Stevanato Group Q2 2024 Earnings Report

Stevanato Group EPS Results

• Actual EPS: €0.09
• Consensus EPS: €0.10
• Beat/Miss: Missed by -€0.01
• One Year Ago EPS: €0.15

Stevanato Group Revenue Results

• Actual Revenue: $259.60 million
• Expected Revenue: $254.92 million
• Beat/Miss: Beat by +$4.68 million
• YoY Revenue Growth: +1.70%

Stevanato Group Announcement Details

• Quarter: Q2 2024
• Date: 8/6/2024
• Time: Before Market Opens
• Conference Call Date: Tuesday, August 6, 2024
• Conference Call Time: 8:30AM ET

Stevanato Group (NYSE:STVN) is a global provider of primary packaging solutions and related services for the pharmaceutical and biotech industries. The company specializes in the design, development and manufacturing of glass drug containers such as vials, cartridges and pre-fillable syringes, as well as advanced inspection systems and assembly equipment. Its integrated offerings cover the entire packaging supply chain, from component production to bespoke filling lines and serialization technology.

In addition to its core glass business, Stevanato Group delivers engineering services and process validation support to pharmaceutical customers. Through its Networked Inspection Systems division, the company offers machine-vision inspection equipment designed to meet stringent quality standards and regulatory requirements. Stevanato’s manufacturing capabilities also extend into polymer primary packaging and high-precision molding, enabling a broader portfolio of container formats.

Founded in 1949 and headquartered in Piombino Dese, Italy, Stevanato Group has expanded its footprint with manufacturing sites and engineering centers across Europe, North America, Latin America and Asia. Key production facilities are located in Italy, the United States, Brazil, Slovakia and China. This global presence allows the company to serve multinational pharmaceutical and biotech firms as well as contract development and manufacturing organizations (CDMOs).

Under the leadership of Chief Executive Officer Paolo Dellachà, Stevanato Group emphasizes innovation, sustainability and digitalization in its operations. The company invests in research and development to advance containment materials, processing technologies and inspection automation. With a focus on environmental stewardship and patient safety, Stevanato continues to evolve its offerings to meet the dynamic needs of the life sciences sector.

Stevanato Group Q2 2024 Earnings Call Transcript

Key Takeaways

• Revenue grew 2% to €260M in Q2, driven by a 9% rise in the BDS segment but offset by a 26% decline in Engineering, leading to a downwards revision of full-year guidance to €1.09–€1.11B revenue, €264–€272M adj. EBITDA, and $0.48–$0.50 adj. EPS.
• The High value solutions mix expanded 23% to represent ~40% of Q2 revenue, with biologics hitting a new record of 35% of BDS revenues, bolstering future margin potential.
• The Engineering segment faced significant project delays and higher costs—particularly in Denmark—causing gross margins to fall to 10.3% and operating profit to 2.6%, and prompting consolidation of sites and new leadership.
• Major capacity expansions remain on track: the Fishers (Indiana) plant is completing validation with commercial syringe production slated for Q3 2024, while the Latina (Italy) facility advances its ramp-up despite early-stage inefficiencies.
• Vial destocking continues to depress utilization, but reception of fresh orders in smaller markets and customer forecasts indicate a likely tail-end recovery in bulk vials by late 2024.

Presentation

[Operator]

Good afternoon. This is the Chorus Call Conference Operator. Welcome, and thank you for joining the Stevanato Group Second Quarter 2024 Earnings Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice President, Investor Relations. Please go ahead, Lisa.

[Lisa Miles, SVP of Investor Relations at Stevanato Group]

Good morning, and thank you for joining us. With me today is Franco Stevanato, Executive Chairman and Chief Executive Officer, and Marco Dal Lago, Chief Financial Officer. This morning, 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 3.D, 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.

[Lisa Miles, SVP of Investor Relations at Stevanato Group]

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

[Franco Stevanato, CEO at Stevanato Group]

Thank you, Lisa, and thanks for joining us. Today, we will review our second quarter performance, provide an update on market dynamics, and share some insights on the challenges and the ongoing initiatives to meet our objectives. For the second quarter, revenue was a little bit better than our expectation, driven by 9% growth in the BDS segment, but margins fell short of our forecast in the engineering segment, where delays led to higher costs on certain projects. We also incurred increased expenses related to the actions taken in the second quarter to address these delays. These factors combined are the main reason for the revision of our 2024 guidance. As you know, the engineering segment has experienced significant growth, more than doubling its revenue over the last four years.

[Franco Stevanato, CEO at Stevanato Group]

We scaled our operations to support this large volume of work, but persistent delays in the supply of electronic components and the complexity of certain projects prevented us from delivery as planned. The challenges are mostly limited to our Denmark operation and are related to certain highly customized projects. Our number one priority today is to advance this large volume of work in progress and bring these projects to completion, but this will take some time. Moving to Slide 6, we are undergoing extensive efforts to optimize our engineering footprint, harmonize industrial processes, and enhance our supply chain and logistics strategies. Let me give you a concrete example of these efforts. In Denmark, we consolidated activities of two different production sites into a single location, so that the Danish team can focus on the advancement of our assembly and packaging technologies.

[Franco Stevanato, CEO at Stevanato Group]

At the same time, we're implementing a cross-site plan to better support our visual inspection teams in Denmark with our technical specialists in Italy. This will also increase the standardization of our technologies and processes across the engineering segment. While these initiatives include expenses that will impact our 2024 financial performance, they will help us optimize our operational structure, maximize efficiencies, and secure the success of ongoing projects. This is one of the primary areas of responsibility of Ugo Gay, our Chief Operating Officer, who joined Stevanato Group in March. Ugo brings over 20 years of experience in the industry, having held both commercial and operations leadership positions at organizations such as DiaSorin. Long term, we believe the demand landscape for engineering remains favorable.

[Franco Stevanato, CEO at Stevanato Group]

Not only is the industry moving to secure supply chains and manufacturing capacity for fast-growing biologics, but we also see an increasing shift to upgrade infrastructure to better align with the requirements under Annex 1. In addition to improving our execution in the Engineering segment, we are still navigating through the effects of vial destocking. We see positive signals in the market, with orders starting to materialize in certain smaller markets such as Latin America. In larger markets, we still expect a more gradual recovery. Our customers are sharing forecasts that point to improving demand, and they are beginning production planning. Accordingly, we are optimistic that vial orders will begin to pick up at the tail end of 2024, starting with bulk vials.

[Franco Stevanato, CEO at Stevanato Group]

Moving to our capacity expansion projects on slide seven, it is important to note that we are working through these challenges in the midst of a large demand-driven capital cycle. Last year, we successfully completed our Piombino Dese plant expansion, and we are continuing our multi-year ramp-up of our expansion projects in Fishers, Indiana, and Latina, Italy. In Fishers, our validation activities are going as planned, and we are progressing through the first set of customer audits. During the quarter, we took delivery of our second and third syringe lines, and installation and qualification activities are underway. Most importantly, we are on track to launch commercial production and generate our first commercial revenue from Fishers in the third quarter of 2024.

[Franco Stevanato, CEO at Stevanato Group]

During the second quarter, we hosted 40 customers for the opening of the new plant in Latina to give them a first look at our new high-value solutions manufacturing facility. We expect to continue to expand our syringes production as part of our multi-year ramp-up in Latina. We have 2 manufacturing plants at our Latina campus. As previously disclosed, the next phase in Latina is concentrated on the expansion of EZ-fill cartridges capacity to support the transition from bulk to ready-to-use products for an anchor customer. Activities tied to this project will launch next year. The expansion is designed to harmonize operations between the two sites. This includes the installation of new bulk and EZ-fill cartridge lines in the new plant and the upgrade of already operational lines in the original Latina plant.

[Franco Stevanato, CEO at Stevanato Group]

This approach is part of our wider strategy to enhance efficiency and production capacity, reduce lead times, and expand our offer of premium solutions. As expected, the ramp-up activities of our two new facilities are resulting in temporary inefficiencies, on which Marco will elaborate further. With our teams focused on the execution in Latina and Fishers, we decided to further postpone any additional expansion in China for the coming twelve months. As a consequence, we are shifting some of this CapEx to Latina to accommodate a change in regional manufacturing preference for a large customer. Accordingly, we believe we have sufficient capacity to support the demand in the region. On slide eight, in summary, we are confident that we can successfully navigate through the challenges in front of us, and we are squarely focused on improving our execution. The core fundamentals of our business have not changed.

[Franco Stevanato, CEO at Stevanato Group]

The end markets we serve are healthy and growing. Demand for our products remains strong. Our integrated solutions resonate with our customers, and we are operating in an environment with favorable secular tailwinds. We continue to see a durable, profitable growth path in front of us, driven mainly by biologics. In fact, in the first half of 2024, biologics hit a record high of 35% of BDS revenues, which is creating strong demand, especially in high-value solutions. I will now hand the call over to Marco.

[Marco Dal Lago, CFO at Stevanato Group]

Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the second quarter of 2023, unless otherwise specified, and in the second quarter, foreign currency was immaterial, so all revenue comparisons exclude currency translation. Starting on page 10, for the second quarter of 2024, revenue increased 2% to EUR 260 million. This was driven by a 9% growth in the biopharmaceutical and diagnostic solutions segment, which offset the expected decline in the engineering segment. Our product diversity helped expand our mix of high-value solutions, which grew 23% in the second quarter and represented approximately 40% of total revenue in the quarter. The increase in high-value solutions was favorable to gross profit margin. This offset lower revenue from EZ-fill vials, which adversely affected the mix within high-value solutions. Gross profit margin was also tempered by three headwinds.

[Marco Dal Lago, CFO at Stevanato Group]

First, the higher-than-anticipated cost in the Engineering segment had the biggest effect on gross profit margin in the second quarter. Second, the impact from vial destocking, causing the underutilization of our vial lines, and lastly, inefficiencies tied to the ramp-up phase of our new facilities. As a result of these temporary headwinds, gross profit margin decreased to 26%. It is important to point out that we believe that these headwinds are temporary and will gradually subside. In turn, we expect a step-up in margins. As we outlined during our Capital Markets Day, margin expansion is expected to be driven by the mix shift to High-Value Solutions, the benefit of scale, and better leverage of our fixed assets and operational efficiencies.

[Marco Dal Lago, CFO at Stevanato Group]

For the second quarter, lower gross profit led to a decline in operating profit margin to 10.8%, and on an adjusted basis, operating profit margin was 12.8%. For the second quarter of 2024, net profit totaled EUR 20.6 million, and diluted earnings per share were EUR 0.08. On an adjusted basis, net profit was EUR 24.5 million, and adjusted diluted earnings per share were EUR 0.09. Adjusted EBITDA was EUR 54 million, and adjusted EBITDA margin was 20.8%. Moving to segment results on page 11. For the second quarter of 2024, revenue from the BDS segment increased 9% to EUR 222.4 million, mostly driven by growth in high-performance syringes. The diversity in our product portfolio helped drive 9% growth, despite a 40% decrease in revenue related to vials.

[Marco Dal Lago, CFO at Stevanato Group]

Revenue from high-value solutions grew 23% to EUR 103.4 million in the second quarter, while revenue from other containment and delivery solutions decreased 1% to EUR 119 million. As expected, the increase in high-value solutions benefited gross profit margin, but segment margins continued to be unfavorably impacted by the ongoing effects of destocking as customer inventories continue to normalize, and start-up inefficiencies in Latina and Fishers. As a reminder, these are natural inefficiencies that occur during the early phases of operations. These inefficiencies reflect the under-absorption of expenses as volumes, productivity, and revenue progressively grow to reach the target levels. As these facilities mature, we believe that this impact will decrease and that margins will improve accordingly. As a result, in the second quarter of 2024, BDS segment gross profit margin was 27.7%.

[Marco Dal Lago, CFO at Stevanato Group]

This represented a 390 basis points decrease compared to the prior year. For the second quarter, operating profit margin for the BDS segment decreased to 14.5% from 19.8% in the same period last year. For the second quarter of 2024, revenue from the engineering segment decreased 26% to EUR 37.2 million. As Franco noted, delays have led to higher costs on certain complex and highly customized projects in process. As a result, gross profit margin decreased to 10.3%, and operating profit margin declined to 2.6% for the second quarter. It's important to mention that we currently see strong, continued interest in our innovative, market-leading technologies.

[Marco Dal Lago, CFO at Stevanato Group]

With the actions we have ongoing, we believe that we can drive the necessary improvements to bring these projects to completion, improve the segment's financial performance, and return to a profitable growth trajectory. 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 expected, our inventory levels increased in the quarter, mainly due to the establishment of baseline inventories in our new plants in US and Italy, including products that are expected to be delivered to customers in the future quarters. This was partially offset by collections of trade receivables. We ended the second quarter with cash and cash equivalents of EUR 78.1 million and net debt of EUR 238.2 million.

[Marco Dal Lago, CFO at Stevanato Group]

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 adequate liquidity to fund our strategic and operational priorities over the next 12 months. As expected, capital expenditures for the second quarter of 2024 totaled EUR 75.9 million, as our demand-driven investments continued to ramp. In the second quarter of 2024, net cash from operating activities totaled EUR 22.3 million. During the second quarter, we received proceeds of EUR 3 million for the sale of a building in Denmark as part of our initiatives to optimize our footprint and gain operational efficiencies. Cash used in the purchase of property, plant, and equipment, and intangible assets was EUR 72.1 million. This resulted in negative free cash flow of EUR 46.1 million in the second quarter.

[Marco Dal Lago, CFO at Stevanato Group]

Lastly, on slide 13, we are updating guidance for fiscal 2024. Let me walk you through the changes. Starting with the engineering segment, which is the main reason for the revision, we now estimate a revenue decrease of approximately 15%-20% for fiscal 2024 compared with last year. Turning to the BDS segment, for fiscal 2024, we continue to anticipate mid-single-digit revenue growth compared with last year, and we remain comfortable with the current consensus revenue estimate of EUR 930 million for the segment.

[Marco Dal Lago, CFO at Stevanato Group]

So when you add this all up, for fiscal 2024, we now expect revenue in the range of EUR 1.09 billion-EUR 1.11 billion, adjusted EBITDA in the range of EUR 264 million-EUR 272 million, and adjusted diluted EPS in the range of EUR 0.48-EUR 0.50. As we consider the future trajectory, our long-term growth construct remains unchanged. We believe we have the right ingredients in place to return to double-digit growth and expand margins, as outlined at our Capital Markets Day. Looking to next year, in the BDS segment, we have positive momentum in high-value solutions, particularly in syringes, which is a favorable tailwind. On the other side, we currently anticipate that our growth may be tempered by the current headwinds.

[Marco Dal Lago, CFO at Stevanato Group]

This includes the pace of recovery in bulk and EZ-fill vials, which is the largest factor, and the timing of the effect of the corrective actions we are taking for the engineering segment. We will continue to update you on our progress, but we will provide formal guidance in March. We remain confident in our strategy and in our long-term growth prospects going forward. Thank you. I will hand the call back to Franco.

[Franco Stevanato, CEO at Stevanato Group]

Thank you, Marco. In closing, on slide 15, we are maintaining focus on our long-term objectives, and we are confident in our strategic direction. Despite the headwinds, we are still delivering organic growth, primarily in High-Value Solutions. We are investing in the right areas and meeting customer demand. In the near term, we must deliver on our commitments and sharpen our focus on solid execution across our main priorities. This includes the ongoing expansion in Latina, our ramp-up activities in Fishers, and improving our project delivery in Engineering segment. The fundamentals of our business remain strong. We operate in a dynamic and growing market with favorable secular tailwinds. Demand is robust, and we have a portfolio of products that are ideally suited to meet customer needs.

[Franco Stevanato, CEO at Stevanato Group]

We believe the business is well positioned to capitalize on these trends, and we are determined to return to durable double-digit organic growth, expand margins, and drive long-term shareholder value. Over the past few months, I had the opportunity to meet with many of our key stakeholders, including customers, employees, and investors. As a CEO, I'm confident that we will achieve our long-term objectives. Operator, let's open it up for questions.

[Operator]

Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. We kindly ask you to limit to one question and a follow-up only, and join the queue again for any further questions. We will pause for a moment as callers join the queue. The first question is from Jacob Johnson of Stephens. Please, please, go ahead.

[Jacob Johnson, Managing Director, Research Analyst at Stephens]

Hey, good morning. Thanks for taking the questions. Maybe just on the engineering business. You know, this business grew rapidly the past few years. We've heard, you know, about some weakness around capital equipment demand in the current environment. Do you think this is largely supply chain issues and within your control, or is there any softening in demand that you're seeing for engineering equipment?

[Franco Stevanato, CEO at Stevanato Group]

Thank you, Jacob. Franco speaking. So today, in order to put in a context the engineering division, we more than double our revenue in the last two years, in particular, in the middle of the context of the pandemic and supply chain shortages. Today, we are behind schedule in some complex new projects, more than what were previously expected, and this is putting pressure on our performance on the business. Those temporary challenges are predominantly isolated to our Denmark operation on certain highly customized projects at the late stage of development, and we are taking strong action to improve and recover the situation. We are confident that we can successfully navigate through these temporary challenges in front of us in the new next few quarters.

[Franco Stevanato, CEO at Stevanato Group]

By the way, the portfolio of order in the engineering division is solid, is strong with our big customer, in particular in biologics.

[Jacob Johnson, Managing Director, Research Analyst at Stephens]

Got it. Thanks for that, Franco. And then I guess I'll ask one on Fishers. You guys talked about seeing commercial revenues in 3Q. Was this always what was kind of assumed in guidance or is this a slight benefit versus prior expectations? And I guess as we think about Fishers coming online in 3Q, should we think about that initial contribution as being kind of modest? Thanks.

[Franco Stevanato, CEO at Stevanato Group]

Correct. Correct, Jacob. Validation activities are progressing as planned. So practically, we are on track to launch commercial production in the third quarter of 2024, and we expect to generate commercial revenue also in the Q3 of this year. Today, the big attention, the big focus on all our organization is to perform validation audits with all our U.S.-based customers.

[Marco Dal Lago, CFO at Stevanato Group]

All the guidance, the revenue, are embedded in our guidance we provided.

[Jacob Johnson, Managing Director, Research Analyst at Stephens]

Got it. Thanks for taking the question.

[Franco Stevanato, CEO at Stevanato Group]

Thank you.

[Operator]

The next question is from Paul Knight of KeyBank. Please go ahead.

[Paul Knight, Managing Director and Equity Research Analyst at KeyBank]

I, Franco, do you expect engineering systems to grow in 2025? I mean, obviously, this is a reorg year.

[Marco Dal Lago, CFO at Stevanato Group]

We provided some colors. Marco speaking, sorry, Paul. We provided some color about 2025, about our preliminary thoughts on next year. It's a little bit early to provide guidance. We will provide guidance as usual after Q4 earning call. What we can tell you today, again, is that we see strong demand in syringes in high-value, Nexa, and Alba, suitable for biologics, and this is a good tailwind. On the other side, we see some uncertainty about the timing of a recovery of the vials and the timing of the effect of the action we are taking for engineering. As Franco mentioned before, we see strong demand for our technology in engineering.

[Marco Dal Lago, CFO at Stevanato Group]

Unfortunately, we are struggling to complete the testing on some highly customized project, and this impairing a little bit our ability to bring on new contracts and advance on the projects. So, this is a little bit early to talk about specifically engineering for 2025.

[Franco Stevanato, CEO at Stevanato Group]

Paul, if I can further give you some more element. This complex line that Marco are referring are new technology that our bigger customer was, in particular, on the assembly technology and inspection, where the average lead time is up to 20-24 months. So we have faced now some challenges at the latest stage of a certain test at the end of May and June. It also is important to specify that this project are the first of a kind of machinery for our customer, that are part of our long-term multiple line achievement. So what you see, on one side, you see a big increase in demand on syringes, Nexa, on cartridges, EZ-fill, automatically, our same customers are asking to also to deliver new, high, sophisticated line for assembly and for inspection.

[Franco Stevanato, CEO at Stevanato Group]

These are the first line, and our organization, Denmark, is facing some temporary challenge, but under the new leadership of Ugo Gay, they already put in place all the action in order to recover and to be back on track in the next few quarters.

[Paul Knight, Managing Director and Equity Research Analyst at KeyBank]

And then second question is Latina, which seems to I know you had a lot of another opening down there recently. Who, what was the transfer of expansion was from what? Piombino Dese, or what, you know, can you just give us an update on Latina? It seems to be a lot bigger expansion than had been-

[Franco Stevanato, CEO at Stevanato Group]

Yes.

[Paul Knight, Managing Director and Equity Research Analyst at KeyBank]

-planned, two years ago.

[Franco Stevanato, CEO at Stevanato Group]

Yes, Paul. Practically, Latina was, we have decided that it became the second big hub in Europe in order to serve our customer for our Nexa ranges. And this is the reason why, by the way, if you compare Latina with Fishers, we are 2, 3 quarters ahead. Today, we have already some many customer, we are generating commercial revenue. Today, we one of our major anchor customer have decided to increase capacity in Latina for this new technology, for this cartridges ready to fill. You know that we are market leader on cartridges, both on cartridges, bulk, also in technology. Today, we see there is more and more demand from this cartridges ready to fill from all the bio customer, and particular, this big customer want to we have a big capacity in Europe, in particular, on the site of Latina.

[Franco Stevanato, CEO at Stevanato Group]

This is the reason for these further expansions.

[Paul Knight, Managing Director and Equity Research Analyst at KeyBank]

Okay, thanks.

[Operator]

The next question is from Matt Larew of William Blair. Please go ahead.

[Matt Larew, Partner and Senior Equity Research Analyst at William Blair]

Hi, good morning. You know, last quarter, when you took down guidance for destocking, you communicated that you were trying to be conservative there, and you did, you know, beat, I think, our expectations for the second quarter on BDS, and it sounds like you're maintaining that outlook largely for the year. Now that you've encountered issues in engineering, are you trying to take a similar approach now in terms of the way that you are communicating those challenges to investors?

[Marco Dal Lago, CFO at Stevanato Group]

Yeah, you mentioned, they are two very different reasons for adjusting the guidance. We recognize we had to change the guidance twice in a year, but again, for two very different reasons. BDS destocking is affecting all the industry, and at the beginning of the year, we didn't detect the drop down for about 40% year-over-year in our BDS demand, and this is the specific reason why we had to review the guidance in Q1. Engineering is a different situation, whereas Franco explained, we more than doubled the size of the business. We are taking some highly customized projects. A matter of fact, we are delaying some acceptance from customer because they are really specific projects and customized one. Matter of fact, we are spending more time to test the equipment.

[Marco Dal Lago, CFO at Stevanato Group]

We had to add more resources in May and June to complete the staff. So matter of fact, we are spending more time with more people on those projects, and this is affecting our profitability in the second quarter. At the same time, we took a conservative approach also in bringing in new customized projects, and this is the main reason why we are reviewing our guidance for fiscal 2024.

[Franco Stevanato, CEO at Stevanato Group]

And if, Matt, if I can give some more color to the answer of Marco. So from our perspective, if you're going to isolate these temporary challenges, we will expect that the effects from vial destocking will be behind us. Also, like Marco mentioned in his remarks, we'll gain leverage from the scaling of our new operation in Latin America and Fishers, and the engineering segment should return to profitable growth in the next quarter. So we are excited that this will give us good confidence in the future.

[Marco Dal Lago, CFO at Stevanato Group]

Matt, one clarification. We don't expect the engineering segment to return to profitable growth next quarter. It will be in the coming quarters.

[Franco Stevanato, CEO at Stevanato Group]

Sure.

[Matt Larew, Partner and Senior Equity Research Analyst at William Blair]

Okay. Okay, thank you. And then just, on CapEx, the-- took up the high end of the range there, I think, to EUR 335 million. This obviously was expected to be, another big year of CapEx following last year. You know, but just given, I think, Fishers validation may be a little bit ahead of, of at least Street expectations, could you just provide us with sort of an outlook on CapEx over the next several quarters here as, you know, starting to continue to fill out those facilities with, with lines?

[Marco Dal Lago, CFO at Stevanato Group]

Yes, we are on line with our CapEx plan for the year. So we reiterate our guidance for the year between EUR 300 million to EUR 335 million. So everything is going according to the plan, and we reiterate our guidance. It means that second half of the year will be slightly below first half of the year with respect of cash out, but we are not talking about big differences compared to the first half of the year.

[Matt Larew, Partner and Senior Equity Research Analyst at William Blair]

Okay, thanks.

[Operator]

The next question is from Michael Ryskin of Bank of America. Please go ahead.

[John Kim, SVP and Relationship Manager at Bank of America]

Hello, good afternoon. This is John Kim, on for Michael. Great to hear of the orders coming in in Latin America and elsewhere. You talked about the customers talking about the production planning coming in. Is that across the boards, as in all regions? And then, what sort of products can we expect to come after bulk vials? And if there's a timeline expectation for that destocking to happen, would appreciate those comments.

[Franco Stevanato, CEO at Stevanato Group]

So thank you for your question. We are still navigating through the effects of the market destocking. We see today positive signal, like I mentioned to you, in the market, with orders starting to materialize in certain smaller markets such as Latin America. In larger markets, we still expect a more gradual recovery, but our customers are sharing forecasts that point to improving demand, and they are beginning production planning. This reinforce our confidence that vial orders will begin to pick up at the tail end of 2024, starting from bulk vials. So we are starting to see an overall positive sign from the market.

[John Kim, SVP and Relationship Manager at Bank of America]

Great. Thank you for that. In the guide update today, you laid out for the fiscal 2024, that High-Value Solutions, now you expect that to take up 36%-39% of the total sales, and that's making progress towards your 2027 target. But 2Q is already 40%, so I'm wondering if that fiscal 2024 target could even be higher.

[Marco Dal Lago, CFO at Stevanato Group]

This is our guidance today about 2024, so we reiterate in absolute value that the revenue from high-value solutions, we can see strong demand, as mentioned, in high-value syringes. Compared to initial guidance, as mentioned, we have seen pronounced reduction in sterile vials, but all overall, we confirm our guidance in total numbers. Obviously, going down engineering, we are consequently increased the percentage on total revenue. About the midterm view, we feel confident to get to 40%-45% by 2027, with the growth in the coming years. Also, as mentioned by Franco, we see temporary the vials, the stocking, so we expect to restart growing in vials, both bulk and sterile. We expect also other product lines to ramp up, not only value products.

[John Kim, SVP and Relationship Manager at Bank of America]

All right. Thank you.

[Marco Dal Lago, CFO at Stevanato Group]

Welcome.

[Operator]

The next question is from Patrick Donnelly of Citi. Please go ahead.

[Patrick Donnelly, Managing Director and Equity Research at Citi]

Hey, guys. Thanks for taking the questions. I'll just ask you two upfront. Franco, maybe just quickly on the destocking piece, can you just talk about visibility, what you're hearing from customers, just expectations on that front as we work our way through the year? And then second, just on the China facility, how to think about the timing and the commitment to that region would be helpful. Thank you, guys.

[Lisa Miles, SVP of Investor Relations at Stevanato Group]

So just to clarify your question, Patrick, it was a little hard to hear you. Your first question was on destocking and asking about visibility into our customer forecast, and the second question related to China and the timing on China. Is that correct?

[Franco Stevanato, CEO at Stevanato Group]

Yes, you know.

[Lisa Miles, SVP of Investor Relations at Stevanato Group]

Okay, thanks.

[Franco Stevanato, CEO at Stevanato Group]

So regarding the stocking, just to give some number, the vial market, bulk vial market is a market that have a size around 13 billion vials per year consumption. These are numbers approximately pre-pandemic. We are starting to face some issue with the destocking in 2023, also this year. So practically, we are entering the second year where we are facing this destocking issue. Today, what do we see? That practically all our customers, international customer, regional customer, they build a huge inventory for COVID vials, also for all the other therapeutic drugs. Now, our customer are moving this situation of destocking. We are starting, like I mentioned before, to see, particularly in smaller customer, where they have more lean supply chain reactivation of order.

[Franco Stevanato, CEO at Stevanato Group]

What is more related to international customer, they are starting to they are still soft in the demand on 2024, but they're starting to discuss forecast for 2025. So this is the reason why we are starting to see all overall positive sign on the vial market. Regarding China, the factor. By the way, China, Asia Pacific for Stevanato is still will remain a strategic market because we see a very big opportunity, particularly in biosimilars, in the next year to come. It's also true that in Stevanato Group, we are very flexible in term of follow the demand, the request by our customers, and also where our customer is addressing the request, and our model to make investment are modular. So particular, one of our major anchor customer, they have just reallocated their needs from Asia.

[Franco Stevanato, CEO at Stevanato Group]

They've asked us to further enforce our capacity into the plants of Latina. This is the reason why we are partially reallocate our investment, we are increasing capacity in Italy. And also because what we, the capacity that we have in China today is sufficient to serve and satisfy the market.

[Operator]

The next question is from David Windley of Jefferies. Please go ahead.

[David Windley, Managing Director and Founding Member at Jefferies]

Hi, hopefully you can hear me. I wanted to ask, I'm trying to understand the guidance a little bit. From some scratch math I've done here, it looks like you need about 27% EBITDA margins in the second half from 21 in the first half, and then incremental margins of, you know, something in the mid-50s% to kind of hit this new midpoint of the range. And clearly with the, you know, the costs that you've incurred, the delays in projects or the complexity of some of these projects, your margins have been negatively affected. I mean, effectively, your incremental margins have been negative. Just wanted to understand how you see the progression from first half to second half. You know, are you taking costs out of the business?

[David Windley, Managing Director and Founding Member at Jefferies]

It sounds like you're actually investing into, but, but again, wondering if you're taking cost out of the business that would help to support those high incremental margins to get to the much higher EBITDA targets in the second half. Thanks.

[Marco Dal Lago, CFO at Stevanato Group]

Yes, thanks for the question, David. We see a path similar to last year with respect to growth sequential growth between Q2, Q3, and Q4. So basically, we need to repeat what we have done last year. Overall, let's say, we took the hit of the higher costs in Engineering second quarter. We expect to grow, particularly with the good mix in value products, especially syringes, and we can leverage the ramp-up in Latina. By the way, to give you more comfort on this, in the first half of the year, the ramp-up in Fishers and Latina was painful from the P&L perspective, because we have all the structure in place, we have quality in place, information technology, controlling, logistics planning, and we generated a small amount of revenue first half of the year.

[Marco Dal Lago, CFO at Stevanato Group]

Definitely, for the second part of the year, we plan to ramp up, significantly Latina and start generating some, commercial revenue in Fishers. So this is one of the driver of the growth, and, everything is embedded in our guidance, basically, to, to repeat what we have been able to do last year.

[Franco Stevanato, CEO at Stevanato Group]

David, if I can complement the answer of Marco. Also, we are making a lot of attention, and also under the leadership of Ugo Gay, this year, the new Chief Operating Officer, to make a lot of attention in making a lot of improvement in efficiency internally, in order to really to try to maximize and bring the full plant system around the group, the full function, it will become extremely efficient. So this is an exercise that we are starting to put a lot of attention. By the way, it will be an ongoing activity also for the next year.

[David Windley, Managing Director and Founding Member at Jefferies]

Got it. Maybe a slight twist on the question: Would you be willing to give us some sense of split? I don't think you did that in the updated guidance. I'm sorry if I missed it, but the sense of split of revenue contribution for the year between BDS and engineering.

[Marco Dal Lago, CFO at Stevanato Group]

Yes, we, let's say, are in line with current consensus with respect of BDS, around EUR 930 million. That means, mid-single digit growth in BDS. In engineering, we mentioned that we expect a decline between 15%-20% compared to last year.

[David Windley, Managing Director and Founding Member at Jefferies]

Okay. And then if I could ask one last one that's more long term. In thinking about your longer term margin targets, and the change, so we've kind of come to understand that high value vials are quite profitable for you. High vials, I think you said vials maybe overall were down 40%. Is the achievement of your longer term targets dependent on vials recovering the same percentage of your business that they were, say, a year or two years ago?

[Franco Stevanato, CEO at Stevanato Group]

David, today, once we will scale up our two new greenfield plants, in particular, Latina and Fishers, we are confident that we'll continue to really to match our adjusted EBITDA target that we share on 2027, about 30%, and to stay in the high value range of high value solution product between 40%-45%. This is where we are target. Today, we are growing a lot on syringes Nexa. We are growing. We have a good pipeline on Alba technology. We have a lot of mid, small program on syringes with bypass. Also, we have a big program on cartridges say, to fill with some anchor customer, but we see more and more a trend on the industry that cartridges will turn into a ready-to-fill. So overall, we are confident that, on the number that we share with you.

[David Windley, Managing Director and Founding Member at Jefferies]

Okay. Thank you.

[Marco Dal Lago, CFO at Stevanato Group]

So, actually, in the medium term, we see disappearing the bias, the destocking. We are taking action to be back on track for the engineering, and compared to the capital markets, they will see reiterate strong demand in syringes, as Franco was saying, the conversion, the acceleration of the conversion of cartridges to sterile. So we are offsetting some risk also in fill vials, but we are confident to drive the growth the same direction.

[David Windley, Managing Director and Founding Member at Jefferies]

Thank you.

[Franco Stevanato, CEO at Stevanato Group]

Welcome.

[Operator]

The next question is from Larry Solow of CJS Securities. Please go ahead.

[Larry Solow, Managing Director and Partner at CJS Securities]

Great, thank you. A lot of my questions have just to follow up on David's question on the vials. So it does feel like you've seen some positive signs and maybe you were hopeful for some of those positive signs that we're starting to see, but it also feels like you're not maybe as confident or certain that we'd get a recovery in 2025, maybe some recovery. But is it fair to say that maybe you're a little bit less confident, or you just don't want to necessarily stick your head out, neck out and make a guide for 2025 yet?

[Larry Solow, Managing Director and Partner at CJS Securities]

On the same respect, though, it doesn't feel like your confidence has diminished at all in the overall potential of vials, and that you will get back to levels you thought you would get to, maybe just a little bit further out. Is that kind of fair to sum that up that way?

[Marco Dal Lago, CFO at Stevanato Group]

So on that, we are confident, the vial market is there. It's a necessary format for the industry. For 2025-

[Larry Solow, Managing Director and Partner at CJS Securities]

Right.

[Marco Dal Lago, CFO at Stevanato Group]

There's uncertainty about the timing of the inflection point, because we are monitoring it, but it's a little bit early to say that January second will be at the level of we expect.

[Franco Stevanato, CEO at Stevanato Group]

Today, we have a constant dialogue with our customers because we are involved with our customers, not only in bio, in many programs, we can move to syringes, on cartridges, DDS program. So today, with that, we have an intense discussion, their supply chain level, because also is one of their main concern to reduce, to normalize the level of stock. So all overall, the trend is positive. We see positive sign in small customer, like I mentioned before, that they're going back to normalize. The bigger customer, more when they have complex supply chain, there are multiple site, this is something that we are more prudent. But there are a constant and intimate discussion that we have practically every week with our customer today.

[Larry Solow, Managing Director and Partner at CJS Securities]

And you mentioned some stuff on the... a little update on the cartridge market. Can you just give us any more color? I know manufacturing capabilities, capacity had been built out a little bit by some of your customers last year, but are we seeing some destocking there, too? It's a smaller market, so probably not. But could you just give us anything, anything there, any update there?

[Marco Dal Lago, CFO at Stevanato Group]

Larry, just to clarify the question, you're asking if we're also seeing destocking effects in cartridges?

[Larry Solow, Managing Director and Partner at CJS Securities]

Or just any update. Not destocking, just any update qualitatively, you know, in terms of, you know.

[Franco Stevanato, CEO at Stevanato Group]

We don't have no sign for change in demand with our customer. Most, we see a strong demand on Nexa syringes, and we see an increase in demand ofcartridges ready-to-fill. For sure, on cartridge to fill, we are put in place high-speed line, that this is something that will generate more big revenue in the later stage, because now our engineering division is in a complex phase to build the technology for internal user. But all overall, the demand is robust, and in biologics is really strong in this moment.

[Larry Solow, Managing Director and Partner at CJS Securities]

If I may just quick last question, just on cash flow expectations. I think your cash balance was about EUR 75 million currently. Looks like I think... So can you just give us any thoughts on that in light of your, your CapEx plans and, will you need to raise any more, maybe, you know, any more financing this year? Any thoughts on that? Thank you.

[Franco Stevanato, CEO at Stevanato Group]

So as mentioned, we have EUR 78 million of cash on hand. We have availability on credit lines, and we are, we have positive free cash flow from cash flow from operations. So we believe we are in the position to finance the growth, at least for the next 12 months. And then, you know, looking ahead, we are still working on the plan for 2025. We are working on the budget to see a detailed plan for CapEx in 2025. We still have a balance sheet with a small leverage, so we can leverage the opportunity to further invest in high-value products, obviously, provided the internal rate of return is higher than our cost of capital.

[Larry Solow, Managing Director and Partner at CJS Securities]

Okay, great. Thank you very much.

[Operator]

The next question is from Dan Leonard of UBS. Please go ahead.

[Dan Leonard, Senior Analyst at UBS]

Thank you. You made a comment that you're seeing an increasing shift to upgrade infrastructure to better align with Annex 1 requirements. Could you elaborate a bit more on that?

[Franco Stevanato, CEO at Stevanato Group]

Yes. Practically, Annex 1 is a new regulation that practically, all overall, is asking all the pharmaceutical industry to try to put in place some processes that avoid any type of risk to put in danger the sterility of their product. So practically, which is the answer of Stevanato Group on this? Our EZ-fill configuration, because it's going to be serving a no glass-to-glass configuration to our customer, is helping really to avoid any type of generation of particle. It can be particle from glass, delamination, or some particle that came from during the washing, sterilization, and heating program. So this is the reason why we think that in the medium term, the adoption of EZ-fill vial can help Stevanato in order to boost our revenue.

[Franco Stevanato, CEO at Stevanato Group]

On top of this, if you're moving to our engineering segment, is going to require more sophisticated, special line with a particular artificial intelligence that can further detect and improve the process of the pharma company. Overall, Annex 1 in the medium term, we think that will be favorable for Stevanato Group.

[Dan Leonard, Senior Analyst at UBS]

Sure. Thank you. And then, as a follow-up, you mentioned that some of the CapEx shift from China to Latina was the result of a regional capacity preference change from an anchor customer. Could you discuss that a bit more? Is that due to concerns from that customer about Biosecure or anything specific you could point to? Thank you.

[Franco Stevanato, CEO at Stevanato Group]

I'm sorry if we don't have the internal detail from the customer. We know that usually our global customer, they want to secure a global footprint, and this is why most probably have decided to make some modification from one region to another one, but we don't have more element that in our hand.

[Dan Leonard, Senior Analyst at UBS]

Okay. Thanks, Franco.

[Franco Stevanato, CEO at Stevanato Group]

You're welcome.

[Operator]

The next question is from Curtis Moiles of BNP Paribas Exane. Please go ahead.

[Curtis Moiles, Equity Research Analyst at BNP Paribas Exane]

Hi, thank you for taking my questions. First one, I just wanted to come back on the gross margin for the Engineering segment. I think I heard you say that you took kind of the biggest impact of the higher cost in Q2. Does that mean that in the second half of the year, we should see that gross margin bounce back to a more normalized level, or what are you expecting there?

[Franco Stevanato, CEO at Stevanato Group]

Back to sequential improvement for the projects in engineering, we took the hit in the second quarter on those big projects. Nevertheless, we expect still some quarters before going back to the normal profitability in engineering. We still have to navigate and complete the project and satisfy our customers. And to do that, we need to put more effort and more people on the field in order to satisfy the customers. Today, if I can also give some operational clarification, under the leadership of Ugo Gay, the new Chief Operating Officer, and not only Ugo, also Raffaele Pace, that most of you met in the past event. We are really...

[Franco Stevanato, CEO at Stevanato Group]

With our backlog, we are building a clear program in order really to review all our footprint, to optimize all our factory, even more to prepare the engineering division for the next future growth with our customer. So these are all the action that we have put in place. There is a clear governance, in particular, starting from Denmark, and we count to have the first result in the next few quarters in front of us.

[Curtis Moiles, Equity Research Analyst at BNP Paribas Exane]

Okay, that's helpful. Thank you. And then just second question, again, you were talking about earlier how you were postponing the expansion in China and shifting it over to Latina, I think. Does that kind of indicate to us that you're going to come in at the lower end of the full-year CapEx range of EUR 300-335 million, or is nothing really changing there?

[Franco Stevanato, CEO at Stevanato Group]

It's not, it's not changing. The guidance for CapEx, we expect, between EUR 300 million and EUR 335 million. It's not making a big difference in 2024. It's more, an impact that we will be considered for 2025 guidance.

[Curtis Moiles, Equity Research Analyst at BNP Paribas Exane]

Okay. Appreciate it. Thank you.

[Franco Stevanato, CEO at Stevanato Group]

If I can say maybe, if there is no more questions, some final word. Today, all the organization is squarely focused to face these temporary challenges, but also in the meantime, also, we are exciting the company because we are also working for the future. So there is a high concentration and motivation in the company to deliver, in particular with these new greenfield plans, this amazing program that we have around cartridge, safety shield And today, all the organization, no matter if it's in Europe, United States, this is the big goal: to deliver the long-term agreement, business plan that we have with the community, with our customer. This is the only thing that we have tried to do every day.

[Operator]

As a reminder, if you wish to register for a question, please press star and one on your telephone. For any further questions, please press star and one on your telephone. The next question is a follow-up from Paul Knight of KeyBank. Please go ahead.

[Paul Knight, Managing Director at KeyBank]

Hi, Marco or Franco. On the third-party intercompany line item, what's in that? It seems to have obviously been huge as well. Is that internal supply of inspection systems for yourself? What is that exactly?

[Franco Stevanato, CEO at Stevanato Group]

Mainly, Paul, we have there the glass forming machines that our Engineering segment is providing to Fishers and Latina to expand our capacity.

[Paul Knight, Managing Director at KeyBank]

Okay. Completely makes sense. Thank you.

[Franco Stevanato, CEO at Stevanato Group]

Welcome.

[Paul Knight, Managing Director at KeyBank]

Welcome.

[Operator]

That was the last question. Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.

Participants

Executives

• Franco Stevanato, CEO
• Lisa Miles, SVP of Investor Relations
• Marco Dal Lago, CFO

Analysts

• Curtis Moiles, Equity Research Analyst at BNP Paribas Exane
• Dan Leonard, Senior Analyst at UBS
• David Windley, Managing Director and Founding Member at Jefferies
• Jacob Johnson, Managing Director, Research Analyst at Stephens
• John Kim, SVP and Relationship Manager at Bank of America
• Larry Solow, Managing Director and Partner at CJS Securities
• Matt Larew, Partner and Senior Equity Research Analyst at William Blair
• Patrick Donnelly, Managing Director and Equity Research at Citi
• Paul Knight, Managing Director and Equity Research Analyst at KeyBank
• Paul Knight, Managing Director at KeyBank