Welcome, ladies and gentlemen, to the Fiscal Fourth Quarter and Full Year 2023 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.

Thank you, operator. Good morning, everyone, and welcome to embecta's fiscal fourth quarter and full year 2023 earnings conference call. The press release and slides to accompany today's call and webcast replay details are available on the Investor Relations section of the Company's website at www.embecta.com. With me today are Dev Kurdikar, 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. 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. 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 fourth quarter and full fiscal year of 2023 as well as an overview of our strategic priorities for 2024. Jake will then provide a more in-depth review of our Q4 and full year 2023 financial results as well as our financial guidance for fiscal year 2024, which we introduced in today's press release. Finally, Dev will provide some thoughts on the GLP-1 market landscape, and we will close the call with a question-and-answer session. With that said, I would now like to turn the call over to CEO, Dev Kurdikar. Dev?

Good morning, everyone, and thank you for taking the time to join us. The completion of fiscal 2023 marks our first full fiscal year as a stand-alone company, a company that is dedicated to developing and providing solutions that make life better for people living with diabetes, and I could not be prouder of our teams around the world. Turning to some fiscal 2023 highlights. It is my pleasure to share that our fiscal year 2023 results exceeded our expectations as our team's commitment, resilience, and strategic focus played a pivotal role in our success. And the team's efforts did not go unnoticed as embecta was recognized as the winner of the MD+DI Readers Choice Company of the Year for 2022, which is one of several external recognitions our team received. Additionally, our associates have continued to make significant advancements in the process of establishing embecta as an independent company with the goal of exiting as many transition service agreements with BD as possible by March 31, 2024. Along those lines, we've made substantial progress by implementing our own global HR information system, launching a new customer relationship management system, and establishing our global IT network. Throughout these activities, we've been diligent in minimizing any potential disruptions to our customers and people with diabetes who rely on our products daily. As we had mentioned on the prior call, we have initiated the demerger process for our Suzhou, China manufacturing entity so that we could transfer that entity from BD to embecta. This is a multistep process, and I'm pleased to inform you that during the past few months, we have achieved several important milestones. These include obtaining business and product licenses, implementing our ERP solution and transferring ownership of land and buildings. We have also resumed production at that plant…

Thank you, Dev, and good morning, everyone. Before I discuss the financial results, I would like to remind the investment community that embecta was spun off from BD on April 1, 2022, and that the financial results during the pre-spin periods were based on carved-out accounting principles and do not reflect what embecta's financial results would have been had embecta operated as a stand-alone public company. Therefore, the financial results for the 12-month periods ending September 30, 2023, and September 30, 2022, are not meaningfully comparable. Given the discussion that has already occurred regarding revenue, I will start my review of embecta's financial performance for the fourth quarter at the gross profit line. GAAP gross profit and margin for the fourth quarter of fiscal 2023 totaled $181.8 million and 64.5%, respectively. This compared to $176.9 million and 64.4% in the prior year period. The slight year-over-year increase in GAAP gross profit and margin was due to a combination of factors, which essentially net each other out. These include tailwinds from product and geographic mix, favorable year-over-year pricing and cost improvement programs. These items were offset by the impact of inflation on the cost of certain raw materials, direct labor and overhead. Incremental standup and separation costs, unfavorable manufacturing variances stemming from the temporary shutdown of our China domestic manufacturing at our facility in Suzhou and FX. While on an adjusted basis, gross profit and margin for the fourth quarter of 2023 was $182.6 million and 64.8%. As compared to our prior outlook, our adjusted gross margin during the fourth quarter of 2023 was better than we previously expected, and this was due to a higher-than-anticipated revenue, favorable geographic and product mix, pricing that exceeded our internal expectations and our ability to manage the costs incurred to stand up the organization.…

Thanks, Jake. If you haven't already seen it, we posted a separate presentation on our website this morning titled Diabetes Considerations. Please refer to this deck as we have tried to lay out the current GLP-1 landscape and how it touches various aspects of our business. GLP-1s have been a significant point of interest for investors, and I would like to take this opportunity to make a few comments regarding our observations and the impact that GLP-1s have had on our business. As we reflect over the past five years and focus on weekly GLP-1s, we observed significant growth in prescriptions with an impressive CAGR of over 40%. In contrast, the insulin prescriptions have remained relatively stable, experiencing a slight decline on the low single-digit CAGR basis. Regarding the number of people switching from insulin to GLP-1 drugs, the data showed that is relatively low at around 1%. As you know, our business is highly geographically diversified with almost 50% of our revenue being generated outside the U.S., where cost considerations usually limit the access of newer high-priced therapies. Turning our attention to our U.S. business. We have seen continued stability over a period where weekly GLP-1s have grown at a CAGR of greater than 40% and pump adoption for insulin delivery has steadily increased. While there may have been small decreases in volume, they have been offset by pricing dynamics, resulting in a generally flat revenue CAGR. This data supports our hypothesis that GLP-1s have delayed the onset of insulinization, but not eliminated it. Let's further focus on the differences between type 1 and type 2 diabetes. Type 1 results from an autoimmune response that leads to destruction of insulin-producing beta cells in the pancreas. There has not been any data that we have seen demonstrating that GLP-1s have…

[Operator Instructions] Our first question comes from Marie Thibault with BTIG.

Congrats on a good quarter. I wanted to start here, ask a little bit about the guidance set for next year. I heard about your assumptions built into the revenue range, but wanted to ask a little more detail on the gross margin side. I think the guide was set just a bit higher than we were expecting, consensus was expecting. And you certainly outperformed on that metric. What's sort of driving the -- that gross margin assumption?

Yes, Marie, and thanks for the question. So from -- during 2023, we generated adjusted gross margin of about 67%. We certainly exceeded our initial expectations coming into the year, and we're obviously quite pleased with that. And if you think about the drivers of going from about 67% in 2023 down to, let's call it, the midpoint of our guidance range of about 63.5% in 2024, it's really being driven by three things almost equally. FX is a large headwind for us as we look into 2024. We expect that headwinds to be about 130 basis points year-over-year. The next largest driver is really increased raw material and labor costs, including the additional increased costs associated with the cannulas that we purchased from BD. And then lastly, it really comes down to the negative manufacturing variances coming from the fact that we won't be able to manufacture for a period of time in our facility in China, specifically for the Chinese market. So about half of our revenue in China is product that is manufactured in China and sold in China. And until we get all the necessary product registrations and approvals from the local Chinese regulators, that manufacturing for the China -- for China market is going to be shut down for a period of time. So it really comes down to those three drivers, again, almost equally driving the year-over-year margin change. Those being FX, the increased raw material and labor costs, and then, again, some manufacturing variance headwinds coming from the China plant.

Okay. That's helpful, Jake. And as a quick follow-up on the guide, I know in the past, you've had an OUS competitor's supply constraints, which was helping international sales. Is that built into your assumption for revenue next year?

It is, Marie. It is built into our assumptions for next year.

Okay. That will continue. Okay. And then I wanted to ask about the Medicare Part D win, three of the top payers there giving embecta exclusive or dual-preferred status. What does that mean? And will that be material to sales in some way? How quickly do some of these preferred status wins convert into revenue?

We are extremely pleased with those wins, Marie. Medicare prescription plans used to be open access. Three of the ones that we have won now, we are either exclusive provider for our pen needles or dual-preferred status. This is an important category for us because, as you know, it covers seniors. Seniors have a disproportionately high prevalence of diabetes. And we win these on the same criteria as other commercial plans, quality, brand, supply continuity. It's been incorporated into our guidance. These three plans cover a large portion of the Medicare beneficiaries that have prescription plans. And so we're very pleased to have won these, and it's certainly incorporated into our guidance for next year.

[Operator Instructions] Our next question comes from Mike Polark with Wolfe Research.

For fiscal '24, if you said it, I missed it, but can you level set on constant currency growth expectations for the Americas versus international, maybe for the core injection business, excluding contract manufacturing?

Yes, Mike. We don't separate out our constant currency guidance by region. But let me tell you that as we look ahead into 2024, it's going to be similar to what we have spoken about previously and experienced so far. So broadly speaking, the way we see the market dynamics play out is that the U.S. tends to be stable. Any sort of volume changes are typically offset by pricing. Emerging market has been and will likely continue to be a source of growth for us, largely driven by demographic changes over there. And then other developed markets sort of sit somewhere in between. And so what we've seen in 2023 and certainly years prior to that, resembles that. And we don't expect that to change in any material fashion for 2024.

Understood. Appreciate that. I have two more, if I may. Follow-up to Marie's question on the Part D call out, interesting, I guess. My specific questions are. Why now? Why are these plans going from open access to exclusive or dual-preferred? And as you consider those opportunities, can you frame at a high level kind of what the price/volume trade-off might be for embecta in narrowing the network?

Yes. The why now question, Mike, honestly, is going to be a little difficult to answer. These are operated by some of the same players that run commercial plans. The commercial plans are obviously under contract for us. We think about it as a win for reasons that I explained prior when I was talking with Marie, just given the population base that it covers and the prevalence of diabetes and then potential insulin use in that sector. With respect to price/volume dynamics, obviously, I wouldn't want to describe them for these particular plans. But generally speaking, once you get dual status or exclusive preferred status, our share increases significantly beyond what it typically is. And then there are rebates that are given. And those rebates, again, while I won't comment on these plans, specifically, vary by payer. They can go into the low teens or sometimes in the high teens, sometimes slightly higher than that. But generally speaking, that's the dynamic that occurs.

Helpful. And then my last one, just on TSA, I heard the comments on limited extensions with BD. Can you level set, and if you set the summary number for fiscal '23, I missed it, but I think we were thinking $60 million of total TSA expense in '23, can you frame how much TSA expense might be in '24? And that's it.

Yes. Thank you, Mike. I'll let Jake answer the TSA expense question for '24. But let me broadly sort of at least frame the TSA sort of where we are in the TSA. So first of all, we're extremely pleased with the progress that we have made so far. I'd like to remind everybody, we're talking about taking a business that had been part of a much larger business for close to 100 years and now standing it up as a separate company. And so if you think about all the separation work that our teams accomplished including setting up the HR information system; the Suzhou demerger, which was a big project for us and where we've achieved important milestones; and implementations for ERP distribution networks, shared services in 60% of our markets and two of our three plants, so very pleased with all of that. What we want to do essentially is for the remainder plant and the remainder of our markets, really phase these implementations out. That allows us to reduce the risk of operational disruption that can happen. So this is an extension that we requested from BD. BD will undertake a supplemental -- a private letter ruling process with the IRS. And upon getting an acceptable ruling, we would get an extension that would allow us to do the remaining markets in two or potentially a few more phases, which would essentially take us through maybe early fiscal 2025 to get done. Let me turn it over to Jake to talk about the expenses.

Yes, Mike. So in 2023, you're correct, we incurred about $63 million worth of TSA expense in 2023. And then our guidance assumes, for 2024, inclusive of the -- an extension being granted, that we would incur somewhere between, let's call it, $30 million to $35 million worth of TSA expense in 2024. And obviously, the fact that we still are able to generate around that, let's call it, the midpoint of our guidance, assumes a 30% adjusted EBITDA margin, that's consistent with what we had expected, obviously, pre-spin. And as we said in our prepared remarks, prior to spin, we certainly did not think that we would incur nearly the amount of inflationary negative headwinds that we've obviously seen in the two-plus years now post-spin. Obviously, we didn't think that we would incur the same level of FX headwinds nor quite frankly did we originally think that we would need an extension and have to incur some additional TSA costs. So I think it really just points back to the fact that being able to still think that we can generate somewhere between that 29.5% and 30.5% adjusted EBITDA margin is really a testament to the strength and resiliency of the base business here.

There are no further questions. I'd like to turn the call over to Dev for closing remarks.

Before we conclude the call, I would like to express my gratitude to all my colleagues around the world for the immense amount of work that they have been doing over the past 1.5 years to stand up embecta as an independent company. And the fact that they have been doing so without impacting our customers is a testament to their commitment of fulfilling our mission of developing and providing solutions that make life better for people living with diabetes. Thank you all for attending our call and for your interest in our business.

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