Q3 2024 Embecta Corp Earnings Call

August 9, 2024

Kallum Titchmarsh, Embecta, Kallum Titchmarsh, Kallum Titchmarsh, Kallum Titchmarsh, Kallum

Operator: Welcome, ladies and gentlemen, to the fiscal third quarter 2024 Embecta earnings conference call. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded, and the recording will be available on the company's website for replay following the completion of this call. I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Please go ahead.

Speaker Change: Please stand by. Welcome, ladies and gentlemen, to the Fiscal Third Quarter 2024 Embecta Earnings Conference Call. At this time, all participants have been placed in a listen-only mode.

Pravesh Khandelwal: Please note that this conference call is being recorded and the recording will be available on the company's website for replay following the completion of this call. I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Please go ahead.

Pravesh Khandelwal: Thank you, operator. Good morning, everyone, and welcome to Embecta's fiscal third quarter 2024 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.embecta.com. With me today are Devdatt Kurdikar, Embecta's president and chief executive officer, and Jacob Elguicze, our chief financial officer.

Pravesh Khandelwal: Thank you, operator. Good morning, everyone, and welcome to Embecta's fiscal third quarter 2024 earnings conference call.

Speaker Change: 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.embecta.com.

Speaker Change: With me today are Devdatt Kurdikar, Embecta's President and Chief Executive Officer, and Jake Elguicze, our Chief Financial Officer.

Pravesh Khandelwal: 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 our slides. We 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 referenced in our press release today, as well as our filings with the SEC, which can be accessed on our website.

Speaker Change: 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 our slides.

Speaker Change: We 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.

Speaker Change: 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.

Pravesh Khandelwal: 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 GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation.

Speaker Change: 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 GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation.

Pravesh Khandelwal: Our agenda for today's call is as follows. Dev will begin by providing some remarks on the overall performance of our business during the fiscal third quarter of 2024, as well as an overview of our strategic priorities. Jake will then provide a more in-depth review of our Q3 financial results, as well as our updated financial guidance for the year. We will then open the call to questions. With that said, I would now like to turn the call over to our CEO, Devdatt Kurdikar. Okay?

Speaker Change: Our agenda for today's call is as follows. Dev will begin by providing some remarks on the overall performance of our business during the fiscal third quarter of 2024, as well as an overview of our strategic priorities.

Speaker Change: Jake will then provide a more in-depth review of our Q3 financial results, as well as our updated financial guidance for the year. We will then open the call for questions. With that said, I would now like to turn the call over to our CEO , Devdatt Kurdikar. Dev?

Devdatt Kurdikar: Good morning, and thank you for taking the time to join us. Let's start with slide five, where you will see the three strategic priorities that we have executed in our spin-off in April of 2022. First, we continue to strengthen our base business while maintaining our global leadership position in the category of insulin injection devices. Second, we have made significant progress in our separation and stand-up activities necessary to establish ourselves as an operationally independent company.

Unknown Executive: Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Claes Stambeye, Welcome Ladies and Gentlemen to the fiscal 3rd quarter of 2024. Please note that this conference call is being recorded and the recorder will be available on the company's website for replay following the completion of this call.

Devdatt Kurdikar: Good morning and thank you for taking the time to join us. Let's start with slide 5, where you will see the three strategic priorities that we have executed since our spin-off in April of 2022.

Devdatt Kurdikar: First, we continue to strengthen our base business while maintaining our global leadership position in the category of insulin injection devices.

Devdatt Kurdikar: Second, we have made significant progress in our separation and stand-up activities necessary to establish ourselves as an operationally independent company.

Devdatt Kurdikar: And finally, we continue to invest for growth, most notably around our insulin patch form program that is being developed for the type 2 market, as well as seeking M&A and additional partnership opportunities. I am proud of the significant progress we have made on each of these goals. Now, turning to some third quarter highlights. During the third quarter, our team's disciplined execution led to financial results that were aligned with our prior expectations. We generated revenue of approximately $272.5 million, which represented a decrease of 4.8% on an as reported basis and a decrease of 3.9% on a constant currency basis.

Devdatt Kurdikar: And finally, we continue to invest for growth, most notably around our insulin platform program that is being developed for the type 2 market, as well as seeking M&A and additional partnership opportunities.

Devdatt Kurdikar: I am proud of the significant progress we have made within each of these goals, turning to some third quarter highlights.

Pravesh Khandelwal: I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Please go ahead. Thank you, operator. Good morning, everyone. And welcome to Embecta's fiscal 3rd quarter, 2024, on its conference call. The press leads and slides to a company today's call and webcast replay details are available on the Investor Relations section of the company's website at www.embecta.com.

Devdatt Kurdikar: During the third quarter, our team's disciplined execution led to financial results that were aligned with our prior expectations.

Devdatt Kurdikar: We generated revenue of approximately $272.5 million, which represented a decrease of 4.8% on an as reported basis, and a decrease of 3.9% on a constant currency basis.

Devdatt Kurdikar: When normalizing for the transient contract manufacturing revenue that we generate based on the sales of non-diabetes products to our former parent, our constant currency code injection business revenue declined by 4.1% as compared to the prior year period. While our revenue during the third quarter was lower year over year on a constant currency basis, this was something that we had expected and highlighted on our second quarter earnings call and was primarily due to inventory rebalancing that occurred with some of our distributors following the ERP implementations that occurred during the first six months of our fiscal year.

Pravesh Khandelwal: With me today are Devkodikar, Embecta's President and Chief Executive Officer, and Jake Elguicze, 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 our slides. We 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.

Devdatt Kurdikar: While our revenue during the third quarter was lower year-over-year on a constant currency basis, this was something that we had expected and highlighted on our second quarter earnings call.

Pravesh Khandelwal: 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. 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 GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation.

Devdatt Kurdikar: and was primarily due to inventory rebalancing that occurred with some of our distributors following the ERP implementations that occurred during the first six months of our fiscal year.

Devdatt Kurdikar: On a year-to-date basis, our core injection business has remained stable, growing 0.4% on a constant currency basis. Over the past year, much news has come out regarding GLP-1 and the impact they might have on people with diabetes and insulin delivery. Based on what we have seen over the past several years, our view is that while GLP-1s may delay the onset of becoming insulin-dependent, they do not eliminate the need for insulin.

Devdatt Kurdikar: On a year-to-date basis, our core injection business has remained stable, growing 0.4% on a constant currency basis.

Speaker Change: Over the past year, much news has come out regarding GLP-1 and the impact they might have on people with diabetes and insulin delivery.

Pravesh Khandelwal: Our agenda for today's call is as follows. Dev will begin by providing some remarks on the overall performance of our business during the fiscal third quarter of 2024, as well as an overview of our strategic priorities. Jake will then provide a more in-depth review of our QC financial results, as well as our updated financial guidance for the year.

Speaker Change: Based on what we have seen over the past several years, our view is that while GLP-1s may delay the onset of becoming insulin-dependent,

Devdatt Kurdikar: In fact, as the method of GLP-1 administration continues to evolve over the next several years, from the use of an auto-injector to that of a pen-injector, which requires a pen needle, we expect that we will stand to benefit. To that end, we have identified an opportunity to introduce a new small pack pen needle product that can be used for GLP-1 administration. We intend to first come to market with this product in Germany within the next several months and eventually expand this product offering to other countries in the future. We believe this will help meet the needs of the growing number of people using pens and, therefore, pen needles for GLP-1 administration. Turning to separation activities,

Speaker Change: They do not eliminate the need for insulin. In fact, as the method of GLP-1 administration continues to evolve over the next several years, from the use of an auto-injector to that of a pen-injector, which requires a pen needle, we expect that we will stand to benefit.

Pravesh Khandelwal: We will then open the call for questions.

Devdatt Kurdikar: With that said, I would now like to turn the call over to our senior Devkodikar. Good morning, and thank you for taking the time to join us. Let's start with slide five, where you will see the three strategic priorities that we have executed in our spin-off in April of 2022. First, we continue to strengthen our base business, while maintaining our global leadership position in the category of consumer injection devices. Second, we have made significant progress in our separation and standard activities necessary to establish ourselves as an operational independent company.

Speaker Change: To that end, we have identified an opportunity to introduce a new small pack pen needle product that can be used for GLP-1 administration.

Speaker Change: We intend to first come to market with this product in Germany within the next several months and eventually expand this product offering to other countries in the future.

Speaker Change: We believe this will help meet the needs of the growing number of people using pens and therefore pen needles for GLP-1 administration.

Devdatt Kurdikar: I'm pleased to report that we made significant progress in the implementation of our own ERP system, the operationalization of our own distribution network, and shared services capabilities. Now, our systems and capabilities are operational in regions that cover approximately 93% of our revenue base. Looking ahead, with the exception of a few deferred closing jurisdictions, we remain on track to complete all ERP implementations, distribution networks, and shared service separation activities by early fiscal year 2025.

Speaker Change: Turning to separation activities.

Devdatt Kurdikar: And finally, we continue to invest for growth most notably around our insulin-pass-pom program that is being developed for the type 2 market, as well as seeking MNA and additional partnership opportunities. I am proud of the significant progress we have made within each of these goals, turning to some third quarter highlights. During the third quarter, our team's discipline execution led to financial results that were aligned with our prior expectations. We generated revenue of approximately $272.5 million, which represented a decrease of 4.8% on an agriborded basis, and a decrease of 3.9% on a constant currency basis.

Speaker Change: I am pleased to report that we made significant progress in the implementation of our own ERP

Speaker Change: Operationalization of our own distribution network and Shared Services capabilities. Now, our systems and capabilities are operational in regions which cover approximately 93% of our revenue base.

Speaker Change: Looking ahead, with the exception of a few deferred closing jurisdictions, we remain on track to complete all ERP implementations, distribution networks, and shared service separation activities by early fiscal year 2025.

Devdatt Kurdikar: Once these implementations are complete, the only remaining separation program will be the brand transition, which entails changing the product packaging from Beedi's brand to ours. We have been planning this transition since the spinoff, and we intend for the execution of this program to begin in phases during fiscal year 2025. Notably, we are not changing the product names or color schemes associated with our packaging.

Speaker Change: Once these implementations are complete, the only remaining separation program will be brand transition, which entails changing the product packaging from BD's brand to ours.

Devdatt Kurdikar: When normalizing for the transient contract manufacturing revenue that we generate based on the sales of non-divided products to a former parent, our constant currency core injection business revenue declined by 4.1%, as compared to the prior year period. While our revenue dealing the third quarter was over a year over a year on a constant currency basis, this was something that we are expected and highlighted on our second quarter earnings call. And was primarily due to inventory rebalancing that occurred with some of our distributors following the ERP implementations that occurred during the business's image table, growing 0.4% on a constant currency basis.

Speaker Change: We have been planning this transition since the spin-off, and we intend for the execution of this program to begin in phases during fiscal year 2025.

Speaker Change: Notably, we are not changing the product names or color schemes associated with our packaging. This is important as people with diabetes will continue to experience the same look and feel on our boxes that they have been accustomed to for many years.

Devdatt Kurdikar: This is important as people with diabetes will continue to experience the same look and feel on our boxes that they have been accustomed to for many years. Regarding our insulin patchment program, we continue to progress on the open-loop patch pump. As a reminder, we submitted a 510k application to the FDA in December of 2023, and earlier this year, we received questions from the FDA concerning that application. We have since responded with the necessary data and await feedback from the FDA.

Speaker Change: Regarding our insulin patch pump program, we continue to progress on the open-lip patch pump.

Speaker Change: As a reminder, we submitted a 510k application to DFDA in December of 2023, and earlier this year, we received questions from DFDA concerning that application. We have since responded with the necessary data and await feedback from DFDA.

Devdatt Kurdikar: Over the past year, much news has come out regarding ERP1, and the impact they might have on people with diabetes and insulin delivery. Based on what we have seen over the past several years, our view is that while ERP1s may delay the onset of becoming insulin-independent, they do not eliminate the need for insulin. In fact, as the method of ERP1 administration continues to evolve over the next several years, from the use of an auto injector to that of a pen injector, which requires a pen needle, we expect that we will stand to benefit.

Devdatt Kurdikar: We will continue to provide updates to the investment community on the progress regarding our insulin patch pump at the appropriate time. Regarding our objective of entering the infusion pump market, we jointly sponsored two abstracts at the American Diabetes Association. 84th Scientific Session, that point to the potential for adults with type 2 diabetes to better manage insulin delivery through a patch pump with a larger 300-unit insulin reservoir, which could provide longer wear times and fewer disposable patches over time.

Speaker Change: We will continue to provide updates to the investment community on the progress regarding our insulin patch pump at the appropriate times.

Speaker Change: Relating to our objective of entering the infusion pump market, we sponsored two abstracts at the American Diabetes Association's

Speaker Change: 84 scientific sessions that point to the potential for adults with type 2 diabetes to better manage insulin delivery through a patch pump with a larger 300-unit insulin reservoir, which could provide longer wear times and fewer disposable patches over time.

Devdatt Kurdikar: To that end, we have identified an opportunity to introduce a new small pack pen needle product that can be used for ERP1 administration. We intend to first come to market with this product in Germany within the next several months, and eventually expand this product offering to other countries in the future. We believe this will help meet the needs of the growing number of people in pen and therefore pen needles for ERP1 administration.

Devdatt Kurdikar: The DAD app presented reaffirms what we've learned from speaking with people living with diabetes and their health care providers and validates our thesis that there is a critical unmet need among the type 2 diabetes population for pumps with a larger insulin reservoir.

Speaker Change: The DAD app presents and reaffirms what we've learned from speaking with people living with diabetes and their healthcare providers, and validates our thesis that there is a critical unmet need among the type 2 diabetes population for pumps with a larger insulin reservoir.

Devdatt Kurdikar: So, to summarize, we had another good quarter of results, and based on the year-to-date performance, as well as our expectations for the remainder of the fiscal year, we are again raising and tightening our guidance range for key financial metrics while reaffirming our revenue guidance range. Now, let's review our third quarter and year-to-date revenue performance in a bit more detail. As I mentioned before, during Q3, we generated revenue of $272.5 million, which represented a decrease of 4.8% on an as-recorded basis and a decrease of 3.9% on a constant currency basis, or 4.1% when adjusting for the impact of year-over-year changes in the revenue of the non-diabetes products that we contract, manufacture, and sell to BD.

Speaker Change: So, to summarize, we had another good quarter of results and based on the year-to-date performance as well as our expectations for the remainder of the fiscal year, we are again raising and tightening our guidance range for key financial metrics while reaffirming our revenue guidance range.

Devdatt Kurdikar: Within the US, during the quarter, revenue totaled $143.6 million, which represented a year-over-year decline of approximately 6.7% on a constant currency basis. When normalizing for year-over-year contract manufacturing revenue, our underlying Q3 constant currency revenue decline within the US was approximately 7.3%. The lower revenue within the U.S. was expected and was primarily due to distributors normalizing their inventory levels after making advanced purchases ahead of RERP implementation, as well as our annual price increase that went into effect on April 1st.

Speaker Change: Now, let's review our third quarter and year-to-date revenue performance in a bit more detail.

Devdatt Kurdikar: This volume decline was partially offset by favorable price and gross net adjustments. Turning to our international business, revenue totaled $128.9 million, which equated to a year-over-year constant currency decline of 0.6%. Like the U.S., the decline in constant currency revenue within international this quarter was expected and was primarily due to the timing of advanced purchases that customers made in advance of our ERP implementation. Importantly, through all separation activities that occurred during fiscal year 2024, our core injection business remains stable, growing 0.4% year-to-date on a constant currency basis.

Speaker Change: As I mentioned before, during Q3, we generated revenue of $272.5 million, which represented a decrease of 4.8% on an as-reported basis and a decrease of 3.9% on a constant currency basis.

Devdatt Kurdikar: Khandelwal. Looking ahead, with the exception of a few deferred closing jurisdictions, we remain on track to complete all ERP implementation, distribution network and shared service separation activities by early fiscal year 2025. Once these implementations are complete, the only remaining separation program will be brand transition, which entails changing the product packaging from BD's band to ours.

Speaker Change: or 4.1% when normalizing for the impact of year-over-year changes in the revenue of the non-diabetes products that we contract manufacture and sell to BD.

Speaker Change: Within the U.S., during the quarter, revenue totaled $143.6 million, which represented year-over-year decline of approximately 6.7% on a constant currency basis.

Devdatt Kurdikar: We have been planning this transition since this been off, and we intend for the execution of this program to begin in phases during fiscal year 2025. Notably, we are not changing the product names or color schemes associated with our packaging. This is important, as people with diabetes will continue to experience the same look and feel on our boxes, that they have been accustomed to for many years. Regarding our insulin patchment program, we continue to progress on the open look patch prompt.

Speaker Change: When normalizing for year-over-year contract manufacturing revenue, our underlying Q3 constant currency revenue decline within the U.S. was approximately 7.3%.

Speaker Change: The lower revenue within the U.S. was expected and was primarily due to distributors normalizing their inventory levels after making advanced purchases ahead of RERP implementation.

Devdatt Kurdikar: As a reminder, we submitted a 5.2K application to the FDA in December of 2023. And earlier this year, we received questions from the FDA concerning that application. We have soon responded with the necessary data and a waste feedback from the FDA. We will continue to provide updates to the investment community on the progress regarding our insulin patch prompt and the appropriate types. Relating to our objective of entering the infusion prompt market, we all sponsored two abstracts at the American Diabetes Association 84 scientific sessions that point to the potential for adults with type 2 diabetes to better manage insulin delivery through a patch prompt with a larger 300 unit insulin reservoir, which could provide longer wear times and fewer disposable patches over time.

Speaker Change: as well as our annual price increase that went into effect on April 1st. This volume decline was partially offset by favorable price and gross net adjustments.

Speaker Change: Turning to our international business, during Q3 revenue totaled $128.9 million, which equated to a year-over-year constant currency decline of 0.6%.

Speaker Change: Like the U.S., the decline in constant currency revenue within international this quarter was expected and was primarily due to the timing of advanced purchases that customers made in advance of RERP implementation.

Speaker Change: Importantly, through all separation activities that occurred during fiscal year 2024, our pore injection business remained stable, growing 0.4% year-to-date on a constant currency basis.

Devdatt Kurdikar: The dad app presented reaffirms what we learned from speaking with people living with diabetes and their healthcare providers. And validates our thesis that there is a critical and met need among the type 2 diabetes population for pumps with a larger insulin reservoir.

Devdatt Kurdikar: That completes my prepared remarks, and with that, let me turn the call over to Jake to take you through the third quarter financial results, as well as our updated full year financial guidance, in more detail.

Speaker Change: That completes my prepared remarks, and with that, let me turn the call over to Jake to take you through the third quarter financial results, as well as our updated full year financial guidance in more detail. Jake?

Jacob Elguicze: Thank you, Dev, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's financial performance for the third quarter at the gross profit level. Gap gross profit and margin for the third quarter of fiscal 2024 totaled $190.1 million and 69.8%, respectively. This compared to $189.5 million and 66.2% in the prior year period. While on an adjusted basis, our Q3 2024 Adjusted Gross Profit and Margin totaled $190.3 million and 69.8%, respectively.

Jake Elguicze: Thank you, Dev. And good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's financial performance for the third quarter at the gross profit line.

Devdatt Kurdikar: So to summarize, we had another good quarter of results and based on the year-to-date performance, as well as our expectations for the remainder of the fiscal year, we are again raising anti-minor guidance rates for key financial metrics while reaffirming our revenue value change. Now, let's review our third quarter and year-to-date revenue performance in a bit more detail. As I mentioned before, during Q3, we generated revenue of 272.5 million dollars, which represented a decrease of 4.8% on a low-resistant patient, and a decrease of 3.9% on a counseling currency basis, or 4.1% when normalizing for the impact of year-over-year changes in the revenue of the non-divided products that we contact manufacture and sell to beating.

Jacob Elguicze: This compared to 189.6 million and 66.3% in the prior year period. The year-over-year increase in adjusted gross profit and margin was primarily driven by the impact of inventory revaluation adjustments, which positively impacted year-over-year results by approximately 550 basis points, as well as the impact from favorable changes in price and gross to net adjustments that Dev referred to earlier. This was partially offset by lower product volume, the impact of inflation on the cost of certain raw materials, direct labor, freight, and overhead, and the negative impact of foreign currency translation, primarily due to the weakening of the U.S. dollar.

Jake Elguicze: Gap gross profit and margin for the third quarter of fiscal 2024 totaled $190.1 million and 69.8% respectively.

Jake Elguicze: This compared to 189.5 million and 66.2% in the prior year period.

Jake Elguicze: While on an adjusted basis, our Q3 2024 Adjusted Gross Profit and Margin totaled $190.3 million and 69.8%.

Jake Elguicze: This compared to 189.6 million and 66.3% in the prior year period.

Jake Elguicze: The year-over-year increase in adjusted gross profit and margin was primarily driven by the impact of inventory revaluation adjustments, which positively impacted year-over-year results by approximately 550 basis points.

Devdatt Kurdikar: Within the US, during the quarter revenue told the $143.6 million, which are presented year-over-year decline of approximately 6.7% on a counseling currency basis. One normalizing for a year-over-year contract manufacturing revenue, our underlying Q3 constant currency revenue decline within the US was approximately 7.3%. The lower revenue within the US was expected and was primarily due to distributors normalizing their inventory levels after making advanced purchases ahead of our ERP implementation. As well as, our annual price increase that went into effect on April 1st, this volume decline was partially observed by favorable price and gross to net adjustments.

Jake Elguicze: as well as the impact from favorable changes in price and gross-to-net adjustments that Dev referred to earlier.

Dev Kurdikar: This was partially offset by lower product volumes, the impact of inflation on the cost of certain raw materials, direct labor, freight, and overhead, and the negative impact of foreign currency translation, primarily due to the weakening of the U.S. dollar.

Jacob Elguicze: Turning the Gap Operating Income in March. During the third quarter, they were 55.9 million and 20.5%. This compared to 51.3 million and 17.9% in the prior year period. Meanwhile, on an adjusted basis, our Q3 2024 Adjusted Operating Income and Margin totaled $83.3 million and 30.6%. This compared to 79.8 million and 27.9% in the prior year period. The year-over-year increase in adjusted operating income is primarily due to the adjusted gross profit changes I just discussed, as well as year-over-year decreases in both SG&A and R&D. The year-over-year decline of approximately 2 million in SG&A was primarily due to cost optimization actions taken in the current period, as well as lower TSA costs. However, these reductions were somewhat offset by increases in free and warehouse.

Speaker Change: Turning the Gap Operating Income and Margin, during the third quarter they were $55.9 million and 20.5%.

Speaker Change: This compared to 51.3 million and 17.9% in the prior year period.

Devdatt Kurdikar: Turning to our international business, during Q3 revenue told 128.9 million dollars, which equated to a year-over-year constant currency decline of 0.6%. Like the US, the decline in constant currency revenue within the international this quarter was expected and was primarily due to the timing of advanced purchases that customers made in advance of our ERP implementation. Importantly, through all separation activities that occurred during fiscal year 2024, our poor injection business remains stable, growing 0.4% year-to-date on a constant currency basis.

Speaker Change: While on an adjusted basis, our Q3 2024 Adjusted Operating Income and Margin totaled $83.3 million and 30.6%. This compared to $79.8 million and 27.9% in the prior year period.

Speaker Change: The year-over-year increase in adjusted operating income is primarily due to the adjusted gross profit changes I just discussed, as well as year-over-year decreases in both SG&A and R&D.

Speaker Change: The year-over-year decline of approximately 2 million in SG&A was primarily due to cost optimization actions taken in the current period, as well as lower TSA costs.

Jacob Elguicze: That completes my prepared remarks and with that, let me turn the call over to Jake to take you through the third quarter financial results, as well as our updated fully financial guidance in more detail. Jake? Thank you, Dev, and good morning everyone.

Speaker Change: These reductions were somewhat offset by increased freight and warehousing costs.

Speaker Change: While the year-over-year decline of approximately 2 million in R&D was primarily due to lower expenses associated with our insulin patch pump platform.

Jacob Elguicze: While the year-over-year decline of approximately $2 million in R&D was primarily due to lower expenses associated with our insulin patch pump platform, turning to the bottom line, Gap net income and earnings per diluted share were $14.7 million and 25 cents during the third quarter of fiscal 2024, which compared to $15.2 million and $0.26 in the prior year period. While on an adjusted basis, net income and earnings per share were $43,074,000 during the third quarter of fiscal 2024.

Jacob Elguicze: Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's financial performance for the third quarter at the gross profit line. Gap gross profit and margin for the third quarter of fiscal 2024 totaled 190.1 million and 69.8% respectively. This compared to 189.5 million and 66.2% in the prior year period. While on an adjusted basis, our Q3 2024 adjusted gross profit and margin totaled 190.3 million and 69.8%.

Speaker Change: Turning to the bottom line, GAAP net income and earnings per diluted share was $14.7 million and $0.25 during the third quarter of fiscal 2024, which compared to $15.2 million and $0.26 in the prior year period.

Speaker Change: While on an adjusted basis, net income and earnings per share were $43,074,000 during the third quarter of fiscal 2024.

Jacob Elguicze: This compared to $39.8 million and $0.69 in the prior year period. The increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed, as well as a reduction in our adjusted tax rate from approximately 25% in Q3 of 2023 to approximately 22% in Q3 of 2024. This was somewhat offset by an increase in year-over-year interest expense associated with the rise in SOFR and the impact that it had on our variable interest rate debt. Lastly, from a P&L perspective, for the third quarter of 2024, our adjusted EBITDA and margin totaled approximately $99.2 million and 36.4%, respectively. This compared to 92.2 million and 32.2% in the prior year period.

Speaker Change: This compared to $39.8 million and $0.69 in the prior year period.

Speaker Change: The increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed.

Jacob Elguicze: This compared to 189.6 million and 66.3% in the prior year period. The year-over-year increase in adjusted gross profit and margin was primarily driven by the impact of the inventory revaluation adjustments, which positively impacted year-over-year results by approximately 550 basis points, as well as the impact from favorable changes in price and gross to net adjustments that never refer to earlier. This was partially offset by lower product volumes, the impact of inflation on the costs of certain raw materials, direct labor, freight, and overhead, and the negative impact of foreign currency translation primarily due to the weakening of the US dollar.

Speaker Change: as well as a reduction in our adjusted tax rate from approximately 25% in Q3 of 2023 to approximately 22% in Q3 of 2024.

Speaker Change: This was somewhat offset by an increase in year-over-year interest expense associated with the rise in SOFR and the impact that had on our variable interest rate debt.

Speaker Change: Lastly, from a P&L perspective, for the third quarter of 2024, our adjusted EBITDA and margin totaled approximately $99.2 million and 36.4%.

Speaker Change: This compared to 92.2 million and 32.2% in the prior year period.

Jacob Elguicze: Turning the gap operating income and margin, during the third quarter they were 55.9 million and 20.5%. This compared to 51.3 million and 17.9% in the prior year period. While on an adjusted basis, our Q3 2024 adjusted operating income and margin totaled 83.3 million and 30.6%. This compared to 79.8 million and 27.9% in the prior year period. The year-over-year increase in adjusted operating income is primarily due to the adjusted gross profit changes I just discussed, as well as year-over-year decreases in both SGNA and R&D.

Jacob Elguicze: Turning to the balance sheet and cash flow, at the end of the third quarter, our cash balance totaled approximately $282 million, while our last 12 months' net leverage, as defined under our credit facility agreement, stood at approximately 3.7 times. As a reminder, our net leverage covenant requires us to stay below 4.75%. From a cash flow perspective, our cash balance as of June 30th is approximately $45 million lower than the balance that existed as of September 30th, and this is largely attributed to cash that has been used related to the Separation Act, which includes product registration and labeling costs. Warehousing and Distribution Setup Costs, and legal costs associated with patents and trademark work.

Speaker Change: Turning to the balance sheet and cash flow. At the end of the third quarter, our cash balance totaled approximately $282 million, while our last 12 months' net leverage, as defined under our credit facility agreement, stood at approximately 3.7 times.

Speaker Change: As a reminder, our Net Leverage Covenant requires us to stay below 4.75 times.

Speaker Change: From a cash flow perspective, our cash balance as of June 30th is approximately $45 million lower than the balance that existed as of September 30th, and this is largely attributed to cash that has been used related to separation activities.

Jacob Elguicze: The year-over-year decline of approximately 2 million in SGNA was primarily due to cost optimization actions taken in the current period as well as lower TSA costs. These reductions were somewhat offset by increased freight and warehouse costs. While the year-over-year decline of approximately 2 million in R&D was primarily due to lower expenses associated with our insulin patch pump platform.

Speaker Change: which include product registration and labeling costs, warehousing and distribution setup costs,

Speaker Change: Legal costs associated with patents and trademark work.

Jacob Elguicze: Temporary Headcount Resources within Accounting, Tax, Finance, Human Resources, Regulatory, and IT, and one-time business integration and IT-related costs primarily associated with our global ERP employment. We estimate that during the first nine months of fiscal year 2024, we will use approximately $130 million of cash towards the separation activity. Additionally, we now show trade receivables globally on our balance sheet given our previously mentioned ERP implementation. As such, Embecta now collects receivables from customers directly, as compared to prior to the ERP implementations, whereby BD factored those receivables on our behalf.

Speaker Change: Temporary headcount resources within accounting, tax, finance, human resources, regulatory, and IT, and one-time business integration and IT related costs primarily associated with our global ERP implementations.

Speaker Change: We estimate that during the first nine months of fiscal year 2024, we used approximately $130 million of cash towards these separation activities.

Jacob Elguicze: Turning to the bottom line, gap net income and earnings per diluted share was 14.7 million and 25 cents during a third quarter of fiscal 2024, which compared to 15.2 million and 26 cents in the prior year period. While on an adjusted basis, net income and earnings per share were 43 million and 74 cents during a third quarter of fiscal 2024. This compared to 39.8 million and 69 cents in the prior year period.

Speaker Change: Additionally, we now show trade receivables globally on our balance sheet given our previously mentioned ERP implementations.

Speaker Change: As such, Embecta now collects receivables from customers directly, as compared to prior to the ERP implementations, whereby BD factored those receivables on our behalf.

Jacob Elguicze: I'm pleased to report that following the implementation of our ERP systems and shared service functionality within approximately 93% of our global revenue base, cash collections associated with those receivables have continued to trend in a positive direction. Consistent with the comments I made on our second quarter earnings conference call, we continue to expect that we will end fiscal year 2024 with a cash balance of roughly $300 million, or comparable to the balance that existed at the end of the second quarter. This includes an expectation that, for the full year, we will use approximately $180 million of cash towards separation activities. This compares to cash used for separation activities of approximately $145 million during fiscal year 2023.

Speaker Change: I'm pleased to report that following the implementation of our ERP systems and shared service functionality within approximately 93% of our global revenue base,

Jacob Elguicze: The increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed, as well as a reduction in our adjusted tax rate from approximately 25% in Q3 of 2023 to approximately 22% in Q3 of 2024. This was somewhat offset by an increase in year-over-year interest expense associated with the rise and so far and the impact that had on our variable interest rate debt.

Speaker Change: Cash collections associated with those receivables have continued to trend in a positive direction.

Speaker Change: Consistent with the comments I made on our second quarter earnings conference call, we continue to expect that we will end fiscal year 2024 with a cash balance of roughly $300 million, or comparable to the balance that existed at the end of the second quarter.

Speaker Change: This includes an expectation that for the full year, we will use approximately $180 million of cash towards separation activities.

Jacob Elguicze: Lastly, from a P&L perspective, for the third quarter of 2024, our adjusted EBIDA and margin totaled approximately 99.2 million and 36.4%. This compared to 92.2 million and 32.2% in the prior year period.

Speaker Change: This compares to cash used for separation activities of approximately $145 million during fiscal year 2023.

Jacob Elguicze: Given that we expect to be largely complete with separation activities by the end of this fiscal year, we expect to see an improvement in our cash balances in fiscal year 2025 and beyond, which would allow us additional flexibility in terms of capital allocation, including more material debt repayment. That completes my comments on our fiscal Q3 results. Next, I will provide an update on our full year 2024 financial guidance. Beginning with revenue, given our performance during the first nine months of the year, as well as our expectations for the fourth quarter, we are reaffirming our full year constant currency revenue range to be flat to down 0.5% as compared to 2023.

Speaker Change: Given that we expect to be largely complete with separation activities by the end of this fiscal year, we expect to see an improvement in our cash balances in fiscal year 2025 and beyond.

Jacob Elguicze: Turning to the balance sheet and cash flow, at the end of the third quarter, our cash balance totaled approximately 282 million. While our last 12 months net leverage as defined on our credit facility agreement stood at approximately 3.7 times. As a reminder, our net leverage covenant requires us to stay below 4.75 times. From a cash flow perspective, our cash balance, as of June 30, is approximately 45 million dollars lower than the balance that existed as of September 30.

Speaker Change: which would allow us additional flexibility in terms of capital allocation, including more material debt repayment.

Speaker Change: That completes my comments on our fiscal Q3 results.

Jacob Elguicze: Likewise, we are reaffirming our previously provided guidance for foreign currency, which called for foreign currency to be a headwind of about 0.4% versus the prior year. These FX assumptions are based on foreign exchange rates that were in existence in the late July timeframe, including a euro to US dollar exchange rate of approximately 1.08.

Speaker Change: Next, I will provide an update on our full year 2024 financial guidance.

Speaker Change: Beginning with revenue, given our performance during the first nine months of the year, as well as our expectations for the fourth quarter, we are reaffirming our full year constant currency revenue range to be flat to down 0.5% as compared to 2023.

Jacob Elguicze: And this is largely attributed to cash that has been used related to separation activities, which include product registration and labeling costs, warehousing and distribution setup costs, legal costs associated with patents Temporary Headcount Resources Within Accounting, Tax, Finance, Human Resources, Regulatory and IT, and one-time business integration and IT-related costs primarily associated with our global ERP implementations. We estimate that during the first nine months of fiscal year 2024, we used approximately 130 million of cash towards the separation activities.

Speaker Change: Likewise, we are reaffirming our previously provided guidance for foreign currency, which called for foreign currency to be a headwind of about 0.4% versus the prior year.

Speaker Change: These FX assumptions are based on foreign exchange rates that were in existence in the late July timeframe, including a Euro to US dollar exchange rate of approximately 1.08.

Jacob Elguicze: On a combined basis, our as reported guidance range continues to call for revenue to be down between 0.4% and 0.9% as compared to 2023, resulting in a revenue guide of between $1,111,000,000 and $1,116,000,000. Turning to Margin. We are raising and narrowing our adjusted gross margin guidance from a range of between 64.5% and 65% to a new range of between 65.5% and 65.5%. Similarly, from an adjusted operating margin perspective, we are raising and narrowing that guidance from a range of between 25.25% and 25.75% to a new range of between 25.75% and 26%.

Speaker Change: On a combined basis, our as-reported guidance range continues to call for revenue to be down between 0.4% and 0.9% as compared to 2023.

Speaker Change: resulting in a revenue guide of between $1,111,000,000 and $1,116,000,000.

Jacob Elguicze: Additionally, we now show trade receivables globally on our balance sheet given our previously mentioned ERP implementations. As such, Embecta now collects receivables from customers directly as compared to prior to the ERP implementations, whereby beating factor those receivables on our behalf. I'm pleased to report the following implementation of our ERP systems and shared service functionality within approximately 93% of our global revenue base, cash collections associated with those receivables have continued to trend in a positive direction.

Speaker Change: Turning to margins.

Speaker Change: We are raising and narrowing our adjusted gross margin guidance from a range of between 64.5% and 65% to a new range of between 65.25% and 65.5%.

Speaker Change: Similarly, from an adjusted operating margin perspective, we are raising and narrowing that guidance from a range of between 25.25% and 25.75%

Jacob Elguicze: Consistent with the comments I made on our second quarter earnings conference call, we continue to expect that we will end fiscal year 2024 with a cash balance of roughly 300 million, or comparable to the balance that existed at the end of the second quarter. This includes an expectation that for the full year, we will use approximately 180 million of cash toward separation activities. This compares to cash used for separation activities of approximately 145 million during fiscal year 2023.

Speaker Change: to a new range of between 25.75% and 26%.

Jacob Elguicze: While in terms of adjusted EBITDA margin, we are narrowing that guidance from a range of between 31% and 31.5% to a new range of between 31.25% and 31.5%. Lastly, due to an improved margin outlook, we are increasing and narrowing our adjusted earnings per share guidance from a range of between $2.20 and $2.30 to a new range of between $2.30 and $2.35, or an increase at the midpoint This completes my prepared remarks, and at this time, I would like to turn the call over to the operator for questions.

Speaker Change: While in terms of adjusted EBITDA margin, we are narrowing that guidance from a range of between 31% and 31.5% to a new range of between 31.25% and 31.5%.

Speaker Change: Lastly, due to an improved margin outlook, we are increasing and narrowing our adjusted earnings per share guidance from a range of between $2.20 and $2.30

Speaker Change: to a new range of between $2.30 and $2.35, or an increase at the midpoint of approximately $0.08.

Speaker Change: This completes my prepared remarks, and at this time, I would like to turn the call over to the operator for questions.

Jacob Elguicze: That completes my comments on our fiscal Q3 results.

Jacob Elguicze: Next, I will provide an update on our full year 2024 financial guidance. Beginning with revenue, given our performance during the first nine months of the year, as well as our expectations for the fourth quarter, we are reaffirming our full year constant currency revenue range to be flat to down 0.5% as compared to 2023. Likewise, we are reaffirming our previously provided guidance for foreign currency, which called for foreign currency to be a headwind of about 0.4% versus the prior year.

Speaker Change: Thank you. If you'd like to ask a question, please press star 11.

Speaker Change: If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again.

Operator: Thank you. If you'd like to ask a question, please press star 11. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again. Our first question comes from Marie Thibault with BTIG. Your line is open.

Speaker Change: Our first question comes from Marie Thibault with BTIG. Your line is open.

Marie Thibault: Good morning. Thanks for taking the questions and a very nice quarter. Wanted to start here a little bit on guidance and specifically the gross margins. They were very strong this quarter, and I think I heard mention of inventory valuation readjustments. Can you help me understand exactly what that is specifically? And then what we should be assuming in the implied step down for fiscal fourth quarter on that gross margin metric?

Marie Thibault: Good morning. Thanks for taking the questions and very nice quarter. I wanted to start here a little bit on guidance and specifically the gross margins. They were very strong this quarter and I think I heard mention of inventory valuation readjustments. Can you help me understand exactly what that is specifically and then what we should be assuming in the implied step down for fiscal fourth quarter on that gross margin metric?

Jacob Elguicze: These effects assumptions are based on foreign exchange rates that were in existence in the late July timeframe, including a Euro to US dollar exchange rate of approximately 1.08. On a combined basis, our as reported guidance range continues to call for revenue to be down between 0.4% and 0.9% as compared to 2023, resulting in a revenue guide of between 1 billion, 111 billion, and 1 billion, 116 billion.

Jacob Elguicze: Sure, Marie. Thanks. I appreciate the question. So let me start by saying that our adjusted gross margin was slightly better than our prior expectations for the quarter. And that's really what's allowing us to once again increase our full-year adjusted gross margin guidance range by about 62.5 basis points at the midpoint of our new full-year guidance. So during the quarter, the year over year increase in adjusted gross margin occurred due to a few factors, uh, the largest of which you mentioned was a benefit from inventory revaluation adjustments, or what's referred to as, you know, profit in inventory.

Marie Thibault: Sure, Marie. Thanks. I appreciate the question. So, let me start by saying that our adjusted gross margin was slightly better than our prior expectations.

Marie Thibault: in the quarter. And that's really what's allowing us to once again increase our full year adjusted gross margin guidance range by about 62.5 basis points at the midpoint of our new full year guidance range.

Marie Thibault: So, during the quarter, the year-over-year increase in adjusted gross margin occurred

Jacob Elguicze: Turning to margin. We are raising and narrowing our adjusted gross margin guidance from a range of between 64.5% and 65% to a new range of between 65.25% and 65.5%. Similarly, from an adjusted operating margin perspective, we are raising and narrowing that guidance from a range of between 25.25% and 25.75% to a new range of between 25.75% and 26%. While in terms of adjusted EBADAM margin, we are narrowing that guidance from a range of between 31.5% to a new range of between 31.25% and 31.5%.

Marie Thibault: due to a few factors, the largest of which you mentioned was a benefit from inventory revaluation adjustments or what's referred to as, you know, profit in inventory. And that contributed about a 550 basis point year over year increase. And I'll come back to that in a moment as to as to what that what that was.

Jacob Elguicze: And that contributed about a 550 basis point year over year increase. And I'll come back to that in a moment, but, as to what that was, um, in addition to the profit and inventory impact, we also had some favorable year over year impact from pricing and the gross to net reserve adjustments, which contributed about 140 basis points of the year over year increase.

Marie Thibault: In addition to the profit and inventory impact, we also had some favorable year-over-year impact from pricing and the gross-to-net reserve adjustments. That contributed about 140 basis points.

Jacob Elguicze: And then that was somewhat offset by some headwinds associated with lower product volumes stemming from the customers rebalancing their inventory levels following the increased purchases that they made during the second quarter in advance of both our international ERP implementations, as well as the April 1st price increase that went into effect in the U.S., so those items negatively impacted volumes, uh, year over year by about 210 basis points. In addition, we also saw some year-over-year headwinds associated with inflation of about 120 basis points.

Marie Thibault: of the year-over-year increase.

Marie Thibault: And then that was somewhat offset by some headwinds associated with lower product volumes.

Marie Thibault: Stemming from the customers rebalancing their inventory levels following the increased purchases

Marie Thibault: that they made during the second quarter in advance of both our international ERP implementations as well as the April 1st price increase that went into effect in the U.S. So those items negatively impacted volumes year-over-year by about 210 basis points.

Jacob Elguicze: Lastly, due to an improved margin outlook, we are increasing and narrowing our adjusted earnings per share guidance from a range of between $2.20 and $2.30 to a new range of between $2.30 and $2.35 or an increase at the midpoint of approximately 8%.

Marie Thibault: In addition, we also saw some year-over-year headwinds associated with inflation of about 120 basis points.

Jacob Elguicze: So coming back to your question on inventory revaluation or profit in inventory, so as a result of all the ERP implementations that began in early fiscal year 2024, you know, we had a real concerted effort for us to build up inventory, to make sure that there were no issues from a customer. And that inventory was built in our manufacturing locations in China, in Ireland, and the US, and then we shipped that inventory to a variety of distribution centers and different legal entities.

Speaker Change: So, coming back to your question on inventory revaluation or profit in inventory.

Speaker Change: So, as a result of all the ERP implementations that began in early fiscal year 2024, you know, we had a real concerted effort for us to build up inventory to make sure that there were no issues from a customer standpoint.

Unknown Executive: This completes my prepared remarks, and at this time, I would like to turn the call over to the operator for questions. Thank you. If you'd like to ask a question, please press star 1-1. If your question has been answered and you'd like to remove yourself from the queue, please press star 1-1 again.

Speaker Change: And that inventory was built in our manufacturing locations in China, in Ireland, and in the U.S. And then we shipped that inventory to a variety of distribution centers and different legal entities. And when that happens,

Marie Thibault: Our first question comes from Marie Tibo with BTIG. Your line is open. Good morning. Thanks for taking the questions in very nice quarter. I wanted to start here a little bit on guidance, and specifically the gross margins. They were very strong in this quarter, and I think I heard mention of inventory valuation readjustments. Can you help me understand exactly what that is specifically, and then what we should be assuming in the implied step down for fiscal fourth quarter on that gross margin metric?

Jacob Elguicze: And when that happens, there's intercompany profit that results once things transfer from one legal entity to another. And that intercompany profit needs to be eliminated at a consolidated level since that product hasn't been shipped yet to any type of third-party customer. So once that inventory is then sold to customers, that profit that was previously on the balance sheet needs to be recognized in the P&L. And that's what happened this quarter.

Speaker Change: There is intercompany profit that results once things transfer from one legal entity to another, and that intercompany profit needs to be eliminated at a consolidated level.

Speaker Change: Since that product wasn't shipped yet to any type of a third party customer.

Speaker Change: So, once that inventory is then sold to customers, that profit that was previously on the balance sheet...

Marie Thibault: Sure, Marie. Thanks. I appreciate the question. Let me start by saying that our adjusted gross margin was slightly better than our prior expectations in the quarter, and that's really what's allowing us to once again increase our full year adjusted gross margin guidance range by about 62 and a half basis points at the midpoint of our new full year guidance range. So during the quarter, the year over year increase in adjusted gross margin occurred due to a few factors, the largest of which you mentioned was a benefit from inventory evaluation adjustments or what's referred to as profit in inventory.

Speaker Change: needs to be recognized into the P&L. And that's what happened this quarter. It just so happens that because of all the inventory that we had built up in advance of the ERP implementations,

Jacob Elguicze: It just so happens that because of all the inventory that we had built up in advance of the ERP implementations, it resulted in a larger amount than what we would typically see. Typically, these profit and inventory adjustments range within a few million dollars every quarter. It just happens to be the fact that because we had built up so much inventory and then recognized and then sold that inventory into the market, we needed to release that profit and inventory from the balance sheet into the P&L. And this was something that was previously contemplated within our prior year full year guidance. It just happens to be, and it's typically much larger than what we would normally see.

Marie Thibault: And that contributed about a 550 basis point year over year increase, and I'll come back to that in a moment as to what that was. In addition to the to the profit inventory impact, we also had some favorable year over year impact from pricing and the gross to net reserve adjustments that contributed about 140 basis points of the year over year increase. And then that was somewhat offset by some headwinds associated with lower product volumes stemming from the customers rebalancing their inventory levels following the increased purchases that they made during the second quarter.

Speaker Change: It resulted in a larger amount than what we would typically see.

Speaker Change: So typically these profit and inventory adjustments.

Speaker Change: you know, range within a few million dollars every quarter. It just happens to be the fact that because we had built up so much inventory and then recognized and then sold that inventory into the market, we needed to release that profit and inventory from the balance sheet into the P&L. And this was something that was previously contemplated within our prior year full year guidance range.

Speaker Change: It just happens to be, it's typically much larger than what we would normally see. So as we move into the fourth quarter, we're not going to necessarily see that same level of benefit.

Jacob Elguicze: So as we move into the fourth quarter, we're not going to necessarily see that same level of benefit. And if you go from, you know, our Q3 performance into our Q4 performance, you're correct. You know, the gross margins, the implied gross margins would step down from Q3 to Q4. And again, that largely has to do with the inventory revaluation or profit on inventory not recurring in the fourth quarter. So that alone is about a 500 basis point move from Q3 to Q4.

Speaker Change: And if you go from, you know, our Q3 performance...

Speaker Change: into our Q4 performance.

Speaker Change: You're correct. The gross margins, the implied gross margins would step down from Q3 to Q4. And again, that largely has to do with the inventory revaluation or profit in inventory not recurring in the fourth quarter. So that alone is about a 500 basis point move from Q3 to Q4.

Marie Thibault: In advance of both our international European implementations, as well as the April 1st price increase that went into effect in the U.S. So those items negatively impacted volumes year over year by about 210 basis. Dispoints. In addition, we also saw some year-over-year headwinds associated with inflation of about 120 basis points. So, coming back to your question on inventory revaluation or profit in inventory. So, as a result of all, the ERP implementations that began in early fiscal year 2024, you know, we had a real concerted effort for us to build up inventory to make sure that there were no issues from a customer standpoint.

Jacob Elguicze: And additionally, I would say, you know, now that we've implemented our ERP systems within 93% of our business, and we only have, you know, Latin America and India left, beginning in Q4, we're going to intentionally start to manufacture less product as we attempt to reduce our overall inventory levels and improve our working capital and improve our cash. But because we're doing that, we're going to see some negative manufacturing variances that will impact us in Q4. Again, like the positive benefit to our P&L from the profit in inventory that occurred during Q3, the reduction in manufacturing volumes was something that we had previously contemplated in our prior year.

Speaker Change: And then additionally, I would say, you know, now that we've implemented our ERP systems within 93% of our business, and we only have, you know, Latin America and India left.

Speaker Change: Beginning in Q4, we're going to intentionally start to manufacture less product.

Speaker Change: as we attempt to reduce our overall inventory levels.

Speaker Change: and improve our working capital and improve our cash. But because we're doing that, we're gonna see some negative manufacturing variances that impact us in Q4.

Speaker Change: Again, like the positive benefit to our P&L from the profit and inventory that occurred during Q3, the reduction in the manufacturing volumes was something that we had previously contemplated in our prior year guidance.

Marie Thibault: And that inventory was built in our manufacturing locations in China, in Ireland, and in the US. And then we shipped those that inventory to a variety of distribution centers and different legal entities. And when that happens, there is inter-company profit that results once things transfer from one legal entity to another. And that inter-company profit needs to be eliminated at a consolidated level since that product wasn't shipped yet to any type of a third-party customer.

Devdatt Kurdikar: Okay, that all makes sense to me, Jake. Thanks for the level of detail there. Let me ask a follow-up question then on the move to start selling small pen needle packs in Germany for those GOP1 users. How did you land on starting with that country, Germany? What are your thoughts on marketing those packs, and is there going to be a pricing premium? Is there something to look forward to on that as well?

Speaker Change: Okay, that all makes sense to me, Jake. Thanks for the level of detail there. Let me ask a follow-up here then on the move to start selling small pen needle packs in Germany for those GOP1 users. How did you land on starting with that country, Germany? What are the thoughts

Speaker Change: Marketing those packs and is there going to be a pricing premium? Is there something to look toward on that as well?

Marie Thibault: So, once that inventory is then sold to customers, that profit that was previously on the balance sheet needs to be recognized into the P&L. And that's what happened in this quarter. It just so happens that because of all the inventory that we had built up in advance of the ERP implementations, it resulted in a larger amount than what we typically see. So, typically these profit and inventory adjustments, you know, range within a few million dollars every quarter.

Devdatt Kurdikar: Good morning, Marie. We are absolutely excited about our prospects of launching the small pack for GLP-1s in Germany. Germany, you know, has made sort of a logical first country for us. GLP-1s there are being launched in the form of a pen. So obviously, our pen needles are required to administer those GLP-1s. The pen needles that we make today are the same pen needles that are required for GLP-1 administration.

Speaker Change: Good morning, Marie. We are absolutely excited about our prospects of launching the small pack for GLP-1s in Germany. Germany, you know, made sort of a logical first country for us.

Speaker Change: GLP-1s there are being launched in the form of a pen.

Speaker Change: So obviously our pen needles are required to administer the GLP-1s. The pen needles that we make today are the same pen needles that are required for GLP-1 administration. And so we launched the projects a few months ago.

Marie Thibault: It just happens to be the fact that because we had built up so much inventory and then recognized and then sold that inventory into the market, we needed to release that profit and inventory from the balance sheet into the P&L. And this was something that was previously contemplated within our prior year full year guidance range. It just happens to be that it's typically much larger than what we normally see.

Devdatt Kurdikar: And so we launched the projects a few months ago to make small packs, because, as you can imagine, small packs are more patient and customer-friendly for GLP-1 administration. The pricing is, I would say, appropriate for the market and appropriate for the use case. I won't talk specifically about pricing premiums.

Speaker Change: to make smallpax, because as you can imagine, smallpax are more patient and customer friendly for GLP-1 administration.

Speaker Change: The pricing is, I would say, appropriate for the market and appropriate for the use case. I won't talk specifically about pricing premiums, but let me just say that we are pleased with the price that we expect to get.

Jacob Elguicze: So, as we move into the fourth order, we're not going to necessarily see that same level of benefit. And if you go from our Q3 performance into our Q4 performance, you're correct. The gross margins, the implied gross margins, would step down from Q3 to Q4. And again, that largely has to do with the inventory revaluation or profit and inventory, not recurring in the fourth quarter. So, that alone is about a 500 basis point move from Q3 to Q4.

Devdatt Kurdikar: But let me just say that we are pleased with the price that we expect to get. And look more broadly; we are starting with Germany, as Penn Injectors proliferate and expand for the administration of GLP once again. We will certainly be there to provide Penn Needles. We have the capacity and can ramp up production of the small packs quickly to fill the man. And if you really project out over a number of years, if biosimilars enter the market, certainly again, that provides a tailwind for us. So we're excited about Germany. We're going to be launching that product there, imminently, in the coming weeks, maybe a couple months, and we'll see where we go from there.

Marie Thibault: Okay, very good. Thanks for taking the questions.

Speaker Change: And look more broadly, we are starting with Germany as

Speaker Change: Pen Injectors Proliferate and Expand for the Administration of GLP-1s

Speaker Change: We will certainly be there to provide pen needles. We have the capacity and can ramp up production of these small packs.

Speaker Change: Thank you.

Jacob Elguicze: And then additionally, I would say, you know, now that we've implemented our ERP systems within 93% of our business and we only have, you know, Latin America and India left. Beginning in Q4, we're going to intentionally start to manufacture less product as we attempt to reduce our overall inventory levels and improve our working capital and improve our cash. But because we're doing that, we're going to see some negative manufacturing variances that impact us in Q4.

Speaker Change: So we are excited about Germany. We're going to be launching that product there imminently here in the coming weeks, maybe a couple months.

Speaker Change: and we'll see where we go from there.

Speaker Change: Okay, very good. Thanks for taking the questions.

Operator: Thank you. Our next question comes from Travis Steed with Bank of America Security. Your line is open.

Marie Thibault: Thanks Marie.

Speaker Change: Thank you. Our next question comes from Travis Steed with Bank of America Securities. Your line is open.

Travis Steed: Hey, thanks for taking the question. I guess the first question I'd like to start with is, when you think about the progress you're making on the pump and the investments that you kind of need to launch that product successfully, how should we think about the kind of margins and earnings that the streets got modeled for kind of going forward? Can you guys expand margins next year, you know, even with the investments required to launch this product? I just want to make sure we get the models correct going forward for this.

Jacob Elguicze: Again, like the positive benefits to our P&L from the profit and inventory that occurred during Q3, the reduction in the manufacturing volumes was something that we had previously contemplated in our priorities, and your guidance. Okay, that all makes sense to me, Jake, thanks for the level of detail there.

Speaker Change: to launch that product successfully. How should we think about kind of margins and earnings like that the streets got modeled for kind of going forward? Can you guys expand margins next year?

Marie Thibault: Let me ask a follow-up here then on the move to start selling small pen needle packs in Germany for those GOP1 users.

Speaker Change: You know, even with the investments required to launch this product, just want to make sure we get kind of the models correct kind of going forward for this.

Devdatt Kurdikar: Thanks, Travis, and good morning. So just as a quick reminder for the audience here, we made that submission in late calendar 2023. We got some questions from the MDA, and it's part of the normal process that we responded. You know, in a very timely manner, and we'll be progressing on the closed loop solution as well. But first things first. We need and hope to get clearance for the pump. Obviously, I won't comment on the outcome and the timing of the FDA decision.

Speaker Change: Thanks Travis and good morning. So just as a quick reminder for the audience here, we made that submission in late calendar 2023. We got some questions from the FDA. It's part of the normal process that we responded.

Marie Thibault: How did you land on starting with that country, Germany? What are the thoughts on marketing those packs? And is there going to be a pricing premium? Is there something to look toward on that as well?

Devdatt Kurdikar: Good morning, Marie. We are absolutely excited about our prospects of launching the small packs for GOP1s in Germany. Germany made sort of a logical first country for us. GLP1s there are being launched in the form of a pen. So obviously our pen needles are required to administer those GLP1s. The pen needles that we make today are the same pen needles that are required for GLP1 administration. And so we launched the projects a few months ago to make small packs because as you can imagine small packs are more patient and customer friendly for GLP1 administration.

Speaker Change: You know in a very timely manner and we'll be progressing on the closed loop solution as well. So first things first

Speaker Change: We need and hope to get clearance on the pump. Obviously, I won't comment on the outcome and the timing of the FDA decision. And when it comes to our plans for the commercial launch for the pump and potential implications for fiscal 2025,

Devdatt Kurdikar: And when it comes to our plans for the commercial launch of the pump and potential implications for fiscal 2025, respectfully, Travis, at this point, we are not ready to comment on 2025 numbers. I will repeat what I've said before. We are very mindful of our net leverage levels. We're very mindful of our debt. You've heard us comment in the past that we do have an increasing focus on cash and debt paydown.

Speaker Change: Respectfully, Travis, at this point, we are not ready to comment on 2025 numbers.

Speaker Change: I will repeat what I've said before. We are very mindful of our net leverage levels. We are very mindful of our debt. You've heard us comment in the past that we do have

Devdatt Kurdikar: And so we'll be very measured and thoughtful in our plans. And what we are thinking right now, Travis, is that we could hold an endless day later this year, sometime in December. By that time, certainly, we'll have clarity on the open loop. We will have confirmed our plans for the pump. We will have made progress in the closed loop, and so we can talk about all of this at that time. In the meantime, you know, we are laser focused on obviously closing out and delivering a successful 2025.

Speaker Change: and Increasing Focus on Cash and Debt Paydown.

Speaker Change: And so we'll be very measured and thoughtful in our plans. And what we are thinking right now, Travis, that we would hold an analyst day later this year, sometime in December . By that time, certainly we'll have clarity on open loop, we will have confirmed our plans on the pump.

Devdatt Kurdikar: The pricing is I would say appropriate for the market and appropriate for the use case. I won't talk specifically about pricing premiums but let me just say that we are pleased with the price that we expect to get. And look more broadly we are starting with Germany as pen injectors proliferate and expand for the administration of GLP1s. We will certainly be there to provide pen needles. We have the capacity and can ramp up ramp up production of these small packs quickly to fill the man.

Speaker Change: We will have made progress in the closed loop. And so we can talk about all of this at that time. In the meantime, you know, we are laser focused on obviously closing out and delivering a successful 2025.

Devdatt Kurdikar: And if you really project out over a number of years, if biosimilars enter the market, certainly again that provides a tailwind for us. So we are excited about Germany, we are going to be launching that product there imminently here in the coming weeks, maybe a couple months. And we will see where we go from there.

Travis Steed: Great, thanks. Thanks for that color!

Devdatt Kurdikar: I look forward to analyst day. I guess the second question I'd ask is just kind of a bigger picture. You guys have been a public company now for a while and, you know, kind of gotten independent and just thinking about how you maximize shareholder value from this forward point. You know, are there things that you're thinking about differently, just to make sure that the value for shareholders is kind of being maximized at this point versus what's reflected in public markets today? Travis, look, I...

Travis Steed: Great, thanks. Thanks for that caller. I look forward to the analyst day. And I guess the second question I'd ask is,

Speaker Change: Just kind of bigger picture. You guys have been a public company.

Speaker Change: now for a while and, you know, kind of gotten independent. And just thinking about, like, how you maximize shareholder value from this forward point, you know, are there things that you're thinking about differently just to make sure that the...

Speaker Change: The value for shareholders is kind of being maximized at this point versus what's reflected in public markets today.

Devdatt Kurdikar: Travis, look, our focus from day one has been on maximizing shareholder value, and we continue to look for ways to do that. You know, we laid out Prespin, sort of a three-year plan that we've been executing, executing on, and we'll certainly continue to execute that. But really look, I mean, from a, from a, you know, every day as a management team, we really think about all the ways that might be, that might be available to us to maximize shareholder value. So, that certainly continues to guide us on all the decisions we make.

Marie Thibault: Okay, very good. Thanks for taking the questions. Thanks very much.

Unknown Executive: Thank you.

Speaker Change: Travis look our focus from day one has been on maximizing shareholder value right and we continue to look for ways to do that you know we laid out

Travis Steed: Our next question comes from Travis Steed with Bank of America Security. Your line is open. Hey, thanks for taking the question. I guess the first question I would like to start with is when you think about the progress you are making on the pump and the investment that you kind of need to launch that product successfully. How should we think about margins and earnings that the street has got models for going forward?

Travis Steed: Can you guys expand margins next year, you know, even with the investments required to launch this product? Just want to make sure we get kind of the models correct kind of going forward for this. Thanks, Travis.

Pravesh Khandelwal: pre-spin sort of a three-year plan that we've been executing on. We'll certainly continue to execute that.

Pravesh Khandelwal: But really, look, I mean, from a, you know, every day as a management team, we really think about all the ways that might be available to us to maximize shareholders' value. So that certainly continues to guide us on all the decisions we make.

Operator: Thank you. Our next question comes from Kristen Stewart with CL King. Your line is open.

Pravesh Khandelwal: All right, Sarah, thanks a lot.

Speaker Change: Thank you. Our next question comes from Kristen Stewart with CL King. Your line is open.

Devdatt Kurdikar: Good morning. So just as a quick reminder, right? So for the audience here, we made that submission in late calendar 2023 because some questions from the MTA part of the normal process that we responded. You know, in a very timely manner and we'll be progressing on the close loop solution as well. So first things first, we need and hope to get clearance on the pump. Obviously, I won't comment on the outcome and the timing of the FDA decision and when it comes to our plans for the commercial launch for the pump and potential implications for fiscal 2025.

Kristen Stewart: Hi, thanks for taking the question. I was wondering if we could just focus a little bit on free cash flows. I think, Jake, you had mentioned that separation costs are going to be stepping down here. I was wondering if there's any way that you could quantify that or just provide a little bit more color on the cash flow outlook for the company.

Kristen Stewart: Hi, thanks for taking the question. I was wondering if we could just focus a little bit on free cash flows. I think Jake, you had mentioned that separation costs are going to be stepping down here. I was wondering if there's any way that you could quantify that or just provide a little bit more color on the cash flow outlook for the company.

Jacob Elguicze: Yeah, so thanks for the question, Kristen. You know, again, coming back to, I think this year we're going to end the year with around $300 million in cash on the balance sheet at the end of the year. That's going to include using around $180 million of cash in terms of separation activities this year. And that's coming on the heels of using around $145 million of cash in 2023.

Jake Elguicze: Yeah, so so thanks for the thanks for the question, Kristen, you know, again, coming back to, you know, I think this year, you know, we're going to we're going to end the year with around 300 million in in cash on the balance sheet for the end of the year, that's going to include using around 180 million of cash in terms of separation activities this year. And that's coming on the heels of using around 145 million of cash in 2023. So I think one of the things that as we've gone through the spin here that I think sort of gets.

Devdatt Kurdikar: Respectfully Travis, at this point, we are not ready to comment on 2025 numbers. I will repeat what I've said before. We are very mindful of our net leverage levels. We're very mindful of our debt. You heard us comment in the past that we do have an increasing focus on cash and debt paydown. And so it will be very measured and thoughtful in our plans. And what we are thinking right now, Travis, that we would hold an endless day later this year.

Jacob Elguicze: So I think one of the things that, as we've gone through the spin here, that I think sort of gets masked is really the free cash flow generation capabilities of the company. Because it really is quite strong, and I think beginning in 2025, you're going to see a much improved free cash flow generation. This isn't the type of franchise that needs a tremendous amount of capital expenditure investment, given where we are. I mean, we have three highly automated plants that we can put even more capacity through.

Jake Elguicze: gets masked is really the free cash flow generation capabilities of the company.

Devdatt Kurdikar: Sometime in December, by that time, certainly we'll have clarity on on open loop. We will have confirmed our plans on the pump. We will have made progress in the closed loop. And so we can talk about all of this at that time. In the meantime, you know, we are laser focused on obviously closing out and delivering a successful 2025. All right. Great. Thanks. Thanks for the color. I look forward to the annual stay.

Jake Elguicze: because it really is quite strong, and I think beginning in 2025, you're going to see a much improved pre-cash flow generation.

Jake Elguicze: This isn't the type of franchise that needs a tremendous amount of, you know, capital expenditure investment, given where we, given where we are, I mean, we have three highly automated plants that we can put even more capacity through.

Devdatt Kurdikar: I guess the second question I'd ask is just kind of bigger picture. You guys have been a public company now for a while and you know kind of gotten independent. And just speaking about like how you maximize shareholder value from this forward point, you know, are there things that you're thinking about differently to make sure that the value for shareholders is kind of being maximized at this point. And versus what's reflected in public markets today.

Jacob Elguicze: So as we think about, you know, next year, those separation costs are going to materially tick down. So it's going to go from, let's call it somewhere around 180 million this year down to, you know, maybe somewhere to the tune of around 50 million or so next year. And that's the reason why we even have that amount next year. It largely has to do with the finalization of some brand transition expenses that we're going to have to go through in 2025 and then to a lesser extent in 2026.

Jake Elguicze: So as we're thinking about, you know, next year, you know, those those separation costs are going to materially kick down.

Jake Elguicze: So it's going to go from, let's call it somewhere around $180 million this year down to, you know, maybe somewhere to the tune of around, you know, $50 million or so next year. And that's the reason why we even have that amount next year largely has to do with

Devdatt Kurdikar: Travis, look, our focus from day one has been on maximizing shareholder value, right? And we continue to look for ways to do that. We laid out prespen sort of a three year plan that we've been executing executing on will certainly continue to execute that but really look coming from a from a, you know, every day as a management team, we really think about all the ways that might be that might be available to us to maximize shareholder's value. So so that certainly continues to guide us on all the decisions we make. All right there.

Travis Steed: Thanks a lot.

Jake Elguicze: The finalization of some brand transition expenses that we're going to have to go through in 2025, and then to a lesser extent in 2026. But as we move forward here, we should start, you know, over the next couple of years,

Jacob Elguicze: But as we move forward here, we should start, you know, over the next couple of years, our free cash flow generation should really more closely approximate, you know, our adjusted EBITDA as a company. So, you know, I'm not going to give you a specific number for 2025, but I would tell you that I think our free cash flow beginning in 2025 is going to materially improve from where we were in 2025.

Jake Elguicze: Our free cash flow generation should really more closely approximate, you know, our adjusted EBITDA as a company. So, you know, I'm not going to give you a specific number for 2025, but I would tell you that I think our free cash flow beginning in 2025 is going to materially improve from where we were in 2024.

Chris Stewart: Thank you. Our next question comes from Chris Stewart with CL King. Your line is open. Hi, I think we're taking the question. I was wondering if we could just focus a little bit on free cash flows. I think Jake, you mentioned that separation costs are going to be stepping down here. I was wondering if there's any way that you could quantify that or just provide a little bit more color on the cash flow outlook for the company.

Speaker Change: Okay, thank you. And then, Deb, any color that you can provide us on the questions that you received back from the FDA, if they were expected, or any sort of color there would be helpful.

Kristen Stewart: Thank you. And then, Dev, any and all questions that you receive back from the FDA if they were... Good morning. Good morning. Good morning.

Devdatt Kurdikar: It's nice to have you on the call and look forward to engaging more with you. Listen, I would say that all the questions we got were able to, at least from our perspective, adequately and comprehensively, comprehensively respond to and do so in a timely manner. Beyond that, Kristen, I wouldn't go into the details, obviously of the feedback. And, and we are eager, we are eager to, receive the FDA's decision here. And would you be prepared to go forward with the proposal to get approval on the- Person, Howl?

Deb: Good morning. It's nice to have you on the call and look forward to engaging more with you.

Jacob Elguicze: Yeah, so thanks for the thanks for the question, Kristen. You know, I again coming back to, you know, I think this year, you know, we're going to we're going to end the year with around 300 million in cash on the balance sheet for the end of the year. That's going to include using around 180 million of cash in terms of separation activities this year and that's coming on the heels of using around 145 million of cash in 2023.

Deb: Listen, I would I would say that all the questions we got

Deb: We were able to, at least from our perspective, adequately and comprehensively respond to and do so in a timely manner.

Speaker Change: Beyond that, Kristen, I wouldn't go into the details, obviously, of the feedback. And we are eager. We are eager to receive the FDA's decision here.

Kristen Stewart: And would you be prepared to go forward with the closed loop version as soon as you get approval of the open loop version? How will that work?

Jacob Elguicze: So I think one of the things that as we've gone through the spin here that I think sort of gets gets masked is is really the free cash flow generation capabilities of the of the company because it really is quite strong and I think beginning in 2025, you're going to see, you're going to see a much improved free cash flow generation. This isn't the type of franchise that needs a tremendous amount of, you know, capital expenditure investment, given where we are, I mean, we have three highly automated plants that we can put even more capacity through.

Devdatt Kurdikar: Yeah, we've been working on the closed loop version in parallel. You remember we signed an agreement with Tidepool, and our team has been busy integrating that algorithm with an open loop. So the work on the closed loop has actually been progressing even as we've been working on responding to the FDA on the open loop.

Kristen Stewart: Okay, thank you very much.

Operator: Thank you. As a reminder, if you'd like to ask a question, please press star 11. Our next question comes from Michael Polark with Wolf Research. Your line is open.

Kristen Stewart: Okay, thank you very much.

Speaker Change: Thanks, guys. Thanks, Chris.

Speaker Change: Thank you. As a reminder, if you'd like to ask a question, please press star 11.

Speaker Change: Our next question comes from Michael Polark with Wolf Research. Your line is open.

Michael Polark: Good morning. Thank you for taking the questions. I have two.

Michael Polark: Good morning. Thank you for taking the questions. I have two. I want to follow up on gross margin and ask a question about type two pumping. So on, Jake, I heard your response to Marie, a lot of good color there. But when I

Jacob Elguicze: So as we're thinking about, you know, next year, you know, those those separation costs are going to materially kick down. So it's going to go from let's call it somewhere around 180 million this year down to, you know, maybe somewhere to the tune of around, you know, 50 million or so next year. And that the reason why we even have that amount next year largely has to do with the finalization of some brand transition expenses that we're going to have to go through in 2025 and then to a lesser extent in 2026.

Michael Polark: I want to follow up on gross margin and ask a question about type two. Pumping. So on, Jake, I heard your response to Marie. There was a lot of good color there.

Michael Polark: But when I do the like 4Q implied gross margin, I get a 60% huge step down, even taking into account the thematic considerations you flag. It just strikes me as ultra conservative, and then when you run that down the P&L, you see 30 31 32 cents of EPS for the quarter, which is obviously a huge step down versus where you've been. So can you imagine it just, it's tough to fathom. So I want to, those are the numbers I see. And I want to confirm that those are the numbers you intend to plan for, and is this just ultra-conservatism here, sequentially?

Speaker Change: When I do the like 4Q implied gross margin, I get 60%, huge step down, even taking into account the thematic considerations you flag. It just strikes me as.

Speaker Change: ultra conservative. And then when you run that down the P&L, you see, you know, 30, 31, 32 cents of EPS for the quarter, which is obviously a huge step down versus

Speaker Change: where you've been so can you it just it's tough to fathom so I want to those are the numbers I see and I I want to confirm that those are the numbers you intend

Jacob Elguicze: But as we move forward here, we should start, you know, over the next couple of years, our free cash flow generation should really more closely approximate, you know, our adjusted eva dot as a company. So, you know, I'm not going to give you a specific number for 2025, but, but I would tell you that I think our free cash flow beginning in 2025 is going to materially improve from where we were in 2024.

Speaker Change: Thank you. Thank you.

Speaker Change: to plan for? And is this just ultra conservatism here sequentially?

Jacob Elguicze: Yeah, so Mike, thanks for the question. I mean, I think your implied math, you know, for Q4 is correct, in terms of, it really is a gross margin story that is occurring, you know, largely associated with the PII that I mentioned, that drives around a 500 basis point move from Q3 to Q4. Additionally, you know, as I said in my answer to Marie, we are very intentionally looking to try and right-size our inventory levels now that we're through all of these, largely through all of these separation activities.

Chris Stewart: Okay, thank you.

Speaker Change: Yeah, so so Mike, thanks for thanks for the question. I mean, I think your your implied math, you know for for q4 is is correct

Speaker Change: in terms of, it really is a gross margin story that is,

Devdatt Kurdikar: And then, Dev, any color that you can provide us on the questions that you received back from the FDA if they were expected or any sort of color there would be helpful. It's nice to have you in the call and look forward to engaging more with you. Listen, I would say that all the questions we got, we were able to at least from our perspective adequately and comprehensively respond to and do so in a timely manner.

Speaker Change: that is occurring, you know, largely associated with the PII that I mentioned, you know, that drives around, you know, a 500 basis point move from Q3 to Q4. Additionally, you know, as I said, I think in my answer to Marie, we are very intentionally looking to try and right-size our inventory levels now that we're through all of these.

Speaker Change: All largely through all of these separation activities. So that is something that we are very intentionally looking to do to drive an improvement in our working capital. And what that's going to mean, at least in the fourth quarter, is sort of a temporary headwind associated with manufacturing variances. So we're not going to have the same level of absorption. Now, all of this was contemplated, you know, in our prior guidance and obviously now in our current guidance.

Devdatt Kurdikar: Beyond that question, I wouldn't wouldn't go into the details, obviously, of the feedback and we are eager to receive the FDA's decision here. And would you be prepared to go forward with the closed loop version as soon as you get approval of the open loop version, how will that work? Yeah, we've been working on the closed loop version in parallel. You remember we signed our agreement with title and our team has been busy integrating that algorithm with an open loop. So the work on the closed loop had actually been progressing even as we've been working on responding to the FDA on the open loop.

Jacob Elguicze: So that is something that we are very intentionally looking to do to drive an improvement in our working capital. And what that's going to mean, at least in the fourth quarter, is sort of a temporary headwind associated with manufacturing variances. So we're not going to have the same level of absorption.

Jacob Elguicze: Now, all of this was contemplated, you know, in our prior guidance and, obviously, now in our current guidance. Yet, we're still able to raise our gross margin guidance by about 62 and a half basis points from the mid-period from our prior guidance. And that raise really comes down to a few things.

Speaker Change: And yet we're still able to raise our gross margin guidance, you know, by about 62.5 basis points from the midpoint.

Speaker Change: from our prior guide.

Devdatt Kurdikar: Okay, thank you very much. Thanks, thanks. Thank you.

Speaker Change: and that

Jacob Elguicze: It comes down to our ability to continue to drive, you know, positive pricing and pricing being a little bit better than what we had previously expected. And then that guidance raise at the gross margin line also comes down to mix, both from a geographic and a product standpoint. So, you know, additionally, I would just say we're also trying to take costs out in terms of regulatory freight and some manufacturing costs.

Speaker Change: Raise really comes down to a few things. It comes down to our ability to continue to drive

Unknown Executive: As a reminder, if you'd like to ask a question, please press star 11.

Speaker Change: you know positive pricing and pricing being a little bit better than what we had previously expected.

Michael Polark: Our next question comes from Michael Polark with Wolf Research. Your line is open. Good morning. Thank you for taking the questions. I have two. I want to follow up on gross margin and ask a question about type two pumping. So Jake, I heard your response to Maria. A lot of good color there, but when I do the like 4Q implied gross margin, I get 60%. So it's a huge step down, even taking into account the thematic considerations you fly.

Speaker Change: And then that guidance raised at the gross margin line also comes down to mix, both from a geographic and a product standpoint.

Speaker Change: Additionally, I would just say, you know, we're also trying to take cost out in terms of regulatory freight and some manufacturing costs. So I think our team has done a tremendous job of trying to drive cost out of the system. That's allowing us to raise our full year guide. But as you think about, you know,

Jacob Elguicze: So I think our team has done a tremendous job of trying to drive cost out of the system. That's allowing us to raise our full-year guide. But as you think about, you know, going from kind of Q3 to Q4, there are some transient things going on, one related to PII, which, you know, moving forward, isn't going to occur at that same level.

Speaker Change: Going from kind of Q3 to Q4, there's some transient things going on, one related to PII.

Michael Polark: It just strikes me as ultra conservative. And then when you run that down the PNL, you see 30, 31, 32 cents of EPS for the quarter, which is obviously a huge step down versus where you've been. So it's tough to fathom. So I want to, those are the numbers I see, and I want to confirm that those are the numbers you intend to plan for. And is this just ultra conservatism here sequentially?

Speaker Change: which, you know, moving forward isn't going to occur at that same level. And then likewise, you know, from a manufacturing standpoint, a real concerted effort by us to try and reduce inventory levels now that the separation has gone really well.

Jacob Elguicze: And then likewise, you know, from a manufacturing standpoint, a real concerted effort by us to try and reduce inventory levels now that the separation has gone really well. I mean, Mike, if you think about this, this base business, on a full-year basis. And there's been noise post-spin for the last two and a half years as we've had to go through all of this separation work.

Speaker Change: I mean, Mike, if you if you think about if you think about this, this beast business.

Mike: on a full-year basis and and there's been there's been noise post spin For the last two and a half years as we've had to go through all of this separation work

Michael Polark: Yeah, so, so my thanks for, thanks for the question. I mean, I think you're, you're implied math, you know, for Q4 is, is correct. In terms of the, it really is a gross margin story that is, that is occurring, you know, largely associated with the PII that I mentioned, you know, that drives around, you know, a 500 basis point move from, from Q3 to, to Q4. Additionally, you know, as, as I said, I think in my answer to Marie, we are very intentionally looking to try and right size our inventory levels now that we're through all of these largely through all of these separation activities.

Jacob Elguicze: I think as we get into 2025, what you're going to end up seeing is a much more stable quarter-to-quarter performance from the business, and certainly from an annual standpoint. I mean, if you think about what this would look like during 2024, if you look at the different components of the business, and you sort of break down and go from, you know, consolidated impact. And you look at, you know, we have a very small contract manufacturing business that generates around five to $10 million per year in revenue back to back to BD.

Mike: I think as we get into 2025, what you're going to end up seeing is a much more stable quarter-to-quarter performance from the business.

Mike: and certainly from an annual standpoint. I mean, if you think about what this, you know, during 2024, if you look at the different components of the business.

Mike: and you sort of break down and go from, you know, consolidated Embecta and you look at, you know, we have a very small contract manufacturing business, you know, that generates around

Mike: You know five to ten million dollars per year in revenue back to back to BD You know, that's at gross margins that are around, you know, let's call it twelve, you know, twelve percent

Michael Polark: So that is something that we are very intentionally looking to do to drive an improvement in our working capital. And what that's going to mean, at least in the fourth quarter, is sort of a temporary headwind associated with manufacturing variances. So we're not going to have the same level of absorption. Now, all of this was contemplated, you know, in our prior guidance, and obviously now in our, in our current guidance. And yet we're still able to, to, to raise our gross margin guidance, you know, by about 62 and a half basis points from the midpoint, from our prior guide.

Jacob Elguicze: You know, that's at gross margins that are around, you know, let's call it 12, you know, 12%. We have, you know, we spend around 60 to $65 million a year on our insulin pump program. And then you have, you know, the core injection business, which is, you know, a very stable, low to mid-60s, typically gross margin business that, you know, then at the operating margin is, you know, somewhere in the low-30s, you know, range. So, a much more stable business, I think, is what you should expect as we sort of move forward, you know, from 2024 into 2025.

Mike: We have, uh, you know, we spend around 60 to $65 million a year in, in our insulin pump, you know, program. And then you have, you know, the, the core injection business.

Mike: which is, you know, a very stable, you know, low to mid 60s, typically gross margin, you know, business that, you know, then at the, at the operating margin line.

Mike: is somewhere in the low 30s range. So a much more stable business, I think is what you should expect as we sort of move forward from 2024 into 2025.

Michael Polark: And, and that raise really comes down to a few things. It comes down to our ability to continue to drive, you know, positive pricing and pricing being a little bit better than what we had previously expected. And then that guidance raise at the gross margin line also comes down to mix, both from a geographic and a, and a product standpoint. So, you know, additionally, I would just say, you know, we're also trying to take cost out in terms of regulatory freight and some manufacturing costs.

Devdatt Kurdikar: Mike, and if I can just sort of zoom back a little bit, right? FY 24 has been marked by ERP implementations in dozens and dozens of countries. We went to 93% of our revenue in the background. What that involves is moving products from BD's distribution network into new distribution centers, and you can imagine the inventory that has to be placed in new locations, working with customers to make sure, in case there was any disruption, we didn't And so this year has been particularly lumpy quarter to quarter, no question.

Mike: Mike and if I can just sort of zoom back a little bit right I mean FY 24 has been marked with

Mike: ERP implementations in dozens and dozens of countries, right? We went to 93% of our revenue.

Mike: In the background, what that involves is moving products from BD's distribution network into new distribution centers. And you can imagine the inventory that has to be

Michael Polark: So I think our team has done a tremendous job of trying to drive cost out of the system. That's allowing us to raise our full year guide. But as you think about, you know, going from kind of Q3 to Q4, there's some transient things going on, one related to PII, which, you know, moving forward isn't going to occur at that same level. And then likewise, you know, from a manufacturing standpoint, a real concerted effort by us to try and, and reducing inventory levels now that the separation has gone really well.

Mike: placed in new locations, working with customers to make sure in case there was any disruption, we didn't disrupt product continuity for our patients and customers. And so this year has been particularly lumpy quarter to quarter, no question.

Devdatt Kurdikar: But I'm very pleased that we had incorporated our part around this in the full year guidance, and frankly, our team has been executing on that. And so while it might appear certainly the quarterly variance that you are seeing, I certainly would urge you to zoom back and look at it over a full year. And really just look at the performance of this business over a full year. So I just wanted to provide a little bit of that context.

Mike: But I'm very pleased

Mike: that we had incorporated our thoughts around this in the full year guidance and frankly our team has been executing to that.

Mike: And so while it might appear, certainly, the quarter-to-quarter variance that you are seeing

Michael Polark: I mean, Mike, if you think about, if you think about this, this base business, on a full-year basis. And there's been noise post spin for the last two and a half years as we've had to go through all of this separation work. I think as we get into 2025, what you're going to end up seeing is a much more stable quarter to quarter performance from the business. And certainly from an annual standpoint, I mean, if you think about what this, you know, during 2024, if you look at the different components of the business, and you sort of break down and go from, you know, consolidated impact, and you look at, you know, we have a very small contract manufacturing business.

Mike: I certainly would urge you to zoom back and look at it over a full year basis.

Mike: And really just look at the performance of this business over a full year basis. So just wanted to provide a little bit of that context.

Jacob Elguicze: I appreciate all that color. Thank you. Um, I want to ask about type two pumping. So, you know, obviously, you have the program; you're interested in this market. I've heard the update loud and clear today, but I'm curious how you internally expect the type two pump market to develop. You know, type one is 40-45% penetrated in the US, and it's grinding higher. It's a trend that's been in place for a while now. Type 2 is, you know, sub 5%, pump penetrated, you know, insulators gearing up for the AID push into this market.

Speaker Change: Appreciate all that color. Thank you. Um, I want to ask on type two pumping. So, you know, obviously you have the program, you're interested in this market. I've heard the update loud and clear today. But, but I'm curious how you

Speaker Change: Internally expect the type 2 pump market to develop, you know, type 1 is 40-45% penetrated in the US, grinding higher, it's a trend that's been in place.

Michael Polark: You know, that generates around, you know, five to $10 million per year in revenue back to, back to BD, you know, that's that gross margins that are around, you know, let's call it 12%. We have, you know, we spend around 60 to $65 million a year in our insulin pump, you know, program. And then you have, you know, the core injection business, which is, you know, a very stable, you know, low to mid 60s typically gross margin, you know, business that, you know, then at the operating margin line is, you know, somewhere in the low 30s, you know, range.

Speaker Change: for a while now. Type 2 is, you know, sub 5% pump penetrated, you know, insulates gearing up for the AID push into this market.

Jacob Elguicze: Next year, and I'm curious how quickly you think that ramps up. How do you model the curve? Do you follow? The type one cadence, do you think it could be faster, slower? I'd be interested in any color that you'd have to provide on that topic. Thank you so much.

Speaker Change: next year. And I'm curious, how quickly do you think that ramps? How do you model the curve? Do you follow?

Speaker Change: The Type 1 cadence, do you think it could be faster, slower?

Speaker Change: I'd be interested in any color that you'd have to provide on that topic. Thank you so much.

Devdatt Kurdikar: Yeah, thanks. Thanks, Mike.

Devdatt Kurdikar: Look, it's too early for us to provide sort of any quantitative guidance with respect to what the penetration of Type 2 will be. And while we respect, you know, competitors entering the Type 2 market as well, I mean, I just want to remind everybody that ours would be a disposable patch pump with 300 units. And that has, I would argue, some specific applicability for Type 2 customers. And also, we've designed it with simplicity in mind, which also makes it applicable.

Speaker Change: Yeah, thanks. Thanks, Mike. Look, it's too early for us to provide sort of any quantitative guidance with respect to what the penetration on type 2 will be.

Michael Polark: So much, a much more stable business, I think is what you should expect as we sort of move forward, you know, from 2024 into 2025. Yeah, Mike, and if I can just sort of zoom back a little bit, I mean, FY 24 has been marked with ERP implementations in dozens and dozens of countries, right. We went to 93% of our revenue in the background, what that involves is moving products from BD's distribution network into new distribution centers.

Speaker Change: And while we respect...

Speaker Change: you know, competitors entering type 2 market as well. I mean, I just wanted to remind everybody that ours would be a disposable platform with 300 units and that has

Michael Polark: And you can imagine the inventory that has to be placed in new locations, working with customers to make sure in case there was any disruption, we didn't disrupt product continuity for our patients and customers. And so this year has been particularly lumpy quarter to quarter no question, but I'm very pleased that we are incorporated our hearts around this in the full year guidance and frankly our team has been executing to that.

Speaker Change: I would argue some specific applicability.

Speaker Change: for Type 2 customers. And also we've designed it with simplicity in mind, which also makes it applicable. So having said all of that, listen, we will talk more about our Type 2 plans at this investor day we are planning in December . By that time, as I said, you know, we expect to have FDA's decision. We'll have made some more progress in the closed loop.

Devdatt Kurdikar: So having said all of that, listen, we will talk more about our Type 2 plans at this investor day we are planning in December. By that time, as I said, you know, we expect to have FDA's decision, and we'll have made some more progress in the closed loop. So respectfully, Mike, I understand the eagerness to know more about our Type 2 plans, but I suggest we wait until later this year.

Devdatt Kurdikar: Thank you. There are no further questions at this time. I'd like to turn the call back over to Dev for closing remarks.

Speaker Change: So, respectfully, Mike, I understand the eagerness to know Type 2 plans more, but I suggest we wait until later this year.

Speaker Change: Thank you.

Michael Polark: And so while it might appear, certainly the quarter to quarter variants that you are seeing, I certainly would urge you to zoom back and look at it for a for over a full year basis and really just look at the performance of this business over over a full year basis.

Speaker Change: Thank you. There are no further questions at this time. I'd like to turn the call back over to Dev for closing remarks.

Devdatt Kurdikar: Thank you, Michelle. As we wrap up this call, I do want to extend my heartfelt appreciation to all my colleagues at Embecta across the globe. Our global team has this year executed on complex, major separation-related programs while never wavering from our mission of developing and providing solutions that make life better for people living with diabetes. And, as I mentioned during the call, we look forward to engaging with all of you at our Analyst and Investor Day in mid-December. Thank you all for attending the call and for your interest in our business.

Dev Kurdikar: Thank you, Michelle. As we wrap up this call, I do want to extend my heartfelt appreciation to all my colleagues at Embecta across the globe.

Dev Kurdikar: Our global team has, in this year, executed on complex, major separation-related programs.

Dev Kurdikar: While never wavering from our mission of developing and providing solutions that make life better for people living with diabetes.

Dev Kurdikar: And as I mentioned during the call, we look forward to engaging with all of you at our Analyst and Investor Day in mid-December. Thank you all for attending the call and for your interest in our business.

Michael Polark: So just wanted to provide a little bit of that context. Appreciate all that color, thank you.

Operator: Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.

Michael Polark: I want to ask on type two pumping. So, you know, obviously you have the program you're interested in this market. I've heard the update about and clear today, but I'm curious how you internally expect the type two pump market to develop type one 40, 45% penetrated in the US. Grinding Hire at the trend that's been in place for a while now. Type 2 is, you know, sub 5% pump penetrated, you know, insulates gearing up for the AID push into this market next year.

Speaker Change: Thank you for your participation. This does conclude the program and you may now disconnect. Everyone, have a great day.

Speaker Change: Thank you very much for watching this video.

Speaker Change: That's all, folk!

Michael Polark: And I'm curious how quickly do you think that ramps? How do you model the curve, the a follow? The type 1 cadence, do you think it could be faster slower? I'd be interested in any color that you'd have to provide on that topic. Thank you so much. Yeah, thanks, thanks, Mike.

Devdatt Kurdikar: Look, it's too early for us to provide sort of any quantitative guidance with respect to what the penetration on type 2 will be. And while we respect, you know, competitors entering type 2 market as well, I mean, I just want to remind everybody that ours would be a disposable patch pump with three units. And that has, I would argue, some specific applicability for type 2 customers. And also we've designed it with simplicity in mind, which also makes it applicable.

Speaker Change: Elguicze, Devdatt Kurdikar, Pravesh Khandelwal Elguicze, Devdatt Kurdikar, Pravesh Khandelwal

Devdatt Kurdikar: So I mean, said all of that, this and we will talk more about our type 2 plans that this investor day we are planning in December. By that time, as I said, you know, we expect to have a previous decision. We'll have made some more progress in the closed loop. So respectfully, Mike, I understand the e-giveness to know our type 2 plans more, but I suggest we wait until later this year. Thank you.

Speaker Change: [inaudible]

Unknown Executive: There are no further questions at this time.

Speaker Change: thank you for watching Thank You

Speaker Change: Thank you for watching

Devdatt Kurdikar: I'd like to turn the call back over to Deb for closing remarks. Thank you, Michelle.

Devdatt Kurdikar: As we wrap up this call, I do want to extend my heartfelt appreciation to all my colleagues that embarked across the globe. Our global team has in this year executed and complex major separation related programs while never wavering from our mission of developing and providing solutions that make life better for people living with diabetes. And as I mentioned during the call, we look forward to engaging with all of you at our analyst and investor day in mid-December. Thank you all for attending the call and for your interest in our business. Thank you for your participation.

Unknown Executive: This doesn't Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Caroline Borowski, Brian Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Caroline Borowski, Brian Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Caroline Borowski, Brian Michael Polark, Jacob Elguicze, Marie Thibault Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Michael Polark, Jacob Elguicze, Marie Thibault, Michael Polark, Jacob Elguicze, Marie Thibault, Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Michael Polark, Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Michael Polark, Jacob Elguicze, Marie Thibault,[inaudible] Marie Thibault, Travis Steed, Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Michael Polark, Jacob Elguicze, David[inaudible] Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Caroline Borowski Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Caroline Borowski Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Caroline Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Michael Polark, Jacob Elguicze, Marie Thibault, Travis Steed, Caroline Borowski, Welcome ladies and gentlemen to the fiscal 3rd quarter of 2024, Embecta Ernie's Conference Call. At this time, all participants have been placed in all this lonely mode. Please note that this conference call is being recorded and the recording will be available on the company's website for replay following the completion of this call.

Pravesh Khandelwal: I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Please go ahead. Thank you operator. Good morning everyone and welcome to Embecta's fiscal 3rd quarter 2024 on its conference call. The press leads and slides to a company today's call and webcast replay details are available on the Investor Relations section of the company's website at www.embecta.com.

Pravesh Khandelwal: With me today are Dev Kodiker, Embecta's President and Chief Executive Officer and Jacob Elguicze, Chief Financial Officer of the company's website at www.embecta.com Sir. 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 our slides. We 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.

Pravesh Khandelwal: 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 are filing with the SEC which can be accessed on our website. In addition, we will discuss certain non-gap 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-gap measures to the comparable GAP measures is included in a press release and conference call presentation.

Pravesh Khandelwal: Our agenda for today's call is as follows. Dev will begin by providing some remarks on the overall performance of our business, during the fiscal third quarter of 2024 as well as an overview of our strategic priorities. Jake will then provide a more in-depth review of our Q3 financial results, as well as our updated financial guidance for the year. We will then open the call for questions.

Devdatt Kurdikar: With that said, I would now like to turn the call over to our CEO, Dev Kodakert. Second, we have made significant progress in our separation and standard activities necessary to establish ourselves as an operational independent company. And finally, we continue to invest for growth most notably around our insulin patch from program that is being developed for the type two market, as well as seeking MNA and additional partnership opportunities.

Devdatt Kurdikar: I am proud of the significant progress we have made within each of these goals. Turning to some third quarter highlights. During the third quarter, our team's discipline education led the financial results that were aligned with our prior expectations. We generated revenue of approximately $272.5 million, which represented a decrease of 4.8% on a measured boarded basis, and a decrease of 3.9% on a constant currency basis. When normalizing for the transient contract manufacturing revenue that we generate based on the sales of non diabetes products to a former parent, our constant currency code injection business revenue declined by 4.1% as compared to the prior year period.

Devdatt Kurdikar: While our revenue during the third quarter was over a year over year on a constant currency basis, this was something that we expected and highlighted on our second quarter earnings call. And was primarily due to inventory rebalancing that occurred with some of our distributors following the European implementations that occurred during the first six months of our fiscal year.

Devdatt Kurdikar: On a year-to-date basis, our core injection business has remained stable, growing 0.4% on a constant currency basis. Over the past year, much news has come out regarding GLP1 and the impact they might have on people with diabetes and insulin delivery. Based on what we have seen over the past several years, our view is that while GLP1s may delay the onset of becoming insulin dependent, they do not eliminate the need for insulin.

Devdatt Kurdikar: In fact, as the method of GLP1 administration continues to evolve over the next several years, from the use of an auto injector to that of a pen injector which requires a pen needle, we expect that we will stand to benefit. To that end, we have identified an opportunity to introduce a new small pack pen needle product that can be used for GLP1 administration. We intend to first come to market with this product in Germany within the next several months and eventually expand this product offering to other countries in the future. We believe this will help meet the needs of the growing number of people using pens and therefore pen needles for GLP1 administration.

Devdatt Kurdikar: Turning to separation activities, I am pleased to report that we made significant progress in the implementation of our own ERP system, operationalization of our own distribution network and shared services capabilities. Now, our systems and capabilities are operational in regions which cover approximately 93% of our revenue base. Looking ahead, with the exception of a few deferred closing jurisdictions, we remain on track to complete all ERP implementations, distribution network and shared service separation activities by early fiscal year 2025.

Devdatt Kurdikar: Once these implementations are complete, the only remaining separation program will be brand transition which entails changing the product packaging from BD's brand to ours. We have been planning this transition since this went off and we intend for the execution of this program to begin in phases during fiscal year 2025. Notably, we are not changing the product needs or color schemes associated with our packaging. This is important as people with diabetes will continue to experience the same look and feel on our boxes that they have been accustomed to for many years.

Devdatt Kurdikar: Regarding our incident patchment program, we continue to progress on the open with patchwork. As a reminder, we submitted a 510K application to the FDA in December of 2023 and earlier this year, we received questions from the FDA concerning that application. We have soon responded with the necessary data and a waste feedback from the FDA. We will continue to provide updates to the investment community on the progress regarding our incident patch and the appropriate types.

Devdatt Kurdikar: Relating to our objective of entering the infusion fund market, we all sponsored two abstracts at the American Diabetes Association 84 scientific sessions that point to the potential for adults with type 2 diabetes to better manage insulin delivery through a patch from with a larger 300 unit insulin reservoir, which will provide longer wear times and fewer disposable patches over time. The dad app presented reaffirms what we learned from speaking with people living with diabetes and their healthcare providers and validates our thesis that there is a critical and met need among the tightly diabetes population for pumps with a larger insulin reservoir.

Devdatt Kurdikar: So to summarize, we had another good quarter of results and based on the year-to-date performance as well as our expectations for the remainder of the fiscal year, we are again raising anti-tuning our guidance range for key financial metrics while reaffirming our revenue guidance range. Now, let's review our third quarter and year-to-date revenue performance in a bit more detail. As I mentioned before, during Q3 we generated revenue of 272.5 million dollars which represented a decrease of 4.8 percent of the liar's reporting patient and a decrease of 3.9 percent on a constant currency basis, or 4.1 percent when normalizing for the impact of year-over-year changes in the revenue of the non-divided products that we contact manufacture and sell to be.

Devdatt Kurdikar: Within the US, during the quarter revenue total 143.6 million dollars which represented year-over-year decline of approximately 6.7 percent on a constant currency basis. When normalizing for year-over-year contact manufacturing revenue, our underlying Q3 constant currency revenue decline within the US was approximately 7.3 percent. The lower revenue within the US was expected and was primarily due to distributors normalizing their inventory levels after making advanced purchases ahead of our ERP implementation as well as our annual price increase that went into effect on April 1st.

Devdatt Kurdikar: This volume decline was partially offset by favorable price and gross net adjustments. Turning to our international business during Q3 revenue total 128.9 million dollars which equated to a year-over-year constant currency decline of 0.6 percent. Like the US, the decline in constant currency revenue within international this quarter was expected and was primarily due to the timing of advanced purchases that customers made in advance of our ERP implementation.

Devdatt Kurdikar: Importantly, through all separation activities that occurred during fiscal year 2024, our poor injection business remained stable, growing 0.4 percent year-to-date on a constant currency basis.

Jacob Elguicze: That completes my prepared remarks and with that let me turn the call over to Jake to take you through the third quarter financial results as well as our updated fully financial guidance in more detail.

Jacob Elguicze: Jake? Thank you, Dev, and good morning everyone. Given the discussion that has already occurred regarding revenue, I will start my review of and back this financial performance for the third quarter at the gross profit line.

Jacob Elguicze: Gap gross profit and margin for the third quarter of fiscal 2024 totaled 190.1 million and 69.8 percent respectively. Emily. This compared to 189.5 million and 66.2% in the prior year period. While on an adjusted basis, our Q3 2024 adjusted gross profit and margin totaled 190.3 million and 69.8%. This compared to 189.6 million and 66.3% in the prior year period. The year-over-year increase in adjusted gross profit and margin was primarily driven by the impact of the inventory revaluation adjustments, which positively impacted year-over-year results by approximately 550 basis points, as well as the impact from favorable changes in price and gross tenet adjustments that did refer to earlier.

Jacob Elguicze: This was partially offset by lower product volumes, the impact of inflation on the costs of certain raw materials, direct labor, freight, and overhead, and the negative impact of foreign currency translation primarily due to the weakening of the U.S, dollar.

Jacob Elguicze: Turning the gap operating income and margin, during the third quarter, they were 55.9 million and 20.5%. This compared to 51.3 million and 17.9% in the prior year period. While on an adjusted basis, our Q3 2024 adjusted operating income and margin totaled 83.3 million and 30.6%. This compared to 79.8 million and 27.9% in the prior year period. The year-over-year increase in adjusted operating income is primarily due to the adjusted gross profit changes I just discussed, as well as year-over-year decreases in both SGNA and R&D.

Jacob Elguicze: The year-over-year decline of approximately 2 million in SGNA was primarily due to cost optimization actions taken in the current period, as well as lower TSA costs. These reductions were somewhat offset by increased freight and warehouse costs. While the year-over-year decline of approximately 2 million in R&D was primarily due to lower expenses associated with our insulin patch pump platform.

Jacob Elguicze: Turning to the bottom line, gap net income and earnings per diluted share was 14.7 million and 25 cents during the third quarter of fiscal 2024, which compared to 15.2 million and 26 cents in the prior year period. While on an adjusted basis, net income and earnings per share were 43 million and 74 cents during the third quarter of fiscal 2024. This compared to 39.8 million and 69 cents in the prior year period.

Jacob Elguicze: Lastly, from a P&L perspective, for the third quarter of 2024, our adjusted Ibadah and Margin totaled approximately 99.2 million and 36.4%. This compared to 92.2 million and 32.2% in the prior year period.

Jacob Elguicze: Turning to the balance sheet and cash flow. At the end of the third quarter, our cash balance totaled approximately 282 million. While our last 12 months net leverage as defined on our credit facility agreement stood at approximately 3.7 times. As a reminder, our net leverage covenant requires us to stay below 4.75 times. From a cash flow perspective, our cash balance as of June 30th is approximately 45 million dollars lower than the balance that existed as of September 30th and this is largely attributed to cash that has been used related to separation activities which include product registration and labeling costs, warehousing and distribution setup costs, legal costs associated with patents and trademark work, temporary headcount resources within accounting, tax, finance, human resources, regulatory and IT and one-time business integration and IT-related costs primarily associated with our global ERP implementations.

Jacob Elguicze: We estimate that during the first nine months of fiscal year 2024, we used approximately 130 million of cash towards the separation activities. Additionally, we now show trade receivables globally on our balance sheet given our previously mentioned ERP implementations. As such, impact and now collects receivables from customers directly as compared to prior to the ERP implementations whereby beating factor those receivables on our behalf. I'm pleased to report the following implementation of our ERP systems and shared service functionality within approximately 93% of our global revenue base.

Jacob Elguicze: Cash collections associated with those receivables have continued to trend in a positive direction. Consistent with the comments I made on our second quarter earnings conference call, we continue to expect that we will end fiscal year 2024 with a cash balance of roughly 300 million. Or comparable to the balance that existed at the end of the second quarter. This includes an expectation that for the full year, we will use approximately 180 million of cash towards separation activities.

Jacob Elguicze: This compares to cash used for separation activities of approximately 145 million during fiscal year 2023. Given that we expect to be largely complete with separation activities by the end of this fiscal year, we expect to see an improvement in our cash balances in fiscal year 2025 and beyond, which would allow us additional flexibility in terms of capital allocation, including more material that repayments.

Jacob Elguicze: That completes my comments on our fiscal Q3 results.

Jacob Elguicze: These effects assumptions are based on foreign exchange rates that were in existence in the late July timeframe, including a euro to US dollar exchange rate of approximately 1.08. On a combined basis, our as reported guidance range continues to call for revenue to be down between 0.4% and 0.9% as compared to 2023, resulting in a revenue guide of between 1 billion 111 billion and 1 billion 116 billion.

Jacob Elguicze: Turning to margins, we are raising and narrowing our adjusted gross margin guidance from a range of between 64.5% and 65% to a new range of between 65.25% and 65.5%. Similarly, from an adjusted operating margin perspective, we are raising and narrowing that guidance from a range of between 25.25% and 25.75% to a new range of between 25.75% and 26%. While in terms of adjusted EBIDOM margin, we are narrowing that guidance from a range of between 31.5% to a new range of between 31.25% and 31.5%.

Unknown Executive: This completes my prepared remarks and at this time, I would like to turn the call over to the operator for questions. Thank you. If you'd like to ask a question, please press star 11. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again.

Marie Thibault: Our first question comes from Marie Tivo with BTIG. Your line is open. Good morning. Thanks for taking the questions in very nice quarter. I wanted to start here a little bit on guidance and specifically the gross margins. They were very strong in this quarter and I think I heard mention of inventory valuation readjustments. Can you help me understand exactly what that is specifically and then what we should be assuming in the implied step down for fiscal fourth quarter on this.

Marie Thibault: Gross Margin, that's correct. Stormy, thanks. I appreciate the question. So let me start by saying that our adjusted gross margin in was slightly better than our prior expectations in the quarter. And that's really what's allowing us to once again increase our full year adjusted gross margin guidance range by about 62 and a half basis points at the midpoint of our new full year guidance range. So during the quarter, the year over year increase in adjusted gross margin occurred due to a few factors, the largest of which you mentioned was a benefit from inventory evaluation adjustments or what's referred to as profit in inventory.

Marie Thibault: And that contributed about a 550 basis point year over year increase. And I'll come back to that in a moment as to what that was. In addition to the profit in inventory impact, we also had some favorable year over year impact from pricing and the gross to net reserve adjustments that contributed about 140 basis points of the year over year increase. And then that was somewhat offset by some headwinds associated with lower product volumes stemming from the customers rebalancing their inventory levels following the increased purchases that they made during the second quarter in advance of both our international ERP implementations as well as the April 1st price increase that went into effect in the US.

Marie Thibault: So those items negatively impacted volumes year over year by about 210 basis points. In addition, we also saw some year over year headwinds associated with inflation of about 120 basis points. So coming back to your question on inventory revaluation or profit in inventory. So as a result of all the ERP implementations that began in early fiscal year 2024, we had a real concerted effort for us to build up inventory to make sure that there were no issues from a customer standpoint.

Marie Thibault: And that inventory was built in our manufacturing locations in China, in Ireland and in the US. And then we shipped those that inventory to a variety of distribution centers and different legal entities. And when that happens, there's intercompany profit that results once things transfer from one legal entity to another. And that intercompany profit needs to be eliminated at a consolidated level since that product wasn't shipped yet to any type of a third party customer.

Marie Thibault: So once that inventory is then sold to customers, that profit that was previously on the balance sheet needs to be recognized into the P&L. And that's what happened in this quarter. It just so happens that because of all the inventory that we had built up in advance of the ERP implementations, it resulted in a larger amount than what we typically see. So typically these profit inventory adjustments range within a few million dollars every quarter.

Marie Thibault: It just happens to be the fact that because we had built up so much inventory and then recognized and then sold that inventory into the market, we needed to release that profit in inventory from the balance sheet into the P&L. And this was something that was previously contemplated within our prior year full year guidance range. It just happens to be it's typically much larger than what we would normally see. So as we move into the fourth quarter, we're not going to necessarily see that same level of benefit.

Marie Thibault: And if you go from our Q3 performance into our Q4 performance, you're correct. The gross margins, the implied gross margins would step down from Q3 to Q4. And again, that largely has to do with the inventory revaluation or profit in inventory, not recurring in the fourth quarter. So that alone is about a 500 basis point move from Q3 to Q4. And then additionally, I would say now that we've implemented our ERP systems within 93% of our business and we only have Latin America and India left.

Marie Thibault: Beginning in Q4, we're going to intentionally start to manufacture less product as we attempt to reduce our overall inventory levels and improve our working capital and improve our cash. But because we're doing that, we're going to see some negative manufacturing variances that impact us in Q4. Again, like the positive benefit to our P&L from the profit inventory that occurred during Q3, the reduction in the manufacturing volumes was something that we had previously contemplated in our Roger.

Marie Thibault: Okay, that all makes sense to me, Jake, thanks for the level of detail there.

Marie Thibault: Let me ask a follow-up here then on the move to start selling small pen needle packs in Germany for those GOP1 users.

Devdatt Kurdikar: Good morning, Marie. We are absolutely excited about our prospects of launching the small packs for GOP1 in Germany. Germany made sort of a logical first country for us. GLP1's there are being launched in the form of a pen. So obviously our pen needles are required to administer those GLP1's. The pen needles that we make today are the same pen needles that are required for GLP1 administration. And so we launched the projects a few months ago to make small packs because you can imagine small packs are more patient and customer friendly for GLP1 administration.

Devdatt Kurdikar: The pricing is, I would say appropriate for the market and appropriate for the use case. I won't talk specifically about pricing premiums, but let me just say that we are pleased with the price that we expect to get. And look more broadly, we are starting with Germany as pen injectors proliferate and expand for the administration of GLP1's. We will certainly be there to provide pen needles. We have the capacity and can ramp up ramp up production of these small packs quickly to fill demand.

Devdatt Kurdikar: And if you really project out over a number of years, if biosimilars enter the market, certainly again, that provides a tailwind for us. So we are excited about Germany. We are going to be launching that product there, imminently here in the coming weeks, maybe a couple months. And we will see where we go from there.

Marie Thibault: Okay, very good. Thanks for taking the questions. Thanks, Marie.

Travis Steed: Thank you. Our next question comes from Travis Steed with Bank of America Security. Your line is open. Hey, thanks for taking the question. I guess the first question I'd like to start with is, when you think about the progress you're making on the pump and the investment that you kind of need to launch that product successfully. How should we think about margins and earnings that the streets got modeled for kind of going forward? Can you guys expand margins next year, even with the investments required to launch this product? I want to make sure we get the models correct kind of going forward for this. Thanks, Travis.

Devdatt Kurdikar: Good morning. So just as a quick reminder for the audience, you have made that submission in late calendar 2023. We got some questions from the MTA part of the normal process that we responded in a very timely manner and we'll be progressing on the closed loop solution as well. So first things first, we need and hope to get clearance on the pump, obviously I won't comment on the outcome and the timing of the FDA decision.

Devdatt Kurdikar: And when it comes to our plans for the commercial launch for the pump and potential implications for fiscal 2025. Respectfully Travis, at this point, we are not ready to comment on 2025 numbers. I will repeat what I've said before, we are very mindful of our net leverage levels. We're very mindful of our debt. You heard us comment in the past that we do have an increasing focus on cash and debt paydown and so it will be very measured and thoughtful in our plans.

Devdatt Kurdikar: And then what we are thinking right now, Travis, that we would hold an endless day later this year sometime in December by that time, certainly we'll have clarity on on open loop. We will have confirmed our plans on the pump. We will have made progress in the closed loop. And so we can talk about all of this at that time. In the meantime, you know, we are laser focused on obviously closing out and delivering a successful 2025. All right, great. Thanks for the color. I look forward to the annual stay.

Travis Steed: And I got the second question I'd ask is just kind of a bigger picture. You guys have been a public company now for a while and kind of gotten independent and just speaking about how you maximize shareholder value from this forward point. Are there things that you're thinking about differently to make sure that the value for shareholders is kind of being maximized at this point versus what's reflected in public markets today?

Travis Steed: Travis, look, our focus from day one has been on maximizing shareholder value right and we continue to look for ways to do that. We laid out prespen sort of a three year plan that we've been executing executing on will certainly continue to execute that but really look coming from a from a, you know, every day as a management team. We really think about all the ways that might be that might be available to us to maximize shareholder values. So that certainly continues to guide us on all the decisions we make. All right, fair. Thanks a lot. Thank you.

Chris Stewart: Our next question comes from Chris Stewart with CL King. Your line is open. Hi, I think so taking the question.

Jacob Elguicze: I was wondering if we could just focus a little bit on free cash flows. I think Jake, you mentioned that separation costs are going to be stepping down here. I was wondering if there's any way that you could quantify that or just provide a little bit more color on the cash flow outlook for the company. Yeah, so thanks for the thanks for the question, Chris. You know, I again coming back to, you know, I think this year, you know, we're going to we're going to end the year with around 300 million in cash on the balance sheet for the end of the year.

Jacob Elguicze: That's going to include using around 180 million of cash in terms of separation activities this year. And that's coming on the heels of using around 145 million of cash in 2023. So I think one of the things that as we've gone through the spin here that I think sort of gets, gets masked is really the free cash flow generation capabilities of the company because it really is quite strong. And I think beginning in 2025, you're going to see, you're going to see a much improved pre cash flow generation.

Jacob Elguicze: This isn't the type of franchise that needs a tremendous amount of, you know, capital expenditure investment given where we are. I mean, we have three highly automated plants that we can put even more capacity through. So as we're thinking about, you know, next year, you know, those those separation costs are going to materially take down. So it's going to go from, let's call it somewhere around 180 million this year down to, you know, maybe somewhere to the tune of around, you know, 50 million or so next year.

Jacob Elguicze: And that's the reason why we even have that amount next year largely has to do with the finalization of some brand transition expenses that we're going to have to go through in 2025 and then to a lesser extent in 2026. But as we move forward here, we should start, you know, over the next couple of years, are our free cash flow generation should really more closely approximate, you know, our adjusted EBITDA as a company.

Jacob Elguicze: So, you know, I'm not going to give you a specific number for 2025, but but I would tell you that I think our free cash flow beginning in 2025 is going to materially improve from where we were in 2024.

Chris Stewart: Okay, thank you.

Devdatt Kurdikar: And then, Dev, any color that you can provide us on the questions that you received back from the FDA if they were expected or any sort of color there would be helpful on the topic. It's nice to have you in the call and look forward to engaging more with you. Listen, I would say that all the questions we got, we were able to at least from our perspective adequately and comprehensively respond to and do so in a timely manner. Beyond that question, I wouldn't wouldn't go into the details obviously of the feedback. And we are eager to receive the FDA's decision here.

Devdatt Kurdikar: And would you be prepared to go forward with the closed loop version as soon as you get approval of the open loop version, how will that work? Yeah, we've been working on the closed loop version in parallel. You remember we signed our agreement with title and our team has been busy integrating that algorithm with an open loop. So the work on the closed loop has actually been being progressing, even as we've been working on responding to the FDA on the open loop.

Unknown Executive: Okay, thank you very much. Thanks, thanks. Thank you. As a reminder, if you'd like to ask a question, please press star 11.

Michael Polark: Our next question comes from Michael Polark with Wolf Research. Your line is open. Good morning. Thank you for taking the questions. I have two. I want to follow up on gross margin and ask a question about type two pumping. So Jake, I heard your response to Maria. A lot of good color there. But when I do the like 4Q implied gross margin, I get 60%. So it's a huge step down, even taking into account the thematic considerations you fly.

Michael Polark: It just strikes me as ultra conservative. And then when you run that down the PNL, you see 30, 31, 32 cents of EPS for the quarter, which is obviously a huge step down versus where you've been. So it's tough to fathom. So I want to, those are the numbers I see. And I want to confirm that those are the numbers you intend to plan for. And is this just ultra conservatism here sequentially?

Jacob Elguicze: Yeah, so so my thanks for thanks for the question. I mean, I think you're you're implied math, you know, for Q4 is is correct in terms of it really is a gross margin story that is that is occurring, you know, largely associated with the PII that I mentioned. You know, that drives around, you know, a 500 basis point move from from Q3 to to Q4. Additionally, you know, as I said, I think in my answer to to Marie, we are very intentionally looking to try and right size our inventory levels.

Jacob Elguicze: Now that we're through all of these largely through all of the separation activities. So that is something that we are very intentionally looking to do to drive an improvement in our working capital. And what that's going to mean at least in the fourth quarter is sort of a temporary headwind associated with manufacturing variances. So we're not going to have the same level of absorption. Now, all of this was contemplated, you know, in our prior guidance and obviously now in our in our current guidance.

Jacob Elguicze: And yet we're still able to raise our gross margin guidance, you know, by about 62 and a half basis points from the midpoint from our prior guide. And that raise really comes down to a few things. It comes down to our ability to continue to drive, you know, positive pricing and pricing being a little bit better than what we had previously expected. And then that guidance raise at the gross margin line also comes down to mix both from a geographic and a product standpoint.

Jacob Elguicze: So, you know, additionally, I would just say, you know, we're also trying to take cost out in terms of regulatory freight and some manufacturing costs. So I think our team has done a tremendous job of trying to drive cost out of the system that's allowing us to raise our full year guide. But as you think about, you know, going from kind of Q3 to Q4, there's some transient things going on, one related to PII, which, you know, moving forward isn't going to occur at that same level.

Jacob Elguicze: And then likewise, you know, from a manufacturing standpoint, a real concerted effort by us to try and reduce inventory levels now that the separation has gone really well. I mean, Mike, if you think about, if you think about this, this base business, on a full-year basis. And there's been noise post-spin for the last two-and-a-half years as we've had to go through all of this separation work. I think as we get into 2025, what you're going to end up seeing is a much more stable quarter to quarter performance from the business.

Jacob Elguicze: And certainly from an annual standpoint. I mean, if you think about what this, during 2024, if you look at the different components of the business. And you sort of break down and go from consolidated impact, and you look at, we have a very small contract manufacturing business. That generates around $5 to $10 million per year in revenue back to BD. That's that gross margins that are around. Let's call it 12%. We spend around $60 to $65 million a year in our insulin pump program.

Jacob Elguicze: And then you have the core injection business, which is a very stable load to mid-60s typically gross margin business that then at the operating margin line. It is somewhere in the low 30s. So much a much more stable business. I think is what you should expect as we sort of move forward from 2024 into 2025.

Devdatt Kurdikar: Mike, and if I can just sort of zoom back a little bit right now, why 24 has been marked with ERP implementations in dozens and dozens of countries, right? We went to 93% of our revenue in the background, what that involves is moving products from BD's distribution network into new distribution centers. And you can imagine the inventory that has to be placed in new locations, working with customers to make sure in case there was any disruption we didn't disrupt product continuity for our patients and customers.

Devdatt Kurdikar: And so this year has been particularly lumpy quarter to quarter no question, but I'm very pleased that we had incorporated our hearts around this in the full year guidance and frankly our team has been executing to that. And so while it might appear, certainly the quarter to quarter variants that you are seeing, I certainly would urge you to zoom back and look at it for a for over a full year basis and really just look at the performance of this business over a full year basis. So just wanted to provide a little bit of that context.

Michael Polark: Appreciate all that color. Thank you.

Michael Polark: I want to ask on type two pumping. So, you know, obviously you have the program you're interested in this market. I've heard the update about and clear today.

Michael Polark: But I'm curious how you internally expect the type two pump market to develop. Type one is 40, 45% penetrated in the U.S. Grinding Hire at the trend that's been in place for a while now. Type 2 is, you know, sub 5% pump penetrated, you know, insulates gearing up for the AID push into this market. Next year and I'm curious how quickly do you think that ramps? How do you model the curve, the a follow, the type 1 cadence? Do you think it could be faster, slower? I'd be interested in any color that you'd have to provide on that topic.

Devdatt Kurdikar: Thank you so much. Yeah, thanks, thanks, Mike. Look, it's too early for us to provide sort of any quantitative guidance with respect to what the penetration on type 2 will be. And while we respect, you know, competitors entering type 2 market as well, I mean, I just wanted to remind everybody that ours would be a disposable patch pump with three units. And that has, I would argue some specific applicability for type 2 customers.

Devdatt Kurdikar: And also we've designed it with simplicity in mind, which also makes it applicable. So I mean, said all of that, listen, we will talk more about our type 2 plans that this investor day we are planning in December by that time, as I said, you know, we expect to have FDA's decision. We'll have made some more progress in the closed loop. So respectfully, Mike, I understand the e-giveness to know our type 2 plans more, but I suggest we wait until later this year.

Unknown Executive: Father, thank you. Thank you.

Unknown Executive: There are no further questions at this time.

Devdatt Kurdikar: I'd like to turn the call back over to Deb for closing remarks. Thank you, Michelle.

Devdatt Kurdikar: As we wrap up this call, I do want to extend my heartfelt appreciation to all my colleagues that embarked across the globe. Our global team has in this year executed a complex major separation related programs while never wavering from our mission of developing and providing solutions that make life better for people living with diabetes. And as I mentioned during the call, we look forward to engaging with all of you at our analyst and investor day in mid-December. Thank you all for attending the call and for your interest in our business. Thank you for your participation. This doesn't include the program and you may now disconnect.

Unknown Executive: Everyone, have a great day.

Q3 2024 Embecta Corp Earnings Call

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