Embecta - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered resilient profitability despite softer top-line: revenues $261.9M (-5.6% reported, -4.8% adjusted constant currency), GAAP EPS $0.00, adjusted EPS $0.65; adjusted operating margin rose to 30.7% and adjusted EBITDA margin to 37.2%.
• Guidance updated: reported revenue cut to $1.075–$1.092B driven solely by stronger USD, while adjusted operating margin raised to 29.5–30.5% and adjusted EBITDA margin to 36–37%; adjusted EPS reaffirmed at $2.70–$2.90.
• Management highlighted cost discipline and deleveraging: $32.4M Term Loan B paid down in Q1; on track to reduce debt by $110M in FY25; cash ~$217M; net leverage ~3.7x vs covenant <4.75x.
• Strategic pivot continues: insulin patch pump program discontinued (Nov. 2024); restructuring completion expected by 1H FY25 with $60–$65M annualized savings; brand transition to Embecta packaging starts 2H FY25 (U.S./Canada first); GLP‑1 pen needle initiatives progressing (small packs in Germany; multiple co‑pack discussions).
• Near-term catalysts: Investor & Analyst Day in late May 2025 (multi‑year outlook, portfolio expansion, GLP‑1 update) and Q2 implied revenue range $250–$255M, normalizing Q1 timing benefits.

What Went Well and What Went Wrong

What Went Well

• Adjusted profitability strengthened: adjusted operating margin expanded to 30.7% (vs 27.9% YoY), adjusted EBITDA margin to 37.2% (vs 32.6% YoY) on lower SG&A/R&D from pump discontinuation and cost containment.
• Cost discipline and deleveraging: $32.4M principal repaid on Term Loan B; management reiterated plan to cut debt by ~$110M in FY25, targeting ~3.0x net leverage by year‑end.
• Strategic GLP‑1 positioning: small‑pack pen needles launched in Germany; advancing co‑pack agreements with 10+ potential generic GLP‑1 entrants to capture pen‑based administration growth.
• Management quote: “We raised our adjusted operating and EBITDA margin guidance ranges while maintaining our previously provided adjusted EPS… despite an incremental $0.10 FX headwind”.

What Went Wrong

• Top-line softness: revenue declined 5.6% reported (4.8% adjusted constant currency), with pen needles down 8.5% YoY; U.S. -4.6%, International -5.1% (adj. CC), driven by ERP‑related inventory timing and Q4’24 U.S. port-strike pull‑forward.
• Gross margin compression: GAAP gross margin fell to 60.0% (vs 67.0% prior year) on lower volumes and profit/inventory normalization; adjusted gross margin decreased to 62.7% (vs 67.2% prior year).
• FX headwinds worsened: FY25 FX headwind assumption increased to ~2.2% (from ~0.6%), reducing reported revenue guidance despite unchanged constant-currency outlook.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome, ladies and gentlemen, to the Embecta Fiscal First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. Please note that today's conference is being recorded, and a replay will be available on the company's website following the call. I would now like to hand the call over to your speaker, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Please go ahead, sir.

Pravesh Khandelwal (VP of Investor Relations)

Thank you, Operator. Good morning, everyone, and welcome to Embecta's Fiscal First 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, a 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 begin by providing some remarks on the overall performance of our business during the fiscal first quarter of 2025, as well as an overview of our strategic priorities.

Jake will then review our financial results for the fiscal first quarter of 2025, as well as discuss the updated financial guidance for 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.

Dev Kurdikar (President and CEO)

Good morning, and thank you for taking the time to join us. Having successfully delivered on our previous three-year outlook, we have now pivoted to the next phase of Embecta's transformation. As we move forward, we are focused on three key priorities that will drive our growth and success. First, strengthening our core business. We are targeting to execute a seamless brand transition to ensure our identity resonates globally while maintaining the trust of our customers. At the same time, we are continuing to identify opportunities within our core portfolio that bolster our leadership position in insulin injection devices. Second, expanding our product portfolio. We believe we are well-positioned to introduce market-appropriate products that leverage our expertise in high-volume manufacturing and the strength of our global commercial channel.

Such initiatives potentially include utilizing our capabilities to manufacture products for partners that already have a commercial channel, as well as using our global commercial presence to sell products manufactured by others, and finally, increasing our financial flexibility. This began with our decision this past November to discontinue our insulin patch pump program, initiate a restructuring plan intended to generate significant cost savings, and prioritize debt reduction, including the plan to pay down approximately $110 million in debt during 2025. Importantly, given the free cash flow generation capabilities of the company, coupled with the fact that cash used towards separation activities is largely behind us, we expect to be able to materially reduce our outstanding debt during the next few years, thereby enhancing our financial agility. The successful execution of these priorities will position us for sustainable success as we continue to evolve and transform Embecta for the future.

Turning to some fiscal first quarter highlights. The first quarter marked a solid start to the fiscal year for Embecta, slightly exceeding our internal expectations. We generated approximately $262 million in revenue, representing a 5.6% decline year-over-year on the reported basis and a 4.8% decline on an adjusted constant currency basis. As we have mentioned before, quarterly year-over-year growth rate comparisons will be impacted by the phased ERP implementations that occurred during fiscal 2024 and the associated changes in distributor inventory in advance of these implementations. Turning to our brand transition program, I'm pleased to report that this important initiative remains on track, with a focus on executing a seamless transition that strengthens our identity, ensuring it remains clear, consistent, and resonates across our global markets. We are also making progress in securing external distribution agreements and partnerships.

As part of our strategy, we are advancing our efforts to co-package our pen needles with potential generic GLP-1 drugs and in retail packaging, enabling us to expand the use of our products into a fast-growing market while leveraging our world-class distribution network and commercial expertise. Execution of our restructuring plan announced in November 2024, related to the discontinuation of the insulin patch pump program, remains on track, with completion expected by the end of the first half of fiscal year 2025. In line with our commitment to enhancing financial flexibility, we continue to reduce our debt, making an aggregate principal payment of approximately $32 million on our Term Loan B facility during the quarter. Finally, based on our first quarter performance and outlook for the remainder of the year, we are updating our fiscal 2025 financial guidance.

This updated guidance reflects recent foreign exchange rates, which are unfavorable as compared to the foreign exchange rates used when we set our initial guidance ranges. Importantly, our constant currency revenue guidance remains unchanged. Additionally, we raised our adjusted operating and EBITDA margin guidance ranges while maintaining our previously provided adjusted earnings per share guidance range, despite having to absorb an incremental $0.10 headwind from the aforementioned foreign exchange pressure. Turning to slide six, I'd like to provide an update on our upcoming brand transition plan and walk through the key elements of its execution. We have been planning this transition since spring, and we intend to execute the program in phases starting in the second half of fiscal year 2025, beginning with the U.S. and Canada. We expect we will be globally complete in the next couple of years.

On the slide, you will see, as an example, the transition from our old BD Nano packaging design to our new Embecta branded packaging. You will note that the product names and color associated with the packaging are not changing. This is a conscious choice based on research we have conducted. At the same time, we are providing a modern and refreshed look to the product packaging while maintaining visual cues that will enable our customers and people with diabetes to identify our products. We are focused on ensuring operational readiness throughout the supply chain, including inventory management, customer communications, and regulatory compliance. This thoughtful and phased approach is intended to ensure a seamless transition while maintaining the trust of healthcare providers and people with diabetes who rely on our products daily. Now, let's review our revenue performance for the first quarter.

During the first quarter of fiscal year 2025, Embecta generated $261.9 million in revenue, reflecting a 5.6% decline year-over-year on an as-reported basis or a 4.8% decline on an adjusted constant currency basis. The year-over-year decline was expected and was primarily driven by an unfavorable comparison, as the prior year period benefited from the timing of certain orders in advance of our ERP system implementation in North America, and as mentioned in our prior call, the additional revenue generated in our fiscal 2024 fourth quarter as distributors purchased product to mitigate potential disruptions from the then looming U.S. port strike. In regard to our prior expectations, our Q1 revenue came in slightly ahead, primarily due to timing, and we expect this to normalize during Q2. Within the U.S., revenue for the quarter totaled $141.7 million, reflecting a year-over-year decline of 4.6% on an adjusted constant currency basis.

This decline was primarily driven by the same two factors mentioned previously: a challenging comparison to the prior year period due to order timing related to the ERP implementation in the U.S., which benefited the year-ago period, and additional distributor orders which occurred during the fourth quarter of last year due to the then looming U.S. port strike. Turning to our international business, our Q1 revenue totaled $120.2 million, which equated to a 5.1% decline on an adjusted constant currency basis as compared to the prior year period. The year-over-year decline within our international business was primarily due to distributor rebalancing, as well as a difficult comparison due to inventory purchases in advance of ERP implementation. While from a product family perspective, during the quarter, pen needle revenue declined approximately 8.5%, syringe revenue declined approximately 4.2%, safety products grew approximately 11.3%, and contract manufacturing grew approximately 153%.

The decline in pen needle revenue was primarily due to the additional revenue that occurred during the fourth quarter of 2024, associated with the potential U.S. port strike, as well as revenue generated during 2024 as distributors procured incremental inventory in advance of ERP implementations. Turning to our syringe products, while they declined during the quarter of 4.2% due to volume declines within the U.S., the rate of decline was lower than what we have experienced recently. While our safety products grew 11.3% as compared to the prior year period due to the annualization of share gains due to 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. He will review the other financial highlights as well as provide our updated financial guidance for fiscal year 2025. Jake.

Jake Elguicze (CFO)

Thank you, Dev, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's first quarter financial performance at the gross profit line. GAAP gross profit and margin for the first quarter of fiscal 2025 totaled $157.1 million and 60%, respectively. This compared to $185.9 million and 67% in the prior year period. While on an adjusted basis, our Q1 2025 adjusted gross profit and margin totaled $164.2 million and 62.7%. This compared to $186.3 million and 67.2% 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 revenue that Dev mentioned earlier, as well as from the impact of net changes in profit and inventory adjustments. These headwinds were partially offset by lower freight costs and our ability to drive year-over-year price increases.

Turning to GAAP operating income and margin, during the first quarter, they were $28.7 million and 11%. This compared to $45.5 million and 16.4% in the prior year period. While on an adjusted basis, our Q1 2025 adjusted operating income and margin totaled $80.5 million and 30.7%. This compared to $77.5 million and 27.9% 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, in addition to lower compensation and marketing expense recognized in the current period. This was offset by the adjusted gross profit changes I outlined above.

Turning to the bottom line, GAAP net income and earnings per diluted share were both zero during the first quarter of fiscal 2025, as compared to $20.1 million and $0.35 in the prior year period. While on an adjusted basis, during the first quarter of fiscal 2025, net income and earnings per share were $38.3 million and $0.65, as compared to $35.3 million and $0.61 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 our adjusted tax rate from approximately 26% in Q1 of 2024 to approximately 25% in Q1 of 2025. The lower year-over-year adjusted tax rate was due to tax planning initiatives, partially offset by the impact of Pillar Two.

Lastly, from a P&L perspective, for the first quarter of 2025, our Adjusted EBITDA and margin totaled approximately $97.3 million and 37.2%, as compared to $90.4 million and 32.6% in the prior year period. Turning to the balance sheet and cash flow. At the end of the first quarter, our cash balance totaled approximately $217 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 4.75x. As Dev mentioned earlier, we continue to be focused on more aggressively delevering, and during the quarter, we paid down $32.4 million of Term Loan B debt, and we remain on track to achieve our goal of reducing our debt by $110 million during fiscal year 2025. That completes my prepared remarks on our first quarter 2025 results.

Next, I would like to discuss Embecta's updated 2025 financial guidance and certain underlying assumptions. Before we begin, I want to acknowledge the evolving tariff landscape and provide some important context regarding our global operations. First, our updated financial guidance does not factor in any newly implemented or proposed tariffs following the recent administration change, and as such, remain consistent with those tariffs in place when we provided our initial fiscal year 2025 guidance in late November of 2024. We manufacture our products across three facilities: Dún Laoghaire, Ireland; Holdrege, Nebraska; and Suzhou, China. We do not perform any manufacturing in either Canada or Mexico. We should note that the tariff regulations include other elements beyond manufacturing location and require analysis of the specific rules to determine impact.

Regarding the U.S., most of the products that we sell in the United States are manufactured either in Ireland or domestically within the U.S. In fact, less than 1% of our global revenue is derived from products we manufacture in China and sell into the U.S., and those products are currently exempt from tariffs. As it relates to China, most of our revenue in China is from products manufactured at our plant in China. Less than 1% of our global revenue is derived from products we manufacture in the U.S. and sell into China, and those products are currently exempt from tariffs. Turning to Canada, approximately 1% of our global revenue is derived from products we manufacture in the U.S. and sell into Canada, and our products were not included in the recently published but delayed retaliatory tariffs, though this remains subject to change.

Finally, as it relates to Mexico, approximately 3% of our global revenue is derived from products we manufacture in the United States and sell into Mexico. We continue to closely monitor these developments and remain committed to mitigating any potential impact, where possible, to both our customers and 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 reaffirming our previously provided guidance range, which called for revenue to be down between 1% and 2.5% as compared to 2024. At the high end of our constant currency revenue range, we continue to assume that volumes remain relatively flat and that price will be a headwind of approximately 1%.

While at the low end, we continue to assume all the same factors impacting our high end, except for the potential of greater year-over-year headwinds associated with volumes. Turning to our thoughts on FX, since we provided our initial fiscal 2025 financial guidance in late November, the U.S. dollar has continued to strengthen against most currencies, and as a result, we currently expect FX to be a headwind of about 2.2% versus the prior year. This compares to our prior guidance, which called for FX to be a headwind of approximately 0.6%. This assumption is based on foreign exchange rates that were in existence around the late January timeframe, including a euro to U.S. dollar exchange rate of approximately 1.03.

Somewhat offsetting FX is the fact that our as-reported 2025 GAAP 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 GAAP revenue. This equates to a tailwind of approximately 0.4%. On a combined basis, our as-reported revenue guidance now calls for a decline of between 2.8% and 4.3%, resulting in an updated revenue guidance range of between $1.075 billion and $1.092 billion. Turning to adjusted gross margin, we are reaffirming our previously provided guidance range of between 63.25% and 64.25%. While from an adjusted operating margin standpoint, we are raising our guidance from a range of between 29% and 30% to a new range of between 29.5% and 30.5%. This improvement is expected to be driven by our ongoing initiatives to improve operational efficiency and reduce our expense base.

Moving to earnings, during Q1, we exceeded our internal expectations for adjusted earnings per share by approximately $0.20, and this was due to two things that contributed almost equally. First, revenue came in better than we initially anticipated, which we attribute to timing, and as Dev mentioned earlier, we expect the overperformance in Q1 revenue to reverse itself during Q2. While the second driver of our Adjusted EPS overperformance during Q1 was due to lower SG&A expenses. As such, we expect our ongoing cost containment efforts to absorb the impact of the incremental foreign exchange headwinds, which negatively impacted us by approximately $0.10, thereby allowing us to reaffirm 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 continues to assume that we will use between $50-$60 million of cash during fiscal 2025 associated with separation costs largely related to brand transition, between $25million and $30 million in cash usage associated with the discontinuation of our insulin patch pump program, and approximately $20 million in capital expenditures. Lastly, and like our adjusted operating margin range, we are also raising our Adjusted EBITDA margin guidance from a range of between 35.5% and 36.5% to a new range of between 36% and 37%.

And before I turn the call over to the operator, I'd like to highlight some considerations regarding the cadence of quarterly revenue expectations during 2025. Moving forward, we may not provide any further commentary concerning the quarterly cadence of revenue on an ongoing basis. Consistent with our initial guidance, our updated financial guidance continues to anticipate that we will generate a slightly lower percentage of our annual revenue during the first half of fiscal year 2025, approximately 48%, as compared to the second half of the year, in which we expect to generate approximately 52% of our annual revenue. Based on this outlook, second quarter implied revenue would be in the range of between $250 million and $255 million. That completes my prepared remarks, and at this time, I'd like to turn the call over to the operator for questions. Operator?

Operator (participant)

Thank you. As a reminder, to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Kallum Titchmarsh with Morgan Stanley. Your line is open. Please go ahead.

Kallum Titchmarsh (VP and Healthcare Equity Analyst)

Yeah, thanks a lot, guys, for taking the question. Just a couple from me. First of all, it would be great if you could walk through each of the kind of three key product categories and kind of just calibrate us for how you expect these to perform through the year. Any pricing dynamics that are a bit more noticeable in one category over the other? I just appreciate, given some of the ERP dynamics from last year, they've kind of thrown off some of the year-over-year numbers. So just any clarity for how you expect that to play out in 2025 would be appreciated.

Dev Kurdikar (President and CEO)

Good morning, Kallum. I'll start off and then ask Jake to augment. So first of all, as we think about the product category performance in Q1, it was as expected. Q1, if anything, was maybe slightly better in general than our expectations from a few months ago in total revenue, and obviously, pen needles comprise the majority of our revenue. So that's sort of point one. And point two, as you pointed out, we do expect growth rates in the quarters this year to be somewhat lumpy, given all the phased implementations that we carried out, really most of the world last year.

Now, talking specifically about Q1, before I talk about sort of future quarters, right, Q1 performance, particularly, I would say, in pen needles, though it affected the other product categories as well, was driven by two major factors. Number one, and probably the most sort of quantitatively important one, was the pull forward that we had in Q4 of 2024 in the U.S. in advance of the then looming port strike that I'm sure you remember, as distributors procured additional inventory to avoid or mitigate potential disruptions in supply. So that's sort of the first factor. The second factor was indeed the ERP implementations, and those sort of fell into two time slots, if you will.

One in Q1 of prior year, and so that affected the growth rate year-over-year, and some in the later part of 2024 as the inventory sort of buildup blew through in Q1 of this year. And those were the two primary factors. Now, if you'll notice in the syringe category, we did actually a little bit better than what historically the declines have been, and that's largely most of the declines, the volume declines in the U.S. And as that becomes a smaller factor, the decline rates actually improve, if you will, and that was probably the single largest factor. Safety products, in fact, grew, and that's because we were able to win some share in the market as a competitor discontinued their product and exited certain markets. So those were the three factors that impacted the product categories in Q1 of 2025.

Now, as we go forward, we do expect this lumpiness to go through the year, primarily due to the same factors I've talked about regarding ERP implementations. If I just step back and look at overall sort of growth rates in each of our product categories, historically, we've seen slight increases in pen needles and decreases in syringes and some growth in our safety products as well. There is nothing that we've seen in the market so far that would imply that there has been a change in those historical growth rates. So we don't give guidance by product categories through the year, but I think it's fair to assume if you look at our overall revenue guidance for fiscal 2025, you will see those rates reflected certainly in the pen needle category, given that it comprises the majority of our revenue. Jake, anything?

Jake Elguicze (CFO)

Yeah, well, you know, Callum, maybe I'll just quantify some of the items that Dev talked about. And maybe first off, even before I do that, I'd say that everything that occurred here was certainly in line with what our original expectations were. In fact, I think in Q1, we probably did about somewhere between $7 million and $8 million better in terms of revenue than what we had originally anticipated, largely due to the timing item that Dev referred to. And that really had to do with the fact that we were putting in place a price increase that was going to go into effect on 1/1 of 2025, and we saw some revenue sort of get pulled forward into our fiscal first quarter as a result.

But during the first quarter, particularly impacting, I think, the pen needle category, we talked about distributors placing orders in the fourth quarter of 2024 because of the port strike. That probably impacted our business by about $10 million. And then secondly, another item that impacted us was the ERP implementation in our North American business that occurred in the first quarter of 2024. And we estimate that that resulted in additional revenue in the prior year quarter by about $6 million. So largely those two factors. To a lesser extent, we saw some distributors in China sort of rebalancing some inventory levels, and we estimate that probably impacted our business in the first quarter of 2025 by about $3 million. So those three items really drove the pen needle performance. But again, certainly, actually, probably a little bit better than what we had originally anticipated coming into the year.

As our implied guidance for the second quarter points to revenue somewhere between $250 million-$255 million, and that would essentially indicate that our pen needle performance in the second quarter would be very, very similar to what we saw in the first quarter of this year. Similar performance is expected there. Then as we go into the back half of the year, we would expect improvements in terms of the pen needle as well as the safety product category. Hopefully, that provides you with a little bit more color regarding some of the drivers and then some of the reasons why I think we think sequentially we're going to be a little bit better in the second half of the year as compared to the first.

Kallum Titchmarsh (VP and Healthcare Equity Analyst)

Yeah, that's fantastic. I really appreciate the color on that. And then just one more on the GLP-1 pen needle opportunity, any sort of quantifications you can give us around Germany and the progress there? And then would love to hear a bit more progress on the outlook outside of Germany for the same program. Thank you.

Dev Kurdikar (President and CEO)

Yeah. Hi, Kallum. Our progress in Germany sort of continues for our expectations. Obviously, we will follow how Mounjaro and KwikPen gets adopted in Germany. And what we are striving for over there is that making sure that our pen needles do get used for the out-of-pocket prescriptions that are going to be filled in Germany. It's going to take some time. We are not quantifying, if you will, the revenue from GLP-1s.

Frankly, as you can imagine, as Mounjaro and KwikPen launches in other countries around the world, it is going to be hard for us to distinguish pen needles used for GLP-1s via Mounjaro and KwikPen if they are going to be reimbursed because they're going to follow our same procurement channels as the pen needles used for diabetes. It's only in markets where the GLP-1s are going to be out of pocket, and patients might procure a three-month prescription for a GLP-1 where we can actually monitor the number of small packs that are bought. The point I do want to make is that while pen needles might be being used for GLP-1s that are administered via pens, we cannot certainly distinguish between volume that's procured through our normal channels, but we can certainly identify the small packs. Now, that's going to take some time.

Frankly, I think the bigger opportunity for the use of pen needles for GLP-1s is going to be in the discussions that we are having with generic GLP-1 entrants, where we are certainly working towards being able to co-package our pen needles with those generic GLP-1s. We do think over the long term that that is a bigger opportunity, and those discussions with 10-plus potential GLP-1 generic entrants are going very, very well. We certainly anticipate providing more color around this at our analyst day plan for May 2025. So I'd request we wait until then to get a little bit more sort of at least a range of what this could mean for us over the next few years.

Kallum Titchmarsh (VP and Healthcare Equity Analyst)

Thanks, guys.

Operator (participant)

Thank you. One moment as we move on to our next question. Our next question comes from the line of Marie Thibault with BTIG. Your line is open. Please go ahead.

Hey, good morning, everyone. This is Sam Ewan for Marie. Thanks for taking the questions this morning and congrats on a nice quarter. Maybe I can start on a capital allocation question. Things progressing clearly on that paydown initiatives, but I guess I'm wondering if there's a certain leverage ratio where maybe you become more comfortable looking at opportunistic M&A and more related to your comments about expanding the product portfolio. I guess wondering if that's more of a near-term opportunity or perhaps medium to longer term.

Jake Elguicze (CFO)

Yeah. So thanks for the question, Sam. So I think from our standpoint, I think over this year, certainly, and I think into next year, we're really focused on continuing to try and create some additional financial flexibility. Our net leverage, our last 12 months net leverage as of the end of this quarter is around 3.7x.

Now, our covenant allows us to go up to 4.75x. Now, obviously, we wouldn't want to go anywhere close to that, and I think by the end of this year, assuming that we pay down around $110 million in debt, which we are well on our way to doing, we should be around a three-times net leverage mark by the end of fiscal 2025. And I think as we move then into 2026, it's probably more likely that we will continue to focus on more aggressively paying down our debt and allowing us to create some additional balance sheet flexibility, so I think it's probably a little bit more likely that we'll trend lower than three and somewhere into the twos in terms of net leverage as we get into 2026, so from an M&A standpoint, obviously, M&A is very, very opportunistic, right?

I think for us, we only need an incremental $10 million-$15 million of revenue per year to drive our constant currency revenue growth rates up by about 1%. So I don't think we need to necessarily do highly transformative M&A in order to create value here for shareholders. But I think in the near term, our focus really is more about continuing to finalize the separation programs, which will allow us to really keep that free cash flow and use it towards debt repayment.

Really helpful, Jake. I appreciate all the color there. Maybe I can just use my follow-up here on long-term margin progressions and maybe how we should be thinking about any initiatives that you guys have going on in terms of either maintaining or even expanding margins, perhaps beyond fiscal 2025.

Dev Kurdikar (President and CEO)

Sam, with respect to sort of long-term margin progression, I mean, that's certainly something that we'll be discussing in our May 2025 Analyst and Investor Day. So I'm going to reserve giving ranges for that at this time. But what I will say is that our priorities around expanding product portfolio are important to us. And I think, as I said in the script, that comprises two potential vectors, right, where we manufacture products for companies that already have a commercial presence or, frankly, distribute products that can be manufactured by others. Both of those, as you can imagine, are going to have different margin profiles. And so as we work through the opportunities here, we need to net that out against the margin progression that we expect to see in our base business.

But those are the puts and takes that we just need to work through, and we'll certainly provide more information during the analyst day.

Jake Elguicze (CFO)

Yeah. And Sam, maybe just coming back to the quarter and I think our updated guidance, I think we had from an earnings standpoint, we ended up, and we alluded to this in our prepared remarks, I think we ended up performing better than our internal expectations by about $0.20. And that was really due to sort of two things almost impacting it equally. One, revenue being actually a little bit better in Q1, which is going to reverse in Q2 and the associated drop through to earnings. But then two, and importantly, I think our SG&A in the quarter really drove around $0.10 of an improvement as compared to our original internal expectations.

And we would expect that to stay for the entirety of the year and really allows us, if you will, to sort of absorb the incremental $0.10 headwind that we saw or expect to see because of FX rates working against us in relation to our original guidance. So this year is really going to be for the company, it's really going to be focused on finishing up and completing the discontinuation of the patch pump program, which the team has done an excellent job and we're well on track to having that complete by the first half of the year. It's also going to be driven and focused on continuing to more aggressively deliver. And then third, it really is about trying to further optimize our cost base and take expenses out of the system.

If you recall when we spun from BD, obviously a much larger organization, and to a fair amount, there was sort of a lift and shift in terms of how they did things and in terms of how we did things. I think now really there's an opportunity as we go through 2025 and into the next few years to really just look at our cost base and try and find ways to continue to take cost out, and that's what we're doing.

Understood. Thanks for taking the questions and looking forward to the Investor Day.

Operator (participant)

Thank you. One moment for our next question. If you would like to ask a question, please press star one one on your telephone. Our next question comes from the line of Ryan Schiller with Wolfe Research. Your line is open. Please go ahead.

Ryan Schiller (Equity Research Senior Associate)

Good morning. Thank you for taking the questions. This is Ryan on for Mike Polark. You talked about expanding your product portfolio by leveraging your commercial channel to distribute products from others. Are there specific types of products that come to mind that could fit well into your model, and when might this start layering into your financial model?

Dev Kurdikar (President and CEO)

Yeah. Good morning, Ryan. The types of products that we would want are those that fit in reasonably cleanly through our commercial channel. Given the breadth of our commercial channel across the world, those products might be different. I'm going to give you some examples. In China, for example, we do call on hospitals. We could add products to the portfolio that our sales team can actually be able to sell into hospitals. In the U.S., on the other side, as you know, we have a strong presence with retailers and strong payer relationships.

So we might look for products that can fit through that channel. And that retail pharmacy channel is present also in several countries in Europe. In Germany and Japan, we call on endocrinologists. And therefore, we might look for products that are served by that channel. So I think it's going to differ in every market, but I think the unifying theme is going to be someplace where our products that can really leverage our commercial strength. We certainly anticipate being able to speak more about that at our upcoming analyst day, where we're working hard to add these products to our portfolio, and I look forward to providing some examples at that time.

Operator (participant)

Thank you. And I'm showing no further questions at this time, and I would like to hand the conference back over to Dev Kurdikar for closing remarks.

Dev Kurdikar (President and CEO)

As we close the call, I just want to express my sincere gratitude to my colleagues at Embecta around the world. Our global team remains focused on executing the priorities that we've laid out. And finally, we look forward to engaging with all of you at our upcoming conferences and at our Investor Day in late May 2025, where we'll certainly share more about some of the topics that were discussed today and our vision for Embecta. Thank you for calling in and for your interest in our company.

Operator (participant)

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.