Embecta Corp. (NASDAQ:EMBC) Q4 2022 Earnings Conference Call December 20, 2022 8:00 AM ET
Company Participants
Pravesh Khandelwal – Vice President of Investor Relations
Dev Kurdikar – Chief Executive Officer
Jake Elguicze – Chief Financial Officer
Conference Call Participants
Cecilia Furlong – Morgan Stanley
Marie Thibault – BTIG
Operator
Please standby. Welcome ladies and gentlemen, to the Fiscal Fourth Quarter and Full Year 2022 Embecta Earnings Conference Call. [Operator Instructions] Please that this conference call is being recorded and that 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. Pravesh Khandelwal, Vice President of Investor Relations. Please go ahead.
Pravesh Khandelwal
Good morning, everyone and welcome to Embecta’s fiscal fourth quarter and full year 2022 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 Chief Executive Officer; and Jake Elguicze, our Chief Financial Officer.
Before we begin, I’d 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, our results may differ materially. The factors that could cause actual event or events to differ materially include but are not limited to, factors difference 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.
Starting on Slide 3, our plan for today’s call is as follows: Dev will start by making a few opening remarks on the overall performance of our business. Jake will then provide a more in-depth review of financial results for the fiscal fourth quarter and full year 2022, as well as a preliminary financial guidance for fiscal year 2023. Dev will then provide some closing thoughts on our strategic imperatives for fiscal 2023 and we will then open the call for questions.
With that said, I would now like to turn the call over to our CEO, Dev Kurdikar. Dev?
Dev Kurdikar
Good morning, everyone and thank you for joining us today.
Turning to Slide 4, let me begin by reminding everyone who we are. Embecta is a leading global medical device company focused on providing solutions to improve the health and well-being of people living with diabetes and we believe that our products have become one of the most widely recognized and respected brands in insulin injection devices used for diabetes management. We have a broad portfolio of products which we estimate are used annually by nearly 30 million people in over 100 countries for insulin administration and to aid with the daily management of diabetes. As a newly-independent entity, we are an organization with a truly unique opportunity to become the preeminent diabetes focused company in the world.
Moving to Slide 5, we debuted on the Nasdaq stock market on April 1, 2022 and as an independent diabetes pure play company, we can build upon the foundation established by BD over almost 100 years ago. We intend to leverage our position as the global leader in insulin injection devices to invest in growth as we expand our portfolio through research and development, acquisitions and partnerships to make better diabetes management solutions available to more people around the world. We were proud to celebrate this year’s Diabetes Awareness Month by ringing the Nasdaq opening bell on November 1, along with representatives of several organizations that makes supporting the people who are living with diabetes their sole focus. Our company is honored to recognize the people with diabetes, caregivers, health care providers and advocacy organizations working together to improve access to education and continue to progress towards the vision of a life unlimited by diabetes.
Thanks to the strong execution of our dedicated global team during the second half of fiscal 2022, our core business remained on track while we progressed through our separation from BD and this occurred notwithstanding the challenging macro environment that our team had to navigate through. Our teams have made notable progress in standing up new systems, processes, regional offices so that we can exit the transition service agreements that we have in place with BD while taking great care to minimize the impact that separation and standup oriented activities could have had on our customers and people with diabetes who need and use our products each and every day. We are committed to investing behind organic new product development and remain excited about the progress we are making in terms of our insulin patch pump that is being developed specifically for the Type 2 market.
Finally, we continue to seek partnerships and acquisitions where we can use our manufacturing strength and commercial capabilities to add value. I’m pleased to say that we were recently active on this front as we signed a co-promotional agreement with Intuity Medical, under which our sales representatives will promote Intuity’s innovative POGO Automatic Blood Glucose Monitoring System to select health care professionals in the U.S. The agreement to promote POGO Automatic to health care professionals not only enables us to expand our offerings to physicians we call on but it does so within the innovative new category of automatic blood glucose monitoring. In addition to the co-promotional agreement with Intuity, we also signed similar agreements, albeit smaller in size, with companies in China and France which leverage our existing commercial capabilities.
Now let’s move to Slide 6 and look at our second half of 2022 financial guidance and compare it to our actual results. Beginning in May, we provided initial financial guidance for the second half of fiscal year 2022 which called for revenue of approximately $555 million which at that time represented an as-reported revenue decline of approximately 7% and a constant currency revenue decline of approximately 3.5%. At that time, we also expected to achieve adjusted gross and adjusted EBITDA margins in the low 60s and low 30s, respectively.
In conjunction with our fiscal third quarter earnings conference call in August, we maintained our as-reported revenue dollar expectations. However, we raised our constant currency revenue expectations as well as our guidance for both adjusted gross and adjusted EBITDA margins. I’m pleased to announce that for the second half of 2022, we generated approximately $566 million in revenue which represented a decline of approximately 5.1% on an as-reported basis and a decline of 1.2% on a constant currency basis. This was better than our August guidance, primarily due to our constant currency revenue performance as the FX impact was largely aligned with our guidance.
Our second half of 2022 revenue results were better than anticipated due to our performance in North America and EMEA, as well as more than anticipated contract manufacturing revenue with BD. The better-than-expected revenue performance in the quarter was somewhat offset by greater-than-anticipated COVID-19 restrictions that impacted our business in China.
Like revenue, our adjusted gross and adjusted EBITDA margins for the second half of 2022 also exceeded our already-increased guidance as we generated adjusted gross margin of 67.2% and an adjusted EBITDA margin of 36.3%. The better-than-expected margin performance was primarily due to a combination of favorable geographic and product mix, as well as the timing of certain operating expenses associated with standing up Embecta as an independent company.
That completes my summary concerning 2022. With that, let me turn the call over to Jake to discuss our Q4 and full year 2022 financial results in a bit more detail, as well as provide our preliminary fiscal 2023 financial guidance and underlying assumptions. Jake?
Jake Elguicze
Thank you, Dev and good morning, everyone. Before I discuss the financial results for the 3 and 12-month periods ending September 30, I would like to remind the investment community that Embecta was spun off from BD on April 1 of 2022 and that the financial results during the pre-spin periods were based on carved out accounting principles and do not reflect what Embecta’s financial results would have been had Embecta operated as a stand-alone public company.
Therefore, financial results for the 3 and 12-month periods ending September 30, 2022 and September 30, 2021 are not meaningfully comparable. Given the fact that Embecta’s historical financial results for the pre-spin periods do not include all the actual expenses that would have been incurred had Embecta been a stand-alone public company during the periods presented, I plan on focusing the majority of my time today discussing Embecta’s preliminary 2023 financial guidance and underlying assumptions.
Turning to Slide 7 and beginning with revenue. During the fourth quarter, revenue totaled $274.6 million which represented a decline of 8.7% on an as-reported basis and 4.2% on a constant currency basis. The decline in Q4 constant currency revenue which was expected and something we foreshadowed on our third quarter earnings conference call, was primarily due to unfavorable comparisons stemming from a rebate reserve reversal which had occurred in the prior year period, coupled with decisions we made to exit certain legacy customer relationships at the very end of fiscal year 2021, as well as the timing of certain distributor orders in United States which positively impacted our revenue in Q3. These headwinds were partially offset by revenue generated related to the contract manufacturing of non-diabetes related product that was sold to BD which did not exist in the prior year period.
In comparison to our prior expectations, Q4 2022 revenue came in better than we previously anticipated, largely due to better volumes within North America and EMEA as well as more than anticipated contract manufacturing revenue with BD. The better-than-expected revenue performance in the quarter was somewhat offset by greater-than-anticipated COVID-19 restrictions that impacted our business in China.
From a regional standpoint, during Q4, U.S. revenues totaled $149.9 million which represented a decrease of 5.9% on both an as-reported and constant currency basis. The year-over-year decline in the U.S. was primarily due to the unfavorable comparison stemming from the rebate reserve reversal which had occurred in the prior year period, as well as the aforementioned timing of certain orders which occurred in Q3. These headwinds were partially offset by contract manufacturing revenue which did not exist in the prior year period.
While International revenues totaled $124.7 million or a decrease of 11.9% on an as reported basis and 2.3% on a constant currency basis. The year-over-year decline in our International business was primarily due to decisions we made to exit certain legacy customer relationships at the very end of fiscal year 2021.
For the full year, Embecta’s revenues totaled approximately $1.130 billion which was down approximately 3.1% on an as-reported basis or down 0.5% on a constant currency basis. The drivers of the slight full year 2022 constant currency revenue decline were similar to the items that impacted our fourth quarter, including the prior year rebate reserve reversals which did not occur to the same extent in 2022, the decisions we took towards the very end of fiscal year 2021 to exit certain legacy customer relationships as well as COVID-19 restrictions in certain geographies. These headwinds were somewhat offset by contract manufacturing revenue which did not exist in the prior year.
Moving to Slide 8 and a review of some of our remaining key financial indicators for the fourth quarter. GAAP and adjusted gross profit and margin for the fourth quarter of 2022 totaled $176.9 million and 64.4%, respectively. This compares to $209.7 million and 69.7% in the prior year period. Like revenue, the year-over-year decline in gross margin during the fourth quarter was expected and primarily due to contract manufacturing and supply agreement impacts, most notably the impact of increased cannula costs, product and geographic mix, incremental investments and standup costs and the continued negative incremental impacts of inflation and increased labor and material costs.
Additionally, like my comments concerning revenue, our adjusted gross margin performance in the fourth quarter also exceeded our previously-provided guidance which called for adjusted gross margins to be in the low 60s during Q4.
Turning to the bottom line. During the fourth quarter of 2022, we incurred a GAAP net loss of $17.2 million as compared to net income of $97.1 million in the prior year. The year-over-year decrease of approximately $114 million is primarily due to the reduction in gross profit dollars that I just referred to, the incurrence of separation and standup expenses related to Embecta becoming its own publicly traded company, interest expense that was incurred in the fourth quarter of fiscal 2022 as compared to $0 in the prior year period, as well as a non-cash impairment charge of $58.9 million associated with the decision to abandon certain manufacturing production lines in the United States and $5.5 million of costs incurred related to purchase commitments which was also related to the decision to abandon those same manufacturing production lines.
As some additional background, the impaired assets were previously included as a component of construction and progress within property, plant and equipment on our balance sheet. These assets were transferred to Embecta in conjunction with the spin, were never placed into service and were related to certain diabetes syringe manufacturing production lines. These impaired assets were in no way associated with our insulin patch pump which continues to progress in its development.
Lastly, from a P&L perspective, for the fourth quarter of 2022, our adjusted EBITDA and margin totaled approximately $87.2 million and 31.8%. This compares to $131.6 million and 43.8% in the prior year period. Due to the slight overachievement at the gross margin line as compared to our expectations, our adjusted EBITDA margin for the fourth quarter of 2022 also came in a bit better than we previously expected.
Finally, with respect to our balance sheet and financial condition at year-end. As of September 30, 2022, we held approximately $331 million in cash and cash equivalents and approximately $1.65 billion in debt which taken together with our last 12 months adjusted EBITDA, resulted in a net leverage ratio of approximately 2.9x.
That completes my prepared remarks as it relates to Embecta’s financial results for the second half of fiscal 2022. Next, I would like to discuss Embecta’s preliminary 2023 financial guidance and certain underlying assumptions.
Beginning with revenue on Slide 9. On a constant currency basis, we currently anticipate that our revenues will be flat to down 2% as compared to 2022. At the low end of the guidance range, we are assuming about 1/2 of the decline will result from reduced contract manufacturing revenue of non-diabetes care products to BD, with the remainder coming from slight volume pressure within developed markets as well as periods of uncertainty in emerging markets due to the potential for lingering COVID-19 restrictions like those we saw impact our business in China during the latter part of 2022, while the high end of our constant currency range assumes a slightly smaller year-over-year headwind associated with contract manufacturing revenue, flattish product volumes and the ability for us to modestly raise prices on our product offerings. Given how new the partnership agreements are that we were able to execute, we assumed an immaterial amount of revenue associated with them as part of our 2023 revenue guidance range.
Turning to our thoughts on FX. Embecta has a larger presence outside of the United States than many other companies of our size and as such, our initial guidance calls for a foreign currency headwind of approximately 5% during 2023. This assumption is based on foreign exchange rates that were in existence around the mid-November time frame, including a euro to U.S. dollar exchange rate of approximately 0.98. On a combined basis, our as-reported revenue guidance calls for a decline of between 5% and 7%, resulting in an initial revenue guide of between $1.05 billion and $1.073 billion.
Turning to adjusted gross margin, I’ll be comparing 2023 again for Q4 2022 jump-off point as our fourth quarter 2022 adjusted gross margin is the most representative to date of our business as an independent entity. During 2023, we currently anticipate that our adjusted gross margin will be approximately 62% or a decline of about 240 basis points as compared to Q4 2022, with the largest drivers being additional standup costs inclusive of various regulatory, quality, supply chain and manufacturing expenses as we continue to invest in these capabilities in advance of exiting the TSAs, increased raw material costs, including those associated with the cannulas that we purchased from BD and continued headwinds because of inflation. We estimate that additional stand-up costs and increased material costs will drive the majority of the adjusted gross margin change. While despite several cost improvement programs that are underway at the company, we expect inflationary pressures to make up the remainder of the adjusted gross margin fluctuation.
Continuing down the P&L, we expect that we will maintain adjusted SG&A near a 30% level despite periods of time during 2023 in which we may incur a combination of both TSA expense and standup costs, while we also intend to invest more heavily in R&D, most notably behind our Type 2 insulin pump development program. And because of this, R&D as a percentage of revenue may exceed 7% during 2023. All totaled, we anticipate that our adjusted operating margin during 2023 will be approximately 25% which is near best-in-class as compared to other med tech companies of our revenue size.
Moving to earnings. During 2023, our initial guidance calls for an adjusted diluted earnings per share range of between $1.75 and $2. This includes an assumption that our annual net interest expense will be between $115 million and $120 million, that our annual adjusted tax rate will be approximately 25% and that we’ll have approximately 57.7 million weighted average diluted shares outstanding.
With respect to our interest expense expectations, our full year guidance assumes that SOFR will continue to increase as we move throughout the year, peaking near 5.25%. As a reminder, our capital structure is comprised of approximately $950 million of Term Loan B debt which is a floating rate instrument, bearing interest at SOFR plus 300 basis points and approximately $700 million of senior secured notes which are fixed rate instruments. While from a tax rate standpoint, our 25% adjusted tax rate assumption is based on a few key variables, including the geographic mix of global earnings by legal lending as well as limitations associated with U.S. interest expense deductibility.
Finally, from a guidance standpoint, that takes me to adjusted EBITDA margin which we expect to be approximately 30% during 2023. The adjusted EBITDA margin in 2023 is expected to be down from the levels achieved during the fourth quarter of 2022 largely due to the gross margin items I mentioned earlier, coupled with very deliberate investments we intend to make within R&D which we are willing to do to accelerate our constant currency revenue growth rates sustainably in the future.
And before I turn the call over to Dev for some final remarks, I’d like to highlight some considerations regarding the cadence of quarterly revenue expectations during 2023 and briefly touch on our previously provided 2024 financial objectives. Moving forward, we may not provide any further commentary concerning the quarterly cadence of revenue on an ongoing basis.
During fiscal year 2022, we generated approximately 50% of our as-reported revenue dollars during the first half of the year, including approximately 26% during the first quarter. During 2023, we currently anticipate generating a slightly lower percentage of our annual revenue during both the first quarter and first half of 2023 as compared to the prior year periods.
Lastly, as it relates to the 2024 financial goals and objectives that we provided to the investment community in March of this year prior to spin, we remain committed to the achievement of those objectives, including maintaining an adjusted EBITDA margin of approximately 30% in 2024. And this comes despite a significantly more challenging operating environment as compared to the one that existed when we originally provided those targets, including inflation at near 40-year highs, rising interest rates as well as additional foreign exchange headwinds.
That completes my prepared remarks. And at this time, I would like to now turn the call back over to Dev for some final remarks. Dev?
Dev Kurdikar
Thank you, Jake. Wrapping up our discussion on Slide 10, you will see that our 2023 priorities are set with the intention to solidify our business and make investments in our strategic imperatives to accelerate our long-term growth profile.
First, we will continue to strengthen our base business while maintaining our global leadership position in the category of insulin injection devices. We do anticipate facing many of the same macroeconomic factors that continue to impact our industry. Our performance to date reflects the non-liquid nature of our products and the resilience of our business model which will help us in navigating through the challenging operating environment. Second, we will continue to incur costs as we stand up our own public company, including expenses associated with the creation of various corporate functions and infrastructure, including an ERP system. Also as part of the separation from BD, we anticipate a temporary suspension of manufacturing operations associated with regulatory approvals and transitions, including for inspections at our Suzhou, China facility in the second half of fiscal 2023. This was an anticipated action item at the time of spin-off for transitions from BD over to Embecta.
And finally, we intend to increase our investment in R&D and we remain excited about our patch pump that is being developed for the Type 2 market. At the same time, we plan to continue to seek partnerships and acquisitions where we can use our manufacturing strengths and commercial capabilities to add value.
In closing, I would like to extend my thanks to all my colleagues around the globe for everything they have done and continue to do to serve people with diabetes while we stand up Embecta as an independent company. Their dedication to our mission serves as a source of Embecta’s strength.
That completes my remarks. With that, operator, we will now open up the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question will come from the line of Cecilia Furlong with Morgan Stanley.
Cecilia Furlong
I wanted to start with just the ’23 outlook that you laid out, recognizing kind of the lower end and the top end of the range that you talked about. But if you could speak a bit more about how you’re thinking about U.S. versus O-U.S. relative growth mix as well as growth stemming from emerging markets? And then you called out pricing at the high end. If you could just provide some more color how you’re thinking about potential pricing benefits as well?
Jake Elguicze
Yes. So Cecilia, so thanks very much for the questions. So I would tell you, I think just to reiterate, I think the low end of the guidance range assumes about half of that decline coming from lower contract manufacturing revenue which is something that would impact most notably our U.S. business. As well as certainly the possibility for additional COVID-19 restrictions that we saw impact our business predominantly in China in the fourth quarter and which did have some lingering effects into the first quarter of the year. As well as some lower volumes, if you will, some volume pressure in some of those more developed markets, whether that’s the U.S. or developed Europe.
The high end of the constant currency range assumes essentially a lower year-over-year headwind from contract manufacturing revenue, flattish product volumes in more mature markets and the ability for us to raise prices modestly. So I think the way that you should sort of think about our ability to take price is that it would essentially offset those slightly reduced contract manufacturing volumes. So we expect anywhere from only $5 million to $10 million worth of contract manufacturing revenue of non-diabetes care product back to BD. At the low end, that would be about $5 million. We’re down about $10 million year-over-year. At the higher end of our guidance range, we would expect to only see a headwind of about $5 million year-over-year. And the pricing would largely be something that we would expect to be able to offset those lower contract manufacturing volumes.
Cecilia Furlong
And if I could follow up, just wanted to touch on the POGO strategic partnership that you announced in November. As you think longer term, just the benefit — the potential benefit for pull-through sales, can you speak to that, recognizing it’s not contemplated in the fiscal ’23 guidance? And also just the potential to transition some of the suppliers’ inputs for POGO over to Embecta over the long term?
Dev Kurdikar
Cecilia, this is Dev. So the POGO partnership is one we are excited about. You probably would recognize it’s exactly aligned with the strategy we had laid out which was seeking partnerships that leverage one of our strengths. In this case, it leverages our commercial channel in the U.S. It is an innovative product. It’s a dramatic improvement, frankly, over a traditional blood glucose monitoring system. And what we’ve done here is that we are leveraging our U.S. field force that call upon health care providers in the U.S. And as we are talking about our product, we are now also talking about POGO. It is a new partnership. I believe we announced it only 6 or 7 weeks ago and so we did not sort of incorporate any of that into our financial guidance.
And listen, it’s too early to comment sort of where this might go but we are very excited about it. I mean, the initial reaction we’ve gotten from our team that has gone and spoken with physicians has been quite exciting and quite encouraging. Look, over the long term, we’ll see. I don’t want to sort of foreshadow where this partnership might go but it’s off to a strong start, Cecilia.
Operator
Our next question comes from the line of Marie Thibault with BTIG.
Marie Thibault
Dev and Jake, congrats on a strong finish to year fiscal ’22. Wanted to ask here, your fiscal fourth quarter results were strong again. You’ve come in above targets on all the key metrics but the fiscal ’23 guide seems to accelerate the decline in margins to sort of what we thought the fiscal year ’24 targets were going to be. Can you talk a little bit more about what’s driving some of that margin decline? It certainly seems like an acceleration to me.
Jake Elguicze
Yes. So Marie, I would tell you that the fourth quarter of 2022 margin profile was certainly the most representative to date for Embecta as a public entity. And we generated — while it was better than what we had previously communicated, we generated adjusted gross margin of about 64.4% and adjusted EBITDA margin of around 31.8%. And obviously, that included more of the standup costs, separation costs as well as impacts from increased raw material and supply chain and inflationary impacts, including the cost of — the increased cost of the cannula that we purchase from BD. So certainly, Q4 was most representative to date of what Embecta’s margin profile could look like. As we thought about fiscal 2023 and sort of that jump off from the fourth quarter margin profile to full year 2023, we’re now calling for adjusted gross margins to be approximately 62% and adjusted EBITDA margin of approximately 30% which is still very, very healthy adjusted EBITDA margins.
And our assumptions include additional standup costs impacting gross margin. That includes a variety of things. Costs related to regulatory, quality, supply chain, manufacturing as we continue to invest in these capabilities in advance of us exiting the TSA, so there’s going to be a period of time where we’re incurring actually some TSA expense and incurring our own standup costs related to those items. So our assumptions assume that. Additionally, in the gross margin line, we’re continuing to call for or expect increases in raw material costs, including the costs associated with the cannulas that we’re going to purchase from BD. So that is part of our assumptions for 2023 as well. And then we’re also continuing to actually see some lingering headwinds from inflation, whether that’s on the labor side or whatnot. So we tried to take that into consideration. And that’s really what’s going to drive, I would say, the gross margin decline.
Now if you think about then what is going to occur at the EBITDA margin line, we’re anticipating that drop-through in the gross margins to impact adjusted EBITDA margin. We’re also anticipating incurring additional investments behind our R&D, again, most notably the insulin patch pump. And we’re doing that because we certainly think that by doing so, we have the ability to create a faster-growing top line company in the future. And then somewhat offsetting that is going to be some offsets in the SG&A line. So all totaled, the initial guide for 2023 calls for those adjusted gross margins in the 62% area. Adjusted EBITDA margin, still very, very strong at the approximately 30%. And again, despite incurring, I would say, significantly more headwinds as compared to what we originally knew about in March of 2022 when we provided some longer-term goals, we continue to remain very, very committed to the achievement of those 2024 financial objectives which include adjusted EBITDA margin maintaining at approximately 30%.
Marie Thibault
Okay. So no change to the long term?
Dev Kurdikar
Yes, yes, no change to the long term. And it really, I think, comes down to the sort of the 3 things that Jake pointed out, right? One is this is a year where there’s going to be some simultaneous spending on TSAs as well as standing up corporate functions because you remember that by April 2024, right, so in the second half of fiscal 2024, we want to be able to exit most, if not all of our TSAs. Second factor is obviously the increased investment in R&D. And the third factor, frankly, is something that we are proud of how the team has tackled all these inflationary factors that have impacted gross margin more negatively than one could have anticipated, call it, 9 months ago. And that’s been primarily through addressing price where we can. And so those are the 3 sort of combination of factors that drive our anticipation of the gross margin and adjusted EBITDA margin to ’23 but we are committed to what we said for FY ’24.
Marie Thibault
Okay. I’ll ask a quick follow-up here on the China facility. You mentioned a temporary suspension has to do with sort of the regulatory clearances and things. Can you tell us any more detail on impact to volumes, any impact to margin from that? Anything we should be watching out for?
Dev Kurdikar
Yes. Happy to address that as well, Marie. So just by way of background, China was a deferred entity at close. BD has a presence in China. We need to obviously transfer the assets that are going to come to us and go through the process there. And so as you go through the process there, there are really 4 things you’ve got to work through. You got to get a business license, a manufacturing license. There’s some quality audits and you’ve got to go through product registrations. And some of these steps occur in sequence and some of these steps have public notices and sort of waiting periods. And so what happens is as you go through some of these steps, you have to suspend manufacturing operations while you go through some of these steps.
What we expect is that the plant will become operational again and start producing product for export from Suzhou to other markets sooner than it can resume operations for producing product within China. Now what we’ve done is for a while now, we’ve been building up inventory to accommodate the suspension of manufacturing operations and we have reasonable estimates for how long that process would take. Obviously, we don’t want to get ahead of the regulatory authorities here in terms of forecasting an exact time line. But what we did was we certainly incorporated all the best knowledge that we had into the guidance that we provided for FY ’23 as well as obviously kept that all in mind when we reiterated sort of our expectations for FY ’24.
Jake Elguicze
Yes and just to add on to that. So to Dev’s point, the inventory build that we have been doing and anticipate continuing to do during the course of 2023, the expectation is that there’s no revenue impact as a result of this shutdown. As we move throughout the year, we did incorporate into our thoughts some lower absorption in the back half of the year related to the manufacturing shutdown and our gross margin thoughts and our EBITDA margin thoughts take that into consideration. But the thought is that certainly from a revenue perspective, very — no impact as a result of this temporary shutdown.
Operator
[Operator Instructions] We are currently showing no remaining questions in the queue at this time. I’d like to turn the call over to Mr. Dev Kurdikar.
Dev Kurdikar
Thank you, Shannon. Before we end this call, I just wanted to take this opportunity to thank you for your interest in Embecta, we appreciate it greatly. And we hope you have a safe and enjoyable holiday season. Thank you for your participation.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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