Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Stevanato Group First Quarter 2024 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Ms. Lisa Miles, Senior Vice president, Investor Relations. Please go ahead, madam.

Good morning, and thanks for joining us. With me today is Franco Stevanato, Executive Chairman; Franco 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 Securities and Exchange Commission on March 7, 2024. Please take a moment to read our Safe Harbor statements included in the front of the presentation and also 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 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 to Franco Stevanato for opening remarks.

Thank you, Lisa, and thanks for joining us. Today, we will review our first quarter performance, address our guidance change, and provide an update on our markets and the dynamics we are seeing today. While first quarter results did not meet our expectations, the fundamentals of our business have not changed, and the demand landscape remains robust. We are tackling 2 challenges today, and our #1 priority is execution. First, the impact from the industry-wide temporary destocking was more pronounced than previously expected, especially in the more accretive EZ-fill vials. Customers are still working down excess inventories that were stockpiled during the pandemic. This has resulted in a temporary softening in demand for both bulk and ready-to-use vials. But, we believe once the market rebounds that vials will return to normalized market growth rates. Second, in the Engineering business, we enjoyed a period of record orders in the second half of 2022. This large volume of work and long lead times for components put stress on our organization last year. But, while external factors played a role, our execution simply could have been better. We've taken many actions over the last year. And we believe these steps will help us achieve a more optimized operational structure to maximize efficiencies to secure the success of projects going forward. I would like to take a moment to address our updated guidance. The temporary destocking is the main factor in our guidance change. Our updated guidance also assumes a recent postponement of expected orders for high-value solutions for a large customer that were forecasted to be shipped in 2024. This was due to a change in the customer's commercialization timeframes. But nevertheless, we have removed the forecasted orders from our guidance. Despite these factors, we remain confident about our long-term prospects, and we remain on the right path to achieve our near-term targets in 2027. Our unique value proposition of integrated offerings ideally positions Stevanato Group to capitalize on favorable secular tailwinds such as aging populations with more complex health conditions; pharma innovation, particularly in sensitive biologics; and the trend towards the self-administration of medicines. We operate in growing end markets, and we are well positioned in the fastest growing biologics segment. We believe we have a leading presence in GLP1s, underpinned by long-term commercial contracts. And we see many opportunities primarily in biologics over the next several years. Above all, our global footprint, differentiated product portfolio and integrated end-to-end solutions offer customers a unique value proposition. This provides us with sustainable competitive advantages. I will now hand the call over to Marco.

Thanks, Franco. Before I begin, I want to clarify that all comparisons refer to the first quarter of 2023, unless otherwise specified. Starting on Page 7, for the first quarter of 2024, revenue decreased 1%, and 40 basis points on a constant currency basis, to EUR 236 million. The Biopharmaceutical and Diagnostic Solutions Segment grew 2%, which partially offset the expected decline in the Engineering Segment. The revenue decrease in the first quarter was mainly driven by lower revenue related to glass vials in the BDS Segment due to the industry-wide destocking, which we believe is transitory. Our product diversity helped expand our mix of high-value solutions, which represented 37% of total revenue in the first quarter. However, the product mix within high-value solutions was less accretive compared with the same period last year, mainly due to lower volumes from EZ-fill vials. For the first quarter of 2024, the lower revenue from EZ-fill vials was the largest factor in the gross profit margin decrease to 26.4%. In addition, the underutilization on vial lines, lower gross profit from the Engineering Segment, temporary inefficiencies in our new manufacturing plants and higher depreciation also impacted gross profit margin, but to a much lesser extent. Lastly, the prior-year period also benefitted from government grants that helped offset the spike in utility costs that did not repeat in the first quarter of 2024. This led to an operating profit margin of 10.7%. And on an adjusted basis, operating profit margin was 12.3%. For the first quarter of 2024, net profit totaled EUR 18.8 million, and diluted earnings per share were EUR 0.07. On an adjusted basis, net profit was EUR 21.5 million, and adjusted diluted earnings per share were EUR 0.08. Adjusted EBITDA was EUR 50.6 million, and adjusted EBITDA margin was 21.4%. Moving to…

Thank you, Marco. Starting on Slide 12, over the last several weeks, we have spent a lot of time with our customers as they continue to manage excess vial inventories. As Marco noted, we now anticipate a slower recovery in vials, particularly EZ-fill vials, which will unfavorably impact our mix of high-value solutions in 2024. It's important to remember that the ready-to-use vials are currently a small portion of the market, and the vast majority of vials are in bulk configurations. We are the market leader in ready-to-use vials, and the temporary imbalance of supply and demand is having a pronounced impact for us, given our significant position in the market, coupled with the low volumes in the market today. In the near-term, we are carefully managing costs, and we have taken many actions on the labor side, including redeploying vial production staff, and improving efficiencies on maintenance activities, while some vial lines are idle. At the same time, we expect to retain most of the staff who work on our vial production lines, despite the temporary underutilization. We believe this approach best positions us to be prepared for the recovery, especially considering the time it takes to recruit, hire and train new staff to achieve full productivity. We believe it's the right thing to do for our business, and we do not want to take short-term actions that might compromise our future growth. Turning to the Engineering Segment, the actions that we initiated last year are just starting to yield operational improvements in the business. The combination of additional resources, ongoing optimization of our industrial footprint and streamlining internal processes are helping to improve the overall health of the business. These actions are ongoing, but improvements will take time. We expect that in the long run, they will drive…

Thank you, Franco. In closing, Stevanato Group has cemented its leadership position as a mission-critical partner in the pharmaceutical supply chain. We have experienced significant growth, and we have been building the organization to support our long-term objectives. Our #1 priority in 2024 is execution. We are laser focused on ramping up our new capacity to meet rising customer demand for high-value solutions such as our Nexa syringes and EZ-fill cartridges. We are also strengthening our processes and driving efficiencies across our global operations to best manage our future growth. These are exciting times. We offer a unique value proposition of integrated solutions and differentiated products that resonate with customers. We operate in attractive end markets with long secular tailwinds. These factors favorably position us to drive durable organic growth, expand margins and deliver long-term shareholder value. Operator, let's open it up for questions.

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

Great. I want to dig in first on the inventory comments, obviously. It's something that's been going on in the industry for a number of months now. I wouldn't say it's exactly a surprise. But can you give us a little bit more color on what changed as you went through the quarter? If you look back to where you were in March versus where you are now, in early March when you reported 4Q and initially guided for the year, you provided some color on destocking, but clearly, you underestimated the problem. So is this something that changed during the quarter? Is this something where you've got better visibility in customers? And I'll tack on the follow-on immediately after that is, the new outlook that you're giving, what gives you confidence that destocking will fade as you go through the year? Is there any level of conversations you [ can have ] with customers or anything like that point to the improved timelines?

Thanks, Mike. Just to make sure we've captured all of your questions, first on what's changed since our last earnings call on destocking. And secondly, the confidence in the fact that destocking will continue to fade and we'll see that recovery later in the year on the new outlook. So I'm going to hand that over to Franco Stevanato to begin.

Yes. Thank you. So the pandemic presented extraordinary challenge across our industry, and we are still on the path to normalization, but the market is still choppy today. First, the impact from destocking was simply more pronounced than previously expected. Frankly, the pandemic created a fast acceleration of vial demand as a customer stockpile inventory. We previously anticipated a slower path to normalization. But instead, we experienced a more rapid decline in vial demand due to excess inventory. In this context, customers and us, by consequence, faced challenges in anticipating and predicting the right timing and intensity of [ the doubt ]. This caught us partially off guard. This, at the end of the game, is a temporary dynamic that is impacting 2024. Once completely over, we anticipate that we'll return to pre-pandemic market growth rate. This includes low-single digit for vial bulk and double-digit for ready-to vial.

And Mike's follow-up is the confidence that we see in the fading of the destocking throughout the year.

Yes. During this year, as said by Franco, we see a more difficult condition than previously anticipated. We don't see, during this year, an increase in the following quarters with respect of vials and EZ-fill vials. As mentioned during the commentary, we now expect orders starting increasing towards the end of the year with vials bulk starting first and immediately after the EZ-fill vials. We mentioned also the fact that we went down 43% year-over-year in vials. And as you said, this headwind is stronger than what we anticipated. We expected a lower reduction in vials, but matter of fact, this is what we can see today, and this is the main difference compared to 2 months ago.

Correct. If I can further implement, Michael, we have a very close and intense relationship with our customer, in particular for the supply chain, what is related to research and development and engineering department. And from one hand, in 2024, we see the customer is looking really to bring the inventory back to the original scenario towards pre-pandemic. In parallel, we are starting to see more and more of our big customers [ talking ] to renew our long-term contract for vials starting from 2025. This is the reason why we are going to see that this temporary destocking that was more pronounced than previously expected is going to be closed at the end of 2024.

The next question is from Paul Knight with KeyBanc.

First question is, I would expect that Novo or Catalent site in Anagni to expand quite a bit. Would you be involved in that because you're so nearby in Latina in terms of -- have you historically been a provider for that site in that region?

Yes, Paul, thank you for the question. Obviously, we can repeat that our CapEx decision and plans are not related to single customer, that we are addressing mostly biologics space, where there is a good growth for -- because of the success of some treatments. We cannot comment, obviously, in terms of any relationship we have with single customers. But we can confirm also that the view about the utilization of our new investment is very clear, and our capacity is almost taken for very precise ideas. In terms of the investment will give us the possibility to have more high-value solutions, both in syringes, and even important, the growth in the EZ-fill cartridges that is much more than expected at the time of our IPO, to be candid.

Yes. And then, the single customer delay, is it a delay in clinical trial success? Is it a delay in their other CapEx that they're adding? Could you give a little color on what's behind this one customer delay?

As for our understanding, is a change in their planning for the commercialization of some drugs in the biological space that we are involved in with our high-value solutions. We are not talking about any cancellation of committed orders. We are just talking about the change in our forecast, mostly in timing. So we expect to have some news in the near future with the customer. We continue to monitor with them the situation. In the meantime, obviously, we will have time to backfill the capacity to expand our business following other opportunities.

Can I squeeze in a last one? What's your capacity utilization rate right now, Franco?

That is strongly dependent on product line by product line. Obviously, it's clear that is not the best in vials, but we are under pressure to continue to serve our customer with the syringes with all the most innovative solution we are bringing to the market. So the rate of utilization is in the good or beyond the good standards that we expect.

The next question is from Patrick Donnelly with Citi.

Maybe just a follow-up on that large customer postponement. Can you talk about, I guess, the visibility into this order? Is there any chance it materializes this year? It doesn't sound like it. And if not, does that show up next year? Could that actually lead '25 growth above trend? Just how do you think about that order and when it shows up and what it means for numbers?

As we put and embedded in our guidance, we don't expect a recovery -- significant recovery for the same volume this year. We are talking about high-value solutions, mostly syringes. So we expect to follow the trend of growth in this space, not only because of this single opportunity, but for many others. The time to react in this specific case is also impacted by the longer lead time to start a different production because of we have to order the proper components, the proper tubing and then to plan the production, execute production, including the final sterilization. So it's a matter of time more than of the visibility opportunity. Timing of execution cannot allow us to react in a very, very short time.

Okay. That's helpful. And then, Marco, maybe just in terms of the cadence of the year, can you help us think about 2Q, what that looks like? And just trying to figure out that 2H ramp and how to get comfortable with it. So again, if there's any way you can kind of frame up the 2Q numbers, that would be certainly helpful.

Yes. We expect that revenue will increase incrementally quarter-by-quarter throughout the year. We still anticipate the second half of 2024 will be stronger than the first half because the challenges that we mentioned today, we expect, will persist in the second quarter. We still anticipate the second quarter will be largely in line with the prior year, so growing compared to Q1, but still not growing compared to the prior year, largely in line. And for the year, we expect -- for the BDS Segment, we expect a mid-single-digit to high-single-digit growth, driven by syringes that are still very strong. We -- in first quarter, we have been able to offset the 43% drop in vials with syringes that are growing in line with our expectations. And our model now assumes a mid-single-digit decline in Engineering business for the year. So this is the kind of color we can provide today that is based on the visibility we have and is based also on the fact that we are installing more capacity in syringes throughout the year.

No, that's helpful. I appreciate it.

The next question is from Matt Larew with William Blair.

Sam Martin on for William Blair on behalf of Matt Larew. So when I think about the large customer delaying in order, is there any way you can somewhat kind of quantify the impact that had on the reduction to the guide? And then, when we think about destocking accelerating or really even spreading to EZ-fill vials, can you speak about when you first noticed that? You held your Q1 call, I think, in early March. And then, can -- or earlier mid-March, and then can you speak to really when you notice the -- it spreading to EZ-fill vials are accelerating past your expectations?

Yes. Our guidance is assuming now a gap compared to prior guidance of approximately EUR 55 million. About the gap, about 65% of the gap is related to vials with more pronounced gap on EZ-fill vials in this period of time. The remaining 25% is associated to the large order we were mentioning and 10% is related to Engineering. So this is the breakdown of the delta we assume today based on, again, the visibility we have, [ and review ] guidance for those 3 reasons.

And Sam, I apologize. Can you please repeat your second -- the second part of your question? We missed that.

No, you answered -- sorry, just really when I think about kind of when you first noticed destocking in vials accelerating to EZ-fill, when did you really notice that? Was it late March? Was it over the course of April? Just kind of when did it first start to become apparent that destocking was going to be worse and more pronounced than you thought?

Basically, 2 months ago, we were assuming a situation similar to Q4 and beginning of the year. In reality, in Q1, revenues and order went down more than our expectation. And we don't have today clear signal of a different situation in the following quarters throughout the year. So we are taking an approach with vials in line with the new situation, new compared to Q4 and compared to the beginning of the year. To give you even more color, we went down quite significantly in 2023 in vials. We did not expect such a strong headwind to further decline the level of market demand in 2024. That is what we are now putting our guidance for the rest of the year.

The next question is from Remmers Tucker with Jefferies.

Can you guys hear me alright?

Tucker, yes, we can hear you [indiscernible].

Great. The first kind of question I had was on the margin impacts. Can you kind of divide between the mix of lower absorption -- sorry, divide between mix and lower absorption? You said, [ 15% growth ] in EPS. That seems like it would be a benefit to mix, but we didn't really see that. So can you kind of break down just the mix and absorption pieces in the margin?

Yes, of course. I'll start with the mix. First of all, it's good. We are shifting syringes more and more toward high-value products. This is the main driver for increasing the share of high-value products. Within high-value products, on the other side, we are, as you know, market leader in sterile vials, and this is a very accretive product for us. And the sharp decline in EZ-fill vials is what impacted the most the margin, so a mix effect within the mix of high-value products. Second reason is, as mentioned, the underutilization we have in bulk vials line, mainly because this is where we have more quantity and fixed cost compared with the other lines. And so, the impact has been significant also there. In first quarter, we had higher depreciation, as you can see from the number in the range of 150 basis points more. So, the combination of this factor will more than offset the mix shift toward high-value products in general.

Got you. And if I can get one more in, so what were the temporary inefficiencies in Italy, in particular, but kind of in both Fishers and Italy?

Yes, it's more in Italy, of course, because today, the most important factory for EZ-fill is still in Italy. Obviously Fishers, we are in a ramp-up phase. But yes, the short answer is, yes.

The next question is from Larry Solow with CJS Securities.

This is Will on for Larry Solow. I understand today's revision is related to a temporary slowdown in market and widespread inventory destocking. But can you update us on the competitive environment in ready-to-use products?

Yes. In terms of -- I'll start answering it from vials. We maintain our leadership position in ready-to-use vial. Our view about expansion of capacity in ready-to vials in the mid to long run is unchanged. Obviously, it takes time because we are talking about the conversion of a market from vial configuration to ready-to-use configuration. So it's much more important for us to look at the mid to long run than to a single quarter or a single year volume. But the outlook on the adoption of the ready-to-use configuration, not only in vials, but also in cartridges, as I mentioned before, is more important -- very important for us.

Alright. Great. And then, just one more. There's a lot of talk of tightening regulations on drug packaging quality and adoption of high-value solutions and services for not only new drugs, but conversion on older legacy pharmaceuticals. Have you seen increased customer interest on this front?

Yes, sure. There is some regulation that are becoming stricter and stricter. I can mention the Annex I that are pushing customers to adopt the more stricter rules about particle contamination. And ready-to-use vials and cartridges are the right answer to these needs in the current configuration and even more when we will have the commercial volume for the new generation of the same products. So it's one of the most important driver for the adoption for sure, that is on top of the other benefits we deliver to customers in terms of total cost of ownership reduction and flexibility. That is something that is very important for our customer.

And just to add one comment on that, as we discussed at our Capital Markets Day, we are seeing this adoption, and we can see it in the infrastructure and the industry, particularly as it relates to fill and finish lines capable of processing ready-to-use containers. So we see that as an important leading indicator as well as Annex I that will further enable that adoption as we move forward.

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

So you, in the BDS Segment, had commented that you're seeing strong demand for syringes. I just wanted to check, can you give a little bit of color around the demand that you're seeing for the cartridges as well?

You know that we are a market leader in cartridges since many years because the cartridges are the containment solution for pen injectors. So the growth of, generally speaking, the self-administration and even more the expected growth in pen injectors is driving volume for the future. In this space, the adoption of higher-quality standards and the protection of quality that is more pronounced when they use ready-to-use configuration is accelerating the demand of such containment solution in the market. So our CapEx are really in line with these trends, and we expect to take opportunities mostly in biologics because of the quality of our containment solution and because of our ability to serve them in ready-to-use configuration. That is also linked to the positive impact in the business we have from the same trends in Engineering for our assembly lines and visual inspection systems.

And if I could just add another one on the Engineering Segment, you had previously mentioned that there were long lead times for electronic components. I'm just curious, have you seen any improvement there? Or do you have a timeline of when that will be kind of normalized?

The comments of Franco before was mostly related to what happened in 2022. Now the situation is much more normalized in terms of reliability of the supply. There are still lead times that are longer than 5 years ago. What is now needed to be ordered 2 months in advance, a few years ago was out-of-the-shelf supply. But now we adjusted our planning to the new situation. And so, we are dealing with the tail of what happened 1 year ago or more.

[Operator Instructions] Ms. Miles, gentlemen, there are no more questions registered at this time. Floor is back to management for any closing remarks.

Thank you. Franco Stevanato will add some closing remarks.

Thank you, Lisa. So despite this near-term headwind that we are facing in 2024 for vial, that is more pronounced than what was expected, what for me is extremely important to reassure all of you that our strategy is extremely solid. We are confident in our future. We are so proud and honored to invest in these new greenfield plants because we are behind big customer program, in particular, for syringes, Nexa, EZ-fill cartridges, and we are today laser focused to execute. Nothing changed on our strategy to deliver to our customers a high-value solution program for them. So today, the organization in a humble approach is going to more and more reinforce attention on execution and efficiency in order to deliver what we presented during the Capital Market Day in New York. Thank you.

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