Stevanato Group - Earnings Call - Q2 2021

Transcript

Speaker 0

Ladies and gentlemen, hello, and welcome to the Stefonate Group Second Quarter twenty twenty one Earnings Call. My name is Maxine, and I'll be coordinating the call today. Call will now hand you over to your host, Lisa Miles, Head of Investor Relations to begin. Lisa, please go ahead when you're ready.

Speaker 1

Good morning and thank you for joining us. With me today to offer prepared remarks is Franco Stefano, Executive Chairman Franco Moreau, Chief Executive Officer and Chief Operating Officer and Marco Delgado, Chief Financial Officer. We are also joined by Mauro Stocki, Chief Business Officer and Paolo Pautri, Chief Technology Officer. I'd like to remind everyone that a number of statements being made today will be forward looking in nature. Please remember that such statements are only predictions.

Actual events and results may differ materially as a result of risks we face, including those discussed in our registration statement on Form F-one, which was filed with the Securities and Exchange Commission on 07/16/2021. We encourage you to review the information contained in our earnings release today in conjunction with our associated SEC filings and F-one. 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 gating the quality of our financial performance, identifying trends in our results, and providing meaningful period to period comparison.

For a reconciliation of the non GAAP measures presented in this document, please see the company's most recent quarterly earnings press release. And with that, I'll hand the call over to Franco Svanado for opening remarks.

Speaker 2

Thank you, Lisa. Good morning, and thank you for joining us. Today, I'm going to kick off with some key highlights of the investment consideration for Stefano Group. First, I'm pleased with our financial results for second quarter and first half of fiscal year twenty twenty one. Revenue for the first half of twenty twenty one grew 33% and adjusted EBITDA increased 58% over the same period of the last year.

Our operating performance reflects our long history of more than seventy years serving the pharma, biotech and life science industry. The core of our DNA is science and technology. Our unique analytic and engineering capability have helped solidify our position as the market leader worldwide in pen cartridges and easy fill buyer. We serve the top of blue chip global high growth biopharma, pharma and diagnostic customer. We have a strong track record for customer support and service, which has translated into customer retention rate of 97%.

Over the last seventeen years, we have grown the business through constant reinvestment in technical and scientific innovation, geographical expansion to better serve our customer and solidify our position in the pharmaceutical value chain. The proceeds from our recent IPO will be reinvested to drive sustainable long term organic growth. Our top three investment priorities are: one, geographical expansion two, research and development to sustain and accelerate our high value solution and three, selected M and A. Which have the same fundamental goal of creating and driving long term shareholder value. On behalf of the Board, we are proud of the positive step that the management team has taken to advance the company position in the market, and we are confident in their ability to execute against the company long term strategic plan.

Franco, Marco, Mao and Paolo bring deep expertise, decades of experience and an unparalleled commitment to achieving our growth objectives. We believe we have the right team in place to drive vision and strategic pillars over the next ten years. The family, the Board and the management team are keenly aligned with the goal of building a long term shareholder value. Our mission is simple, delivering patient centric solution to support our customer need to meet the increasing market demand driven by positive macro environment. Strato Group remain at the heart of the pharmaceutical value chain now and for decades to come.

And with that, I will hand the call over to Franco Moro, Chief Executive Officer.

Speaker 3

Thanks, Franco, and good morning. For the second quarter, we delivered solid year over year operating and financial results, highlighted by double digit revenue growth. More importantly, the key performance indicators of future growth came in particularly strong. We continue to make steady progress in transitioning our revenue to an increasing mix of high value solutions, which accounted for 24% of total revenue in the second quarter. Our high value solutions include our higher margin products focused on pre sterilized vial, cartridges and syringes.

The solution offer an increasing value to our customers with the four key advantages, reduced time to market, lower total cost of ownership, increased quality, and improved flexibility. Our focus and much of our future investments will be dedicated to growing the mix of high value solutions. The second quarter was also highlighted by strong order intake. We ended the second quarter with the new order intake of €278,000,000 and a total backlog of €739,000,000 at June 30. We define our backlog as customer committed orders.

The current backlog provides significant visibility into future revenues. This gives us confidence in our ability to achieve our revenue guidance for 2021. We are pleased with the positive momentum in new order intake and backlog. These are indicative of the positive favorable trends in the market today. These trends have paved the way for our consistent double digit growth over the last ten years.

And today, we are focused on executing against our strategic investment plan to take advantage of the longer term demand. So today, I want to talk about our expansion and investment framework. This is an important element to driving sustainable accretive growth in the near term and the long term. With that in mind, I will provide context around our historical investment strategy, how that translates to growth and our plan to replicate this strategy in the years ahead. In 2016, we launched expansion initiative that has been yielding double digit growth over the last few years and continue today.

We accelerated our investment in Italy and abroad, which served as a catalyst to meet the significant increase in demand precipitated by COVID. Yet at the same time, we are still able to significantly increase production in other core products outside the vaccine space, particularly in vials and cartridges. For example, our investment also allowed us to remain number one in the insulin pen catheter market. I will highlight key metrics and capacity increases tied to this effort. First, in our easy to receivable Teradata synergies.

When compared to our production output in 2016, we expect to double the number of syringes produced in 2021 and half to triple the syringes output in 02/2023. Secondly, in our EZP derived wires and cartridges, the numbers are even more impressive. In 2021, we expect to produce up to 11 times more sterile wires and cartridges compared to 2016. And in 2023, we expect to produce up to 19x more sterile wires and catalysts compared to 2016. Our investment initiatives are targeted to the production delivery of more accretive high value solutions.

Equally important, this is the invites response to customer demand. The approximate CapEx on the easy fuel expansion between 2015 and 2021 was roughly €220,000,000 and we will continue investing. The recent acceleration of organic growth demonstrates our proven track record in optimizing our capital investment. At this stage of our life cycle, we see unprecedented demand. In the near term, we have made timely investments in our capacity to enable us to stay ahead of our customers' rising demand for our high value solution, and we expect to invest in a similar manner in the future.

We are supplementing our ongoing inspection with the new existing lines and converting space to dedicate to our high value solutions. An important element to our investment strategy is anticipating customer demand to make the right investment at the right time. This has been our approach in the past and it continues today. Based on current trends, we believe now is the time for investing in expanded capacity globally for our easy fill solution. Our current expansion plans in The U.

And China are practically addressing where we believe we will continue to experience high levels of customer demand. Our future investments in the fastest growing market of The U. S. And China advance our position with customers across the pharmaceutical, biotech and life sciences industries. From a CapEx perspective, we currently plan to spend approximately €300,000,000 for our plants in The U.

S. And China. This will expand our existing footprint in these geographies and enhance our opportunity to customers in attractive end markets. As many of you already know, The U. S.

Market is highly sophisticated and the pace of growth in biologics is at record speed. We believe that we are well positioned to become a larger player in the market. From a timing perspective, we expect to build ground in Indiana in the fall of twenty twenty one. We anticipate construction will take approximately eighteen months, followed by start up and customer validation in 2023. At this pace, we are currently targeting revenue generation to begin around the end of twenty twenty three or early twenty twenty four.

In China, the backdrop is very different. There is a predominance in biosimilars and the biologics market is just emerging. Our goal is to take advantage of market timing to be among the first movers. We are estimating that construction will begin in early twenty twenty two, which put our estimated revenue generation in the second half of twenty twenty four. We are approaching this new investment with the ambition to replicate business strategy, discipline and execution as we pass investment.

Our overall approach of increasing capacity, embedding a scientific and technological advancement in our portfolio and broadening our servicing and geographic reach is the cornerstone of driving value to our customers. We are also boosting our efforts in research and development with a significant effort in service capabilities. These investments are evident in our technology centers in Boston and Italy. The scientific analytical services developing our technology centers are helping us gain a early entry point with our customers. We expect this will help expand our presence in the pipeline of new biologic drugs.

In parallel, these efforts are aimed at expanding our own portfolio of proprietary solutions across all product lines. Above all, we believe that the current underlying trends in the macro environment set the stage for capable payments for the kids to come. We currently see a contrast or event coming together with a huge need to tackle the challenge of aging population, the increasing complexity in health condition and comorbidity rates and the significant shift in patients seeking to manage their condition and assess care closer to their home environment. We believe we are well positioned to capitalize on these trends. Our priority is to support our customers in creating and delivering patient centric solution, which is central to our philosophy and vision.

I will hand the call over to Marco to cover the financials in more detail.

Speaker 4

Thanks, Franco. For the second quarter, total company revenue grew 26% to $2.00 $4,000,000 and 28.5% on a constant currency basis compared to the same period last year. Top line increases were driven by growth in both segments and all geographies. As Franco noted, our focus remained on expanding the sales mix of iValue Solutions in the portfolio. For the second quarter, iValue solution accounted for approximately 24% of total company revenue.

We currently expect full year contribution from iValue solutions to range between 2526%. The COVID-nineteen pandemic continues to be a tailwind and it has increased demand for our drug containment solutions. We are playing a meaningful role in the fight against pandemic and our products are supporting the vaccination rollout around the world. In the second quarter, we estimate that approximately 15% of gross revenue was linked to the pandemic. The key takeaway is that excluding COVID, we still achieved a robust double digit growth in the second quarter compared to last year.

This is a result of solid demand for our core products and the shift to a value solution. For the rest of the year, we expect contribution from the pandemic to remain consistent. We currently estimate that gross revenue attributable to COVID will range between approximately 1317% for 2021. For the second quarter, total company gross margin improved 100 basis points over the last year to 31.2%, mainly thanks to our focus on iValue Solutions. Also, in the second quarter, adjusted operating profit margin improved two forty basis points to 19.1% and adjusted EBITDA grew by 90 basis points to 25.7%.

It was due to gross margin expansion and efficient cost management in certain overhead expenses. In parallel, we continue to increase investment in R and D activities compared to the same period last year as we aim to sustain and accelerate the pipeline of high value solutions. Operating profit of €47,600,000 and EBITDA of €61,000,000 included onetime benefit of €8,600,000 gross profit, which is €4,400,000 of net profit or €0.02 of diluted earnings per share. The majority of this related to the termination of a stock incentive plan. As a result, second quarter diluted earnings per share was €0.14 and adjusted diluted earnings per share was €0.12 Moving on to segment results, starting with BDS segment.

Second quarter revenue increased 23% in our Biopharmaceutical and Diagnostics Solutions segment compared to prior year despite unfavorable foreign currency translation. On a constant currency basis, year over year revenue growth was 26%. This segment benefited from a revenue increase of 27% in Aevelo Solutions and 21% in other Containment and Delivery Solutions over the same period last year. Second quarter gross margin operating margin improved compared to 2020, principally due to an increase in more attractive iValue solution and improved efficiencies. For the second quarter, revenue derived from third parties in the Engineering segment grew by 50% to $29,100,000 over last year.

This segment experienced growth across all business lines, including visual inspection machines, assembly and packaging systems and glass converting machines. Margin expansion in the quarter compared to the prior year period was driven by an increase in after sales activities to support customers and improve synergies across our manufacturing network. Moving on to balance sheet and cash flow items. We ended the quarter in a solid financial position. At 06/30/2021, cash and cash equivalents totaled €100,800,000 For the second quarter, cash from operating activity increased to €54,100,000 We continue to prioritize investments in our future growth.

And as such, capital expenditures totaled €23,700,000 during the quarter. Free cash flow in the second quarter was €31,300,000 At June 30, our net debt ratio had improved to one compared to 1.3 at the March 2021. Our leverage between net debt and trailing twelve months EBITDA has improved to one compared to 1.4 at the end of twenty twenty. We define net debt as current and non current financial liabilities minus other current financial asset, financial receivable and cash and cash equivalents. In an action, we believe that our cash, future cash generation from operating activities, availability under our existing debt facilities and the proceeds from the IPO will be adequate to address our future liquidity needs.

In terms of capital allocation strategy, our approach remains measured and disciplined. But to recap, our top three priorities are, first, mass need expansion to increase capacity, especially in our iValue solution where demand is high. Second, investment in research and development to sustain and accelerate our high value solutions pipeline and to maintain our market leading position offering the highest quality product. And lastly, AI selected prudent approach to M and A to complement our existing book of businesses. We view M and A in the construct of driving organic growth.

This has been our approach in the past and it remains the same today. We see no major gaps in our portfolio, but we believe there are markets that are natural expansion of our current core competencies. And finally, as highlighted in this morning's press release, we established full year 2021 guidance. The company currently expects revenue in the range of €820,000,000 to €830,000,000 This will represent a year over year growth between 2425%. Adjusted diluted earnings per share in the range of €0.43 to €0.47 Lastly, adjusted EBITDA in the range of €212,000,000 to €217,000,000 which will represent a growth between 3235% over the prior year period.

And with that, let's open it up for questions. Operator?

Speaker 0

You would like to ask a question, please press followed by 1 on your telephone keypad now. If you do change your mind, please press followed by 2. Our first question comes from Paul Knight from KeyBanc Capital Markets. Your line is now open.

Speaker 5

Congratulations on the quarter. The backlog trend looks to be very strong. Can you talk about the was it the core business in terms of ex COVID? Can you talk about demand for the high value add solutions? And what the color around that backlog?

Speaker 3

Paul, thanks for your question.

Speaker 4

For

Speaker 3

sure, trends that we are facing are very good, and we target to have this very robust backlog and to deploy our capacity accordingly to satisfy our customer demand. So in terms of the core about the backlog, you know, when we talk about the backlog, we are talking about committed orders. And this visibility allowed us to plan the utilization of our capacity in a very efficient way. Nevertheless, we are also investing to expand the capacity to match additional upside in demand that's coming from customers. And in terms of the COVID related demand, we can say that for sure we can state that the current year is impacted by the COVID and we have some visibility for the next year.

For the longer term, we envision to have a transition to a normal business in terms of vaccine. And you know that we are a well established player in the vaccine space since the decade.

Speaker 5

Do you have capacity, or is it tight right now to supply customer demand?

Speaker 3

I want to stress that the capacity we have for our high value solution are the most important asset for the also for the future because the COVID situation proved that that our high value solution are there really suitable not only to match this technical specification of drugs, but also to have a faster response to the upside in demand. And our internal engineering capabilities is an amazing differentiating factor in terms of the competition because we proved to be faster than anybody else to match the demand. In terms of the constraints that you mentioned, to show we have to take care about our CapEx to adjust in advance our capacity to the demand coming from the market. But we are in very good position and we deployed this capacity additional capacity around the world and we are ready to move also the high value solution, the easy fill capacity, not only in Europe as we are now, but also in U. S.

And China.

Speaker 0

Thank you. Our next question comes from David Windley from Jefferies. Your line is now open.

Speaker 6

Hi. Thank you for the results this morning or this evening for you, and I appreciate you taking my question. I wondered if you could comment a little bit on kind of borrowing from Paul's question on how COVID is influencing your high value solutions sales. Is there much overlap there? And kind of how do you expect that to evolve?

Speaker 3

Thank you for the question. So in this case, I have to reinforce the message that we are not the newcomer in the vaccine space. We are working with the biggest player in the market that seems to be the case. So we thanks to the intimacy with such customers, we cannot adjust our production for the future. And in some of the technicalities going into our high value solution, we proved that the glass containment solution are the best choice also for a measuring or a graph linked for example to the code chain and the supply chain for vaccine.

So we think that after this year and the next year, the vaccine for COVID that we land at the end in more or less normal business in for vaccine treatment.

Speaker 6

Okay. On your backlog, I don't believe I have a number, for the comparable q two of twenty twenty. If you'd be willing to give that, I'd love to get it. But the the spirit of the question is that your backlog growth year over year is substantial in the first quarter. And then it looks like it's sequentially double digits from the first quarter of this year to the second quarter.

And you've already mentioned visibility is quite high. It seems like your visibility to this year's revenue based on backlog is substantially better than what it probably was last year. And so I I guess I wanted to understand how conservative your revenue assumptions are for this year and or how much of that backlog is giving you greater visibility into 2022, if you understand the question, hopefully.

Speaker 3

Yes. I hope you understand your question. And I give you the general the full picture, and then maybe Marco may comment on about the financials. For sure, the visibility is very high and the demand is very strong. Demand is very strong because the market is growing and we anticipated some investments to allow us to give the right answer to our customers.

And nevertheless, the our, business has some factor that impacted the timeline that is linked to the, building the right supply chain with the right level of robustness for us and for our customers, the lead time in production, and then all the planning activities that allow us to have a very robust answer to our customer and to meet their expectation. For sure, now it is very easy to say that the coverage for this year is very high, very good. There is a possibility to have upside. We believe that the guidance we provided are fair, not just to present, not just to address it. It's a fair expectation for this year.

Marco may ask for me to more fully

Speaker 4

work Just on to complete the answer, David, last year, same period, we had about €396,000,000 of backlog. As you know, we went up to $6.00 €5,000,000 at the end of twenty twenty, $665,000,000 at the end of Q1, and we are now at €739,000,000 So we have much better visibility. As Franco was saying, between the sales already realized and the expected sales coming from backlog in second half of the year were covered by 94%. And we are starting also building a backlog for next year.

Speaker 0

Our next question comes from Dan Leonard from Wells Fargo. Your line is now open.

Speaker 5

Thank you. So I was hoping you could offer some insight into your conversations with customers on the COVID business and and how far in advance you're having discussions nowadays. Are are you talking about customer demand needs in 2022, 2023? Any insight you could offer?

Speaker 3

It's very important. Thank you for the question. It's very important to say that we built the intimacy with our customer since many, many years leveraging on our not only the manufacturing platform, but also the scientific technology offering that is embedded in our integrated offering. So we try to work with them in anticipating their needs. And, for sure, they gave us some visibility about their expectation for the '22 and maybe also for the '23 in terms of general view.

But it is very early to say what happened really because of the transition to multi dose wire to single dose wire, the potential position to syringes and all the other uncertainty level linked to the boosters and so on. So we have good visibility, but we cannot state that there is a full visibility about the COVID impact in the next years.

Speaker 5

Okay. That's helpful color. And just a quick follow-up. Marco, what's your tax rate expectation for the year for 2021?

Speaker 4

The normalized one is 24%. We're being I said the normalized because in first quarter, we had a one time positive event. We reached an agreement with Italian tax authority benefiting by 5.5 of tax saving due to the Patent Box according to the Italian tax law. But the normalized one is 24%.

Speaker 3

Got it. Thanks for the help.

Speaker 0

Our next question comes from Juan Havando Your line is now open.

Speaker 5

Thank you. Good morning. My first thanks a lot for the details on your capacity expansion plans. I have a couple of questions on this topic. First, what what is your current average level of capacity utilization across your network?

I'm aware that, you know, COVID might have helped utilization, but how long did it take for capacity added over the last five years since 2016 to reach the current utilization level?

Speaker 3

It's a very good question. And we are expanding our capacity independently from COVID. And after COVID started, we accelerated some investments to be faster. And thanks a lot to our colleagues in engineering because they helped us to provide an amazing, faster response to these emerging needs. In terms of utilization, we are used we used to plan accordingly to the standard practices to have enough downtime for preventive maintenance or the stuff that make our supply chain robust and in the sake of the certainty for our customer.

So we are at a very good level of utilization worldwide, both both in bulk and in the field, consider the right configuration. And we we used to maintain this high level of of occupation. But answering your question about how much we need on some much time we need to reach this level of division. This is the very tricky point, the very interesting point of our setup because we don't need them so much time because we have engineering now. So when we have to expand the capacity, we are very far.

So we don't need long time to establish the capacity and then ramping up the utilization. We are much faster than anybody else because we can tune the expansion of the capacity very close to the emerging.

Speaker 5

Thank you. And if you could put a number on that utilization level, which is, you know, accounting for the necessary downtime and changeover, you know, typically in the industry, full is defined at around the low eighties. Would you say it's sixty, seventy, 80% utilized? If you could put a number to that, that's what I'm looking for.

Speaker 3

Depending on different production lines, we are in the range of of 85%.

Speaker 0

Our next question comes from Patrick Donnelly from Citi. Maybe

Speaker 5

to stay on the facility expansion topic. Can you just

Speaker 3

talk about what the spend is going to

Speaker 5

look like over the next few years? I know you talked about Indiana revenue generation 23% China maybe more 24%. I guess over the next two years, how should we think about the spend, the impact on margins until they're fully ramped up?

Speaker 3

I give you the picture, Patrick. Thank you for your question. And then Marco may have have more color on financials. The idea is, as you mentioned, to have the first revenue generation coming from The U. S.

Plant later 2023, beginning of twenty twenty four, and at least six months more to have the total revenue generation in China. The total amount of money we are ready to invest to expand our high value solution network and manufacturing is in the range of EUR300 million and we have deployed this total investment more or less in two point five or three years. We expect in the long run to have revenue generation in the range of EUR300 million is two figures that are comparable, but they are different. But you know, there are many things that we can also adjust and tune at the best during the execution of these investments. So six, seven years from now is not easy to see, but for sure, we are in the right position to start the investment, and we are already we have already started doing something in US.

And beginning of next year, we have some news about the China. Michael, if you can provide a more detailed income of dimension, it would be helpful.

Speaker 4

Yeah. Just to complement. So first of all, we are replicating investment we have already done here in Italy with Easyfield. So we know very well the technology and the steps to be done in order to prepare the two new facilities. Now ensuring the return of our investment, we experienced a very good internal rate of return here in the investment in Italy, north of 20%.

And also in China and U. S, we are targeting high value easy fee products. So we expect high teens internal rate of return in these two new plans or these are our expectations.

Speaker 7

That's helpful. And maybe Marco,

Speaker 5

staying with you on the margin piece. Just obviously, there's been a few questions around COVID, what the revenue could look like. Can you just refresh us on the margin profile of the COVID business? Is that any different than kind of the core? Just trying to think through what that could look like if it's a bigger number next year or anything like that.

Speaker 4

Thank you for the question, Patrick. So product line by product line, we are not experiencing different gross margin. I mean, if we sell high value solution, we are experiencing the same level of margin between COVID and non COVID products. Same for batch solution, so I wouldn't say we have a different margin profile related to COVID. Sometimes the mix is pushing more toward iWebu solution, as Franco was saying before, but April with April we are not experiencing different margin.

Speaker 5

Great. Thank you. Welcome.

Speaker 0

Our next question comes from Justin Lin from William Blair. Your line is now open.

Speaker 5

Hello. Good morning, guys. I'm calling in for John Kruse today. Congrats on the quarter, and thank you for taking the questions. So previously, there were a lot of talks about COVID vaccines moving to single dose vials.

Is that still the case based on what you've heard? Or do you think the sort of anticipated large scale rollout of booster shots in The U. S. We'll likely keep it

Speaker 3

in the multi dose format. Thank you for the question. It's very interesting. And we are trying to monitor this evolution together with our customers to adopt the supply chain for the future needs. I can ask Mauro to have some calls about these relationships with the major, most important players in the vaccine space to give you the full scenario.

Speaker 8

Sure. Thank you, Franco. Yes, just maybe to come back also a bit to what we said during our road show. Actually, one of the reason why we are so good and intimate relationship relationship with with the the customer customer is because we ask them starting from the development phase with our solution to reach the patient in a faster way. So now as Franco mentioned before, it is really too early to tell the future of COVID.

But what we can say is that continuing partnering with our customer is providing some indication of which the major trends could be in the future. And you mentioned a couple. So from multi dose to single dose is something which is for sure happening and at the same time also evaluating some syringe solution in order to have a single dose ready to go to the market for the customer. So a lot of moving parts in market today, but what we can say is that we are really very well positioned in order to respond to these emerging trends, specifically thanks to our engineering also part of the business, which is actually responding very faster to this kind of customer request and movement in the market.

Speaker 5

Understood. Thank you for that. And just, I guess, one follow-up question on the capacity front. So, can you review your ongoing facility expansion projects outside of The U. S.

And China? And where do they stand right now?

Speaker 3

By the capacity expansion, we are investing also in large production in our network of facilities around the world. And we have some expansion also in the plastic business in U. S. And more of our investment in Europe. But now we are really focused in expanding our high value solution platform that we deliver the best answer to the needs of our customer.

So for the next year, we are really focused on the execution of our investments in U. S. And China. And in the meantime, we are bridging this capacity with some investments also in Italy that will help us to move the production from Italy to the new geographies in the next three, four years.

Speaker 0

Our next question comes from Drew Ranieri from Morgan Stanley. Your line is now open.

Speaker 9

Hi, everyone. Thanks for taking the questions. Just to go back on the backlog for a moment, it sounds like you have good visibility for this year, maybe some partial visibility for 2022. But just as you look at the backlog today, can you just maybe discuss or break down what backlog is from broadening your current customer relationships versus new partnerships, new customers or just geographic expansion, early days of geographic expansion? Thank you.

Speaker 3

Okay. For sure, you've touched a very important point that it is the pipeline. Pipeline of our new products that will deliver additional business for the future. The most of the current backlog is obviously linked to established commercial production because you know very well that in our market to develop a new project that you you needed some time. But we are really early engaged with our customer in some very important projects.

And also in this case, I think that Mauro may add some colors on that.

Speaker 8

Thank you, Franco. So yes, we are really proud of our present pipeline, specifically also in the biotech space and biosimilar space because this is what is, of course sustaining and providing visibility and growth for the future. We can say that one of the main reason for our position in the drug pipeline today has been really the critical support that our services through our tech in Boston and in Italy we're able to provide to customers, in order really to help them to choose the right drug containment solution since the beginning. So we are really growing a lot in this, supporting our customer in scientific and technology related areas. So in the past five years, we have more than doubled the molecules in which we are in today and we can say that with our today 1,100 different projects, different molecules, are really well positioned to

Speaker 3

grow in

Speaker 8

the future in this high value segment.

Speaker 9

Thank you. And this might be a question for Marco. But just on the gross margin trends in the back half of the year, I mean, would there be any reason that gross margins would step down in third quarter or fourth quarter from your current second quarter levels Just as you look at having more high value solution mix, the facility build out sounds like it might be later this year, so it might not be a full hit there. But just curious on the gross margin trends. And then just would you be comfortable putting out a number for free cash flow or CapEx for 2021?

Yes.

Speaker 4

Thank you for the question. We expect gross margin in Q3 and Q4 to be consistent with second quarter, so above 31%. This is in our guidance, let's say. And so the going back to the backlog, the mix is positive, is consistent with what we are experiencing. We are moving more and more to our eValue solutions.

Geographically, we didn't reply,

Speaker 9

but we are growing more and

Speaker 4

more in Asia Pacific. As you can see in the first half of the year, we went up 79% in Asia Pacific and 38% in North America. So we are confirming the trend to move more and more toward those areas. So we expect consistent gross margin Q3 and Q4 compared with the second quarter. About the question about the cash flow, let me start with saying that we start with a very robust balance sheet now because we had $250,000,000 of net debt as of the end of q two with the leverage of one with the last twelve months EBITDA.

And on top of it, we received the primary policy. So we are now in a position where we have 165,000,000 of positive net financial position. The important thing to be measuring the next month would be the outflow of money for CapEx. As mentioned many times, we are investing S.

And China for expanding our easy fill capacity. Worst case, we expect $180,000,000 of CapEx for the current year with the lending net financial position of 120, 125 positive cash flow cash position. So we are in a safer position in an action as mentioned during my speech before.

Speaker 0

Our final question comes from John Salabear from UBS. I

Speaker 5

guess just one on future M and A. Could talk you a little bit on what areas the company is looking at? And the company is currently around 1x levered today. Does the company have a long term leverage target that you provide?

Speaker 3

May I ask to say again? Please, because the the line was just a little bit confused.

Speaker 5

Sure. Just on future M and A, what areas is the company looking at? And then the company is around onetime levered. Does the company have a long term leverage target that you provide?

Speaker 3

Yes. No. It's very clear. Sorry to ask that you do a bit. But, you know, first of all, our board and, integrated offering is very robust.

We are really focused on exploring all the potential about the existing platform of the solution we have, and we can expand also in terms of different geography. We mentioned several time, we do see production in and China. Nevertheless, as you know, we are monitoring the opportunities to expand our capabilities with something that is that can complement our our tool existing integrated offering. I want to mention some intellectual property of third parties in DBS, some technologies in injection molding like microfluidic. We have some interesting opportunity to exploit in the molecular diagnostic and also in time of design company for the design of new solution as CDMO.

These are potential M and A opportunities, but we are not under pressure to execute any M and A if you don't see the right condition to add the value to our integrated offer, to our customer or to our shareholder. So we are relaxed in this sense and we will apply discipline in capital allocation with a very selective approach for the next years. That is not your plan, strong position. We will have passed to make the right choices in the future. Yeah.

And about the leverage yeah.

Speaker 4

About the leverage, like to play with BCPen and SAFR, but for a portion important strategic opportunity, we are ready to to have in the range of 2.5 leverage between net financial position and EBITDA. Obviously, the precondition is to create a great value.

Speaker 5

Got it. And if I could just ask one follow-up. Can you talk a little bit maybe on growth trends in some of the BDS sub segments in the quarter across closed containment, IVD and BDS?

Speaker 4

Yes. We don't provide the details, but in any case, as as in the past, we are keeping on experiencing about 15% of our overall sales are represented by engineering, another 15% by in vitro diagnostic and DBS together, and the remaining 70% is related to container closure systems. So we are consistent with this growth. We are growing in each business line and product line. We are growing more rapidly as mentioned in iDevolution where in the first half of the year we went up to 37% and on a constant currency basis we would have gone up by 33 year over year.

So this is where we are growing more rapidly consistently with our plans.

Speaker 3

Got it.

Speaker 0

That was our final question, so I'll hand it back to the management team for closing remarks.

Speaker 7

Yes. Good morning. Francois Serrato speaking. So I want to just take one minute in order to give the internal feedback from the board and the management team and also our customer after this important event of the IPO of Sbernata Group. So the Board and the management team are extremely happy and motivated for what we have done because it's an important step for Sbernato after seventeen years.

And also our customers are extremely happy to see Sbernato Group to continue to be present in the pharmaceutical industry and to continue to invest in the pharmaceutical industry and also will proceed. So today, all the organization is fully committed to execute our strategy in order to continue to grow together with our customer. Our big focus is to really build the right investments to in order to be more close in proximity to all of our customers worldwide. And the fact that we have the procedure that will allow us more financial flexibility is even more important and well perceived by the customer. I also want to thank you all of you because in this month, we learned a lot in order to do work, to have more discipline in when we build number also to deliver number, also in the right way for the shareholder, not even more for the shareholder.

Today, our big focus are the customers, the employees, even more the new investors that are trusting Stellanto Group. So it's a new exercise, a new era, Stellanto, but it's a very nice moment for us. Thank you.

Speaker 1

And that concludes SevenEye Group's second quarter twenty twenty one earnings call. Thank you for joining us. We appreciate your support.

Speaker 0

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.