Embecta Corp.

Good day, and welcome to the MBECTA fourth quarter of fiscal year 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Pravesh Candlewall, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to MBECTA's fiscal fourth quarter and full year 2024 earnings conference call. The press release and slides to accompany today's call and webcast replay details are available on the Investor Relations section of the company's website at www.investorrelations.com. With me today are Dev Kodikar, MBECTA's President and Chief Executive Officer, and Jake Alguiz, 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. We wish to caution you that such statements are, in fact, forward-looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include but are not limited to factors referenced in our press release today, as well as our filings with the SEC, which can be accessed on our website. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation. Our agenda for today's call is as follows. Dev will start by presenting an overview of our strategic priorities following the spinoff and will highlight key accomplishments to date. He will also share insights into our future strategy and provide details of the restructuring plan announced today. Jake will then review our financial results for the fourth quarter and full fiscal year 2024, as well as discuss the preliminary guidance for fiscal 2025. Following these updates, we will open the call for questions. With that said, I would now like to turn the call over to our CEO, Dev Gurdekar.

Good morning, and thank you for taking the time to join us. Since the spin, which occurred on April 1st of 2022, our strategic priorities over the past two and a half years have been focused on three areas. These included the need to strengthen and optimize our core business, the requirement to separate and stand up the organization from our former parent, and to invest in growth opportunities. I'm pleased to report that during the past two and a half years, we made significant progress within each of these objectives. First, we strengthened our core business by securing exclusive and dual preferred contracts with key Medicare Part D plans, as well as establishing our products as a top choice within major national formularies, among other accomplishments. Second, we successfully completed major standard programs, including the implementation of our own ERP, shared services and distribution network, covering approximately 98% of our revenue base with only India remaining. We also executed a complex program to transfer the legal entity ownership of our manufacturing facility in China. I'm proud to say that we completed these activities and more while avoiding interruptions to our customers, as well as avoiding disruptions to the people with diabetes who use our products daily. Finally, we continue to invest and grow. A testament to that is the clearance of our open-loop patch pump, which occurred in Q4, as well as the launch of a small-pack GLP-1 10-meter set in Germany with the intent to address the needs of a growing customer base. This strong execution, which occurred in a challenging macro environment, led to financial outcomes that exceeded 2024 expectations that were set prior to spin. This included delivering a constant currency compounded annual adjusted revenue growth rate of approximately 1.3% and an adjusted EBITDA margin of approximately 31.4%. This compared to initial pre-spin expectations, which called for a flattish constant currency revenue caterer, including significantly higher contract manufacturing revenue of non-diabetes products for BD and an adjusted EBITDA margin of approximately 30%. As a reminder, we had provided these initial expectations in March of 2022 in a vastly different economic climate, unaware of the unprecedented challenges that would soon follow. Since that time, we navigated historic inflation, a rapidly rising interest rate environment, geopolitical conflicts, and supply chain and labor issues. Despite these factors, which we estimate cost us roughly 500 basis points in negative margin impact, our team delivered. Lastly, during this most recent quarter, we initiated a debt pay down plan. This multi-year commitment to reduce our debt obligations should position MBECTA with greater financial flexibility as we move forward. Turning to slide six, as we embark on the next phase of our journey, We recognize that building on our past accomplishments will require both prudent management of our capital structure and thoughtful investments to broaden our product portfolio to support future growth. Hence, this morning we announced a restructuring plan aimed at streamlining operations and reducing costs. This restructuring program includes the decision to discontinue our insulin patch pump program. Following the recent U.S. FDA clearance that we received in the open-loop version of the pump that could be used by people with type 1 or type 2 diabetes, the decision to seize the pump program may come as a surprise. However, it is important to understand that we did not intend to do a full market launch of this product, as the open-loop product currently cleared requires additional enhancements to be commercially competitive, including extensions of the product's shelf life as well as enhancements in the form of making the device compatible from a bring-your-own-device perspective. Most importantly, our goals in SPIN was to come to market with a closed-loop version of a patch pump that had a specific label designation for people with type 2 diabetes. While our product development team has executed this program extremely well, achieving all internal milestones to date, It would take several more years of significant investment for us to complete a clinical study, obtain FDA clearance, and build up the necessary commercial and support functions before fully commercializing that product and achieving the scale for it to be accretive to rebid dump. Additionally, we recognize the pump market has continued to evolve, and we anticipate that competition in closed-loop type 2 indicated products may continue to intensify and our offering would require incremental investments to be market competitive. I also want to point out that upon FDA clearance of our open loop pump, which we announced in September, we performed a market check to identify potential opportunities that would allow us to monetize the asset. Since that did not surface any viable options, we acted promptly to discontinue the program. The accompanying reorganization is designed to enhance the organization's profitability and cash flow, create a leaner and more efficient operation that would have greater financial flexibility to take advantage of opportunities that leverage our global commercial channel and strengthen high-volume manufacturing. In terms of financial impact, we currently anticipate that we will incur pre-tax cash charges associated with this reorganization of between $25 and $30 million. Additionally, we anticipate that there will be non-cash charges associated with asset impairments and asset write-offs, which we currently estimate to be in the range of between $10 and $15 million on a pre-tax basis. We expect that this restructuring will be largely complete during the first half of fiscal year 2025 and will deliver annualized pre-tax cost savings of between $60 and $65 million. Lastly, given the recency of this decision, we have postponed our Analyst and Investor Day to the spring of 2025. This delay allows us to fully focus on executing this restructuring plan so that when we come together for our Analyst and Investor Day, we will be able to provide a fuller view of a more streamlined organization. In summary, we believe this strategic reorganization is a proactive step to improve our financial health, enhance profitability, and strengthen the company for the years ahead. Moving to slide seven. Moving forward, our focus will be on the next phase of Embecta's transformation, which will be guided by three key strategic priorities. Continuing to strengthen the core business, expanding our product portfolio, and increasing financial flexibility. First, I would like to explain how we are planning to strengthen the core business further. In addition to continuing to deepen our relationships with customers and maintain our leading share of categories, we intend to progress the implementation of our brand transition plan and seek growth opportunities. By advancing our brand transition plan, we are ensuring that Empecta's identity remains strong, clear, and resonates across our markets. We have been planning this transition since the spin-off, and we intend for the execution of this program to begin in phases during fiscal year 2025. Notably, we are not changing the product names or color schemes associated with our packaging. This is important, as people with diabetes will continue to experience the same look and feel of our boxes that they have been accustomed to for many years. The U.S. will be the first region to undergo this transition, followed by Europe and then the other regions. We expect to be largely complete in the next couple years, but successful execution will involve a carefully coordinated transition of packaging, labeling, registrations, and regulatory certificates, among other things. As with the separation activities we were discussing a year ago, our continued stand-up and transition activities will involve temporary suspensions of our ability to manufacture or promote product in certain markets, which we intend to mitigate through inventory management, and other measures that we successfully employed over the past year. Separately, we are actively pursuing other growth opportunities, identifying new areas to expand our reach and increase our impact. This includes both growing within our current markets and exploring untapped potential. One of the most promising opportunities on the horizon for MBECTA is the growth for GLP-1 therapy. We believe that while GLP-1s may delay the progression to insulin independence, they do not eliminate the need for insulin. Furthermore, as GLP-1 administration methods continue to evolve from autoinjectors to peninjectors, which require pen needles, we anticipate incremental benefit to our business. As noted on an earlier call, we recently launched our new small pack pen needle product in Germany. specifically targeted for GLP-1 administration. This product introduction marks an important milestone, and we plan to expand this offering to additional markets in the future. We are confident that this will help address the growing demand for pen-based GLP-1 administration, meeting the needs of an increasing number of patients using pens and pen needles. We will share more of our thoughts on the broader GLP-1 market opportunity and how we intend to benefit in the coming years at our investor day in the spring. Our next strategic priority is to widen our product offering by leveraging our core strengths. One of the strongest assets is our global commercial channel comprising of 600 plus commercial resources with deep customer relationships with over half of these resources serving customers in the faster growing emerging markets. Adding market appropriate products that can be delivered via our existing channels will allow for increased productivity of our commercial resources. Another core strength is our expertise in high-volume manufacturing while maintaining robust quality standards. Competency in injection molding and operating highly automated plants can be leveraged into making products that benefit from these competencies. While identifying the right products to manufacture will take time, we intend to start exploring the possibilities now. Lastly, increasing financial flexibility is an important priority for us. We recognize that without that, we are going to be limited in the strategic options available to us that could transition the company towards higher growth markets. Improving operational efficiency is at the heart of this priority. We are committed to refining our processes, eliminating inefficiencies, and optimizing every aspect of our operations. This approach goes beyond cost-cutting. It ensures we remain lean, agile, and ready to adapt. Additionally, we believe that reducing net leverage and debt creates a stronger financial base that enables us to make strategic investments and remain resilient, regardless of market conditions. In summary, by strengthening the core business, expanding our product portfolio, and increasing financial flexibility, our plan is to build a strong foundation for Mvecta's future. Now, let's review our revenue performance for the quarter and the full fiscal year. Before beginning our normal review, I wanted to highlight an event we worked through during the fourth quarter. The Italian government introduced legislation back in 2015 requiring medical device companies that supply goods and services to the Italian national healthcare system to pay back a portion of their proportional revenues to contribute to any deficit created by government budget overspent for medical devices each year. The payment amounts are calculated based on the amount by which the regional ceilings for that given year were exceeded. Numerous medical device companies challenged the enforceability of the law, primarily on the basis that the legislation was unconstitutional. The Italian administrative courts referred the question regarding the constitutionality of the law to the Italian Constitutional Court which in July 2024 issued a ruling upholding the law as constitutional. Following the ruling of the Italian Constitutional Court, the appeal before the Italian Administrative Court will proceed with respect to the remaining legal arguments asserted by the appellants regarding the enforceability of the Payback Law. Since the law was enacted, our fourth quarter and full year revenue includes a reduction to revenue of $4.1 million related to fiscal years 2015 through 2023. Given that this amount relates to prior years, we have normalized for this amount when calculating our adjusted constant currency revenue growth rates for both the quarter and the full year. Additionally, our fourth quarter and full year results also include a $1.2 million reduction of revenue associated with fiscal year 2024. Given that this amount relates to the current year, we have not normalized for this impact, although it was not something that was previously contemplated in our prior financial guidance. As litigation before Italian courts is still pending, final resolutions are known at this time, and it is possible that the amount of a vector's liability could differ from the amount currently accrued. Finally, you will notice that in addition to a typical geographic revenue disclosures, we are also providing a breakdown of our revenue on a product family basis. With that, I will now begin a review of our revenues for the fourth quarter. All amounts that I will refer to are on an adjusted revenue and adjusted constant currency basis unless otherwise noted. In the fourth quarter of fiscal year 2024, MBECTA's adjusted revenues total $290.2 million, which represents an increase of 4.1% as compared to the prior year period, or 3.3% if you were to exclude contract manufacturing revenue. This exceeded our prior expectations with the outperformance in the quarter primarily related to the timing of orders from some distributors. The additional orders occurred as distributors attempted to mitigate any potential impact from the then looming U.S. port strike. While from a product family perspective, during the quarter, pen needle revenue grew approximately 2.8%, syringe revenue grew approximately 4.8%, safety products grew approximately 5.8%, and contract manufacturing grew approximately 96%. Within the year, during the quarter, revenues totaled $167.4 million, which represented year-over-year growth of 10.3% on an adjusted constant currency basis. The year-over-year growth was primarily driven by the impact of the aforementioned distributor order timing, favorable pricing, and growth in the sales of non-diabetes products that were manufactured and sold to BD. Turning to our international business, during Q4, revenue totaled $122.8 million, which equated to a 3.1% decline on an adjusted constant currency basis as compared to the prior year period. The year-over-year decline within our international business was due to the as-expected timing of orders within China in advance of the ERP implementation, as well as absorbing the full year 2024 $1.2 million impact of the Italian payback measure, which was all recorded in the fourth quarter. This was partially offset by year-over-year increases in Canada, Latin America, and Asia. Turning to slide nine. For the full year, MBECTA generated adjusted revenues of approximately $1,127,000,000, which represented an increase of 1.1% on an adjusted constant currency basis and remained unchanged at 1.1% if you were to exclude contract manufacturing revenue. Globally, our pen, needle, and safety product lines grew approximately 2.6 and 2.5% respectively as compared to fiscal 2023. Together, these two product categories represented around 86% of our consolidated fiscal year 2024 revenue. However, this growth was offset by a decline of approximately 9% within our syringe product lines, primarily driven by ongoing end-market volume declines within the U.S. This trend is not new and has persisted over the past several years and is consistent with the decrease in prescriptions for insulin vials as compared with insulin pens. Lastly, the contract manufacturing revenue of non-diabetes products declined approximately 1.5% as compared to the prior year. While from a regional perspective, U.S. revenues totaled $607.2 million, which is an increase of 1% on an adjusted constant currency basis. Growth in the U.S. was primarily due to favorable pricing dynamics, partially offset by continued end-market volume declines for serious products. Meanwhile, international revenues totaled $520 million, which equated to year-over-year adjusted constant currency growth of approximately 1.3%. Growth internationally was driven primarily by volume growth within Canada, China, and Asia, partially offset by declines within India and Latin America. Lastly, and before I turn the call over to Jake, I want to highlight that since PIN, we have been able to successfully increase the prices of our products, particularly within the U.S., to help offset inflationary pressures. However, during 2025, we anticipate that pricing will turn into a headwind as we seek to renew agreements whose terms are expiring. With that, let me turn the call over to Jake for him to review other financial highlights, as well as to provide a preliminary financial guidance for fiscal year 2025.