Stevanato Group - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good afternoon, this is the Chorus Call conference operator. Welcome and thank you for joining the Stevanato Group First Quarter 2025 Results Conference 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, Madam.

Lisa Miles (SVP Investor Relations)

Good morning, and thank you for joining us. With me today are Franco Stevanato, Chief Executive Officer, and Marco Dal Lago, Chief Financial Officer. A presentation to accompany today's results is available on the Investor Relations page of our website under the Financial Results tab. As a reminder, some statements being made today are forward-looking and based on current expectations. Actual results may differ materially due to risks outlined in item 3D, risk factors, of our most recent annual report on Form 20-F filed with the SEC. Please review the Safe Harbor Statement included at the beginning of today's presentation and in our press release. The company undertakes no obligation to revise or update these forward-looking statements except as required by law. Today's presentation may include non-GAAP financial information.

Management uses these measures internally to assess performance and believe they may be helpful for investors in evaluating the quality of our financial results, identifying trends in our performance, and providing meaningful period-to-period comparisons. For reconciliation of these non-GAAP measures, please refer to the company's most recent earnings press release. With that, I'll hand the call over to Franco Stevanato for his opening remarks.

Franco Stevanato (CEO)

Thank you, Lisa, and thanks for joining us. Today, we review our first quarter performance, share an update on our investment projects, and discuss the current environment. We started fiscal 2025 with strong momentum in the first quarter, highlighted by 9% revenue growth and a step-up in gross profit margin compared to last year. Our first quarter financial results exceeded our expectations, driven by strong operational delivery in the biopharmaceutical and diagnostic solution segment. This helped offset the anticipated soft performance in the engineering segment, as we continue to execute our business optimization plan. This solid performance in the BDS segment was driven by the expected improvements at our Latina and Fishers facilities, as our capacity expansion projects started to scale volumes and revenue, and a favorable mix of high-value solutions, including a modest recovery in the easy-fill vials.

Revenue from high-value solutions accounted for 43% of the total revenue in the first quarter of 2025, as we continue to expand capacity for high-value syringes to meet robust demand. We also see ongoing signs of stabilization in vial demand, as the effects of the stocking gradually subside. As anticipated, the revenue and margin decline in the engineering segment were primarily related to the legacy projects in Denmark. This unfavorably impacted the portfolio mix in the first quarter. As part of our optimization plan, we prioritized the execution of these projects and have made significant operational progress. We remain on track to complete all of them in 2025, with the majority expected to be completed mid-year. While these improvements may not be fully reflected in our financial results, they led to meaningful gains across key operational performance indicators. This reinforces our confidence that we are on the right path.

For example, in the first quarter, acceptance testing rates continued to improve for both final factory acceptance and site acceptance testing. This reflects the tangible progress we are making in bringing these projects to completion and strengthening the segment's operational delivery. Looking ahead, we see strong demand for our engineering manufacturing lines, where long-term growth is underpinned by favorable secular trends. For example, rising patient adoption of drug delivery devices is fueling demand for complex device assembly and packaging lines. We are supporting a new wave of customers as they rapidly expand their device programs, helping customers deliver therapies and treatments to patients safely and efficiently. Let's turn to an update on our capital investment projects in Fishers and Latina. In the first quarter, we saw continued financial improvement in margins from our expansion projects as we began to scale volumes, utilization, and revenue.

Both facilities were ramping up syringes to satisfy strong market demand. Our hub in Fishers brings together our drug containment solutions and device manufacturing capabilities to offer customers an integrated offering with localized production in the U.S.. I recently returned from Fishers, where activities are in high gear. Today, we are in the early phase of scaling commercial syringe production. In parallel, we are on track with ongoing installations of additional manufacturing lines. We have a full schedule of customer validation and audit activities booked for the second quarter as more capacity comes online. We also started construction on our device manufacturing area to support customer device programs for biologic treatments. As a reminder, we keep a selective and strategic approach to contract manufacturing, and these projects integrate our glass products and, most of the time, our engineering technology for assembly.

This demonstrates the value customers see in our diversified and complementary portfolio of integrated solutions. In Latina, we are scaling commercial production for high-value syringes, and manufacturing line installations are ongoing. Customer validation activities will continue into 2026 as planned. We are also preparing for the next phase of ready-to-use cartridges production, with commercial production still expected to launch at the end of 2026. Before I hand the call over to Marco, I'd like to briefly share some thoughts on global trade and tariffs. We have a task force that's practically working to mitigate the potential exposure to tariffs through a combination of actions, including customer surcharges, supply chain procurement, and other initiatives. Based on recent discussions with customers, alongside thorough analysis and broader industry commentary, we expect that most of the tariff-related costs will be absorbed by customers.

As a reminder, we experienced a similar situation when gas prices spiked a few years ago. These cost increases were passed through. That said, we are continuing to leverage our global manufacturing network to support localized production. As we ramp up operations in Fishers, this will further support our customers with a robust in-market supply chain. As more pharma and biotech companies increase their manufacturing footprints in the U.S., we do not expect that tariffs will affect our competitive positioning. On the contrary, we believe our ongoing investment in the U.S. will further reinforce our position in this important market. With that, I'll turn the call over to Marco.

Marco Dal Lago (CFO)

Thanks, Franco. Before I begin, I'd like to clarify that all comparisons refer to the first quarter of 2024, unless otherwise specified. Let's start on page 9. In the first quarter of 2024, revenue increased by 9% or 8% on a cost and currency basis to EUR 256.6 million. This was driven by 11% growth in the BDS segment, which offset the 4% revenue decline in the engineering segment. Revenue from high-value solutions grew 25% in the first quarter to EUR 110.3 million and accounted for 43% of total revenue. This was driven by continued strong demand in high-value syringes, increasing capacity in Latina and Fishers, and a partial recovery in easy fill vials as the stocking subsides. The strong performance in the BDS segment led to an 80 basis point increase in consolidated gross profit margin of 27.2% in the first quarter of 2025.

This was driven by the expected improvements at our Latina and Fishers facilities as we scale our multi-year investment plan, including device contract manufacturing activities in Fishers. While the two sites remain margin-dilutive, we are gaining operating leverage as we scale volumes, utilization, and revenue. Second, a higher mix of more accretive high-value solutions, including a modest improvement in easy fill vials. These favorable trends were offset by the expected lower gross profit from the engineering segment. In the first quarter of 2025, operating profit margin increased 280 basis points to 13.5%. On an adjusted basis, operating profit margin was 14.3%. This was driven by an increase in gross profit and continued benefits from the initiative launched last year to curtail costs without compromising future growth. For the first quarter of 2025, net profit totaled EUR 26.5 million, and diluted earnings per share were EUR 0.10.

On an adjusted basis, net profit was EUR 28.1 million, and adjusted diluted EPS were also EUR 0.10. Adjusted EBITDA was EUR57.4 million, and adjusted EBITDA margin increased 100 basis points to 22.4%. Moving to segment results on page 10. In the first quarter of 2025, revenue from the BDS segment increased 11% to EUR 220.8 million, on both a reported and cost and currency basis, driven by strong growth in high-value syringes and, to a lesser extent, other product categories. During the quarter, we also saw continued stabilization in vial demand, as the effects of this stocking began to gradually ease. High-value solutions grew 25% to EUR 110.3 million, representing approximately 50% of segment revenue. Revenue from other containment delivery solutions totaled EUR 110.5 million, which was consistent with the same period last year. In the first quarter of 2025, gross profit margin increased 420 basis points to 31.3%.

Margin expansion was driven by the improvements in Latina and Fishers as we scale operations. This includes activities related to our contract manufacturing projects in Fishers and the higher mix of more accretive high-value solutions, including modest growth in easy fill vials. As a result, the operating profit margin for the BDS segment rose to 18.8%, up from 14.1% in the same period last year. In the first quarter of 2025, revenue from the engineering segment decreased 4% to EUR 35.7 million, primarily due to lower sales from pharmaceutical visual inspection and glass conversion lines. This was partially offset by growth in assembly and packaging lines, as well as after-sales activities. Gross profit margins were slightly below our expectations by approximately 50 basis points and decreased to 10.7%. For the first quarter, margins were unfavorably impacted by project mix, as we prioritized the completion of the legacy projects in Denmark.

As a result, operating profit margin declined to 4.7%. Please turn to the next slide for a review of balance sheet and cash flow. We ended the quarter with cash and cash equivalents of EUR 90.7 million and net debt of EUR 300.2 million. We believe we have adequate liquidity to fund our strategic priorities through a combination of cash on hand, available credit lines, cash generated from operations, and the ability to access additional financing. For the first quarter of 2025, capital expenditures totaled EUR 69.7 million, with more than 90% tied to growth investments to advance our ongoing capacity expansion for high-value solutions in Fishers and Latina. We continue to carefully manage trade working capital to support the growth of our business. In the first quarter, we benefited from a strong collection of receivables, which drove cash generation.

As expected, our inventory levels increased in the first quarter as we replenished inventories that fell in the fourth quarter, driven by strong sales. In the first quarter of 2025, net cash from operating activities increased to EUR 99.8 million. Cash used in the purchase of property, plant and equipment, and intangible assets was EUR 71.8 million. As a result, we generated free cash flow of EUR 29.7 million in the first quarter of 2025. Please turn to the next slide for an update of our assessment of tariffs and our revised guidance. As Franco noted, our task force analyzed both regional sales and our network of global suppliers. These efforts are ongoing as the situation evolves, and the team is closely monitoring any further developments.

Our current guidance assumes a 10% tariff rate for goods shipping from the EU to the U.S., the absorption of price increases from suppliers, and no change in the U.S. policy. Based on these assumptions, we estimate a tariff-related impact of approximately EUR 4.5 million to operating profit, or approximately EUR 0.01 of diluted earnings per share in 2025. It is important to note that this is based on what we know today. We have implemented mitigation strategies in an effort to further reduce our exposure, and these efforts will continue. Discussions with customers have been constructive and are ongoing. Aside from the expected impact from tariffs, all other elements of our guidance remain fully on track with what we shared in March.

As a result, we continue to expect revenue in the range of EUR 1.160 billion-EUR 1.190 billion, and we now expect adjusted EBITDA between EUR 288.5 million-EUR 301.8 million, and adjusted diluted EPS between EUR 0.50-EUR 0.54. Our updated guidance assumes the following factors: revenue will be stronger in the second half of fiscal 2025 versus the first half. The BDS segment is still expected to grow mid-single digit to high single digit, and the engineering segment is expected to be neutral to low single digit growth. High-value solutions of 39%-41% of total revenue. On foreign currency, we now assume a modest headwind that has been fully absorbed in the model. Our hedging strategies have limited our exposure, and we assumed a euro/dollar average rate of 1.13 for the period from April to December.

With the inclusion of tariffs, we now assume a gross profit margin improvement of approximately 100 basis points at the central point of our guidance. Lastly, the unfavorable impact from tariffs of EUR 4.5 million of operating profit, or approximately EUR 0.01 of diluted earnings per share. Thank you. I will end the call back to Franco. Thank you, Marco. In closing, we had a solid start to fiscal 2025 with strong momentum in the BDS segment as we advance progress at our Latina and Fishers sites and increase our mix of high-value solutions. We are also encouraged by the continued stabilization in the vial market demand as the stocking fades. The team remains laser-focused on executing against our key priorities and delivering our long-term objectives. Ongoing capacity expansion in high-value solutions is critical to meeting elevated end-market demand, driven primarily by the rise in biologics.

We operate in growing markets, and our capital investments are aligned with demand-driven needs. We continue to see a robust pipeline of long-term opportunities supported by favorable secular tailwinds, from aging population with increasingly complex health needs to pharma innovation and a shift towards self-administration of medicines. These trends align closely with our core strengths. We remain committed to meeting strong customer demand for our high-value solutions. Longer term, we believe the ongoing shift toward these solutions will support a return to our target of low double-digit revenue growth and drive margin expansion. Our strong business fundamentals and disciplined financial strategy provide us with the flexibility to fund our growth and create long-term value for shareholders. Operator, we are ready for questions. Thank you.

Operator (participant)

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 the 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 one follow-up only, and join the queue again for any further questions. We will pause for a moment as our participants are joining the queue. The first question is from Matt Larew, William Blair. Please go ahead.

Matt Larew (Equity Research Analyst)

Hi. Thank you for taking my questions. The first one would just be a follow-up on tariffs. I just want to clarify that what is incorporated in guidance is the gross impact from tariffs and that the number of mitigations you're pursuing are not included in guidance and thus, in theory, are upside. That is kind of the first part of it. The second part of the tariff question is, can you help us understand what percentage of U.S. demand is serviced by U.S.-based manufacturing today, and how much of that U.S. demand you'll be able to satisfy from Fishers, perhaps both by the end of this year and then over the long term?

Marco Dal Lago (CFO)

Thanks for the question. Marco speaking. As Franco noted, we have been working with the task force internally for a couple of months. This includes sales people, procurement people, legal, finance, and supply chain. We play different scenarios, obviously. Our guidance is embedding tariffs to our customers, also impact on supply chain and procurement, and it is including finished product, raw material, and semi-finished products. We are planning to transfer in higher price to most of the customers the impact. Nevertheless, we see some impact in supply chain, either in production or in procurement, in purchasing. This is the estimation about the EUR 4.5 million at operating profit level we mentioned in the remarks. Basically, we are playing different scenarios. We believe this is the current best estimation we can provide while we are working on further mitigation actions in order to minimize the impact.

About your question about the U.S. footprint, we want to remind we have also a factory in California, in Ontario. The combination of Ontario and Fishers are partially offsetting the impact already. As you know, with the ramp-up of Fishers, we estimate that we will further mitigate in the future. Correct. Fishers in 2025 is going to partially absorb this tariff impact because the focus on 2025 of Fishers is to ramp up capacity with our customer in order to execute the actual contract that we have. We are still in the phase that we are installing high-speed line, particularly for syringes. In the medium term, Fishers, it will be a nice tool for Stevanato Group in order to compensate this tariff.

Matt Larew (Equity Research Analyst)

Okay. Very good. Then just to follow up on vials, it sounds like the stack in there progressing, I think, as anticipated, given an outlook for mid to high single-digit growth in vials for the year. Based on what you saw in the quarter and I assume increasing visibility, is that still kind of the outlook for the year?

Marco Dal Lago (CFO)

Correct. Correct. We continue to see positive signal in the market. Practically all our customers, both the regional customers or spread in all the region, but in particular the global key account, they are starting to increase their order. If you compare 2024 with 2025, our order intakes grow in double digit, both for bulk vial and ready-to-fill vial. In fact, we are starting to activate the vial lines practically in all our plants worldwide. From our viewpoint, this recovery is really moving in the right direction for all the 2025 in order to go to a normalization in 2026. We are happy for this. We are iterating our guidance with respect to vials. We expect mid-single digit to high single-digit growth in 2025 compared to 2024, with sequential improvement throughout the year.

Matt Larew (Equity Research Analyst)

Okay. Thank you.

Marco Dal Lago (CFO)

You're welcome.

Operator (participant)

Next question is from Paul Knight, KeyBanc. Please go ahead.

Paul Knight (Managing Director)

Congratulations on the quarter. Ultimately, Indianapolis and Latina, what's the revenue potential going to be from those sites, whether it's five years from now, three years? I'm assuming it's just starting early days of revenue now, but what's the potential of those two sites?

Franco Stevanato (CEO)

Paul, Franco speaking. Today, one of the major contributors of our growth in 2025 is thanks to the greenfield plants in Latina, in particular also on Fishers. We always share with you that in Fishers, we have planned to invest EUR 500 million to be fully ramp-up at the end of 2028. Our goal is to generate EUR 500 million revenue thanks to this investment that we are doing in Fishers. We always want to remind you that our ratio is for high-value product, one euro CapEx had to correspond to one euro revenue.

Paul Knight (Managing Director)

How do you feel about Latina?

Franco Stevanato (CEO)

Latina is really progressing extremely well because, like I mentioned to you, last year, we already delivered in the quarter a positive gross margin. In 2025, we are continuing to increase commercial production, increasing the capacity for refill syringes, in particular for NEXA syringes. We are continuing to install high-speed line. We are in a dense program of validation for our international customers. On the top of this, we are starting to prepare a next phase for the large capacity for cartridges ready-to-fill. We want one big customer that will be launched at the end of 2026, beginning of 2027, commercial production and revenue.

Paul Knight (Managing Director)

Marco, what will CapEx be in 2025? Thank you.

Marco Dal Lago (CFO)

We are not modifying our guidance. We have a net of contribution from customers from EUR 250 million-EUR 280 million CapEx in 2025, mainly dedicated, as you can imagine, to the ramp-up in Latina and Fishers.

Paul Knight (Managing Director)

Thank you.

Marco Dal Lago (CFO)

Welcome.

Operator (participant)

Next question is from Michael Riskin, Bank of America. Please go ahead.

Michael Riskin (Research Analyst)

Thanks, guys. Maybe I'll tie up a couple of previous ones. On the tariff front, your comments in terms of the hit this year, the EUR 4.5 million operating profit, EUR 0.01 of EPS, that's for the partial year. Any early signs of how to think about that for 2026? I guess what I'm saying is you'll have a full year of impact, but you'll also have more revenue shifted to Fishers over time, right? When should you be able to fully offset the tariff hit?

Marco Dal Lago (CFO)

Yeah. I think you fully got the point, Marco speaking. First of all, we are assuming our guidance this year based on the current situation of tariffs with 10% current tariff from EU to the U.S.. There are different scenarios in front of us with respect of that. Nevertheless, the number one mitigating factor will be the ramp-up in Fishers. We are generating currently about 25% of our revenue in the U.S., but we expect with Fishers and Ontario to mitigate a lot in the future.

Michael Riskin (Research Analyst)

Okay. Okay. Thanks. Then on the engineering segment, you called out that the gross profit margin was lower and the operating profit was lower this quarter because of the unfavorable mix, the legacy projects. Can you give an update on how those legacy projects are moving through? Are you almost done with that? I guess just sort of asking, what should we expect gross profit margin for engineering in the second quarter, in the second half? When will it sort of bounce back to more historical levels in engineering? Thanks.

Franco Stevanato (CEO)

I can start from a business point of view, execution point of view. Today, the organization is fully focused to execute and deliver this complex program for our big customers that we are producing and delivering from the plants in Denmark. We are on track to complete within all of 2025, but the majority of this complex program, we are targeted to deliver in mid-year. This is where the organization is working hard. In parallel, we are working on what we call this operational optimization plan where we want to balance the production in order to mitigate the risk between Denmark and Italy. We are adding more and more capacity for assembly inspection machine from our plants in Italy in order really to make more center of excellence. Also, this plan is on track.

Today, the organization, like we shared the last quarter, is fully focused in order really to reinforce our leadership team, our project management, and to have two big hubs in Denmark and in Italy in order to be equivalent to serve this line.

Marco Dal Lago (CFO)

Yeah. About the sequential margin, first of all, the gross profit margin in Q1 was close to our expectations because we knew we had to dedicate a big effort, a workload to accelerate the completion of the legacy projects in Denmark. Basically, we worked on less profitable projects and new ones. We expect this fact will be sequentially improved throughout the year. As guidance, we expect sequential improvement quarter after quarter with the overall 2025 still better than 2024 with respect to gross profit margin.

If I also add another color from a customer point of view, if you look ahead, we see a strong demand today from our engineering division because the pharmaceutical industry is heavily investing in new capacity for their bioproduct, where this assembly technology in order to serve their growing demand for drug delivery system is exactly in the direction that we are going with our engineering division. Once this line is installed to our customers, it really is going to make the customer happy in order to reiterate other orders in the future.

Michael Riskin (Research Analyst)

Great. Thank you.

Operator (participant)

Next question is from David Windley. Jefferies, please go ahead.

David Windley (Managing Director)

Hi. Hopefully, I don't create an echo here if I dialed in wrong. Thank you for taking my questions. I wanted to ask around the vial recovery, but kind of packaged within the HVS margin driver. Certainly, you're highlighting HVS vials, easy-fill vials, improving. We were under the impression that maybe standard vials were going to come back first or bulk, followed by easy-fill. Am I hearing that easy-fill is recovering earlier than your expectation? Part B of that would be, do you expect that to be sustainable over the balance of the year and beyond? I'll stop there, and then I'll follow up.

Marco Dal Lago (CFO)

I start with the numbers, David, Marco speaking. First of all, we are happy in Q1. We got double-digit growth in orders intake compared with the same period last year, both in bulk and sterile vials. In Q1, the revenue increase was modest. Nevertheless, we generated better profitability in Q1, mainly for two reasons. One is the good margin we generated in easy-fill. Very important also, we are starting reactivating many lines around the world, and this is helping us with the coverage of fixed expenses also in bulk. The combination of the two is making us more happy, obviously, than one year ago. We do not see any change in the trajectory throughout the year, as compared to what we said a couple of months ago. David, if you can also give us some angle from a customer point of view.

Bulk vial is a market that has a size of many billions of containers per year with different therapeutic drugs for the region and several hundreds of customers. When they're starting to recover, it's a big wave. For what is related to easy-fill vial, we are more in the range of a few hundred million with most small, medium-sized customers, in particular customers that are launching new products on the market. Both are growing. We see positive signals, but there are two different types of league.

David Windley (Managing Director)

Okay. I can't remember if you've disclosed in the past or if you'd be willing to tell us about your GLP-1 specific exposure in the revenue base. I think for you, it would be almost exclusively BDS, but how much of your recovery here is driven by specifically GLP-1 demand?

Marco Dal Lago (CFO)

We disclose biologics that are growing rapidly. I mean, we reached 42% as a percentage of BDS revenue compared to 34% last year. GLP-1 is part of our biologics disclosure. It's an important leg for us, GLP-1, but it's not the only driver of growth. Maybe Franco can give you more color about the market and the—

Franco Stevanato (CEO)

correct. We already shared with you that we have already signed a multi-year contract with our historical insulin customer that we have established a very good relationship with since practically 20 years ago. This customer has engaged us a few years ago through our tech center in order to start to validate our products in their molecule. Today, the contract and where we are building capacity through our plant in Europe and the United States are for bulk cartridges, NEXA syringes, NEXA syringes double bypass, also vial.

We have a program, a big program for cartridges ready-to-fill. On top of this, also, we signed a big program for devices. This is the reason why in Fishers, we are going also to add capacity for our drug delivery system so we'll be able to serve NEXA syringes and also these devices. From an engineering point of view, our customers are engaging us on high-speed machines for assembling, also inspection machines. Practically all our product portfolio is involved in this new tech week.

David Windley (Managing Director)

I'll leave it at that. Thank you.

Franco Stevanato (CEO)

You're welcome.

Operator (participant)

Next question is from Doug Schenkel, Wolfe Research. Please go ahead. Doug Schenkel, we've lost the line. Next question is with Tejas Savant, Morgan Stanley. Please go ahead.

Tejas Savant (Executive Director)

Hey, guys. Good morning and appreciate the time here. Franco, perhaps Marco, just a point of clarification to an earlier question. To what extent are you baking in mitigation benefit in that EUR 4.5 million impact? It sounds like there's partial credit in there for surcharges, but you hope to do more on supply chain and procurement in the back half of the year. Is that the right interpretation that there is some mitigation benefit baked into the net impact of EUR 4.5 million?

Marco Dal Lago (CFO)

Yes, it's a good interpretation. For example, we have a global footprint. We are producing finished products from many locations around the world. We can have some also logistic optimization in order to minimize the tariff. This is just an example. The task force is really active in detecting further initiatives in order to minimize the impact of tariff. This is the key message behind our forecast.

Tejas Savant (Executive Director)

Got it. That's helpful. My second follow-up, more for longer-term question, really. Look, I mean, acknowledging that Pharma doesn't want to cut sort of cost as it relates to CDMO vendors, do you see an opportunity for sort of more vendor consolidation here as they try to protect their margin? Given your sort of complementary solutions, which you called out, is there an opportunity for Stevanato to gain wallet share specifically because of what's going on with tariffs and the push for Pharma for some of their U.S. reshoring efforts and so on?

Lisa Miles (SVP Investor Relations)

I'm sorry, Tejas. Can you clarify the first portion of your question? I'm not sure we fully understood what you were getting at there.

Tejas Savant (Executive Director)

Yeah. The question is basically around pharmaceutical companies generally do not view their CDMO vendors as a bucket where they want to squeeze out cost because they would rather work with better vendors with a long track record of delivering on time and without any quality issues, right? My question is, just given the moving parts here with customers trying to preserve their margins as well, I mean, is there a possibility here for you to opportunistically gain share from some of the smaller vendors that perhaps your Pharma customers are working with today because of the noise around tariffs and U.S. reshoring?

Marco Dal Lago (CFO)

Practically, if I fully understand your question, today, tariff is going to give to Stevanato a small pain in 2025 that we already captured with this EUR 4.5 million of market share. It's also true that the fact that we have already proactively decided to invest in 2021 with this big campus in the United States that will be able to serve the U.S. market for NEXA syringes, for Alba, for bypass, vial, vial-to-fill today also with a big program device, it has further raised interest for our American customer that Stevanato is the right global partner, in particular because of this U.S. plant. The scope of this U.S. plant is in order to serve the full U.S. biotech market and all the international customers. At the end of the game, short pain, and in the longer term, we see much more benefit.

Tejas Savant (Executive Director)

Okay. I'll leave it there. Thanks, guys.

Operator (participant)

Next question is from Mac Etoch, Stephens Inc. Please go ahead.

Mac Etoch (Research Analyst)

Good morning. Thank you for taking my questions. Maybe just to quickly touch on the performance within the BDS segment. During the quarter, did you see any shift in customer ordering patterns or timing there or behavior within the companies as they prepared for the impact of tariffs?

Franco Stevanato (CEO)

Franco speaking, the way that our customers are passing the forecast to Stevanato Group is in line with the past. Usually, our customers, okay, we have the long-term contract, then they move with the 12-month forecast, and then they have the one or two-quarter confirm order, usually depending if it's bulk product or easy-fill product, where with easy-fill, the order intake is a little bit longer. We do not see any difference from the way that they're placing order. For what we see on vial, like I mentioned, we already started to see Q3, Q4 last year an increase in their forecast, and they're increasing the order intake, but this is only due to the stocking effect in the past. They are in line with the past.

Mac Etoch (Research Analyst)

Thanks, Wes. Can you break out just about how much of an improvement you saw from each of the respective buckets for margin impacts that you saw for easy-fill and also the ramp in the new facilities? As in, what percentage of the year-over-year improvement relates to the improvements in the vial stocking?

I can tell you that the number one improvement is related to Latina and Fishers. We mentioned many times last year that obviously, with the ramp-up, we generated more cost than revenue due to validations, training, and all the ramp-up activities. We are very happy about the progresses in Latina, and also Fishers is starting generating better results than last year, generating more revenues and gross margin. The margin is still dilutive compared to the overall segment, but we expect sequential improvement, as we mentioned last March.

Franco Stevanato (CEO)

Thank you for taking my questions.

Yeah. The number two factor, as underlined in the remark, is the fact that with 43% high-value solution on total revenue, the mix is favorable and better than last year.

Appreciate the color.

Operator (participant)

Next question is from Patrick Donelly, Citi. Please go ahead.

Patrick Donnelly (Managing Director)

Hey, guys. Thanks for taking the questions. Marco, maybe one for you. I know you talked about the second half being stronger than the first half. Can you just help us think about just the progression throughout the year, particularly Q2, just a little context around both reps and then margins, how we would think about this Q2 and then slowing into the second half would be helpful.

Marco Dal Lago (CFO)

Yes. We still expect like two months ago sequential growth throughout the year. We expect overall 44% of revenue generated in the first half of the year and the remaining 56% in the second half with sequential improvement throughout the year. As last time we mentioned, we also expect margin improvement throughout the year with Latina and Fishers ramping up, with engineering improving in the second half of the year. Also on vials, the stocking, we expect sequential improvement quarter after quarter. Our assumption has not changed. We have some confirmation, as mentioned, for vials and the ramp-up. That is, the second one is under our control. As a matter of fact, we are reiterating our guidance beside, obviously, the effect of tariffs. That is a net impact of.

Patrick Donnelly (Managing Director)

Okay. That's helpful. Franco, maybe one for you. Just in terms of the facilities, on the China piece, has the current situation, whether it's tariffs, the overall tensions, has that changed the way you're thinking about expanding into China? I know you guys pushed the facility out a bit, but we're still committed. How are you thinking about your presence in China as we move forward here?

Franco Stevanato (CEO)

Today, we serve this market from the existing plants that we have in Shanghai. Also, for what is related to easy-fill product, we produce in Europe and we ship to China. Today, it is also true that in 2025, also in 2026, our big focus is in ramping up Latina and even more Fishers because if you remember, originally, in 2021, there was also the program to build production for easy-fill product of high-value products in China. Then some of our big customers have decided to put in standby, and they asked us, to Stevanato, to increase their capacity from Europe and the United States to serve from these two locations. In order to summarize, Asia will remain strategic for Stevanato because also there is a big growth on biosimilars.

Today, the big focus is to execute these two huge greenfield plants in order to execute all the contracts that we have with our customers. One example is the big program from cartridges ready-to-fill. This is a huge program. We need to be laser-focused to execute with big success because there is a big contract behind it.

Operator (participant)

Next question is from Doug Schenkel, Wolfe Research. Please go ahead.

Doug Schenkel (Managing Director)

Hey. Thank you for taking my questions and sorry for the technical challenges before. Two topics. First, on guidance. It seems like your updated full-year guidance reflects first-quarter upside, both at the revenue line and the margin line, but you're not really changing the outlook for the balance of the year beyond that other than to reflect the tariff impact that you've discussed. Do I have that right? If so, keeping in mind that orders remain strong, you don't feel like there was any pull forward of revenue or abnormal behavior in the midst of the current policy uncertainty, and again, margins are ahead of plan. Is this just prudent conservatism as a philosophy given the current environment?

Marco Dal Lago (CFO)

Marco speaking. First of all, we are reiterating our revenue guidance. We see there two opposite effects. On one side, we see some headwinds related to the exchange rate. Euro went stronger compared to a couple of months ago, and this is a headwind. On the other side, one of the mitigation effect tools we have for tariff is increasing price or transfer some extra cost to our customer. This is basically offsetting the currency headwinds in the top line. The guidance, obviously, we are providing is obviously the best estimation we have today, and this is reflecting the trajectory we designed two months ago.

Franco Stevanato (CEO)

From Marco's point of view, the demand from our customers is robust, well spread practically in all the products.

We have also to be considered that we are in the middle of the construction and ramping up these huge greenfield plants where the demand is driven by the capacity that we have put in place. There are some technical timing that we are going to install this high-speed line. We are doing the validation. We have the green light from the customer, and then we're going to deliver it. It is difficult to further accelerate this ramp-up because the quality is the priority number one for our international customers.

Doug Schenkel (Managing Director)

Okay. Understood. Thank you for that. For my second question, just high level on free cash flow, this was a really strong quarter. I presume some of that is timing of projects, but also the benefit of mix. Could you just comment on that a little bit more? Maybe more importantly, how should we think about durability from here in terms of free cash flow improvement over the coming quarters?

Marco Dal Lago (CFO)

Sure. First of all, we still expect EUR 40 million-EUR 60 million negative free cash flow for the year. We are happy about the performance in Q1, driven by strong collection from customers after the revenues we generated in Q4 last year. Nevertheless, we will see some fluctuation quarter after quarter depending on CapEx, but also the fact that we are, for example, paying taxes in the second half of the year. We are very focused on keeping under control the free cash flow, but we are reiterating our guidance of EUR 40 million-EUR 60 million negative free cash flow in the year.

Doug Schenkel (Managing Director)

Okay. Thank you again.

Operator (participant)

For any further questions, please press star and one on your telephone. Ms. Miles, gentlemen, there are no more questions registered at this time.

Franco Stevanato (CEO)

Maybe if I can just summarize the sentiment that we have in Stevanato Group, we have a solid start in 2025. We have a robust demand for all the 2025, practically in all our product categories. We see a strong momentum in the BDS segment, and we see a high interest on our high-value product because the biologic demand of this product from our customer is very strong. With our greenfield plants, we are on track, both with installation of line and the validation with our customers. We see visible improvement from an engineering point of view. We are happy that finally, on vial, we see a recovery.

We are fully committed to deliver the result, but also even more, we are confident in our long-term trajectory of double-digit growth target of 30% of EBITDA and to move to 40-45% of high-value products in our product. Thank you very much.

Lisa Miles (SVP Investor Relations)

Thank you, everyone, for joining us today, and we look forward to speaking with you in the future.

Operator (participant)

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