Good morning. My name is Christine. I will be your conference operator today. At this time, I would like to welcome everyone to the Bausch Health Companies Second Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host. Mr. Shannon, you may begin your conference.

Thank you, Christine. Good morning, everyone, and welcome to our second quarter 2020 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Joe Papa, and Chief Financial Officer, Mr. Paul Herendeen. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, we would like to remind you that our presentation today contains certain forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures. For more information about these measures, please refer to slide 2 of the presentation. Non-GAAP reconciliations can be found in the appendix of the presentation posted on our website. Finally, the financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter and not to update or affirm guidance other than through broadly disseminated public disclosure. With that, it's my pleasure to turn the call over to Joe.

Thank you, Art. And thank you for joining us today. I'm going to begin today's call by sharing our current perspective on the COVID recovery process and briefly cover the second quarter highlights. Paul Herendeen, our CFO, will then review the second quarter in more detail and update our 2020 guidance. I will conclude by covering the core priorities we have identified to drive Bausch Health future before opening the line for questions. But before I address these topics, I'd like to comment on this morning's announcement that we have decided spin off our eye health business as an independent, publicly-traded company. The spinoff will establish two separate companies. It's fully integrated, pure play eye health company built on the iconic Bausch + Lomb brand and a long history of innovation and an international diversified pharmaceutical company with leading positions in gastroenterology, dermatology, esthetics, neurology, and in international pharma business. Four years ago, we initiated a multi-year plan, first to stabilize and then to transform Bausch Health into a company positioned to deliver long-term organic growth. Over that time, we have divested approximately $4 billion of non-core assets, paid down over $8 billion of debt, resolved nearly all of the significant legacy legal issues and managing the loss of exclusivity on a $1.4 billion product portfolio, while also investing in research and development, new product launches in core franchises with attractive growth opportunities. Our board and management have been working over the last 12 months to determine how best to unlock value across our businesses and believe that separating into two highly focused and attractive standalone companies is the way to accomplish that goal. We've looked at the value of our peer eye health companies like Alcon and Cooper, and believes that Bausch + Lomb would compare very favorably when…

Thanks, Joe. The story of Q2 2020 versus Q2 of 2019 comes down to one word, and that's COVID. Please turn to slide 8. COVID was the primary driver in substantially reduced revenue across all of our business units. Overall, organic revenue declined 21%. All four segments declined, led by B&L International, down 24%; then Salix, down 21%; then diversified, down 17%; and finally, Ortho Derm with the smallest decline relative to Q2 of 2019, it was down 5%. Within B&L International, as expected, Global Surgical suffered the greatest impact from COVID as non-essential surgeries essentially stopped in many markets. Global Surgical was down 48% overall. It was down 49% outside the United States and down 44% in the US. We'd expected that the O-US surgical markets would begin to improve as the second quarter played out, and they did, but at a slow pace. Meanwhile, in the US, we saw quite a deep dip and then a pronounced recovery with US surgical revenue in the month of June down only 10% versus June of 2019. I'll talk a bit more about the pace of recovery of various businesses and geographies when I get to guidance. Ophtho Rx was down 42%, not surprising due to the weighting of the products in this business that are used pre and post eye surgery. 60% of Ophtho Rx is in the US. And as we saw in the surgical business, the US part of the Ophtho Rx recovered nicely off of the floor that we saw in April. Global Vision Care on an organic basis was down 37%, down 43% in the US and 34%. O-US. Outside the US, we had thought that Vision Care would show more life as social restrictions were eased. However, in the Asia Pacific region, which represents just…

Thank you, Paul. In a world of COVID uncertainty, our overall Bausch Health response is straightforward, focus on key brands and new product launches, grow market share, and manage OpEx to optimize EBITDA. Turning to Bausch + Lomb's Global Vision Care on slide 17. Once again, a lot of data with a few key points. The pandemic reduced consumption of contact lenses on a worldwide basis. But new fits are starting to come back after significant declines due to office closures in the second quarter. The chart in the bottom left shows average weekly change in field consumption in the United States. Our B&L recovery is in process. To be clear, the recovery in Europe and Asia is proceeding more slowly. Even during this period of disruption, we were able to grow market share for some lenses. On the right, we showed the gains in the Biotrue one day lens family, up 100 basis points versus last year in the daily disposable category. And in the frequent replacement category, the ULTRA family grew market share by 130 basis points. And finally, despite COVID, we're obtaining product approval and launching great new products to meet consumer needs, such as ULTRA monthly lenses in China, ULTRA one day lenses in Canada and Hong Kong and INFUSE daily SiHy lenses in the United States. On to slide 18, many asked about INFUSE. INFUSE is the only silicone hydrogel daily disposable lens with a next generation INFUSE ProBalance technology that helps maintain ocular homeostasis and reduce the symptoms of contact lens induced dryness. For example, INFUSE lens maintained 96% of moisture for a full 16 hours, which is more than the leading SiHy daily disposables available today, and has the lowest modulus which is associated with a comfortable lens experience. Turning now to Global…

Thank you. [Operator Instructions]. Our first question comes from Chris Schott with J.P. Morgan.

Just a couple on the separation. So, I know the potential of the separation is something we've discussed in the past, but elaborate a little bit more in terms of why now in terms of the decision? What got you comfortable to kind of move forward with this at this point? My second question on this is I know the numbers aren't finalized. But how do you think about the magnitude of dyssynergies from a separation? Is this something that's going to be meaningful? When we look at the business, it seems like these two operate fairly independently and would suggest maybe there's not huge dyssynergies, but just any color there would be helpful. And then maybe just one final really quick one on this is, can you remind us – as we're looking at your corporate expenses, what percent of those go to B&L and what percent are associated with the pharma business? Thanks so much.

I'll take the first one, the why now, and maybe you can help on the dyssynergies and percentage of B&L on the corporate expense side. So, Chris, great questions. Why now? So, we've been working at this for four years. What we felt we had to do is we had to get ourselves into a position where we can divest the non-core assets, about $4 billion, pay down a lot of debt, about $8 billion plus of pay down, manage the portfolio that we had – we knew we were going to lose exclusivity on about a $1.4 billion portfolio. We had to get through all these legacy issues that were part of what we faced as a company, the legal issues that Christina and her team solved, the Salix litigation, the Allergan litigation, the class action lawsuit both in the United States and Canada, the SEC Philidor accounting. The great news is those are now behind us. We also, though, knew that we had to get both businesses in a position for growth. And what we did is we invested behind R&D for new products, invested in CapEx for these new launches like ULTRA Toric, we invested for daily SiHy capability. So, a lot of activity had to happen before we could get ourselves into position to do that. We now feel that we are in that position to do that. And we reflected on our portfolio. We said that we find ourselves with a portfolio of products that are somewhat an artifact of history that were put together through a number of acquisitions. And we said, what's the best way to get these portfolio of businesses to a place where we could grow these businesses organically over the long term? And we felt that by putting them and separating them, so each of them can make those types of judgments and decisions and focus with the right long-term decision. And that's really the simplicity of the timing question. There's a lot of work to do to be clear, and we'll keep the market updated. But we felt now is the right time to start. And the activities have been done by the Board and the executive leadership team. But as you start to pull apart and separate two businesses, it takes a lot more than 20 people to do that. You really start – need to engage the organization. And once you start to do that, you've got to be forthcoming. You've got to share that information, be very transparent with investors, which is what we've always tried to do. So, that was the logic of why now, why announce it now, realizing there's still a lot of work to go forward in the future. Paul, maybe you can take the second part of the question about the dyssynergies and the B&L as a percent corporate expense side.

Chris, obviously, very good questions. First, we're not providing a spot estimate of what the dyssynergies would be in the separation of the companies. And while you point out that they do look like they operate relatively autonomously, in reality, you've got to take a look at what we're defining as the eye care business for the future. It's our Global Vision Care, Global Consumer, Global Surgical and Global Ophtho. Currently, those businesses share a fair amount of infrastructure with our international pharma business. And so, there will clearly be some dyssynergies associated with having to build up infrastructure to support those businesses when they are separated. Of course, there are also the expenses associated with standing up all of the enabling functions that will be necessary in order for the eye health business to stand on its own. So, can't give you a number today. But I would submit to you that if you were to look at levels of G&A and R&D for similar sorts of businesses, you can come up with a pretty good estimate of what fully loaded G&A and R&D particularly would be because those are the ones where you're going to see the dyssynergies. With respect to corporate expenses, similarly, you'll get to the same answer. If you go back – if you use 2019 as a guide, I believe there was circa $450 million of corporate expenses, both R&D and G&A that were not allocated. What I would suggest is that you can, in a relatively straightforward way, go back to that 2019 information and make your assumptions about how that R&D might have flopped on to what we're defining as the eye health business to go forward. Again, to be crystal clear, it's not the segment. In fact, there's actually some additional products that would be moved from other businesses into that business. So, it's not as straightforward a process as you might imagine. As we start to refine these things, we will certainly be helping you to think about what the fully loaded P&Ls would look like for the eye health business going forward.

Our next question is from Gregg Gilbert with SunTrust Charities. Please go ahead.

Good to see you taking some action here. I was hoping you could walk us through the mechanics of how and when you can affect the separation in as much detail as you're willing to provide today, at least to level set expectations of how soon or not soon this could actually happen. And then, within RemainCo, if I could call it that, does international pharma fit with the remaining pieces? I know each piece is a little bit different, but that one is distinctively international compared to the other pieces. Thank you.

The question on the timing aspect, we are working through that timeline. But the best way I can answer it right now without giving any specifics relative to exactly our timeline, I'd say is – we looked at all a lot of precedent company transactions, and usually it's somewhere in that year and a half timeframe. It usually takes somewhere around a year-and-a-half. It's going to take some time. There's a number of issues to work through to, obviously, ensure that it's a tax efficient structure, to ensure that the organizational design is correct. So, we've outlined a lot of the steps that have to go into this in terms of a timeline. I don't want to put a specific timeline right now as we go through it. But I do think that the best way for us to answer the question right now is the – looking at some of the precedent transactions. On the question of RemainCo and international prescription, does it fit with other pieces? One of the things that we do think is an opportunity is that we're going to look at what we're doing with international pharma because this is very diverse, but it does include products in dermatology, neurology, in gastroenterology. We've looked at that portfolio. So, we do think there's opportunities to, for example, globalize our Salix businesses. As you know, when we acquired TRULANCE and dolcanatide, we did also acquire global rights to those products. So, there are global opportunities for products like our gastroenterology business. I think you know we're developing next generation rifaximin opportunities. Some of those opportunities we also believe will be international opportunities. So, I do think there's an international opportunity. I won't dismiss that there are some parts of the international pharma that are going to be different than our current Salix gastroenterology business. Our med derm business as well. So, we'll work our way through that, try to make the right decisions to once again focus on driving long-term shareholder value for our shareholders.

Our next question comes from Umer Raffat with Evercore.

I'll primarily focus on the B&L separation as well. But before I do, can I just clarify for everyone? Paul, I think on slide four, it says pro forma B&L newco is $3.7 billion. I believe that was supposed to be around $4.9 billion. I just wanted to confirm that. But my question is, so thinking of this B&L newco as a $5 billion business, the one thing that does catch our eye is, it was supposed to have $1.2 billion in a perhaps non-ophtho business, the international Rx. And I noticed you guys are adding an additional $140 million or so on top of that after some changes today. My question is, is it fair to assume that the international segment works at something north of 60% operating margin. I'm just trying to break out the operating profit drivers of this B&L business, just to understand how we should think about valuing it because it's not inconceivable market when I think of those as separate or not. And maybe you could speak to that. Thank you very much.

Paul, you want to take that question?

Yeah, I do. And Umer, please stay in line here because I think the – on slide four, the business to be spun out is the $3.7 billion. I did not understand your question regarding the first part of your question. So, I apologize for that. But let me let me address first what else is in there? There are parts of – for example, if you were going to stand up your eye health business and you put together a global supply chain, within that global supply chain, there are assets that are produced there that ought to be then sold by that eye health business. And the easiest example to think about that is we have a fairly meaningful portfolio of generic products to ophthalmic Rx products. So, revenue that previously would have mapped to diversified and shown up in the generics line, which are ophthalmic products which should map to the eye health business. There are a few other minor items that result in kind of the addition to the eye health and the subtraction from BHC. But I would say that is the primary difference between those two things.

And the margin, Paul, from the international?

On the margin, I'm going to point back to something I said. It was probably 18 months ago or so. I'd have to go back to see exactly what call it was on. But when people were trying to tease out – like, thinking about international pharma as it was part of the B&L international segment, people often asked, well, does it distort the segment, how should we think about it, and what I said was, if you use the EBITA contribution margin of the aggregate B&L international segment with international pharma in there, that blended margin was approximately the same as the margin that you would have seen if you could tease out international pharma. I think that gives you what you need. You see what I'm saying?

Thank you, Paul, for that. We'll obviously be providing more information as we make this spinoff happen. But we're excited about what this means in terms of really unlocking what we think is a great iconic brand with Bausch + Lomb.

Our next questioner is Akash Tewari with Wolfe Research.

And kind of similar to what people have asked before. When you've talked about spinning up eye care, it always seemed like the timing wasn't right, given the current debt structure. What changed internally with your thinking? And was there any external shareholder pressure? And would you consider having the spinoff occur two to three years down the line and potentially also doing an equity linked transaction to maybe lower the debt of the spinoff? Thanks.

I think that I back to the why now. I think there's a lot of things that we felt we need to clear, currently resolved, as we were thinking about direction of our company. As I mentioned, we felt that we had a number of issues to resolve before we could make this move. We've now resolved those issues, we've resolved those legacy legal issues. And we feel now's the time to start. Do I absolutely understand it's going to take some time? As I said before, looking at precedent transactions, I think it's somewhere in that year-and-a-half timeframe. But let's start now. We'll continue to work through some of those other questions like our capital structure to ensure that we launch this with the best results for both businesses. As you know, we're going to continue to work very diligently to pay down debt. And that's an important part of it as we grow EBITDA with our total businesses. So, except that there's still some things we're working our way through – but as you can imagine, as you start to go down this path, in order to unlock this value, we needed to open this up to a lot more people in our company. We wanted to maintain, obviously, transparency with the market. Therefore, our view was – we'll announce it now, we'll take the appropriate steps, we'll work through all these questions, and, obviously, go forward. But this is something that's been ongoing for, as I mentioned, about 12 months. Our board and the management team have been working on this question as to how best to unlock value for our shareholders. And we feel now is the time to announce it. We still have some additional work to do to be clear, but we're looking forward to unlocking the value of the B&L franchise for the future.

I'd actually like to follow on because I think, Akash, you framed it – it's a terrific framing kind of question. I think the way we approach this is that, to preserve the maximum value for BHC's shareholders through the separation process, it requires that we consider balance, solve for a number of variables, including those that are based on our current leverage. And to be clear, our goal is that both B&L and BHC will emerge from the spin process with appropriate capital structures that will allow each of them the financial strength and flexibility to drive future value. And an important consideration in executing that is time. The passage of time helps as we continue to generate cash and delever. I want to reinforce something that Joe touched on is, why now, it's like it was very important that we solve and resolve many, many legacy issues prior to being able to kind of announce and move forward with this. And not the least among them was to resolve those – the legacy liabilities that our colleague Christina Ackermann, our General Counsel, and her team have done a fantastic job of settling those things out, so that we can put those in the rearview because that enables us to think about separating into the two companies where both will be well positioned without overhangs in order to be able to do to drive forward from there. The other thing I do want to stress as well is with respect to the timing, say the same things as Joe, but I think it's important. Us announcing this today is entirely consistent with the way Joe and I have approached financial reporting from the time we got here, which was to be as transparent as possible, so that you, external…

Our next question comes from David Amsellem with Piper Sandler.

So, I know that you haven't provided specifics on the capital structure. But I do think that at least some qualitative commentary on the capital structure would be helpful as we navigate this period. I guess my question here is, given that the eye care business has always been perceived as durable over a long-term period, doesn't have the major exposures to losses of exclusivity, is it fair to say that that's going to be a business – that business is going to shoulder more of the debt than the remaining pharmaceutical business, which does have some durability question marks, albeit nothing as dire as what we saw the last few years? I guess, just from a sort of whitespace perspective, can you just help us in terms of how you're thinking about it? And again, I know these are early days, but I think it would be helpful to at least address it in some way. Thanks.

I'll start, but, Paul, please feel free to also add your comments. I think the important point that we're thinking about this is, let's figure out how best to unlock these businesses that came together as an artifact of history. Do they need to be together? No, we do not believe that to be the case. Let's separate them out. Let's put the appropriate focus and investment behind each business and ensure that we can make each of these business successful. Do we absolutely have to work our way through that capital structure question that Paul mentioned on a previous question? The answer is absolutely yes. But our view is that, over the long term, this is the right thing to do for our investors. We think the B&L business will compare very favorably with companies – great companies like Alcon, like Cooper. We think those comparisons will be important as people measure the future success of this business. So, that was the overriding principle. We didn't feel that these businesses, as we reflected on it, needed to be together. Let's separate them. Let's let both businesses go out and be successful on their own. And that's our approach. Do we absolutely recognize capital structure is an important question. The answer, yes. We're going to deal with that in a very efficient manner. But the only thing I will point out, David – I know you follow very closely – is that we do feel very good about the progress we've also made on the loss of exclusivity products. We've worked our way through that. The majority of those are behind us. And now, we feel we've done a very good job in managing the XIFAXAN challenges to the patent. You probably recall that we've settled both with Teva, the world's largest generic company and arguably the third largest company, and Sandoz in terms of a 2028 date. So, we do think we've got the longevity of XIFAXAN that will allow us to manage our way through this and to ensure that once again Bausch healthcare business with a focus on international pharma, gastroenterology, aesthetics, dermatology, neurology will also be very successful. So, I probably don't want to make any more specific comments about how we'll allocate debt, et cetera, but I do think we will manage that in a way that is best for both businesses to optimize? Paul, I don't know if you want to add as well.

I thought that was great. But, yeah, I'd say that the key thing, David is that each of those two businesses needs an appropriate capital structure. I don't think – we were certainly not going to guide to what does the cap structure of the spinco look like today and what does it look like. There are too many variables sitting here on August 6 to come into play. And I think the time is one of is those variables. There are a number of ways that we can proceed with this that can accelerate the time. While I'm on the topic of time, I'd say that the mechanical things associated with gearing up and laying the foundation to separate the two companies is something that we can and will go very fast with. The bigger challenge, as I said a moment ago, in trying to answer Akash was – it's to preserve the maximum value for BHC shareholders through this process. You've got to consider and balance a lot of things and time is one of them.

Our next question comes from David Risinger with Morgan Stanley.

So, Paul, I was just hoping to ask a question on debt covenants. So, what do the debt covenants currently indicate in terms of maximum value that can be exited? I had read an SEC document that had indicated – I guess it was the 10-Q from March that the company had approximately $12.3 billion of basket buildup capacity. So, I'm hoping that you can put that into context. And just provide some more color on how you plan to overcome the debt covenant issues. Thank you.

This is a question we're surely going to get from many of our folks on the leverage finance side. Suffice it to say that we're announcing that we're going forward with this because there is a path under all of our existing agreements in order to be able us to conclude this transaction. Not going to get into the specifics of calculation of baskets and what goes where, but, clearly, was a consideration in thinking about the prospective separation into an eye health company and to BHC – into B&L and BHC. We've done the math. We've done our homework. And it is absolutely something that we can do. And I'll just leave it at that.

Our next question comes from Ken Cacciatore with Cowen and company.

Just my one question is, it seems it would be a lot easier to just sell this legacy business. So, just wondering, is this process that you're undergoing to basket and separate and tease out operationally, does it make it easier to sell? Is that part of the optionality ahead of – to the end stage of a spin? And can you just give us any color if that was pursued and just simply you weren't able to do, and so this is the right appropriate next step? Thank you.

The best way I can answer that question, I think, is the board and management looked at all the alternatives. And as we evaluate all the alternatives, we believe that this approach is the best way to move forward. It is within our control. It is something that we can manage – we can ensure it happens. Obviously, there are things that we'll need to do and there's a lot of work that we need to do, but this is totally within the control of the team that is moving this forward. As I said earlier in the call, we knew that – as we wanted to be very transparent with the market, we needed to involve more people in our company to get this done. But that was going to mean that we had concerns about leaking information or anything along those lines. So, we said let's be transparent, let's announce it, recognized that it's going to take us a year-and-a-half or thereabouts in terms of basing on precedent. We haven't given a specific timing for ourselves, but precedent tells us about a year-and-a-half. Let's get that all up and running. This is totally within the control of management and, therefore, we believe this will be the best way to proceed. Obviously, as we arrived, we've always said we will consider all alternatives to drive shareholder value for this company. We believe this is the correct way as we sit here today, totally within management control. If other things occur, we're always going to make sure we do the right thing for our shareholders. So, to be clear. Thank you, everyone, for joining us today. Paul, did you want to make any other comments on that?

I have like 30 seconds. I think you've covered it, but I'd like to double cover it, if I could. Ken, as it has been since we got here, all alternatives are on the table at all times. Clearly, any alternative is on the table. And importantly, taking this step does not foreclose any of the options that might present themselves that could – and could potentially accelerate our ability to deliver greater value to our shareholders. So, this is it. You used the word optionality. This is something that provides additional options to us as we look forward. We're really excited about this. As I said earlier, this is the right thing to do. And we're committed.

Thank you, Paul, for those comments. Let me just try to conclude. As I mentioned earlier in prepared remarks, we think it's a very exciting day. It's an opportunity to take Bausch health care to the next step by separating into two public, independent companies. We are very excited about what that means in terms of unlocking the value in the Bausch and iconic brands and look forward to sharing with you more information as we move forward. But thank you, everybody, for joining us and we look forward to answering additional questions that you may have in the future. Have a great day, everyone.

And that does conclude today's conference call. We appreciate your attendance. You may disconnect your lines at this time and have a great day.