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EC

Embecta Corp. (EMBC)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 revenue was $286.1M (+1.5% YoY) with adjusted revenue of $290.2M (+4.1% adj. cc); U.S. grew 10.3% while International declined 8.8% reported (-3.1% adj. cc) . Margins compressed: adjusted gross margin fell to 61.4% (from 64.8% YoY), adjusted operating margin to 21.1% (from 23.1%), and adjusted EPS to $0.45 (from $0.59) as plant absorption declined on intentional inventory drawdown and mix/FX headwinds, partially offset by pricing .
  • Strategic pivot: embecta discontinued its insulin patch pump program and initiated a restructuring, guiding FY25 revenue down 1.2%–2.7% as reported, with adjusted gross margin 63.25%–64.25%, adjusted operating margin 29%–30%, adjusted EPS $2.70–$2.90, and adjusted EBITDA margin 35.5%–36.5% (ex-pump) .
  • Cash discipline and deleveraging: management expects ~$60–$65M annualized cost savings from the restructuring, to prioritize free cash flow for debt paydown (FY24 quarter-end cash $274.2M; debt principal $1.601B; revolver undrawn). FY25 plan assumes ~$110M debt repayment and ~$107M net interest, with ~25% adjusted tax rate (Pillar 2 impact) .
  • Shareholder return maintained: quarterly dividend of $0.15 was declared; management postponed the Analyst & Investor Day to Spring 2025 to execute the reorganization and refine strategy .

What Went Well and What Went Wrong

What Went Well

  • U.S. growth and mix: U.S. revenue rose 10.3% YoY in Q4 (reported and adj. cc), supported by pricing, order timing benefits, and non-diabetes contract manufacturing; pen needles, safety, and syringes all posted positive reported growth in Q4 .
  • Execution on stand-up: ~98% of revenue transitioned to embecta’s ERP/shared services/distribution, limiting disruptions; management highlighted stability and resilience through separation programs .
  • Strategic refocus and cost actions: Discontinuation of the patch pump program and an organizational restructuring are expected to deliver $60–$65M annualized pre-tax cost savings and streamline operations to enhance profitability and free cash flow .

What Went Wrong

  • Margin compression: Q4 adjusted gross margin fell to 61.4% (vs 64.8% YoY) due to lower plant absorption from intentional inventory reductions post-ERP, mix, inflation, and FX, only partially offset by pricing .
  • International softness and legal headwinds: International revenue declined 8.8% reported (-3.1% adj. cc) in Q4, including an Italian “payback” accrual that reduced revenue; FY24 also absorbed a $1.2M current-year impact recognized in Q4 .
  • FY25 pricing headwind and guide down: Management expects pricing to be a ~1% headwind in FY25 and guides FY25 adjusted constant currency revenue down 1%–2.5% with adjusted gross margin down ~200 bps at midpoint versus FY24 on reduced profit-in-inventory benefits, pricing, and inflation .

Financial Results

Quarterly Trend (sequential; oldest → newest)

MetricQ2 2024Q3 2024Q4 2024
Revenue ($M)$287.2 $272.5 $286.1
GAAP Diluted EPS ($)$0.50 $0.25 $0.25
Adjusted EPS ($)$0.67 $0.74 $0.45
Adjusted Gross Margin (%)64.7% 69.8% 61.4%
Adjusted Operating Margin (%)26.1% 30.6% 21.1%
Adjusted EBITDA ($M)$90.8 $99.2 $73.0
Adjusted EBITDA Margin (%)31.6% 36.4% 25.2%

Year-over-Year Comparison (Q4)

MetricQ4 2023Q4 2024
Revenue ($M)$281.9 $286.1
Adjusted Revenue ($M)$281.9 $290.2
GAAP Diluted EPS ($)$0.10 $0.25
Adjusted EPS ($)$0.59 $0.45
Adjusted Gross Margin (%)64.8% 61.4%
Adjusted Operating Margin (%)23.1% 21.1%
Adjusted EBITDA ($M)$79.6 $73.0
Adjusted EBITDA Margin (%)28.2% 25.2%

Segment and Geography (Q4 2024)

Segment ($M)Q4 2023 ReportedQ4 2024 ReportedQ4 2024 AdjustedYoY Reported GrowthAdjusted Constant Currency Growth
Pen Needles$211.1 $215.2 $215.2 1.9% 2.8%
Syringes$33.2 $33.7 $33.7 1.5% 4.8%
Safety$31.3 $32.8 $32.8 4.8% 5.8%
Other$3.9 -$0.3 $3.8 (107.7%) —
Contract Manufacturing$2.4 $4.7 $4.7 95.8% 95.8%
Geography ($M)Q4 2023 ReportedQ4 2024 ReportedQ4 2024 AdjustedYoY Reported GrowthAdjusted Constant Currency Growth
United States$151.8 $167.4 $167.4 10.3% 10.3%
International$130.1 $118.7 $122.8 (8.8%) (3.1%)
Total$281.9 $286.1 $290.2 1.5% 4.1%

KPIs and Balance Sheet

KPIValue
Cash & equivalents + restricted cash (9/30/24)$274.2M
Debt principal outstanding$1.601B
Revolver drawn$0
Term Loan B principal repaid in Q4~$27.4M
LTM net leverage (Q4 commentary)~3.8x
Quarterly dividend$0.15/share

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Reported RevenueFY2025 (ex-pump)—$1,093–$1,110M; (2.7%)–(1.2%) YoYNew initial guide
Adjusted Constant Currency Revenue GrowthFY2025 (ex-pump)—(2.5%)–(1.0%)New
FX ImpactFY2025—~–0.6% revenue headwindNew
Italian Payback Tailwind to ReportedFY2025—+0.4% (prior-year accrual non-repeat)New
Adjusted Gross MarginFY2025—63.25%–64.25%New
Adjusted Operating MarginFY2025—29.0%–30.0%New
Adjusted EPSFY2025—$2.70–$2.90New
Adjusted EBITDA MarginFY2025—35.5%–36.5%New
Net interest expense (assumption)FY2025—~$107MNew
Debt repayment (assumption)FY2025—~$110MNew
Adjusted tax rate (assumption)FY2025—~25% (incl. Pillar 2)New
DividendOngoing$0.15 (Q4)$0.15 declared for Dec. 18, 2024Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2024, Q3 2024)Current Period (Q4 2024)Trend
Technology/patch pump510(k) under review; closed-loop development with Tidepool progressing Program discontinued; restructure to streamline costs and refocus Deteriorating (terminated)
GLP-1 pen-needle opportunityPositioning for GLP-1 pen form; discussions with entrants Small-pack GLP-1 needles launched in Germany; evaluating expansion Improving
Supply chain/ERPERP/live across ~85% of revenue by Q2; inventory builds ahead of cutovers 98% revenue transitioned; intentional inventory reduction drove lower absorption Improving (transition completion); margin headwind near-term
Pricing/mixQ2 pricing flat U.S.; Q3 pricing favorable; mix aided margins in Q3 FY25 pricing expected ~1% headwind; mixed/regional effect pressured Q4 GM Deteriorating (FY25 headwind)
Macro/FXFX headwind (0.4%) in FY24 guide FY25 FX headwind ~0.6% (based on mid‑Nov rates) Deteriorating
Regulatory/legalEU MDR costs ongoing; Q3 cost line Italian payback accrual reduced revenue; disclosure of risks Deteriorating (one-time headwind; risk persists)
Deleveraging/capital allocationFocus on cash; debt paydown flexibility post-separation Prioritizing debt reduction in FY25; target ~3.0x net leverage by YE25 scenario Improving

Management Commentary

  • “We have decided to discontinue our insulin patch pump program and initiate an organizational restructuring plan… streamline operations, reduce costs and enhance our profitability and free cash flow profile.” – CEO Dev Kurdikar .
  • “We expect… annualized pre-tax cost savings of between $60 million and $65 million.” – CEO Dev Kurdikar .
  • “Q4 adjusted gross margin… decreased primarily driven by lower absorption as we intentionally reduced inventory levels… and by revenue mix, inflation and FX; offset by favorable pricing.” – CFO Jake Elguicze .
  • “During 2025, we anticipate that price will be a headwind of approximately 1% due to the renewal of agreements whose terms are expiring.” – CEO Dev Kurdikar .
  • “Our #1 priority right now is to pay down debt… to create the financial flexibility to make some M&A moves.” – CEO Dev Kurdikar .

Q&A Highlights

  • Capital allocation and deleveraging: Management intends to use restructuring savings and reduced separation spend to accelerate debt paydown in FY25 (~$110M), aiming toward ~3.0x net leverage by YE25, with M&A optionality thereafter .
  • Tariffs/macro: Minimal U.S. revenue is sourced from China-made products; potential tariff-related supply uncertainty could be an opportunity; management is monitoring Canada/Mexico developments; FX headwind ~0.6% in FY25 plan .
  • Patch pump disposition: Market check post‑clearance did not yield monetization options; while discontinued, management remains open to inbound interest in IP/assets .
  • FY25 tax and Pillar 2: Adjusted tax rate guided to ~25% in FY25, with ~2.5% of the increase vs FY24 attributable to Pillar 2 .

Estimates Context

  • Street consensus (S&P Global) for Q4 2024 and forward quarters could not be retrieved at this time due to request limits; we therefore cannot assess beat/miss versus consensus for revenue or EPS [GetEstimates error].
  • Management indicated Q4 outperformance versus internal expectations was driven by U.S. distributor order timing and pricing, but this is not a proxy for Street consensus .

Key Takeaways for Investors

  • The pivot away from the patch pump and a targeted restructuring are meaningful for margins and cash: $60–$65M annualized savings underpin FY25 margin durability and deleveraging; this is likely a core rerating driver if execution is consistent .
  • FY25 topline/margin reset reflects transitory tailwinds rolling off (profit-in-inventory), a pricing headwind (~1%), and FX (~0.6%): investors should model lower gross margins (63.25%–64.25%) but stronger EBITDA margin (35.5%–36.5%) on opex control .
  • U.S. durability offsets international noise: U.S. grew 10.3% YoY in Q4; international declined on Italy accrual and timing; mix/pricing are levers, but watch for contract renewals and regional dynamics in FY25 .
  • GLP-1 pen-needle optionality: small-pack launch in Germany provides a tangible path to participate as GLP-1 administration shifts toward pen injectors; scope to expand in additional markets over time .
  • Deleveraging is central: with ~$274M cash and no revolver draw at FY-end, the plan to repay ~$110M of debt in FY25 and keep dividend stable supports equity value via lower interest and improved flexibility .
  • Legal/regulatory watch items: Italian payback accruals reduced FY24 revenue; while FY25 reported revenue benefits by ~0.4% from non-repeat, litigation outcomes remain uncertain .
  • Near-term trading setup: Expect debate around the FY25 guide down and pricing headwinds versus the structural cost takeout and debt paydown narrative; execution on savings cadence and steady U.S. performance likely the key sentiment drivers .