Q1 2023 Embecta Corp Earnings Call
Speaker 1: You you, you.
Speaker 2: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.
Speaker 3: Please stand by. Welcome ladies and gentlemen to the fiscal first quarter 2023, In Back to the Ernie's Conference Call. At this time, all participants have been placed in all of snowly modes. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay.
Speaker 3: following the completion of this call. I would now like to end the conference over to your host today. Mr. Purvesh, Candle Wall, Vice President of Messed Relations. Just go ahead. Thank you.
Speaker 4: Thank you, operator. Good morning, everyone, and welcome to Mbecta's fiscal first quarter 2023 earnings conference call. The press release and slides to accompany today's call and webcast replay details are available on the investor relations section of the company's website at www.mbecta.com.
Speaker 4: With me today are Dev Kudrikar, MBecta's Chief Executive Officer and Jake Albuis, our Chief Financial Officer.
Speaker 4: Before we begin, I'd like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides.
Speaker 4: We wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risk and uncertainty. Natural events or results may differ materially.
Speaker 4: The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, which can be accessed on our website.
Speaker 4: In addition, we will discuss certain non- GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAP. A reconciliation of these non- GAAP measures to the comparable GAAP measures is included in a press release and conference call presentation.
Speaker 4: Starting on slide 3, our agenda for today's call is as follows.
Speaker 4: Dev will begin by providing an overview of M-Bector, our strategic priorities for 2023, and some remarks on the overall performance of our business during the first quarter.
Speaker 4: Jake will then provide a more in depth review of first quarter financial result.
Speaker 4: as well as our updated financial guidance for the year.
Speaker 4: We will then open the call for questions.
Speaker 4: With that said, I would now like to turn over the call to our CEO , Dev Kodaikar. Thank you.
Speaker 5: Good morning everyone and thank you for joining us today.
Speaker 5: A life with diabetes doesn't have to come with limitations.
Speaker 5: And at M-BECTA, our mission is to develop and provide solutions that make life better for people living with diabetes.
Speaker 5: At every stage of the diabetes care journey, we are there by a person's side because we believe that no one should have to live with diabetes alone.
Speaker 5: We are driven by a sense of urgency to advance what's next in diabetes, and for nearly a hundred years we've been accelerating the journey to better diabetes care.
Speaker 5: Whether you're newly diagnosed or transitioning to a new line of therapy, we are working to make a person's everyday experience as comfortable and convenient as possible while also advancing a new generation of solutions.
Speaker 5: During 2023, our strategic priorities are centered around three pillars as shown on slide 5.
Speaker 5: First, we will focus on continuing to strengthen our base business while maintaining our global leadership position in the category of insulin injection devices.
Speaker 5: Examples of this are our inclusion on the Express Scripts National Preferred Formulary as well as recent pen, needle and insulin syringe contract wins from the U.S. Department of Veterans Affairs. For more information, visit www.fema.gov
Speaker 5: Second, as a recently spun-off new public company, 2023 is a critical year for Embekta to stand up our own systems, processes and procedures so that we can achieve a timely separation from B.D.
Speaker 5: During the first quarter, we continued to make progress in this area as evidenced by the exit of several transition service agreements.
Speaker 5: And finally, we also have our eye on the future and we intend to continue investing in R&D, most notably around a patch pump that has been developed for the Type 2 market.
Speaker 5: In addition, we are continuing to evaluate suitable M&A and partnership opportunities to add market appropriate products to our portfolio.
Speaker 5: We remain energized about our long-term prospects as we work towards creating the preeminent diabetes-focused company in the world.
Speaker 5: Turning to our performance during the first quarter of 2023 on slide 6.
Speaker 5: During Q1, we delivered strong commercial performance despite the challenging macro operating environment as we generated revenues of $275.7 million.
Speaker 5: This represented a decline of 4.7% on an as-reported basis.
Speaker 5: but an increase of 0.7% on a constant currency basis.
Speaker 5: Our Q1 revenue was better than we initially expected as we exceeded our constant currency revenue expectations for both the US and international markets.
Speaker 5: Foreign currency, while the headwind during the portal was modestly better than we had originally thought.
Speaker 5: And while Jake will go through this in more detail in a few minutes.
Speaker 5: Like revenue, our adjusted gross, adjusted operating, and adjusted EBITDA margins for the first quarter also exceeded our expectations. As we generated adjusted gross margin of 68.5%
Speaker 5: Adjusted operating margin of 36.9% and adjusted a bit-down margin of 40%.
Speaker 5: This solid operating performance translated into adjusted diluted earnings per share during the first quarter of 2023 of 96 cents.
Speaker 5: In addition to getting off on the right track from a financial perspective, during the first quarter, we also took steps to strengthen our base business, including holding over 50 scientific and educational events, which reached over 2000 healthcare professionals.
Speaker 5: I am also pleased to say that effective January 1st, Embector, Spend Needles and Insulin Syringes are the exclusive preferred products.
Speaker 5: on the express-crypt national preferred formulary.
Speaker 5: But working together to achieve widespread formulary access, and Vecta and its partners continue to reduce barriers for patients and and prescribers in the market.
Speaker 5: We also recently won national contracts for both men needles and insulin syringes from the US Department of Wettings Affairs for a five-year term.
Speaker 5: These awards not only demonstrate our commitment to the singular focus of improving the lives of people living with diabetes.
Speaker 5: but also ensure that our nation's veterans have access to the highest quality products.
Speaker 5: Moving to separation and stand-up activities, we continue to make progress on that front as well as we exited several transition service agreements and continue to build up our own internal organizations, systems and processes.
Speaker 5: From an invest for growth perspective, our commercial teams began to execute on the strategic partnerships we announced a few months ago and we continued to progress the development of our insulin patch pump.
Speaker 5: Finally, based on our strong first quarter results, we are raising our financial guidance ranges for as reported in constant currency revenues, adjusted gross, adjusted operating and adjusted beta margins as well as adjusted diluted earnings per share.
Speaker 5: Next, let's review our first quarter revenue performance in a bit more detail on slide seven
Speaker 5: During Q1, US revenue is totaled $149.3 million, which will present a decrease of 1.1% on a constant currency basis.
Speaker 5: The slight year-over-year decline in the US was primarily due to unfavorable volume dynamics.
Speaker 5: The majority of which was offset by the favorable timing of certain distributed purchases that occurred late in the quarter, as well as the contract manufacturing and sale of certain non-divided products to BD.
Speaker 5: As we move forward, we anticipate this timing benefit associated with distributed purchasing, which is not uncommon in our business and which totaled approximately $6 million in Q1, to largely reverse itself during the second quarter.
Speaker 5: Turning to our performance outside the US.
Speaker 5: During Q1, international revenues totaled $126.4 million or an increase of 2.6% on a constant currency basis.
Speaker 5: The year over year growth within our international business was primarily due to favorable pricing as well as favorable volumes which were augmented by a competitive product supply shortage in certain regions.
Speaker 5: With that, let me turn the call over to Jake to discuss our Q1 financial results in a bit more detail, as well as provide our updated fiscal 2023 financial guidance and underlying assumptions.
Speaker 5: call over to Jake to discuss our Q1 financial results in a bit more detail, as well as provide our updated fiscal 2023 financial guidance and underlying assumptions. Jake?
Speaker 6: Thank you, Deb. And good morning, everyone.
Speaker 6: Before I discuss the financial results for the three-month period ending December 31st, I would like to remind the investment community that Invecta was spun off from BD on April 1st of 2022 and that the financial results during the pre-spin periods were based on CarBout accounting principles.
Speaker 6: and do not reflect what impact this financial results would have been had impacted or operated as a standalone public company.
Speaker 6: Therefore, the financial results for the three-month period ending December 31, 2022 and December 31, 2021 are not uniquely comparable.
Speaker 6: Turn to Embector's financial performance for the first quarter.
Speaker 6: Given a discussion that has already occurred regarding revenue, I will start at the gross profit line.
Speaker 6: Gross, GAAP gross profit and margin for the first quarter of fiscal 2023 totaled 188.8 million and 68.5% respectable.
Speaker 6: This compares to 203.9 million and 70.5% in the prior year period.
Speaker 6: The year-over-year decline in gap growth profit and margin was expected and primarily driven by the negative impact of inflation.
Speaker 6: the impact of low margin contract manufacturing revenue that was not in the prior year period, and incremental stand-up and separation costs.
Speaker 6: including the markup on the purchase of Canula from BD.
Speaker 6: While on an adjusted basis, gross margin for the first quarter of 2023 was also 68.5%.
Speaker 6: The adjusted growth margin performance during the first quarter was better than we initially expected, primarily due to the mix of additional revenue that we generated during the quarter.
Speaker 6: Finally, concerning gross margin, during the first quarter of 2023, both our GAAP and adjusted gross margins benefited from the revaluation of our inventory to our new 2023 standard costs, which occurs once a year.
Speaker 6: as well as from positive absorption as we manufacture the additional product in advance of our planned temporary suspension of our facility in Suzhou, China later this year.
Speaker 6: All these items were taken into consideration when we provided our initial guidance. I point them out because as we move forward during the remainder of 2023, we do not anticipate the same level of positive impact to our gross margins.
Speaker 6: And as such, we currently expect our adjusted gross margins to trend downward in succeeding courts.
Speaker 6: Turning to operating income and margin.
Speaker 6: During the first quarter, GAAP operating income and margin was $88.8 million and 32.2%, respectively.
Speaker 6: This compared to operating income and margin of $116.6 million and 40.3 percent, respectively, in the prior year period.
Speaker 6: The decline in year-over-year gap operating income and margin is primarily due to the gap gross profit and margin drivers that I just mentioned.
Speaker 6: as well as an increase in operating expenses associated with separating and breaking them back up and becoming a standalone publicly traded company.
Speaker 6: On an adjusted basis during the first quarter of 2023, operating income and margin was 101.6 million and 36.9% respectively.
Speaker 6: This suggests that operating income and margin performance was significantly better than we initially expected.
Speaker 6: in part due to the revenue timing benefits that positively impacted our adjusted gross margin.
Speaker 6: as well as lower operating expenses in the corridor versus expectations.
Speaker 6: which we believe is also largely timing related.
Speaker 6: This operating expense timing benefit was primarily due to lower separation and stand-up costs.
Speaker 6: the phasing of hiring, and certain project spending.
Speaker 6: As we move forward during the remainder of fiscal 2023, we anticipate that this spending will occur and as such, we currently expect our adjusted operating margins to trend downward in succeeding quarters.
Speaker 6: Turning to the bottom line.
Speaker 6: Gap net income and diluted earnings per share was $35.2 million and 61 cents.
Speaker 6: during the first quarter of fiscal 2023.
Speaker 6: This compared to $98.8 million, or $1.73, in the prior year period.
Speaker 6: As I mentioned at the outset, because our financials for pre-spin periods was done on a carve-out accounting basis, we were able to make sure that our financials were done on a carve-out accounting basis.
Speaker 6: The comparisons of prespin to post-spin periods are not meaningfully comparable.
Speaker 6: One example of this is interest expense, which burdened our P&L in the current year.
Speaker 6: but was zero in the prior year period.
Speaker 6: on an adjusted basis...................
Speaker 6: net income, and earnings per share was $55.4 million and 96 cents during the first quarter of fiscal 2023.
Speaker 6: Lastly, from a P&L perspective, for the first quarter of 2023, our adjusted EBITDA and margin totaled approximately 110.2 million and 40%.
Speaker 6: This compares to $138.3 million and 47.8% in the prior year period.
Speaker 6: Like our adjusted operating margin, due to the revenue and gross margin overachievement in the quarter, coupled with the timing benefit from lower operating expense spending.
Speaker 6: Our adjusted EBITDA margin during the first quarter also significantly exceeded our original expectations.
Speaker 6: Finally, with respect to our balance sheet and financial condition at quarter end.
Speaker 6: As of December 31, 2022, we held approximately $385 million in cash and cash equivalents.
Speaker 6: and approximately $1.64 billion in debt.
Speaker 6: which taken together with our last 12 months adjusted either die, resulted in a net leverage ratio of approximately 2.9 times.
Speaker 6: That completes my prepared remarks as it relates to Embektas financial results for the first quarter of Fiscal 2023.
Speaker 6: Next, I'd like to discuss Invecta's updated 2023 financial guidance and certain underlying assumptions.
Speaker 6: Beginning with revenue on slide 9.
Speaker 6: Given our strong performance in the first quarter, we have increased our guidance by 50 basis points on both the low and high ends of our constant currency revenue guidance range.
Speaker 6: As we are now calling for a decline of 1.5% on the low end,
Speaker 6: to 50 basis points of growth on the upper end.
Speaker 6: The low end of our constant currency revenue range continues to assume that most of the potential decline will result from reduced contract manufacturing revenue of non-diabetes care products that are sold to BD.
Speaker 6: with the remainder coming from slight volume pressure within developed markets.
Speaker 6: as well as periods of uncertainty in emerging markets due to the potential for COVID-19 spikes like those we saw impact our business in China during the first quarter of fiscal 2023.
Speaker 6: The high end of our constant currency revenue range continues to assume a slightly smaller year-over-year headwind associated with contract manufacturing revenue.
Speaker 6: Flattest product volumes.
Speaker 6: and the ability for us to modestly raise prices on our product offerings.
Speaker 6: And while we continue to make progress in this area, our updated cost and currency revenue guidance range continues to assume in the immaterial amount of revenue associated with our diesel and gas and gas partnership agreements.
Speaker 6: Turning to our thoughts on FX.
Speaker 6: Since we provided our initial guidance for 2023,
Speaker 6: Foreign currency exchanges have moved in a positive direction, and as such, our updated guidance now calls for a foreign currency headwind of approximately 2.5% during 2023.
Speaker 6: This compares to our original assumption, which called for a headwind of approximately 5%.
Speaker 6: Our updated FX assumptions were based on foreign exchange rates that were in existence in the early February timeframe.
Speaker 6: On a combined basis, we're raising our full year as reported revenue guidance.
Speaker 6: From a range which calls for decline of between 5 and 7%, to a new range which calls for decline of between 2 and 4%.
Speaker 6: In dollar terms, this equates to a revenue range of between $1 billion and $84 million.
Speaker 6: and $1,107,000,000.
Speaker 6: Lastly, concerning revenue, during fiscal year 2022, we generated approximately 50% of our as-reported revenue dollars during the first half of the year.
Speaker 6: Consistent with our initial guidance that we have provided in December , we continue to anticipate that we will generate a slightly lower percentage of our annual revenue during the first half of 2023.
Speaker 6: Moving to margins.
Speaker 6: Due to the performance that we achieved in the first quarter, coupled with foreign exchange capability, it compared to the initial guidance.
Speaker 6: We are raising the low and high end of our adjusted growth, adjusted operating, and adjusted ebidon margins by 150 basis points each. As we now anticipate that our adjusted growth margin will be approximately 63.5% for fiscal 2023.
Speaker 6: Up from our original guidance of approximately 62%.
Speaker 6: that our adjusted operating margin is now expected to be approximately 26.5%.
Speaker 6: Up from our visual guidance of approximately 25%.
Speaker 6: While our adjusted EBITDA margin is now projected to be approximately 31.5% for full year 2023, up from our original guidance of approximately 30%.
Speaker 6: We're going to 150 basis point improvement in margins.
Speaker 6: We estimate that approximately half is due to an improvement in foreign currency.
Speaker 6: while half is due to an improvement in base business operations.
Speaker 6: These new guidance ranges continue to call for a trusted operating expenses to be approximately 37% for the entire date of 2023.
Speaker 6: Compride the warranty expense as a percentage of revenue reaching 7%, and SGNA of approximately 30%.
Speaker 6: This assumes that the timing-related operating expense favorability we saw in Q1 reverses itself as we move throughout the remainder of the year.
Speaker 6: Continuing down the P&L, we currently expect that our net interest expense will be approximately $115 million during 2023, or closer to the low end of our previously provided range.
Speaker 6: Our assumptions regarding our non-GabBTAS rate and weighted average shares remain unchanged from our original assumptions of approximately 25% and 57.7 million shares respectively.
Speaker 6: At the bottom line, this translates into our new full year 2023 adjusted deleted earnings per share range of between $2.20 and $2.35.
Speaker 6: which is an increase from our previous range of between $1.75 and $2.00.
Speaker 6: Warbades are approximately 40 cents at the mid-point.
Speaker 6: Like the increase in our margin guidance, we estimate that approximately half of the increase at the midpoint of our guidance range.
Speaker 6: is attributed to FX.
Speaker 6: while half is due to improvement in our business.
Speaker 6: In closing, during the first quarter, embankment made good progress in each of our three major strategic priorities.
Speaker 6: including strengthening our base business.
Speaker 6: Separating and staining ourselves off as an independent entity and investing in growth.
Speaker 6: We generated solid financial performance during Q1, and we're pleased to be able to raise several of our financial metrics after only one quarter.
Speaker 6: As we look ahead, we still have some important separation activities in front of us, including the implementation of our ERP system, as well as managing through the anticipated temporary suspension of manufacturing operations associated with the regulatory approvals and transitions.
Speaker 6: including for inspections at our facility in China.
Speaker 6: and our teams remain highly focused on these and other separation related activities.
Speaker 6: That completes my prepared remarks and at this time I'd like to now turn the call over to the operator for questions.
Speaker 7: Apa???
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Speaker 3: And our first question comes from Cecilia Furlong with Morgan Stanley . Your line is open.
Speaker 8: Great. Good morning and thank you for taking the questions. I wanted to start on the growth margin performance in the quarter, just well ahead of our expectations. But if you could walk through just the bridge for a Q to one Q, you talked about some of the China planned manufacturing closure, that impact.
Speaker 8: If you could speak to that geographic sales, like other drivers that really supported the sequential step up, and then how we should be thinking about growth margin beyond fiscal 23, kind of toward your 62% or so longer range plan.
Speaker 6: Yeah, so thanks Cecilia, thanks for the question. Let me begin by saying that as we provided our initial financial guidance for fiscal 2023, we always anticipated that our adjusted gross or adjusted operating and our adjusted EBITDA margin profile would be strongest during the first quarter of the year.
Speaker 6: The 400 basis point sequential improvement in adjusted gross margin from the fourth quarter, from our fiscal fourth quarter, 2022 to the first quarter. It's primarily due to two things. First, during fiscal year 2022.
Speaker 6: We saw really an unprecedented increase in the cost of raw materials, labor and overhead. And as we moved into fiscal year 2023, we need to revalue the inventory that existed on our balance sheet to our new standard cost for 2023.
Speaker 6: which include the impact of those higher raw material labor and overhead costs. This is something that occurs once a year, at the beginning of every new fiscal year. And it essentially resulted in impact needing to increase the value of the inventory that was on our balance sheet, with the offset being a credit to the income statement.
Speaker 6: So as such, the revaluation of that inventory drove a sequential gross margin benefit of approximately 300 basis points from the fourth quarter of fiscal 22 to the first quarter of fiscal 23.
Speaker 6: Now, since that inventory is now on our balance sheet at a higher cost, as we move forward into future quarters and then sell that inventory into the channel, we should then actually see a decline in our adjusted gross margins moving forward because now that inventory is valued at a higher cost.
Speaker 6: So the inventory revaluation is something that calls the benefit from the fourth quarter of 22 to the first quarter of 21, but will then cause a just-to-gross margin to go down from the first quarter of 23 through the remainder of the year. In addition to the impact that we saw from, I would say, revaluing the inventory.
Speaker 6: We also saw sequential benefit stemming from favorable absorption. And that's because we continue to manufacture inventory to service our business in China ahead of the temporary shutdown at that facility, which we would anticipate occurring later this fiscal year.
Speaker 6: So we built additional inventory as safety stock during the first quarter and that led to about a hundred basis points of sequential improvement in gross margin from the fourth quarter to the first quarter. And then again, like the positive impact that we saw in Q1 related to the inventory revaluation.
Speaker 6: As we move forward during the remainder of fiscal 23, we're not going to be manufacturing or do not anticipate to be manufacturing the same levels or amounts of inventory. And eventually we may incur negative variances in the second half of 2023 as we temporarily shut down production in our facility in China.
Speaker 6: So, we would expect the judge the gross margin to go down from the first quarter through the remainder of the year because of this as well. So all that said are adjusted gross more than performance in Q1 did exceed our expectations and because of that as well as the raw material, as well as just an expectation that raw material cost ...
Speaker 6: for quarters two through four are actually trending better than we initially anticipated. We're increasing our full year guidance range from the original guidance which called for approximately 62 percent, a just the gross margin, to a new range of 63 and a half percent.
Speaker 6: And then I think you might have had another question concerning drivers for the rest of the years, that correct?
Speaker 8: It is also how you're thinking about the long-term outlook tied in with your LRP that you previously provided.
Speaker 6: Yeah, so maybe I'll start again by saying I think that we had very strong margins throughout the P&L during the first quarter, again, exceeding our initialized expectations. Part of that Q1 over performance is something that we anticipate remaining for all of 2023.
Speaker 6: So, let me just try and address that throughout the different line items of the P&L. So from a gross margin standpoint, I would tell you that we would expect our adjusted gross margins to first trend into the mid-60s during the second quarter of this fiscal year, really for two reasons. First, we don't anticipate that same level of...
Speaker 6: Distributive purchasing that positively impacted our US revenues during the during the first quarter and as a result we may see some some decline sequentially from Q1 to Q2 gross margin. And then second during Q2 we anticipate that we'll begin to see that negative impact.
Speaker 6: roll through our gross margin from the revaluation of our inventory at those higher costs. Now, as we move throughout the 2nd half of 2023, we would expect that to see that our adjusted gross margins could actually trend into the low 60s as we currently expect to see the negative impact.
Speaker 6: of the higher cost inventory continue to impact us. And we also then would anticipate seeing a potential negative impact from no longer manufacturing at the same levels in our facility in China and not generating those same positive impact from absorption.
Speaker 6: So that's sort of the thought fund kind of gross margin is trending to the mid-60s for Q2 and then trending into the low 60s for the second half of the year. Now, turning to operating margin, I would say we expect them to trend to the mid-20s beginning in the second quarter and the sort of remaining at that level for the remainder of the year.
Speaker 6: And part of that sequential decline in adjusted operating margin is because of the gross margin drivers that I just mentioned. But we also do right now anticipating a sequential increase in both R&D and SGNAs we move forward through the year. So during the first quarter Q1 operating expenses were below our initial expectations.
Speaker 6: primarily because of the timing of certain separation and stand-up expenses. And as we move forward throughout the year, we would expect to see an increase in that beginning as early as the second quarter. And that, I would say, you know, from a trending standpoint, this increased level of op-ex, it's expected to really last through kind of the third quarter of the year.
Speaker 6: and then trend down in the fourth quarter as a percentage of revenue as we anticipate, you know, further exiting even more TSAs.
Speaker 6: And then I just say lastly just from an EBITDA standpoint, we expected to largely follow our adjusted operating margin trends and for it to remain, you know, at or around that approximately 30% level for the remaining quarters of the year. Now, obviously all these assumptions are somewhat based on sort of the level and pace
Speaker 5: With respect to your question about the long-term outlook, I mean, obviously we'll give formal 2024 guidance at the right time once 23 is done. But certainly we are pleased with the strong start to the year and certainly what the outlook for 23 looks like.
Speaker 5: So no real change from what we've discussed before but will provide more updated guidance certainly at the end of the year but at this point we are pleased with where we stand today.
Speaker 8: Great, thank you. And if I could tell you just to your OUS constant current, to your performance in the quarter, if you could speak to what you saw out of China versus other markets, the impact from pricing, positive impact from pricing that you saw, and then also just the competitor shortage, if you could walk through the benefit you saw in the quarter and also included in your updated outlook.
Speaker 5: in China in particular.
Speaker 5: You know our performance by our team in China has been quite resilient because you remember through the calendar year of 2022 fourth quarter calendar year 2022. There was a rise in spikes. We certainly had rise in infections as well, but our team has managed through it.
Speaker 5: You know, what we see in China certainly is that the situation is certainly improving. You know, as we went from zero COVID to now open and like I said, our team is what through those inspections, inflections that occurred. You know, our outlook on China, you know, obviously remains certain. It all depends upon the path.
Speaker 5: that COVID takes and the resulting government policies that are put into place. In terms of our guidance, we certainly are anticipating the modest improvement in performance in China and some other markets in Asia where COVID has taken the toll. And that's all included in the guidance that we provided for 2023.
Speaker 5: I think with respect to the competitor shortage, we certainly did have some benefit in RQ1 numbers of a competitor shortage. It was in several markets around the world. It is difficult for us to forecast how long that shortage would last. But certainly we've taken our best thinking into account when we provided our guidance, including...
Speaker 8: Good morning, Deb. Good morning, Jake. Congrats on a great quarter here. I wanted to start here with a question here on the Concent Currency Revenue Growth Guidance. If I'm looking at what you did this quarter, the fiscal first quarter, the Concent Currency Revenue Growth is actually about 0.7%. And when I looked at what you're guiding for.
Speaker 6: Yeah, thanks for the question, Marie. So I'm really pleased to say that we got off to a really strong start in the first quarter. You know, quite frankly, we exceeded our internal estimates. I would say by approximately $14 million on an as reported basis. Now about 2 million of that.
Speaker 6: was due to the positive impact from FX as compared to what we had originally expected it to be. But on a constant currency basis, we exceeded our internal estimates by almost 12 million. Now, about 6 million of that additional constant currency revenue beat was...
Speaker 6: Hence, we increased both below and high ends of our constant currency revenue range by about 50 basis points. Now, the other $6 million of, I would say, over achievement in comparison to our initial expectations that occurred in the quarter was really largely due to the timing of??.
Speaker 6: And as we look forward, you know, really beginning as early as the second quarter of the year, we would anticipate that positive benefit that we saw in the first quarter from those distributor orders to reverse itself. And we've taken that into consideration when we updated our guidance range.
Speaker 8: Okay, that makes a lot of sense. Thank you, Jake. I wonder if I could get a little bit more detail on some of the transition service agreements. I know you still have the ERP transition ahead, but I'm curious if you can tell us which of these agreements have been exited. Is this process ahead of schedule? Is it on schedule? Maybe you can give us a sense of that as well.
Speaker 5: Yeah, you know broadly speaking, Murray, it's on schedule. Many of our transition services agreements that are yet to be exited are obviously tied to the implementation of the ERP and that's obviously a longer schedule project just given the number of countries we are operating and the complexity is on.
Speaker 9: Okay, thank you very much.
Speaker 6: Yeah, I would say again, to your point, I think we've continued to make progress there and just for maybe from a cost standpoint, we currently estimate that we would incur around 60M dollars worth of PSA expense for the full year and for that to certainly be more heavily weighted.
Speaker 8: in the first half of the year as compared to the second half of the year. Okay, thank you for that. I guess last question here. I did want to... it sounded to me like you were confirming that your pre-spin fiscal 24 outlook hasn't changed. I believe that was both 60s growth margin, about 30% adjusted use.
Speaker 9: for taking the question.
Speaker 5: Yeah, Mary, you know, with respect to 24.
Speaker 5: You know, nothing that we've seen so far would say we should change our outlook on 2024, but obviously, you know, will give
Speaker 5: you know, more formal guidance 123 is done. And just given the number of activities we still have to complete as we exit the TSAs and the implementations we've talked about, I'm going to refrain from talking about 2025. We are focused on getting.
Speaker 5: and executing all these separation related activities and getting FY23 done before we start talking about FY25.
Speaker 8: Okay, understood. Thank you.
Speaker 3: Thank you. As a reminder, if you'd like to ask a question, please press star 11.
Speaker 3: And our next question comes from Travis Steed with Thanks America. Your line is open.
Speaker 6: Hey guys, thanks for taking the question. I did want to follow up a little bit. I mean, we talked a lot about margins and EBITDA margins and stuff already, but the guidance does imply a pretty big step down sequentially from Q1. And I'm not sure if you did tell them explanations for that, but anything else to call out on the EBITDA margin operating margins.
Speaker 6: on the EPS side with up X-Rates.
Speaker 6: Yeah, Travis, so I'll try and take that and Dev if you'll be ready to jump in. So I think, you know, largely our thoughts on margin. Obviously we got off to a really good start, you know, quite frankly. We expected the first quarter of the year margins to be strong. As that said, we did do a little bit better in terms of would be a measurable inc Hammett.
Speaker 6: are adjusted gross margins largely because of the additional revenue and the mix of that revenue. And then from an adjusted operating margin and then flow through to EBITDA margins, even more significant overperformance largely because of the...
Speaker 6: the timing benefit as it relates to certain op-ac spending related to separation and stand-up costs. Now, as we move forward during the remaining quarters of the year, we would expect those gross margins to kind of trend from sort of the upper 60s, first going into kind of the mid-60s in Q2.
Speaker 6: primarily because of the fact that we would expect to see some of that distributor order benefit that positively impacted our revenue in the first quarter to reverse itself in the second quarter. That tends to be, you know, in the U.S. at a higher gross margin area.
Speaker 6: And then second, we're not going to get that same positive impact if you will from the evaluation of our inventory. And in fact, now that the inventory is actually valued at a higher cost on our balance sheet as we sell that product through the remainder of the year, it's actually going to result in slightly lower gross margins.
Speaker 6: So the expectation from gross margin standpoint in Q2 is to get into the mid-60s, eventually in the second half of the year to get into the low-60s or very consistent with what we think our gross margin profile would look like in 2024.
Speaker 6: from an operating margin standpoint, again, very strong operating margins in the first quarter. We are anticipating seeing a pretty large step up in op-expending, both on the R&D side sequentially, as well as on the SGNA side.
Speaker 6: Certainly on the SGNA side, a lot of that is related to separation and stand-up costs and just the timing of hiring as well as we move throughout the year. Now all that said, we're certainly going to do our best to try and manage our op-expending lower, but we're certainly right now essentially reaffirming.
Speaker 6: are full year total op-acc spending as a percentage of revenue of 37%, 7% in R&D, and 30% for S-GNA, which is really unchanged from our original guidance. And then from an earnings standpoint, you know,
Speaker 6: I would tell you that right now we're raising about 40 cents at the midpoint. About half of that is because of updated FX rates. As compared to our initial expectations, we saw very little benefit to our adjusted earnings from FX in the first quarter.
Speaker 6: And really we would expect to see that benefit largely play out in the remainder of the year. And then look, our base business performed better than we had originally anticipated. And we would expect about half of the adjusted earnings range to come from just improved from its company near the end could based in Little father property in the last part of 2019, in classes for our
Speaker 6: Now, coming back to Hop-X, I would say despite Hop-X coming in well below those levels in Q1, we are continuing to expect total Hop-X to approximate that 37% for the entirety of the year. So...
Speaker 6: All said, I would say we continue to just be mindful of very large separation projects that we need to execute on during the course of 2023. But we're really pleased with our ability to increase our adjusted earnings so meaningfully after only 1 quarter of the year being done.
Speaker 10: Yeah, it helpful color. And then you also mentioned some continued progress with the patch pump program. Curious what kind of progress you're making there, one of your patch pump competitors, you know, scooping up patents and you should not be ending these thoughts on that if you thought the patent lens case was about to get a bit more competitive.
Speaker 5: Yeah, Travis. Good morning. This is the I'll take that. You know, obviously we follow up. We follow all the public announcements in the in the pump space and, you know, I really don't want to comment on competitive moves on acquisition of bad products. Let me just say that on patch from product program.
Speaker 5: is progressing as we would expect in line with our internal expectations. Nothing new to share. I would say that certainly from our own perspective of what that product can do for us in the market. I mean, nothing has changed vis-à-vis our outlook on our product.
Speaker 5: In light of all the announcements that have taken place in the marketplace, nothing new to share with respect to milestones that I've said in the past when we have a meaningful milestone Travis will share it for now. We just focused on keeping our heads down and getting the work done.
Speaker 3: Thank you. We currently have no further questions in the queue. I'd like to turn the call over to Mr. Professor Candlelaw. Thank you.
Speaker 4: Thank you operator and thank you everyone that joined us on the call today. This concludes Mbick Dazs for squatter 2023 on its conference call. Have a nice day.
Speaker 3: This does include the program, you may now disconnect. Everyone, have a great day.
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