Stevanato Group S.p.A. (NYSE:STVN) Q4 2023 Earnings Call Transcript March 7, 2024
Stevanato Group S.p.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Lisa Miles: Good morning and thank you for joining us. With me today is Franco Stevanato, Executive Chairman; Frank Moro, CEO; and Marco Dal Lago, CFO. 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 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. Please also take a moment to read our Safe Harbor statement included in the front of today’s presentation.
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 analyses 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, please see the company’s most recent earnings press release. And with that, I will now hand the call over to Franco Stevanato for opening remarks.
Franco Stevanato: Thank you, Lisa. 2023 was very positive for us. We closed out another solid year with 10% growth or 11% on a constant currency basis. We continued to successfully execute our near-term objectives of advancing our capacity expansion projects and growing our mix of high-value solutions, while still delivering double-digit growth. At the same time, during 2023, we navigated some macro challenges in a dynamic environment of inflation uncertainty, ongoing supply chain issues and industry-wide curity ongoing supply chain issues and industry white cast fit from favorable secular tailwinds which we expect will continue to drive demand for our high-value solutions. While at the same time, we have been investing heavily in expanding capacity to meet the market demand.
We expect that these investments will drive organic growth in the midterm as we efficiently leverage our invested capital to exploit the opportunities in front of us. The fundamentals of our business remain strong. We operate in high-growth end markets like biologics, where we see a broad range of opportunities. As the global leader in pen cartridges and with an enviable market position in prefillable syringes, we are well positioned to capitalize on the growth in biologics and the trend towards the set administration of medicine. My recent visits with several of our largest customers, game continued optimism that we are on the right path, customers favor our unique value proposition of integrated end-to-end solutions, our global footprint, our one quality standard and our differentiated product set.
We are focusing on driving future growth through solid execution and we believe we have the right strategy, the right product portfolio and the right team to succeed as we work toward creating and driving long-term shareholder value. Thank you. I will now hand the call over to Marco.
Marco Dal Lago: Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to year-over-year changes unless otherwise specified. Starting on Page 7, we delivered double-digit growth in the fourth quarter which was slightly below our expectations and put us at the low end of our 2023 guidance range. However, the differences in fiscal 2023 actual results and our 2023 guidance were mostly due to lower vial volumes as customers work down inventories, they stockpile during the pandemic. The higher inventories are not limited to COV-19-related customers but also customers with non-COVID-19 applications who built up stock to mitigate supply chain uncertainty and manage long lead times at the high of the pandemic. We believe this is a temporary imbalance of supply and demand across the industry.
We are starting to see some early indications of market improvement but our 2024 guidance assumes a lower recovery in vial demand, resulting in a growth rate of 9% to 12% for fiscal 2024. Looking beyond 2024, we are maintaining our midterm targets of low double-digit growth starting in 2025. In 2027, we still anticipate high-value solutions in the range of 40%, 45% and an adjusted EBITDA margin target of approximately 30%. Let’s turn our attention to fourth quarter results on Slide 8 which will be a focus of my comments. Fourth quarter revenue was a little bit below our internal expectations by about €5 million which was evenly split across the segments. Nevertheless, total revenue increased 10% to €320.6 million or 11% on a constant currency basis, driven by growth in the biopharmaceutical and Diagnostic Solutions segment tied to higher volumes and increasing mix of high-value solutions.
Growth was offset by a decline of approximately €33.8 million related to COVID-19. Excluding COVID-19, revenue growth in the fourth quarter would have been 24%. We have been managing their offer revenue related to COVID-19 while at the same time, growing our mix of high-value solutions. In the fourth quarter of 2023, we generated record sales from high-value products which represented 37% of total revenue. As expected, gross profit margin for the fourth quarter of 2023 decreased to 31.8% As a reminder, the fourth quarter of 2022 was an exceptionally strong quarter and included 2 benefits that did not repeat. First, we recognized higher revenue and profit from easy field virals which led to a more favorable mix within high-value solutions.
And second, we instituted some additional price adjustments to recover inflationary costs from prior periods, predominantly in the BDS segment. These 2 effects were the largest contributors to the step down. This was partially offset by the increase in high-value solutions. Gross profit margin was also unfavorably impacted by the currency translation and continues to be tempered by short-term inefficiencies tied to the start-up of new facilities including higher industrial costs, depreciation and naturally lower utilization during the ramp-up phase. For the fourth quarter of 2023, SG&A and R&D expenses were lower compared with the prior year, mainly due to a lower accrual for our performance-based management bonus program. In addition, we have prudent short-term cost management initiatives to counterbalance the temporary headwinds.
Operating profit margin decreased 160 basis points to 20%, mainly due to lower gross profit and the decrease in other income. On the bottom line, for the fourth quarter of 2023, we generated net profit of €45.2 million or $0.17 of diluted earnings per share. adjusted net profit of €47.1 million or adjusted diluted EPS of $0.18 and adjusted EBITDA totaling $86.7 million, reflecting an adjusted EBITDA margin of 27%. Let’s review segment results on Page 9. The biopharmaceutical and Diagnostic Solutions segment delivered strong growth in the quarter despite a steep decline in COVID-19 revenue and industry-wide inventory destocking. For the fourth quarter of 2023, BDS segment revenue grew 12% and 14% on a constant currency basis to €260.6 million, driven by growth in our core drug containment solutions business.
In the fourth quarter of 2023, revenue from high-value solutions grew 37% to €119.4 million, representing 46% of segment revenue. This was offset by a 3% decline in revenue due to other containment and delivery solutions. Gross profit margin decreased to 33.6% in the fourth quarter of 2023, mainly due to lower easy field vials volumes, currency translation and short-term inefficiencies tied to the start-up of new plants. Additionally, lower vial volumes have led to short-term underutilization on some lines. For the fourth quarter of 2023, Engineering segment revenue totaled €60.6 million which was consistent with the same period last year. For the fourth quarter of 2023, gross profit margin for the Engineering segment decreased 10 basis points to 21.1% compared with the same period last year.
We are managing through a large volume of work in progress. Our main priority in 2024 is executing on these projects and shortening our lead times. On Page 10, as of December 31, 2023, we had cash and cash equivalents of €69.6 million and net debt of €324.4 million. Capital expenditures were $94.7 million in the fourth quarter and €453.3 million for the full year which was in line with our expectations. Our investments in expanding capacity in high-value solutions are essential to meet expected market demand. For the fourth quarter of 2023, cash flow from operating activities was €10.2 million which reflects our current working capital needs to support organic growth. Cash used for the purchase of property, plant and equipment and intangible assets was €87.1 million which resulted in negative free cash flow of €76 million.
Over the past few months, we strengthened our balance sheet with 3 new midterm loans totaling €110 million and that drew down approximately €60 million. We believe we have adequate liquidity to fund the needs of the business and we will continue to explore additional financing options to support future growth. Lastly, on Page 11, we are introducing our full year 2024 guidance. We currently expect revenue in the range of €1.180 billion and €1.21 billion, adjusted EBITDA in the range of €314.1 million to €329.5 million and adjusted diluted EPS in the range of $0.62 to $0.66. In 2024, we estimate that CapEx will range between 25% and 28% of total revenue based on the midpoint of our revenue guidance. Our full year 2024 guidance assumes the following: the second half of 2024 will be stronger than the first half.
The 2024 will be stronger than the first half, while engineering will remain flat as we focus on executing on our current work in progress. High-value solutions in the range of 35% to 37% on total revenue. And lastly, we are estimating a currency headwind of approximately €7 million to €9 million. Also, consistent with prior years, we expect a step down in revenue in the first quarter compared with Q4 2023. We currently expect the revenue in the first quarter of 2024 will be flat to slightly down compared with the same period last year. In Q1, this assumes mid-single-digit growth for the BDS segment and the revenue decline in the engineering segment compared with the first quarter of 2023. Overall, as the pandemic continues to wane, we are still operating in a dynamic environment with the ongoing inventory normalization.
Despite this, we believe that 2024 will still be a year of growth and our midterm outlook remains unchanged. Thank you. I will hand the call to Franco.
Franco Moro: Thanks, Marco. For fiscal 2023, we achieved double-digit top line growth and increased our mix of high-value solutions to 34% of total revenue, up from 30% last year. During the year, we made meaningful progress in our capacity expansion and enhanced our integrated value proposition. Nevertheless, we also faced the challenges that we continue to manage. On Slide 14, as previously disclosed, we see a convergence of factors impacting the engineering segment. Over the last 24 months, we benefited from strong demand for engineering machinery but we have been challenged with timely execution mostly due to the long lead times for electronic components and the time needed to shore up the resources to deliver on the upsized demand.
As we discussed last quarter, we believe that we are on the right path to better balance resources with demand but it will take some time. We believe the most attractive path is to prioritize execution and bring these projects to completion. This may negatively impact segment growth in the short term but we believe this action will better position the business for long-term success. Turning to the BDS segment on Slide 15. Despite the headwinds from destocking, the underlying demand for biologics continues to rise. In our BDS segment, revenue from Biologics, excluding COVID-19, represented approximately 28% of the segment revenue, up from 19% last year. We believe the slower recovery in vial demand is temporary. We currently expect that the path to normalization will continue throughout 2024.
And we are cautiously optimistic that order flow will begin to pick up in the second half of the year. Longer term, we see many opportunities in the adoption of our ready-to-use buyers and cartridges. Today, less than 5% of the vial and cartridge market has converted to a ready-to-use format — compared with 95% of the syringe market. Customers increasingly see the advantages of leveraging our ready-to-use configurations to reduce supply chain risk, enhance quality and expand flexibility. In fact, based on market data, the number of fill and finish lines capable of processing sterilized buyers and cartridges is estimated to have increased 32% in 2023. We also believe that changing regulatory landscape will galvanize adoption over the next decade.
The diversity in our product portfolio is helping us navigate the lingering impacts from COVID-19. So why short-term higher demand has been lagging, demand for other glass products, particularly syringes, continues to be robust. In fact, in 2023, biologics drove a record year in sales of high-value syringes such as Nexa. Turning now to backlog and new order intake on Page 16. New order intake increased 44% to approximately €342 million in the fourth quarter. And as a result, we exited the year with backlog of approximately €945 million, heavily weighted towards biologics because we often experience quarterly fluctuation in backlog and order intake, we believe that annual analysis of these metrics provides a more accurate view of demand trends.
So beginning in fiscal 2024, we will provide backlog and order intake on an annual basis rather than quarterly. On Page 17; our capital projects are multiyear investments that have a multiyear volume and revenue ramps. In Latina, we launched commercial syringe production in the fourth quarter and we expect a steady ramp over the coming years. In addition, we will be installing a ready-to-use catheter lines as part of a long-term project to support a customer transition from back to stabilized cartridges. And these lines are expected to supply commercial volume beginning in 2026. In Fishers, customer validation activities will continue into 2026 as planned. We remain on track to begin commercial production later this year but do not anticipate a meaningful revenue contribution until 2025 when we’ll begin ramping up production for GLP-1s and other biologics.
The Fisher facility is currently expected to hit full productivity by the end of 2028. On Slide 18, we continue to refine our integrated offerings to enhance our value proposition. Our technology excellence centers in Boston and Italy serve as the front line in supporting early-stage drug development. We recently launched non-GMP Fill-and-finish services for small batch operations. These services allow customers to identify any possible interaction between the drug and the container system during and after the fill-and-finish process. Our centers foster early customer engagement which helps us gain a strategic foothold supporting them throughout the entire drug life cycle. In closing, on Slide 19, our number one priority in 2024 is flawless execution of our operational priorities.
As we consider 2025 and beyond, we remain bullish on our medium-term targets. We still expect to achieve low double-digit revenue growth in 2025 through 2027. And in 2027, high-value solutions in the range of 40% to 45% and an adjusted EBITDA margin of approximately 30%. Our confidence is underpinned by what we are seeing around us, including strong secular tailwinds, continued growth in biologics and an increasingly strong competitive mode, we believe we are well positioned to fully capitalize on our investments to drive durable organic growth, expand margins and deliver long-term shareholder value. Operator, let’s open it up for questions.
Lisa Miles: Operator, before we jump into questions, I have one clarification regarding this morning’s press release. I would like to correct an error as it relates to backlog for fiscal 2022. It should be $957 million, not $944 million as stated in this morning’s press release; we apologize. Okay, we are ready to open up. Thank you.
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