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. 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 will 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 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 Dev Kurdikar, Embecta's President and Chief Executive Officer, and Jake Elguicze, our Chief Financial Officer. Before we begin, I’d like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides. 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 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. With that said, I’d now like to turn the call over to our CEO, Dev Kurdikar. Dev?

Good morning, and thank you for taking the time to join us. Let us start with Slide 5, where you will see the three strategic priorities that we’ve executed since 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. And finally, we continue to invest for growth, most notably around our insulin patch pump 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 within each of these goals. 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. 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 core 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. 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…

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. GAAP 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%. 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 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 US dollar. Turning to GAAP 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 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. These reductions…

Thank you. [Operator Instructions] Our first question comes from Marie Thibault with BTIG. Your line is open.

Good morning. Thanks for taking my 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 re-adjustments. 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?

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 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. 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 revaluation adjustments or what's referred to as, profit and 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 what that was. 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 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 1 price increase that went into effect in the US. 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 the -- to your question on inventory revaluation or profit and 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. And that inventory was…

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 GLP-1 users. 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?

Good morning Marie. We are absolutely excited about our prospects of launching the small pack for GLP-1s in Germany. Germany made sort of a logical first country for us. GLP-1s that 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. 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 wouldn'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 GLP-1, we’ll certainly be there to provide pen needles. We have the capacity and can ramp up production of these small packs quickly to fill demand. 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're going to be launching that product there imminently here in the coming weeks, maybe a couple of months. And we will see where we go from there.

Okay. Very good. Thanks for taking the questions.

Thanks Marie.

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

Hi, thanks for taking my question. I guess the first question, I would like to start with when you think about the progress you are making on the pump and the investments that you kind of need to launch that product successfully. How should we think about kind of margins and earnings like that the street's got modeled for kind of going forward. Can you guys expand margins next year? Even with the investments required to launch this product? I just want to make sure we get kind of the models correct kind of going forward for this?

Thanks Travis. Good morning. So just as a quick reminder, right, for the audience here we made that submission in late calendar 2023. We got some questions from the FDA. It is part of the normal process that we responded in a very timely manner, and we've been 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. 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’ll repeat what I have 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 an increasing focus on cash and debt pay down. 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. We will have made progress in the closed loop. And so we can talk about all of this at that time. In the meantime, we are laser focused on obviously closing out and delivering a successful 2025.

Okay. Great. Thanks for that color. I look forward to the Analyst Day. And 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 kind of gotten independent? And just thinking about like how you maximize shareholder value from this forward point? Are there things that you're thinking about differently just to make sure that the value for shareholders is going to be maximized at this point versus what's reflected in public markets today?

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 pre-spend sort of a three year plan that we've been executing on, we'll certainly continue to execute that. But really, look I mean, from a everyday 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.

All right Dev. Thanks a lot.

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

Hi, thanks for taking the question. I was wondering if you 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.

Yes. So thanks for the question, Kristen. Again coming back to I think this year, we are 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. 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 are 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. So as we are thinking about next year, those separation costs are going to materially tick down. So it is going to go from, let's call it somewhere around $180 million this year down to maybe somewhere to the tune of around $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 are 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 over the next couple of years, our free cash flow generation should really more closely approximate our adjusted EBITDA as a company. So 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.

Okay. Thank you. 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.

Hi, Kristen good morning and 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 we were able to, at least from our perspective, adequately and 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 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?

Yes. 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 have been working on responding to the FDA on the open loop.

Okay, thank you very much.

Thanks Kristen.

Thank you. [Operator Instructions] Our next question comes from Michael Polark with Wolfe Research. Your line is open.

Hi, good morning. Thank you for taking my questions. I have two. I want to follow up on gross margin and then ask a question about Type 2 pumping. So Jake, I heard your response to Marie. A lot of good color there. But 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 ultra conservative? And then when you run that down in the P&L, you see $0.31, $0.32 of EPS for the quarter which is obviously a huge step down versus 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 want to confirm that those are the numbers you intend to plan for? And is this just ultra conservatism here sequentially?

Yes. So Mike, thanks for the question. I mean, I think your implied math for Q4 is correct. In terms of -- it really is a gross margin story that is occurring largely associated with the PII that I mentioned, that drives around a 500 basis point move from Q3 to Q4. Additionally 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 are 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 in our prior guidance and obviously now in our current guidance. and yet we are still able to raise our gross margin guidance by about 62.5 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 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 Additionally, I would just say we are 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 going from…

Mike and if I can just sort of zoom back a little bit, right? 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. 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 had incorporated our thoughts 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 variance that you are seeing, I certainly would urge you to zoom back and look at it over a full year basis and really just look at the performance of this business over a full year basis. So I just wanted to provide a little bit of that context.

Appreciate all that color. Thank you. I want to ask on Type 2 pumping. So obviously, you have the program you are interested in this market. I've heard the update loud and clear today, but I'm curious how you internally expect the Type 2 pump market to develop Type 1s, 40%, 45% penetrated in the US grinding higher. It is a trend that's been in place for a while now. Type 2 is sub-5% pump penetrated [insulin] (ph) 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? Do you 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.

Yes. 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 expect competitors entering Type 2 market as well. I mean I just want to remind everybody that ours would be a disposable platform with 300 units, and that has I would argue, some specific applicability for Type 2 customers. And also, we have designed it with simplicity in mind, which also makes it applicable. So having said all of that, this and we will talk more about our Type 2 plans at this Investor Day, we are planning in December. By that time, as I said we expect to have a FDAs decision. We'll have made some more progress on the closed-loop. So respectfully, Mike, I understand the eagerness to do now our Type 2 plans more, but I suggest we wait until later this year.

Got it. Thank you.

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

Thank you, Michel. 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 in 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.

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