Stevanato Group S.p.A.

Good afternoon. This is the Coral School Conference operator. Welcome and thank you for joining the Stavonato Group third quarter 2024 earnings call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Ms. Liza Miles, Senior Vice President and Investor Relations.

Please go ahead, Madam.

Good morning, and thank you for joining us. With me today is Franco Stevinato, Chairman and Chief Executive Officer, and Marco De Lago, Chief Financial Officer. You can find a presentation to accompany today's results on the Investor Relations page of our website, which can be found under the Financial Results tab. As a reminder, some statements being made today will be forward-looking in nature and are only predictions. Actual events and results may differ materially as a result of the risks we face, including those discussed in Item 3D entitled Risk Factors in the company's most recent annual report on Form 20F, filed with the SEC on March 7, 2024. please read our safe harbor statement included in the front of the presentation and in today's press release. 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 analysis of results to and believes this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results, and providing meaningful period-to-period comparisons. For a reconciliation of these non-GAAP measures, please see the company's most recent earnings press release. And with that, I will now hand the call over to Franco Stevanotto.

Thank you, Lisa, and thanks, everyone, for joining us. Today, we will review our third quarter performance, provide an update on market dynamics, and discuss ongoing initiatives to meet our objectives. For the third quarter, revenue was in line, but margins were below our expectations. As a result, we are lowering our full year 2024 guidance for adjusted EBITDA and adjusted diluted EPS. The main factors are higher costs in the engineering segment as we implement our optimization plan. and to a lesser extent, higher costs in the US as we increase our validation activities. Let's start with the engineering. We are starting to see some initial benefits from the actions we have recently taken to improve execution and business performance. While it's still early days, we have successfully completed several compressed projects in the third quarter for key customers that were previously delayed. As a reminder, we launched a business optimization plan designed to address the current challenges, improve the overall health of the business, and position the segment to return to profitable growth. The main steps we are taking are focused on optimizing our engineering footprint in alignment with our product strategy, right-sizing the operational structure as we move some activities to Italy, and harmonizing our industrial processes. Together, we believe this action will lead to an improved operational structure that can drive both cost savings and gains in productivity. Above all, we remain confident that this will position the segment for long-term success. We believe that the demand landscape for the engineering segment remains favorable. Underpinned by long-term tailwinds such as the rise in biologics and the adoption of drug delivery devices, high regulatory standards like Annex I and the trend towards ready-to-use systems. Let's turn to vial destocking, which remains top of mind for many investors. Our thoughts on the recovery remain the same. We still expect to see vial orders begin to pick up at the end of this year, with a gradual recovery in 2025. We continue to see positive signals in the market, and during the third quarter, collaboration with our customers reaffirmed our view. Nevertheless, market dynamics are such that customers are working down inventories at different rates. Despite the current weakness in buyers, we continue to see strong demand for our high value solutions, which grew 18% year to date compared with last year. The continued momentum in biologics and the increasing trend towards high performance primary packaging reinforces our investment strategies as we expand our capacity for high-value solutions to match this customer demand. Moving to our capacity expansion projects on slide six, we continue to make relevant progress on the multi-year ramp-up of our expansion projects in Fishers and Latina. In both facilities, the ongoing installation of manufacturing lines and the customer validation are planned to be phased throughout 2025 and into 2026. In Fishers, we achieved a major milestone in the third quarter with a successful launch of commercial production, generating our first commercial revenue. During the quarter, we completed the installation of our second high-speed manufacturing line. We also started validation activities with several key customers, which are expected to continue for the rest of the year. In Latina, we are scaling production, improving utilization, and beginning to gain efficiencies. And in the third quarter, the Latina project became profitable at the gross profit level. Marco will provide more details later on. Turning to slide seven, we recently announced the launch of the Alliance for RTU, together with other industry players. It has generated a lot of interest across the industry, from customers to other industry stakeholders. The purpose of this initiative is to educate the pharmaceutical industry as customers consider a transition to sterilize vials and cartridges. Over the last 30 years, the syringe market has converted mostly to sterilized solutions. We believe that customers will continue to adopt ready-to-use vial and cartridge solutions, replicating what we saw in the syringe market. RTU solutions meet the growing industry demand for greater efficiency, faster production times, and enhanced product quality by simplifying the filling process and reducing contamination risks. Furthermore, a shift to ready-to-use products can facilitate compliance with Annex 1. We are supporting customers through the assessment and decision-making process with scientific research through symposiums, webinars, and white papers. We continue to make tangible progress on our wider high-value solutions portfolio. We recently won a strategic supply agreement to support the first needle-free epinephrine NASA spray that recently received FDA approval. Under the agreement, we will produce our premium microvials used in the NFE device. In summary, we are making good progress and we remain focused on execution. Our growth investments are ramping. Latina was profitable in the third quarter and fishers started generating commercial revenue. In engineering, we are executing our optimization plan and completed several of the previously open projects in the quarter. And, while the effects of wild stocking are expected to gradually improve throughout 2025, we are starting to see some stabilization in wild demand as customers work down inventories. I now hand the call over to Marco.

Thanks Franco. Before I begin, I want to clarify that all comparisons refer to the third quarter of 2023, unless otherwise specified. Starting on page 9, for the third quarter of 2024, revenue grew 2% and 3% on a cost and currency basis to $277.9 million, driven by 6% growth in the biopharmaceutical and diagnostic solution segment, which offset the expected decline in the engineering segment. Revenue from high-value solutions grew 17% driven by high-value syringes and to an extra extent other product categories. High-value solutions represented approximately 36% of total revenue in the quarter, versus 32% last year. We are currently forecasting a strong four-quarter for high-value solutions, So, for the full year 2024, we now expect that high-value solution will represent approximately 37% to 39% of total revenue, versus our prior estimation of 36% to 39%. Gross profit margin decreased to 26.8% in the third quarter of 2024 due to the ongoing temporary impact from vial destocking. including underutilization of vial lines, as well as lower revenue for more accretive easy-fill vials. Inefficiencies and higher costs tied to the ramp-up in fishers in Indiana, as we scale our validation activities, and higher costs in engineering. For the third quarter, lower gross profit led to a decline in operating profit margin to 14.8%. On an adjusted basis, operating profit margin was 16.3%. For the third quarter of 2024, net profit totaled 30 million and diluted earnings per share were 11 cents. On an adjusted basis, net profit was 33.1 million and adjusted diluted EPS were 12 cents. Adjusted EBITDA was 63.7 million and adjusted EBITDA margin was 22.9%. Please turn to slide 10. Before we review segment results, we thought it would be useful to dive deeper into the temporary inefficiencies that we typically experience during the startup phase of a new manufacturing site, their impact on margins, and the expected gross profit trajectory. This slide illustrates the timing and phasing tied to a new manufacturing plant as an example. For the new brownfield site in Latina, we acquired the building in Q1 2022. We started generating revenue from commercial production in Q4 2023. As Franco noted, in the third quarter of 2024, the site was a slightly positive contributor to the group's margins. The current temporary inefficiencies that we are experiencing reflect the under-absorption of expenses in the early phase of the project, as well as the ongoing activities to support the multi-year capacity ramp-up. But as production capacity, productivity and revenue progressively increase, we expect that unfavorable impacts will gradually abate and we will benefit from higher utilization better product mix and scale. Let's review segment results on page 11. For the third quarter of 2024, BDS segment revenue grew 6% and 7% on a constant currency basis to $233 million, driven predominantly by growth in high-value syringes and to a lesser extent other products. Top-line growth of 6% was offset by a revenue decline of approximately 38% related to vials, and the drop was more pronounced in easy-fill vials. Revenue from high-value solutions grew 17% to $100.4 million in the third quarter, while revenue from other containment and delivery solutions was $132.6 million. and consistent with the prior year period. The gross profit margin for the BDS segment was tampered by the ongoing effects of vial destocking, including lower revenue for more accretive easy-fill vials, underutilization and the underabsorption of overhead costs, and startup inefficiencies and some higher cost in fishers. As a result, gross profit margin for the BDS segment decreased to 28% and operating profit margin declined to 16.9% for the third quarter of 2024, compared with the same period last year. For the third quarter of 2024, revenue from the engineering segment decreased 15% to 44.8 million. Performance in the business was mixed with expected revenue declines in glass conversion and visual inspection, offsetting growth in assembly and packaging. Gross profit margin decreased to 15.6% and operating profit margin declined to 10.1% for the third quarter. The decrease in margin was driven by higher costs related to certain highly complex projects. and expenses tied to our business optimization plan. As Franco noted, we are making progress with our optimization plan, but it will continue to take some time. We believe we have set the path for continued operational and financial improvement, which we expect will better position the segment to capture and execute future opportunities. Please turn to the next slide for a review of balance sheet and cash flow items. We continue to carefully manage trade working capital to support the growth of our business. As of September 30, inventory levels were higher compared to December 31, 2023, while contract assets decreased, in part due to the advancement of projects in the engineering segment. We ended the third quarter with cash-in-cash equivalents of 78 million and net debt of 284.3 million. Through a combination of our cash-on-hand, available credit lines, cash generated from operations, and our ability to access additional financing, we believe that we have available liquidity to fund our strategic and operational priorities over the next 12 months. As expected, capital expenditures for the third quarter of 2024 total 58.8 million, as we continue to ramp up in Latina and fishers to meet market demand. In the third quarter of 2024, net cash from operating activities totaled 18.3 million. Cash used in the purchase of property, plant equipment and intangible assets was 47.8 million. This resulted in negative free cash flow of 28.4 million in the third quarter. Lastly, on slide 13, guidance. We are maintaining our revenue guidance for 2024, but lowering our outlook for adjusted EBITDA and adjusted diluted EPS. As Franco mentioned, our guidance now includes additional costs with the actions that are underway with our engineering optimization plan, and to a lesser extent, higher costs as we increase our validation activities in the U.S. For fiscal 2024, we still expect revenue in the range of $1.9 billion to $1.1 billion. And we now expect adjusted EBITDA in the range of 257 million to 263 million, and adjusted diluted EPS in the range of 47 cents to 49 cents. As we consider 2025, our faults remain unchanged, and we remain cautious in the near term. We still expect that the pace of recovery in bulk and easy-fill values will be the largest swing factor in the level of growth next year. That said, we also continue to see strong demand, particularly for high-performance syringes and other product categories such as cartridges, IVD and DDS. We also anticipate improvement in the engineering segment alongside the implementation of our optimization plan. As always, We intend to provide formal guidance in March. Thank you. I will hand the call back to Franco.

Thank you, Marco. In closing, while 2024 has presented many challenges, we are focused on execution and achieving our long-term objectives. We operate in growing end markets with favorable secular tailwinds, and we have several reasons to be confident in our strategic direction. First, we continue to deliver organic growth, driven by high-value solutions, the main pillar of our long-range construct. We are investing in the right areas to meet growing customer demand. Second, we expect to increasingly benefit from the new capacity in Italy and in the US, as we advance our ramp-up activities and drive profitable growth. Third, the buyer market continues to show positive signs, and we remain optimistic that as the demand continues to stabilize, we will see a return to historical market volumes and growth rates. Finally, in the near term, we are implementing a clear and actionable plan to optimize the operations and improve execution in our engineering segment. This together, coupled with the strong fundamentals of our business and the high commitment of the team, set the stage for us to drive durable double-digit organic growth expand margins, and drive long-term shareholder value. Operator, let's open it up for questions.

Thank you. This is the Coral School Conference operator. First of all, we apologize for the technical issues we had on the webcast from our side. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. In the interest of time, please limit yourself to one question and a follow-up only. Anyone who has a question may press star and one at this time. The first question is from Michael Reiskin, Bank of America. Please go ahead. Hi.

Thank you for the question. This is Avantika. I'm from Mike. I understand that you will provide formal guidance for 2025 on the 4Q call, but the street is modeling mid-to-high single-digit growth on the top line for 2025, and you reiterated your long-term construct of 11%. You know, I understand that you've had headwinds in fiscal year 24 from DSOC in the engineering segment, but is this a good starting point for 2025 as we stand today? Thank you. Thank you.

Yes, thanks for the question. Yeah, you are right. We will provide formal guidance next quarter. What we mentioned during the commentaries, the summary of what we see today, I mean, the uncertainty is related to the pace of recovery in easy fill vials and in bulk vials. This is the uncertainty. On the other side, we still continue to see favorable tailwinds, particularly in high-performance syringes. but also in other product categories like cartridges in vitro diagnostic drug delivery system. We also anticipate improvements in the engineering segment alongside the implementation of our business optimization plan. Finally, we expect improved financial performances in fishes and Latina as we increase our capacity and increase our level of revenue. better leveraging the fixed expenses that are under pressure during the startup phase. So in the end, we see a reasonable assumption.

Great. Thank you so much. The next question is from Matt Leroux of William Blair. Please go ahead.

Hi. Thanks for the question. I just wanted to ask about, you know, visibility to sort of destocking, easing. I think last quarter you'd referenced maybe smaller customers in some countries getting back to ordering some positive conversations with larger customers. Just curious if you had to bucket, you know, by customer group what the conversations are like and if sort of the number of each customer is making positive progress in each group has increased.

Thank you for your question. Based on our customer conversations, we would characterize the market as normalizing. While we see some positive signals, it's still a mixed bag. Customers are working through inventories at different rates. In terms of orders, we started to see gradual improvements in viral orders in the second half of 2024 compared to the first half. But we're also seeing customer forecasts that indicate increased demand for vials in 2025. That being said, the timing and pace to recovery remain uncertain. But the work we are doing with our customers give us caution optimists in 2025.

Matt, just to clarify on your question, I think you were also asking about as it may relate to larger customers versus smaller customers. I think we can add some additional color on that, and I'll ask Franco to chime in here.

Okay, thanks. Yes. We are starting to see order coming through in smaller markets, like Latin America in particular. And in our larger market, things are going in the right direction. You're seeing updated customer forecasts, that point to increasing buyer demand in 2025. So all over all, we are starting to see positive signal month after month.

Okay, thank you. And then if the sort of the stocking issue is maybe a market issue, the engineering issues perhaps to some extent more internal or under your control, just curious on sort of the new guide and also the outlook, you know, how much of your ability to hit your expectations is under your control? whether that's the optimization program or completing projects versus things that are perhaps out of your control, like earlier when you were waiting for components or dealing with customer changes.

So if you want, I can start to give you an overview or picture of the situation and Marco can maybe drive more through the numbers, if it's okay. So in engineering, we are starting to see some initial benefits from the action we have recently taken. we launched an optimization plan designed to address the current short-term challenges, improve the footprint, and position the segment to return the profitable growth. First, we have successfully completed complex projects in the third quarter for key customers. Second, we are focused on optimizing our engineering footprint in alignment with our product strategies. Third, we are improving operational structures that can drive both cost savings and gain in productivity. We believe we can return to the segment to profitable growth by middle of next year. But some actions we are taking are expected to drive long-term results. The demand for the engineering segment remains favorable today. Boost in particular by long-term tailwinds such as the raising biologics, the adoption of drug delivery device, and more and more the new regulatory like Annex 1 and the trend toward ready-to-use systems.

Yeah, the main driver of the change of our guidance is related to engineering in 2024 and in Q3 and Q4. So as Franco was saying, we are taking action in order to regain the future profitability in a sustainable way. And this is the main driver of the change of our guidance this year. Besides that, we had also some changes related to the ramp-up cost for validation in Latina. But again, we are working hard to take a future advantage with the action we are taking today.

And Matt, just a final close-out comment on that. You're correct. It is really largely within our control as it relates to the execution and engineering. We really are no longer suffering from the supply chain challenges that we felt early on after the record wins that we had in that segment in late 2022. So as we advance our business optimization plan today, those actions are, we would characterize them as largely within our control.

Okay. Thank you for all the color.

The next question is from Larry Solo, CJS Securities. Please go ahead.

All right. Thanks, and good morning, good afternoon. I guess the first question is on BDF, some of the moving parts. You mentioned vials were down 38%. Was that kind of in line with your expectations, or was that still a little bit worse? And just within that, has bulk started to come back at all? It doesn't sound like the RTU has, but I'm just curious a little bit more.

um granularity on the on the vial piece so mark is speaking thanks for the question so it's in line with our expectations i mean we changed our guidance after q1 basically we expected and we can see also today steady level of revenue in q2 q3 and q4 we are down 38 percent and the decrease is more pronounced in easy-field bias that is impacting our margin because they are very collective for us. We can see some good signals in orders intake that was Franco was mentioning. So we can see improvement in overall situation, but it's more for revenue to be generated in 2025 rather than in Q4 2024. So we see a steady situation in 2024. Got it.

And just I appreciate the illustrative chart on the Latina ramp. Just curious, you know, obviously a similar ramp in Fishers a couple years out. Can you just give us just an update on Fishers, where we stand today? I imagine, you know, are we still losing money there? I assume so. When do you kind of hit? think that fishers can turn break even and actually start reaching a profit. Is that like a 26, 27 target? Any thoughts on that? Thank you.

I'll start with the margin question, then Franco for sure will compliment on the operational and business point of view. So from the margin standpoint of view, as you can see the illustrative graph, we have now started the... revenues in commercial ways. So we are obviously in the lower point of our profitability because of the activities we are putting together with validation, with customer testing and the ramp up of the production, validating the lines immediately after distillation. So we expect improvements in the next quarter. Keep in mind that fishery is a larger plant compared with Latina. It is a green field. Nevertheless, we believe we have started the turning point and we expect quarter after quarter improvement also in both sides, I would say. So that's why I mentioned before that in 2025, but also in Q4, the financial performances in Fishers and Latina are expected to be on the positive side.

Maybe I can further give some color about the capacity that we are doing between Fisher and Latina. We continue to make progress in both the greenfield plants. So in the both facilities, the ongoing installation manufacturing line, the customer validation are on track today with a very high intense activity with a partnership together with them. In Fisher, the third quarter, we start commercial production and we started to generate our first commercial revenue. And during the quarter, we also completed the installation of a second high speed manufacturing line. And we start the validation activity with the several key customers. In Latina, we are scaling production, and this quarter, the blanks become profitable at a gross profit level. So, in conclusion, we continue to see strong demand for high-value solutions driven by the strong momentum in biologics. And this reinforces our decision to strategically invest, in particular, in fissure and in Europe.

Great. Thank you, Franco. I appreciate that.

The next question is from Patrick Donnelly, CT. Please go ahead.

Hey, guys. Thank you for taking the questions. I have two. Maybe I'll just ask them both at once. I mean, Marco, just on the margin side, can you just talk about, you know, what you're seeing there? Obviously, the engineering piece dragged a little bit. It would be helpful just to talk through the moving pieces there and expectations going forward. And then, you know, Franco, obviously talked a little bit about the stocking piece. Can you just talk about the confidence level that it's mostly in the rear view behind you guys, What would be the risks of that, you know, another leg there, or are you guys feeling, based on the order patterns, you know, very confident that's over and we're in some level of stability to recovery? Thank you, guys.

The stocking was one of the most painful headwinds that we had in 2024. And I would like to start also in order to clarify this. that the vial stocking is just a temporary dynamics. This is a temporary inventory normalization effect. This is not a question if the vial market will recover. It's a question when the market will recover. Vial are still the most adapted containment format globally. Every year, just to give you an idea, approximately more than 13 billion vials are used to deliver treatment to the patient. And this is through all the different pharmaceutical companies, all through the different therapeutic areas in different regions around the world. So we have a strong confidence that the end markets are healthy and vial demand will return to its pre-pandemic volumes. Just to give you another information, today we are below 2019 via demand level. And to us, this is clearly an inventory normalization effect. On the top of this, we continue to see positive signals from many of our customers, both small customers that are reactivating order in the second part of 2024 and bigger international customers that are sharing new forecast for 2024. So step by step, we have a caution optimist that we are going to the right direction.

And about engineering, if I got correctly, Patrick, you asked about engineering also. So as mentioned, after basically doubling the size of the segment in terms of people and the revenue from 2019 to 2023, we are facing some challenges. We explained last quarter with some specific challenges highly customized complex projects. We are in the good direction to fix them. As Franco was mentioned, we have been able to complete some of them in the quarter. Nevertheless, we are taking action to optimize the segment and we expect it will take another two to three quarters to fully normalize our profitability. This is embedded in our guidance, obviously. And this is an area where we are working hard and taking action in order to set the stage for the future growth.

The next question is from Jacob Johnson Stevens. Please go ahead.

Hey, thanks. Good morning. Maybe sticking on the margin front, your guidance would seem to imply a decent step up in EBITDA margins sequentially. Just curious how to think about that in terms of gross margin expansion sequentially versus operating leverage.

It is mainly driven by gross profit margin in Q4. expect to leverage better volumes. The mix is expected to improve in Q4. As you can see, we increased a little bit the guidance for high value products because we are largely covered by firm committed orders from customers there. So the confidence is both on volumes and mix. And finally, we expect slightly better performances in Latina and fishes in Q4 compared to Q3. So it mainly business and operational improvement rather than cost reduction.

Got it. Thanks for that, Marco. And maybe just sticking on the cost side, you know, you guys lowered the guide due to some incremental costs for engineering and fishers. As we think about the kind of the return on those costs, just do those incremental costs maybe help accelerate the recovery in engineering and the ramp at fishers, or just any way to think about where that money's going and the potential benefit from it?

Yeah, let's say we are investing now to improve the situation, the profitability in the future. They are very different situation. I mean, in fishers, as you know, we are ramping up the production validating the lives with customers. So this is driven by strong demand we see for the future and customers are willing to validate the production to leverage our capacity in the future. In engineering, we commented is more to execute our own business optimization plan and be more profitable in the future.

Yes, I confirm. We have decided to apply this decision right now in order to build a new platform to set in the future more cost competitive in order to increase our productivity.

Got it. Thanks for taking the questions.

The next question is from Dave Vindley. Jefferies, please go ahead.

Hi. Thanks for taking my questions. I was hoping to understand a little bit better how – Larry kind of asked this question, but where we stand in fishers related to the illustrative slide that you provided, did I understand you to say that you're at kind of maximum operating loss there and with increased revenue you would expect that to get better? Did I understand that correctly? And how should we think about incremental margin as that revenue improves in fishers? Thank you.

You know, we started commercial production in Q3. So our expectation is to increase the revenues quarter after quarter with more validation, more line installed, so on so far. So we expect to better leverage fixed expenses as soon as our production will steadily grow up. So this is our assumption. We believe we touched the lower point in this quarter with the higher cost associated to the validation and installation. Correct.

It's very similar to the journey we had with Latina. Now we have also the second line and also in parallel we are performing again validation and we started to deliver commercial revenue also with the second line. In the next quarter we will continue with this path with the same similar what we already happened in Latina today. In the long run, Fischer, it will have even more wide product portfolio because we are going also to produce some ALBA technology, some auto-injector technology. So in the long run, at a certain point, Fischer in the long period, it will be even wider and bigger than Athena.

Okay. So when you talk about gradual recovery, in vials in 25, can you help to define what that means? Should we, you know, pick a point in the second half of 25 and kind of assume somewhat of a straight line from here to there of the destocking, you know, the destocking negative impact lessening from here to there? Or again, I'll just say it again. What does gradual recovery in 25 mean? translate to for us?

Dave, just let me just quickly start. I think as Marco commented earlier, that the largest swing factor that we have for growth next year is really going to be tied to the timing and pace of recovery in vials. And so as you know that there is a amount of capacity on the market today. And so customers are not necessarily compelled to place orders as quickly as they may have historically. And so as we move into 2025, I think that it would be early to speculate kind of the timing and pace of that. And I just don't think we're in a position today. And Marco or Franco could add additional color if they'd like.

You think that at least We have a constant exchange with our customer, in particular at the end of the year. And we see that month by month, they are going to increase their way that they give more transparency on the forecast for 2025, not only the small customer, but also big international organizations. But still, we want to have a quotient optimism that 2025 will be the year that we will recover. We want to be prudent to understand when it will be the right of normalization.

Sorry. Sorry. Go ahead, Jeff. Okay. Since that one didn't hit the mark, let me move to a different one, which is around the additional costs for validation in fissures and optimization in engineering. So those are your adding costs. These are plans that were in place before and you're adding costs related to those. Can you talk about what what has deviated from your previous expectation that requires those additional costs? For example, in fishers, is validation proving to be more challenging than you previously expected? Are you validating for more customers than you previously expected? And similarly, in engineering, what is requiring the additional cost relative to the optimization plan that you set out before? Thank you.

The ramp-up activities are advancing as planned and we are happy about the program. We have higher costs for fishers related to validation and some time is taking longer depending on customer approach, their process and not every customer is the same with respect to the validation activities. We are targeting here, as you know, high-value products, so the requirements are often Anyway, we are very happy about the success we gained in validating the plant and the first line with the very important customers that are, by the way, already committed orders, so they are really willing to start with us.

For what is related to the engineering segment, one of the main actions that we are taking in our optimization plan is to review our footprint. For example, we have done some right size in our operational structure and we have moved some activity to Italy. We have decided to move with this type of decision in order to build the floor for the next growing in order to increase our productivity and reduce our costs. We have decided to do this investment right now today in order to gain and to be back on more regular marginality for next 2020, in the middle of next 2025.

Got it. Thank you. Appreciate the extra question. Thanks.

The next question is from Paul Knight at KeyBank Capital Markets. Please go ahead.

Hi, Franco. Could you talk why Indianapolis is coming online faster? Was it customer request, customer payment? What were the dynamics from what we thought would be a later 2025 startup

we are in line with our expectation i mean it was in our plan to start the commercial revenue about two three quarters after latina so we are exactly in line with our plan obviously now it's a matter of ramping up the revenue and the activities there and better leverage the fixed cost we have there but for honesty we are exactly in line with our plan in order to remember

Paul, that Latina was a brownfield and fisheries are greenfield plants. And the greenfield plants also, from the moment that we decided during the IPO to do the greenfield plants, we received some additional orders like BARDA, also the other opportunity that we have enlarged the plant. So this is why we have this, let's say, few quarters of difference between Europe and United States.

Okay. And then within an engineering group, the turnaround there, is it done in terms of fixing operations in Northern Europe? Where are we from where you want to be with the efficiencies at engineering in Northern Europe, Denmark, I believe?

Today, our goal is to build a center of excellence for each product. And already our original idea is to have, for inspections, the system to have excellence in Denmark and also in Italy in particular, in Bologna. So this plan is in place. It will require also a few quarters in front of us. Our expectation is to be in the middle of next year, to be back on certain marginalities.

The last question would be the startup of hiring and training people in front of capacity starting like Indiana, like Latina, what do you think that's had? 100 basis point impact on gross EBITDA margin? Is it 200 or is it kind of a range of 100 to 200? Can you kind of give a formula or a data range on you know, personnel costs, training costs.

What I can tell you, Paul, is that we are having in this quarter negative gross profit in the combination of Fisher and Latina. So the graph is illustrative, but we are not still at overall the combination of the two in positive gross profit margin. And since we are targeting high value products here, we expect the final gross profit margin will be above the average of the company. So you can see the magnitude of the data we are suffering today with the ramp up of the two facilities. But again, we are doing it for future profitability covered by customer's demand.

Okay, thank you.

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

Thank you. I have a follow-up to Jacob's question from earlier. I'm just trying to better understand the Q4 sequential margin expansion. I mean, I'm looking at a 500 basis point sequential gross margin improvement from Q3 levels into Q4. Is that number correct? And it does seem inconsistent with historical incremental margins. So I was wondering if you could help me better understand the buckets that would drive that.

Yes, thanks for the question. So we are targeting at the center point more than 320 million of revenue in Q4. We are largely covered by committed orders and the mix is expected to be pretty good. And that is the reason why we increased the guidance for high value products in Q4. And again, we are covered by committed orders from customers largely. The mix and the growing volumes is expected to help the better levels of fixed expenses and the mix. And on top of it, we are expecting better performances from the financial point of view, both in fishers and Latina, as soon as we step up with the revenue and the coverage of fixed expenses. So the combination of these events is giving us confidence in delivering the guidance for Q4.

Okay. I think I understand a bit better. And just a quick follow-up. Franco, I was wondering if you could Better to mention that comment you made that vial demand is below 2019 levels. By how much? And I'm trying to better understand the magnitude of revenue lift possible if demand merely returned to 2019 levels.

Yes, Marco speaking. As we disclosed clearly, we are down 48, 40% compared to last year in buyers. And it's coming after a year when we decline the COVID business that was mainly biased by 80 to 90 millions in 23. So it's the combination of two years of decline is putting us in a condition that we are below 2019 demand. What we expect for the future, I think we disclose of the variables in place between large customers and smaller customers, also by geographical area. Obviously not easy today to put together the combination of all these probability and give you precise guidance about 2025. This is the main uncertainty we need to assess and to address for 2025. Okay. Thank you.

You're welcome.

The next question is from Curtis Moyles, BMP Paribas Exane. Please go ahead.

Thank you for taking my question. I'm just looking at the the the fiscal year guidance. You know the range that you have out there for the implications for Q4. It looks like it's kind of anywhere from a 1% decline to a 5% increase in Q4, so I kind of wanted to get a better idea of what the moving parts are there. Are you expecting an improvement in BDS and engineering or is one going to do better than the other or any other color will be helpful?

For Q4 expectation is to improve mainly in BDS segment. where we are basically leveraging the high value produce, the higher volumes and the ramp up of fishes in Latina. So it's mainly about the BDS segment improvement.

Okay, that's helpful. And then also, just going back to the destocking, you know, you're calling out vial orders expected to improve or pick up by the end of the year. Should we expect any kind of impasse on revenue in Q4, or is that going to be delayed until 2025 at the earliest?

Again, as Franco was saying, we are gaining traction in orders. We see some improvement and not yet the normalization of the level of orders in vials. Orders are mainly for beginning of 2025 rather than Q4, 2024.

And if I may also, your sort of confidence about our long-term strategy and what eventually is behind 2024 in order to isolate the situation 2024. So, 2024 was a challenge for Stavronato Group. We faced some temporary painful headwind this year. Via the stocking took the industry by surprise and will turn around. This is important that we need to be clear. We are also in a cycle of high investment in Fisher and in Latina, but we are doing this investment for the future. In engineering, this is within our control, and we feel confident that the action we are taking will deliver results. On the other side, we see sustained demand for high-value solutions, in particular on syringes, Nexa, and Alba, a cartridge 3-to-3. At the end of the day, the fundamentals have not changed, the demand landscape is robust, and we have long secular tailwinds. In short, we are positioned for profitable growth. So, from our perspective, as we consider 2026, we would expect that, while the stocking will be behind us, we will gain leverage from scaling our new operation in Latina and in Fischer, and the engineering segment should return to profitable growth. give us continued confidence in our ability to achieve an adjusted EBITDA margin of 30% and high value solution in the range of 40 to 45% in 2027. This is the behavior that we have today with the leadership team.

Thank you.

Operator, do we have any other questions? As a reminder, if you wish to register for a question, please press star and one on your telephone. Once again, if you wish to ask a question, please press star and 1 on your telephone. Ms. Miles, there are no more questions registered at this time.

Thank you very much. We want to thank everyone for joining us today and have a wonderful day.