Q4 2023 Embecta Corp Earnings Call
[music].
Yeah.
Please standby.
Welcome, ladies and gentlemen to the fiscal fourth quarter and full year 2023 and back the earnings conference call. At this time, all participants have been placed in a listen only mode. Please.
Please note that this conference call is being recorded.
Be available on the company's website for replay following the completion of this call.
I'd like to hand, the conference call over to your host today, Mr progressed, Candace <unk> Vice President of Investor Relations. Please go ahead.
Thank you operator.
Everyone and welcome to our fiscal fourth quarter and full year earnings conference call.
So really in flight to accompany today's call and webcast.
Are available on the Investor Relations section of the company's website at Www <unk> Com with me today are Jeff Cologuard <unk>.
Chief Executive Officer and Jacob.
Our Chief Financial Officer.
Before we begin I would 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 that light.
Wish to caution you that such statements are in fact forward looking in nature and are subject to risks and uncertainties and actual events or results may differ materially the factors that could cause actual results or events to differ materially include but are not limited to factors.
Factors that affected our press release today as well as our filings with the SEC, which can be accessed on our website.
In addition, we will discuss certain non-GAAP financial measures on this call, which should be can figure out a supplemental and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation.
Our agenda for todays call is as follows.
Doug will begin by providing some remarks on the overall performance of our business during the fourth quarter and full fiscal year credit quality as well as an overview of our strategic priorities for anybody for it.
Jack will then provide a more in depth review of our Q4 and full year 2023 financial results as well as our financial guidance for fiscal year ago anybody for which we introduced in today's press release finally, Dave will provide some thoughts on the <unk> market landscape and we will close the call with a question and answer session with that.
I would now like with Don Carlos Watson, CEO that credit card debt.
Good morning, everyone and thank you for taking the time to join us.
Completion of fiscal 2023 months, our first full fiscal year as a Standalone company.
A company that is dedicated to developing and providing solutions that make life better for people living with diabetes and it could not be prouder of our teams around the world.
Turning to fiscal 2023 of highlights.
It is my pleasure to share that our fiscal year 2023 results exceeded our expectations.
Deep commitment resilience and strategic focus played a pivotal role in our success.
The teams did not go unnoticed isn't better was recognized as the winner of the MDI Reader's choice continues to yield for 2022, which is one of several external recognitions <unk> received.
Additionally, our associates have continued to make significant advancements in the process of establishing <unk> as an independent company with.
With the goal of exiting as many transition service agreement with Bds possible by March 31 2024.
Along those lines, we've made substantial progress by implementing a global HR information system launching a new customer relationship management system, and establishing a global IP network.
Through all these activities, we have been diligent in minimizing any potential disruption to our customers and people with diabetes, who rely on our products deal.
And you had mentioned on our prior call we have initiated the demerger process for your China manufacturing entity. So that we could transfer their LTE from BD to investor.
This is a multi step process and I'm pleased to inform you that during the past few months, we have achieved several important milestones.
These include obtaining business in product licenses implementing.
Implementing our ERP solution.
And putting ownership of land and buildings we have.
Also resumed production of that planning for markets outside of China, and we are currently in the final stages of obtaining a manufacturing license, which will enable us to produce domestic products for China.
We also initiated the deployment of our ERP solution, along with the Operationalization of our distribution network and shared service infrastructure for the U S and getting out of holders manufacturing plant in Canada.
This implementation began earlier this month and we are pleased with the progress we've made so far.
As mentioned in the past to minimize the potential for disruption with ETV approach to meeting our ERP system increases.
With the ERP implementations in Xuzhou, China, the U S and Canada, we have now implemented our systems in two of our three manufacturing plants.
Markets, representing approximately 60% of our revenue.
Turning from separation activities that occurred during 2023 to actions taken to strengthen and optimize our core we continue to demonstrate a strong commitment to ensuring broad any preferred access to a product for patients.
2% effective January 2020 for three of the top Medicare part D plans, which are a critical and growing segment of the payer market, providing pharmacy benefits for seniors.
Who comprise the disproportionately high percentage of people with diabetes.
We're going to get better as an exclusive or dual preferred brand on their formulary list.
Previously these Medicare plan for open access and broadly covered all brands of pen needles and syringes without advantage in any one brand.
Additionally, we remain committed to new product development and remain excited about the progress we are making in terms of our insulin patch pump.
That is being developed specifically for the type two market.
We are working to achieve critical milestones in fiscal 'twenty 'twenty, four and plan on sharing more at the appropriate time.
Lastly, we were proud to celebrate this year diabetes awareness month by ringing the NASDAQ opening bell along with representatives of certain organizations that make supporting the people who are living with diabetes their focus.
Our company is honored to recognize the people with diabetes caregivers healthcare providers and advocacy organizations.
Working together to improve access to education and continue to progress towards the vision of our life and limited by diabetes.
Now, let's review, our fourth quarter and full year revenue performance in a bit more detail.
During Q4, we generated revenue of $281 9 million, which represented an increase of two 7% on an as reported basis and growth of two 1% on a constant currency basis.
When normalizing for the impact of year over year changes of the non diabetes products that we contract manufacturing 30, beating our underlying core injection business grew an impressive four 9% on a constant currency basis.
The constant currency growth of our core injection products was aided in part by an easy comparable as the fourth quarter of 2022 was negatively impacted by the timing of certain distributor orders, which positively impacted our revenue in the third quarter of 2022.
Normalizing for both the year over year contract manufacturing revenue headwinds.
As well as the timing of certain distributor orders.
Core product lines grew approximately two 4%.
These results exceeded our previously communicated expectations, primarily due to the performance of our <unk> products.
While from a geography perspective, Q4 revenue came in better than we previously expected in most countries, including the U S, Canada and Latin America.
Regarding the U S. During the quarter revenue totaled $151 8 million, which represented year over year growth of approximately one 3% on a constant currency basis.
This was driven by higher pricing on certain core injection products, partially offset by lower year over year contract manufacturing revenue from the sale of certain non diabetes products to BD.
Unfavorable changes in volume mainly related to our series business, where end user demand in the U S market continues to decline.
Excluding contract manufacturing revenue, our core injection business grew by six 6% in the U S.
However, this was aided by an easy comparable in mentioned earlier associated with the timing of certain distributor orders, which positively impacted our revenue in the third quarter of 2022.
When normalizing for both the year over year contract manufacturing revenue headwind as well as the timing of certain distributor orders.
What product lines within the U S grew approximately three 8%.
Turning to our performance outside of the U S.
During Q4 international revenue totaled $131 million, which equated to year over year constant currency growth of approximately 3.0%.
Growth internationally was primarily due to a favorable comparison in China.
Last year.
<unk> was 50 COVID-19 restrictions.
As well as year over year growth within Canada and Asia.
For the full year <unk> generated revenues of approximately $1 billion $121 million, which represented a decline of <unk>, 8% on an as reported basis.
But an increase of one 6% on a constant currency basis.
When normalizing for the impact of year over year contract manufacturing headwinds.
The underlying core injection business grew approximately one 8% on a constant currency basis.
From a regional perspective U S revenue totaled $601 4 billion, which grew by 0.2% on a constant currency basis or 0.5% when normalizing for the impact of year over year changes of contract manufacturing.
Why do you think are some revenues totaled $419 4 million, which equated to a year over year constant currency growth of approximately three 2% driven primarily by performance in emerging markets as well as the benefit we saw from a competitive product supply shortage.
Lastly, before I turn the call over to Jay I'd like to share some strategic priorities for fiscal 2024.
In 2024, we will continue to be focused on the same three core strategic priorities that we had in 2023.
These priorities they have served as the basis for our actions and decision, making driving our company forward.
They are.
First strengthen and optimize the KOL based business.
We are rapidly evolving market landscape, we will continue to be diligent in supporting our customers and people with diabetes.
The operating environment and inflation remains unpredictable, we will maintain our focus on managing through any challenges that may arise.
And it will go through really provides a fiscal 2020 full guidance you will see that it is consistent with the expectations. We laid out pre spin in March of 2022.
Separate and stand up as an independent company.
Then on a transformative journey to become an independent entity.
This process involves complex projects like the implementation of an ERP system.
Setting up our own distribution network and exiting many of our transition services agreement with BD.
And as I mentioned earlier, we have implemented our ERP solution.
Personalize their distribution network and shared services infrastructure to support our business in U S and Canada and two out of three manufacturing plants.
Have a great deal from these implementations and are now focused on accomplishing the theme in the remaining markets and at our plant in Ireland.
We have previously commented that our transition service agreements are generally set to expire on March 31 2024.
To allow for phasing of the remaining implementations of our ERP solution distribution network.
Our services capabilities, we have requested for an extension of certain <unk> related agreements with BT.
BD really simply agreed in principle to create the limited extension conditioned upon obtaining supplemental private letter ruling from the IRS, which will allow us to extend certainty for a limited set of markets until early fiscal 2025.
We have been expanding and will continue to expand significantly the effort across the company to mitigate the risk of potential disruption and we have to exit TSA and replace them with our own systems and processes.
While we have generally been successful so far there could potentially be some temporary disruption of sales in certain countries as we work to obtaining all the appropriate product registration the licenses among other requirements.
Our third priority is invest for drill bits.
Despite the competitive challenges in our industry, we remain committed to investing for growth.
We understand that transitioning the company to growth over time by new product development or in organic business development initiative is an important goal for us and we are keenly focused on sustainably improving the long term constant currency revenue growth profile of inductor.
With that let me turn it over to Jay to go through our financial highlights Jake.
Thank you, Jeff and good morning, everyone.
Before I discuss the financial results I would like to remind the investment community that in fact was spun off from BD on April one 2022 net financial results during the pre spin periods, where based on accounting principles and do not reflect what impact its financial results would have been had impact the operated as a standalone public company.
<unk>.
Therefore, the financial results for the 12 month periods ending September 32023, and September 32022 are not meaningfully comparable.
Given the discussion has already occurred regarding revenue I will start my review of <unk> financial performance for the fourth quarter at the gross profit line.
GAAP gross profit margin for the fourth quarter of fiscal 2023 totaled $181 8 million and 64, 5% respectively.
This compares to $176 9 million and 64, 4% in the prior year period.
The slight year over year increase in GAAP gross profit and margin was due to a combination of factors, which essentially net each other out.
These include tailwind from product and geographic mix.
Favorable year over year pricing and cost improvement programs.
These items were offset by the impact of inflation on the cost of certain raw materials direct labor and overhead.
Incremental standup and separation costs.
Unfavorable manufacturing variances stemming from the temporary shutdown of our China domestic manufacturing at our facility in Suzhou.
And FX.
While on an adjusted basis gross profit and margin for the fourth quarter of 2023 with $182 6 million and 64, 8%.
As compared to our prior outlook, our adjusted gross margin during the fourth quarter of 2023 was better than we previously expected and this is due to a higher than anticipated revenue.
Favorable geographic and product mix.
Pricing that exceeded our internal expectations.
And our ability to manage the costs incurred to stand up the organization.
Turning to GAAP operating income and margin.
During the fourth quarter, they were $25 8 million and nine 2% respectively.
This compared to a loss of $3 million and one 1% respectively in the prior year period.
The increase in year over year GAAP operating income and margin is primarily due to the GAAP gross profit changes I just discussed as well as a decrease in year over year impairment expense.
This was somewhat offset by an increase in costs incurred to stand up the organization.
While on an adjusted basis during the fourth quarter of 2023 operating income and margin totaled $65 2 million and 23, 1%.
The adjusted operating income and margin performance. During Q4 was in line with our prior expectations as the over achievement at the adjusted gross profit and margin line was offset by additional R&D spending behind our insulin patch pump program.
As well as additional expenses incurred associated with employee benefits and standup activities.
Turning to the bottom line.
GAAP net income and earnings per diluted share was $6 million.10 during the fourth quarter of fiscal 2023.
This compared to a loss of $17 2 million and.
30, <unk> in the prior year period.
The increase in year over year, GAAP net income and diluted earnings per share is primarily due to the GAAP operating profit drivers I just discussed.
Somewhat offset by an increase in year over year interest expense associated with our variable interest rate debt.
While on an adjusted basis net income and earnings per share were <unk> $34 1 million and 59.
During the fourth quarter of fiscal 2023.
Lastly from a P&L perspective for the fourth quarter of 2023, our adjusted EBITDA and margin totaled approximately $79 6 million and 28, 2%.
Turning to our full year 2023 financial results.
This slide shows guidance progression as we move throughout fiscal year 2023.
Ending with our actual fiscal year 2023 results.
As this slide depicts we are pleased with our ability to raise our financial guidance following each quarter of the year ultimately ending fiscal year 2023 with revenue of approximately $1 billion $121 million, which was up approximately one 6% on a constant currency basis.
With adjusted gross margin of 67%.
Adjusted operating margin of 29, 6%.
Adjusted earnings per share of $2 99.
And adjusted EBITDA margin of 33, 8%.
The ability to generate these results was no small task, particularly given all the separation oriented activities that we focused on during the year.
This is a testament to the resiliency of our products and our people who put in countless number of hours to make them back to successful.
Now, let's take a closer look at our cash flow.
We began the year with a cash balance of approximately $331 million and generated approximately $68 million of cash flow from operations.
While using approximately 27 million on capital expenditures.
Translating into free cash flow generation of approximately $41 million.
Additionally, we used approximately $34 million of cash towards our dividend.
Ultimately ending the year with a cash balance of approximately $327 million or roughly flat as compare to where we began the year.
However, what you do not readily see is that our ending cash balance was negatively impacted by over $140 million of onetime operating expenses and capital expenditures associated with standup and separation activities.
That completes my prepared remarks as it relates to <unk> financial results for the fourth quarter and full year of fiscal 2023.
Next I would like to discuss <unk> preliminary 2024 financial guidance and certain underlying assumptions.
Before I go into all the details surrounding our fiscal year 2024 guidance. Let me remind you that in March of 2022 in advance of the spin occurring we laid out our expectations for our business through fiscal year 2024.
Joseph Burk patients included that our revenue growth CAGR would remain flattish on a constant currency basis from fiscal year 2022 through 2024 and that our adjusted EBITDA margin would be approximately 30%.
And despite needing to absorb a significant decrease in the amount of contract manufacturing revenue as compared to our initial expectations.
An unprecedented inflationary environment as.
As well as significant FX pressure as compared to our original expectations.
Our initial financial guidance ranges for fiscal year 2024 is aligned with our pre spin projections.
Beginning with revenue.
On a constant currency basis, we currently anticipate that our revenues will be flat to down 2% as compared to 2023.
At the low end of the guidance range. We are assuming about half of that decline will result from no additional contract manufacturing revenue and 2024 as compared to 2023.
While the remaining 1% headwind at the low end is associated with continued competitive shifts negatively impacting volume.
Lastly at the low end, we are assuming that pricing will be flattish as compared to the prior year.
While the high end of our constant currency revenue range includes all the same factors impacting our LOE and <unk>.
Except for a slightly smaller year over year headwind associated with contract manufacturing revenue as well as the ability for us to modestly raise prices.
As such the low end of our constant currency revenue growth for our core business. Excluding contract manufacturing revenue is a range of between negative one and positive 1%.
Turning to her thoughts on FX, our initial guidance calls for a foreign currency headwind of approximately 1% during 2024.
This assumption is based on foreign exchange rates that were in existence in the early November timeframe, including a euro to U S. Dollar exchange rate of approximately 1.05.
On a combined basis, our as reported revenue guidance calls for a decline of between 1% and 3%, resulting in an initial revenue guide of between $1 billion $85 million and $1 billion $105 million.
Turning to adjusted gross margin. We currently anticipate that our 2024 adjusted gross margin will be in the range of between 63% and 64% with.
With the largest anticipated year over year drivers being headwinds associated with foreign exchange increased raw.
Raw material and labor costs.
And the impact of negative year over year manufacturing variances stemming from lower <unk> production as well as the temporary shutdown of our Suzhou, China facility as it relates to production for the domestic Chinese market.
Continuing down the P&L, we expect that our SG&A will increase during fiscal 2024, as we incur additional expenses associated with standing up and backed up.
Most notably associated with our it systems and organization as.
As well as costs associated with shipping and supply chain as we move to our own distribution and transportation network.
We expect this to be offset by lower year over year TSA expense inclusive of costs associated with the potential and conditional extension of certain TSA is subscribed by depth.
In addition during fiscal year 2024, we will incur depreciation and amortization expense associated with the implementation of a portion of our ERP system and this will appear in the other operating expense line.
Turning to R&D, we anticipate continuing to invest behind our insulin patch pump program and because of this R&D as a percentage of revenue may exceed 7% during 2024.
All totaled we anticipate that our adjusted operating margin during 2024 will be between the range of 23, 75% and $24 75%.
Moving to earnings.
2024 hour initial guidance calls for an adjusted diluted earnings per share range of between $1 90.
And $2 10.
This includes an assumption that our annual net interest expense will be approximately $116 million.
That our annual adjusted tax rate will be approximately 22%.
As well as an assumption that we will have approximately $58 1 million weighted average diluted shares outstanding.
Lastly, our initial guidance for 2020 for fiscal year 2024 calls for an adjusted EBITDA margin of between 29, 5% and 35%.
Which as I mentioned earlier is consistent with our pre spin expectations for fiscal year 2024.
And before I turn the call over to Deb for some final remarks, I'd like to highlight some considerations regarding the cadence of quarterly revenue expectations during 2024.
Moving forward, we may not provide any further commentary concerning the quarterly cadence of revenue on an ongoing basis.
During fiscal year 2023, we generated approximately 49% of our as reported revenue dollars during the first half of the year, including approximately 25% during the first quarter.
During 2024, we currently anticipate generating a slightly lower percentage of our annual revenue during both the first quarter and first half of 2024 as compared to the prior year period.
Due in part to reduced contract manufacturing revenue as compared to the prior year.
That completes my prepared remarks and at this time I would like to turn the call back over to Deb for some thoughts on the <unk>, one landscape and market opportunity.
<unk>.
Thanks, Jake if you haven't already seen it posted a separate presentation on our website. This morning titled diabetes considerations.
Please refer to this deck as we've tried to lay out the current DLP, one landscape and how it touches various aspects of our business.
<unk> has been a significant point of interest for investors and I would like to take this opportunity to make a few comments regarding our observations on the impact that <unk> have had on our business.
As we reflect over the past five years and focus in <unk>.
Significant growth in prescriptions with an impressive CAGR of over 40%.
In contrast, the insulin prescriptions have remained relatively stable experiencing slight decline on a low single digit CAGR basis.
Regarding the number of people switching from insulin <unk> one drugs.
The data shows that is relatively low at around 1%.
As you know our business is highly geographically diversified with almost 50% of our revenue being generated outside the U S where cost considerations, usually limited the access of newer high priced therapies.
Turning our attention to our U S business, we have seen continued stability over a period with weekly <unk> have grown at a CAGR of greater than 40%.
And pump adoption for insulin delivery has steadily increased.
While there may have been small decreases in volume they have been offset by pricing dynamics, resulting in a generally flat revenue CAGR.
This data supports the hypothesis that <unk> has delayed the onset of infield diseases, but not eliminated.
Let's further focus on the differences between type one and type two diabetes.
<unk> results from an auto immune response that leads to destruction of insulin producing beta cells independently.
There has not been any data that we have seen demonstrating that <unk> have the ability to dilute this process in the regional business sells.
DLP ones appear to enhance the body utilization of available insulin potentially explaining the delay with the elimination of insulin use.
Type two diabetes, the table genius and a diagnosis a significant portion of patients already have elevated <unk> levels.
Linda criteria for the diagnosis of diabetes unmet.
It is the result of beta <unk>, no longer being able to keep up with demand.
In this case do we have not seen data demonstrating <unk> ability to reverse the continued degradation of greenfield funds.
Moreover, while DLP ones have demonstrated efficacy in reducing the total daily insulin dose. It is uncertain to what extent this may translate to reduced frequency of injections and injection devices, which are key metrics for our business.
Finally.
We see an opportunity for them better to participate in the secular growth of <unk> over the coming years.
<unk> presentations include vials.
In auto injectors.
This presents an opportunity for us things with the appropriate regulatory approvals in certain markets.
Incident. This can be used to billable GOP when drugs presented in volumes.
When needed W. Manufacturing supply today are already comparable would have been used to deliver GOP one.
While some pharmaceutical companies make packaged their own pen needles in other cases, we offer valuable solutions.
Finally, when it comes to auto injector. It is worth noting that these devices involved injection molded parts with leaders in the area in which we have a well established core competency.
We produced approximately 8 billion units of high quality injection molded parts with needed annually.
Hello, Robin expanding into this market and medical and better to embark upon business development or partnerships.
Entering this space organically would involve a longer timeframe as it would necessitate engaging with pharmaceutical companies during their drug development process and progressing through it with them.
In summary.
While we acknowledge the changing landscape brought about by DLP ones, we see it as an opportunity to potentially expand our product offerings in line with evolving market demands.
This completes my prepared remarks, and with that let me turn the call over to the operator for questions.
Thank you if you'd like to ask a question. Please press star one one.
Your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
Our first question comes from Murray Tivo with Cvs <unk>. Your line is open.
Hi, good morning, Congrats on a good quarter and thanks for taking the question.
Wanted to start here Oscar.
About the guidance for next year I heard about your assumptions built into that revenue range, but wanted to ask a little more detail on the gross margin side I think that got us up just a bit higher than we were expecting consensus was expecting.
There's certainly outperformed on that metric, what's sort of driving the.
That that gross margin assumption.
Yes, Murray and thanks for thanks for the question.
So from.
During 2023, we generated adjusted gross margin of about <unk>.
67%, we certainly exceeded our our initial expectations coming into the year and we're obviously quite pleased with that and if you think about the drivers of going from about 67% in 2023.
Down to let's call it the midpoint of our guidance range of about 63, 5% in.
In 2024, it's really being driven by three things almost equally.
FX is a large headwind for us as we look into 2024.
We expect that headwind to be about 130 basis points.
Year over year.
The next largest driver, it's really increased raw material and labor costs, including <unk>.
The additional increased costs associated with the cannula that we purchased from BD.
And then lastly.
It really comes down to the negative manufacturing variances coming from the fact that we won't be able to manufacture for a period of time.
Our facility in China, specifically for.
For the Chinese the Chinese market, so about half of our revenue in China is product that is manufactured in China and sold in China and until we get all the necessary product registrations and approvals from the local Chinese regulators.
That mean factoring for the China for China market is going to be shut down for a for a period of time. So it really comes down to those three drivers again, almost almost equally driving.
Year over year margin change those being FX, the increased raw material and labor costs, and then again, some manufacturing variants headwinds coming from the.
The China plant.
Okay. That's helpful Jake and as a quick follow up on the guide.
In the past you've had a competitor supply.
<unk>, which is helping.
Our national sales is that built into your assumptions for revenue next year.
It is money it is built into our assumptions for next year.
Okay that that will continue okay, and then I wanted to ask about the Medicare part D win.
Three of the top players there.
Getting back to an exclusive or preferred status what does that mean.
And will that be material to sales in some way how quickly some of these.
Current status.
Wins converting to revenue.
We are extremely pleased with those wins merits Medicare prescription plan used to be open access.
Three of the ones that we have one now we are in EBIT exclusive provider for pen needles or do a preferred status. This is an important category for us because as you know it covers seniors seniors have a disproportionately high prevalence of diabetes.
And we win these on the same criteria as other commercial plans quality brand supply continuity.
It has been incorporated into our guidance.
These three plans cover a large portion of the Medicare beneficiaries that have prescription plans.
So we're very pleased to have won these and it's certainly incorporated into our guidance for next year.
Alright very helpful. Thanks for taking the question.
Thank you Rick.
As a reminder, if you'd like to ask a question.
Our next question comes from Mike <unk> with Wolfe Research Your line is open.
Hi, Good morning, Thank you for taking the question.
For fiscal 'twenty four if you said it I missed it but can you level set on constant currency.
Gross expectations for the Americas versus international maybe for the core injection business excluding <unk>.
Contract manufacturing.
Yeah, Mike Good morning.
We don't separate out our constant currency guidance by region, but let me tell you that as we look ahead into 2024, it's going to be similar to what we've spoken about previously and experience. So far so broadly speaking the way we see the market dynamics play out is that U S tends to be stable.
Any sort of volume changes are typically offset by pricing emerging markets has been and will likely continue to be a source of growth for us largely driven by demographic changes over there and then other developed markets sort of sits somewhere in between.
So what we've seen in 2023.
Certainly years prior to that resembles that and we don't expect that to change in any material fashion for 2024.
Understood appreciate that Ive two more if I may follow up to <unk> question on the on the part D. Callout interesting I guess my <unk>.
Specific questions are why why now why are these plans going from open access to exclusive or dual preferred and as you consider those opportunities can you can you frame at a high level kind of what are the.
The price volume trade off might be for Baxter and.
Narrowing the networks.
Yes, the why now.
Yes, and Mike honestly is going to be a little difficult to answer. These are these are operated by some of the same players that are on commercial plans. The commercial plans are obviously under contract for us.
We think about it as a win for the reasons that I explained prior when I was talking about money just given the population base that it covers and the prevalence of diabetes and then potentially insulin use.
In that in that sector.
With respect to price volume dynamics.
Obviously wouldn't want to describe them for these particular plants, but generally speaking.
Once you get dual preferred status, our exclusive preferred status or share increases.
Significantly beyond what it typically is.
Then there are the rebates that are given and those rebates again, while I wont comment on these plans specifically.
My peers.
They can go into the low teens, sometimes in the high teens, sometimes slightly higher than that but generally speaking that's the dynamic that occurs.
Helpful. And then my last one just on TSA I heard the comments on.
Limited extensions with BD can you level set.
If you if you said the summary number for fiscal 'twenty.
I missed it but I think we were thinking and $60 million total TSA expense in 'twenty. Three can you frame how much TSA expense might be in 'twenty four and that's it. Thanks, Kevin. Thanks, so much for taking the questions.
Okay. Thank you Mike.
I'll, let Jack answer the BSA expense question for 'twenty, four, but let me broadly sort of at least stream that TSA.
Sort of where we are in the <unk>. So first of all we are extremely pleased with the progress that we've made so far.
I'd like to remind everybody we are talking about taking a business that had been part of a much larger business for close to a 100 years and now standing it up as a separate company and so if you think about all the separation work that our teams accomplished including setting up HR information system. The Suzhou Demerger, which was a big project for us and where we are.
Important milestones on implementations for ERP distribution networks shared services and 60% of our markets and to offer <unk> III plant. So very pleased with all of that.
What we wanted to do essentially is for the remainder planned in the remainder of our markets really phase. These implementations out that allows us to reduce the risk of operational disruption that can happen.
So this is the extension that we requested from BD BD will undertake a supplemental a private letter ruling process with the IRS.
And upon.
Getting an acceptable ruling we would get an extension that would allow us to do the remaining markets into a potentially a few more phases, which would.
Essentially take us through maybe as early fiscal 2025.
To get done let me turn it over to Jay to talk about the expenses.
Yes, Mike So in 2023, Youre correct, we incurred about $63 million worth of TSA expense in <unk>.
In 2023.
And then our guidance assumes for 2024 inclusive of.
The extension being being granted that we would incur somewhere between let's call it 30% to $35 million worth of TSA expense in.
In 2024 and obviously.
The fact that we still are able to generate.
That let's call it the midpoint of our guidance assumes a 30% adjusted EBITDA margin.
That's consistent with what we had expected obviously pre spin and as we said in our prepared remarks.
No.
To spin, we certainly did not think that we would incur nearly the amount of.
Inflationary negative headwinds that so we've obviously seen in in the two plus years now post spin.
Obviously didn't think that we would incur the same level of FX headwinds nor quite frankly did did we originally think that we would need.
An extension and have to incur some additional TSA costs. So I think it really just point back to the fact that.
Being able to still think that we can generate somewhere between that 29, 5% and 35% adjusted EBITDA margin is really a testament to the strength and resiliency.
Business here.
Thank you so much.
Thank you there are no further questions I'd like to turn the call over to Dev for closing remarks.
Before we conclude the call I would like to express my gratitude to all my colleagues around the world for the immense amount of work that they have been doing over the past year and a half.
To stand up <unk> as an independent company and the fact that they have been doing so.
Without impacting our customers is a testament to their commitment fulfilling our mission of developing and providing solutions that make life better for people living with diabetes.
Thank you all product ending our call and for your interest in our business.
Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.
Okay.
[music].
Okay.
Sure.