Good morning and welcome to the Bausch + Lomb Third Quarter 2023 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to George Gadkowski, Vice President of Investor Relations and Business Insights. Please go ahead.

Thank you. Good morning, everyone, and welcome to our third 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 the 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 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 Brent.

Thank you, George, and thank you, everyone, for joining us today. I'll start by providing highlights from the quarter. And after Sam does a deeper dive on financials and updates guidance, I'll share how we'll continue to drive profitable growth for the remainder of 2023 and beyond. I'm going to start with three things that define the quarter, which we expect will be familiar themes going forward. First, we are growing revenue at or above market, thanks to the strength of established and emerging brands that cover the entire spectrum of eye health. We're excited about our trajectory as we enter 2024, which we expect will be one of the most active launch years in the 170-year history of our company. Second, we're equipping our sales work with the tools, training, and the product portfolio they need to turn our market leadership potential into reality. Look no further than our powerhouse Dry Eye Disease portfolio and the outsized opportunity in that area. Bringing MIEBO to market and reinvigorating the XIIDRA brand comes at a crucial time as 96% of estimated US population suffering from Dry Eye Disease is not treated with a prescription product. Finally, we're focused on addressing the supply chain challenges we faced. We're nearing the finish line on upgrades to our Lynchburg distribution facility and our new Chief Supply Chain and Operations Officer is establishing a multiyear blueprint for turning our scale and global manufacturing footprint into a competitive advantage. As made clear when I introduced the roadmap to accelerate growth on my first earnings call this May, this is a multiyear journey that will fundamentally change how we operate. Rewiring the company is no easy lift, but I'm proud of our ongoing progress in Phase I. Our leadership team, which has been almost entirely remade since…

Thank you, Brent, and good morning everyone. Before we begin, as I noted in our last earnings call, most of my comments today will be focused on growth expressed on a constant currency basis. Turning now to our financial results on slide seven, in the third quarter, we saw strong revenue growth across our key product franchises. Total company revenue of $1.007 billion for the quarter reflects growth of 8% on a constant currency basis and 7% on a reported basis compared to the prior year. Market demand remains strong and our strategic focus continues to be on investing in the business to drive growth. We're committed to executing this strategy as we look forward to launching more new products in 2023 and 2024. In the quarter, we achieved two major milestones with the launch of MIEBO and the closing of the XIIDRA acquisition. It is still early, but we believe we have a significant opportunity with these products, which combined with our OTC offering, give us a leading position in the Dry Eye Disease category. While we have made solid progress in the quarter and market demand remains healthy, we fully recognize there is more work to be done. Supply remains a work in progress. As I will discuss further, we are implementing mitigating steps and have seen improvements, but it will take time to reach a point where we are fully confident we can supply products to meet our business demand on a consistent basis. Volatility in our currency mix, including the strength of the US dollar, led to foreign currency headwinds of approximately $10 million to revenue and approximately $14 million to adjusted EBITDA in the third quarter. While the currency headwinds are not as sizable as we saw last year, the impact on our results continues…

Thanks, Sam. I'd like to spend some time talking more about where we are investing to drive growth. Months ago, I described our second quarter as being defined by performance and progress. The same holds true for Q3, but I'd like to introduce a third descriptor when it comes to our supply chain, practicality. We have a significant global manufacturing and distribution network that relies on thousands and thousands of inputs. Look no further than surgical where some equipment has more than 1,000 components. With any operation of this size, if you don't have a consistent supply of those components and dependability when it comes to pushing your products out the door, you're not going to realize your full potential. There's no quick fix when it comes to addressing supply chain issues, and it's not a question of just throwing money at a problem. We've made nearly $900 million in capital investments toward improving and expanding our facilities over just the past five years. Instead, we are taking a practical approach to supply chain. We started by bringing in a respected industry veteran who has been making complex systems run smoothly for more than 25 years. He has taken the reins on addressing our Lynchburg issues and is systematically working to improve surgical component availability. Bigger picture, he is creating a thoughtful and staged game plan for supply chain success that will keep up with demand for new and existing products. Being practical requires patience with the understanding that we're going to do it right. Let's turn to one of the biggest events of the quarter and a serious source of pride for our employees, the launch of MIEBO. We'll launch that as just one input when it comes to a product success. In the case of MIEBO, early returns…

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Thank you. The first question comes from Patrick Wood of Morgan Stanley. Patrick, your line is live.

Amazing. Thank you very much for taking the question. I'll keep it to one. I'd love to drill down a little bit into MIEBO given the launch. I'm just curious how you're getting the feedback, how it's coming through from the docs a little bit, prescription trends rather than the numbers, but the kinds of patients that you think are typically being treated at this stage and how you feel about I think it was a $350 million opportunity longer term. I know it's very early days, but really curious to see how you're feeling about that longer term given the launch. Thanks.

Yes. Great. Thanks, Patrick. Great question. Obviously, MIEBO is a big focus of mine of our teams. As you said, early days, and so early feedback. I don't want to overstate the meaning of a few weeks of data. But that being said, I feel really, really good about where we are. The market reaction, the market being physicians or ECPs, is incredibly strong. And in fact, when you look at the data in IQVIA, it's significantly underreported. IQVIA will be doing an update I think November 17th, and then you'll get to see the real data. There were some reporting issues in IQVIA. But suffice it to say, it's doing much better than perhaps you guys even think or the outside world thinks given the reporting issues. What we're hearing from -- what I'm hearing from ECPs, I'm actually going to the American Academy of Ophthalmology this weekend in San Francisco. We're going to be doing a lot of MIEBO and XIIDRA events and programming there as well, but is incredible enthusiasm. They're seeing great patient response. We're starting to see refills already. So, everything, knock on wood, everything is going better than expectations and expectations at least for me were pretty high and they're doing better than that. But again, I want to caution, it's early days, early data. I'll feel much more confident when we have several months of data, but the team is doing a great job.

Okay. Thanks for taking the question.

Thank you very much. Your next question is coming from Larry Biegelsen of Wells Fargo. Larry, your line is live.

Good morning. Thanks for taking the question. Congrats on a nice print here. I'll try to get two in here. One for Sam on margins next year. If you sum all this up, I think at our conference, Brent talked about 200-basis point margin benefit from XIIDRA plus some underlying margin expansion. Does that still hold? And I had one follow-up.

Sure. Good morning, Larry. When you step back and you look at sort of what we've done in '23 and how we're thinking about '24, we do expect to see margin improvements came from our base business and also the addition of XIIDRA. But you also have to balance this with a couple of factors here. One is the level of investment that we would need to make in XIIDRA. Brent talked about XIIDRA and sort of our expectation especially now that's in our hands. And we've previously talked about that this brand, and not only this brand but the Dry Eye market in general is very responsive to promotion investment. So we need to be able to allow and allocate the right level of investment to get XIIDRA to the level of expectation that we would like it to be and re-recognize the value of that. There will be an element of investment going behind XIIDRA going into starting from Q4 and going into the early part of next year and again forward into '24. The other part, which I would want to also talk about, would be the early read that we're seeing from MIEBO. It's very positive. We're excited about it and we're very encouraged. But it's still early and I think we will need to see a couple more datapoints to be able to make that trend solid for us. And this is what I think we will be thinking about the decision in terms of do you accelerate investment behind MIEBO to be able and for incremental investment to be able to accelerate growth into the future years. So again MIEBO for us is not just a one-year brand. We're thinking about this as a long game here, so we're thinking about not only '24, but '24, '25 and beyond. So that's going to be a very critical decision, but we will need to see a little bit more datapoints to be able to see that positive trend that we've seen in the last couple of weeks continue with us for a little bit longer.

That's helpful. Just one follow-up on XIIDRA and MIEBO sales next year. XIIDRA, the guidance, it declined 40% in Q3 revenue. The guidance here that you gave implies another 40% decline, so $335 million for the year at the midpoint. What's your expectation for '24? And on MIEBO, the prescription data you gave us today implies it's annualizing at over $100 million in sales already. Do you think it could be a $100 million product in '24? Thank you.

Yes, so maybe I'll just start, and then Sam can jump in. Look, I think the sales number for Novartis in Q3 is not an accurate picture of performance of the brand. There were some accounting charges that Novartis took there and so I think that's distorted and probably not a true picture. Clearly, it was underinvested in their hands, and we saw that. We've had it for essentially two weeks. And I actually was with the Novartis team, 97% of the team, sales team came over and joined us. We're super excited to have them. I spent some time with them two weeks ago here in New Jersey. And they are super motivated. And again, very early data, but we're starting to see stabilization in the script trends, which is really important. I do think the fourth quarter here is clearly about stabilizing. And then as Sam mentioned in his remarks, the first quarter and going into the second quarter is going to be about recharging that brand and reenergizing that brand, given that we have roughly nine, 10 years of exclusivity to stand behind that brand. So super excited about that. I think when you look at sales for next, for '24, we're not giving guidance for '24, we were just trying to give you some direction. We'll certainly provide that in due course. But Sam, anything else you want to add to this?

Yes. I think, Larry, as we think about XIIDRA based on the remarks we've made thus far, we want to make sure we invest behind the brand. I think the comment I made in my prepared remarks was, as we think about XIIDRA once it balances out, it probably will be a still five call it sort of mid-single-digit growth asset and that's been our thinking around XIIDRA.

Thank you.

Thank you very much. Your next question is coming from Young Li of Jefferies. Young, your line is live.

All right. Great. Thanks so much for taking our questions. Maybe pivoting a little bit to contact lenses, I wanted to hear a little bit on the health of the US consumer. Is there still a lot more demand than capacity for the industry? All the Daily SiHy adoption trends seem very favourable and very strong growth. But are you seeing any signs of consumers trading down or extending their wear? And any high-level thoughts on that might happen in 2024?

Yes. Great question and thank you for that. Across our businesses globally, we don't see any pullback from the consumer whether that be in lenses or in our consumer business. And in fact, some interesting data perhaps out of the consumer business, not exactly what you asked, was we're seeing strong drive of consumption in our consumer products. So another datapoint that shows that the consumer in the US, and frankly globally, is still pretty active. In fact, when you look at GDP data, I think we saw consumer drive most of the GDP growth in the US in the third quarter, so a healthy consumer. Our lens business in the US, the market was up around 7%, 8%. Sam can give us the exact number. But I think we're seeing really healthy trend. Daily SiHy was about 80% growth in the quarter. So I think our issues there have been just distribution and being able to ship and that is solving itself this quarter, and we're starting to move into a good spot. But overall, the market I think is robust. It's big, it's growing. And we finally have a good product portfolio. We just need to be able to ship to customers on a more consistent basis.

All right, great. Very helpful. And I guess for my follow-up, so on the China business, minus 1% due to tough comps, year-to-date 6%. I guess I was wondering if maybe you can comment a little bit about what you're seeing on the ground currently. It's high single-digit percent of your business. We read all the macroeconomic and consumer consumption headlines. There's also some anticorruption campaign color that doesn't really impact contact lenses as much, but it's in the background. What's your view on the health of the Chinese consumer for the contact lens business in the near term? What indicators are you more closely tracking? Are there noticeable differences in the different tiered cities?

Yes. It's a great question. So, first, I'd just talk, take a step back and look at the opportunity in China. It's a massive market. We have a tremendous opportunity to grow into that market. Unlike perhaps one of our competitors that has more market share, I think our opportunity is to take share in a growing market is pretty strong. And we're just really getting started there with the Daily SiHy launch. It just happened a quarter ago. So we still have to bring the multifocal and other modalities into China. The other thing is our team in China. I was over there not that long ago. We have a really strong team. I was very impressed by the B+L colleagues in China. And in fact, this quarter, they stood up a DTC model that was quite impressive. So we'll see how that works out, but they did a lot of really good work with a strong entrepreneurial spirit. So I'm excited about China. I think when we look at the consumer in China, they're resilient, perhaps a little less resilient in the Tier 2 or 3 cities versus the 1, but still strong. I think our opportunity is clearly in this Tier 1 and 2 cities. So we're participating in the market where the consumer is strong. And again I think we're going to be less focused on the macroenvironment versus the opportunity we have to grow within a massive market. Sam, any color you'd want to add?

Yes. I think with -- when you think about this year, I think that when you look at the year-to-date data, it's probably more meaningful than looking at any specific quarter. So year-to-date, we're 6% constant currency. If you remember last year, we had the first half was pretty much shut down, so you've seen the comps are sort of not really a good proxy. For example, last quarter we reported 25% constant currency growth in China, so that flows down to a minus 1% this quarter just reflecting the rebound that happened last year with a stronger comp and people just sort of coming out of a shutdown. So for this year, I will encourage you to probably look more of a year-to-date on China data, that probably will be more meaningful.

All right. Thank you very much.

Thank you. [Operator Instructions] Your next question is coming from Craig Bijou of Bank of America. Craig, your line is live.

Good morning, guys, and Congrats on a strong quarter and closing the XIIDRA deal. I wanted to start with a follow-up to Larry's question on XIIDRA EBITDA. So if I look at your implied guidance or your guidance for the year and the EBITDA margin for XIIDRA is about 35%. So given your comments on investment in XIIDRA, what I want to understand is, is that 35% margin a jumping off point? Should we think about you can improve upon that throughout, sequentially throughout '24? Or how else should we think about that?

Good morning, Craig. I would think about it as 35% as a baseline. When you think about 35% for Q4 and as you start now progressing into 2024, we should expect that 35% in terms of margin to continue to expand as you go forward. So my commentary was highlighting on the fact of the investment in XIIDRA, we're starting Q4, we do expect that will take a couple of quarters to be able to get to the level that will meet our expectations. That will be just a phasing as you go into 2024.

Got it. That's helpful, Sam. And then just as a follow-up, I wanted to ask on the Lynchburg facility. It looked like the revenue impact was less in Q3 than it was in Q2. I appreciate your comments that you expect to be back to a more normalization in Q1. But wanted to understand, how should we think about any revenue and EBITDA impact in Q4 and even Q1?

Year-to-date, we're having roughly about $20 million impact, and that's on the EBITDA. And I made that comment as we talked about the guidance showing that the guidance that we have updated to this quarter observed that $20 million year-to-date. We do expect to see some of that coming into Q4, but we will -- or more of that coming into Q4, but that's already factored into our guidance ranges that we provided. When you think about next year, I think, Craig, it's too early to be able to talk about any impact of Lynchburg for next year. But what I can tell you is we're making progress, and we are actually looking as we get to Q1 of '24, we believe this will be getting to a level that reaching our full level of optimization that we will be expecting from that facility with all the upgrades that we put in.

Yeah, look, I mean, I think, yeah. Go ahead, we're good.

Okay. Thank you very much. Your next question is coming from Joanne Wuensch from Citi. Joanne, your line is live.

Good morning and thank you for the question and nice quarter. Two, and I'm going to put them both out upfront, the Rx portfolio grew about 1% off of a somewhat tougher comp. Obviously, this is before you're really layering in XIIDRA and MIEBO. But I want to make sure that I understand if there were any onetime headwinds, et cetera that I need to think about. And then my second question is, in the lay press, the FDA warned against certain eye drops. Bausch wasn't on that list, but I was curious if you have a view on how that might create market opportunity for you. Thank you.

Yes, sure. So with respect to Rx growth in the quarter, 1%, the key metric I track there is the promoted products, which was anchored by VYZULTA, which was up 54% I think in the quarter. And so the sales team and what we focus on saw good growth in the quarter. We did have two older non-promoted products that had supply constraints in the quarter. If you took those out, pharma would have been up around 4% versus the 1%. But I think the dynamics and the reporting there will change dramatically in the next quarter when we have MIEBO and XIIDRA in there. I think as you look to next year, we have a PROLENSA LOE, and we've talked about that quite a bit. But outside of that, that's the only puts and takes in there. And I think there's more puts with XIIDRA and MIEBO going in than takeouts, Joanne. Hopefully, that clarifies that for you. On the FDA recall, it doesn't in and of itself present any kind of specific opportunity for us. But I think it underscores the importance of quality control in manufacturing and supply. I think what I've seen from the ECPs, there's a lot of promotion on staying with the branded companies in this category, whether it be us or our competitors being mentioned as alternatives. And I think lastly, it shows how hard it is to make these products in a sterile environment and provide high-quality supply. So all-in-all, our focus and our absolute commitment is to supply high-quality products. And to the extent there is an opportunity, perhaps retailers take some of these drops off their shelf and give us more shelf space for our products, whether it be LUMIFY or Blink or any of the other products in the reset that will happen as a result of these SKUs coming off shelf. So small opportunity, but I think more importantly, underscoring the importance of high-quality supply.

Thank you.

Thank you very much. Your next question is coming from Vijay Kumar from Evercore ISI. Vijay your line is live.

Hey, guys. Thanks for taking my question. I had two questions. Maybe, Brent, first one for you on revenues here. Some of your comments you made here on fiscal '24 were helpful. The Lynchburg disruption, can you quantify the revenue impact in fiscal '23? Are they, lost revenues, should they come back in fiscal '24? And I think you did touch upon consumer strength. How should we think about consumer business in a recessionary environment?

Yes. On Lynchburg, we've made a lot of progress in the last month or two. And Lynchburg in this quarter, the fourth quarter, I think is starting to ship, particularly domestically, on time. And so we're getting -- we're pretty close. Clearly, we need a little bit more time to get the optimization out of Lynchburg, but we're making progress. We still have some hiccups in international orders, but all-i- all, it's a big improvement in the fourth quarter. The revenues in '23 are roughly $20 million impact. And to be fair, that's revenue lost. The patients who got fit with lenses, got fit with other lenses versus the ones we couldn't provide. So it's more or less revenue lost. We will come back. There is good demand for our products. We will see a return to our product line, and we're seeing that happening. We're seeing green shoots of that right now in the fourth quarter. But that's -- it's an unfortunate situation and why I continuously talk about the need for strategic and thoughtful leadership in our global supply operations. Because at the end of the day, what matters most is getting your products to patients and consumers. And that's how you actually create a robust business, as practically as that sounds. The consumer business in a recessionary environment, I think clearly, if there was -- if we saw a consumer recession, we would have to be thoughtful about that, and we would feel some impact. But at the end of the day, people don't stop treating their eyes in a consumer recession. I think we have somewhat of a protection in our business from that. Would people trade down? Perhaps. But as we just talked about with Joanne, some of the lower-cost providers of eye drops as an example, have quality issues. It's a tough thing to trade down on price for treating your eyes. Not that some won't do it, but we have I think some immunity from a potential consumer recession. That being said, we don't see that. We don't see that in any of our businesses anywhere in the world, and we don't see that in any of the data we track as well.

Understood. Helpful comments, Brent. Sam, one for you on the margins here. I think you mentioned FX $100 million headwind on was it the revenue impact. What's the drop down here on EBITDA? Should that be similar to fiscal '23? Where it sounds like there's some incremental investments to support new product launches. Should we be thinking of that as incremental versus where we were three months ago?

Vijay, I would think about -- let me take the currency first. It's hard to predict currency, right? I'm giving the $100 million as of today based on the rates of today. Probably the best I'll call direction I'll provide will be you can use the proxy of what we've seen in '23 as sort of a flow-through that will give you a directional of how we're thinking about the currency as we stand. But this is something I'll have to come back to you and update it as we end this year, and we give guidance for full '24 to update you on the currency and sort of truly the flow-through. In terms of the investment, the launches, I think I'll break it up into two parts. I think Brent showed a slide that shows all the launches that are coming into 2024. This is our largest number of launches that we have in a single year in the company's history as we recall. So that's definitely going to be an investment that we will have to think about and we will be able to make sure we dedicate the right resources behind it. I called out MIEBO specifically because I think it's a large asset for us, a large brand. When you think about the early data that we're seeing on MIEBO, it's very encouraging and very positive. We want to see that trend continue. And as that trend continues, I think we will have the decision to be able to say, do we want to spend and invest incremental dollars behind it and accelerate growth? Again, it's a long game for us. And that decision will have to come in and we'll update more of it as we give the full year guidance for 2024.

Perhaps said another way, we have a big opportunity with MIEBO and XIIDRA and other launches across the portfolio in '24. Many of those launches lead us to higher-margin product mix for the long term. And so being successful in those are really an investment in improving margins. That being said, making that investment impacts margins to the negative in '24. And so what we want to do is be thoughtful about that. We are committed to margin improvement, but we want to make data-driven decisions. When we look at early data on MIEBO, and you'll see a clearer picture when IQVIA comes out and you'll see what we're seeing on November 17th, you'll understand why we're pausing and saying, could we do more with MIEBO? Could it be more than $350 million in peak sales? Could we steepen the curve and get there faster? And so we're going to make investments based on data, based on KPIs, and see what we're going to do. That being said, we're absolutely committed to margin improvement, but we want it to be sustainable and we want margin improvement for the long term. And so that's the balancing act that we would normally make in these decisions.

Helpful comments. Thanks, guys.

Thank you very much. The next question is coming from Doug Miehm from RBC Capital Markets. Doug your line is live.

Thank you. Two questions. Number one, with respect to XIIDRA, given the importance of the drug to the company now, how long do you believe it's going to get to that mid-single-digit growth profile? And then my second question just has to do with the success of LUMIFY. Brent, maybe you could delineate in a little bit greater detail. We've had a number of launches, but what seems to be resonating with people? And how soon can we expect the other products within that LUMIFY pipeline to come to market? Thank you.

Sure. So, XIIDRA, it's -- we assumed it would happen what happened in the prior owner's hands, but it happened a bit more severely, right. They really did neglect this drug. And as I said to the sales reps that came over two weeks ago, XIIDRA is finally home. It's in a company that's a dedicated eye care company. It becomes among our most, if not most important product, and they become arguably our most important field force versus an afterthought in the company they were at. And that's highly motivating to them. The other thing I would point out is the Dry Eye category is incredibly promotionally sensitive. And I know that. I remember when XIIDRA launched, and I was at Allergan, we had RESTASIS. Many on the sell side thought that RESTASIS would go into decline, and it didn't. The market expanded to adapt to XIIDRA because of the increased promotion from XIIDRA and RESTASIS at the time. We saw tremendous market growth and both brands grew through the launch and beyond. And so I think that dynamic sets up well for us. We will have a very strong share of voice between XIIDRA and MIEBO. We really do have a 1-2 punch to treat the disease holistically. And we have an opportunity to really work with the ECP community to drive more of the untreated roughly 38 million patients in for treatment. And with a better option to treat whichever aspect of the disease they have with XIIDRA and MIEBO. So huge opportunity. That being said, XIIDRA comes in a little wounded, right, a little neglected. As I said earlier, fourth quarter is about stabilization and '24 is about restoring it to growth. I can't give you the exact date that will happen, but I do expect…

No, that appears to be the end of the question-and-answer session.

Yes. Thank you, Operator. Well, again, thanks to everyone for joining us this morning. We remain very committed to focusing on driving our roadmap to accelerate growth. The quarter was another great testament to our teams around the world focused on execution and driving growth. And we look forward to keeping you updated as we progress and certainly excited for our future. Thanks for joining us.

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