Welcome, ladies and gentlemen, to Embecta Corp.'s Fiscal Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded, and a replay will be available on the company's website following the call. I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Mr. Khandelwal, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Embecta's Fiscal Third 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 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. 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 2025 as well as an overview of the progress that has been made concerning our strategic priorities. Jake will then review our financial results for the fiscal third quarter of 2025 as well as discuss the updated financial guidance for the 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, Dev Kurdikar.

Good morning, and thank you for taking the time to join us. As we detailed during our recently conducted Analyst and Investor Day event, we are currently in the second phase of our journey that is focused on progressing initiatives intended to position Embecta for long-term growth. Our priorities in this phase are to continue strengthening our core business, expanding our product portfolio and increasing our financial flexibility. Starting with the core. We completed the ERP shared services and distribution network implementation in India, which had been the only remaining market operating on BD systems. This milestone means that 100% of our revenue is now flowing through Embecta's own systems and marks the successful conclusion of a multiyear complex separation program. In addition, the transition from BD to Embecta branded products in the U.S. and Canada has significantly advanced with greater than 90% of our North American revenue base having been changed over to Embecta branded product. Consistent with our ERP implementation approach, we are executing the brand transition project in a phased manner to minimize risk. The transition began in North America in 2025 and in line with our plan, is expected to extend to international markets in 2026. On the portfolio expansion front, I'm pleased to share that we continue to make meaningful progress in our efforts aimed at positioning the utilization of our pen needles with GLP-1 therapies delivered via pen injectors. As we highlighted at our recent Analyst and Investor Day, we are actively collaborating with over 30 pharmaceutical companies to co-package our pen needles with their generic GLP-1 therapies. Several of these companies have already signed agreements with us and placed purchase orders for our pen needles. Our products are already part of multiple generic GLP-1 regulatory submissions with potential commercialization beginning as early as…

Thank you, Dev, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's third quarter financial performance at the gross profit line. GAAP gross profit and margin for the third quarter of fiscal 2025 totaled $197.1 million and 66.7%, respectively. This compared to $190.1 million and 69.8% in the prior-year period. While on an adjusted basis, our Q3 2025 adjusted gross profit and margin totaled $198.6 million and 67.2%. This compared to $190.3 million and 69.8% in the prior- year period. The year-over-year decline in adjusted gross margin was driven by the impact of net changes in profit and inventory adjustments. As during the third quarter of 2024, we incurred a large favorable profit and inventory adjustment resulting from the buildup of inventory associated with the various 2024 ERP implementations and the ultimate sale of that product into the market. During the third quarter of 2025, while profit and inventory did impact us positively, it was not to the same extent as it was in the prior year period. Turning to GAAP operating income and margin. During the third quarter, they were $94 million and 31.8%. This compared to $55.9 million and 20.5% in the prior-year period. While on an adjusted basis, our Q3 2025 adjusted operating income and margin totaled $109.1 million and 36.9%. This compared to $83.3 million and 30.6% in the prior-year period. The year-over-year increase in adjusted operating income is primarily due to lower R&D expenses associated with the discontinuation of our insulin patch pump program and higher revenue and gross profit as compared to the prior-year period. Turning to the bottom line. GAAP net income and earnings per diluted share were $45.5 million and $0.78 during the third quarter of fiscal 2025 as compared to…

[Operator Instructions] Our first question comes from the line of Marie Thibault from BTIG.

Congrats on another very strong quarter. I wanted to ask one here, I guess, Jake, for you on the guidance. Certainly, I heard that some of the timing benefits you saw in fiscal third would be reversing in fiscal fourth. But I think you also called out equal contribution from pricing benefits. It wasn't so clear to me that those would be reversing. Can you help me to think about how we should be modeling fiscal fourth quarter when it comes to revenue and some of those pricing dynamics?

Yes. Sure, Marie. Thanks for the question. So to start off, I think we're really, really pleased with the third quarter results. I think in comparison to our own internal expectations, we did better by approximately $14 million or so in terms of revenue contribution. Again, as we said in our prepared remarks, that was all entirely due to the U.S., and it was sort of equally split between some of the pricing items that you were referring to, coupled with improved volumes due to distributors buying in advance of the July 4 holiday. So if you were to think about the implied midpoint, if you will, of our fourth quarter revenue, we're essentially going from about $295 million in revenue in Q3, down to a midpoint of around $265 million in Q4. And really, that's driven by the fact that -- we don't expect those distributor orders to happen in the fourth quarter of the year. And from the third quarter to the fourth quarter, that's driving about half of the potential sequential decline in revenue. And the U.S. rebate reserve adjustments are not necessarily expected to also reoccur in the fourth quarter. That positively impacted our third quarter results by about $7 million. We also expect there to be around a $3 million incremental headwind from FX going from Q3 to Q4. And then you heard us talk about China in the fourth quarter. Our estimates are there's certainly been an impact, I would say, from like a geopolitical standpoint. And right now, we're projecting that China revenue in the fourth quarter is going to be slightly lower than the China revenue that we're seeing in the third quarter. So it really comes down to those dynamics.

Okay. That's helpful, Jake. If I can also ask a similar question on margins. I'm working through my model here, and it just looks like we'd have to bake in a pretty sharp decline in gross margins, operating margins, EBITDA to get to the, I guess, really the high end of the range for the guide. What are some of the dynamics there? Of course, I understand revenue is going to be a bit lower than it was this quarter, but what else should we be thinking about?

Yes. Marie, again, I think coming back to first, the results in the third quarter, again, we significantly exceeded our internal estimates, very, very strong performance in Q3, in part aided by the fact that we did have a benefit from profit and inventory that impacted our results. So if we think about whether it's the revenue profile going from kind of Q3 to Q4 or the gross or operating margin profile from Q3 to Q4, this isn't something that is necessarily unusual for us. We have seen over the last several years step downs from kind of Q3 margins, whether it's gross margins or operating margins to Q4. So it is more typical for us for that to occur. But the midpoint of our operating margin range essentially calls for operating margins to be around 24% in the fourth quarter of the year. And the step down is largely due to our thoughts on gross margin, largely due to the fact that revenue is expected to come down. So we're not necessarily expecting those same pricing benefits. We're not necessarily expecting right now to see those same benefits in terms of distributor orders that positively impacted Q3 results. So from that perspective, we would expect the revenue impact to our margins to drive around a 400-basis-point sequential decline. And then the next big driver is profit in inventory. So PII was a benefit to our third quarter margins. It's actually expected to be a slight expense in the fourth quarter, and that is driving around or is expected to drive around a 300-basis-point sequential move from Q3 to Q4. And then lastly, in terms of OpEx, typically, in SG&A, we do see somewhat of a step-up from Q3 to Q4 in terms of SG&A expense, and that's largely due to the timing of some commercial spending and some trade shows that typically occur in the fourth quarter of any given year. And then lastly, we do expect there to be a slight uptick in terms of R&D expense. So we're making a lot of very, very good progress in terms of some of the value creation drivers that we outlined at the recent Analyst and Investor Day. And we do intend to spend behind some of those things. So for instance, we talked about developing a market appropriate, more low-cost pen needle and syringe product lines. We're going to be spending behind that. We also talked about making inroads in terms of becoming more cannula independent from our former parent, and we're going to be spending behind that as well as we move that project ahead. And then lastly, we're making a lot of really, really good progress in terms of working with well over 30 different generic pharmaceutical companies as it relates to the use of our pen needles with their GLP-1 products. And we expect to see an uptick in terms of R&D spending associated with that as well.

And maybe, Marie, just to sort of emphasize something that Jake said, our business results may fluctuate a bit quarter-to-quarter, but over a longer period of time, they tend to be incredibly stable, right? So the implied quarter 4 margins are fairly consistent with quarter 4 margins you have seen in prior years. So I just wanted to emphasize that point as well.

Okay. Very helpful. Lots of great detail. If I can sneak in one last quick one, really sort of on capital allocation. Congrats on hitting your debt paydown goal ahead of time. I did want to ask about your openness or interest in possible share repurchasing. Obviously, I understand debt paydown remains a priority. But given what we see as a very attractive valuation for your stock, wondered about your thoughts on share buybacks.

Yes. Marie, our thoughts on capital allocation haven't changed since what we laid out at our Investor Day in May. Paying down debt is a priority and then essentially making the investments necessary to transition the company back to growth remains a key priority. So at this point, those are the things -- those are the priorities we are focused on, Marie.

[Operator Instructions] Our next question comes from the line of Anthony Petrone from Mizuho Americas.

Congratulations on the quarter here. Maybe I'll start with the competitive bidding proposal from CMS. Certainly, it encompasses CGMs and pumps. It also talks about other accessories around those 2 solutions. I was just wondering if that goes through potentially what could be the ancillary tailwind, I would imagine, to the pen needle business? And then I'll have a couple of follow-ups.

Yes. Anthony, I think your hypothesis is probably the right one, but obviously, it's too early to tell what impact CMS, the competitive bidding proposal is going to have on pump adoption rates going forward. For us, as you realize that we are largely insulated just given the nature of the portfolio and the channels through which we operate. And obviously, we'll continue to monitor developments. And as it develops, if we feel like it's going to have a positive impact on our business, we'll certainly update you.

No, that's helpful. And then maybe shifting gears to China. There's been obviously updates on the tariff front. Maybe, Jake, if you can provide a little bit with updated rates out there, how that potentially could flow through the P&L. But also on the demand side, I know you're local for local there, but I think there's also some inventory that comes out of China that goes elsewhere. So maybe just the geopolitical backdrop, how it flows in from a tariff standpoint with the latest rates? And is there any demand impact that you're seeing? Congrats on the quarter.

Yes. Maybe, Anthony, I'll start off and then Jake can augment as necessary. Look, on the tariff front, as you know, the tariff rates between U.S. and China were reduced while negotiations were underway for a new agreement. That agreement is supposed to come due somewhere in the next week, I think, August 12. So since the last update, since our last call to now, when rates are around 10%. So at this point for fiscal 2025, we expect a very minimal incremental tariff impact across our business, U.S. to China, China to U.S. The product that we make in China, very little of that comes to the U.S. And because we are a product focused on diabetes, we get certain exemptions under the Nairobi Protocol. So we expect that those exemptions will remain. The rest of the product that's made at our plant in China is either consumed locally in China or mostly in Asian markets. So there, we don't see much of a tariff impact. And then the final point I'll make, as you asked on the demand side. So as you know, it's a fairly uncertain environment right now. We are certainly seeing a preference towards local Chinese brands as the U.S.-China relationship evolves. So we are continuing to monitor it. And we took the latest thoughts we had on this when we updated the guidance earlier this morning.

[Operator Instructions] Our next question comes from the line of Travis Steed from Bank of America Securities.

This is Gracia Mahoney on for Travis. Congrats on the nice quarter. My first one, I wanted to ask about free cash flow. So it was higher in the quarter, and you called out that $26 million trade receivables benefit, but I was just wondering if there's continuing underlying strength in that and any way to potentially contribute to some upside for that $600 million free cash flow LRP target you called out at your Investor Day in May?

Yes. Thanks for the question. I mean free cash flow was certainly a real positive for the quarter. And I think we've been saying for quite some time that this business is really a highly profitable cash flow generative business. It's just that up until recently, because we've had to use so much cash associated with standup and separation activities, the true underlying free cash flow ability of the company was sort of masked. And now that we're complete with separation activities, we're starting to see and it's becoming more apparent externally what the free cash flow capabilities of Embecta are. So yes, we generated around $81 million of free cash flow this quarter. Even if you were to sort of normalize for the factoring, we were around $55 million or so of free cash flow generation. If you were to just simply annualize that, you get to a little over $200 million in terms of potential annual free cash flow. So we are well on our way to being able to achieve the targets that we laid out at our Analyst Day in terms of free cash flow generation through 2028. And I think it's really going to position us well to be able to continue to delever, get the balance sheet at a point where we do have that additional financial flexibility to be able to do organic and probably importantly, inorganic investments to really get the top line moving in a much more sustainable positive direction.

Great. And then just one more. On the store closures that you called out in Q2 that are pressure in second half of this year. Just wondering if you could walk through how you're seeing those dynamics play out in the second half and any visibility maybe into a broader trend into 2026?

Yes. Thanks for the question. Look, it's only been 1 quarter really. So it's too early to point to specific trends, but let me just say that it is something we are following closely. And we commented earlier that we are seeing strength in our U.S. performance, and it's pretty broad-based. It is something that is potentially a result of patients that are facing their local pharmacy store closed, go to some other pharmacies to continue to procure the product. So it's something we'll watch closely. It is potentially contributing to our U.S. results, but it's too early to call it that. We'll certainly update as we get more information on this.

[Operator Instructions] Our next question comes from the line of Michael Polark from Wolfe Research.

I wanted to ask the China follow-up question. So Dev, you alluded to it there in your response to Anthony, but it sounds like tariff- driven global tensions in China might be persuading the local markets to preference local manufacturers and brands. Am I reading this correct? I just want to understand -- I'm not a China analyst by any stretch. I want to understand what you mean by the kind of geopolitical kind of environment. And it sounds like in the guidance, you're expecting that China revenue down Q-over-Q. So double- click on that one more time, please. What are you really saying?

Yes. So what we did, Mike, for the guidance that we gave out today, we incorporated our thoughts and sort of revised distributor demand in Q4. And the reason for that was really twofold. Our expectations around in the -- or amidst the challenging geopolitical and trade environment, maybe a preference towards local Chinese brands and increased competitiveness, but also distributors potentially rebalancing their inventory towards the end of our fiscal year. By way of background, I mean the way our business flows in China is we sell to 3 or 4 national distributors that then sell to 200-plus subdistributors. And importantly, the national distributors that we sell to prepay for our products. So that gives us a little bit more visibility into what their ordering patterns are likely to be. Now I'm pleased to say that in spite of this potential softness in China, our U.S. business has been performing. And so we sort of netted those out as we considered our thoughts on guidance for this year. It's a fast-moving environment, as you know, Mike. So it's something that we are following closely. Our China team is commercially extremely strong. As you know, we have a manufacturing base there. So -- and we continue to be sort of optimistic with respect to our long-term outlook on China because the volume growth over there tends to be in the mid-single digits.

Helpful, Dev. I have one more as a follow-up back to the U.S. market, maybe a little out of bounds here. But on the GLP-1 topic, the compounders have been remarkably effective at growing in this market. And often, they're selling vials of compounded GLP-1 medication with syringes. And my question for you is, are you positively exposed to that syringe demand? Or is your product not fit that use case?

We are positively exposed, right? In certain markets, we are only indicated for insulin delivery. So obviously, we stick to our indications when it comes to marketing. I think when we think about GLP, Mike, more broadly, it is really the generic GLP-1 trends that we follow more closely because we do expect -- and you might have heard of this or read about this from certain drug companies that have had earnings calls in recent weeks about their bullishness in terms of generic GLP-1 adoption in various markets beginning as early as 2026 in Canada and potentially India and Brazil as well. So really, from a business standpoint, I think that is going to be far more impactful for us than any potential syringe uplift from compounders using our syringes or patients using our syringes.

Understood. That is helpful. Just one clarification there, so I fully -- I hear the pen needle opportunity loud and clear on the syringe side. So you don't have the indication, it's insulin indicated, so you can't market it. But does the syringe would work in this use case if a patient were to try that?

Yes. I mean it is the syringe. It would work. No question about it, right? But it's marked for insulin. It's been indicated for insulin. Now in certain markets outside the U.S., actually, regulatory bodies have taken the view that it's okay to use our syringes for GLP-1 delivery, but I'm not aware of that actually happening in the U.S.

Thank you. At this time, I would now like to turn the conference back over to Dev for closing remarks.

Thank you all for joining us. Let me just emphasize that we are very pleased with our performance in Q3 and really excited about the second phase of our journey as we progress on the various initiatives we laid out during Investor Day to transition the company back to growth, particularly pleased with the strong free cash flow generation capabilities of the company and achieving our debt paydown target. And as you heard us say, brand transition is well underway and our multiyear ERP program has been completed. And I really wanted to thank and provide and send my sincere gratitude to all my colleagues at Embecta around the world. All of this work obviously requires significant dedication and effort by our team. And I'm very grateful for how they are executing even as uncertainty exists in the geopolitical and global trade environment. With that, thank you for calling in and for your interest in Embecta.

This concludes today's conference call. Thank you for participating. You may now disconnect.