Bausch + Lomb Corporation (NYSE:BLCO) Q2 2023 Earnings Call Transcript

Bausch + Lomb Corporation (NYSE:BLCO) Q2 2023 Earnings Call Transcript August 2, 2023

Bausch + Lomb Corporation beats earnings expectations. Reported EPS is $0.29, expectations were $0.16.

Operator: Greetings. Welcome to the Bausch & Lomb Second Quarter 2023 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to your host, George Gadkowski. Sir, the floor is yours.

George Gadkowski: Thank you. Good morning, everyone, and welcome to our second 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.

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For more information about these measures and ratios, please refer to Slide 1 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.

Brent Saunders: Thank you, George, and thank you, everyone, for joining us today. My remarks will focus on two themes that define the quarter, performance and progress. Let’s jump right in on Slide 3. Since our last update, I spent significant time on the road hearing directly from customers. No matter of the country, no matter the specialty, one theme was consistent, people are rooting for us and want to see Bausch + Lomb as an industry leader once again. Two areas for improvement were also made clear and speak directly to challenges we covered during our call last quarter. First, we need to bring a steady supply of new products to market. Second, we need to ensure customers have access to a consistent supply of products across our entire portfolio, which means upgrading our global supply chain.

Here’s the good news. We know what needs fixing. As I’ve said before, we have a large global infrastructure and an expansive commercial footprint. We offer products that address all eye care needs. There are approximately 13,000 Bausch & Lomb employees motivated every day by our mission of helping people see better, to live better. But scale is a competitive advantage only when it’s efficient. Think of our challenge like a restaurant with great food and service, loyal clientele and an ideal location, but it fails to get to orders right and on time. The question is, how do you streamline the dining experience without losing any of what customers love? Let’s take a look at our progress. Last quarter, I unveiled the roadmap to accelerate growth, our multiyear plan to realize Bausch + Lomb’s full potential.

We’re early in the process, but I am encouraged by what we’ve been able to accomplish in just a few months. Highlights include flattening the organization to free up resources and focus on new capabilities we’re building, including next-generation digital and data competencies. We launched an employee-driven initiative aimed at reducing inefficiencies and administrative burden, with a focus on our sales team. We’ve put quick wins on the board in several areas, including expense reporting, meeting protocols and IT support in the field. I also solidified our leadership team, bringing in new talent and creating new roles aligned to our strategy. Complex change projects like our roadmap tend to ask a lot of employees, but we have a talented and motivated team that gets it.

They understand what needs to be fixed and want to be part of the solution. And amidst all this change, they delivered a very solid quarter. 12% revenue growth on a constant currency basis, outperformance across all segments and increasing demand in key markets, would make any CEO happy, especially in my first full quarter. And to be perfectly clear, I am proud of our performance and encouraged by several trends that will influence future growth. But my focus is on what’s holding us back? To put it simply, we need to improve how we make and deliver our products to customers and consumers. I’ll use our Lynchburg, Virginia contact lens distribution center, as an example. We were forced to upgrade that facility given significant growth in the business, a good problem to have.

I’ll spare you the details, that essentially we needed to move from a 30-year-old manual system to a new digitized way of working. The problem is, we didn’t execute and technical issues led to the facility quickly falling behind in processing orders. We expect to have things sorted out by the end of the year, thanks to the tireless efforts of our Lynchburg employees, we did experience a self-imposed negative financial impact to our business. What happened in Lynchburg is the most prominent supply chain issue we faced in the last quarter, but certainly not the only one. While some things may be outside of our control, we need to eliminate self-inflicted negative impacts to our business. Despite the ongoing supply challenges, I’m very pleased with our second quarter, which Sam will go deeper on.

Sam Eldessouky: 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 8. In the second quarter, we saw strong revenue growth across all three of our segments. Total company revenue, $1.035 billion for the quarter reflects growth of 12% on a constant currency basis and 10% on a reported basis compared to the prior year. Our strategy is to continue to invest in the business. The investments we’re making are driving the strong revenue growth performance. We will continue to execute on this strategy, as we look forward to launching new products and reaching our full potential.

As Brent mentioned, supply remains a challenge for us, specifically in the surgical and lens portfolios. As I will discuss further, we’re taking medicating steps, but this remains a work in progress. On the positive side, market demand remains strong. As we improve our supply, we expect a robust demand to continue to drive growth. In the quarter, foreign currency headwinds were approximately $18 million to revenue and $25 million to adjusted EBITDA. We’re seeing currency headwinds having a larger impact on adjusted EBITDA, which is driven by our geographic footprint, and the resulting currency mix. Regarding China, we’re seeing tangible signs of recovery. In the quarter, our China business grew 24% on a constant currency basis, relative to a soft comparable in the prior year quarter, that was negatively impacted by COVID restrictions.

China contributed approximately 200 basis points to the 12% overall second quarter constant currency growth. We will continue to monitor the progress and remain confident that our business in China will return to stable and consistent growth over time. Now let’s discuss the results in each of our segments. Vision Care revenue of $646 million increased by 12% on a constant currency basis, driven by growth in both our consumer and lens portfolios. The consumer business grew by 17% on a constant currency basis, led by our LUMIFY, Eye Vitamins, and Artelac franchises. LUMIFY revenue grew by 23% globally compared to the prior year and achieved a record $43 million of revenue in the second quarter of 2023. LUMIFY has continued its strong momentum in the U.S., where it has had a leading market share of approximately 50%.

We’re also building the successful launch of LUMIFY in Canada, and we’re leveraging the brand equity to launch the LUMIFY Eye Illuminations beauty line. Revenue from our Eye Vitamins franchise, PreserVision and Ocuvite grew by 12% on a constant currency basis. PreserVision continues to be the market leader with 90% plus market share in the U.S. Our recent launches of OCUSorb and PreserVision + CoQ10 continue to expand the franchise. Our international consumer portfolio revenue grew by 22% on a constant currency basis. Revenue from Artelac, a key brand in our dry eye franchise, grew by 24% on a constant currency basis, mainly driven by higher demand in Europe. We have continued to drive growth in our consumer portfolio. To sustain the growth momentum, we will focus on investments to support launches, including in the second half of the year.

In July, we announced the strategic acquisition of Blink to further expand our OTC eye drop portfolio. While we’re excited about the strategic fit, we don’t expect Blink to have a meaningful impact in our 2023 financial results. In the lens portfolio, we saw 4% constant currency growth in the second quarter. Reported revenue from our Daily SiHy lenses grew by 42% in the quarter, driven by strong demand as we continue to expand the Daily SiHy family. We recently launched a Daily SiHy multifocal lens in the U.S. and also rolled out Daily SiHy in China, which is a large and important market for us. We also saw broad-based growth across the DLEs portfolio. On a constant currency basis, Biotrue delivered 3% growth and our legacy brand, SofLens Daily grew by 10%.

As Brent discussed, revenue in the U.S. lens portfolio was negatively impacted by implementation disruptions related to a new warehouse management system upgrades to our Lynchburg facility. This mainly impacted our Ultra lens family, which declined in revenue in the quarter. Excluding the impact of the disruptions, global lens constant currency revenue growth would have been approximately 10% in the quarter. We’re taking steps to resolve the disruptions and resume a normal level of order processing. We anticipate there will be a continued impact in the second half of the year as we work through the implementation. Moving now to the Surgical segment; second quarter revenue was $195 million, an increase of 7% on a constant currency basis. The consumables portfolio, our largest category, grew by 11% in constant currency compared to Q2 ’22, mainly driven by surgical packs.

Implantables declined by 4% on a constant currency basis. Strong growth in the high-margin premium IOL portfolio, which was up 33% in constant currency, was offset by the impact of a products hold by our partner on the EyeCee One Standard IOL. We anticipate the product hold to continue in the second half of the year. We’re also executing our phased U.S. launch of the EyeCee A Premium IOL, which has generated strong interest in the market. We’re continuing to make investments to support the launch, including training associates and onboarding surgeons. Revenue from equipment was up 10% versus Q2 ’22 on a constant currency basis, driven by a recovery in China as well as contributions from the Instruments portfolio. While market demand in our surgical portfolio continues to be strong, our ability to supply remains a work in progress.

Our team continues to implement various mitigating measures, including strategic spot buying of components, which has led to higher cost inventory and pressure on margins. We anticipate the supply will remain volatile as we progress throughout the year. Lastly, revenues in the Pharma segment were $194 million, representing constant currency growth of 16%, with strong performance across all three portfolios and all major markets. In our U.S. Rx business, VYZULTA revenue grew by 25% in the quarter, with TRxs up 26%. U.S. Generics revenue grew by 10% as we continue to actively capitalize on supply challenges faced by our competitors. The international portfolio saw strong performance across all major markets, leading to 20% constant currency growth in the quarter.

Growth in the international portfolio was broad-based across all major markets, including China. We’re pleased to have received FDA approval for MIEBO. As we prepared to launch this innovative dry eye product in the third quarter, we expect to make additional investments. As you have heard me say before, it takes approximately 18 to 24 months to ensure newer launches are well positioned in the marketplace. Now that we have covered revenues for each of our segments, let me walk through some of the key non-GAAP line items on Slide 9. As a reminder, the Bausch & Lomb IPO occurred in May 2022, and our second quarter 2022 results did not fully reflect run rate standalone costs. Along the same lines, the basis of interest expense and taxes reported in Q2 ’22 results also does not fully reflect our operations as a standalone entity.

As we have previously mentioned, this impacted comparability between 2022 and 2023 results. Adjusted gross margin for the quarter was 59.7%, which was flat compared to Q2 ’22. Second quarter adjusted EBITDA of $179 million was impacted by currency headwinds of approximately $25 million. Adjusted EBITDA also reflects standalone costs, that were not fully reflected in the prior year quarter, given the May ’22 timing of the Bausch + Lomb IPO. We’ll continue to focus our strategy on increasing investments to support product launches and R&D. In the second quarter, we invested an additional $10 million in R&D compared to Q2 ’22. We’re committed to investing in our upcoming launches in ’23 and ’24, to ensure they are reaching their full potential.

Additionally, our second quarter margins were negatively impacted by supply chain challenges, particularly in our surgical and lens portfolios. In the surgical business, the limited availability of components has led to higher costs. In the lens business, the system upgrade disruption at our Lynchburg facility impacted a normal level of order processing. Net interest expense for the quarter was approximately $53 million, reflecting the current interest rate environment. For comparability purposes, the lower net interest expense of approximately $43 million in Q2 ’22, did not fully reflect our standalone capital structure. The adjusted tax rate in the second quarter was 6%, which is in line with our expectations for the full year ’23. Adjusted EPS for the quarter was $0.18.

Adjusted cash flow used by operations was $14 million in the second quarter. This is mainly driven by a strategic inventory build, to mitigate potential supply disruptions and an investment in working capital to support launches and growing sales. Year-to-date, the strategic inventory build has been approximately $82 million. Adjusted cash flow was also impacted by higher interest expense and the timing of payments. Second quarter CapEx was $27 million. Turning now to our 2023 guidance on Slide 12. We’re raising our revenue guidance for 2023 to a range of $3.95 billion to $4 billion, which reflects a constant currency growth rate of approximately 6.5% to 7.5%. Based on current exchange rates, we expect the currency headwinds to have a negative impact on revenue of approximately $50 million for the full year.

While we’re very pleased with the strong performance in the first half of the year, our guidance reflects a responsible perspective on the remainder of the year. We are balancing their strong performance and the market demand with the work in progress of resolving our supply chain challenges and the potential volatility this creates. As mentioned, we have taken action to address supply challenges, particularly in our surgical and lens portfolios. We recognize there is more work to be done to provide consistent level of supply to our customers and patients. It is also important to note that as we were seeing signs of recovery in China, the Q2 ’23 level of growth benefited from softer performance in the prior year. While we’re excited to further enhance our consumer portfolio product line with the July acquisition of Blink, we do not expect the acquisition to have a meaningful impact on our overall financial results for 2023.

I would also like to note that the XIIDRA transaction we announced at the end of June, subject to regulatory approvals and customary closing conditions and is expected to close by the end of 2023. Our guidance does not reflect any anticipated impact of this transaction and the related financing. We are maintaining our adjusted EBITDA guidance for 2023 in the range of $700 million to $750 million. The adjusted EBITDA guidance absorbs the supply chain pressure incurred in the second quarter and reflects our commitment to continue to invest in our product launches. We expect full year currency headwinds to adjusted EBITDA of approximately $35 million. On a rounded basis, we continue to expect our 2023 adjusted gross margin to be approximately 60%, although there is some slight unfavorability driven by the supply chain pressures that I’ve already discussed.

In terms of other key assumptions underlying our guidance, we anticipate investments in R&D to be approximately 8% of revenue and interest expense to be approximately $225 million for the full year. Our adjusted tax rate is expected to be roughly 6% and full year CapEx is approximately $200 million. As I already mentioned, keep in mind that the comparability between 2022 and 2023 results for the full year, will also be impacted by the May ’22 timing of the B&L IPO. Overall, we are pleased with the strong growth across all of our segments in the first half of 2023, and we’re excited to continue enhancing our portfolio. We recognize there’s more work to be done in the back half of the year to overcome the volatility related to supply challenges, and to deliver consistent performance.

Our 2023 guidance reflects our strategy to increase investments in the business to support launches that we expect will become important drivers of profitable growth. And now I will turn the call back to you, Brent.

Brent Saunders: Thanks, Sam. Let’s talk about what’s on the horizon. With our recently announced acquisition of XIIDRA and Blink, we’ve been asked if we’re focused exclusively on pharmaceuticals. That couldn’t be farther from the truth. While we are committed to growing our pharma business, we’re focused on being the best eye care company, from surgical equipment to contact lenses and everything in between. The products you see here represent all of our businesses. Some are significant, while others will be steady contributors. But the point is they all matter and support our approach to holistic eye health. The timing of these product launch matters as well. Recent and upcoming 2023 launches will serve as a catalyst for 2024, which we expect will be one of the most active launch years in the 170-year history of Bausch + Lomb.

While there’s typically an 18 month to 24 month launch cycle to realize full economic potential from new products, we’re excited about the trajectory and industry positioning and our ability to innovate for patients. How we’re bringing these products to market is critical and something we expect to significantly improve on. Let’s take a look at how we’re rolling out what we expect to be an important contributor for years to come. The MIEBO launch later this quarter will be an exciting event for the company and the teams have worked so hard to bring this product to market. It’s also an opportunity to truly leverage our infrastructure and apply what we’ve learned from past launches. The critical success factors for MIEBO’s introduction are nice-to-haves, their imperatives, and we will help establish a blueprint for launch excellence going forward.

This is especially true, when it comes to field preparedness and setting the team up for success. The timing for a refresh go-to-market approach could be better, as the dry eye disease category is ripe for innovation and new treatment options. Dry eye disease is underdiagnosed and undertreated, representing a significant opportunity. This is especially true when you consider we have an aging population, and more time is being spent staring at phones and tablets. The data is jarring. An estimated 96% of the U.S. population that suffers from dry eye disease, is not using a prescription treatment. Dry eye disease is also multifactorial, which means different treatment options are needed. MIEBO is the first and only FDA-approved treatment for dry eye disease, that directly targets to evaporation.

XIIDRA and other similar medicines focus on inflammation associated with dry eye. In other words, these are different medicines treating different needs. Our acquisition of XIIDRA, which is subject to regulatory approval and other customary closing conditions, will complement our existing drive portfolio and provide prescribers with different treatment options, based on unique patient needs. Moving to our Vision Care business; despite supply chain challenges from our Lynchburg distribution center, our silicone hydrogel lens performance was exceptional, continuing a growth theme. We launched multifocal in the U.S. last quarter, and our single vision spherical launch in China means, we now have presence in all major markets. As an aside, I had a chance to visit China this June.

I’m excited about the investment we made in talent there, and our market potential. Rounding out our business highlights; we continue to strategically expand consumer offerings and provide more OTC options in more places. LUMIFY saw its highest ever quarterly revenue, with 23% year-over-year growth on a reported and constant currency basis. We saw similar numbers for Artelac and have growth plans for both franchises with a goal of creating truly international brands. In surgical, product demand remained strong, but component availability continues to be an issue impacting our supply chain. We’re working with third parties to address these challenges, while providing more options in a growth market. I highlighted our impressive company-wide launch calendar earlier, but it’s worth pointing out surgical launch contributions well into 2024, including several new products in the high-margin premium IOL category.

I spent a lot of time highlighting the challenges we face and our plan to overcome it. But I’ll reiterate the two themes that define the second quarter; performance and progress. Despite ongoing supply chain issues, we put several wins on the board, which speaks to the resiliency of our employees. That’s clearly reflected in our 12% constant currency revenue growth and other financial metrics. But I’m more interested in the progress we’ve made in our ambitious plans to reshape Bausch + Lomb and realize our full potential. Actions speak louder than words, and I’m encouraged by the level of commitment I’ve already seen. Change is hard, but the reward is worth it. Operator, let’s open the line for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question for today is coming from Joanne Wuensch at Citi.

Joanne Wuensch: Good morning. And thank you for the question. I have a couple. Supply challenges in surgical and lenses, is there a way to quantify the impact of that and the timing to resolution? And then I’ll pass my second one on. Daily silicone hydrogel up 42% is pretty impressive. What do you think is going on there and how much of that growth is maybe market share or cannibalization or market expansion?

BrentSaunders: Great. Thanks Joanne. So let’s deal with the first question on supply challenges. First, I’d probably say, look, I’m a tough grader, and I do think that we can improve our ability to supply customers and patients with our products across all of our businesses. Yesterday, I announced we’re bringing in a very experienced new head of our supply chain, and I suspect it will take us a year or two to get to a place where I feel very confident in our ability to execute in the supply chain. That being said, we don’t have regulatory issues, FDA issues, other health authority issues. This is more about delivery of products and componentry and supply. And so that is a fixable situation, and one that we’re very focused on solving. So it will take some time, but absolutely solvable. In terms of quantifying, Sam, do you want to…

SamEldessouky: Sure. Joanne, good morning. I will break the supply chain into the two parts that you mentioned, surgical and the lens business because they are different. So when you think about surgical, what we were talking about is the availability of components. And what we’ve been doing is, we’ve been working through, trying to validate second vendors to be able to find the supply – sufficient supply that will support the demand that we’re seeing in the marketplace in the surgical business. And we’ve also been doing what I refer to as a spot buy. And the spot buy is basically acquiring whatever supply we find in the market, that’s acquiring a higher cost, which is putting pressure on the margin, and I highlighted that in the first quarter, and I highlighted it again this quarter.

So you’ll see the impact of that as we go through the year, as the inventory comes in and you see the impact on the margin pressure. The second issue is the Lynchburg that Brent mentioned and we discussed earlier in our prepared remarks, that’s related to the distribution center and the upgrade that we’ve done in the distribution center in the U.S. The impact of that, I quantified it in my prepared remarks about 600 basis points for the lens business. So we’ve seen the growth in our lens business at 4%, that would’ve been 10% excluding, so that’s about 600 basis points. We absorbed the impact of, then our EBITDA, which was roughly about $10 million that we absorbed in this quarter, in our results as well.

BrentSaunders: Yes. And with respect to the Daily SiHy or our infused product line, obviously, I think what’s most important is, we have a very good product there and we’re seeing great support from ODs and patients to the lens. When you look at volume there, we see that about 60% is being sourced from new fits and the rest from switches. I do think that when we get deeper into the data, we see about 1/3 of patients switching from other modalities or other consumers coming into our infused products. So there obviously is some cannibalization anytime you launch a new, really well-received product in the marketplace. But I do think that the overall big picture is we have a great product. We’ve launched it now in all the major markets around the world.

And now we’re moving into the higher-margin specialty versions like the multifocal, which just launched in the U.S. and then we’ll have the multi – the Toric following next year as well. So those will take a little bit to roll out around the world, but I think the entire portfolio there is a very strong competitive offering.

Joanne Wuensch: Thank you.

BrentSaunders: Next question, operator.

Operator: Your next question for today is coming from Douglas Miehm at RBC Capital Markets.

Douglas Miehm: Thank you. And good morning. My question – and I know this is out of your hands at the moment, and we’re not expecting a close of the XIIDRA deal until later this year. But I do have a question around the performance of that product down around 20%. And I know that they’re trying to garner more market share, but we’re not seeing a pickup in prescription rates. And we are probably dealing with a disengaged sales force. So first question is, is – are you hearing about any turnover in that sales force? And then secondly, if we are starting from a base of $400 million in revenue as we exit 2023, when you talked originally about 5% growth, were you talking from $500 million or from whatever 2023 ended up being?