Embecta Corp.

Welcome, ladies and gentlemen, to the second quarter of fiscal year 2022 earnings conference call for Embed to Court. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded and that the recording will be available on the company's website for replay shortly. During the call, the company will make more forward-looking statements, and it is possible actual results could differ from management's expectations. Risk, uncertainties, and other factors that could cause such differences can be found in the company's earnings release and latest SEC filings, including the information statement dated February 11, 2022, filed as Exhibit 99.1 to the company's current report on Form 8 and Form 10 . Your caution not to place undue reliance upon any forward-looking statements which speak only as of the date made. Although it may voluntarily do so from time to time, the company undertakes no commitment to update or revise the forward-looking statements whether as a result of new information, future events, or otherwise, except as required by applicable securities laws. Management will also discuss non-GAAP financial measures regarding our performance. Reconciliations to GAAP measures, including the details of purchase accounting and other adjustments, can be found in our earnings release and financial schedules and the appendix of the investor relations presentation. Unless otherwise specified, all comparisons will be on a year-over-year basis versus the relevant period. Revenue percent changes are on an FX neutral basis unless otherwise noted. When management refers to any given period, they are referring to the fiscal period unless specifically noted as a calendar period. The earnings press release, slides to accompany today's call, and webcast replay details are available in the investor relations section of the company's website, www.invecta.com. I would now like to turn the call over to Mr. Dev Krudekar, MBECTA's president and chief executive officer. Please go ahead, sir.

Thank you, Shannon, and welcome everyone to MBECTA's second quarter of fiscal year 2022 earnings call, which also marks our first quarterly earnings call as a newly public company. My name is Dev Krudekar. I'm the president and CEO of MBECTA, and I'm joined on the call today by Jake Elguiz, MBECTA's chief financial officer. As you know, we successfully executed the spinoff from Beckton Dickinson on April 1st, just about six weeks ago. Being able to ring the closing bell at the NASDAQ on day one was a motivating and uplifting day for our global team of 2,000 employees who are dedicated to our mission of developing and providing solutions for people with diabetes. I would like to thank all those who worked tirelessly for almost a year to ensure that the spin was executed smoothly. including all our formal colleagues at Becton Dickinson. While we are now an independent company, we have a series of transition services agreements or TSAs with Becton Dickinson that we are now operating under. We have begun the work of recruiting people, implementing processes, and setting up the systems that we will need to have in place before we exit the TSAs. In addition, our team continues to work tirelessly to overcome the multiple challenges that currently exist globally, including inflationary pressures, supply chain disruptions, COVID-19 restrictions, and geopolitical uncertainties. Throughout all these challenges, our focus remains on ensuring that people with diabetes that use our products continue to have access to them. Here is what we plan to cover during our prepared remarks this morning. As this is MBECTA's first quarterly earnings call as a public company, we thought it would be helpful to spend a few minutes describing our company's history, our business, and our competitive strengths as a diabetes injection devices company. After my opening remarks, Jake will provide you with a more in-depth review of the financial results for the second quarter and first six months of fiscal 2022, as well as our financial guidance which we introduced in our earnings press release issued earlier today. I will then provide some thoughts on why we believe we've emerged from our spin in a strong, stable position with global growth opportunities. We will then open up the call for questions. Slide five, please. Let me first start with who we are. Quite simply, we are an organization with a truly unique opportunity to create a preeminent diabetes-focused company in the world. Our mission is to develop and provide solutions that make life better for people with diabetes. That is our entire focus. We've built an incredible leadership team to advance our vision of empowering people to live a life unlimited by diabetes. Jake and I joined this business from outside of BD and have significant experience in the medical device industry. Our global team of 2,000 employees are excited about what we can do with this business for people with diabetes, for our customers, and for our shareholders. I'm thrilled to have this opportunity, and I know our global team feels the same way as well. Slide six, please. For Spin, we believe we have emerged as an independent company with some enduring strengths. We are a trusted leader with best-in-class products and unmatched capabilities. Strengths we have developed after making these devices for almost 100 years. We believe we have best-in-class products and brands across our portfolio in all geographies. As a reminder, insulin was first used to treat diabetes in 1922, and we introduced the first specialized insulin syringe in 1924. Since then, we have continued to earn a reputation for quality and reliability that we believe is unrivaled in the marketplace. In preparation for the separation from BD, we've taken care to ensure that our new name, Embecta, and logo retain a linkage to the BD brand, and have decided to keep the names of our products unchanged. As we transition to the Embecta brand over the next couple of years, we will be careful to ensure that our brand recognition is maintained. In addition to the history, reputation, and brand strengths that I just discussed, our leadership is based on our core strengths where our scale, quality, and efficiency create competitive advantages. We have unmatched manufacturing, distribution, and sales capabilities. We are the number one producer of injection devices. We produce almost 8 billion units a year in three facilities around the world, and we distribute them to over 100 countries where we estimate they're used by 30 million people annually. Our commercial efforts globally are supported by approximately 600 of our team members. Taken together, this extensive distribution capability, along with our sales infrastructure, provides a significant ability to reach people with diabetes around the world. Furthermore, we are especially proud of the fact that we have strong presence and infrastructure in emerging markets. More than half of our 600 commercially focused employees are in emerging markets, which is where we expect the vast majority of the growth in the number of people with diabetes to occur going forward. These trends have been developed and enhanced over many decades, and they provide a strong foundation for our business. Slide seven, please. We believe that Embecta has begun its life as a public company in a position of strength. Specifically, we have a strong core business, we are in an expanding category, and the spin has created immediate benefits for our organization. Looking further ahead, We have opportunities for growth, and our stable core provides a solid foundation for us to seek out and realize these new growth opportunities. Now let me walk you through each of these reasons in a bit more depth. First, our core business of injection devices is strong. We have been making and selling insulin injection devices for almost 100 years. Our global manufacturing infrastructure is unmatched. and we have a geographically diverse sales and distribution network, as I noted earlier. Second, we participate in a large and expanding disease area that continues to have unmet needs. We are a pure play diabetes company, one of a handful, that provides products for the treatment of a chronic condition. Third, post-spin, we have a compelling financial profile with the flexibility to invest for growth. As a newly independent public company, We continue to attract talent and have the opportunity to create a streamlined operating model that will provide enhanced agility and drive decision-making closer to our customers. Finally, we are well positioned to identify and drive opportunities for growth. These include investing in commercial initiatives, a development program with the potential to enter into the infusion segment, as well as seeking M&A and partnership opportunities. This is why we believe that our company is uniquely positioned. We have a strong, stable core business upon which stood opportunities to drive growth in a market that is large, growing, and with unmet needs. Slide eight, please. Here are our strategic and operating highlights during the second quarter and first half of 2022. The company successfully completed the planned spinoff from BD on April 1st, 2022, giving Empecta the strategic, operational, and financial independence, and the opportunity to optimize its product portfolio and achieve more efficient resource and capital allocation to address the significant unmet need for chronic diabetes care. The spinoff occurred by means of a pro-rata distribution of all of Empecta's issued and outstanding shares of common stock. On the basis of one share of Empecta common stock for every five shares of BD common stock, held as of the close of business on March 22, 2022, the record date for the distribution. The distribution qualified as tax-free to BD and its shareholders for U.S. federal income tax purposes. As of the spin-off date, the diabetes care business was completely transferred to Embecta. Upon completion of the distribution, Embecta became an independent publicly traded company and BD retained no ownership interest. Regular weight trading of MBECTA common stock began on the spin-off date of April 1st under the ticker symbol EMBC. In connection with the spin-off, BD and MBECTA entered into various agreements to effect the spin-off and provide a framework for the relationship between BD and MBECTA after the spin-off, including a separation and distribution agreement, a transition services agreement, manufacturing and supply agreements, reverse manufacturing and supply agreements, an employee matters agreement, a tax matters agreement, a lease agreement, and certain other commercial agreements. We are highly focused on creating a solid foundation for sustainable growth going forward. We already have an established presence in the injection space. but we are focused on innovation and driving improved outcomes and the reduction of complications for those people who live with diabetes. As such, and as discussed in our pre-spin investor presentation, we continue to advance the development of an insulin patch pump specifically designed for people with type 2 diabetes. Success there will expand our total addressable market significantly and increase our long-term organic growth rate. We are proud to say that the Type 2 closed-loop insulin delivery system utilizing this proprietary patch pump is being developed under the Breakthrough Device Program of the US FDA. This offers us an opportunity to interact with the FDA's experts to efficiently address topics as they arise during the premarket review phase. This has allowed us to have multiple discussions with the FDA and receive feedback even during the pandemic period. The breakthrough device program will also allow us a prioritized review of our submission when made. Over the course of 2022, our team has faced unprecedented global supply chain disruptions, inflationary pressures, continuing COVID-19 restrictions, and geopolitical uncertainties. We are proud of our team's ability to deliver strong executions despite the challenging operating environment. As has been widely reported in the press, these headwinds are impacting the financial results of companies doing business around the world. Empecta, unfortunately, has not been immune to these either. While we are continuing to mitigate the impact of COVID-19 restrictions in some markets that are impacting operations, inflationary pressures on raw materials shipping costs and delays, and fluctuations in foreign currency exchange rates continue to impact our financial results. The scale and scope of our operations, along with the long history of working with our suppliers, have allowed us to maintain continuity of supply and minimize customer and patient disruption. With that, let me turn it over to Jake to discuss our Q2 results and our expectations for the second half of the year. Jake?

Thank you, Deb, and good morning, everyone. It is my pleasure to have the opportunity to speak with you today about IMBECTA, as during the next several years, we believe that we have a truly unique opportunity to create the preeminent diabetes-focused company in the world. Before I discuss the financial results for the second quarter of 2022, I would like to provide some background information and highlight a few items regarding the presentation of financial results for the second quarter and first half of fiscal years 2021 and 2022. First, INVECTA has a September 30th year end. So the financial results for INVECTA's fiscal second quarter and first half are for the three and six months ended March 31st. Second, the Q2 and first half of fiscal years 2021 and 2022 results are based on carve out accounting principles. derived from the unaudited interim condensed consolidated financial statements and accounting records of Beck and Dickinson. These financial statements reflect the historical results of operations, financial position, and cash flows of BD's diabetes care business as they were historically managed in conformity with U.S. generally accepted accounting principles. In addition, These financial statements include general corporate expenses of VD and shared segment expenses for certain support functions that are provided on a centralized basis within VD and which were not historically allocated to the VD diabetes care business. Nonetheless, these financial statements do not include all the actual expenses that would have been incurred had Imbex been a standalone public company during the periods presented. Third, we have introduced financial guidance for the second half of fiscal year 2022 in today's earnings press release, which I'll review in a few moments. These financial guidance items represent the company's expectations for financial performance as an independent company. This makes the evaluation of our historical financial results compared to our forward-looking guidance for the second half of 2022 a bit challenging. as it is not on an apples-to-apples basis. Given the fact that IMBECTA's historical financial results do not include all the actual expenses that would have been incurred had IMBECTA been a standalone public company during the periods presented, I plan on focusing most of my prepared remarks this morning discussing IMBECTA's second half of 2022 financial guidance. turning quickly through Imbecta's financial performance for the three and six-month periods. For the second quarter, Imbecta generated revenue of $274.5 million. This represents a decrease of 3.4% on an as-reported basis and a decline of 1.3% on a constant currency basis. The constant currency revenue decline was due to a decrease in volume to customers located within the U.S., and Europe. This volume decline was primarily due to conscious decisions that the EMBECTA management team made during the latter portion of 2021 to no longer participate in certain business moving forward due to several considerations, including the length of contract term, premium price on brand, quality, reliability, and clinical support, and profitability. While these deliberate decisions to walk away from certain customers will cause a temporary volume impact during 2022, it creates a healthier impact than moving forward. On a year-to-date basis, revenue was $563.8 million. This represents a decrease of 1% on an as-reported basis and an increase of 0.2% on a constant currency basis. The constant currency revenue increase was primarily driven by an increase in volume in certain emerging markets, which consist of countries within Eastern Europe, the Middle East, Africa, Latin America, Central and Southeast Asia, as well as mainland China. The volume increase we experienced in emerging markets was somewhat offset by the decisions not to participate in certain business I referred to earlier. Moving to gross profit and margin. Gross profit and margin for the second quarter of 2022 totaled 191.2 million and 69.7% respectively. This compares to 196.3 million and 69.1% in the prior year period. The 60 basis point improvement in gross margin was primarily due to favorable product mix. On a year-to-date basis, Gross profit and margin totaled 395.1 million and 70.1 percent, respectively. This compares to 387.6 million and 68.1 percent in the prior year period. The 200 basis point improvement in gross margin was primarily due to a $10 million impairment charge associated with the write-off of certain construction and progress assets that were recorded in the first quarter of 2021. If you were to normalize for the impairment charge recorded in 2021, gross margin would have improved approximately 20 basis points year over year. Turning to net income, during the second quarter of 2022, it totaled $79.6 million. This compares to $107.9 million in the prior year. The decrease of approximately $28 million is due to a combination of factors, including a decrease in gross profit dollars that I just mentioned, an increase in selling and admin expenses of approximately $11 million, driven by an increase in marketing and advertising spend, as well as an increase in compensation and benefit costs due to increased headcount in anticipation of spin and becoming a standalone publicly traded company, an increase in R&D of approximately $4 million, driven by increased investments in the development of new products, specifically including our insulin patch pump. Interest expense of approximately $5 million that was incurred in the second quarter of 2022 as compared to zero in the prior year period, as well as approximately $7 million of other operating expenses that was incurred related to the spinoff. This is somewhat offset by lower year-over-year tax expense, which totaled approximately $6 million. On a year-to-date basis, net income totaled $178.4 million, and that compares to $213.2 million in the prior year. The year-to-date net income decrease is due to the same factors that impacted our second quarter results. Lastly, moving to adjusted EBITDA and margin, it totaled approximately $116.8 million and 42.6 percent for the second quarter of 2022, and 254.8 million and 45.2% for the six months of 2022. This compares to 141.6 million and 49.8% and 289.8 million and 50.9% in the year-ago periods. Once again, I would like to reiterate that the historical financial results that I just referred to do not include all the actual expenses that would have been incurred had Invecta been a standalone public company during the periods presented. Finally, with respect to our balance sheet and financial condition at quarter end, as of March 31, 2022, we held approximately $264 million in cash and cash equivalents and $1.65 billion in debt. As we created our initial capital structure and leverage levels, we also tried to be mindful of our current financial profile, the need to increase the level of investment into the business, and shareholder returns. Effective day one of SPIN, we have a balance sheet that we can use to invest both organically as well as use for M&A and partnership opportunities. And as of March 31st, 2022, our last 12 months ended net leverage ratio stood at approximately 2.8 times. We also intend to provide shareholders with a sustainable return of capital in the form of a dividend that is targeted at a 20% payout ratio of gap net income. We think that we can provide this return to shareholders while preserving the ability to increase the level of investment in the business to drive accelerated constant currency revenue growth rates in the future, all while maintaining a very strong liquidity profile. That completes my prepared remarks as it relates to Imbecta's historical financial performance. Next, I'd like to outline for you Imbecta's financial guidance for the last six months of fiscal year 2022. Beginning with certain key assumptions. Unlike the first half of 2022, Our second half of 2022 guidance attempts to take into consideration the various costs that MBECTA will incur moving forward as an independent, publicly traded company. This includes various contract manufacturing agreements that we will have in place with BD, which result in third-party revenue for MBECTA at very little gross margin. While certain other supply agreements are for inputs that MBECTA needs to obtain from BD, such as cannulas, which are used in Imbecta's product offerings. In addition to these contract manufacturing and supply agreement impacts, our second half of 2022 financial guidance also assumes incremental expenses that we will incur because of the lease of our Holdridge, Nebraska facility from BD, as well as additional expense that we'll incur as a result of BD continuing to factor certain accounts receivable on Imbecta's behalf. Furthermore, our second half of 2022 financial guidance also assumes six months' worth of transition services expense related to a variety of things that BD will perform for INVECTA. The transition services expenses were determined and costed out at a very detailed line item level. These TSAs can last for a period not to exceed two years and can be terminated earlier by MBECDA with a defined notice period. As part of our second half of 2022 financial projections, we also included estimates associated with costs that we anticipate incurring as we stand up our own public company. These costs include expenses associated with stock-based compensation, external audit fees, stock exchange listing fees, and most notably the expenses associated with the creation of various corporate functions and infrastructure, such as finance, treasury, tax, HR, IT, legal, supply chain, and regulatory and quality. Moreover, as we prepared our second half of 2022 financial guidance, we also attempted to take into consideration the impact that COVID-19 is having on China and some other markets, geopolitical concerns such as the war in Ukraine, as well as having negative impacts stemming from inflation and supply chain disruptions. We have attempted to give due consideration to these elements, but we realize that the future trajectory of these factors is inherently unpredictable. Lastly, given that approximately half of Invecta's business is derived internationally, I wanted to take a moment and highlight what we assumed for some of the key currency pairs that affect our business, those being the euro dollar, dollar Japanese yen, and dollar Chinese yuan. We based our second half of 2022 financial estimates on spot rates that existed at the end of April, including a euro to dollar rate of approximately 1.07%, a dollar to Japanese yen rate of approximately 127, and a dollar to Chinese yuan rate of approximately 6.6. These assumptions compare to the second half of 2021 rates of approximately 1.19, 109, and 6.5, respectively. Now that I've outlined some of our key assumptions, I'd like to now take you through our financial guidance for the last six months of 2022 and provide some perspective as to what some of the key drivers of change are as compared to the first half of 2022 results. Beginning with revenue, we expect to generate approximately $555 million in the second half of 2022, or approximately $1.1 billion for the 12 months of fiscal year 2022. This full year revenue assumption is largely consistent with the revenue dollar amount that BD had included in its original fiscal year 2022 revenue guidance for diabetes care, as well as what it recently removed when it provided Remainco guidance approximately one week ago. The approximately $555 million of revenue in the second half of 2022 would represent a decrease of approximately 7% on an as reported basis as negative foreign currency headwinds are anticipated to drive about half of the decline, while constant currency revenue is expected to be down approximately 3.5%. The constant currency revenue decline that we expect to see in the second half of 2022 is due to a few main items. First, COVID-19 continues to be a headwind, and this comes in two forms. as during the second half of 2021, we saw a rebound from COVID and an increase in the volume of our products that were purchased. While during the second half of 2022, we're now faced with disruption impacting China and some other countries. These COVID dynamics create a difficult revenue comparable for us in the second half of 2022. However, to date, we have been able to maintain our operations and continuity of supply throughout this period. Next, while we do not have a material amount of revenue in Russia and Ukraine, the war and the resulting geopolitical uncertainties are expected to have an adverse impact on our business in the second half of 2022. And third, I referenced earlier certain decisions that we made in the latter part of 2021 to not participate in certain business moving forward. Like the first half of 2022, This will also be a modest headwind in the second half of the year as well. This is a temporary headwind for INVECTA as we compare the second half of 2022 results to the second half of 2021 results. Lastly, as we prepared for the spin during the second half of 2021, we analyzed our rebate reserves, which caused us to reverse some previously established liabilities. This caused us to recognize additional revenue in the second half of 2021, and that is not expected to reoccur in 2022. These rebate reversals, which occurred in 2021, would have been a headwind for us in the second half of 2022. However, that is being offset almost one for one by approximately $15 million worth of contract manufacturing revenue. we expect to generate during the second half of this year related to product we will sell to BD. Turning to adjusted gross margin. During the second half of 2022, we expect our adjusted gross margin to be somewhere in the low 60s. This represents a decrease from the 70% level that we achieved during the first half of 2022 and is due to a few factors. One being increased expenses that we will incur relating to standing up in VECTA. A second being the combined impact of contract manufacturing and supply agreements that are in place with BD, both from the perspective of purchasing cannula from BD at a markup, as well as from selling certain product back to BD at only upper single digit gross margin. And third being incremental inflation raw material, and supply chain costs we expect to incur during the second half of the year. Moving next to TSA expense. As I stated earlier, the TSAs last for up to two years. Assuming we maintain every TSA, during the first 12-month period, we will be charged a total of $70 million, or approximately $35 million during the second half of 2022. Again, that assumes we maintain every TSA that is currently available to us. Finally, that takes me to adjusted EBITDA margin, which during the second half of 2022, we expect to be in the low 30s. Like gross margin, the decline in adjusted EBITDA margin from the first half of 2022 to the second half of 2022 is due to a few primary drivers. These include the change in gross margin discussed earlier, incremental stand-up costs, and additional investments in R&D. Despite these incremental investments, Invecta is very well positioned with robust adjusted EBITDA margins as we embark as an independent company. That completes my prepared remarks. Let me now turn the call back over to Dev. Dev?