Ambecta (Ticker: AMB), a leader in medical technology, reported a slight decline in its fiscal Q3 2024 revenue, totaling $272.5 million, which is a 4.8% decrease on an as-reported basis and a 3.9% decline on a constant currency basis. Despite the revenue dip, the company's core injection business showed resilience with a modest growth of 0.4% year-to-date on a constant currency basis. The U.S. market contributed $143.6 million to the revenue, while international sales accounted for $128.9 million. Ambecta's adjusted net income stood at $43 million, or $0.74 per share, and the company holds a cash balance of approximately $282 million.
Key Takeaways
- Ambecta's fiscal Q3 2024 revenue saw a decrease, but the core injection business remains stable.
- U.S. and international revenues were $143.6 million and $128.9 million, respectively.
- Adjusted net income was reported at $43 million, with earnings of $0.74 per share.
- The company has a strong cash position with a balance of around $282 million.
Company Outlook
- Ambecta reaffirmed its full-year constant currency revenue guidance, expecting it to be flat to down 0.5%.
- Adjusted gross margin, operating margin, and earnings per share guidance have been raised and narrowed.
- The company anticipates improved free cash flow generation in fiscal year 2025.
- Separation costs are projected to reduce significantly from $180 million in 2024 to about $50 million in 2025.
Bearish Highlights
- There was a reported decline in overall revenue for the quarter.
Bullish Highlights
- The core injection business is seeing stable growth.
- The company has completed significant ERP implementations, covering the majority of its revenue base.
Misses
- Revenue did not grow, marking a decrease compared to the previous fiscal period.
Q&A Highlights
- CEO Dev Kodicker emphasized the company's attention to net leverage and debt management.
- CFO Jay Kelguis highlighted that free cash flow is expected to align more closely with adjusted EBITDA.
- Kodicker reiterated the company's commitment to maximizing shareholder value and exploring avenues to enhance it.
In the strategic developments, Ambecta has completed a large portion of its ERP implementations and is advancing its Insulin Patch Pump Program, having submitted a 510(k) application to the FDA and engaging in ongoing discussions. The company is also tapping into the GLP-1 market opportunity by developing small pen needle packs and planning a launch in Germany, with expectations of market growth as biosimilars become available.
Ambecta's leadership is focused on maintaining a strong financial position, optimizing cash flow, and delivering value to shareholders as it navigates through the fiscal challenges and leverages its strategic initiatives for future growth.
Full transcript - Embecta Corp (EMBC) Q3 2024:
Conference Operator: Welcome, ladies and gentlemen, to the Fiscal Third Quarter 2024 Imvector 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 the recording will be available on the company's website for replay following the completion of this call. I would now like to hand the conference call over to your host today, Mr. Purvesh Khandelwal, Vice President of Investor Relations.
Please go ahead.
Purvesh Khandelwal, Vice President of Investor Relations, Ambecta: Thank you, operator. Good morning, everyone, and welcome to Ambecta's fiscal Q3 2024 Earnings Conference Call. The press release and slides to accompany today's call and webcast replay details are available on the Investor Relations section of the company's website atwww.mbeka.com. With me today are Dev Kodicker, Ambecta's President and Chief Executive Officer and Jay Kelguis, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward looking statements regarding future events as outlined in our slides.
We wish to caution you that such statements are, in fact, forward looking in nature and are subject to risks and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include, but are not limited to, factors referenced in our press release today as well as our filings with the SEC, which can be accessed on our website. In addition, we will discuss certain non GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation. Our agenda for today's call is as follows.
Deb will begin by providing some remarks on the overall performance of our business during the fiscal Q3 of 2024 as well as an overview of our strategic priorities. Jake will then provide a more in-depth review of our Q3 financial results as well as our updated financial guidance for the year. We will then open the call for questions. With that said, I would now like to turn the
Dev Kodicker, President and Chief Executive Officer, Ambecta: call over to our CEO, Dev Goodycker. Dev? Good morning and thank you for taking the time to join us. Let's start with Slide 5, where you will see the 3 strategic priorities that we have executed since our spin off in April of 2022. 1st, we continue to strengthen our base business, while maintaining our global leadership position in the category of insulin injection devices.
2nd, we have made significant progress in our separation and stand up activities necessary to establish ourselves as an operational independent company. And finally, we continue to invest for growth, most notably around our insulin patch form program that has been developed for the Type 2 market, as well as seeking M and A and additional partnership opportunities. I am proud of the significant progress we have made within each of these goals. Turning to some Q3 highlights. During the Q3, our team's disciplined execution led to financial results that were aligned with our prior expectations.
We generated revenue of approximately $272,500,000 which represented a decrease of 4.8% on a non reported basis and a decrease of 3.9% on a constant currency basis. When normalizing for the transient contract revenue that we generate based on the sales of non diabetes products to our former parent, our constant currency core injection business revenue declined by 4.1 percent as compared to the prior year period. While our revenue during the Q3 was lower year over year on a constant currency basis, this was something that we had expected and highlighted on our Q2 earnings call and was primarily due to inventory rebalancing that occurred with some of our distributors following the ERP implementations that occurred during the 1st 6 months of our fiscal year. On a year to date basis, our core injection business has remained stable, growing 0.4% on a constant currency basis. Over the past year, much news has come out regarding GLP-1 and the impact they might have on people with diabetes and insulin delivery.
Based on what we have seen over the past several years, our view is that while GLP-1s may delay the onset of becoming insulin dependent, they do not eliminate the need for insulin. In fact, as the method of GLP-one administration continues to evolve over the next several years, from the use of an auto injector to that of a pen injector, pen injector, which requires a pen needle, we expect that we will stand to benefit. To that end, we have identified an opportunity to introduce a new small pen needle product that can be used for GLP-one administration. We intend to first come to market with this product in Germany within the next several months and eventually expand this product offering to other countries in the future. We believe this will help meet the needs of the growing number of people using pen and therefore pen needles for GLP-one administration.
Turning to separation activities, I'm pleased to report that we made significant progress in the implementation of our own ERP system, operationalization of our own distribution network and shared services capabilities. Now, our systems and capabilities are operational in regions which cover approximately 93% of our revenue base. Looking ahead, with the exception of a few deferred closing jurisdictions, we remain on track to complete all ERP implementations, distribution network and shared service separation activities by early fiscal year 2025. Once these implementations are complete, the only remaining separation program will be brand transition, which entails changing the product packaging from BD's brand to ours. We have been planning this transition since the spin off and we intend for the execution of this program to begin in phases during fiscal year 2025.
Notably, we are not changing the product names or color schemes associated with our packaging. This is important as people with diabetes will continue to experience the same look and feel on our boxes that they have been accustomed to for many years. Regarding our insulin patch pump program, we continue to progress on the open loop patch pump. As a reminder, we submitted a 510 application to the FDA in December of 2023 and earlier this year, we received questions from the FDA concerning that application. We have since responded with the necessary data and await feedback from the FDA.
We will continue to provide updates to the investment community on the progress regarding our insulin patch pump at the appropriate times. Relating to our objective of entering the infusion pump market, we also sponsored 2 abstracts at the American Diabetes Association 84th Scientific Sessions that point to the potential for adults with Type 2 diabetes to better manage insulin delivery through a platform with a larger 300 unit insulin reservoir, which could provide longer wear times and fewer disposable patches over time. The Dad app presented reaffirms what we've learned from speaking with people living with diabetes and their healthcare providers and validates our thesis that there is a critical unmet need among the Type 3 diabetes population for pumps with a larger insulin reservoir. So to summarize, we had another good quarter of results and based on the year to date performance as well as our expectations for the remainder of the fiscal year, we are again raising and tightening our guidance range for key financial metrics, while reaffirming our revenue guidance range. Now, let's review our Q3 and year to date revenue performance in a bit more detail.
As I mentioned before, during Q3, we generated revenue of $272,500,000 which represented a decrease of 4.8% on an as reported basis and a decrease of 3.9% on a constant currency basis or 4.1% when normalizing for the impact of year over year changes in the revenue of the non diabetes products that we contract manufacture and sell to BD. Within the U. S, during the quarter revenue totaled $143,600,000 which have presented year over year decline of approximately 6.7% on a constant currency basis. When normalizing for year over year contract manufacturing revenue, our underlying Q3 constant currency revenue decline within the U. S.
Was approximately 7.3%. The lower revenue within the U. S. Was expected and was primarily due to distributors normalizing their inventory levels after making advanced purchases ahead of our ERP implementation, as well as our annual price increase that went into effect on April 1. This volume decline was partially offset by favorable price and gross to net adjustments.
Turning to our international business, during Q3 revenue totaled $128,900,000 which equated to a year over year constant currency decline of 0.6%. Like the U. S, the decline in constant currency revenue within international this quarter was expected and was primarily due to the timing of advanced purchases that customers made in advance of our ERP implementation. Importantly, through all separation activities that occurred during fiscal year 2024, our core injection business remained stable, growing 0.4% year to date on a constant currency basis. That completes my prepared remarks.
And with that, let me turn the call over to Jake to take you through the Q3 financial results as well as our updated full year financial guidance in more detail. Jake?
Jay Kelguis, Chief Financial Officer, Ambecta: Thank you, Dev, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Imbexa's financial performance for the Q3 at the gross profit line. GAAP gross profit and margin for the Q3 of fiscal 2024 totaled $190,100,000 69.8 percent respectively. This compared to $189,500,000 66.2 percent in the prior year period. While on an adjusted basis, our Q3 2024 adjusted gross profit and margin totaled 190,300,000 dollars 69.8 percent.
This compared to $189,600,000 66.3 percent in the prior year period. The year over year increase in adjusted gross profit and margin was primarily driven by the impact of inventory revaluation adjustments, which positively impacted year over year results by approximately 550 basis points, as well as the impact from favorable changes in price and gross to net adjustments that Deb referred to earlier. This was partially offset by lower product volumes, the impact of inflation on the cost of certain raw materials, direct labor, freight and overhead and the negative impact of foreign currency translation, primarily due to the weakening of the U. S. Dollar.
Turning to GAAP operating income and margin. During the 3rd quarter, they were $55,900,000 20.5 percent. This compared to $51,300,000 dollars 17.9 percent in the prior year period. While on an adjusted basis, our Q3 2024 adjusted operating income and margin totaled $83,300,000 30.6 percent. This compared to $79,800,000 and 27.9 percent in the prior year period.
The year over year increase in adjusted operating income is primarily due to the adjusted gross profit changes I just discussed as well as year over year decreases in both SG and A and R and D. The year over year decline of approximately $2,000,000 in SG and A was primarily due to cost optimization actions taken in the current period as well as lower TSA costs. These reductions were somewhat offset by increased freight and warehousing costs. While the year over year decline of approximately $2,000,000 in R and D was primarily due to lower expenses associated with our insulin patch pump platform. Turning to the bottom line, GAAP net income and earnings per diluted share was 14,700,000 dollars and $0.25 during the Q3 of fiscal 2024, which compared to $15,200,000 $0.26 in the prior year period.
While on an adjusted basis, net income and earnings per share were 43,000,000 dollars 0.74 dollars during the Q3 of fiscal 2024. This compared to 39,800,000 dollars and $0.69 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 25% in Q3 of 2023 to approximately 22% in Q3 of 2024. This was somewhat offset by an increase in year over year interest expense associated with the rise in sulfur and the impact that had on our variable interest rate debt. Lastly, from a P and L perspective, for the Q3 of 2024, our adjusted EBITDA and margin totaled approximately $99,200,000 36.4 percent.
This compared to $92,200,000 32.2 percent in the prior year period. Turning to the balance sheet and cash flow. At the end of the 3rd quarter, our cash balance totaled approximately 282,000,000 dollars 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. From a cash flow perspective, our cash balance as of June 30 is approximately $45,000,000 lower than the balance that existed as of September 30 and this is largely attributed to cash that has been used related to separation activities, which include product registration and labeling costs, warehousing and distribution setup costs, legal costs associated with patents and trademark work, temporary headcount resources within accounting, tax, finance, human resources, regulatory and IT, and one time business integration and IT related costs, primarily associated with our global ERP implementations.
We estimate that during the 1st 9 months of fiscal year 2024, we used approximately $130,000,000 of cash towards these separation activities. Additionally, we now show trade receivables globally on our balance sheet given our previously mentioned ERP implementations. As such, Ambecta now collects receivables from customers directly as compared to prior to the ERP implementations whereby BD factored those receivables on our behalf. I'm pleased to report that following the implementation of our ERP systems and shared service functionality within approximately 93% of our global revenue base, cash collections associated with those receivables have continued to trend in a positive direction. Consistent with the comments I made on our Q2 earnings conference call, we continue to expect that we will end fiscal year 2024 with a cash balance of roughly $300,000,000 or comparable to the balance that existed at the end of the second quarter.
This includes an expectation that for the full year, we will use approximately $180,000,000 of cash towards separation activities. This compares to cash used for separation activities of approximately $145,000,000 during fiscal year 2023. Given that we expect to be largely complete with separation activities by the end of this fiscal year, we expect to see an improvement in our cash balances in fiscal year 2025 beyond, which would allow us additional flexibility in terms of capital allocation, including more material debt repayment. That completes my comments on our fiscal Q3 results. Next (LON:NXT), I will provide an update on our full year 2024 financial guidance.
Beginning with revenue, given our performance during the 1st 9 months of the year, as well as our expectations for the Q4, we are reaffirming our full year constant currency revenue range to be flat to down 0.5% as compared to 2023. Likewise, we are reaffirming our previously provided guidance for foreign currency, which called for foreign currency to be a headwind of about 0.4% versus the prior year. These FX assumptions are based on foreign exchange rates that were in existence in the late July timeframe, including a euro to U. S. Dollar exchange rate of approximately 1.08.
On a combined basis, our as reported guidance range continues to call for revenue to be down between 0.4% and 0.9% as compared to 2023, resulting in a revenue guide of between 1,111,000,000 dollars and $1,116,000,000 Turning to margins, we are raising and narrowing our adjusted gross margin guidance from a range of between 64.5% 65% to a new range of between 65.25%
Dev Kodicker, President and Chief Executive Officer, Ambecta: 65.5%.
Jay Kelguis, Chief Financial Officer, Ambecta: Similarly, from an adjusted operating margin perspective, we are raising and narrowing that guidance from a range of between 25.25 percent 25.75 percent to a new range of between 25.75 percent 26%. While in terms of adjusted EBITDA margin, we are narrowing that guidance from a range of between 31% 31.5% to a new range of between 31.25% 31.5%. Lastly, due to an improved margin outlook, we are increasing and narrowing our adjusted earnings per share guidance from a range of between $2.20 $2.30 to a new range of between $2.30 $2.35 or an increase at the midpoint of approximately $0.08 This completes my prepared remarks. And at this time, I would like to turn the call over to the operator for questions.
Conference Operator: Thank you. Our first question comes from Marie Thibault with BTIG. Your line is open.
Marie Thibault, Analyst, BTIG: Good morning. Thanks for taking the questions and very nice quarter. I wanted to start here a little bit on guidance and specifically the gross margins. They were very strong this quarter and I think I heard mention of inventory valuation readjustments. Can you help me understand exactly what that is specifically?
And then, what we should be assuming in the implied step down for fiscal Q4 on that gross margin metric?
Jay Kelguis, Chief Financial Officer, Ambecta: Sure, Marie. Thanks. I appreciate the question. So, let me start by saying that our adjusted gross margin was slightly better than our prior expectations in the quarter. And that's really what's allowing us to once again increase our full year adjusted gross margin guidance range by about 62.5 basis points at the midpoint of our new full year guidance range.
So during the quarter, the year over year increase in adjusted gross margin occurred due to a few factors, the largest of which you mentioned was a benefit from inventory revaluation adjustments or what's referred to as profit in inventory. And that contributed about a 5 50 basis point year over year increase. And I'll come back to that in a moment as to what that was. In addition to the profit and inventory impact, we also had some favorable year over year impact from pricing and the gross to net reserve adjustments that contributed about 140 basis points of the year over year increase. And then that was somewhat offset by some headwinds associated with lower product volumes stemming from the customers rebalancing their inventory levels following the increased purchases that they made during the 2nd quarter in advance of both our international ERP implementations as well as the April 1 price increase that went into effect in the U.
S. So those items negatively impacted volumes year over year by about 2 10 basis points. In addition, we also saw some year over year headwinds associated with inflation of about 120 basis points. So coming back to your question on inventory revaluation or profit in inventory. So as a result of all the ERP implementations that began in early fiscal year 2024, we had a real concerted effort for us to build up inventory to make sure that there were no issues from a customer standpoint.
And that inventory was built in our manufacturing locations in China, in Ireland and in the U. S. And then we shipped that inventory to a variety of distribution centers and different legal entities. And when that happens, there's intercompany profit that results once things transfer from one legal entity to another. And that intercompany profit needs to be eliminated at a consolidated level.
Since that product wasn't shipped yet to any type of a third party customer. So once that inventory is then sold to customers, that profit that was previously on the balance sheet needs to be recognized into the P and L. And that's what happened this quarter. It just so happens that because of all the inventory that we had built up in advance of the ERP implementations, it resulted in a larger amount than what we typically see. So typically these profit and inventory adjustments range within a few $1,000,000 every quarter.
It just happens to be the fact that because we had built up so much inventory and then recognized and then sold that inventory into the market, we needed to release that profit in inventory from the balance sheet into the P and L. And this was something that was previously contemplated within our prior year full year guidance range. It just happens to be it's typically much larger than what we would normally see. So as we move into the 4th quarter, we're not going to see necessarily see that same level of benefit. And if you go from our Q3 performance into our Q4 performance, you're correct.
The gross margins, the implied gross margins would step down from Q3 to Q4. And again, that largely has to do with the inventory revaluation or profit in inventory not recurring in the Q4. So that alone is about 500 basis point move from Q3 to Q4. And then additionally, I would say now that we've implemented our ERP systems within 93% of our business and we only have Latin America and India left, Beginning in Q4, we're going to intentionally start to manufacture less product as we attempt to reduce our overall inventory levels and improve our working capital and improve our cash. But because we're doing that, we're going to see some negative manufacturing variances that impact us in Q4.
Again, like the positive benefit to our P and L from the profit in inventory that occurred during Q3, The reduction in the manufacturing volumes was something that we had previously contemplated in our prior year guidance.
Marie Thibault, Analyst, BTIG: Okay. That all makes sense to me, Jake. Thanks for the level of detail there. Let me ask a follow-up here then on the move to start selling small pen needle packs in Germany for those GLP-one users. How did you land on starting with that country, Germany?
What are the thoughts on marketing those packs? And is there going to be a pricing premium? Is there something to look toward on that as well?
Dev Kodicker, President and Chief Executive Officer, Ambecta: Good morning, Marie. We are absolutely excited about our prospects of launching the small pack for GLP-1s in Germany. Germany made sort of a logical first country for us. GLP-1s there are being launched in the form of a pen. So obviously our pen needles are required to administer those GLP-1s.
The pen needles that we make today are the same pen needles that are required for GLP-1 administration. And so we launched the projects a few months ago to make small packs because as you can imagine, small packs are more patient and customer friendly for GLP-one administration. The pricing is, I would say, appropriate for the market and appropriate for the use case. I won't talk specifically about pricing premiums, but let me just say that we are pleased with the price that we expect to get. And look more broadly, we are starting with Germany as pen injectors proliferate and expand for the administration of GLP-1s, we will certainly be there to provide pen needles.
We have the capacity and can ramp up production of these small packs quickly to fill demand. And if you really project out over a number of years, if biosimilars enter the market, certainly again that provides a tailwind for us. So we are excited about Germany. We're going to be launching that product there imminently here in the coming weeks, maybe a couple of months and we'll see where we go from there.
Marie Thibault, Analyst, BTIG: Okay, very good. Thanks for taking the questions.
Dev Kodicker, President and Chief Executive Officer, Ambecta: Thanks, Marie.
Conference Operator: Thank you. Our next question comes from Travis Steed with Bank of America Securities. Your line is open.
Travis Steed, Analyst, Bank of America Securities: Hey, thanks for taking the question. I guess the first question I'd like to start with is, when you think about the progress you're making on the pump and the investments that you kind of need to launch that product successfully, how should we think about kind of margins and earnings like that the streets got modeled for kind of going forward? Can you guys expand margins next year even with the investments required to launch this product? Just want to make sure we get the models correct kind of going forward for this?
Dev Kodicker, President and Chief Executive Officer, Ambecta: Thanks, Travis, and good morning. So just as a quick reminder, right, so for the audience here, we made that submission in late calendar 2023. We got some questions from the FDA. It's part of the normal process that we responded in a very timely manner and we'll be progressing on the closed loop solution as well. So first things first, we need and hope to get clearance on the pump.
Obviously, I won't comment on the outcome and the timing of the FDA decision. And when it comes to our plans for the commercial launch for the pump and potential implications for fiscal 2025, Respectfully, Travis, at this point, we are not ready to comment on 2025 numbers. I will repeat what I've said before. We are very mindful of our net leverage levels. We are very mindful of our debt.
You've heard us comment in the past that we do have an increasing focus on cash and debt pay down. And so we'll be very measured and thoughtful in our plans. And what we are thinking right now, Travis, that we would hold an Analyst Day later this year sometime in December. By that time, certainly, we'll have clarity on open loop. We will have confirmed our plans on the pump.
We will have made progress in the closed loop. And so we can talk about all of this at that time. In the meantime, we are laser focused on obviously closing out and delivering a successful 2025.
Travis Steed, Analyst, Bank of America Securities: Great. Thanks for that color. I look forward to the Analyst Day. And I guess the second question I'd ask is just kind of bigger picture. You guys have been a public company now for a while and kind of gotten independent.
And just thinking about like how you maximize shareholder value from this forward point, are there things that you're thinking about differently just to make sure that the value for shareholders is kind of being maximized at this point versus what's reflected in public markets today?
Dev Kodicker, President and Chief Executive Officer, Ambecta: Look, our focus from day 1 has been on maximizing shareholder value, right, and we continue to look for ways to do that. We laid out pre spin sort of a 3 year plan that we've been executing on. We'll certainly continue to execute that. But really look, I mean, from a every day as a management team, we really think about all the ways that might be available to us to maximize shareholders' value. So that certainly continues to guide us on all the decisions we make.
Travis Steed, Analyst, Bank of America Securities: All right, fair. Thanks a lot.
Conference Operator: Thank you. Our next question comes from Kristen Stewart with CL King. Your line is open.
Kristen Stewart, Analyst, CL King: Hi, thanks for taking the question. I was wondering if we could just focus a little bit on free cash flows. I think Jake you had mentioned that separation costs are going to be stepping down here. I was wondering if there's any way that you could quantify that or just provide a little bit more color on the cash flow outlook for the company?
Jay Kelguis, Chief Financial Officer, Ambecta: Yes. So thanks for the question, Kristen. Again, coming back to, I think this year, we're going to end the year with around $300,000,000 in cash on the balance sheet for the end of the year. That's going to include using around $180,000,000 of cash in terms of separation activities this year. And that's coming on the heels of using around $145,000,000 of cash in 2023.
So I think one of the things that as we've gone through the spin here that I think sort of gets masked is really the free cash flow generation capabilities of the company because it really is quite strong. And I think beginning in 2025, you're going to see a much improved free cash flow generation. This isn't the type of franchise that needs a tremendous amount of capital expenditure investment given where we are. I mean, we have 3 highly automated plants that we can put even more capacity through. So as we're thinking about next year, those separation costs are going to materially tick down.
So it's going to go from, let's call it somewhere around $180,000,000 this year down to maybe somewhere to the tune of around $50,000,000 or so next year. And that's the reason why we even have that amount next year largely has to do with the finalization of some brand transition expenses that we're going to have to go through in 2025 and then to a lesser extent in 2026. But as we move forward here, we should start over the next couple of years, our free cash flow generation should really more closely approximate our adjusted EBITDA as a company. So, I'm not going to give you a specific number for 2025, but I would tell you that I think our free cash flow beginning in 2025 is going to materially improve from where we were in 2024.
Kristen Stewart, Analyst, CL King: Okay. Thank you. And then, Deb, any color that you can provide us on the questions that you received back from the FDA, if they were expected or any sort of color there would be helpful
Dev Kodicker, President and Chief Executive Officer, Ambecta: on the platform? Hi, Tristan. Good morning and it's nice to have you on the call and look forward to engaging more with you. Listen, I would say that all the questions we got, we were able to at least from our perspective adequately and comprehensively respond to and do so in a timely manner. Beyond that, Christine, I wouldn't go into the details obviously of the feedback and we are eager to receive the FDA's decision here.
Kristen Stewart, Analyst, CL King: And would you be prepared to go forward with the closed loop version as soon as you get approval of the open loop version? How will that work?
Dev Kodicker, President and Chief Executive Officer, Ambecta: Yes, we've been working on the closed loop version in parallel. You remember we signed an agreement with Tidepool and our team has been busy integrating that algorithm with an open loop. So the work on the closed loop has actually been progressing even as we've been working on responding to the FDA on the open loop.
Kristen Stewart, Analyst, CL King: Okay. Thank you very much.
Jay Kelguis, Chief Financial Officer, Ambecta: Thanks, Chris. Thanks, Alisa.
Conference Operator: Thank you. Our next question comes from Michael Polark with Wolfe Research. Your line is open.
Michael Polark, Analyst, Wolfe Research: Hi, good morning. Thank you for taking the questions. I have 2. I want to follow-up on gross margin and then ask a question about Type 2 pumping. So Jake, I heard your response to Marie, a lot of good color there.
But when I do the like 4Q implied gross margin, I get 60%, huge step down even taking in to account the thematic considerations you flag. It just strikes me as ultra conservative. And then when you run that down the P and L, you see 0 point dollars $0.31 $0.32 of EPS for the quarter, which is obviously a huge step down versus where you've been. So can you it's tough to fathom. So I want to those are the numbers I see and I want to confirm that those are the numbers you intend to plan for and then is this just ultra conservatism here sequentially?
Jay Kelguis, Chief Financial Officer, Ambecta: Yes. So Mike, thanks for the question. I mean, I think your implied math for Q4 is correct. In terms of it really is a gross margin story that is occurring, largely associated with the PII that I mentioned. That drives around a 500 basis point move from Q3 to Q4.
Additionally, as I said, I think in my answer to Marie, we are very intentionally looking to try and right size our inventory levels now that we're through all of these largely through all of these separation activities. So that is something that we are very intentionally looking to do to drive an improvement in our working capital. And what that's going to mean at least in the Q4 is sort of a temporary headwind associated with manufacturing variances. So we're not going to have the same level of absorption. Now all of this was contemplated in our prior guidance and obviously now in our current guidance.
And yet we're still able to raise our gross margin guidance by about 62.5 basis points from the midpoint from our prior guide. And that raise really comes down to a few things. It comes down to our ability to continue to drive positive pricing and pricing being a little bit better than what we had previously expected. And then that guidance raise at the gross margin line also comes down to mix, both from a geographic and a product standpoint. So additionally, I would just say, we're also trying to take cost out in terms of regulatory freight and some manufacturing costs.
So I think our team has done a tremendous job of trying to drive cost out of the system. That's allowing us to raise our full year guide. But as you think about going from kind of Q3 to Q4, there's some transient things going on, one related to PII, which moving forward isn't going to occur at that same level. And then likewise, from a manufacturing standpoint, a real concerted effort by us to try and reduce inventory levels now that the separation has gone really well. I mean, Mike, if you think about this base business on a full year basis and there's been noise post spin for the last two and a half years as we've had to go through all of this separation work.
I think as we get into 2025, it's going to what you're going to end up seeing is a much more stable quarter to quarter performance from the business and certainly from an annual standpoint. I mean, if you think about what this during 2024, if you look at the different components of the business and you sort of break down and go from consolidated impact and you look at we have a very small contract manufacturing business that generates around $5,000,000 to $10,000,000 per year in revenue back to BD. That's at gross margins that are around, let's call it 12%. We have we spend around $60,000,000 to 65,000,000 dollars a year in our insulin pump program. And then you have the core injection business, which is a very stable low to mid-60s typically gross margin business that then at the operating margin line is somewhere in the low-30s range.
So a much more stable business, I think is what you should expect as we sort of move forward from 2024 into 2025.
Dev Kodicker, President and Chief Executive Officer, Ambecta: Mike, and if I can just sort of zoom back a little bit, right? I mean, FY 'twenty four has been marked with ERP implementations in dozens and dozens of countries, right. We went to 93% of our revenue. In the background, what that involves is moving products from BD's distribution network into new distribution centers and you can imagine the inventory that has to be placed in new locations, working with customers to make sure in case there was any disruption, we didn't disrupt product continuity for our patients and customers. And so this year has been particularly lumpy quarter to quarter, no question.
But I'm very pleased that we had incorporated our thoughts around this in the full year guidance and frankly our team has been executing to that. And so while it might appear certainly the quarter to quarter variance that you are seeing, I certainly would urge you to zoom back and look at it for over a full year basis and really just look at the performance of this business over a full year basis. So just wanted to provide a little bit of that context.
Michael Polark, Analyst, Wolfe Research: Appreciate all that color. Thank you. I want to ask on Type 2 pumping. So obviously, you have the program, you're interested in this market. I've heard the update loud and clear today.
But I'm curious how you internally expect the Type 2 pump market to develop, Type 1 is 40%, 45% penetrated in the U. S. Grinding higher. It's a trend that's been in place for a while now. Type 2 is sub 5% pump penetrated, insulates gearing up for the AID push into this market next year.
And I'm curious how quickly do you think that ramps? How do you model the curve? Do you follow the Type 1 cadence? Do you think it could be faster, slower? I'd be interested in any color that you'd have to provide on that topic.
Thank you so much.
Dev Kodicker, President and Chief Executive Officer, Ambecta: Yes. Thanks, Mike. Look, it's too early for us to provide sort of any quantitative guidance with respect to what the penetration on Type 2 will be. And while we respect competitors entering Type 2 market as well, I mean, I just want to remind everybody that ours would be a disposable patch from with 300 units and that has, I would argue, some specific applicability for Type 2 customers and also we've designed it with simplicity in mind, which also makes it applicable. So having said all of that, listen, we will talk more about our Type 2 plans at this Investor Day we are planning in December.
By that time, as I said, we expect to have FDA's decision. We'll have made some more progress in the closed loop. So respectfully, Mike, I understand the eagerness to know our Type 2 plans more, but I suggest we wait until later this year.
Michael Polark, Analyst, Wolfe Research: Got it. Thank you.
Conference Operator: Thank you. There are no further questions at this time. I'd like to turn the call back over to Dev for closing remarks.
Dev Kodicker, President and Chief Executive Officer, Ambecta: Thank you, Michelle. As we wrap up this call, I do want to extend my heartfelt appreciation to all my colleagues at Ambecta across the globe. Our global team has in this year executed on complex major separation related programs, while never wavering from our mission of developing and providing solutions that make life better for people living with diabetes. And as I mentioned during the call, we look forward to engaging with all of you at our Analyst and Investor Day in mid December. Thank you all for attending the call and for your interest in our business.
Conference Operator: Thank you for your participation. This does conclude the program and you may now disconnect. Everyone have a great day.
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