Q2 2022 Embecta Corp Earnings Call
Speaker 1: Tell.
Speaker 2: Please stand by. Welcome, Ladies and gentlemen, to the second quarter of fiscal year 2022 earnings conference. Call for back to CORT.
Speaker 2: At this time, all participants have been placed in a listen only mode.
Speaker 2: Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly.
Speaker 2: During the call the company will make more forward-looking statements and in this possible actual results could differ from management's expectationsrisk uncertainties and other factors that could call. Such differences can be found in the company's earnings release and latest SEC filings, including the information statement dated February eleventh 2, Y and 22, filed as exhibit 99.1 to the company's current report on Form 8-K in Form 10 -q.
Speaker 2: You are cautioned not to place undue reliance upon any forward-looking statements which speak only as of the date madealthough it may voluntarily do so from time to time, the company undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events are otherwise, except as required by applicable securities laws.
Speaker 2: Management will also discuss non-GAAP financial measures regarding our performance. Reconciliations to GAAP measures, including the details of purchase accounting and other adjustments, can be found in our earnings release and financial schedules and the appendix of the Investor Relations presentation. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period.
Speaker 2: Revenue percent changes are on an FX neutral basis, unless otherwise noted.
Speaker 2: When management refers to any given period, they are referring to the fiscal period. I' let to specifically note it as a calendar period.
Speaker 2: The earnings press release slides to company today's call and webcast replay. Details are available in the Investor Relations section of the company's website W embecto com.
Speaker 2: I would now like to turn the call over to MR Dev kiccar and bectous, President and Chief eut Officer. Please go ahead, sir.
Speaker 3: Thank you Shannon, and welcome everyone to inbed our second quarter of fiscal year 2022 earnings call, which also marks our first quarterly earnings call as a newly public company.
Speaker 3: My name is death currick, I'm the presidentency of imbeta and I'm joined on the call today by Jake callgy' inbector's Chief Financial Officer.
Speaker 3: As you know, we successfully executed the spinoff from beting Dickinson and April first, just about six weeks ago. Being able, during the closing bell at the NASDAQ on day one was a motivating and uplifting day for our global team of 2000 employees.
Speaker 3: Who are dedicated to our mission of developing and providing solutions for people with diabetes.
Speaker 3: I would like to thank all those who worked tirelessly for almost a year to ensure that the spin was executed smoothly, including all our formal colleagues at bctton dinson.
Speaker 3: While we are now an independent company, we have a series of transition services agreements, or TSAs, with back indicates in that we are now operating underwe have begven the work of recruiting people, implementing processes and setting up the systems that we will need to have in place before we exit the TSAs.
Speaker 3: In addition, our team continues to work tirelessly to overcome the multiple challenges that currenty exists globally.
Speaker 3: Including inflationary pressures, supply chain disruptions, COVID-19 restrictions and geopolitical uncertainties.
Speaker 3: Throughout all these challenges, our focus remains on ensuring that people with diabetes that use our products continue to have access to them.
Speaker 3: Here is what we plan to cover during our pre prepared remarks this morning.
Speaker 3: As this is embeta's first quarterly earnings call as a public company, we thought it would be helpful to spend a few minutes describing our company's history, our business and our competitive strength as a diabetes injection devices company.
Speaker 3: After my opening remarks, gate will provide you with a more in-depth review of the financial results for the second quarter and first six months of fiscal 2022, as well as our financial guidance, which we introduced in our earnings press release issued earlier today.
Speaker 3: I will then provide some thoughts on why we believe we've emerged from our spin in a strong, stable position with global growth opportunities.
Speaker 3: We will then open up the call for questions.
Speaker 3: Slide five place.
Speaker 3: Let me first start with who we are. Quite simply, we are an organization with a truly unique opportunity to create a eminent diabetes-focused company in the world.
Speaker 3: Our mission is to develop and provide solutions that make life better for people with diabetes. That is our entire focus.
Speaker 3: We built an incredible leadership team to admman servation of empowering people to live life unlimited by diabetes.
Speaker 3: J can. I join this business from outside of BD and have significant experience in the medical device industry.
Speaker 3: On global team of 2000 employees are excited about what we can do with this business for people with diabetes, for our customers and for our shareholders.
Speaker 3: I'm thrased to have this opportunity and I know how our globals team feels the same way as well. Slide 6: Please.
Speaker 3: four spin- we believe we will- to merge as an independent company with some enduring strength.
Speaker 3: We are a trusted leader with test in class products and unmatched capabilities.
Speaker 3: Strengths we have developed after making his devices for almost 100 years.
Speaker 3: We believe we have best-in-class products and brands across our portfolio in all geographies.
Speaker 4: As a reminder, insulin was first used to three diabetes in one thousand nine hundred and twenty-two.
Speaker 4: And reintroduced the first specialised inlence in one thousand nine hundred Twenty four.
Speaker 4: Since then, we have continued to earn the reputation for quality in the lossalready that we believe is unarrival in the marketplace.
Speaker 3: In preparation for the separation from BD, we've taken care to ensure that our new name, emvector and logo retain a linkage to the BD brand.
Speaker 3: And I've decided to keep the names of our products and changed.
Speaker 3: As we transition to the impact our brand over the next couple of years, we will be careful to ensure that our brand recognition is maintained.
Speaker 3: In addition to the history, reputation and brand strength that I just discussed, our leadership is based on our core strengths, where our scale, quality and efficiency create competitive advantageswe have unmatched manufacturing, distribution and sales capabilities.
Speaker 3: We are the number one producer of injection devices. We produced almost eight billion units a year in three facilities around the world.
Speaker 3: And we distribute them to over 100 countries.
Speaker 3: When we estimate they are used by three million people annually.
Speaker 3: Our commercial efforts globally are supported by approximately 600 of our team members.
Speaker 4: Taken together, this extensive distribution capability, along with our sales infrastructure, provides a significant ability to reach people's diabetes around the worldfurthermore, we are especially proud of the fact that we have strong presence in infrastructure and emerging markets.
Speaker 4: More than half of our 600 commercially focused employees are in emerging markets, which is where we expect the vast majority of the growth in the number of people with diabetes to occur going forward.
Speaker 3: These trends have been developed and enhanced over many decades and they provide a strong foundation for our business.
Speaker 3: Flight and place.
Speaker 4: We believe that emba has begun its life as a public company in the position of strength.
Speaker 3: Specifically we have a strong core business. We are than expanding category and the spin has created immediate benefits for our organization. Looking forur ther ahead, we have opportunities for growth in. Our stable core provides a solid transation for us to seek out and realize these new growth opportunities.
Speaker 3: Now let me walk you through each of these reasons in a bit more depth.
Speaker 4: First our core business of injection devices is strong.
Speaker 3: We have been making and selling insualllin injection devices for almost 100 years.
Speaker 4: Our global manufacturing infrastructure is unmatched.
Speaker 4: And we have mageographically diverses and distribution network, as I noted earlier.
Speaker 4: Second we participate in the large and expanding. This is area that continues to happ unbut needs.
Speaker 4: We are a pure-play diabetes company, one of a handful that provides products for the treatment of a chronic condition.
Speaker 3: Third PO spin. We have a compelling financial profile with the flexibility to invest for growth.
Speaker 4: As a newly independent public company, we continue to attract talent and have the opportunity to create a streamlined operating model that will provide enhanced agility and drive decision-making closer to our customers.
Speaker 4: Finally we are well positioned to identify and drive opportunities for growth.
Speaker 4: These include investing in commercial initiatives, a development program with the potential to enter into the infusion segment, as well as seeking MA at partnership opportunities.
Speaker 4: This is why we believe that our company is uniquely positioned.
Speaker 4: We have a strong, stable core business upon which set opportunities to drive growth in a market that is large, growing and withunmet needs.
Speaker 4: slideeight place.
Speaker 4: Here are our strategic and operating highlights during the second quarter and first half of 2020. -two.
Speaker 4: The company successfully completed the plans SP off from BD on April first 2020 two.
Speaker 4: Giving impact: the strategic, operational and financial independence and the opportunity to optimize product portfolio and achieve more efficient resource and capital allocation.
Speaker 4: To address the significant unmet need for chronic diabetes scale.
Speaker 4: This been off occurred by means of a produ distribution of all of vectors issued an outstanding shares of common stock.
Speaker 4: On the basis of one share backa common stock for a we five shares of beautd common stock.
Speaker 4: Head out of the close of business in March. twenty-second 2022 directorcord date for the distribution.
Speaker 4: The distribution qualified as tax free to BD and the shareholders for U's federal income tax purposes.
Speaker 4: As of the spin update, the diary scale business was completely transferred to emba.
Speaker 4: Upon completion of the distribution, ambea became an independent publicly traded company and BD retained no ownership interest.
Speaker 4: theregular weight trading of imbctor common stock began on the spin up date of April first.
Speaker 4: Under the tker symbol eembc. In connection with the spin-off BD emvector, entered into various agreements to effect the spin-off and provide a framework for the relationship between BD and embctor after the spin-off.
Speaker 4: Including a separation and distribution agreement, a transition services agreement, manufacturing and supply agreements, reverse manufacturing and supply agreements and employee matters agreement, a tax matters agreement, a lease agreement and certain other commercial agreements.
Speaker 4: We are highly focused on creating a solid foundation for sustainable growth going forward.
Speaker 4: We already have an established presence in the injection space, but we are focused on innovation and driving improved outcomes and the reduction of complications for those people who live the diabetes.
Speaker 4: As such, and as discussed in our preestpin investor presentation, we continue to advance the development of an insulin patchformk specifically designed for people to type two diabetes.
Speaker 4: Success there will expand our total addressable market significantly and increase our long-term organic growth ratewe are proud to say that the type two closeed loop insulin delivery system utilizing this proprietary patch pump is being developed under the breakthrough device program of the? U usdn.
Speaker 4: This offers us an opportunity to interact the dfps experts to efficient address topics as they arise during the free market reviewphase.
Speaker 4: This has allowed us to have multiple discussions with the FDA and receive feedback even during the pademic period.
Speaker 4: The breakthrough device program will also allow us broadprioritized review of our submission when made.
Speaker 3: Over the course of 2022. our team has faced unprecedented global supply chain, supply chain distribute disruptions, inflationary pressures.
Speaker 3: Continuing in COVID-19 restrictions and geopolitical uncertainties.
Speaker 4: We are proud of our team's ability to deliver strong execution despite the challenging operating environment.
Speaker 4: As has been widely repforded in the press.
Speaker 3: These headwinds are impacting the financial results of companies doing business around the world.
Speaker 3: ambctor unfortunately, has not been immune to these either.
Speaker 4: Why we are continuing to mitigate the impact of COVID-19 restrictions in some markets that are impacting operations.
Speaker 4: Inflationary pressures on raw materials, shipping costs and delays and fluctuations in foreign currency exchange rates continue to impact our financial results.
Speaker 3: The scale and scope of our operations, along with the long history of working with our suppliers.
Speaker 4: Have allowed us to maintain continuity of supply and minimise customer and patient disruption.
Speaker 4: With that, let me turn it over to Jay to discuss our Q2 results and our expectations for the second half of the year J.
Speaker 5: Thank you Dev, and good morning everyone. It is my pleasure to have the opportunity to speak with you today about ambecta.
Speaker 5: As during the next several years. We believe that we have a truly unique opportunity to create the preeminent diabetes-focused company in the world.
Speaker 5: Before I discuss the financial results for the second quarter of 2022, I would like to provide some background information and highlight a few items regarding the presentation of financial results for the second quarter and first half of fiscal year 2021 and 2022, and.
Speaker 5: First in bea has a September thirtieth year-end, So the financial results were inbeedas. Fiscal second quarter and first half are further three and six -months ended March thirty-first.
Speaker 5: Second the Q2 and first half of fiscal year'. 2021 and 2020 -two results are based on carve-out accounting principles.
Speaker 5: Derived from the unaudited interim condenensse, consolidated financial statements and accounting records of beckon Dickinson.
Speaker 5: These financial statements reflect the historical results of operations, financial position and cash flows of BD's diabetess care business, as they were historically managed in conformity with U's generally accepted accounting principles.
Speaker 5: In addition, these financial statements include general corporate expenses of BD and shared segment expenses for certain support functions that are provided on a centralized basis within vd and which were not historically allocated to the BD diabetes care business.
Speaker 5: Nonetheless, these financial statements do not include all the actual expenses that would have been incurred had impacted been a stand-alone public company during the periods presentedthird. We have introduced financial guidance for the second half of fiscal year 2022 in today's earnings press release, which I'll review in a few moments.
Speaker 5: These financial guidance items represent the company's expectations for financial performance as an independent company. This makes the evaluation of our historical financial results compared to our forward-looking guidance for the second half of 2022 a bit challenging, as it is not on an applees-to-applees basis, given the fact that in's historical financial results do not include all the actual expenses that would have been incurred had inacted been a stand-alone public company during the periods presented. I plan on focusing most of my prepared remarks this morning discussing imped's second half of 2000 and twent-two financial guidance.
Speaker 5: Turning quickly through impactive' financial performance for the three and six -month periods. For the second quarter, impacted generated revenue of 274.5 million. This represents a decrease of three point four percent on an as reported basis and a decline of one point 3% on a constant currency basisthe constant currency revenue decline was due to a decrease in volume to customers located within the? U's and Europe .
Speaker 5: This volume decline was primarily due to conscious decisions that the embda management team made during the latter portion of 2021 to no longer participate in certain business moving forward due to several considerations.
Speaker 5: Including the length of contract term. Premium PL pre some brand.
Speaker 5: Quality reliability and clinical support and profitability.
Speaker 5: While these deliberate decisions to walk away from certain customers will cause a temporary volume impact during 2022, it creates a healthier impact of moving forward.
Speaker 5: On a year-to-date basis, revenue was 563.8 million.
Speaker 5: This represents a decrease of 1% on an as reported basis and an increase of zero- 0% on a constant currency basis.
Speaker 5: The constant currency revenue increase was primarily driven by an increase in volume in certain emerging markets, which consists the countries within Eastern Europe , the Middle East Africa, Latin America, central and Southeast Asia, as well as Mainland China.
Speaker 5: The volume increase we experienced in emerging markets was somewhat offset by the decisions not to participate in certain business I referred to earlier.
Speaker 5: Moving the gross profit and margin.
Speaker 5: Gross profit and margin for the second quarter of 2022 totaled 191.2 million and 70% respectable.
Speaker 5: This compares to 196.3 million and 69% in the prior year period.
Speaker 5: The 60 basis point. Improvement in gross margin was primarily due to favorable product mix.
Speaker 5: On a year-to-date basis, gross profit and margin total 395.1 million.
Speaker 6: And 70% respectively.
Speaker 6: This compares to 387.6 million and 68% in the prior year period.
Speaker 6: The 200 basis point improvement in gross margin was primarily due to a $1 million impairment charge associated with the write-off of certain construction and progress assets that were recorded in the first quarter of 2021.
Speaker 6: If you were to normalize for the impairment charge recorded in 2021, gross margin would have improved approximately 2, 20 basis points year-over-year.
Speaker 6: Turning to net income, during the second quarter of 2022 it totaled 79.6 million.
Speaker 6: This compares to 107.9 million in the prior year.
Speaker 6: The decrease of approximately 28 million is due to a combination of factors, including a decrease in gross profit dollars that I just mentioned.
Speaker 6: An increase in selling and admin expenses of approximately Eleven billion.
Speaker 6: Driven by an increase in marketing and advertising spend, as well as an increase in compensation and benefit costs due to increased headcount in anticipation of spend and becoming a standalone publicly traded company.
Speaker 6: An increase in R D of approximately four million, driven by increased investments in the development of new products, specifically including our insulin cash pump.
Speaker 6: Interest expense of approximately five million that was incurred in the second quarter of 2022, as compared to zero in the prior year period.
Speaker 6: As well as approximately seven million of other operating expenses that was incurred related to the spin-off.
Speaker 6: This is somewhat offset by lower year-over-year tax expense, which total approximately six million.
Speaker 5: On a year-to-date basis, net income total 178.4 million and that compares to 213.2 million in the prior year.
Speaker 5: The year-to-date net income decrease.
Speaker 5: Is due to the same factors that impacted our second quarter results.
Speaker 5: Lastly, moving to adjusted EBITDA and margin.
Speaker 5: It totaled approximately 116.8 million and 43% for the second quarter of 2022, and 254.8 million and 45% for the six months of 2022.
Speaker 5: This compares to 141.6 million and 50% and 289.8 million and 51% in the year ago periods.
Speaker 5: Once again, I would like to reiterate that the historical financial results that I just referred to do not include all the actual expenses that would have been incurred had inbacked been a stand-alone public company during the periods presented.
Speaker 5: Finally with respect to our balance sheet and financial condition at quarter end.
Speaker 5: As of March thirty-first 2022, we held approximately 264 million in cash and cash equivalents and one point six five billion in debt.
Speaker 5: As we created our initial capital structure and leverage levels, we also tried to be mindful of our current financial profile, the need to increase the level of investment into the business and shareholder returns.
Speaker 6: Effective day one of spin, we have a balance sheet that we can use to invest both organically as well as use for MNA and partnership opportunities.
Speaker 6: And as of March thirty-first 2022, our last 12 month ended net leverage ratio stood at approximately two pointy-eight times.
Speaker 6: We also intend to provide shareholders with a sustainable return of capital in the form of a dividend that is targeted at a 20% payout ratio of GAAP net income.
Speaker 5: We think that we can provide this return to shareholders while preserving the ability to increase the level of investment in the business to drive accelerated constant-currency revenue growth rates in the future.
Speaker 6: All while maintaining a very strong liquidity profile.
Speaker 5: That completes my prepared remarks as it relate to Investor's historical financial performance.
Speaker 5: Next I'd like to outline for you inbe's financial guidance for the last six months of fiscal year 2020 -two.
Speaker 5: Beginning with certain key assumptions. Unlike the first half of 2022, our second half of 2022 guidance attempts to take into consideration the various costs that inbecctor will incur moving forward as an independent, publicly traded company.
Speaker 6: This includes various contract manufacturing agreements that we will have in place with BD, which result in third-party revenue for ebeca at very little gross margin.
Speaker 5: While certain other supply agreements are for inputs that impacta needs to obtain from BD, such as cannulas, which are used in impact as product offerings.
Speaker 6: In addition to these, contract manufacturing and supply agreement impacts our second half of 2022. financial guidance also assumes incremental expenses that we will incur because of the lease of our holderge in Nebraska facility from BD, as well as additional expense that will incur as a result of BD continuing to factor certain accounts receivable on bco's behalf.
Speaker 5: Furthermore, our second half of 2022 financial guidance also assumes six months' work of transition services expense related to a variety of things that BD will perform. Form beta.
Speaker 6: The transition services expenses were determined and costed out at a very detailed line on a level.
Speaker 5: These TADs can last or a period not to exceed two years and can be terminated earlier by imbeca with a defined notice period.
Speaker 6: As part of our second half of 2022 financial projections, we also included estimates associated with costs that we anticipate in curring, as we stand up, our own public company.
Speaker 6: These costs include expenses associated with stock-based compensation, external audit fees, stock exchange listing fees and, most notably, the expenses associated with the creation of various corporate functions and infrastructure, such as finance treasury tax HR it legal, supply chain, and regulatory and quality.
Speaker 6: Moreover, as we prepared our second half of 2022 financial guidance, we also attempted to take into consideration the impact that COVID-19 is having on China and some other markets.
Speaker 5: Geopolitical concerns, such as the war in Ukraine, as well as having negative impact stemming from inflation and supply chain disruptions.
Speaker 5: We have attempted to give due consideration in these elements what we realize: that the future trajectory of these factors is inherently unpredictable.
Speaker 5: Lastly, given that approximately half of imba's businesses derived internationally, I wanted to take a moment and highlight what we assumed for some of the key currency pays that affect our business.
Speaker 5: Those being the euro dollar, dollar Japanese N and dollar Chinese W.
Speaker 6: We based our second half of 2022 financial estimates on spot rates that existed at the end of April , including a euro to dollar rate of approximately 1.07, a dollar to Japanese yen rate of approximately one and twenty-seven.
Speaker 6: And a dollar to Chinese laundry of approximately six point six.
Speaker 6: These assumptions compared to the second half of 2021, rates of approximately one hundred and nine and six point five respectively.
Speaker 6: Now that I've outlined some of our key assumptions, I'd like to now take you through our financial guidance for the last six months of 2022 and provide some perspective as to what some of the key drivers of change are as compared to the first half of 2022. results beginning with revenue.
Speaker 5: We expect to generate approximately 555 million in the second half of 2022, or approximately one point one billion for the 12 months of fiscal year 2022.
Speaker 6: This full year revenue assumption is largely consistent with the revenue dollar amount that BD had included in its original fiscal year 2022 revenue guidance for diabetes care, as well as what it recently removed when it provided remained co guidance approximately one week ago.
Speaker 5: The approximately 555 million of revenue in the second half of 2022 would represent a decrease of approximately 7% on an as reported basis, as negative foreign currency headwinds are anticipated to drive about half of the decline.
Speaker 6: While constant currency revenue is expected to be down approximately three percentpoint, half percent- and.
Speaker 6: The constant currency revenue decline that we expect to see in the second half of 2022 is due to a few main items.
Speaker 6: First COVID-19 continues to be a headwind, and this comes in two forms.
Speaker 6: As during the second half of 2021, we saw a rebound from coed and an increase in the volume of our products that were purchased.
Speaker 6: While during the second half of 2022. We're now faced with disruption impacting China and some other countries.
Speaker 6: These covert dynamics create a difficult revenue comparable for us in the second half of 2020. -two and.
Speaker 6: However to date, we have been able to maintain our operations and continuity supply throughout this period.
Speaker 6: Next while we do not have a material amount of revenue in Russia and Ukraine, the war and the resulting geopolitical uncertainties are expected to have an adverse impact on our business in the second half of 2020. -two and.
Speaker 6: And third, I referenced earlier certain decisions that we made in the latter part of 2021 to not participate in certain business. Moving forward, like the first half of 2022, this will also be a modest headwind in the second half of the year as well.
Speaker 6: This is a temporary headwind for mbta, as we compare the second half of 2022 results to the second half of 2021 results.
Speaker 6: Lastly, as we prepared for the spin during the second half of 2021, we analyze our rebate reserves, which caused us to reverse some previously established liabilities.
Speaker 6: This caused us to recognize additional revenue in the second half of 2021, and that is not expected to reoccur in 2020. -two and.
Speaker 6: These rebate reversals, which occurred in 2021, would have been a headwind for us in the second half of 2022. however, that is being offset almost one for one by approximately $15 million worth of contract manufacturing revenue we expect to generate during the second half of this year related to product we will sell to BD. Turning to adjusted gross margin.
Speaker 6: During the second half of 2022, we expect our adjusted gross margin to be somewhere in the low 60 S.
Speaker 6: This represents a decrease from a 70% level that we achieved during the first half of 2022 and is due to a few factors.
Speaker 6: one being increased expenses that we will incur relating the standing up inbta.
Speaker 6: A second being the combined impact of contract manufacturing and supply agreements that are in place with BD, both from the perspective of purchasing cannulla from BD at a markup, as well as from selling certain product back-to BD at only upper single-digit gross margin.
Speaker 5: And third being incremental inflation, raw material and supply chain costs we expect to incur during the second half of the year.
Speaker 6: Moving next to TSA expense. As I stated earlier, the TSA last for up to two years.
Speaker 6: Assuming we maintain every TSA during the first 12 -month period, we will be charged a total of $7 million, or approximately 35 million during the second half of 2020. -two and.
Speaker 6: Again that assumes we maintain every TSA that is currently available to us.
Speaker 5: Finally that takes me to adjusted EBITDA margin which, during the second half of 2022, we expect to be in the low 30 S.
Speaker 5: Light gross margin. The decline in adjusted EBITDA margin from the first half of 2022 to the second half of 2: 22 is due to a few primary drivers.
Speaker 5: These include the change in gross margin discussed earlier.
Speaker 6: Incremental standup costs and additional investments in R and D.
Speaker 5: Despite these incremental investments in beta, is very well positioned with robust adjusted EBITDA margins as we embark as an independent company.
Speaker 5: That completes my prepared remarks. Let me now turn the call back over to Deb Deb. Thank you, Jake.
Speaker 4: Slide 12, Please. On Slide 12 you will see some of the reasons why we think we have a strong business.fir, St. As we showed earlier, we have a strong core which translates into a compelling financial profile. Second, our core is broadly defensible. We have solid intellectual property compris of approximately 2000 patterns.
Speaker 3: Know-how and tre secrets. Our manufacturing know-how has been gained over decades of experience and is carefully protected.
Speaker 3: And we have a long-term agreement with BD to continue to provide cnulus. These are the needles that are used in our products.
Speaker 3: Finally we are able to build an organizational capability around the single-minded mission of developing and providing solutions for people with diabetes.
Speaker 4: This purpose motivates our workforce and continues to attract talent to embctor.
Speaker 4: Slide 13 place.
Speaker 3: Let me now walk you through how our business today provides a financial foundation for growth.
Speaker 3: Both our business model and our healthy balance sheet providide a strong core.
Speaker 3: First we have a stable recurring, geographically diverse revenue base, with almost half of our revenue coming from outside the United States. Our products are chronic use and the vast majority of people with diabetes will continue to use injection devices.
Speaker 4: Second our margin profile is heing.
Speaker 4: This is supported by a part brand recognition, long history of reliable supply scale and efficient manufacturing and distribution infrastructure.
Speaker 3: Third we have a history of generating strong positive cash flow from our operations.
Speaker 3: Fourth, we have modest leverage and considerably below the net leverage covenants in our credit agreement.
Speaker 4: Fifth, our starting cash balance will allow us to quickly capitalize on any suitable growth opportunities that we identifytaken together. You can see that these elements allow us the financial flexibility to invest for growth.
Speaker 3: On Slide 14, you will see that we intend to make strategic investments to accelerate our long-term growth profile.
Speaker 4: We expect to do this through commercial investments, the introduction of nextxgen products and MNA.
Speaker 4: First we can continue to expand and penetrate through our core business. This includes e-commerce investments, as well as educating people with diabetes and other stakeholders on the benefits of using a new device for every injection.
Speaker 4: Second we intend to increase our investment in RD and we remain excited about our patch pump that has been developed for the type two market.
Speaker 3: Finally we will seek partnerships and acquisitions where we can use our manufacturing strength and commercial capabilities to add value.
Speaker 4: Before we open up the life for QA, I would like to extend my thanks to the global ambctor team for everything they have done and continue to do to serve people with diabetes, even as we stand up fromba as an independent company.
Speaker 4: To summarize, andembthat is in a strong position after the spin.
Speaker 4: We are excited about the unique opportunity we have to create a pamllent diabetes-focused company in the world. Thank you for your justed invector.
Speaker 4: With that oper. We now open up the line questions. Thank you, sir. If you like to ask a question, Please signal by parsing Star one and your telephone key pads. If you're using a speaker phone, Please make sure your meat function is turned off to allow your signal to reach our equipment. We do Act that you limit yourself to one question and one follow-up.
Speaker 2: If you would like to ask additional questions, we invite you to edge yourself to the queue again by practing Star oneand our first question will come from Marie tled with B T I G line is open. Good morning, thanks for taking the questions, and Devin Jay can grapp on your first quarter. Here is the public company.
Speaker 6: I want and thanks for the interest. Thank you, I wanted to start here. Thank you for the extensive detail on the financial guidance. Just two quick questions on that. You know, with the decision to discontinue some of the business, is that a process that you go through annually or is that part of a rolling review? I certainly understand the impact of this year's guidance, but a year over Europe basis but wondering if that's something we should expect in future years. And secondly, you gave some details on inflationary pressures, certainly on the cost input five curious if there's also inflationary pressure for the consumer and whether that changes their choice of whether to choose an infective brand or another, perhaps less extensive brand. Thanks for taking question.
Speaker 7: M this is there. Thank you for the questions. With respect to the process of evaluating the choice of business that we do, let me just step back here. Given we have- you can imagine, over over sort of our global scope- hundred thousand of customers, and the way we do transact business with those customers depend certainly on the geography we are in. This customers tend to be everything from retail serving customers to patients retail, pharmac hospitals to pharmacies distributors, tenders. The place where we pay particular attention to- as as business comes up for renewals often is is certainly on the tender side.
Speaker 4: And the dynamics of the tender business can defer year-over-year. I would say that the choice that we made almost 12 months ago, it's a process we go through, and every year certainly, but I would not certainly expect to see.
Speaker 4: That level of a change year-over-year, that's not something that I would expect to see.
Speaker 7: Though it is a process that we go through, certainly annually, we pay close the attention obviously to the business that we turntrans Act. With respect to the inflationary pressure- again, just given the diversity of a geographic revenue, know the contracts that we have with our customers are different. We do have the ability to take price and adjust price as we renew our contracts, and we have done so, So we do have the opportunity to passs on some of these inflationary sort of cost pressures that we are feeling to the customer base. I would also like to point out that if you are a person with diabetes that is incurring spend on obviously treating diabetes, the cost of our product tends to be a very small part of, if you will, the total spend on managing the disease, and so that allows us a certain flexibility as well. Hopefully that answers your questions very.
Speaker 8: It does Yeah Thank you for that color some up here and that maybe it maybe if I could just jump in in just real quick just to to add to to what to what they have said you know again. We certainly do not think that these types of things you know moving forward necessarily still have the same impact you know obviously as as as a new management team came on board and even though for for the past year we were working on the spin and being prepared you know for the spin you know. We also wanted to make sure that you know from a longer term standpoint that the health of the business was in a really good good position as we sort of embarked as our own company. So as as we thought about you know which which customers and which business we may want to no longer do do business with I mean that was certainly taken into into consideration and and we certainly feel that.
Speaker 5: That we are in a much better position from a health standpoint, moving forward to, to grow back, the more sustainably as a result of some of these decisions, even though ll they'll have temporary impacts in 2022, and just as it relates to, you know sort of our or longer term, you know guidance were or financial thoughts that we have put out there. A few months ago, in early March, when we had an investor event, you know these tides of things were taken into consideration when we talked about our- you know your term through 2024. you know financial targets which would have called for flattish constant currency revenue, kger. So we still feel very, very comfortable with with those your term numbers that we put out a few months ago. All right, Thank you for that, well understood.
Speaker 7: We are ready to file our 5, 10-K on the hardware, the pump itself. Certainly that is something that we will be talking about. With respect to timing, i'am going to try to stay away from it. You know, I think, as you heard when, when we give our neartermguidance- the end of 2024- we hadn't included any revenue from the pump in that near term guidance. With respect to milestones though, I would say certainly know you'will hear more about that in fiscal 23 from us as we achieve certain milestones. And let me leave it on that, on the pump, for now.
Speaker 7: Murray, with respect, with respect to your second question, maybe I'll ask gave to start off and then I'll jump in.
Speaker 6: Yeah and marurrie, could you, could you just repeat the the second part of the question Please? It was essentially trying to understand an MA profile of what you be in a potential target. It would they be large, small? Is it totally focused on insulin delivery, pre revenue, early stage or commercial stage, or or any defil?
Speaker 6: So So I think, you know, from a, from an, M a standpoint, you know, I think that this is this is truly where I think a company of our size, you know, has real advantages. You know we, you know, at a billion, one or so in revenue, you know we have the scale, I think, to be relevant to you know, to our customers, you know and, and to patients, and that's both in the? U, us and internationally. But at only about a billion or so in revenue, I think we also have the unique opportunity to use M and a as a real growth accelerator, you know, for us, and and the types of transactions I think that we would be, you know, sort of interested in. You know really, fall 3, I would say, different types of categorie.s, you know first, pre revenue technology type deals that that we would use in order to try and augment our own internal R and D product development efforts. And, and those are going to be know, tend to be you.
Speaker 6: We wouldn't necessarily envision ourselves competing with, with you know different targets for for say, some very, very large companies because candidly, you know the types of things I think that we could look at that could move the needal in a more material fashion. For us are not the types of things that would really move the meal in a more material way for a larger, for a larger company. So I think those are. Those are sort of the three large buckets of different types of M and a that we're interested in. And with respect to the therapeutic area question about, would it be diabetes focused, the way we think about it honestly, are you know that it leverage strength and capabilities that we have right? Is it going to? Is it going to leverage our emerging market infrastructure? Can be leverage our manufacturing capabilities can be? Leverage our distribution strength- right? Is it a product that can be sold to the retail pharmacy? We have long history of working with the retailers to provide our products to patients. So you know we will. You know, certainly we remain focused on diabetes, but I wouldn't preclude.
Speaker 4: You know a product that we can sell, to what existing chanals we can live adjustance as well. Thank you. Our next question: how some facilia far long with Morgan Stanley ? Your line is open. greatate, good morning and thank you for taking the questionions. I wanted to turn back to your guidance for the back half of the year. If you could provide a bit more color, just what your contemplating specifically U us versus international contributions, taking into account both what's going on and Russia Ukraine China, walk downs, and then also your decision to step away when certain businesses, just how all of that rolles into your to each your, your back half guidance, and then anything you can provide, also to how you're looking from aaccence standpoint three Q, the park. You would be helpful and thank you. Yeah and Cecilia again. Thanks very much for for for the interest, the question. So you know from a from again from for the second half of of the year. You know for revenue, you know we would expect to generate somewhere.
Speaker 6: Have a smaller impact, you know in, you know to us in in the second half of the year. You know we probably do, you know somewhere to the tune of maybe like six million or so in annual revenue to to Russia and Ukraine. So right now in the second half of the year, you know, we're sort of factoring in that that might be somewhere to the tune of like a $3 million head. We're not really contemplating really much of any revenue in the second half of the year there. And then you know the larger, you know impact and that that's going to have in the second half of the year for us really comes back down to, you know, to those decisions that we refer to to sort of walk away and exit. You know certain business again, that is that in online is more, you know, temporary in nature and is certainly not something that is, you know, indicative and back vis ability.
Speaker 5: To grow in the future. So so, while it's going to havesomewhat, it had a somewhat of the temporary impact in the first half of the year compared to 2021. it's going to haveanother temporary impact in the second to half for the year, as compared to 2021. butwhen we step backand we made those decisions last year, we really did it for the healthan improvement of the business in the long term and it's something we feel very comfortable.
Speaker 9: Ok great things, St. if I could follow up also just on R and D, really what your contemplplanating from investment standpoint, both behind the patch pumpt this year as well as going for, but also the rest of your pipeline? Just if you can talk a bit more about your expectations from R and D, both again the back half of this year but also into 23 and thank youyes. So So from from a, from from an R and D SP standpoint, you know we obviously are, are very committed to, to making sure that and back continues to accelerate the investment R and D and other commercial. You know initiatives is well to really try and drive and accelerated. Know constant currency revenue growth rate in the future. You know there are there are a few different new product introductions that.
Speaker 5: That will be coming into the market over the next few years probably most notably hopefully the insulin patch pumpyou know. In the second half of the year we would expect R and D expense you know to ratably know tick up from sort of the first half of of the year levels and that will obviously be one of the areas that is going to be you know. Causing. We talked about EBITDA margin and and maybe I'll just just mention EBITDA margin just just very quickly just so that the investment community understand you know I would caution people that that the first half of the year you know does does not. It not indicative of all of the costs that in back will incur you know as as we move forward. But in the in the second half of the year going from the first half of the year you know the the EBITDA margin you know one of the iteidms that is going to be driving. It is obviously a very deliberate decision on our part to.
Speaker 10: I just have a question on you know more of a high level question and, given your leverage to emerging markets, I would love to hear your views on how emerging marke device innovation is evolving and how rapidly that could potentially accelerate and sort of how your positioned against that. You know kind of thinking, our emerging markets, where the? U's was from a device perspective a decade ago, 20 years ago, and sort of how that's changing.
Speaker 4: Thank you, Daniel. Emerging markets, as I've mentioned before, is a source of strength for us right, and soeach sort of asked about it in the context of what United States was- maybe 10 a decade ago, but I think there are some differences as we look forward right, So as we think about the fact that we have 300 commercially focused employees in emerging markets, we have a planned in China, one of our newer plans right, that's in one of the key emerging markets for us. That makes products for China as well as other emerging marketsas. We look forward, the majority of the growth in the number of people with diabetes is expected to occur in emerging markets. So, if we started the very thoughtp, that's where we're going to have growth in number of patients. As we look forward.
Speaker 3: Secondly, and as the GD per capit sort of increases and as con always improve, those folks are getting better access to care and better access to insulinand I think that's where I think you will see the strength of our company really match with what the needs of that market or because, as those folks get access to care, they are going to focus on insulin, they are going to focus on injection devices and we are well positioned there. Now there will be a section of the market that will adopt newer drugs, you know, the more advanced technology, but I think that is indeed decades the way I think we are just are perfectly positioned. You really match our strength with the needs of the region.
Speaker 7: As we think about M a as well by the way we keep looking for and we will keep looking for and finding opportunities to really Act to the back. For emerging markets. We you know part of what a min strategy is that we need a product that's going to serve you know the same product to serve produ BAL market. So you know we thenend to use our sense of the emerging markets to continue to you know why do our product portfolio over there. So we can really meet the needs of those patients. mo holisticallythank you our next question some Matthew Blackman with ste o on the open I good morning everybody. Thank you for taking my my questions and just one for me with with two parts versus it'just going to make sure I heard Jake. What you said you sort of touch on this. I think you said about 80% of the second half versus first half sequential step up in investments for stand up costs. So first that I hear that correctly Yeah that you did So as as we think about.
Speaker 5: Going from the first half of the year to the second half of the yeargross margin obviously is going from again 70%, but that is that is something that is not necessarily reflective of back in all the costs that we would really incur. Moving forward to the second half of the year, which we would expect it to be sort of in in the low sixty's, and from from a gross margin standpoint, I would say that there's really three main driversthe first of which I would sort of put in the bucket of kind of business related, that beingincremental inflation, raw material and it's kind of some supply chain increased expenses that we would expect to incur in the second half of the year. And then the other two are really, I would say, in the bucket of kind of spin related, and that'that's really related to an increase in expenses related to standing up in back.
Speaker 6: And then and then second, just the impact of the different contract manufacturing agreements that we're going to have in place where we're selling product to be D a very low up per single digit gross margin. We would expect to sell about $15 million worth the product at up per single digit Marin in the back half of the year to them and then on the flip side there is product that we need to source from them and that's going to come at a markup and none of that is necessarily included in the first half of the year. So gross margin is obviously going to have an impact in terms of the, the flow-through to adjusted EBITDA margin and then the other things that are impact in sort of the first half of the year to second half of the year, adjusted EBITDA margin, which again I would caution you that the first half of the year isn't necessarily obviously reflective of beca as a standalone publicly traded company.
Speaker 5: Whereas the second half of the year were certainly trying to take into consideration. All the different costs that we think that we're going to incur but gross margins obviously going to have an impact you know there are going to be some incremental you know stand up costs that are they re going to impact OpEx and then there's you know additional investment in terms of our indeed as well. Now all that said you know being in you know expecting to be sort of in in the low Thirty's in terms of adjusted EBITDA margin. In the back half of the year I mean that is very very robust adjusted EBITDA margin and it's going to allow us really to continue to make all the necessary investments that we think we need to do moving forward to try and get back to to a more sustainable top line growth moving forward and it also you know adjusted. Ebitda margins in the low. Thirty's really still allows us that flexibility in terms of being able to invest organically and.
Speaker 7: We wouldn't sort of encourage anybody to think about revenue from that through the near-term guidance we provided through 2024. soit's an area of intense focus for uswe are committed to sort of investing as needed to make to make that project come to life and achieve commercial success. butrevenue from the patch bump we certainly haven't included in our near-term guidance through the end of 2024.
Speaker 2: Thank you. That is all time we have for today's call. Thank you for your participation.