Stevanato Group SpA

NYSE:STVN

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Stevanato Group Third Quarter 2024 Earnings Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice President and Investor Relations. Please go ahead, madam.

[Lisa Miles, executive]

Good morning, and thank you for joining us. With me today is Franco Stevanato, Chairman and Chief Executive Officer; and Marco Dal Lago, Chief Financial Officer. You can find a presentation to accompany today's results on the Investor Relations page of our website, which can be found under the Financial Results tab.

As a reminder, some statements being made today will be forward-looking in nature and are only predictions. Actual events and results may differ materially as a result of the risks we face, including those discussed in Item 3D entitled "Risk Factors" in the company's most recent Annual Report on Form 20-F filed with the SEC on March 7, 2024.

Please read our safe harbor statement included in the front of the presentation and in today's press release. 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 these non-GAAP measures, please see the company's most recent earnings press release.

And with that, I will now hand the call over to Franco Stevanato.

[Franco Stevanato, executive]

Thank you, Lisa, and thanks, everyone, for joining us. Today, we will review our third quarter performance, provide an update on market dynamics, and discuss the ongoing initiatives to meet our objectives.

For the third quarter, revenue was in line, but margins were below our expectations. As a result, we are lowering our full year 2024 guidance for adjusted EBITDA and adjusted diluted EPS. The main factors are higher costs in the Engineering segment as we implement our optimization plan and to a lesser extent, higher costs in the U.S. as we increase our validation activities.

Let's start with engineering. We are starting to see some initial benefits from the actions we have recently taken to improve execution and business performance. While it's still early days, we have successfully completed several complex projects in the third quarter for key customers that were previously delayed.

As a reminder, we launched a business optimization plan designed: to address the current challenges, improve the overall health of the business, and position the segment to return to profitable growth.

The main steps we are taking are focused on optimizing our engineering footprint in alignment with our product strategy, rightsizing the operational structure as we move some activities to Italy, and harmonizing our industrial processes.

Together, we believe this action will lead to an improved operational structure that can drive both cost savings and gains in productivity. Above all, we remain confident that this will position the segment for long-term success.

We believe that the demand landscape for the Engineering Segment remains favorable, underpinned by long-term tailwinds such as the rise in biologics and the adoption of drug delivery devices, high regulatory standards like Annex 1 and the trend towards ready-to-use systems.

Let's turn to vial destocking, which remains top of mind for many investors. Our thoughts on the recovery remains the same. We still expect to see vial orders begin to pick up at the end of this year with a gradual recovery in 2025. We continue to see positive signals in the market, and during the third quarter, collaboration with our customers reaffirmed our view.

Nevertheless, market dynamics are such that customers are working down inventories at different rates. Despite the current weakness in vials, we continue to see strong demand for our high-value solutions, which grew 18% year-to-date compared with last year.

The continued momentum in biologics and the increasing trend towards high-performance primary packaging reinforces our investment strategies as we expand our capacity for high-value solutions to match this customer demand.

Moving to our capacity expansion projects on Slide 6. We continue to make relevant progress on the multiyear ramp-up of our expansion projects in Fishers and Latina. In both facilities, the ongoing installation of manufacturing lines and the customer validation are planned to be phased throughout 2025 and into 2026.

In Fishers, we achieved a major milestone in the third quarter with a successful launch of commercial production, generating our first commercial revenue. During the quarter, we completed the installation of our second high-speed manufacturing line. We also started validation activities with several key customers, which are expected to continue for the rest of the year.

In Latina, we are scaling production, improving utilization and beginning to gain efficiencies. And in the third quarter, the Latina project became profitable at the gross profit level. Marco will provide more details later on.

Turning to Slide 7. We recently announced the launch of the Alliance for RTU together with other industry players. It has generated a lot of interest across the industry from customers to other industry stakeholders. The purpose of this initiative is to educate the pharmaceutical industry as customers consider a transition to sterilized vials and cartridges. Over the last 30 years, the syringe market has converted mostly to sterilized solutions. We believe that customers will continue to adopt ready-to-use vial and cartridge solutions, replicating what we saw in the syringe market.

RTU solutions meet the growing industry demand for greater efficiency, faster production times and enhanced product quality by simplifying the filling process and reducing contamination risks. Furthermore, a shift to ready-to-use products can facilitate compliance with Annex 1. We are supporting customers through the assessment and decision-making process with scientific research through symposiums, webinars and white paper. We continue to make tangible progress on our wider high-value solutions portfolio.

We recently won a strategic supply agreement to support the first needle-free epinephrine nasal spray that recently received FDA approval. Under the agreement, we will produce our premium micro vials using the neffy device.

In summary, we are making good progress, and we remain focused on execution. Our growth investments are ramping. Latina was profitable in the third quarter and Fishers started generating commercial revenue. In Engineering, we are executing our optimization plan and completed several of the previously opened projects in the quarter. And while the effects of vial destocking are expected to gradually improve throughout 2025, we are starting to see some stabilization in vial demand as customers work down inventories.

I now hand the call over to Marco.

[Marco Dal Lago, executive]

Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the third quarter of 2023, unless otherwise specified.

Starting on page 9. For the third quarter of 2024, revenue grew 2% and 3% on a constant currency basis to EUR 277.9 million, driven by 6% growth in the Biopharmaceutical and Diagnostic Solutions Segment, which offset the expected decline in the Engineering Segment. Revenue from high-value solutions grew 17% driven by high-value syringes and to a lesser extent other product categories. High-value solutions represented approximately 36% of total revenue in the quarter versus 32% last year.

We are currently forecasting a strong fourth quarter for high-value solutions. So for the full year 2024, we now expect that high-value solutions will represent approximately 37% to 39% of total revenue versus our prior estimation of 36% to 39%. Gross profit margin decreased to 26.8% in the third quarter of 2024 due to: The ongoing temporary impact from vial destocking, including underutilization of vial lines as well as lower revenue for more accretive EZ-fill vials, inefficiencies and higher costs tied to the ramp-up in Fishers, Indiana as we scale our validation activities, and higher cost in engineering.

For the third quarter, lower gross profit led to a decline in operating profit margin to 14.8%. On an adjusted basis, operating profit margin was 16.3%. For the third quarter of 2024, net profit totaled EUR 30 million, and diluted earnings per share were EUR 0.11. On an adjusted basis, net profit was EUR 33.1 million and adjusted diluted EPS were EUR 0.12. Adjusted EBITDA was EUR 63.7 million, and adjusted EBITDA margin was 22.9%.

Please turn to Slide 10. Before we review segment results, we thought it would be useful to dive deeper into the temporary inefficiencies that we typically experience during the start-up phase of a new manufacturing site, their impact on margins and the expected gross profit trajectory. This slide illustrates the timing and phasing tied to a new manufacturing plant as an example. For the new brownfield site in Latina, we acquired the building in Q1 2022. We started generating revenue from commercial production in Q4 2023.

As Franco noted, in the third quarter of 2024, the site was a slightly positive contributor to the group's margin. The current temporary inefficiencies that we are experiencing reflect the under absorption of expenses in the early phase of the project as well as the ongoing activities to support the multiyear capacity ramp-up. But as production capacity, productivity and revenue progressively increase, we expect that unfavorable impact will gradually abate, and we will benefit from higher utilization, better product mix and scale.

Let's review segment results on Page 11. For the third quarter of 2024, BDS segment revenue grew 6% and 7% on a constant currency basis to EUR 233 million, driven predominantly by growth in high-value syringes and to a lesser extent, other products. Top line growth of 6% was offset by a revenue decline of approximately 38% related to vials, and the drop was more pronounced in EZ-fill vials. Revenue from high-value solutions grew 17% to EUR 100.4 million in the third quarter, while revenue from other containment and delivery solutions was EUR 132.6 million and consistent with the prior year period.

Gross profit margin for the BDS segment was tempered by: the ongoing effects of vial destocking, including lower revenue from more accretive EZ-fill vials, underutilization and the underabsorption of overhead costs and start-up inefficiencies and some higher costs in Fishers.

As a result, gross profit margin for the BDS segment decreased to 28% and operating profit margin declined to 16.9% for the third quarter of 2024, compared with the same period last year.

For the third quarter of 2024, revenue from the Engineering segment decreased 15% to $44.8 million.

Performance in the business was mixed with expected revenue declines in glass conversion and visual inspection, offsetting growth in assembly and packaging. Gross profit margin decreased to 15.6% and operating profit margin declined to 10.1% for the third quarter. The decrease in margin was driven by higher costs related to certain highly complex projects, and expenses tied to our business optimization plan.

As Franco noted, we are making progress with our optimization plan, but it will continue to take some time. We believe we have set the path for continued operational and financial improvement, which we expect will better position the segment to capture and execute future opportunities.

Please turn to the next slide for a review of balance sheet and cash flow items. We continue to carefully manage trade working capital to support the growth of our business. As of September 30, inventory levels were higher compared to December 31, 2023, while contract assets decreased in part due to the advancement of projects in the Engineering segment.

We ended the third quarter with cash and cash equivalents of EUR 78 million and net debt of EUR 284.3 million. Through a combination of our cash on hand, available credit lines, cash generated from operations and our ability to access additional financing, we believe that we have available liquidity to fund our strategic and operational priorities over the next 12 months.

As expected, capital expenditures for the third quarter of 2024 totaled EUR 58.8 million, as we continue to ramp up in Latina and Fishers to meet market demand. In the third quarter of 2024, net cash from operating activities totaled EUR 18.3 million. Cash used in the purchase of property, plant, equipment and intangible assets was EUR 47.8 million. This resulted in negative free cash flow of EUR 28.4 million in the third quarter.

Lastly, on Slide 13, guidance. We are maintaining our revenue guidance for 2024, but lower in our outlook for adjusted EBITDA and adjusted diluted EPS. As Franco mentioned, our guidance now includes additional costs with the actions that are underway with our engineering optimization plan, and to a lesser extent, higher costs as we increase our validation activities in the U.S.

For fiscal 2024, we still expect revenue in the range of EUR 1.090 billion to EUR 1.110 billion. And we now expect adjusted EBITDA in the range of EUR 257 million to EUR 263 million and adjusted diluted EPS in the range of EUR 0.47 to EUR 0.49. As we consider 2025, our thoughts remain unchanged, and we remain cautious in the near term. We still expect that the pace of recovery in bulk and EZ-fill vials will be the largest swing factor in the level of growth next year. That said, we also continue to see strong demand, particularly for high-performance syringes and other product categories such as cartridges, IVD and DDS.

We also anticipate improvement in the Engineering segment alongside the implementation of our optimization plan. As always, we intend to provide formal guidance in March. Thank you.

I will hand the call back to Franco.

[Franco Stevanato, executive]

Thank you, Marco. In closing, while 2024 has presented many challenges, we are focused on execution and achieving our long-term objectives. We operate in growing end markets with favorable secular tailwinds, and we have several reasons to be confident in our strategic direction. First, we continue to deliver organic growth, driven by high-value solutions, the main pillar of our long-range construct. We are investing in the right areas to meet growing customer demand.

Second, we expect to increasingly benefit from the new capacity in Italy and the U.S. as we advance our ramp-up activities and drive profitable growth. Third, the wire market continues to show positive signs. And we remain optimistic that as the demand continues to stabilize, we will see a return to historical market volumes and growth rates.

Finally, in the near term, we are implementing a clear and actionable plan to optimize the operations and improve execution in our Engineering segment.

This, together, coupled with the strong fundamentals of our business and the high commitment of the team, set the stage for us to drive durable double-digit organic growth, expand margins and drive long-term shareholder value.

Operator, let's open it up for questions.

[Operator]

First of all, we apologize for the technical issues we had on the webcast from our side.

[Operator Instructions] The first question is from Michael Ryskin, Bank of America.

[Avantika Dhabaria, analyst]

This is Avantika on for Mike. I understand that you will provide formal guidance for 2025 on the 4Q call, but the Street is modeling mid- to high single-digit growth on the top line for '25, and you reiterated your long-term construct of 11%. I understand that you've had headwinds in fiscal year '24 from destocking in the Engineering segment, but is this a good starting point for '25 as we stand today?

[Marco Dal Lago, executive]

Yes. Thanks for the question. Yes, you are right. We will provide formal guidance next quarter. What we mentioned during the commentary is the summary of what we see today. I mean, the uncertainty is related to the pace of recovery in EZ-fill vials and bulk vials. This is the uncertainty. On the other side, we still continue to see favorable tailwinds, particularly in high-performance syringes, but also in other product categories like cartridges, in vitro diagnostic drug delivery system.

We also anticipate improvement in the Engineering segment alongside the implementation of our business optimization plan. Finally, we expect improved financial performances in Fishers and Latina as we increase our capacity and increase our level of revenue, better leveraging the fixed expenses that are under pressure during the start-up phase. So in the end, we see a reasonable assumption.

[Operator]

The next question is from Matt Larew of William Blair.

[Matthew Larew, analyst]

I just wanted to ask about visibility to sort of destocking easing. I think last quarter, you'd referenced maybe smaller customers in some countries getting back to ordering some positive conversations with larger customers. Just curious if you had to bucket by customer group, what the conversations are like and if sort of the number of each customer is making positive progress in each group has increased?

[Franco Stevanato, executive]

Thank you for your question. Based on our customer conversations, we would characterize the market as normalizing. While we see some positive signal, it's still a mixed bag. Customers are working through inventories at different rates. In terms of orders, we started to see gradual improvements in vial orders in the second half of 2024 compared to the first half. But we're also seeing customer forecast that indicate increased demand for vials in 2025. That being said, the timing and pace to recovery remain uncertain, but the work we are doing with our customers give us cautious optimism in 2025.

[Lisa Miles, executive]

Matt, just to clarify on your question, I think you were also asking about as it may relate to larger customers versus smaller customers, I think we can add some additional color on that. I'll ask Franco to chime in here.

[Franco Stevanato, executive]

Yes. We are starting to see orders coming through in smaller markets like Latin America in particular. And in our larger market, things are going in the right direction. We have seen update customers forecasts that point to increasing vials demand in 2025. So all overall, we are starting to see positive signal month after month.

[Matthew Larew, analyst]

Okay. And then if the sort of destocking issue is maybe a market issue, the engineering issue is perhaps to some extent, more internal or under your control. Just curious on sort of the new guide and also the outlook, how much of your ability to hit your expectations is under your control, whether that's the optimization program or completing projects versus things that are perhaps out of your control, like earlier when you were waiting for components or dealing with customer changes?

[Franco Stevanato, executive]

So if you want, I can start to give you an overview or picture of the situation, and Marco can maybe drive more through the numbers, if it's okay. So in engineering, we are starting to see some initial benefits from the actions we have recently taken. We launched an optimization plan designed to address the current short-term challenges, improve the footprint and position the segment to return to profitable growth. First, we have successfully completed complex projects in the third quarter for key customers.

Second, we are focused on optimizing our engineering footprint in alignment with our product strategies. Third, we are improving operational structure that can drive both cost savings and gain in productivity. We believe we can return to the segment to profitable growth by the middle of next year, but some actions we are taking are expected to drive long-term results.

The demand for the Engineering segment remains favorable today, boost in particular, by long-term tailwinds such as the rise in biologics, the adoption of drug delivery device and more and more the new regulatory like Annex 1 and the trend towards ready-to-use systems.

[Marco Dal Lago, executive]

Yes. The main driver of the change of our guidance is related to engineering in 2024 and in Q3 and Q4. So as Franco was saying, we are taking action in order to regain the future profitability in a sustainable way. And this is the main driver of the change of our guidance this year.

Besides that, we had also some changes related to the ramp-up cost for validation in Latina. But again, we are working hard to take future advantage with the action we are taking today.

[Lisa Miles, executive]

And Matt, just a final closeout comment on that. You're correct. It is really largely within our control as it relates to the execution and engineering. We really are no longer suffering from the supply chain challenges that we felt early on after the record wins that we had in that segment in late 2022. So as we advance our business optimization plan today, those actions are -- we would characterize them as largely within our control.

[Operator]

The next question is from Larry Solow, CJS Securities.

[Lawrence Solow, analyst]

I guess first question, just on BDS, some of the moving parts. You mentioned vials were down 38%. Was that in line with your expectations? Or was that still a little bit worse? And just within that, was it -- is it -- has bulk started to come back at all? It doesn't sound like the RTU has, but just curious a little bit more granularity on the vial piece.

[Marco Dal Lago, executive]

Marco speaking, thanks for the question. So it's in line with our expectations. I mean we changed our guidance after Q1. Basically, we expected and we can see also today steady level of revenue in Q2, Q3 and Q4. We are down 38% is more pronounced in EZ-fill vials that is impacting our margin because they are very accretive for us. We can see some good signals in orders intake, that was Franco. We can see improvement in overall situation, but it's more for revenue to be generated in 2025 rather than in Q4 2024. So we see still a steady situation in 2024.

[Lawrence Solow, analyst]

Got it. And just -- I appreciate the illustrative chart on the Latina ramp. Just curious, obviously, a similar ramp in Fishers a couple of years out. Can you just give us just an update on Fishers, where we stand today? I imagine are we still losing money there? I assume so. When do you think that Fishers can turn breakeven and actually start reaching a profit? Is that like a '26, '27 target? Any thoughts on that?

[Marco Dal Lago, executive]

I'll start with the margin question, then Franco for sure will complement on the operational and business point. So from the margin standpoint of view, as you can see the illustrative graph, we are now -- we have now started the revenues in commercial way. So we are obviously in the lower point of our profitability because of the activities we are putting together with validation with customer testing and the ramp-up of the production, validating the lines immediately after the installation. So we expect improvement in the next quarter.

Bear in mind that Fishers is a larger plant compared with Latina, it is a greenfield. Nevertheless, we believe we have started the turning point, and we expect quarter after quarter improvement also in both sides, I would say. So that's why I mentioned before that in 2025, but also in Q4, the financial performances in Fishers and Latina are expected to be on the positive side.

[Franco Stevanato, executive]

If maybe I can further give some color about the capacity expansion we are doing between Fishers and Latina. We continue to make progress in both the greenfield plants. So in both facilities, the ongoing installation of manufacturing line and the customer validation are on track today with a very high intense activity in a partnership together with them. In Fishers, in the third quarter, we started commercial production and we started to generate our first commercial revenue.

And during the quarter, we also completed the installation of our second high-speed manufacturing line. And we start the validation activity with several key customers. In Latina, we are scaling production. And this quarter, the plant became profitable at a gross profit level. So in conclusion, we continue to see strong demand for high-value solutions driven by the strong momentum in biologics. And this reinforced our decision to strategically invest in particularly in Fishers and in Europe.

[Operator]

The next question is from Patrick Donnelly, Citi.

[Patrick Donnelly, analyst]

I have 2, maybe I'll just ask them both at once. I mean, Marco, just on the margin side, can you just talk about what you're seeing there? Obviously, the engineering piece dragged a little bit. It would be helpful just to talk through the moving pieces there and expectations going forward.

And then Franco, obviously talked a little bit about the destocking piece. Can you just talk about the confidence level that it's mostly in the rearview behind you guys? Any -- what would be the risks of that another leg there? Or are you guys feeling based on the order patterns, very confident that's over and we're in some level of stability to recovery?

[Franco Stevanato, executive]

The destocking is -- was one of the most painful headwind that we had in 2024. And I would like to start also in order to clarify that the vial destocking is just a temporary dynamic. This is a temporary inventory normalization effect. That's not a question if the vial market will recover. It's a question of when the market will recover. Vials are still the most adapted containment format globally. Every year, just to give you an idea, approximately more than 13 billion vials are used to deliver treatment to the patients. And this is through all the different pharmaceutical companies or through the different therapeutic areas at the different regions around the world.

So we have a strong confidence that the end markets are healthy and vials demand will return to its pre-pandemic volume. Just to give you another information, today, we are below 2019 vials demand level. And to us, this is clearly an inventory normalization effect. On the top of this, we continue to see positive signal from many of our customers, both small customers that are reactivating order in the second part of 2024 and bigger international customers that are sharing new forecast for 2025. So step by step, we have a cautious optimism that we are going to the right direction.

[Marco Dal Lago, executive]

And about Engineering, if I got correctly, Patrick, you asked about Engineering also. So as mentioned, after basically doubling the size of the segment in terms of people and the revenue from 2019 to 2023, we are facing some challenges we explained last quarter with some specific highly customized complex projects. We are in the good direction to fix them. As Franco mentioned, we have been able to complete some of them in the quarter. Nevertheless, we are taking action to optimize the segment, and we expect it will take another 2 to 3 quarters to fully normalize our profitability. This is embedded in our guidance, obviously, and this is an area where we are working hard and taking action in order to set the stage for the future growth.

[Operator]

The next question is from Jacob Johnson, Stephens.

[Jacob Johnson, analyst]

Maybe sticking on the margin front. Your guidance would seem to imply a decent step-up in EBITDA margins sequentially. Just curious how to think about that in terms of gross margin expansion sequentially versus operating leverage?

[Marco Dal Lago, executive]

It is mainly driven by gross profit margin in Q4. We expect to leverage better volumes. The mix is expected to improve in Q4. As you can see, we increased a little bit the guidance for high-value products because of the -- we are largely covered by firm committed orders from customers there. So the confidence is both on volumes and mix. And finally, we expect slightly better performance in Latina and Fishers in Q4 compared to Q3. So mainly business and operational improvement rather than cost reduction.

[Jacob Johnson, analyst]

Got it. And maybe just sticking on the cost side, you guys lowered the guide due to some incremental costs for Engineering and Fishers. As we think about the return on those costs, just do those incremental costs maybe help accelerate the recovery in engineering and the ramp at Fishers? Or just any way to think about where that money is going and the potential benefit from it?

[Marco Dal Lago, executive]

Yes. Let's say, we are investing now to improve the situation and the profitability in the future. They are very different situation. I mean, in Fishers, as you know, we are ramping up the production, validating the lines with customers. So this is driven by strong demand we see for the future and customers are willing to validate the production to leverage our capacity in the future. In Engineering, as we commented, it is more to execute our business optimization plan and be more profitable in the future.

[Franco Stevanato, executive]

Yes, I confirm. We have decided to apply this decision right now in order to build a new platform to set in the future more cost competitive in order to increase our productivity.

[Operator]

The next question is from Dave Windley, Jefferies.

[David Windley, analyst]

I was hoping to understand a little bit better how -- Larry asked this question, but where we stand in Fishers related to the slightly illustrative slide that you provided. Did I understand you to say that you're at the maximum operating loss there and with increased revenue, you would expect that to get better. Did I understand that correctly? And how should we think about incremental margin as that revenue improves in Fishers?

[Marco Dal Lago, executive]

We started commercial production in Q3. So our expectation is to increase the revenues quarter after quarter with more validation, more line installed, so on and so forth. So we expect to better leverage the fixed expenses as soon as our production will steadily grow up. So this is our assumption. We believe we touched the lower point in this quarter with the higher costs associated with the validation and installation.

[Franco Stevanato, executive]

Correct. It's a very similar journey we had with Latina. Now we have installed also the second line. Also in parallel, we are performing again, validation, and we started to deliver commercial revenue also with the second line. In the next quarter, we will continue with this path with the same -- similar what we already happened in Latina today. In the long run, Fishers, it will have even more wide product portfolio because we are going also to produce some Alba technology, some auto-injector technology. So in the long run, at certain point, Fishers in the long period, it will be even wider and bigger than Latina.

[David Windley, analyst]

Okay. So when you talk about gradual recovery in vials in '25, can you help to define what that means? Should we pick a point in the second half of '25 and assume somewhat of a straight line from here to there of the destocking, the destocking negative impact lessening from here to there? Or again, I'll just say it again, what does gradual recovery in '25 translate to for us?

[Lisa Miles, executive]

Dave, let me just quickly start. I think as Marco commented earlier that the largest swing factor that we have for growth next year is really going to be tied to the timing and pace of recovery in vials. And so as you know that there is a sufficient amount of capacity on the market today. And so customers are not necessarily compelled to place orders as quickly as they may have historically. And so as we move into 2025, I think that it would be early to speculate the timing and pace of that. And I just don't think we're in a position today. And Marco or Franco could add additional color if they'd like.

[Franco Stevanato, executive]

Exactly this. We have a constant exchange with our customers, in particular, at the end of the year. And we see that month by month, they are going to increase their way that they give more transparency on the forecast for 2025, not only the small customer and most big international organizations. But still, we want to have a cautious optimism that 2025 to be the year that we will recover. We want to be prudent to understand when it will be the right normalization.

[David Windley, analyst]

Okay. Since that one didn't hit the mark, let me move to a different one, which is around the additional costs for validation in Fishers and optimization in engineering. So those are -- you're adding costs. These are plans that were in place before and you're adding costs related to those. Can you talk about what has deviated from your previous expectation that requires those additional costs? For example, in Fishers, is validation proving to be more challenging than you previously expected? Are you validating for more customers than you previously expected? And similarly, in engineering, what is requiring the additional cost relative to the optimization plan that you set out before?

[Marco Dal Lago, executive]

The ramp-up activities are advancing as planned, and we are happy about the program. We have higher cost for Fishers are related to validation. And sometimes it's taking longer depending on customer approach, their process and not every customer is the same with respect to the validation activities. We are targeting here, as you know, high-value products. So the requirements are often very level. Anyway, we are very happy about the success we gained in validating the plant and the first line with the very important customers that are, by the way, already committed orders, so they are really willing to start with us.

[Franco Stevanato, executive]

For what is related to the Engineering segment, one of the main actions that we are taking in our optimization plan is review our footprint. For example, we have done some rightsizing of our operational structure, and we have moved some activity to Italy. We have decided to move with this type of decision in order to build the floor for the next growth in order to increase our productivity and reduce our costs. We have decided to do this investment right now today in order to gain and to be back on more regular marginality for next -- in the middle of next -- in 2025.

[Operator]

The next question is from Paul Knight at KeyBanc Capital Markets.

[Paul Knight, analyst]

Franco, could you talk why Indianapolis is coming online faster? Was it customer request, customer payment? What were the dynamics from what we thought would be a later 2025 start-up?

[Marco Dal Lago, executive]

No, we are in line with our expectation. I mean it was in our plan to start the commercial revenue about 2, 3 quarters after Latina. So we are exactly in line with our plan. Obviously, now it's a matter of ramping up the revenue and the activities there and better leverage the fixed costs we have there. But honestly, we are exactly in line with our plan in order to...

[Franco Stevanato, executive]

Remember, Paul, that Latina was a brownfield and Fishers is a greenfield plant. And the greenfield plants also from the moment that we decided during the IPO to do the greenfield plant, we received some additional orders like BARDA, also the other opportunities that we have enlarged the plant. So this is why we have this, let's say, a few quarters of difference between Europe and United States.

[Paul Knight, analyst]

Okay. And then within the engineering group, the turnaround there, is it done in terms of fixing operations in Northern Europe? Where are we from where you want to be with the efficiencies at engineering in Northern Europe, Denmark, I believe?

[Franco Stevanato, executive]

So today, our goal is to build a center of excellence by -- for each product. And already our original idea is to have -- for inspection system to have excellence in Denmark and also in Italy, in particular, in Bologna. So this action -- this plan is in place. We will require also a few quarters in front of us. Our expectation to be in the middle of next year to be back on certain marginality.

[Paul Knight, analyst]

And the last question would be the start-up of hiring and training people in front of capacity starting like Indiana, like Latina, what do you think that's had a 100 basis point impact on gross EBITDA margin? Is it 200? Or is it a range of 100 to 200? Can you give a formula or a data range on personnel costs, training costs?

[Marco Dal Lago, executive]

What I can tell you, Paul, is that we are having in this quarter, negative gross profit in the combination of Fisher and Latina. So the graph is illustrative, but we are not still at overall, the combination of the 2 in positive gross profit margin. And since we are targeting high-value products here, we expect the final gross profit margin will be above the average of the company. So you can see the magnitude of the delta we are suffering today with the ramp-up of the 2 facilities. But again, we are doing it for future profitability covered by customers' demand.

[Operator]

The next question is from Dan Leonard, UBS.

[Daniel Leonard, analyst]

I have a follow-up to Jacob's question from earlier. I'm just trying to better understand the Q4 sequential margin expansion. I mean, I'm looking at a 500 basis point sequential gross margin improvement from Q3 levels into Q4. Is that number correct? And it does seem inconsistent with historical incremental margin. So I was wondering if you could help me better understand the buckets that would drive that.

[Marco Dal Lago, executive]

Yes. Thanks for the question. So we are targeting at the center point more than EUR 320 million of revenue in Q4. We are largely covered by committed orders and the mix is expected to be pretty good, and that's the reason why we increased the guidance for high-value products in Q4. And again, we are covered by committed orders from customers largely. The mix and the growing volumes is expected to help the better leverage of fixed expenses and the mix. And on top of it, we are expecting better performances from the financial point of view, both in Fishers and Latina as soon as we step up with the revenue and the coverage of fixed expenses. So the combination of these events is giving us confidence in delivering the guidance for Q4.

[Daniel Leonard, analyst]

Okay. I think I understand a bit better. And just a quick follow-up. Franco, I was wondering if you could better dimension that comment you made that vial demand is below 2019 levels. By how much? And I'm trying to better understand the magnitude of revenue lift possible if demand merely returned to 2019 levels.

[Marco Dal Lago, executive]

Yes, Marco speaking. As we disclosed clearly, we are down 48%, 40% compared to last year in vials. And this is coming after a year where we declined the COVID business that was mainly vials by $80 million to $90 million in '23. So it's the combination of 2 years of decline is putting us in a condition that we are below 2019 demand.

What to expect for the future, I think we disclosed all the variables in place between large customers and smaller customers also by geographical area. Obviously, not easy today to put together the combination of all the probability and give you precise guidance about 2025. This is the main uncertainty we need to assess and to address for 2025.

[Operator]

The next question is from Curtis Moiles, BNP Paribas Exane.

[Curtis Moiles, analyst]

Just looking at the fiscal year guidance, the range that you have out there for the implications for Q4, it looks like it's kind of anywhere from a 1% decline to a 5% increase in Q4. So I wanted to get a better idea of what the moving parts are there. Are you expecting an improvement in BDS and engineering? Or is one going to do better than the other? Or any other color would be helpful.

[Marco Dal Lago, executive]

Our Q4 expectation is to improve mainly in BDS segment, where we are basically leveraging the high-value products, the higher volumes and the ramp-up of Fishers and Latina. So it's mainly about the BDS segment improvement.

[Curtis Moiles, analyst]

Okay. That's helpful. And then also just going back to the destocking. You're calling out vial orders expected to improve or pick up by the end of the year. Should we expect any kind of impact on revenue in Q4? Or is that going to be delayed until 2025 at the earliest time?

[Marco Dal Lago, executive]

Again, as Franco was saying, we are gaining traction in orders. We see some improvement and not yet the normalization of the level of orders in vials. Orders are mainly for beginning of 2025 rather than Q4 '24.

[Franco Stevanato, executive]

And if I may also give sort of confidence about our long-term strategy and what eventually is behind 2024 in order to isolate the situation in 2024. So '24 was challenger for Stevanato Group. We faced some temporary painful headwind this year. Vial destocking took the industry by surprise and will turn around. This is important that we need to be clear. We are also in a cycle of high investment in Fishers and in Latina, but we are doing this investment for the future.

And Engineering, this is within our control, and we feel confident that the action we are taking will deliver results. On the other side, we see sustained demand for high-value solutions, in particular, on syringes, Alba, cartridges [indiscernible].

At the end of the day, the fundamentals have not changed. The demand landscape is robust, and we have long secular tailwinds. In short, we are positioned for profitable growth. So from our perspective, as we consider 2026, we would expect that while destocking will be behind us, we will gain leverage from scaling our new operation in Latina and Fishers and the Engineering segment should return to profitable growth. This give us continued confidence in our ability to achieve an adjusted EBITDA margin of 30% and high-value solutions in the range of 40% to 45% in 2027. This is the behavior that we have today with the leadership team.

[Lisa Miles, executive]

Operator, do we have any other questions?

[Operator]

[Operator Instructions] Ms. Miles, there are no more questions registered at this time.

[Lisa Miles, executive]

Thank you very much. We want to thank everyone for joining us today, and have a wonderful day.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.