Good morning, and welcome to the Bausch + Lomb's First Quarter 2023 Earnings Call. All participants will be listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Allison Ryan. Please go ahead.

Thank you. Good morning, everyone, and welcome to our first quarter 2023 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Brent Saunders; and Chief Financial Officer, Mr. Sam Eldessouky. 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, I would like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures and ratios. For more information about these measures and ratios, please refer to Slide one of the presentation. Non-GAAP reconciliations can be found in the appendix to 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 unless required by law and to not update or affirm guidance other than through broadly disseminated public disclosure. With that, it is my pleasure to turn the call over to Brent.

Thank you, Allison, and thank you, everyone, for joining us today. It's great to be here. I'll start off by sharing some high-level comments about my first 50 days as Chairman and CEO of Bausch + Lomb and briefly discuss the first quarter financial highlights. I will then turn the call over to Sam, our CFO, to review the first quarter financial results in detail and discuss our 2023 guidance. Finally, I'll cover our key franchises and a few upcoming catalysts before opening the line for questions. Beginning with Slide three. I've been involved in eye health for the better part of my career. It's a dynamic industry that is always evolving, full of innovation and collaboration and with many talented practitioners, surgeons, ophthalmologists, optometrists and significant unmet needs for millions of people. It is an area that I care deeply about and have continued to stay close to. Having an opportunity to work in this great industry again was an important factor in my decision to rejoin Bausch + Lomb. The eye health industry operates an attractive part of the health care space with a large addressable market and growth driven by demographic trends and lifestyle changes that create significant unmet needs. Companies that can meet these needs are rewarded for innovation in a favorable competitive environment with significant barriers to entry. There are many other reasons why I returned to Bausch + Lomb, an iconic brand; 170 years in the making, a broad, diverse commercial platform, products that touch patients throughout their lives a massive global infrastructure, and a competitive landscape where we have the most comprehensive footprint; and most importantly, a team of talented and dedicated colleagues who are passionate about making Bausch + Lomb the best eye health company in the world. My first 50 days…

Thank you, Brent, and good morning, everyone. Before we begin, I would like to point out that most of my comments today and in the future will be focused on growth expressed on a constant currency basis. This is consistent with how we operate the business, and we believe it helps more closely align our reporting to a broader group of comparable companies. Turning now to our financial results on Slide 8. Our first quarter results demonstrated strong growth, and the business is continuing to build a solid track record of durable revenue performance. Total company revenue of $931 million for the quarter reflects growth of 8% on a constant currency basis and 5% on a reported basis compared to the prior year quarter. As Brent mentioned, revenue growth was broad-based and span across all three of our reporting segments: Vision Care, Surgical and Opto Rx. Consistent with the expectations noted in our last earnings call, while we saw gradual improvement in China in the quarter, we continue to be cautiously optimistic about the pace of the recovery. We remain confident that our business in China is well positioned to return to stable growth over time. We'll continue to monitor the economic activity given the stop and go recovery we saw last year. In the quarter, foreign currency headwinds were approximately $31 million to revenue and approximately $14 million to adjusted EBITDA. As mentioned on our last call, we expect that these currency headwinds to persist in the first half of 2023 before improving in the second half of the year. Now let's discuss the results in each of our segments. Vision Care revenue of $587 million increased by 8% on a constant currency basis, driven by both the consumer and contact lens portfolios. The consumer business grew by 8%…

Thank you, Sam. Let's spend a few minutes on a few of our key franchises and some upcoming catalysts we expect to drive business results. On Slide 14, given the prevalence of dry eye disease and the size of the market, we believe our dry eye disease platform will be a key driver of future growth and is a good example of the benefits of an integrated platform and addressing a large market with unmet need. We can reach patients and consumers through multiple access points, leveraging long-standing relationships with the eye health professionals as well as key retailers and e-commerce channels that reach a broad consumer base. The franchises on this platform, primarily Artelac, Biotrue and Soothe generate approximately $250 million in annual sales on a combined basis. In addition to a number of line extensions for our consumer products, we are looking forward to NOV03's PDUFA date on June 28 as the next potential catalyst to further advance this platform with the addition of a pharmaceutical product. More specifically, this is a category that has long been defined by treatments that work along the inflammatory pathway, and we have an opportunity to launch a potential first treatment for evaporative dry eye in a large and growing market, which is currently estimated to be approximately $2 billion in the United States. Our LUMIFY franchise on Slide 15 is another example of the power of a fully integrated eye care platform to launch, promote and drive the performance of our products. Today, LUMIFY is a $125 million franchise with approximately 50% market share in the redness reliever category and the number 1 doctor recommended brand. Our strategy is to build on this success by expanding into new geographies and adjacent categories. We recently acquired the rights to market LUMIFY in…

[Operator Instructions] Your first question is coming from Vijay Kumar at Evercore ISI.

Guys, congrats. I guess my first one is on the organic performance in the guidance. 8% was a pretty big number. We've seen utilization come strong across the group. Was that 8% a clean number? Were there any catch-up one-off items? And I think the guide implies back half of mid-single digits, and I'm curious why the 8% perhaps wouldn't sustain given comps don't seem to be too hard.

Yes. Great. Well, thank you for the question. Yes, it was a good quarter, and I think we're off to a good start for the year. I think specifically to answer your question, I'll turn it over to Sam on any one-offs. I don't think there were, but go ahead.

Good morning, Vijay. Now we really didn't have anything outside of the normal course of business. Just one thing I will remind you, as you think about our first quarter, one of the things we're benefiting from Q1 is the timing of the pricing. This is lapping a full year of now pricing. As a reminder, we did take pricing last year, and we did take pricing again this year. So there's an impact of that. And you'll see that probably more pronounced in our -- more in the Vision Care segment, specifically in the consumer side, just offset inflation. But that's really one of the areas I would just highlight, just the timing of the pricing getting better the tailwind of that. Thanks, Vijay.

And Brent, one maybe follow-up on -- I think you -- looking at second half, you mentioned over three years a key catalyst. What would be like a positive good outcome in your mind? And what would be suboptimal? And how should we think of the contribution from this product in a focus?

Yes. No, great question. Look, we're excited about the, hopefully, upcoming approval at the end of June. We have a PDUFA date at the end of June. So I was -- in my career, I always start with the positive outcome being an FDA approval. You never want to take those for granted. We're pretty confident in it, and we're excited for it. But we just -- I've been here 50 days. We just hired a new head of our pharmaceutical segment. And our primary focus for that business is launching NOV03 with excellence. I think they have a great opportunity. As I mentioned in the prepared remarks, most of the -- in fact, all of the approved treatments in the United States in the pharmaceutical side or for inflammatory-related dry eye disease, and we have the first-in-class or potentially first-in-class product for evaporative. This is a large market, $2 billion, growing to approximately $3 billion in the next few years by 2025. And so I think we have a real opportunity to take significant share. We're working on the launch plans in great detail and great focus as we speak and probably have a better sense of updating you on our next call about it. But big opportunity for us.

Your next question is coming from Robbie Marcus at JPMorgan.

Great. Thanks for taking the questions. Good morning. I have two questions. I'll just ask them both upfront here. First, there's a lot of moving pieces down the P&L, and I appreciate the EBITDA guidance. But where do you want people to kind of fall out on EPS? And what are you trying to imply in the guidance? And then part two, wanted to talk about the remaining organic sales growth that's implied in 2Q through 4Q. The comps last year looked pretty similar to first quarter. So with new product launches, China improving, why the deceleration versus first quarter? Thanks a lot.

Yes. So let me take a high-level stab at both, and then give it to Sam for some more detail. Look, I think as you look at the bottom line, EBITDA or EPS, long term, obviously, we absolutely want to see leverage in the P&L. We want to see margin expansion or improvement. And we want to see, as I mentioned, real utilization of this massive infrastructure we have built over years at Bausch + Lomb, which truly is a competitive advantage if, and I stress if, utilized well. And so tremendous opportunity in the medium to long term to create that leverage. In the short term, I think we need to see improvement. We have some challenges and some investments that need to be made throughout the year. On the challenge side, I would put supply chain being here 50 days. We still have some unknowns there, and I need some more time to really get comfortable and understand what's happening there. I think we have to make investments in important launches like NOV03 and continue to support LUMIFY as a top growth driver for a long period of time. And so we're just balancing those two things and probably have more clarity as we move forward. On organic growth, I would say the same thing. I'm not sure we'll see deceleration, again, 50 days in. This is the guidance I'm comfortable with. I think we still have supply issues throughout all the businesses. Some of them are hangovers from COVID. Some are just new technologies or tough technologies or third-party suppliers that we're working to grab. But it's quite complex. And so I think we're trying to put out guidance that's realistic based on what we know today or what I feel comfortable with today, but that will evolve as I get my feet firmly on the ground here. But let me give it to Sam for some more color.

Thanks, Brent. Good morning, Robbie. Let me take in two parts here. The first one on EPS. As you know, we don't guide EPS. But when you think about just EPS and the dynamics of it, one big factor we spoke about quite a bit is the currency, and we've seen the currency headwind year-over-year. We're estimating for full year 2023, that's about $35 million, which we saw about $14 million of that come through in Q1. The other big factor you have to keep in mind is interest expense. We've seen quite a rise in the interest expense. Just as a reminder, our debt and capital structure today, we're sitting with a variable capital structure SOFR plus 3.25%. So we're all seeing what's happened with Feds and sort of the impact on the interest expense that we're seeing that we're guiding for roughly about $250 million. That's versus that roughly $150 million of last year. So that incremental element does provide headwind on EPS for us as we go through 2023. Keep in mind that we also, on the capital structure, we did talk about this is an interim structure that we will transition out of at the time of the separation. So just putting all these different pieces together will give you a sense of how we're thinking about EPS. In terms of just the organic growth, and Brent covered it pretty well, and maybe I'll take a step back. For Q1, we're very pleased with what we performed in Q1. There's a lot data points in Q1 that we're excited about, and we're pleased for the good start of the year. That's one quarter. And as you start evaluating for the rest of the year, we start thinking about all the puts and takes that you have…

Your next question for today is coming from Joanne Wuensch at Citigroup.

Good morning. And nice start to the year. Two questions. The first one is, I mean, if you could just sort of give us a lay of the land on the contact lens market, where you are in thinking about taking share and the difference between price, volume and mix? And then I'll throw the second question out there. Ask is coming up this weekend. What can we expect from Bausch + Lomb there?

Great. So on the lens market, I'll give you kind of my two cents and then Sam can provide some more context. Look, I think we're in a very good competitive position around the world in our contact lens business. Our Daily SiHy or INFUSE is a very competitive, very high-quality lens, but we're ramping up, right? And so most importantly, we have SPHERE, and we have SPHERE launching globally. We have a multifocal launching in the first half of -- later in the first half of this year in the United States. And we're still working on the toric, right, to get that out, hopefully, next year or so. And so it's a great product. And when you look at it, it was up about 38% in the quarter. And that's a good position. But as I think about that, 60% of that comes from new users and some and the remaining 40s, the biggest source of that is probably from our Biotrue. And so what we have to focus on is exactly what Sam hinted out there, we need to be able to manufacture more. We need -- we can sell basically everything we make and, the team in both Rochester and Waterford where we manufactured is doing a great job of improving yield. And with that comes profitability of those lines. And so we need to continue to work on that because you're trading out in those Biotrue. You're trading out a higher margin for a lower-margin product today. We need to solve for that. So massive opportunity, but some challenges that we need to work through. In terms of the meeting, I'll be heading out there tomorrow to San Diego for the meeting. We're excited for that. I think we'll issue a press release. But what I hope you see from us is, frankly, a team that really shows up to win at the meeting. It's important. It's one of the biggest meetings of the year in our field. And how we show up and how we interact with customers and get them excited about our products and portfolio and our future is really critically important to us. There'll be a bunch of other releases coming out, and you'll see that in the Newswire as they come out. Anything else you want to add to?

Joanne, just to add, in terms of the price volume mix here of contact lens, the growth this quarter was mainly in the contact lens side was mainly volume. So seeing the volume being majority of the growth. We've seen a little bit of price, but majority of volume. And just Brent covered it pretty well on Daily SiHy and where the growth is coming from. One thing I would just also highlight is when you look at the rest of the portfolio of the lenses, we've seen also nice growth in the other parts of the brands such as ULTRA. I called it out this morning, it's growing at 18% and Biotrue at 8%. And the SofLens daily, which is a legacy brand outside of the U.S., is growing nicely at 50%. So the team is doing a good job managing the Daily SiHy as well as sort of along in the tail on the other brands as well.

Yes. And I should reiterate, that's really important because the way to success is by not having a leaky bucket. And this quarter, I think, was a good example of exactly that. And so real kudos to our team for managing across all these different platforms.

Your next question is coming from Larry Biegelsen at Wells Fargo.

Good morning. Thanks for taking the question. Brent, welcome back. One question for you, Brent. One question for Sam. Look, I'll start with the Sam question. The EBITDA margin, I think, implied is about 18.5% for the year. Can you talk a little bit about the cadence from Q2 to Q4 and the drivers over the improvement in Q1, which was about 15.1%? It looks like actually SG&A needs to decline from Q1 in dollar terms. Maybe I'm not looking at that right. But if you could just level set us on the cadence and the drivers, that would be helpful. Brent, you talked about underutilization of infrastructure a few times. I guess I'd love to hear you flesh that out a little bit more. I mean you could reduce your footprint or you could add products. I assume you're talking about adding more products to the bag. So how do you do that? Is that through more M&A, licensing? I'd love to hear about how you do that and your areas of focus. Thanks for taking the questions.

So since you asked Sam first, go ahead, Sam.

Good morning, Larry. And a pretty good question. And phasing is very important and you picked on it, and I made a sort of a feature in my remarks this morning. Because when you think about our phasing, especially between Q1 and the rest of the year, it's an important factor as you think about 2023 is that we start -- maybe I'll step back and just reflect back on last year's phasing. When you look at the natural phasing of our business, we tend to have our lowest point in phasing in the first quarter with the highest point being at the end of the year. So you tend to have the second half much stronger than the first half. As you think about this year, that phasing is caused the same natural phasing, but it's actually more pronounced in a couple of factors, and there's a couple of things that you have to factor in. When you think about our first half, adjusted for currency is a big factor. So we see currency headwinds in Q1, roughly about $14 million EBITDA. We guided for the full year structure by $35 million. So we see most of that coming into the first half. We expect currency to be more of a tailwind or not an issue as we go into the second half. So that flips between the two elements. Second part, which I called out, was the gross margin and the impact of the gross margin from the higher level of inventory that we capitalized at the end of 2022. And as this inventory works its way through the P&L, we're seeing that come through with a headwind in gross margin that you don't expect to play out in the second half. And most of that usually will -- some of it came in Q1 and will be coming also in Q2. And then the third factor you have to put in is the higher investment in launches. So we're gearing up for NOV03 as one of our major launches, but there's other also launches that we have throughout the business. And that's taken investment that majority of the investment coming into the first half and bulk of it is coming into the second quarter. So factoring all those items and factoring the leverage in the revenue and the increase in the revenue in the second half and how that impacts the P&L, you'll be able to see that the phasing is really heavy weighted towards the end of the second half of this year, the Q3 and Q4. So when you look at Q1, it was the lowest point. We expect maybe 1, 1.5-point improvement as we go into Q2. And then after that, we'll see the ramp-up in the second half of the year.

Great. So Larry, I'll kind of address what you mentioned with only utilization. But to be clear, I think we have tremendous opportunities, but we have three challenges that I mentioned, underutilization of our infrastructure, challenges in our supply chain and gaps in our innovation, and they're all kind of somewhat related. But as you think about underutilization, think of the opportunity here. It's a very favorable competitive environment, and Bausch + Lomb itself is probably the most integrated and comprehensive portfolio or focused on this industry, right, touching all four areas in a meaningful way. But we have operations in virtually every country. We have a massive supply chain and distribution center. We have relationships with almost every eye care professional in the world, and we've been doing it for 170 years. But we don't have any big blockbuster brands. We don't have big, high-margin products. We do it. We're kind of a workhorse. We do it with a big portfolio, lots of SKUs, lots of products, and we do that well considering the complexity of that. But that being said, the easiest thing to solve here is to put more sales through that channel. We can do a lot without adding a whole lot of additional cost by leveraging our distribution and sales relationships. And so clearly, we want to do more, we want to sell more. And so that starts with first making the most of the things you have, right? So making sure we continue to launch great products like INFUSE, our Daily SiHy, keep LUMIFY chugging along, keep PreserVision moving forward, right, doing great things with the things that are already in the market, IOLs and the like, like enVista had a great performance in the quarter in the IOL segment. The second thing we…

It does. Thank you.

Your next question for today is coming from Cecilia Furlong at Morgan Stanley.

I wanted to turn just to some of the supply chain comments that you talked about, really what you're seeing from the demand side on the Surgical or equipment side versus your capacity today to meet it and how you're thinking about that in your guidance range just in terms of being able to meet capacity through the balance of the year.

Yes. No, it's a great question. And this is true in a lot of our product lines. We can sell almost everything we make. And so if you think about Stellaris, we have a backorder of demand, if you will. Every machine we can make, we sell. And our issue there is a third-party supplier of microchips. And so we're working incredibly hard to source those chips from the vendor, but also look for alternative supplies as well as qualify and innovate to build a next generation that doesn't rely on those specific chips. And so there's a lot of work being done around that, but it's -- we're a bit at the mercy of third-party suppliers of processors. And so those are the types -- that's just a great example of the types of issues that we're dealing with when I say we're a supply challenge with -- supply challenges around the world. And so if we had we most of those solved, and I think we will, in time, we'd have a lot more confidence in our ability to put up perhaps a stronger guidance as well. Anything else you'd add, Sam?

No, I think you covered it well, Brent. And so yes, I would just add to say that when you think about the supply chain, one of the things I called out is that we are -- our team is working through, trying to do why I we while refer to as our buys and really trying to secure the inventory where they can. And that's why you will see sort of about that where you saw like the Q1, we had a 7% increase or growth in the equipment, but we're still -- because of that spot buying, there's an element of volatility of the -- how we're working through that demand and the backlog that we're working through.

Yes. I mean, the positive news is there's strong demand for our product. It goes beyond Surgical. But we have to solve for these issues, and that's also the opportunity. So it's complex, but we're working through it, and I'm very focused on it.

Great. And if I could follow up as well, just some of the comments you talked about just around supporting product launches. Can you speak to what in 1Q was reflected around NOV03, how you're thinking about that through the balance of the year in terms of the investment side and really how we should think about launch cadence, whether it's reimbursement, getting on formularies, assuming a positive decision in June? Thank you for taking the question.

Yes. So look, I think there was some expense clearly in the first quarter. I think it starts to ramp really in the second and continue into the year. The PDUFA dates at the end of June, the real launch of this product will probably be early fall. It's not -- it's hard to launch any product in any space in the dead of summer. You want doctors and ophthalmologists to be around. So think of this as more September, October for the full launch of the product given the PDUFA date. But it's a huge opportunity for us. I don't know, do you want to talk anything else about it, Sam?

No, I think that's true. It ramps up -- like I said, it will ramp up in -- we're seeing it in the first half of the year, getting ready for June, but there will be also spend afterwards. Once you launch the team -- the commercial team will continue to launch to go to support the launch. So our main focus right now is a successful launch. So I think we're doing whatever we need from an investment behind that launch to make sure it's successful.

We have time for one last question, and it comes from Craig Bijou at Bank of America.

Good morning, guys. Thanks for taking the question. So I wanted to start along with Daily SiHy, prior management kind of highlighted premium IOLs as a growth area or a potential for opportunity. So Brent, as you step in, would love to hear how you think Bausch + Lomb is positioned in that market specifically and then the opportunities that you see there over the next couple of years. And then I do have a follow-up on EBITDA.

Yes. So the cataract market is a great market, right? It will continue to grow. It's a disease of aging for many. It's inevitable. And the demographics are quite favorable over the next several years or a decade or more. So it's an area that is important to the success of Bausch + Lomb and more specifically to our Surgical business. When you look at our offerings there, we have a really strong set of offerings, and this is a great platform, particularly as we continue to expand the offering across that line. And when you look at the premium side, we just did a deal to bring in some new technology. Also, we need to ramp our ability to manufacture and supply those lenses. But the early reception from customers is incredibly positive. So I think we're moving in the right direction. We need to continue to focus on creating trifocals, extended depth of focus lenses and the like. But the innovation is in process. I think there's a lot of innovation externally here as well. And so we've just got to keep our heads down and keep focused on it. The premium IOL portfolio was up about 32% in constant currencies in the quarter. So I think that's a proof point that we can do it. We just need to drive it harder and with more product look. Sam, anything you'd add to that?

Got it. Got it. On EBITDA. So Brent, I appreciate your comments on profitable growth, leveraging the infrastructure. So I guess the question is, I know you're not going to provide guidance for '24 or the out years, but how should we think about your ability to drive margin expansion in those out years? And relative to what the message has been over the last year, how should we think about -- has that changed at all?

Yes. Look, I can tell you, as you guys get reacquainted with me at this business, I'm pretty much a straight shooter about this stuff. Look, I think we have a massive opportunity for out-year margin expansion. That being said, 50 days in, I wanted to make sure we had good guidance for this year. So I'm not sure I'm ready to give you for next year just yet. Give me a little bit more time to get my feet on the ground. That being said, the easiest way to think about it and the way I really look at this is all the massive investment in building out infrastructure has been made, right? We have a presence everywhere. We have a global field force across four different unique businesses. We have relationships around the world with every ECP imaginable, right? So the significant investments were made. The question is how do you put more through this channel, right, that we call Bausch + Lomb to get expansion, right? And so that's the key. We've got to get more product flow through this. And if you do that, margins should expand very quickly and very naturally. And so to me, that's the massive opportunity. And frankly, I don't -- I guess it's our last question, so it's a good point to end on. That's what makes me so excited about being here. I see this massive opportunity to grow this business profitably, right, with all the things you want to see. It may take us a year or so, maybe longer. I can't -- 50 days in, I can't put an exact date on it. But the opportunity is there, and this is such a dynamic industry. We'll have multiple choices on how to seize those opportunities, we just have to do it smartly.

Thanks.

Well, I believe, operator that concludes the remarks or the Q&A. I would just add a closing comment of thanking everyone for joining us. I'm super excited to be here. I think as I just mentioned to Craig, the opportunities are real and exciting. But just give me some time to get my feet on the ground, and we will be, hopefully, keeping you updated as we go. And I look forward to staying in touch and getting to know those that I haven't interacted with better over time. So thank you again for your time this morning.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.