Good day, and welcome to the Embecta Fourth Quarter of Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, 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 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 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 slide. 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 start by presenting an overview of our strategic priorities following the spin-off and will highlight key accomplishments to date. He will also share insights into a future strategy and provide details of the restructuring plan announced today. Jake will then review our financial results for the fourth quarter and full fiscal year 2024, as well as discuss the preliminary guidance for fiscal 2025. Following these updates, we will open the call for questions. With that said, I would now like to turn the call over to our CEO.

Good morning, and thank you for taking the time to join us. Since the spin, which occurred on April 1, 2022, our strategic priorities over the past two and a half years have been focused on three areas. These include the need to strengthen and optimize our core business, the requirement to separate and stand up the organization from our former parent, and invest in growth opportunities. I am pleased to report that during the past two and a half years, we made significant progress within each of these objectives. First, we strengthened our core business by securing exclusive and preferred contracts with key Medicare Part D plans as well as establishing our products as a top choice within major national formularies, among other accomplishments. Second, we successfully completed major standard programs including the implementation of our own ERP shared services and distribution network, covering approximately 98% of our revenue base with only India remaining. We also exited the ownership of our manufacturing facility in China. I am proud to say that we completed these activities and more while avoiding interruptions to our customers, as well as avoiding disruptions to the people with diabetes who use our products daily. Finally, we continue to invest in growth. A testament to that is the clearance of our open-loop patch pump, which occurred in Q4, as well as the launch of a small pack GLP-1 pen needle set in Germany, with the intent to address the needs of a growing customer base. This strong execution, which occurred in a challenging macro environment, led to financial outcomes that exceeded 2024 expectations that were set prior to the spin. This included delivering a constant currency compounded annual adjusted revenue growth rate of approximately 1.3% and an adjusted EBITDA margin of approximately 31.4%. This compared to…

Meanwhile, international revenues totaled $520 million, which equated to year-over-year adjusted constant currency growth of approximately 1.3%. Growth internationally was driven primarily by volume growth within Canada, China, and Asia, partially offset by declines within India and Latin America. Lastly, and before I turn the call over to Jake, I want to highlight that since then, we have been able to successfully increase the prices of our products, particularly within the US, to help offset inflationary pressures. However, during 2025, we anticipate that pricing will turn into a headwind as we seek to renew agreements whose terms are expiring. With that, let me turn the call over to Jake for him to review other financial highlights as well as to provide preliminary financial guidance for fiscal year 2025. Jake?

Thank you, Dev. Good morning, everyone. 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 2024 totaled $173.8 million and 60.7% respectively. This compared to $181.8 million and 64.5% in the prior year period. While on an adjusted basis, our Q4 2024 adjusted gross profit and margin totaled $178.3 million and 61.4%. This compared to $182.6 million and 64.8% in the prior year period. The year-over-year decrease in adjusted gross profit and margin was expected and was primarily driven by the impact of lower absorption at our plants as we intentionally reduced inventory levels from Q3 to Q4, as we are now substantially complete with our ERP implementations. Additionally, the year-over-year decline in gross margin in the quarter was also due to revenue mix, as well as from 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. These headwinds were somewhat offset by favorable pricing. From a sequential basis, we saw a step down in adjusted gross margin from Q3 to Q4. This was something that we expected to occur and is due to the profit and inventory benefit we experienced within our third-quarter results. Turning to our GAAP operating income and margin. During the fourth quarter, they were $26.2 million and 9.2%. This compared to $25.8 million and 9.2% in the prior year period. While on an adjusted basis, our Q4 2024 adjusted operating income and margin totaled $61.2 million and 21.1%. This compared to $65.2 million and 23.1% in the prior year period. The year-over-year…

Press star one one again. One moment while we compile the Q&A roster. Our first question will come from the line of Marie Thibault with BTIG. Your line is open.

Hi. Good morning. Congrats on a great quarter and guide. I wanted to ask here about the patch pump program and try to understand a little bit better what's coming next. Congrats on making a decision there. But I want to understand a little bit about what you are hoping to do with the free cash flow generation in addition to paying down debt. Are there other capital allocation priorities that you want to highlight whether that's, I know you pay a dividend, but increasing a dividend or share repurchases or potentially M&A? Anything else to consider there?

Good morning, Marie. Let me maybe I'll kick off and then Jake can augment as needed. So regarding the patch pump, it was truly just a very pragmatic capital allocation decision. It was after achieving a pivotal milestone. As I said in my prepared remarks, we did a market check as well. With regard to capital allocation, our number one priority right now is to pay down debt because we think that being able to do that will actually create the financial flexibility to make some M&A moves. Continuing to invest in the patch pump would have squeezed out any opportunities for us either on the M&A side or frankly even making additional investments in our own manufacturing or commercial capability. So just to be very clear about that, even though I covered it exhaustively, I believe, in the prepared remarks, this was purely a capital allocation decision, had nothing to do with the design of the pump or the performance of our team with respect to meeting internal milestones. As you pointed out, we already pay a dividend to our shareholders. At this point, we do not see any change in that, and our focus is certainly in fiscal 2025 is going to be on paying down the debt, creating the financial flexibility. We still have one separation-related thing to do, which is brand transition. Executing that very well. That's a complex program as well. And certainly, when it comes to M&A, we'll share more of those thoughts at the upcoming Analyst Day. But we certainly intend to find opportunities that are going to allow us to leverage our global commercial channel of 600 plus commercial employees around the world, particularly in emerging markets, which are fast-growing, as well as leverage our manufacturing competencies, particularly in injection molding and the fact that we make eight billion devices a year with robust quality standards. Those are the areas related to which we will look into, but certainly, we'll share more at the Analyst and Investor Day in spring of 2025.

Yeah. Maybe just to add on just briefly here, I think in terms of cash usage, I think the way that you sort of think about it is, you know, we ended 2024 with a cash balance of roughly $274 million on the balance sheet. I think our expectation is that we'll probably end 2025 with a similar, maybe slightly higher amount of cash on our balance sheet. Essentially, any of the savings, if you will, Marie, from not having to spend in those one-time separation costs, we expect to spend about, you know, we spent around $165 million in 2024 related to one-time separation costs. We mentioned that we intend to spend around $50 to $60 million this year largely around brand transition in 2025. So I think those cash savings of around $110 million are really going to get repurposed into debt pay down in 2025. To the extent that we're able to continue to generate more cash, I think we'll be even more aggressive. I think if you think about what our guide implies today in terms of net leverage, it would sort of indicate that by year-end, we would get down to around a three times net levered mark. As we move into 2026, the free cash flow capabilities of the company will even improve more so as we don't see any really meaningful separation-oriented spending. Hopefully, that provides a little bit more detail for you.

Yeah. That's very helpful. Thank you both. And then I guess I'll ask kind of a macro question. We're getting more tariff headlines, of course, this morning. Can you just confirm for us your thoughts on sort of any impacts, if any, from potential tariffs in China and Mexico and elsewhere and any thoughts on, I guess, you're including Pillar Two in your tax? Any thoughts on FX and some of the big moves we've seen recently? Thank you so much for taking the questions.

Yeah. Thanks, Marie. Again, I'll kick off with tariffs and turn it over to Jake to talk about taxes and FX. Look, obviously, tariff policy, we all expect to continue to evolve. But based on what we know today, a very, very small portion of our US revenue is from products manufactured in China. With respect to tariffs from China, it remains to be seen how customers may react to products that they currently source from China that might get tariffed in the future. Supply and certainty of those products might create an opportunity for us that we certainly stand ready to capitalize on. We'll watch this space and respond accordingly. The overnight headlines around Canada and Mexico, we don't manufacture products in Canada and Mexico. Obviously, we would need to review all those guidelines when they come out in more detail. At this point, it's difficult to forecast any retaliatory tariffs that Canada and Mexico may apply. Canada and Mexico are both important markets for us, so we'll certainly watch this space, Marie. I know it's rapidly developing. Certainly, we will update on future calls as our perspective becomes clearer. Jake?

Yeah, Marie, as it relates to the tax rate, I think our non-GAAP tax rate in 2024 was around 20%. I think the team did a very nice job of trying to implement a variety of different planning initiatives, particularly towards the end of the year, that allowed that to continue to go down. Keep in mind that also included any of the expenses in 2024 associated with the patch pump. Meanwhile, in 2025, our guidance obviously excludes any of the expenses associated with the patch pump for the full year. It is somewhat of an apples and oranges comparison, but if I had to try and bridge from the 20% to the 25% in 2025, I would say that around 2.5% of that 5% increase alone is due to the impact of Pillar Two. The remainder is really due to a mix of additional US tax on foreign earnings, as well as just fewer R&D tax credits that we would expect to incur. From an FX standpoint, again, I think we sort of pegged our initial guidance and closed that down a couple of weeks ago with the FX rates that existed in the mid-November time frame, including a euro of 1.08. Obviously, we'll have to continue to keep track of how those FX moves continue along during the course of the year, but in relation to year-over-year, I think our initial guide today would assume a revenue headwind of around $6 million and I think an adjusted earnings per share headwind year-over-year of around, let's call it around five cents.

Very helpful. Thank you, and good luck.

Thank you. One moment for our next question. That will come from the line of Kallum Titchmarsh with Morgan Stanley. Your line is open.

Good morning, guys, and thanks for taking the question. Just on the patch pump, I feel like many of the points you mentioned when it comes to rationalizing the discontinuation were pretty well known for some time. We knew it would require a step up in R&D. We knew you'd need to establish that sales force, and we knew competition had been intense in the space for many years. Why do you think it took this much time to decide to discontinue the program? We'd just love a bit more color on that thought process, if possible, and then I have one follow-up. Thanks.

Yeah. Thanks, Kallum. I'll take that. Look, as I mentioned, at this point, as we look forward over the next several years and want to create opportunities for growth that are perhaps more aligned with the company's core strengths, we decided that taking those savings and focusing on debt pay down was the best option going forward. But with regard to your question of why now, let me say this. If we think about twelve to eighteen months ago, there was certainly deal activity going on around pumps. There was fundraising activity going around pumps. At that time, we were on the doorsteps of submitting our 510(k) application to the FDA. We decided that going through the process, getting clearance, and then looking for ways to monetize that asset was, of course, we decided to pursue, which we did. We got the clearance. As soon as we got the clearance, we did a market check to evaluate opportunities to monetize the asset, none surfaced. Obviously, over this time, the market has continued to evolve not just in the pump space, but also in the drug space. We just made a pragmatic decision that given that the market check had not turned up any alternatives even for a 510(k) cleared pump, given what we saw with respect to how we should allocate our capital in the future, we promptly, after clearance, decided to discontinue the program once the market check was complete.

That's helpful. When thinking about new opportunities to push into, are there any restrictions we should be aware of that relate to BD post-spin? I think maybe auto-injectors were called out historically as something that maybe could have been developed in-house, but correct me if I'm wrong there.

Yeah. Look, from an M&A perspective, certainly, there are no restrictions. Once we have paid down debt and created some financial flexibility for ourselves, we can certainly proceed in any area that makes sense for us as a company. There are certainly, as part of our separation agreements, restrictions on what we can do with the technology that was acquired by us at the point of separation. There are certainly some restrictions around that. But in terms of our go-forward strategy, which is why creating this financial flexibility is so important because it really creates a vast space for us to go exploring that leverages our core competencies.

That's helpful. Thanks a lot.

Thank you. One moment for our next question. That will come from the line of Michael Polark with Wolfe Research.

Good morning. Thank you. Two follow-ups on the patch pump decision. I'll frame the question this way. Do you think there still could be residual value here? I agree that the pump market continues to intensify. However, as it relates to patch options, the US market is still several years away, and you were kind of, I think, as close as anyone. While you said you've conducted a market check, is there a chance that there's interest in absorbing, taking over your product from someone else, or as you restructure here, does that kind of shut the door for that possibility?

Mike, good morning. Thanks for the question. Look, at this point, I would say the market check that we did, we arrived at the conclusion that there wasn't a viable option to monetize the asset. Would I ever rule anything out in the future if somebody approached us? Obviously, we'd be open to it. With the restructure, certainly, we are taking firm steps today to discontinue the program. But if somebody was interested in the value of the asset, the IP, all of that, certainly we'd be open to those discussions, Mike.

Understood. Appreciate that. The follow-up is on the savings from this update. Jake, I heard $63 million of expense on the pump in fiscal 2024. Sounded familiar. The guidance on a pro forma basis for the benefit from this restructuring program is $60 to $65 million. So it kind of captures the spend last year, but it sounds like there might be something more than just the patch pump discontinuation and this restructuring announcement. So is there, or is this really contained to the patch program and therefore that's why the savings numbers align? Thank you so much.

Yeah, Mike, you're correct. The announcement that we made this morning is tied to the discontinuation of the pump, hence the alignment of the figures from 2024 into our thoughts on an annualized basis going forward into 2025 and beyond. Now, that said, I would say that now that we're through separation, I think we're going to continue to look for ways moving forward to continue to reduce costs and just cost optimization. That is certainly nothing that is necessarily factored into our numbers that we put out today in terms of our guidance. But obviously, now that we're through separation, we're going to continue to try and just be as efficient as possible in terms of our operating cost structure.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Dev for any closing remarks.

Thank you, Operator. As we wrap up the call, I want to extend my heartfelt appreciation to all my colleagues at Embecta across the globe. As we look back over the last two and a half years, our global team has executed complex major separation-related initiatives with dedication and resilience and achieved the expectations that we had laid out even prior to the spin. With that said, I also want to acknowledge the restructuring plan that we announced today and recognize that these changes have impacted many of our valued team members. To those affected, we are sincerely grateful for your contributions and conscious of the difficult transitions that this decision has brought for so many. We believe these changes, though challenging, are necessary steps to strengthen Embecta, setting us up for a stronger, more sustainable future. Finally, we look forward to engaging with all of you at upcoming conferences and at our rescheduled investor day in spring of 2025, where we'll share more about our vision for Embecta. I wish you and your loved ones a happy Thanksgiving. Thank you.

This concludes today's program. Thank you all for participating. You may now disconnect.