Good day, and thank you for standing by. Welcome, ladies and gentlemen, to the Embecta Corp. Fiscal First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please note that today's conference is being recorded and a replay will be available on the company's website following the call. I would now like to hand the call over to your speaker, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone. And welcome to Embecta Corp.'s fiscal first quarter 2025 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 Corp.'s President and Chief Executive Officer, and Jake Elguicze, 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 begin by providing some remarks on the overall performance of our business during the fiscal first quarter of 2025, as well as an overview of our strategic priorities. Jake will then review our financial results for the fiscal first quarter of 2025, as well as discuss the updated financial guidance for fiscal year 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, Devdatt Kurdikar.

Good morning. And thank you for taking the time to join us. Having successfully delivered on our previous three-year outlook, we have now pivoted to the next phase of Embecta Corp.'s transformation. As we move forward, we are focused on three key priorities that will drive our growth and success. First, strengthening our core business. We are targeting to execute a seamless brand transition to ensure our identity resonates globally while maintaining the trust of our customers. At the same time, we are continuing to identify opportunities within our core portfolio that bolster our leadership position in insulin injection devices. Second, expanding our product portfolio. We believe we are well-positioned to introduce market-appropriate products that leverage our expertise in high-volume manufacturing and the strength of our global commercial channel. Such initiatives potentially include utilizing our capabilities to manufacture products for partners that already have a commercial channel, as well as using our global commercial presence to sell products manufactured by others. And finally, increasing our financial flexibility. This began with our decision this past November to discontinue our insulin patch pump program, initiate a restructuring plan intended to generate significant cost savings, and prioritize debt reduction, including the plan to pay down approximately $110 million in debt during 2025. Importantly, given the free cash flow generation capabilities of the company, coupled with the fact that cash used towards operation activities is largely behind us, we expect to be able to materially reduce our outstanding debt during the next few years, thereby enhancing our financial agility. The successful execution of these priorities will position us for stable success as we continue to evolve and transform Embecta Corp. for the future. Turning to some fiscal first quarter highlights. The first quarter marked a solid start to the fiscal year for Embecta Corp.,…

Thank you, Devdatt, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta Corp.'s first quarter financial performance at the gross profit line. GAAP gross profit and margin for the first quarter of fiscal 2025 totaled $157.1 million and 60% respectively, compared to $185.9 million and 67% in the prior year period. While on an adjusted basis, our Q1 2025 adjusted gross profit and margin totaled $164.2 million and 62.7%. This compared to $186.3 million and 67.2% in the prior year period. The year-over-year decline in adjusted gross profit and margin was primarily driven by the lower year-over-year revenue that Devdatt mentioned earlier, as well as from the impact of net changes in profit and inventory adjustments. These headwinds were partially offset by lower freight costs and our ability to drive year-over-year price increases. Turning to GAAP operating income and margin. During the first quarter, they were $28.7 million and 11%. This compared to $45.5 million and 16.4% in the prior year period. While on an adjusted basis, our Q1 2025 adjusted operating income and margin totaled $80.5 million and 30.7%. This compared to $77.5 million and 27.9% in the prior year period. The year-over-year increase in adjusted operating income and margin is primarily due to lower R&D expenses associated with the discontinuation of our insulin patch pump program, as well as lower SG&A expenses, primarily driven by lower TSA costs in addition to lower compensation and marketing expense recognized in the current period. This was offset by the adjusted gross profit changes I outlined above. Turning to the bottom line, GAAP net income and earnings per diluted share were both zero during the first quarter of fiscal 2025 as compared to $20.1 million and $0.35 in the prior year…

Thank you. Our first question is gonna come from the line of Kallum Titchmarsh with Morgan Stanley. Your line is open. Please go ahead.

Thanks a lot, guys, for taking the question. Just a couple from me. First of all, it would be great if you could walk through each of the kind of three key product categories and kind of just calibrate us for how you expect these to perform through the year. You know, any pricing dynamics that are a bit more noticeable in one category over the other. I just appreciate given some of the ERP dynamics from last year, they've kind of thrown off some of the year-over-year numbers. So just any clarity for how you expect that to play out in 2025 would be appreciated.

Good morning, Kallum. I'll start off and then ask Jake to augment. So first of all, as we think about the product category performance in Q1, it was as expected. In Q1, if anything, was maybe slightly better in general than our expectations from a few months ago in total revenue. And obviously, pen needles comprise the majority, so that's sort of point one. And point two, as you pointed out, we do expect growth rates in the quarters this year to be somewhat lumpy, given all the phased implementations that we carried out really most of the world last year. Now talking specifically about Q1 before I talk about sort of future quarters, right? Q1 performance, particularly, I would say, in pen needles, affected the other product categories as well, was driven by two major factors. Number one, and probably the most, the most sort of quantitatively important one was the pull forward that we had in Q4 FY2024 in the US in advance of the then-looming port strike that I'm sure you remember, as distributors procured additional inventory to avoid or mitigate potential disruptions with supplies. That's sort of the first factor. The second factor was indeed the ERP implementations and sort of fell into two time slots, if you will. One in Q1 of the prior year, and so that affected the growth rate year-over-year, and some in the later part of 2024, the inventory sort of bled through in Q1 of this year. And those were the two primary factors. Now, if you'll notice in the syringe category, we did actually a little bit better than what historically the declines have been, and that's largely, you know, most of the declines, the volume declines in the US, and as that becomes a smaller factor, the decline…

Yeah. Go ahead. You know, Kallum, maybe I'll just quantify some of the items that Devdatt talked about, and maybe first off, even before I do that, I'd say that everything that occurred here was certainly in line with what our original expectations were. In fact, I think in Q1, we probably did about somewhere between $7 to $8 million better in terms of revenue than what we had originally anticipated, largely due to the timing item that Devdatt referred to, and that really had to do with the fact that we were putting in place a price increase that was gonna go into effect on 1/1 of 2025, and we saw some revenues sort of get pulled forward into our fiscal first quarter as a result. You know, but during the first quarter, particularly impacting, I think, the pen needle category, you know, we talked about distributors placing orders in the fourth quarter of 2024 because of the port strike. That probably impacted our business by about $10 million, and then secondly, another item that impacted us was the ERP implementation in our North American business that occurred in the first quarter of 2024, and we estimate that that resulted in additional revenue in the prior year quarter by about $6 million. So largely those two factors, to a lesser extent, we saw some distributors in China sort of rebalancing some inventory levels, and we estimate probably impacted our business in the first quarter of 2025 by about $3 million. So those three items really drove the pen needle performance, but again, certainly, actually, probably a little bit better than what we originally anticipated coming into the year. You know, as we our implied guidance for the second quarter points to revenue somewhere between $250 to $255 million, and that would essentially indicate that our pen needle performance in the second quarter would be very, very similar to what we saw in the first quarter of this year. So similar performance is expected there. And then as we go into the back half of the year, we would expect then improvements in terms of the pen needle as well as the safety product category. So hopefully, that provides you with a little bit more color regarding some of the drivers and then some of the reasons why I think we think sequentially we're gonna be a little bit better in the half of the year as compared to the first.

Yeah. That's fantastic. I really appreciate the color there. And then just one more. On the GLP-1 pen needle opportunity, any sort of quantifications you can give us around Germany and the progress there, and then would love to hear a bit more progress on the outlook outside of Germany for the same program. Thank you.

Yeah. Hi, Kallum. You know, our progress in Germany sort of continues for our expectations. Obviously, we will follow how Monjaro and Equipment gets adopted in Germany. And what we are striving for over there is making sure that our pen needles do get used for the out-of-pocket prescriptions that are going to be filled in Germany. It's gonna take some time. You know, we're not quantifying, if you will, the revenue from GLP-1. And frankly, as you can imagine, as Monjaro equipment launches in other countries around the world, it is gonna be hard for us to distinguish pen needles used for GLP-1 via Monjaro and Quip pen if they are going to be reimbursed because they're gonna follow our same procurement channels as the pen needles used for diabetes. It's only in markets where the GLP-1s are gonna be out of pocket, and patients might procure a three-month prescription for a GLP-1, where we can actually monitor the number of small packs that are bought. So the point I do wanna make is that while pen needles might be being used for GLP-1 that are administered via Monjaro and Quip pen, we can certainly just, we cannot certainly distinguish between volume that procured through our normal channels, but we can certainly identify the small packs. Now that's gonna take some time. Frankly, I think the bigger opportunity for the use of pen needles for GLP-1 is going to be in the discussions that we are having with generic GLP-1 entrants, where we are certainly working towards being able to co-package our pen needles with those generic GLP-1s. We do think over the long term that that is a bigger opportunity, and those discussions with ten plus potential GLP-1 generic entrants are going very, very well. You know, we certainly anticipate providing more color around this at our Analyst Day planned for May 2025. So I'd request we wait until then to get a little bit more sort of at least the range of what this could mean for us over the next few years.

Thanks, guys.

Thank you. One moment as we move on to our next question. Our next question comes from the line of Marie Thibault with BTIG. Your line is open. Please go ahead.

Hey. Good morning, everyone. This is Sam Huang from Marie. Thanks for taking the questions this morning. Congrats on a nice quarter. I can start on a capital allocation question. Things progressing clearly on the debt pay down initiatives. But I'm wondering if there's a certain leverage ratio where maybe, you know, you become more opportunistic with M&A and, you know, more related to your comments about expanding the product portfolio. I guess wondering if that's more of a near-term opportunity or perhaps medium to longer term?

Yeah. So thanks for the question, Sam. So I think, you know, from our standpoint, I think over this year, certainly, and I think into next year, we're really focused on continuing to try and create, you know, some additional financial flexibility. You know, our net leverage, our last twelve months net leverage as of the end of this quarter is around 3.7 times. You know, now our covenant allows us to go up to 4.75 times. Now, obviously, we wouldn't wanna go anywhere close to that. And I think by the end of this year, assuming that we pay down around $110 million in debt, which we are well on our way to doing, we should be around a three times net levered mark by the end of fiscal 2025. I think as we move then into 2026, it's probably more likely that we will continue to focus on more aggressively, you know, paying down our debt and allowing us to create some additional balance sheet, you know, flexibility. So I think it's probably a little bit more likely that we'll trend, you know, lower than three and somewhere into the twos in terms of net leverage as we get into 2026. So, you know, from an M&A standpoint, obviously M&A is very, very opportunistic. Right? You know, but I think, you know, for us, you know, we only need, you know, an incremental $10 to $15 million, you know, of revenue per year to drive our constant currency revenue growth rates up, you know, by about 1%. So I don't think we need to necessarily do highly transformative M&A in order to create value here for shareholders. But I think in the near term, our focus really is more about continuing to, you know, finalize the separation programs, which will allow us to really keep that free cash flow and use it towards debt repayment.

Really helpful, Jake. I appreciate all the color there. Maybe I can just use my follow-up here on long-term margin progressions and maybe how we should be thinking about any initiatives that you guys have going on in terms of either maintaining or even expanding margins perhaps beyond fiscal 2025.

Sam, with respect to sort of long-term margin progression, I mean, that's certainly something that we'll be discussing in our May 2025 Analyst and Investor Day. So I'm gonna reserve giving ranges for that at this time. But what I will say is that, you know, our priorities around expanding the product portfolio are important to us, and I think, as I said in the script, that comprises of two potential vectors, right, where we manufacture products for companies that already have a commercial presence or frankly distribute products that can be manufactured by others. Both of those, as you can imagine, are gonna have different margin profiles. And so as we work through the opportunities here, we need to net that out against the margin progression that we expect to see in our base business. But those are the puts and takes that we just need to work through, and we'll certainly provide more information during the Analyst Day.

Yeah. And, Sam, maybe just coming back to the quarter and I think our updated, you know, guidance, you know, I think we had, you know, from an earnings standpoint, you know, we ended up, and we alluded to this in our prepared remarks, I think we ended up performing better than our internal expectations by about, you know, by about $0.20 really. And that was really due to sort of two things almost impacting it equally. One, revenue being actually a little bit better in Q1, which is gonna reverse in Q2, and the associated drop through to earnings. But then two, and importantly, I think, you know, our SG&A in the quarter really drove around $0.10 of improvement as compared to our original internal expectations. And we would expect that to stay for the entirety of the year and really allows us, if you will, to sort of absorb the incremental $0.10 headwind that we saw or expect to see because of FX rates, you know, working against us in relation to our original guidance. So, you know, this year is really gonna be, like for the company, it's really gonna be focused on, you know, finishing up and completing the discontinuation of the patch pump program, which the team has done an excellent job, and we're well on track to having that complete by, you know, the first half of the year. It's also gonna be driven, you know, and focused on continuing to more aggressively delever. And then third, it really is about trying to further optimize our cost base and take expenses, you know, out of the system. You know, if you recall when we spun from BD, you know, obviously a much larger organization, and, you know, to a fair amount, you know, there was sort of a lift and shift in terms of how they did things and in terms of how we did things. I think now really there's an opportunity as we go through 2025 and into the next few years to really just look at our cost base and try and find ways to continue to take cost out, and that's what we're doing.

Understood. Thanks for taking the questions and looking forward to the investor day.

Thank you. One moment for our next question. Our next question comes from the line of Ryan Schiller with Wolfe Research. Your line is open. Please go ahead.

Good morning. Thank you for taking the questions. This is Ryan on for Michael Polark. You talked about expanding your product portfolio by leveraging your commercial channel to distribute products from others. Are there specific types of products that come to mind that could fit well into your model, and when might they start layering into your financial model?

Yeah. Good morning, Ryan. The types of products that we would want are those that fit in reasonably cleanly through our commercial channel. And given the breadth of our commercial channel across the world, those products might be different. So I'm gonna give you some examples. In China, for example, we do call on hospitals, so we could add products to the portfolio that our sales team can actually be able to sell into hospitals. In the US, on the other side, as you know, we have a strong presence with retailers and strong payer relationships, so we might look for products that can fit through that channel. And that retail pharmacy channel is present also in several countries in Europe. In Germany and Japan, we call on endocrinologists, and therefore, we might look for products that, you know, are served by that channel. So I think it's going to differ in every market, but I think the unifying theme is going to be some place where or products that can really leverage our commercial strength. You know, we certainly anticipate being able to speak more about that at our upcoming analyst day, where, you know, we're working hard to add these products to our portfolio, and I look forward to providing some examples of that type.

Thank you. And I'm showing no further questions at this time, and I would like to hand the conference back over to Devdatt Kurdikar for closing remarks.

As we close the call, I just want to express my sincere gratitude to my colleagues at Embecta Corp. around the world. Our global team remains focused on executing the priorities that we've laid out. And finally, we look forward to engaging with all of you at our upcoming conferences and at an investor day in late May 2025. We will certainly share more about some of the topics that were discussed. Thank you for calling in and for your interest in our company.

This concludes today's conference call. Thank you for joining us.