Embecta Corp.

Turning to some fiscal second quarter highlights. Second quarter revenue totaled $259 million, which exceeded our expectations of between $250 and $255 million that we provided in our last earnings call. As compared to the midpoint of our prior guidance range, approximately half of the overachievement in the quarter was due to constant currency performance, while the other half was due to foreign exchange being less of a headwind than we previously anticipated. Turning to some additional highlights, during the second quarter, we published the updated FITR Forward Expert Recommendations in Mayo Clinic Proceedings. This is an important milestone in our commitment to improving clinical outcomes as the recommendations support the best global practices for insulin injection technique, device optimization, and provider training. Additionally, during Q2, MBECTA conducted a company-wide employee engagement survey through Great Place to Work. a global authority on workplace culture, employee experience, and the leadership behaviors proven to deliver market-leading revenue, employee retention, and increased innovation. We had a tremendous response rate from our employees worldwide, and we are pleased to announce that we have received certification as a great place to work for 2025 in eight countries. This recognition is a testament to the effort our teams have put into building a strong, authentic, and inclusive culture. I'm also pleased to announce that we are continuing to advance our efforts to co-package our pen needles with potential generic GLP-1 drugs, as well as making our pen needles available in retail packaging appropriate for use with branded GLP-1 drugs delivered by pen injectors. We expect this will enable us to expand into a fast-growing market while leveraging our world-class distribution and commercial expertise. We have received several purchase orders from generic manufacturers to co-package our pen needles And we look forward to sharing more details about these partnerships and the market potential at our upcoming Analyst and Investor Day. We have completed the majority of the steps required to implement the discontinuation of our insulin patch plan program and the associated restructuring plan announced in November 2024. This progress has occurred within our previously expected timeline. Additionally, our stand-up activities are largely complete, with only India yet to be transitioned to our ERP system and distribution network within the next few months. Therefore, we continue to be focused on reducing our cost structure, and during the second quarter, we initiated a separate restructuring plan aimed at streamlining our organization. We expect the plan to be substantially complete by the end of fiscal year 2025. As a result, we anticipate incurring total pre-tax charges of between $4 to $5 million, the majority of which are expected to be cash related. This action is expected to drive meaningful efficiencies with estimated pre-tax cost savings of between $7 to $8 million during the second half of fiscal 2025. Turning to the next slide. In line with our commitment to enhancing financial flexibility, we continue to reduce our debt, making an aggregate principal payment of approximately $27 million on our term loan fee facility during the quarter. While on a year-to-date basis, we have reduced debt by approximately $60 million, which puts us well on track to achieve our goal of reducing debt by approximately $110 million during fiscal 2025. Finally, as we reflect on our second quarter results and look ahead to the remainder of the year, we are updating our fiscal 2025 guidance. While our teams delivered slightly better than expected financial performance during the first six months of the year, we are adjusting our full year 2025 constant currency revenue outlook to account for lower projected U.S. volumes primarily associated with anticipated reductions in customer inventory levels tied to store closures at a specific U.S. retail pharmacy customer. That said, our as-reported revenue guidance remains largely intact, supported by favorable foreign exchange movements as compared to our previously provided guidance. In terms of gross margins, we have updated our guidance to reflect the lower constant currency revenue expectations as well as the estimated impact of currently implemented incremental tariffs, which are expected to be a headwind of approximately 25 basis points to our fully-adjusted gross margins. However, even with these headwinds, we are raising our guidance ranges for adjusted operating and adjusted EBITDA margins for the year due to disciplined expense management and the initiation of the previously mentioned restructuring plan in the second quarter. We are also reaffirming our adjusted earnings per share outlook for fiscal year 2025. Turning to the next slide, I would like to provide an update on our brand transition plan and walk through the key elements of its execution. This initiative has been in planning since their spin, and I'm pleased to report that the transition is now underway in the U.S. and Canada. We are executing the program in phases, as intended, and are preparing to transition most of the remaining markets in the next fiscal year, in line with our original plan. We continue to expect the global transition to be completed within the next couple years. On the slide, you will see an example of the new Impecta branded packaging contrasted with the legacy BD nano second-gen packaging. Importantly, product names and color cues will remain unchanged, a deliberate decision informed by customer research. At the same time, we are introducing a modern refresh loop while maintaining the visual elements that health care providers and people with diabetes easily recognize our products. We remain focused on ensuring operational readiness along the supply chain, including inventory management, customer communication, and regulatory compliance. This thoughtful phased approach is designed to ensure a smooth transition while preserving the trust of those who rely on our products every day. Now, let's review our revenue performance for the second quarter. During the second quarter of fiscal year 2025, MBECTA generated $259 million in revenue, reflecting a 9.8% decline year-over-year on an as-reported basis, or a 7.7% decline on an adjusted constant currency basis. Within the US, revenue for the quarter totaled $135.2 million, reflecting a year-over-year decline of 8.4% on an adjusted constant currency basis. The year-over-year decline was expected, and is primarily due to two factors, both of which relate to the timing of price increases that went into effect. First, in advance of a price increase that went into effect on April 1st of 2024, we saw certain customers purchase additional products that positively impacted our second quarter of 2024 results. Similarly, in advance of a price increase that went into effect on January 1st of 2025, we saw certain customers purchase additional products and that positively impacted our first quarter of 2025 results and resulted in an offsetting reduction in the second quarter. As such, the combination of these two factors led to a difficult comparable for our U.S. business. Turning to our international business, during Q2, revenue totaled $123.8 million, which equated to a 7% and a $10 million decline on an adjusted constant currency basis as compared to the prior year period. Like the U.S., this decline was expected, and due to certain customers purchasing additional products in advance of ERP implementations in certain regions in the prior year period. While from a product revenue perspective, during the quarter, pen needle revenue declined approximately 12.1%. Syringe revenue grew by approximately 1.7%. Safety products grew approximately 4.2%. and contract manufacturing grew approximately 73%. The decline in year-over-year pen needle revenue was primarily driven by the timing issues associated with price increases that went into effect within the U.S., coupled with the unfavorable prior year comparison stemming from ERP-related inventory builds within our international markets. Turning to our syringe products, they grew in the quarter by 1.7%, driven by international markets, specifically Latin America and Asia, while our safety products grew 4.2% as compared to the prior year period due to the annualization of share gains resulting from a competitor discontinuing their product and exiting the market. That completes my prepared remarks, and with that, let me turn the call over to Jake to review other Q2 financial highlights, as well as provide our updated financial guidance for fiscal year 2025.

Jake? Thank you, Jeff, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I'll start my review of Embecta's second quarter financial performance at the gross profit line. GAAP gross profit and margin for the second quarter of fiscal 2025 totaled $164.1 million and 63.4% respectively. This compared to $185.4 million and 64.6% in the prior year period. While on an adjusted basis, our Q2 2025 adjusted gross profit and margin totaled 165 million and 63.7%. This compared to 185.8 and 64.7% in the prior year period. The year over year decline in adjusted gross profit and margin was primarily driven by the impact of net changes in profit and inventory adjustments, as well as the lower year-over-year revenue that Deb mentioned earlier. These headwinds were partially offset by manufacturing cost improvement programs, lower supply chain functional spend, lower freight costs, and our ability to drive year-over-year price increases. Turning to GAAP operating income information, During the second quarter, they were 62.9 million and 24.3%. This compared to 39.2 million and 13.6% in the prior year period. While on an adjusted basis, our Q2 2025 adjusted operating income and margin totaled 81.4 million and 31.4%. This compared to $74.9 million and 26.1% in the prior year period. The year-over-year increase in adjusted operating income and margin is primarily due to lower R&D expenses associated with the discontinuation of our insulin patch pump program, as well as lower SG&A expenses primarily driven by lower TSA costs, as well as lower compensation and marketing costs. This was offset by the adjusted gross profit changes I just outlined. Turning to the bottom gap net income and earnings per diluted share were 23.5 million and 40 cents during the second quarter of fiscal 2025, as compared to 28.9 million and 50 cents in the prior year period. While on an adjusted basis, during the second quarter of fiscal 2025, net income and earnings per share were $40.7 million and $0.70, as compared to $38.9 million and $0.67 in the prior year period. The increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed, as well as a reduction in interest expense. This was partially offset by an increase in our adjusted tax rate from approximately 18% in Q2 of 2024 to approximately 25% in Q2 of 2025. Lastly, from a P&L perspective, for the second quarter of 2025, our adjusted EBITDA and margin totaled approximately $97.1 million and 37.5%. as compared to 90.8 million and 31.6% in the prior year period. Turning to the balance sheet and cash flow. At the end of the second quarter, our cash balance totaled approximately 212 million, while our last 12 months net leverage, as defined under our credit facility agreement, stood at approximately 3.7 times. As a reminder, our net leverage covenant requires us to stay below 4.75 times. As Deb mentioned earlier, we continue to be focused on more aggressively de-levering. And during the second quarter, we paid down 27.4 million of term loan B debt. I'm pleased to say that we remain on track to achieve our goal of reducing our gross debt by 110 million during fiscal 2025. as well as getting our net leverage levels to approach approximately three times by year end. That completes my prepared remarks on our second quarter 2025 results. Next, I would like to discuss ABECTA's updated 2025 financial guidance and certain underlying assumptions. Before I begin, I want to acknowledge the evolving tariff landscape and provide some important context regarding our global operations. As a reminder, we manufacture our products across three key facilities from Leary, Ireland, Holdridge, Nebraska, and Suzhou, China. We do not perform any manufacturing in either Canada or Mexico. It's important to note that tariff regulations extend beyond manufacturing location and require detailed analysis of trade classifications and rules of origin to determine potential exposure. As it relates to our global operations, we have now incorporated the impact of tariffs currently in effect, notably the incremental 125% tariffs for raw material and finished goods being imported into China with the US as the country of origin. The incremental 145% tariffs for imports into the US from China. and incremental baseline 10% tariffs for imports into the U.S. from certain other countries. We have also assumed that certain exemptions are applicable to certain materials and finished goods being imported into the U.S. We have not incorporated the potential incremental tariffs that may be implemented after the current pause on tariffs has expired. given the uncertainty surrounding the evolving global trade environment. Our estimates remain subject to change, and we will continue to monitor the situation and provide updates when appropriate. As always, we remain committed to mitigating potential impacts where possible to make sure we continue supporting our customers and the people living with diabetes who rely on our products. Now, let me discuss our updated guidance. beginning with revenue. On an adjusted constant currency basis, we are lowering our previously provided guidance range by 150 basis points on both the low and high ends, as we now call for revenue to decline between 2.5% and 4% as compared to 2024. At the low end of the range, we estimate that bonding will be a headwind of approximately 3%, and that pricing will be a headwind of approximately 1%. Meanwhile, at the high end of our constant currency revenue guidance range, we estimate that volume will be a headwind of approximately 1.5%, and that pricing will be a headwind of approximately 1%. As Deb noted earlier, the additional 1.5% volume headwind, which we have incorporated into our outlook, is driven by lower projected U.S. volumes primarily associated with anticipated reductions in customer inventory levels tied to store closures at a specific U.S. retail pharmacy customer. We believe this is transitory and does not reflect any fundamental change in the stability of our base business. Turning to our thoughts on FX. Since we provided our updated fiscal 2025 financial guidance in early February, the US dollar has weakened against most currencies. And as a result, we currently expect FX to be a headwind of approximately 0.8%, as compared to our prior guidance, which called for FX to be a headwind of approximately 2.2%. Additionally, our as-reported 2025 gap revenue will not be impacted by the 2015 through 2023 amount that we needed to accrue associated with the Italian payback measure, which impacted our 2024 as-reported gap revenue. This equates to a tailwind of approximately 0.4%. On a combined basis, our as-reported revenue guidance remains largely unchanged at a range of between $1,073,000,000 and $1,090,000,000. Turning to adjusted gross margin, we are lowering our previously provided guidance range by 50 basis points and now expect adjusted gross margin to be in the range of between 62.75% and 63.75%. The reduction in our current versus prior adjusted gross margin guidance is primarily due to the reduction in our constant currency revenue, as well as the incremental impact of tariffs. This is somewhat offset by favorable profit and inventory adjustments and cost improvement actions we are taking within cost of sales. While from an adjusted operating margin standpoint, we are raising our guidance from a range of between 29.5% and 30.5% to a new range of between 29.75% and 30.75%. This improvement in adjusted operating margin is primarily driven by the expected cost savings associated with the restructuring plan announced this quarter. Moving to earnings. Our better than expected second quarter earnings performance, coupled with the restructuring plan we announced today, as well as favorable shifts in foreign exchange, are enabling us to absorb the impact of the lower adjusted constant currency revenues and incremental tariffs, thereby allowing us to maintain our previously provided adjusted diluted earnings per share guidance range of between $2.70 and $2.90. Our updated guidance range continues to assume that our annual net interest expense will be approximately 107 million, that our annual adjusted tax rate will be approximately 25%, and that our weighted average diluted shares outstanding will be approximately 58.9 million. Our guidance also continues to assume that we will use between 50 and 60 million of cash during fiscal 2025 associated with separation costs largely related to brand transition. While as it relates to capital expenditures, we now expect to incur approximately $15 million during the year, down from our prior estimate of approximately $20 million. For cash usage associated with the discontinuation of our insulin patch pump program, Our guidance now assumes that we will use between 20 and 25 million, as compared to our previous estimates of between 25 and 30 million. Lastly, for the same reasons we increased our adjusted operating margin guidance range, we are also raising our adjusted EBITDA margin guidance range from a range of between 36 and 37 percent to a new range of between 36.25% and 37.25%. And before I turn the call over to the operator, I wanted to take a moment to remind everyone that we will be hosting our inaugural Analyst and Investor Day on May 22nd in New York City. We are looking forward to providing a deeper look into our portfolio value creation opportunities and long-term financial objectives. We hope to see many of you there. Please RSVP by following the instructions on this slide. With that, I would like to now turn the call over to the operator for questions. Operator?

Thank you. At this time, we'll conduct the question and answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please limit yourself to one question and a follow-up. Please stand by while we compile the Q&A roster. Our first question goes to the line of Calum Tishmarsh of Morgan Stanley. Your line is now open.