Embecta - Earnings Call - Q3 2025

Executive Summary

• Q3 FY25 delivered an upside print: revenue $295.5M (+8.4% YoY) and adjusted EPS $1.12, with strength driven by U.S. pricing/rebate reserve adjustments and order timing; management raised and tightened FY25 margin/EPS guidance while narrowing revenue ranges.
• Adjusted operating margin expanded to 36.9% (+630 bps YoY) and adjusted EBITDA margin to 44.3% (+790 bps YoY); GAAP diluted EPS was $0.78.
• Balance sheet improved: cash + restricted cash $233.6M, no revolver draw; principal debt outstanding $1.489B; Q3 debt paydown $52.4M, YTD $112M; management now expects ~$150M FY25 debt reduction and cited LTM net leverage ~3.2x.
• FY25 outlook: revenue range narrowed to $1.078–$1.085B; margins and adjusted EPS raised to $2.90–$2.95 on minimal tariff headwinds and cost controls; Q4 revenue implied ~mid-$260Ms given reversal of Q3 timing/pricing items and softer China.
• S&P Global consensus context: EMBC delivered a beat on revenue ($295.5M vs $278.2M*) and adjusted EPS ($1.12 vs $0.78*); EBITDA also above S&P’s EBITDA consensus (definitions differ) (see “Estimates Context”). Values retrieved from S&P Global.

What Went Well and What Went Wrong

• What Went Well

  • U.S. commercial execution: U.S. revenue +11.6% YoY with contribution from pricing (rebate reserve adjustments) and favorable order timing ahead of July 4 and brand-transition stocking.
  • Margin strength and profitability: adjusted operating margin 36.9% (30.6% LY) and adjusted EBITDA $131.0M (44.3% margin), up from $99.2M (36.4%) LY.
  • Strategic milestones: ERP cutover and India distribution fully implemented; >90% of North America revenue transitioned to embecta-branded products, concluding a multi‑year separation program; multiple contracts/P.O.s to co‑package pen needles with potential generic GLP‑1s.

• What Went Wrong

  • Gross margin down YoY: adjusted gross margin 67.2% vs 69.8% LY due to lower profit-in-inventory benefits vs prior year ERP-related inventory effects.
  • China softness and geopolitical headwinds: guidance embeds lower China Q4 revenue on local-brand preference and distributor inventory rebalancing; FX −$3M expected Q3→Q4.
  • R&D step-up ahead: management anticipates incremental Q4 R&D for low-cost pen needle/syringe lines, cannula independence, and GLP‑1 partnerships, contributing to sequential margin step-down into Q4.

Transcript

Speaker 4

Welcome, ladies and gentlemen, to Embecta Corp.'s fiscal third quarter 2025 earnings conference call. At this time, all participants have been placed in a listen-only mode. Please note that this conference call is being recorded, and a replay will be available on the company's website following the call. I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Mr. Khandelwal, please go ahead.

Speaker 5

Thank you, Operator. Good morning, everyone, and welcome to Embecta's fiscal third 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, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides. Such statements are, in fact, forward-looking in nature and are subject to 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 third quarter of 2025, as well as an overview of the progress that has been made concerning our strategic priorities.

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

Speaker 0

Good morning, and thank you for taking the time to join us. As we detailed during our recently conducted Analyst and Investor Day event, we are currently in the second phase of our journey that is focused on progressing initiatives intended to position Embecta for long-term growth. Our priorities in this phase are to continue strengthening our core business, expanding our product portfolio, and increasing our financial flexibility. Starting with the core, we completed the ERP, shared services, and distribution network implementation in India, which had been the only remaining market operating on BD systems. This milestone means that 100% of our revenue is now flowing through Embecta's own systems and marks the successful conclusion of a multi-year complex separation program. In addition, the transition from BD to Embecta-branded products in the U.S.

and Canada has significantly advanced, with greater than 90% of our North American revenue base having been changed over to Embecta-branded products. Consistent with our ERP implementation approach, we are executing the brand transition project in a phased manner to minimize risk. The transition began in North America in 2025, and in line with our plan, is expected to extend to international markets in 2026. On the portfolio expansion front, I'm pleased to share that we continue to make meaningful progress in our efforts aimed at positioning the utilization of our pen needles with GLP-1 therapies delivered via pen injectors. As we highlighted at our recent Analyst and Investor Day, we are actively collaborating with over 30 pharmaceutical companies to co-package our pen needles with their generic GLP-1 therapies. Several of these companies have already signed agreements with us and placed purchase orders for our pen needles.

Our products are already part of multiple generic GLP-1 regulatory submissions, with potential commercialization beginning as early as 2026. We continue to believe that we are well placed to partner with these generic drug companies, given our decades-long reputation for quality and reliability, regulatory approvals in most markets, and a world-class distribution network. We are also making progress introducing pen needles in retail small packs that patients can purchase for use with weekly GLP-1 injection treatments, thereby supporting patient needs and broadening our commercial relevance. Together, the co-packaging and retail packaging prospects represent a significant long-term opportunity that could generate more than $100 million in annual revenue for Embecta by 2033. In line with our commitment to enhanced financial flexibility, in fiscal Q2, we initiated a restructuring plan aimed at streamlining our organization.

This plan is now substantially complete, and we continue to expect this action will drive meaningful efficiencies, with estimated pre-tax cost savings of between $7 million and $8 million during the second half of fiscal 2025, or approximately $15 million on an annualized basis. Finally, during the third quarter, we paid down approximately $52 million of principal under our Term Loan B facility, bringing total year-to-date debt reduction to approximately $112 million. With this, we have achieved our fiscal 2025 debt reduction goal of paying down approximately $110 million, with one quarter remaining, during which we anticipate making an incremental debt payment. With stand-up-related cash usage largely behind us and cost optimization initiatives underway, we believe we are well positioned to continue strengthening our balance sheet, thereby enabling us to make future organic and inorganic investments.

Turning to some fiscal third quarter highlights, third quarter revenue reached all-time highs, totaling $295.5 million. This significantly exceeded our expectations and was due entirely to overperformance within the U.S. The strong performance in the U.S., in relation to our prior expectations, was due to pricing and volume, which contributed equally. First, favorable pricing driven by year-to-date rebate reserve adjustments, and second, the timing of certain distributor orders in advance of the July 4th holiday, as well as incremental stocking related to our brand transition program. Overall, our Q3 results reflect strong commercial execution and are consistent with our expectation that the second half of the fiscal year would be stronger than the first from a top-line perspective.

Finally, as we reflect on our third quarter results and look ahead to the remainder of the year, we are narrowing our previously provided as-reported revenue guidance range, and we are raising and narrowing our fiscal 2025 guidance ranges for other key financial metrics. Now, let's review our revenue performance for the third quarter. During the third quarter of fiscal year 2025, Embecta generated $295.5 million in revenue, reflecting growth of 8.4% on an as-reported basis or 8% on an adjusted constant currency basis. Within the U.S., revenue for the quarter totaled $160.2 million, representing year-over-year growth of 11.6% on an adjusted constant currency basis. This performance was aided in part by a favorable comparison to the prior year period, as well as the aforementioned rebate reserve adjustments and timing of orders. We expect the timing-related benefits from these orders to reverse in the fourth quarter.

Turning to our international business, revenue for the third quarter totaled $135.3 million, representing growth of 5.0% on a reported basis and 4.2% on an adjusted constant currency basis. Growth in the quarter was primarily due to Latin America and Asia, which benefited from a favorable comparison to the prior year, when order volumes were lower as customers normalized their purchasing patterns following our ERP transition. This was partially offset by a year-over-year decline in China. While from a product family perspective, during the quarter, pen needle revenue grew approximately 6.8%, syringe revenue grew by approximately 14.5%, safety products grew approximately 6.5%, and contract manufacturing grew approximately 47.2%. The year-over-year growth in pen needle revenue was primarily driven by increased product volumes as pricing was relatively flat year over year.

The increase in pen needle volumes was aided by the timing of distributor orders mentioned earlier, as well as a favorable comparison to the prior year period. Turning to our syringe products, they grew in the quarter by 14.5%, primarily driven by increased pricing as volumes were lower than the prior year period. The increase in syringe revenue from pricing was due to a combination of increased U.S. prices, aided in part by the year-to-date rebate reserve adjustment that occurred during the quarter, coupled with increased pricing in most international markets. While our safety products grew 6.5%, primarily due to improved pricing as volume increases within the U.S. were offset by volume declines in international markets. That completes my prepared remarks, and with that, let me turn the call over to Jake to review other Q3 financial highlights, as well as provide our updated financial guidance for fiscal year 2025.

Jake?

Speaker 2

Thank you, Dev, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's third quarter financial performance at the gross profit line. GAAP gross profit and margin for the third quarter of fiscal 2025 totaled $197.1 million and 66.7%, respectively. This compared to $190.1 million and 69.8% in the prior year period. While on an adjusted basis, our Q3 2025 adjusted gross profit and margin totaled $198.6 million and 67.2%. This compared to $190.3 million and 69.8% in the prior year period.

The year-over-year decline in adjusted gross margin was driven by the impact of net changes in profit and inventory adjustments, as during the third quarter of 2024, we incurred a large favorable profit and inventory adjustment resulting from the buildup of inventory associated with the various 2024 ERP implementations and the ultimate sale of that product into the market. During the third quarter of 2025, while profit and inventory did impact us positively, it was not to the same extent as it was in the prior year period. Turning to GAAP operating income and margin, during the third quarter, they were $94 million and 31.8%. This compared to $55.9 million and 20.5% in the prior year period. While on an adjusted basis, our Q3 2025 adjusted operating income and margin totaled $109.1 million and 36.9%. This compared to $83.3 million and 30.6% in the prior year period.

The year-over-year increase in adjusted operating income is primarily due to lower R&D expenses associated with the discontinuation of our insulin patch pump program and higher revenue and gross profit as compared to the prior year period. Turning to the bottom line, GAAP net income and earnings per diluted share were $45.5 million and $0.78 during the third quarter of fiscal 2025, as compared to $14.7 million and $0.25 in the prior year period. While on an adjusted basis, during the third quarter of fiscal 2025, net income and earnings per share were $65.5 million and $1.12, as compared to $43 million and $0.74 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 and a positive year-over-year impact from FX.

This was partially offset by an increase in our adjusted tax rate from approximately 22% in Q3 of 2024 to approximately 25% in Q3 of 2025. Lastly, from a P&L perspective, for the third quarter of 2025, our adjusted EBITDA and margin totaled approximately $131 million and 44.3%, as compared to $99.2 million and 36.4% in the prior year period. Turning to the balance sheet and cash flow, during the third quarter of 2025, we generated approximately $81 million in free cash flow, inclusive of a benefit of approximately $26 million from trade receivables factoring, and our cash balance totaled approximately $234 million. While our last 12 months' net leverage, as defined under our credit facility agreement, stood at approximately 3.2 times, as a reminder, our net leverage covenant requires us to stay below 4.75 times.

As Dev Kurdikar mentioned earlier, we remain focused on reducing our outstanding debt so that we can create the financial flexibility necessary to change the revenue profile of Embecta. During the third quarter, we paid down $52.4 million of outstanding Term Loan B debt. I'm pleased to report that we have already exceeded our fiscal 2025 debt reduction target by repaying $112 million through the first nine months of fiscal 2025, and we now expect to reduce our outstanding debt by approximately $150 million during 2025. We continue to target net leverage levels of approximately three times by fiscal year end. That completes my prepared remarks on our third quarter 2025 results. Next, I'd like to discuss Embecta's updated 2025 financial guidance and certain underlying assumptions.

Beginning with revenue, on an adjusted constant currency basis, we are narrowing our range, now calling for a decline of between 3% and 3.6%, the midpoint of which is consistent with our prior adjusted constant currency range. This updated adjusted constant currency range consists of an improved outlook within the U.S., including the rebate reserve adjustments that positively impacted our Q3 results, offset by an updated outlook for China. Turning to our thoughts on FX, we are reaffirming our previously provided guidance for FX, which called for foreign currency to be a headwind of 0.8% versus the prior year. Additionally, 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, we are narrowing our full-year as-reported revenue guidance from a range which called for a decline of between 2.9% and 4.4% to a new range which calls for a decline of between 3.4% and 4%. In dollar terms, this equates to a revenue range of between $1,078 million and $1,085 million, or a midpoint of $1,081 million, which is also consistent with the midpoint of our prior as-reported revenue dollar range. Turning to margins, for adjusted gross margin, we now expect a new range of between 63.25% and 63.5%, as compared to the prior range of between 62.75% and 63.75%. This includes our updated thoughts on the incremental impact of tariffs, which we now expect to have a negligible effect during fiscal year 2025.

From an adjusted operating margin perspective, we now expect a new range of between 30.75% and 31%, as compared to the prior range of between 29.75% and 30.75%. In terms of adjusted EBITDA margin, we now expect a new range of between 37.25% and 37.5%, as compared to the prior range of between 36.25% and 37.25%. Lastly, due to the improved margin outlook, we are increasing and narrowing our adjusted earnings per share guidance from a range of between $2.70 and $2.90 to a new range of between $2.90 and $2.95, or an increase at the midpoint of approximately 12.5%. 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 slightly changed to approximately 58.8 million as compared to approximately 58.9 million before.

Our guidance also assumes that we will use between $50 million and $55 million of cash during fiscal 2025, associated with separation costs largely related to brand transition, which is slightly lower than our prior expectations, which called for one-time cash usage of between $50 million and $60 million, and approximately $22 million associated with the discontinuation of our insulin patch pump program, as compared to our prior expectations, which called for cash usage of between $20 million and $25 million. As it relates to capital expenditures, we now expect to incur approximately $13 million during the year, down from our prior estimate of approximately $15 million. That completes my prepared remarks, and with that, I would like to turn the call over to the operator for questions. Operator?

Speaker 4

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Marie Thibault from BTIG.

Good morning. Thanks for taking the questions and congrats on another very strong quarter. Wanted to ask one here, I guess, Jake, for you on the guidance. Certainly heard that some of the timing benefits you saw in fiscal third would be reversing in fiscal fourth, but I think you also called out equal contribution from pricing benefits. Wasn't so clear to me that those would be reversing. Can you help me to think about how we should be modeling fiscal fourth quarter when it comes to revenue and some of those pricing dynamics?

Speaker 2

Yeah, sure Marie. Thanks for the question. To start off, I think we're really, really pleased with the third quarter results. I think in comparison to our own internal expectations, we did better by approximately $14 million or so in terms of revenue contribution. As we said in our prepared remarks, that was all entirely due to the U.S., and it was sort of equally split between some of the pricing items that you were referring to, coupled with improved volumes due to distributors buying in advance of the July 4th holiday. If you were to think about the implied midpoint, if you will, of our fourth quarter revenue, we're essentially going from about $295 million in revenue in Q3 down to a midpoint of around $265 million in Q4.

That's driven by the fact that we don't expect those distributor orders to happen in the fourth quarter of the year. From the third quarter to the fourth quarter, that's driving about half of the potential sequential decline in revenue. The U.S. rebate reserve adjustments are not necessarily expected to also reoccur in the fourth quarter. That positively impacted our third quarter results by about $7 million. We also expect there to be around a $3 million incremental headwind from FX going from Q3 to Q4. You heard us talk about China in the fourth quarter. Our estimates are, there's certainly been an impact, I would say, from a geopolitical standpoint. Right now, we're projecting that China revenue in the fourth quarter is going to be slightly lower than the China revenue that we're seeing in the third quarter. It really comes down to those dynamics.

Okay, that's helpful. Jake, if I can also ask a similar question on margins, I'm working through my model here, and it just looks like we'd have to bake in a pretty sharp decline in gross margins, operating margins, EBITDA to get to the, I guess, really the high end of the range for the guide. What are some of the dynamics there? Of course, understand, you know, revenue is going to be a bit lower than it was this quarter, but what else should we be thinking about?

Yeah, Marie, again, I think coming back to the first, you know, the results in the third quarter, we significantly exceeded our internal estimates. Very, very strong performance in Q3, in part aided by the fact that we did have a benefit from profit and inventory that impacted our results. If we think about whether it's the revenue profile, you know, going from kind of Q3 to Q4 or the gross or operating margin profile from Q3 to Q4, this isn't something that is necessarily unusual for us. We have seen over the last several years step downs from kind of Q3 margins, whether it's gross margins or operating margins to Q4. It is more typical for us for that to occur. The midpoint of our operating margin, you know, range essentially calls for operating margins to be around 24% in the fourth quarter of the year.

The step down is largely due to our thoughts on gross margin, largely due to the fact that revenue is expected to come down. We're not necessarily expecting those same pricing benefits. We're not necessarily expecting right now to see those same benefits in terms of distributor orders that positively impacted Q3 results. From that perspective, we would expect the revenue impact to our margins to drive around a 400 basis point sequential decline. The next big driver is profit and inventory. PII was a benefit to our third quarter margins. It's actually expected to be a slight expense in the fourth quarter. That is driving around, or is expected to drive around, a 300 basis point sequential move from Q3 to Q4. In terms of OpEx, typically in SG&A, we do see somewhat of a step up from Q3 to Q4 in terms of SG&A expense.

That's largely due to the timing of some commercial spending and some trade shows that typically occur in the fourth quarter of any given year. We do expect there to be a slight uptick in terms of R&D expense. We're making a lot of very, very good progress in terms of some of the value creation drivers that we outlined at the recent Analyst and Investor Day. We do intend to spend behind some of those things. For instance, you know, we talked about developing a, you know, a market-appropriate, more low-cost pen needle and syringe product lines. We're going to be spending, you know, behind that. We also talked about making inroads in terms of becoming more cannula independent from our former parent. We are going to be spending behind that as well as we move that project ahead.

Lastly, we're making a lot of really, really good progress in terms of working with well over 30 different generic pharmaceutical companies as it relates to the use of our pen needles with their GLP-1 products. We expect to see an uptick in terms of R&D spending associated with that as well.

Speaker 0

Marie, just to sort of emphasize something that Jake said, our business results may fluctuate a bit quarter to quarter, but over a longer period of time, they tend to be incredibly stable, right? The implied quarter four margins are fairly consistent with quarter four margins you have seen in prior years. I just wanted to emphasize that point as well.

Okay, very helpful. Lots of great detail. If I can sneak in one last quick one, really sort of on capital allocation, congrats on hitting your debt paydown goal ahead of time. Did want to ask about your openness or interest in possible share repurchasing. Obviously, understand debt paydown remains a priority, but given what we see as a very attractive valuation for your stock, wondered about your thoughts on share buybacks. Thanks.

Marie, our thoughts on capital allocation haven't changed since what we laid out at our Investor Day in May. Paying down debt is a priority, and essentially making the investments necessary to transition the company back to growth remains a key priority. At this point, those are the things, those are the priorities we are focused on, Marie.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Anthony Petrone from Zoho Americas.

Thanks, and congratulations on the quarter here. Maybe I'll start with the competitive bidding proposal from CMS. Certainly, it encompasses CGMs and pumps. It also talks about other accessories around those two solutions. I was just wondering if that goes through, potentially what could be the ancillary tailwind, I would imagine, to the pen needle business. Then I'll have a couple of follow-ups. Thanks.

Speaker 0

Yeah, Anthony, I think your hypothesis is probably the right one, but obviously, it's too early to tell what impact CMS, the competitive bidding proposal, is going to have on pump adoption rates going forward. For us, as you realize, we are largely insulated just given the nature of the portfolio and the channels through which we operate. We will continue to monitor developments. As it develops, if we feel like it's going to have a positive impact on our business, we'll certainly update you.

No, it's helpful. Maybe, shifting gears to China, there's been obviously updates on the tariff front. Maybe, Jake, if you can provide a little bit on what updated rates are out there, how that potentially could flow through the P&L. Also, on the demand side, I know you're local for local there, but I think there's also some inventory that comes out of China that goes elsewhere. Maybe just the geopolitical backdrop, how it flows in from a tariff standpoint with the latest rates, and is there any demand impact that you're seeing. Thanks again, and congrats on the quarter.

Yeah, maybe Anthony, I'll start off and then Jake can augment as necessary. Look, on the tariff front, as you know, the tariff rates between the U.S. and China were reduced while negotiations were underway for a new agreement. That agreement is supposed to come due somewhere in the next week, I think August 12th. Since the last update, since our last call to now, rates are around 10%. At this point for fiscal 2025, we expect a very minimal incremental tariff impact across our business, U.S. to China, China to U.S. The product that we make in China, very little of that comes to the U.S. Because we are a product focused on diabetes, we get certain exemptions under the Nairobi Protocol. We expect that those exemptions will remain.

The rest of the product that's made at our plant in China is either consumed locally in China or mostly in Asian markets. There we don't see much of a tariff impact. The final point I'll make, as you asked on the demand side, as you know, it's a fairly uncertain environment right now. We are certainly seeing a preference towards local Chinese brands as the U.S.-China relationship evolves. We are continuing to monitor it, and we took the latest thoughts we had on this when we updated the guidance earlier this morning.

Thank you, Dev.

Speaker 4

Thank you. One moment for our next question. Our next question comes from the line of Travis Steed from Bank of America Securities.

This is Gracia Mahoney, on for Travis. Congrats on the next quarter and thanks for taking the question. My first one, I wanted to ask about free cash flow. It was higher in the quarter, and you called out that $26 million saved receivables benefit. I was just wondering if there's continuing underlying strength in that and any way to potentially contribute to some upside for that $600 million free cash flow LRP target you called out at your Investor Day in May.

Speaker 2

Yeah, thanks for the question. Free cash flow was certainly a real positive for the quarter. I think we've been saying for quite some time that this business is really a highly profitable cash flow generative business. It's just that up until recently, because we've had to use so much cash associated with standup and separation activities, the true underlying free cash flow ability of the company was sort of masked. Now that we're complete with separation activities, we're starting to see, and it's becoming more apparent externally, what the free cash flow capabilities of Embecta are. We generated around $81 million of free cash flow this quarter. Even if you were to sort of normalize for the factoring, we were around $55 million or so of free cash flow generation.

If you were to just simply annualize that, you get to a little over $200 million in terms of potential annual free cash flow. We are well on our way to being able to achieve the targets that we laid out at our Analyst Day in terms of free cash flow generation through 2028. I think it's really going to position us well to be able to continue to de-lever, get the balance sheet at a point where we do have that additional financial flexibility to be able to do organic and probably importantly inorganic investments to really get the top line moving in a much more sustainable positive direction.

Great, thank you. Just one more. On the store closures that you called out in Q2 that are pressure in the second half of this year, just wondering if you could walk through how you're seeing those dynamics play out in the second half and any visibility maybe into a broader trend into 2026. Thanks for taking the questions.

Speaker 0

Yeah, thanks for the question. Look, it's only been one quarter really, so it's too early to point to specific trends, but let me just say that it is something we are following closely. We commented earlier that we are seeing strength in our U.S. performance, and it's pretty broad-based. It is something that is potentially a result of patients that are facing, you know, their local pharmacy store closed, go to some other pharmacies to continue to procure the product. It's something we'll watch closely. It is potentially contributing to our U.S. results, but it's too early to call it that. We'll certainly update, you know, as we get more information on this.

Great, thank you.

Speaker 4

Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our next question comes from the line of Michael Polark from Wolfe Research.

Good morning. I wanted to ask the China follow-up question. Dev, you alluded to it there in your response to Anthony, but it sounds like tariff-driven global tensions in China might be persuading the local markets to preference local manufacturers and brands. Am I reading this correct? I just want to understand. I'm not a China analyst by any stretch. I want to understand what you mean by the kind of geopolitical kind of environment. It sounds like in the guidance you're expecting the China revenue down Q over Q. Double click on that one more time, please. What are you really saying? Thank you.

Speaker 0

Yeah, so what we did, Mike, for the guidance that we gave out today, we incorporated our thoughts and sort of revised distributor demand in Q4. The reason for that was really twofold. Our expectations around, you know, in the, in the, or amidst the challenging geopolitical and trade environments, maybe a preference towards local Chinese brands and increased competitiveness, but also distributors potentially rebalancing their inventory towards the end of our fiscal year. By way of background, the way our business flows in China is we sell to three or four national distributors that then sell to 200 plus sub-distributors. Importantly, the national distributors that we sell to prepay for our products. That gives us a little bit more visibility into what their ordering patterns are likely to be. Now, I'm pleased to say that in spite of, you know, this potential softness in China, our U.S.

business has been performing. We sort of netted those out as we considered our thoughts on guidance for this year. It's a fast-moving environment, as you know, Mike. It's something that we are following closely. Our China team is, you know, commercially extremely strong. As you know, we have a manufacturing base there. We continue to be sort of optimistic with respect to our long-term outlook on China because the volume growth over there, you know, tends to be in the mid-single digits.

Helpful, Dev. I have one more as a follow-up back to the U.S. market. Maybe a little out of bounds here, but on the GLP-1 topic, you know, the compounders have been remarkably effective at growing in this market. Often they're selling vials of compounded GLP-1 medication with syringes. My question for you is, are you positively exposed to that syringe demand or is your product not fit that use case?

You know, we are positively exposed, right? In certain markets, we are only indicated for insulin delivery. Obviously, we stick to our indications when it comes to marketing. I think when we think about GLP-1, Mike, more broadly, it is really the generic GLP-1 trends that we follow more closely because we do expect, and you might have heard of this or read about this from certain drug companies that have had earnings calls in recent weeks about their bullishness in terms of generic GLP-1 adoption in various markets, beginning as early as 2026 in Canada and potentially India and Brazil as well. From a business standpoint, I think that is going to be far more impactful for us than any potential syringe uplift from compounders using our syringes or patients using our syringes.

Understood. That is helpful. Just one clarification there. I hear the pen needle opportunity loud and clear on the syringe side. You don't have the indication, it's insulin indicated, so you can't market it. Does the syringe work in this use case if a patient were to try that?

Yeah, I mean, it is a syringe. It would work. No question about it, right? You know, it's marked for insulin. It's been indicated for insulin. In certain markets outside the U.S., actually, regulatory bodies have taken the view that it's okay to use our syringes for GLP-1 delivery. I'm not aware of that actually happening in the U.S.

Thank you for the questions.

Speaker 4

Thank you. At this time, I would now like to turn the conference back over to Dev for closing remarks.

Speaker 0

Thank you all for joining us. Let me just emphasize that we are very pleased with our performance in Q3 and really excited about the second phase of our journey as we progress on the various initiatives we laid out during Investor Day to transition the company back to growth. Particularly pleased with the strong free cash flow generation capabilities of the company and achieving our debt paydown target. As you heard us say, brand transition is well underway and our multi-year ERP program has been completed. I really wanted to thank and sort of send my sincere gratitude to all my colleagues at Embecta around the world. All of this work obviously requires significant dedication and effort by our team. I'm very grateful for how they are executing, even as uncertainty exists in the geopolitical and global trade environments.

With that, thank you for calling in and for your interest in Embecta.

Speaker 4

This concludes today's conference call. Thank you for participating. You may now disconnect.