Q1 2024 Embecta Corp Earnings Call

Participants

Pravesh Khandelwal; IR Contact Officer; Embecta Corp

Devdatt Kurdikar; President, Chief Executive Officer, Director; Embecta Corp

Jacob Elguicze; Chief Financial Officer, Senior Vice President; Embecta Corp

Marie Thibault; Analyst; BTIG, LLC

Mike Polark; Analyst; Wolfe Research, LLC

Presentation

Operator

Welcome, ladies and gentlemen, to the fiscal fourth-quarter 2024 Embecta earnings conference call. (Operator Instructions) Please note that this conference call is being recorded, and a recording will be available on the company's website for replay following the completion of this call.
I would like to hand the call over to your host today, Mr. Pravesh Khandelwal, Vice President, Investor Relations. Please go ahead.

Pravesh Khandelwal

Thank you, operator. Good morning, everyone, and welcome to Embecta's fiscal first quarter 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 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, 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 and 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. David will begin by providing some remarks on the overall performance of our business during the fiscal first quarter of 2024, as well as an overview of our strategic priorities. Jack will then provide a more in-depth review of our Q1 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 call over to our CEO, Dev Kurdikar. Dev?

Devdatt Kurdikar

Good morning, and thank you for taking the time to join us with the introduction of the first specialized insulin delivery device in 1924. This year marks the one hundredth year of our journey to deliver better diabetes care through innovation, whether you're newly diagnosed or transitioning to a new line of therapy Our mission is to make a person with diabetes everyday experience as comfortable and convenient as possible while advancing towards a new generation of life-changing solutions. We have been one of the leaders in insulin delivery for nearly 100 years into our insulin delivery products. We touch an estimated 30 million people living with diabetes in over 100 countries developing and providing solutions that make life better for people living with diabetes is at the core of everything we do and is what drives our global team.
Turning to our strategic priorities for fiscal year 2024, we will continue to be focused on the same three core strategic priorities that we have had since we became an independent company. These priorities have served as the foundation for our actions and decision making driving our company forward and include remaining focused on strengthening our base business while maintaining our global leadership position in the category of insulin injection devices, separating ourselves from our former parent in a thoughtful manner to mitigate risk and position us for success as an independent company.
And finally, investing in growth, most notably around our insulin patch pump program that has been developed for the type two market as well as seeking M&A and additional partnership opportunities. We are advancing with determination and a sense of urgency in each of these objectives, and I'm very pleased with the progress that we've made in these areas.
Turning to some first quarter highlights. First, we published our 2024 environmental, social and governance report. This report provides a summary of the progress we made in 2023 to develop our ESG strategy, including establishing policies and systems that underscore our commitment to delivering our products and solutions responsibly and with a view towards how our business impacts the broader communities in which we operate.
Next, the team's hard work, gain recognition, leading to the acceptance of six IMPACT abstracts and posters for presentation at the upcoming advanced technologies and treatments for diabetes or ATTD conference in March. We believe that poster presentations like these continue to validate our value proposition that a larger insulin reservoir would benefit a person with type two diabetes and potentially facilitate more adults using a single pump for a full three days, resulting in a greater health economic benefit to patients and payers. Additionally, Embeda is set to host an industry-sponsored symposium at ATTD focused on unlocking the potential of insulin pumps for personalized Type two Diabetes Care. These educational objectives align with our commitment to innovation and improvements in diabetes care. By supporting the symposium. We are excited about the potential for helping advance informed decision making around insulin pump therapy for patients with type two diabetes. During Q1, we also notably advanced our separation programs by completing the implementation of our ERP system for approximately 60% of our revenue base and our manufacturing facility within the US, while also operationalizing new shared services capabilities and distribution network serving the US and Canadian markets.
Furthermore, we made significant progress in terms of the development of our insulin patch pumps that are being developed specifically for the type two market, including the filing of a five 10 K premarket application for the open loop version of our insulin patch pump with the FDA. I'll share more about these later accomplishments in the following slides.
Finally, during the first quarter, solid execution led to financial results that exceeded our internal expectations. And based on these results, coupled with our outlook for the remainder of the year, we are raising our financial guidance ranges for revenue and adjusted earnings per share.
Next, I would like to get into a bit more detail regarding the advancements we made in terms of our separation efforts. As I just mentioned, during Q1, our team made significant progress in the global implementation of our ERP system, shared services capabilities and distribution network. These are complex programs, and we have adopted a phased implementation approach to mitigate separation risks. As of today, we have implemented our ERP system and operationalize shared services capabilities and a new logistics and distribution network to support the U.S. and Canadian markets. In addition, we implemented our own ERP in Suzhou, China and holders in Nebraska. We have two of our three manufacturing plants. During the fiscal second quarter. We plan to implement our systems capabilities and processes in additional markets as well as at our remaining manufacturing plant in Ireland. As such by the end of our fiscal second quarter, we anticipate having slightly more than 85% of our revenue base and all three of our manufacturing locations on our own ERP platform. We anticipate implementation of our ERP system and the relevant shared service capabilities in all markets, excluding those in deferred closing jurisdictions within a few quarters to facilitate the phased implementation of our ERP solution, distribution network and shared services capabilities, we had requested an extension for certain TSAs and related agreements from BT, BT agreed to provide a limited extension contingent upon securing an additional private letter ruling from the IRS. This ruling would enable us to extend specific TSAs for a limited set of markets until early fiscal year 2025. Throughout the Company, we have been and will continue to exert substantial efforts to mitigate the risks associated with potential disruptions as we transition away from TSAs with BD and implement and integrate our own systems and processes. While we have been generally successful at avoiding major disruptions. There is a possibility of temporary sales disruptions in specific countries as we navigate the complexities of securing all necessary product registrations, licenses and other requirements, while concurrently standing up our own systems and capabilities.
Lastly, and as we've mentioned on prior earnings calls, we had completed several important steps in the de-merger process for our Suzhou, China manufacturing entity in order to ultimately transfer that legal entity from BD to investor.
I am pleased to report that we have completed the China legal entity transfer, and we anticipate resuming domestic production for the Chinese market in our fiscal second quarter, which is in line with our previous expectations. We had previously commented that this plant was already manufacturing products for export to other markets. This is a significant accomplishment by our team and culminates a process that has spanned years in planning and execution.
Turning to our insulin patch pump program. A month ago, we announced the submission of our five 10 K application for the open loop version of our insulin patch pump to the FDA. This marks a critical milestone in the program. We are pleased to have this filing complete and we look forward to working with the FDA through the review process.
We are also continuing our development of a closed-loop insulin patch pump that is targeted for use by individuals who have type two diabetes. The pump hardware is expected to be substantially the same across both the open-loop and closed-loop versions. This should allow us to streamline development across our platform to platform while also addressing a potential market need for an open-loop pump tailored for type two users.
One noteworthy feature of our pumps is the insulin reservoir size accommodating up to 300 units. We believe this announcement is crucial considering that type two users typically require up to 100 units of insulin daily. Our goal is to have a three-day wear indication for our pumps that would provide an appropriate supply of insulin that better aligns the needs of users and payers with the pump replacement cycle.
While our open-loop submission is under FDA review. We are also actively advancing our closed-loop pump development in collaboration with Tidepool. As a reminder, site will already as a stand-alone Type one algorithm cleared by the FDA, and we are working with them to adapt their algorithm into a type two closed-loop system. We are pleased with the progress made so far and proud of the team that has managed to execute this program while also maintaining their focus on multiple separation activities.
Now let's review our first-quarter revenue performance in a bit more detail. During Q1, we generated revenue of $277.3 million which represented an increase of 0.6% on an as-reported basis and a decline of 0.3% on a constant currency basis. When normalizing for the impact of year-over-year changes of the non-diabetes products that we contract manufacture and sell to BD, our underlying core injection business grew 0.5% on a constant currency basis.
Our Q1 revenue exceeded our previously communicated expectations primarily due to the timing of customer orders in advance of our aforementioned ERP implementation as well as FX tailwinds in relation to our original outlook. As a reminder, when we provided our initial financial guidance for fiscal year 2024, we indicated that we generated approximately 49% of our fiscal year 2023 as reported revenue dollars during the first half of that year and that we anticipated generating a slightly lower percentage of the midpoint of our annual as-reported revenue dollar range during the first half of 2024. We continue to believe this will be the case as the positive impact from the timing of customer orders that occurred during Q1 is expected to unwind during fiscal Q2.
And while these remain our assumptions, as I mentioned earlier, we do plan on implementing our ERP system and other previously noted associated capabilities for additional markets within our fiscal second quarter. And as such, we may see some atypical ordering patterns within the next few quarters.
Turning back to our Q1 results. From a geography perspective, revenue came in better than we previously expected in many regions, including the US, Canada and Asia.
Regarding the US, during the quarter, revenue totaled $148.6 million which represented a year-over-year decline of approximately 0.5%. However, when normalizing for contract manufacturing revenue headwinds, our US core injection business grew by 0.9%, while during Q1, our international revenue totaled $128.7 million which equated to flat year-over-year constant currency growth.
That completes my prepared remarks. And with that, let me turn the call over to Jake to take you through the first-quarter financial results as well as our updated full-year financial guidance in more detail. Jake?

Jacob Elguicze

Thank you, Dev, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's financial performance for the first quarter at the gross profit line.
GAAP gross profit margin for the first-quarter fiscal 2024 totaled $185.9 million and 67% respectively. This compared to $188.8 million and 68.5% in the prior-year period. While on an adjusted basis, our Q1 2024 adjusted gross profit and margin totaled $186.3 million and 67.2%. This compared to $188.9 million and 68.5% in the prior-year period. The year-over-year decrease in adjusted gross profit and margin was due to the negative impact of foreign currency translation primarily due to the weakening of the US dollar.
The impact of negative year-over-year manufacturing variances, including the temporary shutdown of our Suzhou, China facility as it relates to production for the domestic Chinese market as well as the impact of inflation on the cost of certain raw materials, direct labor, and overhead. These headwinds were somewhat offset by a variety of cost improvement initiatives and our ability to generate positive year-over-year pricing.
As compared to our prior outlook, our adjusted gross margin during the first quarter was better than we previously expected, and this was due to the higher-than-anticipated revenue that Dev referred to earlier, as well as favorable geographic and product mix and FX.
Turning to GAAP operating income and margin. During the first quarter, they were $45.5 million and 16.4%. This compared to $88.8 million and 32.2% in the prior-year period. While on an adjusted basis, our Q1 2024 adjusted operating income and margin totaled $77.5 million and 27.9%. This compared to $101.6 million and 36.9% in the prior-year period. The year-over-year decrease in adjusted operating income and margin is primarily due to the adjusted gross profit changes I just discussed and increase in SG&A costs associated with standing up the organization, as well as higher R&D expenses associated with our insulin patch pump program. The adjusted operating income and margin performance during Q1 was better than we previously expected, primarily due to the overachievement at the gross margin line, coupled with the timing of R&D spending within the quarter.
Turning to the bottom line, GAAP net income and earnings per diluted share was $20.1 million and $0.35 during the first quarter of fiscal 2024, which compared to $35.2 million and $0.61 in the prior-year period. While on an adjusted basis, net income and earnings per share were $35.3 million and $0.61 during the first quarter of fiscal 2024. This compared to $55.4 million and $0.96 in the prior-year period.
The decrease in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed, 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, as well as an increase in our adjusted tax rate from approximately 25% to approximately 26%. I would like to point out that due to certain discrete tax items, our adjusted tax rate in Q1 was higher than our full-year guidance, which calls for an adjusted tax rate of approximately 22%. As we move forward throughout the remainder of the year, we would expect our adjusted tax rate to be below 22%.
Lastly, from a P&L perspective, for the first quarter of 2024, our adjusted EBITDA and margin totaled approximately $90.4 million and 32.6%. This compares to $110.2 million and 40% in the prior-year period.
Turning to the balance sheet and cash flow. As of December 31, our cash balance totaled $298.7 million which was down from our fiscal year end 2023 balance of $326.5 million. The decline in cash during the first quarter was primarily due to an increase in accounts receivable. As a reminder, at the time of spin, Investa entered into factoring agreements with BT in which BT would collect receivables on investors' behalf in exchange for fees, the increase in accounts receivable is a direct result of our implementation of certain business continuity processes in North America, including our ERP system that went live in November of 2023 and expiration and termination of a portion of the factoring agreement between and back to NBD for services in the United States. As such impact, it is now responsible for the collection of any outstanding trade receivables in the U.S. and the increase in accounts receivable is a direct result of this impact, and we expect to convert these outstanding receivables into cash during fiscal 2024.
That completes my comments on our fiscal Q1 results. Next I'll provide an update on our full-year 2024 financial guidance. Beginning with revenue, on a constant currency basis, we are reaffirming our previously provided guidance range, which calls for revenue to be flat to down 2% as compared to 2023. The low end of the guidance range continues to assume that about half of the decline will result from reduced contract manufacturing revenue in 2024 as compared to the prior year, while the remaining 1% headwind continues to factor in competitive shifts negatively impacting volume.
Finally, the low end of our constant currency revenue guidance range continues to assume that pricing will be flattish as compared to the prior year, while the high end of our constant currency revenue range includes all the same factors impacting the low end, except for a slight slightly smaller year-over-year headwind associated with contract manufacturing revenue as well as the ability for us to modestly raise prices.
Turning to FX, foreign currency rates have moved in a slightly positive manner in comparison to our initial guidance. And as a result, we currently expect FX to be a headwind of about 0.4% versus the prior year. This compares to our prior guidance, which called for FX to be a headwind of approximately 1%. These FX assumptions are based on foreign exchange rates that were in existence in the late January timeframe, including a euro to US dollar exchange rate of approximately 1.09 on a combined basis, our updated as-reported revenue guidance range calls for a decline of between 0.4% and 2.4%, resulting in an updated revenue guide of between $1.094 billion and $1.116 billion.
Turning to margins, we are reaffirming our guidance ranges for our adjusted gross margin of between 63% and 64%, adjusted operating margin of between 23.75% and 24.75%, and adjusted EBITDA margin of between 29.5% and 30.5%.
Finally, due to improvements in FX, we are increasing our adjusted earnings per share guidance from a range of between $1.90 and $2.10 to a new range of between $1.95 and $2.15. Our updated guidance range continues to assume that our annual net interest expense will be approximately $116 million, that our annual adjusted tax rate will be approximately 22%, and that our weighted average diluted shares outstanding will be approximately $58.1 million.
This completes my prepared remarks. And at this time, I'd like to turn the call over to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) Callum to Marsh with Morgan Stanley.

Jacob Elguicze

Your line is Thanks for much taking the question.

I have a couple if that's okay. Firstly, maybe if you could provide some color on your own plans of entering the GLP market with your opinion, specifically, any thoughts on Lilly's quick pending merger approval in the UK a couple of weeks back given I think impact of pen needles are the recommended choice on the label for this? How should we think about quantifying this opportunity and any additional?

Okay.

Devdatt Kurdikar

Good morning, gentlemen.

Thanks for the question. As I've commented before every time a pen is used all over the world, whether it be for insulin or for GLP ones. Given our strong share positions in countries around the world, it certainly positions us well for our pen needle to be used. Most of the bands that are being used out there are compatible with our pen needles. The KwikPen that you particularly referenced on this call.

Devdatt Kurdikar

That is the same pen that's used for insulin as well.

And certainly our pen needles have a strong position in the UK. I would expect that as GLP presentations, maybe change in ratio overall over time between vials, pens and autoinjectors as more and more bands get introduced. And I think Lilly has commented publicly that they certainly are thinking about introducing GLP ones in more countries with pens, we certainly expect to benefit from.
And the other thing I would point out is some of the older GLP ones will turn generic this year.

Devdatt Kurdikar

They have in certain countries outside the US and those presentations are also often intense.

And so that will benefit, certainly our pen needles business as well.

Great.

And then just one more, if that's okay. On the Q1 margins, specifically on the gross margin side, pretty strong that you've come in beyond 67% of the quarter. Now you're keeping the full-year guide between 63% and 64%. Why shouldn't those margins remain at these levels throughout the year?

Yes.

Thanks. Thanks for the question, Callum. So so it really comes down to timing, right. I think in the in the first quarter at a very high level, I think we're extremely pleased with the with the first quarter results and I think it's particularly so when you think about all the separation oriented work that that had to occur by all the associates, I think they did a tremendous job of keeping the business stable and continuing to to advance, obviously all the the ERP initiatives and separation work. So So on a really good start, I would say two to the year from a from a financial standpoint, and we talked about we talked about revenue in the first quarter and revenue was better than we had previously expected it to be, and we largely attribute that to the timing of customer orders in advance of the ERP to a far lesser extent, we did see some some benefit in the quarter in terms of revenue from an improved FX environment in relation to the U.S. as to the original guide, but really the improvement as compared to our own internal expectations for a for Q1 for for revenue really came down to the timing of the shipments from a from a margin standpoint that again, in relation to our to our expectations for Q1 gross margin, Q1 gross margins came in very strong at around 67.2% on an adjusted basis, again, largely because of the timing of the revenue that we that we saw in the quarter as well as the mix of the revenue and the fact that because revenue was a little bit better, we needed to manufacture more product and had some positive variances in relation to to our original expectations. So as we think about, you know, moving forward, as Dave mentioned, I think in his in his prepared remarks, we think that that timing benefit from a revenue standpoint will largely unwind itself in the in the second quarter of the year. And we still we still believe that the first half of the year from a revenues and margin standpoint is pretty much almost exactly in line with what we had communicated in our initial guide three months ago. So and hopefully that gives you a little bit more color in terms of the reason for the margin trajectory from Q1 to Q2 on a full year basis, again, we reaffirmed all our previously provided margin ranges, whether it's gross margin, operating margin or adjusted EBITDA margin?

Jacob Elguicze

That's correct.

Thanks.

Operator

Our next question comes from Travis Steed with Bank of America Securities. Your line is Good morning.

This is Caroline on for Travis. Thanks for taking my questions. I wanted to ask about the patch pump. Just following your five 10 K submission in January, have you gotten any feedback from the FDA at this point and then just your thoughts on timing of approval.

Yes, good morning, gentlemen, and thanks for the question. Look, we are very pleased to have gotten the submission done almost a month ago. Now, as you can imagine, this is in the very early stages. Certainly we know the review is well underway and our team has been corresponding with the FDA. I wouldn't want to get ahead of the FDA with the signaling timing certainly saw earlier so early in the review process, but nothing atypical so far, gentlemen, and we look forward to working with the FDA and you know, responding to all the questions that we'll have. And certainly when there is something substantial to communicate, we will certainly do so.
I should also take the opportunity to mention, while that is under review, we continue to work on the closed-loop version of the pump as well so that that work is going on concurrently and we are pleased with the progress on that version as well.

Thank you. And then can you talk about your constant currency growth expectations for the US versus internationally for the core injection business ex contract manufacturing for the year and in particular, thinking about growth in China actually in the quarter? And then just your outlook for the fiscal 2024. Thank you.

Yes.

So so as I think, you know, the growth outside of the US and is really expected to exceed the growth in the in the US right now. And that's been a trend, I think largely that we've seen over the past several years, essentially the US market being relatively flattish. And you know the international markets, particularly in the emerging markets for us in growing somewhere in that, let's call it mid single digit, four ish plus percent type range.

Jacob Elguicze

And that's sort of our thoughts.

You know, right now for for 2024 is that the U.S. market or developed in Nature still has, you know, sort of a flattish type constant currency revenue growth rate, and if we were to want to see more more positive growth that's going to come from from sort of the international markets.

And if I can just add to that, just to connect the dots here, we commented that the Suzhou entity. The de-merger process is complete. We plan to start production for the domestic China market in this quarter. That plant was already producing product for export markets, primarily emerging markets. So from a manufacturing standpoint, we are really glad to get some of this separation were done under us and really strengthens our foundation to capitalize, if you will, on the growth that we expect over the continued long term in the emerging markets.

Thank you.

Operator

Marie Thibault, BTIG.

Marie Thibault

Good morning, Devin. Jake, thanks for taking the questions and nice quarter. I wanted to ask your follow-up on the patch pump. Are you planning to broadly launch or broadly commercialize the open loop patch pump and as a follow-up on that and now that you've got that submitted, should we expect R&D investments to step up to stay flat? How are you thinking about the investment needed to get the closed loop pump and to MKS?

Devdatt Kurdikar

Thanks, Mary. Good morning.

Yes, we do plan at the right time to commercialize the open loop. Our view is that we will do a limited market release of the open loop pump. All the work that we've done so far indicates to us that there is a segment of the market that would benefit and be interested in open-loop pump. But obviously the timing of that is all dependent upon the review and eventual approval of the process.
With respect to R&D expenses for the year I mean, I'll let Jay comment some more, but certainly, we've included our anticipated expenses for fiscal 2024 in the guidance, and it's a little too early to sort of comment long term for beyond 24 at this point, but I'll let Jake add additional color.

Jacob Elguicze

Sure, Marie.

I think R&D spending in the first quarter was probably actually a little bit lower than what we had sort of originally internally. I expected it to be just due to some timing issues, and we certainly expect that to pick up in terms of R&D spending as we move throughout the remaining quarters of the year. And I think continue to expect that R&D as a percentage of revenue is it is most likely going to exceed a 7% ish type level for fiscal 2024.

Devdatt Kurdikar

Okay.

Marie Thibault

That's very helpful. And let me ask my follow up on the ERP systems and that transition. I think I heard you say that you know that the sales result this quarter benefited from the timing of customer orders related to that transition. Can you help clarify what that means are they ordering ahead of time to avoid disruption during the transition.
And then as part of the ERP transition and what exactly remains to be done and is there risk around the IRS letter for extension? Do you have any control? What's the plan if that doesn't come through?

Thanks for taking the questions, Germany, I'll take that. So with respect to ordering patterns, during an ERP implementation. In this case, it's an ERP implementation plus we are standing up our own shared services capabilities and we are standing up. Our own distribution network fits quite typical in transitions like this that you have a pause in taking orders as you're moving inventory from all distribution centers to new distribution centers. And so in circumstances like these customers will often placed orders in advance because certainly we don't want and they don't want any stock-outs to occur.

Devdatt Kurdikar

And so it's quite typical.

You get some lumpiness during an ERP transition and so the timing effect that Jake referred to because we were implementing in US and Canada, certainly we had some timing timing benefit. And I think as I said in my prepared remarks, we are going to do a phased implementation around the world as we continue. There will be some atypical ordering patterns and that might actually go from quarter to quarter as we complete these implementations.
With regard to the private letter ruling that you're referring to, as you remember, BD agreed in principle to grant us unlimited extension conditioned upon and obtaining an acceptable supplemental private letter ruling from the IRS, and that would allow us to extend some of these TSAs until early fiscal 2025. And that again, the reason for that is so that we can phase out these implementations and potentially reduce some of the implementation risk that is inherent in complex implementations like this, we've done significant work on preparing the filings.

Devdatt Kurdikar

We've been closely cooperating with BD and providing them with all the necessary information. We anticipate that the filing will be made soon, and certainly we worked with them to make sure that our filing is well positioned.

Obviously, I don't want to comment on the review or outcome. We do wouldn't want to get in front of the IRS, but suffice to say that we have contingency plans and we've incorporated or tried to be prudent in our guidance in contemplating the range of potential outcomes that can occur in ERP implementations of this sort.

Marie Thibault

That's all really helpful.

Thank you.

Operator

(Operator Instructions) Michael Polark, Wolfe Research.

Mike Polark

Good morning. Thank you. I have two one boring, one on the balance sheet and then a question on the patch pump on the balance sheet, Jake, really appreciated the comments about the factoring agreement. We noticed that the step-up in AR. is 100 million, a good level of AR for vector to carry? Or would you expect that this number to change one way or the other as you move through the transition?

Yes, Michael, I mean, I think there could be a little bit of variability. You know, in the coming quarters, just as we bring on, you know, for first, obviously 60% of our revenue in the U.S. and Canada, and then the remaining 40% over the next several quarters. So we could see some variability from from quarter to quarter. But I think right now, you know, our expectation is that as we move throughout the year, we start to in a more meaningful way start to collect that cash. That is now sort of sitting on the balance sheet in terms of of AR during the remaining quarters of the year.

Mike Polark

A follow-up on the patch pump program. The question is on the production side. Marie asked about R&D. Appreciate the comments there. But would I imagine in parallel, you're thinking about how to create a production environment to make a lot of patch pumps. And, you know, and looking at some of the incumbents here, it's been it's a very exquisite process and takes a long time.
And where are you in that? I know you're not you're reluctant to comment on timing of all this, but I have to imagine there's some kind of planning going on for commercial production of this product. And I'd love to get a flavor for how you're thinking about that. And if you're putting CapEx dollars to work today, on a project like that.

Mike, this is Dave.

Devdatt Kurdikar

Good morning.

Thank you. And you're absolutely right. We have been working on commercial production of the product for a while now actually even before the submission was made, I would say there are three specific things that we've focused on. Number one is recognizing that there is expertise in production that maybe not inherent in the company. We went through a RFP process and selected a contract manufacturer that could help us with production that sort of point number one. And we're working with that contract manufacturer now for over a year.
The second thing I would point out is and as we were designing the pump and going through the product development process, we were well aware that manufacturing of a very complex precision engineered medical device is going to be something that is going to be critical to the long-term commercial success of the product. And so with this we embedded design for manufacturability thinking in the product development process itself.
And the third thing I would say is at our R&D site, we actually established a pilot production line and manufactured ourselves. Some I wouldn't give you a specific number, but let me just say a fair number of devices that we used in the testing that was used to generate the data as part of our FDA submission.
With respect to capital, I'll let Jay comment on it, but obviously there was some capital spent on the production lines that I mentioned at the pilot production lines that we that I mentioned at the R&D center, but nothing unusual. Jake, do you want to comment anymore?

Yes, I would I would agree, Doug, and Mike. I think from a from a CapEx standpoint, you know, for our fiscal 2024, we would expect total CapEx. And this is sort of inclusive of some of the spending that occurs as it relates to ERP to be somewhere between, let's call it 50 to $60 million in in 2024, and that's probably 60% or so focused on on sort of the software as a service, our capital cash spend that actually shows up as a reduction of cash flow from operations in our in our cash flow statement and then or the remaining 40% of that is showing up and appearing on the CapEx line within within our cash flow statement. So somewhere between 50 to 60 million in total CapEx, I think for for 2024.

Devdatt Kurdikar

Thanks for the color.

Operator

There are no further questions at this time. I like turn the call back over to you for any closing remarks.

Devdatt Kurdikar

Thank you, Michelle.

Before we conclude the call, I would like to express my gratitude to all my colleagues around the world. Our results truly are a testament to their continued relentless focus are developing and providing solutions that make life better for people living with diabetes.
Thank you all for attending our Fiscal Earnings Call and our Q2 earnings call. And for your interest in our business.

Operator

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone have a.