Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue increased by 2% to EUR260 million, driven by 9% growth in the biopharmaceutical and diagnostic solutions (BDS) segment.
- High-value solutions grew by 23% and represented approximately 40% of total revenue in the quarter.
- Successful completion of the Piombino Dese plant expansion and ongoing multi-ramp-up of expansion projects in Fisher, Indiana, and Latina, Italy.
- Positive signals in the market with orders starting to materialize in smaller markets such as Latin America.
- Strong demand for high-performance syringes and high-value solutions, particularly in biologics, which hit a record high of 35% of BDS revenues in the first half of 2024.
Negative Points
- Margins fell short in the engineering segment due to delays and higher costs on certain projects.
- Increased expenses related to actions taken to address delays in the engineering segment.
- Gross profit margin decreased to 26% due to higher costs in the engineering segment, vial destocking, and inefficiencies tied to the ramp-up phase of new facilities.
- Operating profit margin declined to 10.8%, and on an adjusted basis, it was 12.8%.
- Negative free cash flow of EUR46.1 million in the second quarter due to high capital expenditures and increased inventory levels.
Q & A Highlights
Q: Maybe just on the engineering business, this business grew rapidly the past few years. We've heard 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?
A: This is Franco speaking. So today, in order to put in context the engineering division, we more than doubled 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 was 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 project 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 next few quarters. And by the way, the portfolio of order in the engineering division is solid, is strong with our big customer in particular in biologics.
Q: Got it. 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?
A: Correct, Jacob. It's a validation of future progress 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 and audit with all our US-based customers.
Marco Lago: On the guidance, the revenue are embedded in our guidance we provided.
Q: Franco, do you expect engineering system to grow in 2025? I mean, obviously, this is a reorg year.
A: We provided some color -- Marco speaking, sorry, Paul. We provide 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 earnings call. What we can tell you today, again, is that we see strong demand in syringes in a value of Nexa and Alba suitable for biologics. And this is a good tailwind. On the other side, we see some uncertainty about the timing of recovery of the vials and the timing of the effect of the actions we are taking for engineering. As Franco mentioned before, we see strong demand for our technology in engineering. Unfortunately, we are struggling to complete the testing on some highly customized project, and this is 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: Paul, if I can further give some more element, this complex line-up Marco is referring are new technology that our big customers was in particular on assembling technology on inspection where the average lead time is up to 20, 24 months. So we have faced now some challenges at the late stage of acceptance 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 equipment. So what do you see? One side, you see a big increase in demand on syringes, Nexa, and on cartridges ready to fill automatically. Our same customers are asking also to deliver new high sophisticated line for assembly and for inspection. These are the first line in our organization. Denmark is facing some temporary challenge, but under the new leadership of Ugo Gay, we already put in place all the action in order to recover and to be back on track in the next few quarters.
Q: Last quarter when you took down guidance for destocking, you communicated that you were trying to be conservative there, and you did 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 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?
A: Yeah, you mentioned they are two very different reasons for adjusting the guidance. We recognize we have to change the guidance twice in a year but, again, for two very different reasons. Vials 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 vials demand, and this is the specific reason why we had to review the guidance in Q1. Engineering is a different where, as Franco explained, we more than doubled the size of the business. We are taking some highly customized projects. And matter of fact, we are delaying some acceptance from customers because they are really specific projects and customized ones. Matter of fact, we are spending more time to test the equipment. We had to add more resources in May and June to complete the staff work. 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: 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 that we will gain leverage from the scale-up of our new operation in Latina and Fishers, and engineering segment should return to profitable growth in the next quarter. So we are excited that this can give us confidence in the future.
Lisa Miles: Matt, one clarification, we don't expect the engineering segment to return to profitable growth next quarter. It will be in the coming quarters.
Q: And then just on CapEx, the -- took up the high end of the range there, I think the EUR335 million. This obviously is expected to be another big year of CapEx following last year. But just given, I think, Fishers validation that you're a little bit ahead 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're starting to continue to fill out those facilities with lines?
A: Yes, we are on line with our CapEx plan for the year. So we reiterate our
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
