Welcome, ladies and gentlemen, to Embecta Corp.'s fiscal Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. 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 Corp.'s Fiscal Fourth 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 website at www.embecta.com. With me today are Devdatt Kurdikar, Embecta's President and Chief Executive Officer, and Jacob P. 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 risk 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 as a substitute for financial measures prepared in accordance with GAAP. 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. We will begin with an overview of Embecta's fiscal year 2025 performance and discuss progress across our strategic priorities. Jacob will then review the financial results for the fourth quarter and full year 2025 and share our preliminary thoughts for fiscal year 2026. 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. During fiscal year 2025, we achieved several key milestones. We made the decision to end our batch pump program and we executed a restructuring plan aimed at enhancing our profitability and free cash flow. We completed the implementation of our own ERP system and operationalized a new distribution network and shared service capabilities in Latin America and India, marking the completion of a major complex multiyear standard program. With this, 100% of our revenue now flows through our systems, and all TSAs and LSAs that we had at spin have been exited. We substantially completed our brand transition efforts in North America, with more than 95% of our US and Canadian revenue now converted to the brand. This was carefully managed to ensure continuity for customers and patients. With this foundation in place, we have now commenced the next phase of the initiative globally. Transition activities have already begun in certain international markets, and we expect to be significantly complete in most regions by the end of calendar year 2026. Together, the completion of these separation and stand-up activities have freed up capacity which we are now devoting to initiatives that we anticipate will help transition the company towards long-term sustainable growth. Supporting this goal, we advanced our GLP-1 strategy meaningfully during fiscal 2025. We are now collaborating with more than 30 pharmaceutical partners to co-package our pen needles with generic GLP-1 therapies. Several of these partners have already signed agreements and placed purchase orders. Our products are included in multiple GLP-1 managed regulatory submissions expected to lead to commercial launches. Our generic GLP-1 partners are anticipating launches in Canada, Brazil, and India during calendar year 2026. While we do not control the timing and content of the…

Thank you, Devdatt, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's fourth quarter financial performance at the gross profit line. GAAP gross profit and margin for 2025 totaled $158.5 million and 60%, respectively. This compared to $173.8 million and 60.7% in the prior year period. While on an adjusted basis, our Q4 2025 adjusted gross profit and margin totaled $159.5 million and 60.6%. This compared to $178.3 million and 61.4% 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 volume and mix and price that Devdatt mentioned earlier, as well as the negative impact of foreign currency translation. These headwinds were partially offset by manufacturing cost improvement programs, the favorable impact of net changes in profit and inventory adjustments, and lower freight costs. Turning to GAAP operating income and margin, during the fourth quarter, they were $56.5 million and 21.4%. This compared to $26.2 million and 9.2% in the prior year period. While on an adjusted basis, our Q4 2025 adjusted operating income and margin totaled $66.7 million and 25.3%. This compared to $61.2 million and 21.1% 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, as well as lower year-over-year SG&A expenses due to the restructuring initiative we announced earlier this year coupled with no TSA expenses within the current year. This was partially offset by lower 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 $26.4 million and $0.45 during 2025, as compared to $14.6 million and $0.25…

Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Marie Yoko Thibault with BTIG. Your line is now open.

Good morning. Thanks for taking the questions. I wanted to start here and see if I could learn a little bit more about the GLP-1 partnership that you have. Can you just give us a little more detail on how many partners you have signed POs with? And anything on timing, how they might be ordering ahead of any approvals that they get on their side, just so we can sort of get a little more detail on how this might impact fiscal year 2026, of course, understanding that it's not being assumed in your revenue guidance.

Yeah. Good morning, Marie. Thanks for the question. So we are in discussions with 30 plus potential GLP-1 entrants. And as you remember, this is all about co-packaging of pen needles. They are moving through various stages of discussions. You can imagine, you know, we go through quality agreements. We talk about MSAs. The orders that they provide, and a handful of them have already provided orders, and we've actually shipped product during 2025. Much of the volume, I would say, is for their own development purposes. As they work out, you know, what data they need beyond the data we supply for their regulatory submissions. Several of them have actually submitted to the regulatory authorities. Now they control the timing and the content of the submissions, and these submissions, we believe, include many of them will include specs that our product satisfies. Now, obviously, timing of commercial quantities is contingent on when they get approval, which one of them get approval, when they get approval. As you might have heard, publicly, generic GLP-1s could be available in calendar year 2026 in China, India, Brazil, and Canada. So there is obviously some uncertainty associated with timing, but overall, we are very, very pleased with the progress that we made in fiscal 2025. I mean, you might remember a year ago, we were just starting discussions, the team has made tremendous progress. And we continue to remain confident in the opportunity for us by 2033. in the assumptions that we had laid out or the estimates that we had laid out during the Analyst Day of this being, you know, over a $100 million opportunity.

And Marie, this is Jake. I'll just jump in regarding guidance. I think the low end of our guidance range assumes really a negligible impact in terms of new revenue streams, mostly associated with GLP-1s. While from a high end of our revenue guidance range, we assume that new revenue streams, again, mostly coming from GLP-1 additional revenue, would contribute positively by about 1%. So we feel, we feel very good about where the, where this is all going. Devdatt mentioned that over the longer term that we feel that this can be at least a $100 million, you know, annual product revenue for Embecta through 2033. And we feel like we're well on our way towards achieving that.

Okay. Thank you for that clarification, Jake, on the guidance as well. I guess I'll ask my follow-up here on China. You referred to it at the beginning, you know, some of the geopolitical tensions. What are you seeing on the ground in China in terms of consumer willingness to buy non-Chinese products? Of course, the product is made in China, but not a Chinese brand, I suppose. So any further updates on how that dynamic is playing out? And thanks for taking the questions.

Yeah, Marie. On that, first, let me just say China in Q4 2025 performed very close or almost exactly in line with our expectations. So, you know, our thoughts when we formulated or revised our FY 2025 guidance incorporated a significant year-over-year decline, you know, partially because of the pressures that you mentioned, partially because of some inventory rebalancing. And Q4 2025 played out exactly as we thought it would. We've certainly taken steps to stabilize the situation, including reorganizing our sales team, we've actually introduced a more price-competitive pen needle which also has a lower manufacturing cost. Our guidance for 2026 does incorporate some expectations around headwind in 2026 compared to 2025. But our current expectation is that it's gonna be much less as compared to what we experienced in 2025. You know, as we all read in the press, I mean, the situation continues to evolve. But certainly, we are focused on controlling what we can control to stabilize the situation there as quickly as possible. Maybe just one final comment. Over the long term, you know, we still continue to believe that this is gonna be an important market for us. The market itself is growing mid-single digits. As you know, we have strong commercial and manufacturing infrastructure in China. You've heard us refer to the development of a market-appropriate pen needle. In fact, that pen needle is being developed by our team in China and I'm quite hopeful that it will serve a segment in China that we don't serve today. As well as you asked about GLP-1s earlier. You know, there are generic GLP-1 companies in China that have global aspirations that obviously we wanna serve as well. So over the long term, we still think it's gonna be an important market for us. And we'll find a way to weather through the evolving landscape over there.

Thank you. Our next question comes from the line of Michael K. Polark with Wolfe Research. Your line is now open.

Hi. Good morning. Thank you for taking the questions. Two smaller ones for me. I'm interested in the cannula comments. You talked about increased costs there, and an effort to source alternate, alternative suppliers. So maybe can you just unpack that for us a little bit? Why are the costs up? And what does the opportunity set look like to find other sources to mitigate that creep? Thank you.

Yeah. Good morning, Mike. Maybe I'll kick us off just as a reminder. So the entire supply of cannulas that we get is from our previous parent BD. And we have a cannula agreement with them to supply those cannulas that goes until 2032. So it's sole source from BD right now. And you can imagine, that we do want to have an alternate supplier for cannula. Our team has been working on this for the last couple of years. We've identified a couple of alternate cannula suppliers, and the team has made significant progress, including running some trials with alternate cannulas and doing some development work. So you know, I feel confident that certainly, you know, we have our current supply of cannula to 2032. But the team is making remarkable progress, and I feel reasonably confident that we are gonna have at least one alternate supplier here qualified certainly well before our current cannula agreement runs out. With that, obviously, that allows us, you know, an alternate supply with a different cost profile. Because since we became independent, the increase in cannula cost to us has been a significant contributor to the pressure we faced on gross margin. Jake, anything you'd like to add?

Yeah. Devdatt, so just to maybe add a little bit more, you know, Devdatt had mentioned sort of what the margin profile of the company sort of looked like at the gross margin line kind of pre-spin as to sort of where we were during say 2025 and exiting 2025. And pre-spin, gross margins were sort of or right at spin, right around, let's call it, 67%. This year for 2025, our adjusted gross finished just under 64%. And really, Mike, the entirety of the decline over those years really came down to just increased cannula costs. It really is important for us to find an alternate provider, both from a risk mitigation standpoint and you never wanna be beholden to one sole source. And then also to drive some price decreases in the future as well, which we would certainly hope to do. In terms of our fiscal 2026 guidance in relation to 2025, we talked about our adjusted operating margins being down about 180 basis points at the midpoint compared to 2025 levels. About half of that is in the gross margin line entirely due to increased cannula costs, and the other half of that is just increases in terms of R&D expense as we, you know, need to make some investments in order to come to market with an alternate cannula provider as well as some of those market-appropriate low-cost products for pen needles and syringes to service some of the emerging markets.

Helpful color. For the follow-up, I wanted to ask on one of the comments about the fourth quarter performance. I heard, price unfavorable year on year in the US, $7 million. Mention of milestone payments to a large US pharmacy customer. I just wanna make sure I understand what that is, what you're saying there. The word milestone specifically tripped me up. So if you can add any color on that dynamic, I'd appreciate it. Thank you.

Yeah. Mike, I'm happy to. Obviously, I won't talk about this specific contract, but you know, our contracts with the US change, you know, there is a rebate level. Right? There are sometimes marketing spend items that we contribute to marketing of our products. And finally, on achievement of certain volume levels typically, there is an additional payment, and we often refer to them as milestone payments. At the end of the day, it all comes down to price. But depending upon the timing of the payments, it can lead to, you know, year-over-year unfavorability or favorability during the course of a quarter.

Thank you. Our next question comes from the line of Anthony Charles Petrone with Mizuho Americas. Your line is now open.

Thanks, and good morning, everyone. Happy early Thanksgiving here to everyone in the team's family. Maybe start on GLP-1 and the generic contracting phase. I'm wondering, Devdatt, and or Jake, if you could talk a little bit about how those contracts are gonna be structured here. So typically, when we have, you know, drug-device combination solutions, you're in the clinical phase. But if you get to market, you know, essentially get written into the drug master file and the instructions for use, and that can be a multiyear contract. So how does contracting work with the generic GLP-1 providers in the clinical development phase, and what will those look like once we get with success to a commercial phase? How long will they be? Will there be minimum quantities baked in? How do the economics work over, let's say, a medium-term contract? Then I'll have a couple of follow-ups. Thanks.

Yeah. Anthony, so you know, I don't wanna get too far ahead of myself with respect to commercial quantities and commercial contracts until, you know, some of these generic manufacturers get approved. But let me at least provide additional color. Right? So as we go through the contracting phase, you can imagine the early discussions and the initial discussions. We get NDAs in place. We get qualified as a vendor in our system that includes providing some data on our product from a quality standpoint, from a regulatory standpoint. We have quality agreements in place. Then we start talking about contracting, get a contract complete. But the commercial contract, I think we'll talk about once some of these drugs are commercial. The quantities that they are ordering now are really to do their own development work. And you can imagine, the way this is all going to play out is we will be supplying bulk pen needles to these manufacturers. They are going to co-package our pen needles with their pen injector. And then they will be the ones to market that combined product to patients. They also, as I think you implied, are going to be responsible for the regulatory submission for the whole package. That includes the drug and the device. Certainly, we'll help with providing data but they are responsible for that submission and our pen needle will get specked in. Now, obviously, once you are part of that combination, that imparts a level of stickiness to the product. But beyond that, since they are going to be doing the co-packaging, you know, the co-packaging lines will be configured, if you will, to be accepting of our pen needles. And that provides some additional stickiness, if you will, to our product as part of that combined package.…

No. Very helpful. And provide some color as we think about the, you know, next few years ahead. And then the follow-up here will just be on capital deployment. You mentioned a little bit of CapEx here, but the leverage ratios are coming down. You know, the company in the past has talked about potentially forging additional partnerships perhaps outside of GLP-1 or being a little bit more focused a little bit on tuck-in M&A. So just a little bit to take the temperature on capital deployment outside of GLP-1 and the CapEx needs immediately. Do you see any tuck-in M&A opportunities over the next couple of years? Thanks.

Yeah. Thanks, Anthony. First, let me just say I'm very pleased with how our profitability metrics ended up. With respect to our guidance, as you saw, we sort of exceeded the top end of our gross margin, adjusted EBITDA margin, adjusted operating margin, and that really allowed us to pay down significantly more debt in 2025 and brought our net leverage down, as you pointed out, to 2.9. Our capital allocation plan, you know, remains unchanged from what I said on investor day. You know, we think $600 million in free cash flow over the two years. Most of that will go to debt pay down. We, you know, pay a dividend at this point. We are not considering changing that. And our highest priority still remains paying down debt. But as our leverage comes down, certainly, it's already below three and we drive it down further in 2026. We are very open to organic and inorganic investments. And so M&A by obviously, its very nature, is very opportunistic. We will continue to, you know, to be alert and aware if such an opportunity arises. And we feel that it is gonna be value accretive to our company and help transition the company towards long-term sustainable growth. We certainly will be ready to act on it.

Thank you again.

Thank you. Our next question comes from the line of Gracia Leydon Mahoney with Bank of America Securities. Your line is now open.

Hey. This is Gracia on for Travis. Thanks for taking the questions. I just wanted to ask a follow-up on in your prepared remarks, you mentioned selling certain intellectual properties of $10 million associated with the patch pump subsequent to year-end. So just wondering if you could add any more details around this and what's baked into your assumptions moving forward that is associated with this?

Yeah. Gracia, thanks for the question. Yeah. We did sell certain intellectual property and associated assets to a buyer for $10 million. We are pleased to be able to monetize these assets from the patch pump program that we discontinued about a year ago. I'll let Jake comment on. This is a Q1 event really for 2026 for us. But I'll let Jake comment on how you should expect to see that run through the financials.

Yeah. So, obviously, Gracia, it'll obviously be an increase to cash from a guidance standpoint. This isn't going to impact our adjusted results that we provided guidance metrics for today. There'll be a gain most likely on the sale of these assets. And as a result of that, we're just going to normalize that for our adjusted operating margins or earnings per share.

Great. Thank you. And then maybe just one follow-up on the pharmacy closures that you saw earlier this year, and then you had the stocking dynamic in for July 4 and ahead of the brand transition. So a lot of one-time benefits. Can you just speak to any more details on how you saw that play out in '25? And maybe if there's any sort of visibility on that into 2026 on how the pharmacy volumes are moving forward. Thanks.

Yeah. So, you know, as you pointed out, earlier in the year, we had commented on, you know, plans to closure, store closures at a major US pharmacy chain. We don't sell directly to that pharmacy chain. We sell to a third-party distributor that also serves other customers. But I think as I said at that point, you know, our product is medically necessary. So what happens is if a chain if a store closes, patients will shift to other chains or the sources to procure product. And as expected, we saw strength at some other chain outlets. And we incorporated our thoughts around, you know, what the impact of that closures will be into our 2026 guidance. You know, in the guidance that Jake went through, he talked about, you know, a 100 basis point range in the volume assumptions. That includes our thoughts on what might happen with the US pharmacy volume as well. You know, maybe one just final point on how 2025 played out. You know, we had started the year with the original guidance. And actually, as the year played out, we did see what I'll say China year-over-year headwinds that were not incorporated in our original guidance. But actually, the year played out including the impact of store closures with us being within the range of our original guidance had it not been for China. So I think the store closures are playing out as we thought they would, patients will move to other outlets and will see strength, and we incorporated our thoughts in the 2026 guidance. Thanks, Gracia.

Thank you so much.

Thank you. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Devdatt Kurdikar for closing remarks.

As we close the call, I just want to express my sincere gratitude to all my colleagues at the company around the world. Fiscal 2025 represented a meaningful milestone as we completed the first phase of our strategic roadmap, standing up our core systems and infrastructure needed for the next stage of growth. And despite a complex trade and geopolitical backdrop, we continue to perform well and strengthen our operational foundation. We enter fiscal 2026 confident in the direction of the company. Our focus remains clear: maintaining leadership in our core categories, advancing our innovation programs, and delivering strong profitability and cash flow in order to execute on the commitments we outlined at our 2025 analyst and investor day. Thank you for calling in for your interest in Embecta, and happy Thanksgiving all.

This concludes today's conference. Thank you for your participation. You may now disconnect.