investment. And this is also one of the main reasons why we have decided to list the company in New York in 2021 because we raised money in order to invest together with our customers. So now we are passing this big cycle and the goal in the next years to be more or less on the range of what just mentioned to you. The estimation that we have captured in our long-term business plan is to be on the range between 10% to 15% of the total revenue in terms of CapEx.

Great. And Lisa, you touched on it earlier, about the onshoring opportunity, I think $300 billion worth of announcement from...

$450 billion.

Okay. It's gone up, yes. From biopharma customers year-to-date. Maybe just give us some color on those conversations you're having.

So we see -- in particular, we are starting to see this increasing interest in beginning of this year, in particular, [indiscernible] where we were in March here in New York, that a lot of clients once they're going to see that we have proactively invested a few years ago, a few hundred million in Fishers is helping a lot to be perceived like the domestic player for the new product. So today, on the top of -- overall also in Europe and in Asia, there is a good dynamic of investment pharma company. But the fact that we have invested -- we have done the IPO in New York. We raised money and we invest more than EUR 500 million in Indianapolis in order to build a very sophisticated campus that can serve our customers, Ez-fill product, bulk product and device is helping a lot to potentially gain new business.

So are these conversations, they -- is its incremental business on top of what you have today? Or is it more customers replacing what they have elsewhere bring it in here?

Both because like -- I make an example, a few years ago, you were not aware because we plan on beginning to invest also in China, Shanghai Ez-fill model. Then some of our big clients, they readdressed the investment in United States for this capacity, in particular for Nexa syringes. Today, what we see that partially certain clients are asking, hey, Stevanato, please go in Fisher because they want to have more supply chain in the United States. It's also true that many other customers, the fact that we are already in United States with a huge capacity will allow us to further increase market share. So this will be a combination of true potential. So we change the mix or incremental business.

Great. I think we have a few minutes left. So I will...

It's important to underline the EUR 500 million investment have approved Phase 1. We can easily double the size of this investment because we already have purchased the land. And today, we can double the investment in the next years, we also double the revenue. So we are properly ready for this potential incremental revenue next year.

And to Franco's point on that, as we talk with our customers about what the future looks like in manufacturing in the United States, the way that we build our facilities are modular in nature. So understanding the type of demand in products is very important as we consider what the next phase of Fishers can look like. And as you know, manufacturing sites can take up to 5 years to build, particularly on the client side. So we're really in the early phases of these discussions. But in Fishers today, we're ramping up syringes. We will be installing vial lines, which is in process. And we have a future consideration for other product categories such as cartridges as well.

We are here for the long term. The company is 75 years old. When we done the IPO in 2021, we considered day 1 in order to further invest for the pharmaceutical industry. Our goal is to be the humble partner of a pharmaceutical company. So most probably we will be here for the next decades. And our idea is to not only focus on the quarter but focus on what will happen in the next 10 to 20 years and Fishers is the best location for us.

Great. Two minutes left. So profitability for next year, I think the Street is forecasting a reasonable step up. How are you thinking about that right now?

So there are -- let's stay at the higher level. The market -- the demand for high-value product is high. We are going to be confirmed to our contract. It will be high; it's going to grow. Every quarter, we are installing new technology in capacity in Italy and in Fisher, this will help to contribute to more revenue and more marginality. This normalization of the vial, it will be -- is increasing. So we think that in 2026, we'll be in the full normalization. The engineering, it will be more or less on track. So there are all positive KPI that is going to prove that the 2026 is going to -- it will be a good year. Great.

In particular, in Latin and Fishers, I think one thing that's important to remember on the margin trajectory is as we continue to grow volumes and improve utilization, obviously, an improvement in absorption will certainly help gross profit margins. And that's one area where I think it may be underappreciated as we think about gross profit margins and the evolution over the next 5 years.

Perfect. One more question for you, Franco, last one. What's something you wish investors ask you more often? Or what should investors be focusing on that perhaps they don't?

Okay. We have the question around COVID. Now every time that I ask this question, I ask them to give me $1, I've already a big pocket in this moment. So there is a high attention what is really the connection about our investment, our high-value product connected with the future of our customers. And well, practically, we try to explain to our clients that there is a value proposition that we put in place that is making the difference today compared to some of our competitors and allows Stevanato to win more business.

Perfect. Franco, Lisa, thank you so much.

Thank you.

Thank you.