Stevanato Group SpA
NYSE:STVN

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Stevanato Group SpA
NYSE:STVN
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Earnings Call Transcript

Earnings Call Transcript
2021-Q3

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Operator

Hello, everyone, and a warm welcome to the Stevanato Third Quarter Earnings Call. My name is Samona, and I'll be coordinating your call today. [Operator Instructions]

With that, I have the pleasure of handing over the Head of Investor Relations at Stevanato, Lisa Miles. Please go ahead, Lisa.

L
Lisa Miles
executive

Good morning, and thank you for joining us. With me today is Franco Stevanato, Executive Chairman; Franco Moro, Chief Executive Officer and Chief Operating Officer; and Marco Dal Lago, Chief Financial Officer.

I'd like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predictions. Actual events and results may differ materially as a result of risks we face, including those discussed in our registration statement on Form S-1, which was filed with the SEC on July 16, 2021. We encourage you to review the information contained in our earnings release today in conjunction with our associated SEC filings and S-1.

The company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances, except as required by law. Today's presentation may contain non-GAAP financial information. Management uses this information in its internal analysis of results, and believes this information may be informative to investors in: gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of the non-GAAP measures presented in this document, please see the company's most recent quarterly earnings press release.

And with that, I'll hand the call over to Franco Stevanato for opening remarks.

F
Franco Stevanato
executive

Thank you, Lisa. We are pleased with another successful quarter. Our strong financial results reinforce the solid fundamentals of our business, the long-term demand and our leading position in growing markets. We remain focused on delivering our integrated end-to-end product portfolio, supported by our scientific analytical process and service, all of which are designed to met the rise in need of our customers across the entire drug life cycle from preclinical to commercialization.

We continue to make progress toward: growing our industrial footprint to meet the demand for our high-value solution as a customer and move up the value chain; investing in research and development to maintain and accelerate our market-leading position to increase the pipeline of our proprietary solutions like Alba, Nexa and our drug delivery system; expanding geographically in U.S. and China; and building a multiyear pipeline of opportunity heavily weighted in the growing biologic market.

We are investing in the business to deliver sustainable organic growth that we believe will drive increased shareholder value. Before I hand the call over to Franco, I want to thank you, all of our employees, for their extraordinary efforts over the last 18 months. The remarkable work during a global pandemic help ensured business continuity, support our customers and grow our business. So in the third quarter, we awarded a EUR 6.7 million discretionary bonus to employees as a thank you.

F
Franco Moro
executive

Thanks, Franco. Our third quarter featured over delivery on the top line, thanks to strong sales for both segments, and better-than-expected results from the Engineering segment. This gives us confidence to raise our full year revenue guidance for 2021 and the bottom end of the ranges for adjusted diluted EPS and adjusted EBITDA.

For the third quarter, we had a strong order intake of EUR 310 million, and the backlog of committed orders totaling EUR 834 million. We believe that the strength of our results and robust backlog are indicative of favorable customer demand and the growing markets in which we operate. The positive momentum in new order intake and backlog set the stage for fiscal 2022 and beyond. An important pillar to our long-term strategic plan is responding to rising demand for our high-value solutions. In the third quarter, high-value solutions represented approximately 23% of total company revenue.

Based on high visibility of our backlog, we expect an increase in revenue from high-value solutions in the fourth quarter. The trajectory for how high-value solution is unchanged from the 2021 forecast, we previously provided. We still expect that it will contribute approximately EUR 205 million to EUR 210 million for the full year 2021.

Let's turn our attention to strategic investments in capacity building. The expansion of our footprint in the United States marks an important step in boosting our presence in one of the fastest-growing markets. We broke ground in Indiana, and we are recruiting, hiring and training for key managerial positions. We expect that construction will last approximately 18 months, followed by start-up and validation in 2023 with revenue generation sometime between late 2023 and early 2024.

The plant is designed to expand production for our EZ-Fill pre-fillable vials and syringes. This meets the stringent quality and performance requirements needed for biologics and high-value treatments. This product offers significant benefits to customers by reducing time to market, lowering risk, and most importantly, reducing the overall total cost of ownership.

[ The EZ-Fill hub ] strengthens our presence in this important region where we expect to support customers from design and development through commercialization. The new facility will also house our North American engineering after sales support services. This heads to our existing manufacturing facility in California. And our Boston-based technology excellence center that provides vital scientific and analytical support to customers.

At the same time, we are expanding our production facilities in Italy. Thanks to our current efforts that started in 2016, we have been able to meet increased demand and drive double-digit revenue growth.

We recently operationalized 2 new lines tied to high-value solutions in our Italian facility. The first is dedicated to EZ-Fill syringes and the second to premium EZ-Fill vials. As we approach 2022, we are trying to maximize production of high-value products through continuing expansion and optimization of our industrial footprint.

Construction is well underway on a new building in Italy where we are having new glass forming lines to boost EZ-Fill capacity. This includes the planned addition of 2 new lines devoted to EZ-Fill syringes and 1 dedicated line for premium Alba syringes. These efforts aim to meet the increasing growth and demand for premium products.

We expect that this will have a significantly boost production output and bridge capacity demands while the U.S. and China projects are underway. Our ongoing investment will let us benefit from sector demand trends as customers bring new treatment to market that require products which are further up the value chain. Our integrated end-to-end solution, coupled with our high growth, high-value solutions are important elements to creating and driving shareholder value. During the last couple of months, there has been much discussion of constraints on global supply chains.

To date, we have not experienced significant supply chain issues, but we have taken precautionary steps to increase the amount of raw materials on hand. And in some cases, we are keeping more inventory available. In the short term, logistical costs have created some temporary pressure on our cost structure, which has been partially offset by recent operational efficiencies.

Dealing with the rising input cost is a near-term challenge that we are managing carefully. We're in contact with customer, are negotiating individually. In general, our long-term contracts include the cost escalation clauses that allow us to pass on certain cost increases. This is done regularly, and we adjust our pricing accordingly. The reality is that no one is immune to these pressures, and this creates an environment where price increases are largely expected by our customers. We are actively monitoring the situation, and we will continue to manage our operations diligently in this dynamic environment.

When the pandemic continues to dominate frontline, COVID remains a tailwind to our business. We are currently working with customers as they consider a future transition to single-dose vaccine formats. We can support any mode of distribution whether it is a single-dose vial or syringe. In fact, today, we are already supplying single-dose syringes for COVID vaccines in addition to a range of multi-dose vials around the world.

Recent use of a pill for treat COVID and the first onset of symptoms is a welcome development. We know that prevention and care are the hallmarks of a good health care system and keeping people healthy. We believe that COVID vaccine and oral treatment will play complementary roles in managing the pandemic. The relationship will be comparable to that of a flu vaccine and Tamiflu.

The key takeaway according to most health expert is that the pill is expected to supplement, not to replace the current COVID vaccination effort. Even without contribution from COVID, we achieved robust double-digit growth in the third quarter. We believe that our existing foothold, coupled with our successful track record in supporting vaccine rollout keep us squarely positioned to remain a top player in the overall vaccine market.

In summary, our third quarter was highlighted by strong sales, solid order intake and robust backlog and continued progress of our investments, innovation and capacity expansion plans. We operate in growing markets, and we will continue to meet the demand expectation of our clients. With another good quarter of financial operating results behind us, we are pleased with the trajectory of our business and the foundation for the future.

I will hand the call over to Marco to discuss our third quarter results in more detail.

M
Marco Dal Lago
executive

Thanks, Franco. We are pleased with delivering solid third quarter results and raising our revenue guidance for the year. For the third quarter, revenue increased 37% to EUR 214.5 million driven by strong growth in both segments. As a leading player in vaccine, we are proud to support the fight against COVID. As expected, approximately 16% of consolidated revenue in the third quarter was linked to this ongoing tailwind. The solid fundamental of our business and the robust demand for our core products helped us deliver 25% year-over-year growth, excluding COVID. For the third quarter, revenue from high-value solutions grew 29% on an absolute basis, and represented approximately 23% of consolidated revenue.

This was lower by 1 percentage point compared to the prior year period due in part to total company revenue increasing more rapidly than anticipated. As Franco noted, we currently expect revenue to increase from high-value solution and then improve mix. While we may experience normal quarterly fluctuation in mix, we still believe that our long-term growth trajectory of double-digit organic growth, the shift to high-value solution and expanding EBITDA margin remains the same.

Total company gross profit increased 34% to EUR 63.3 million, despite higher sales from Engineering segment, which has a lower margin. As a result, gross profit margin was 29.5%. Employee recognition reward is an important part of the Stevanato culture, and we awarded a EUR 6.7 million discretionary out-of-cycle bonus to employees for their extraordinary effort.

The bonus was already included in our full year guidance that we provided last quarter. This was the primary reason for lower operating profit margin, diluted earnings per share and EBITDA margin in the quarter. This resulted in a net profit of EUR 18.6 million or EUR 0.07 diluted earnings per share on a GAAP basis. As noted in a reconciliation table of this morning press release and adjusting for certain items in the third quarter, adjusted operating profit margin was 17%. Adjusted net profit totaled EUR 26.4 million or EUR 0.10 adjusted diluted earnings per share. And adjusted EBITDA margin was 24%.

Moving on to segment results, starting from Biopharmaceutical and Diagnostic Solutions segment. Third quarter revenue increased 31% to EUR 172.8 million compared to the prior year. Revenue growth was driven by a 29% increase in high-value solutions, and a 32% increase in other containment delivery solution over the same period last year. Third quarter gross profit margin of 31.2% was lower compared to prior year mostly due to product mix. This segment is expected to benefit from an increased contribution in high-value solutions in the fourth quarter.

Operating profit margin of 18.1% in the third quarter was tempered by mix and the discretionary bonus. For the third quarter, adjusted operating profit margin for the BDS segment was 21.3% compared to 21.2% last year.

Moving to the Engineering segment, which delivered strong financial and operational results. For the third quarter, Engineering segment revenue, derived from third-party sales, increased 67% to EUR 41.8 million compared to the third quarter of last year. This segment recorded strong sales from premium products in glass converting and visual inspection machines.

Gross profit margin for the third quarter was 15.4% compared to 11.9% in the same period last year. This also helped deliver operating profit margin of 7.1%. This includes the unfavorable impact of discretionary bonus. For the third quarter, adjusted operating profit margin for the Engineering segment increased to 9% compared to 0.6% last year.

Let's turn our attention to balance sheet and cash flow. Our balance sheet is stronger than ever, bolstered by our primary proceeds from the IPO. During the third quarter, we raised primary net proceeds from the IPO of approximately EUR 380 million. As of September 30, we had a positive net financial position of EUR 153 million and cash and cash equivalents totaled EUR 428 million.

For the third quarter, net cash generated from operating activities was EUR 17.9 million, and adversely impacted by the income tax payment of approximately EUR 13.7 million, and increased working capital to sustain our growth. The cash paid for capital expenditure totaled EUR 28.6 million during the quarter to support our expansion plan. This resulted in a negative free cash flow of EUR 9.9 million for the third quarter 2021. We currently expect to spend less on CapEx in fiscal year '21 than previously forecast. This is primarily related to timing, and some of this will be realized in fiscal year '22.

Changes in our capital spending plans for 2021 are currently not expected to impact our expansion plans, validation timing or commercialization of new lines. In a nutshell, we believe that our cash, future generation cash from operating activities and availability under our existing debt facilities will be adequate to address future liquidity needs and capital allocation plan.

Our capital allocation plan is a critical element to our long-term growth strategy. We prudently manage capital with the primary aim of driving organic growth. Our top 3 priorities remain unchanged. First, investment in capacity expansion focused on growing our capacity in our high-value solution to satisfy market demand. Second, we are investing in research and development to boost our competitive advantage to drive growth in our high-value solution product set. And third, opportunistic M&A to broaden our offering, technical know-how and international footprint.

Following the quarter end, the company completed 2 transactions as we sharpen our focus on our long-term strategic objectives. First, the company paid approximately EUR 7 million to purchase the remaining 35% minority interest in Denmark-based SVM Automatik, which specialized in assembly and packaging machines, and serialization to the pharmaceutical and copper manufacturing industries. SVM has played a meaningful role in broadening our effort in specialized assembly and packaging.

Second, the company entered in an agreement to sell its remaining minority interest in Swissfillon, a provider of fill and finish services to the pharmaceutical and contract manufacturing industries for a net gain of approximately EUR 12.3 million or EUR 0.05 earning per diluted share. Our adjusted guidance exclude this gain on sale. We intend to invest the net proceeds from the transaction to support our organic growth plans.

And finally, guidance. Based on company's year-to-date financial results and the high level of visibility from backlog, we are increasing our revenue guidance and raising the bottom end of ranges for adjusted earnings per share and adjusted EBITDA. We now expect revenue in the range of EUR 825 million to EUR 835 million. Adjusted diluted earnings per share in the range of EUR 0.45 to EUR 0.47, adjusted EBITDA in the range of EUR 214 million to EUR 217 million.

And with that, let's open it up for questions. Operator?

Operator

[Operator Instructions] Our first question today comes from Paul Knight of KeyBanc.

P
Paul Knight
analyst

Franco, could you talk about the Italy expansion? It seems like these line expansions come online relatively quickly. Is it due to this increased backlog? If you could talk about those expansions.

F
Franco Moro
executive

Yes. Nice to hear you again, Paul. Yes, we are bridging the capacity expansion waiting for the availability of plants in U.S. and China. But this is something that we started with the program in the recent years. And now we are progressing according to our plan. We are meeting the demand of our customer, and this expansion will allow us to keep continuing meeting the demand. We are in line with our program.

P
Paul Knight
analyst

And Marco, this out-of-cycle bonus, has this occurred in the prior years?

M
Marco Dal Lago
executive

Well, we stated in our guidance last quarter that it is a discretionary out-of-cycle bonus to recognize the efforts done from the employees in the last 18 months.

P
Paul Knight
analyst

So it wouldn't necessarily be something to build into a model for future years?

M
Marco Dal Lago
executive

No, we are treating it as any -- many other positive items as nonrecurring items that overall in the year are offsetting one another. And then neutrally impacting the EBITDA and adjusted EBITDA level. But in the quarter, of course, we are somehow hitting the reported P&L. But we are treating as a nonrecurring item. So this is not hitting our adjusted EBITDA and adjusted operating profit.

Operator

[Operator Instructions] Our next question comes from Patrick Donnelly of Citi.

P
Patrick Donnelly
analyst

Maybe one on the COVID front. Obviously, last week, we had an approval that caused some noise in the space certainly in terms of the durability of the COVID tailwinds and some people's expectations. So can you just talk through your visibility into, not only 4Q but into '22 on the COVID front? What your expectations are, and if last week changed anything?

F
Franco Moro
executive

Yes, sure. That is an important topic, Patrick. You know that we are linked to the majority of the players in the vaccine space. So we have good visibility totally with them. We know very well that we are at the very beginning of boosters administration, and there is a lot of people around the world that are waiting for the first shot of vaccine. We see the trend to move from multi-dose vials to single-dose forms, but we are in a good position. We can deliver any form of delivery for the administration. But at the end, you can remember that the COVID is a tailwind for our business, but our business is independent from COVID. So we are focused to serve the customer according to their needs. But it is our focus in expanding the high-value solution that will drive the growth of the company.

P
Patrick Donnelly
analyst

Okay. That's helpful. And then maybe just on the 4Q guide. I think it's implying more kind of mid-single-digit growth. Was there anything onetime in 4Q last year that makes the comp a bit off? It's probably more for Marco. I just want to talk through again that guidance, and what conservatism levels in it. And then again, if the comp had anything weird in there?

M
Marco Dal Lago
executive

Yes. Last year, we had a nonrecurring item in this period for about EUR 2.3 million hitting the P&L and our G&A expenses, yes. It was related to an old acquisition we had done back in 2016. So we recorded as not recurring last year. And we put some specific color in our press release about that.

L
Lisa Miles
executive

Patrick, I just want to confirm that we've answered your question. I think there was a thing that we may have missed.

P
Patrick Donnelly
analyst

Yes, it's a little more on the revenue side in terms of -- did you guys see any -- I know Engineering was strong in 4Q '20 last year. Was there anything onetime in 4Q last year in terms of the revenue? Anything that got pushed into 4Q last year that will make the comp a bit harder on the revenue side for this 4Q?

M
Marco Dal Lago
executive

Not in the generic part of the business. We recognized last year in Q4, we had some important revenues related to in the [ injection molding ] project. So we recognized a big revenues in a project last year in Q4, but in BDS segment not in Engineering. We consider it as ordinary cost of business.

Operator

Our next question comes from John Kreger of William Blair.

J
John Kreger
analyst

Question for you. I believe in your slides, you talked about orders in the third quarter of about EUR 310 million. Can you just talk about how that compared to your expectations? And what that tells you about the mix of the business in the coming year or 2, either kind of COVID versus non-COVID or high-value solutions versus other?

F
Franco Moro
executive

Yes, a very interesting point. The driver for this increase in backlog is the strong demand that we see in the market. And this demand match exactly with our value proposition and with high-value solution that we bring to the customer. In terms of details of our financial calendar, I'll pass over the answer to Marco.

M
Marco Dal Lago
executive

Yes, you are right, we are keeping on increasing our backlog. We are at EUR 830 million -- EUR 834 million at the end of the quarter. We have a very strong visibility on the fourth quarter. And as Franco was saying this assuming if we grow, we have a clear visibility on Q4 growing in high-value solutions. So our trajectory in the medium term remains unchanged, and we are delivering according to our forecast. There could be some temporary mix effect in the quarter, but the trajectory in the medium term is definitely unchanged from our side.

J
John Kreger
analyst

Okay. And then a quick follow-up. In your prepared remarks, you mentioned supply chain pressures. Can you just elaborate a bit on that? Where are you seeing pressure? Is it raw materials or labor? Is it something else?

F
Franco Moro
executive

That's a very good topic. I like most companies we are managing through the current condition. Our supply chain is robust because it delivers to multiple supplier and different facilities around all the geographies. In the meantime, we consider the situation, we have taken precautions steps, increasing the raw material on hand and keeping some more inventory. They are not a specific topic that is under pressure, it's the overall situation that we are managing to continue to meet the customer demand.

M
Marco Dal Lago
executive

You asked for higher effect in Q3. Beside the mix, we were hit by some logistic costs but not in a relevant way, especially it's not material with respect to Stevanato Group overall numbers. But we had about EUR 1 billion higher logistic costs than expected.

Operator

Our next question comes from David Windley of Jefferies.

D
David Windley
analyst

On the -- following up on John's bookings backlog question. Would you be able to break that down for us in terms of what coverage you have for the fourth quarter and then in '22? And how much of the backlog stretches into '23?

M
Marco Dal Lago
executive

Thank you, David, for the question. Let's say, we are covered for the bottom part of the revenue range for the year with the orders we have in our backlog for 2021 and Q4. And we can tell you that as a matter of fact, we have more than EUR 600 million for 2022 and beyond. So we are providing the guidance for 2022 in the next earnings call, but we start from a good position for 2022.

D
David Windley
analyst

Got it. I think you mentioned in the prepared remarks that you were, in fact, already supplying some -- I may have missed it, single-dose or low-dose format glass for COVID vaccines at this stage. Is that -- I understand your comments around readiness and flexibility to basically do what clients want you to do. I guess I'm just trying to get a feel for whether single-dose formats are being manufactured for commercial distribution? Or is that still kind of development and validation work? Can you help us with what stage of commercialization those volumes are going to?

F
Franco Moro
executive

Yes. Thank you, David, for this question. As you know that we are engaged with the majority of the players. So there are different approaches, and each customer has a different strategy. But for sure, we are delivering both the kind of form, the vial and syringes. And we are in combination phase sometime, but we have already started the commercial production for them, both of them.

D
David Windley
analyst

And if I could just tag on to that. Are those high-value solutions where those clients are pulling those through for COVID vaccine? Is that high value? Or is that also a mix of your product?

F
Franco Moro
executive

We already stated that the mix of product in COVID business is representing more or less the same distribution that in the standard business, let's say. So we don't see any big significant difference.

Operator

Our next question comes from Derik De Bruin of Bank of America.

D
Derik De Bruin
analyst

Just -- we've gotten a lot of questions from investors on, obviously, the Pfizer commentary. And just wanting some clarity, are the contracts that you have with customers, take-or-pay contract, means they're obligated and to buy minimum volumes? And I guess, is there any way for them to renegotiate those or change them should their sales projections change?

F
Franco Moro
executive

That's a very good question. You know that each commercial agreement is negotiated individually. But in general, we embedded in this agreement also reduction or cancellation fee or minimum quantity. That is a case-by-case situation. We don't have a general arrangement that is suitable for every customer.

D
Derik De Bruin
analyst

Great. And then just one follow-up. On the diagnostics products in the BDS segment, is there anything that's notable in terms of where you're involved in those products? Meaning, are you involved in any specific COVID diagnostics? Is there anything on the molecular side that is growing outside? Just a little bit more color on what's involved in Diagnostics segment and how we should sort of think about that growth contribution in that business?

F
Franco Moro
executive

Yes, the COVID impact in the diagnostics space is controversial because we had some higher requests for specific diagnostics. But at the meantime, the standard treatment suffer from the slowdown of activity in the hospital. So we don't see overall a net impact in a single direction in that area.

Operator

[Operator Instructions] The next question comes from John Sourbeer of UBS.

J
John Sourbeer
analyst

I was wondering just a little bit on the supply chain commentary, if you could talk a little bit on pricing and what is your ability to maybe pass through some of the increased costs on to customers?

F
Franco Moro
executive

Yes. That's also an important point. But as I mentioned before, the situation is negotiated individually. But in general, we embed in agreement that closes for escalation of prices in case of increased cost, for industrial costs like logistics, raw materials, utilities. We are monitoring carefully the evolution of cost trends and price accordingly.

J
John Sourbeer
analyst

Got it. And as a follow-up, maybe can you talk just a little bit about the 3Q performance across the different regions in EU, U.S. and APAC?

F
Franco Moro
executive

You know that we don't disclose the precise figures in different geographies, but you can have a flavor because you know that U.S. is a very strong market for us.

M
Marco Dal Lago
executive

Yes, we can experience some fluctuation quarter-over-quarter, but the trend remain unchanged. So we are growing very, very rapidly in Asia Pacific. We are growing the same in North America even during this quarter, we slowed down a little bit. But overall, those are the 2 markets where we expect to grow the most also based on the backlog we have in our hands. Overall, we are growing in every and each area: South America, North America, Europe and especially in Asia Pacific, as we were saying.

Operator

We currently have no further questions registered. So this concludes the Stevanato Third Quarter Earnings Call. Thank you all for joining. We hope that you have a great rest of your day. You may now disconnect your lines.