Bausch + Lomb Corporation (NYSE:BLCO) Q4 2023 Earnings Call Transcript

Bausch + Lomb Corporation (NYSE:BLCO) Q4 2023 Earnings Call Transcript February 21, 2024

Bausch + Lomb Corporation beats earnings expectations. Reported EPS is $0.24, expectations were $0.17. BLCO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Bausch + Lomb’s Fourth Quarter and Full-Year 2023 Earnings Call. All participants will be in a listen-only mode. [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.

George Gadkowski: Thank you. Good morning, everyone, and welcome to our fourth quarter and full-year 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 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. We’re going to follow a familiar format. I’ll cover highlights from the fourth quarter and full year, and Sam will dive deeper on financials and provide 2024 guidance. I’ll close by reviewing growth drivers, and then we’ll take your questions. The first of our three key takeaways speaks for itself. Revenue growth in 2023 and in the fourth quarter in particular, exceeded our expectations and set the tone for 2024. Double-digit growth is always impressive, but even more so when you consider how we got there. Our quality of growth is what helps set us apart from others, and that will be enhanced as we’ve entered one of the most active launch years in our company’s history.

You’ve heard me talk about selling and operational excellence quite a bit. It’s central to any discussion I have on company strategy, and will dictate our success going forward. Here’s the good news. We’re making solid progress in both areas. Our dry eye franchise is a perfect example. The combined Miebo and Xiidra sales force is the largest, and I would argue most sophisticated in eye health. And when it comes to operations, our mindset hasn’t changed. We’re taking a methodical approach to addressing the challenges we face, with the expectation that our supply chain will become a competitive advantage in time. Hasty climbers have sudden falls as the saying goes, which means we won’t lose sight of our long-term goals for short-term gains. The last takeaway is focused on innovation, which has been the driving force throughout Bausch + Lomb’s 170-year history.

We’ve made no secret of our desire to put innovation at the forefront once again, and we’re doing that in two ways. First, we’re expanding our internal R&D capabilities across our entire portfolio. From prescriptions to IOLs, we can and should explore all possibilities when it comes to building on the success of existing brands. Second, we’re reloading our pipeline with a focus on areas of unmet need. Our reinvigorated business development function will play a key role there as we cast a wide net for potential gamechangers. The roadmap slide has become a fixture in earnings presentations, and the roadmap itself continues to guide our strategic decision-making as we unlock the company’s full potential in a thoughtful and phased approach. Each quarter, our progress indicator shifts steadily to the right as we move closer to Phase 2.

Let’s take a look at how we delivered against Phase 1 goals in 2023, a report card of sorts with an understanding that I’m a tough grader. We’ve already touched on topline performance last year, but I’m happy to bring it up every chance I get. 12% constant currency revenue growth would earn the highest grade on its own, but again, I’m more impressed with how we did it. When it comes to selling excellence, we made significant strides in 2023, with a focus on high priority areas like dry eye, but with the number of planned launches in 2024, there’s even more of an urgency to build on that work with a balanced approach across all categories. Business development is a function that has matured in short order last year. The most obvious example is our acquisition of Novartis’s front of the eye assets, in addition to our acquisition of Blink eyedrops from Johnson & Johnson.

Equally as important, the growing business development team has laid a groundwork for strategic dealmaking this year and beyond, with an eye towards sustainable growth. I’ll group the last two items together. While they appear to have the lowest mark, a single check mark, it’s really more of an incomplete or too new to rate. Building leading digital capabilities in core areas and enhancing agility and innovation, are broad organizational competencies that require discipline and time. That said, progress in those areas introducing the roadmap, has certainly had an impact on margin expansion. We’ve covered revenue. My only add there would be that this is our third straight quarter of more than $1 billion in sales, our new normal. When it comes to individual segments, there is no laggard.

In fact, I only see opportunity as both vision care and surgical in particular felt the effects of operational challenges, some self-inflicted, others out of our control, yet both delivered impressive year-over-year growth. Now let’s address individual product performance, and I’ll stick with the opportunity theme. Despite an average growth of more than 25% among the key franchises highlighted, they haven’t realized their full potential, not by a long shot. Additional geographic expansion, new ways of reaching customers, including direct-to-consumer engagement, and a persistent focus on providing the best customer experience possible, will propel these products and others to new heights. Before I turn things over to Sam, I’d like to thank my 13,000 colleagues for their performance in 2023, and it’s not just execution I’m grateful for.

It’s their belief in our potential and commitment to doing what it takes to get there. Sam?

Sam Eldessouky: Thank you, Brent, and good morning, everyone. Before we begin, please note that most of my comments today will be focused on growth expressed on constant currency basis. Turning now to our financial results on Slide 8. In the fourth quarter, we once again saw strong revenue growth across each of our segments and key product franchises. We’re pleased with how we ended the year and our performance for the full year in 2023. Our business demonstrated growth in revenue and adjusted EBITDA, with revenue exceeding our full-year guidance. We are excited by the momentum we have heading into 2024, which as Brent mentioned, we expect will be one of the most active launch years in our history. Total company revenue of $1.173 billion for Q4 reflects growth of 19% on a constant currency basis.

For the full year, total company revenue of $4.146 billion reflects growth of 12% on a constant currency basis. This was the first full quarter following the launch of Miebo and the closing of the Xiidra acquisition. I’ll be discussing the impact of these key dry eye franchises more throughout the call, but the headline is that we’re highly encouraged by what we’re seeing so far. Touching briefly on supply, we have continued to make improvements to strengthen our supply chain in 2023, and we’re pleased with the progress. While there’s still work to be done, we feel confident about the path forward. As Brent will discuss, we expect to continue our efforts to implement efficiency measures throughout 2024, which we expect will be an important factor to drive sustainable margin expansion.

Volatility in our currency mix moderated in the fourth quarter and did not have a material impact on the results for the quarter. For the full year, currency was a headwind of $68 million to revenue and $51 million to adjusted EBITDA. While the currency headwinds are not as sizable as we saw last year, the impact on our results continues to be driven by our geographic footprint and the currency mix. Now, let’s discuss the results in each of our segments. Vision care fourth quarter revenue of $662 million increased by 8% on a constant currency basis driven by growth in both the consumer and lens portfolios. For the full year, vision care revenue was $2.543 billion and increased by 10% on a constant currency basis. The consumer business again demonstrated strong performance both in the US and internationally, with growth of 11% on a constant currency basis in Q4.

We continue to see growth across our key franchises, including eye vitamins, which grew by 7% in the quarter, and Lumify, which grew by 17% in the quarter. Our consumer dry eye portfolio delivered $88 million in revenue in the quarter, representing 12% organic revenue growth. Reported revenue from daily SiHy lenses grew by 31% in the quarter. As we discussed in our last earnings call, we recently expanded the daily SiHy family with the launch of the multifocal lens in the US, and the rollout of daily SiHy in China. We continue to see strong demand globally in the daily SiHy category. Revenue in the lens portfolio was negatively impacted throughout 2023 by disruptions at our Lynchburg distribution facility. Excluding the impact of these disruptions, global lens constant currency revenue growth was 9% in the quarter and 10% for the full year.

Moving now to the surgical segment, fourth quarter revenue was $204 million, an increase of 7% on a constant currency basis. For the full year growth was also 7% on a constant currency basis. The consumables portfolio, our largest category in the surgical business, grew in the quarter by 7% on a constant currency basis, mainly driven by cataract packs. Implantables were flat for the quarter on a constant currency basis. Our premium IOL portfolio continues to expand and was up 30% in constant currency in the quarter. As I mentioned last quarter, our standard EyeCee One IOL continues to be impacted by the product recall issued by our partner in 2023, which offset the strong growth in our premium IOL portfolio. Excluding the impact of EyeCee One, the implantables portfolio grew 12% in constant currency in Q4.

Revenue from equipment was up 13% versus Q4 2022 on a constant currency basis, mainly driven by Stellaris system sales. We have recently launched a number of products in our surgical business, and will continue to launch new products in 2024 and beyond, including the higher margin premium end of the market. We intend to continue to invest behind these launches as this is an important area to drive value and margin expansion. Lastly, revenue in the pharma segment was $307 million for the quarter, which represents constant currency growth of 66%. For the full year, revenue in the pharma segment was $836 million, which represents constant currency growth of 24%. Xiidra delivered $106 million in revenue in the fourth quarter, exceeding our previous guidance range of $80 million to $90 million.

Following the relaunch of Xiidra in Q4, we saw TRx stabilize throughout the quarter. Additionally, in the quarter, we had a one-time benefit of $8 million due to lower-than-expected rebate charges for Xiidra. As I said before, Xiidra will continue to be a primary focus for us in 2024. To date, we’re also very pleased with what we have seen from the Miebo launch. The early performance and feedback from eyecare professionals have been incredibly positive, and we’re committed to continuing to invest behind this launch. Together, Xiidra and Miebo provide us with clear leadership and dry eye disease, and we’re excited about reaching their full future potential. Now, let me walk through some of the key non-GAAP line items. Adjusted gross margin for the fourth quarter was 62.5%, which was up 470 basis points compared to Q4 2022.

For the full year, adjusted gross margin was 61%, which was up 130 basis points compared to last year. The gross margin improvement was mainly driven by favorable product mix, including Xiidra. This was balanced by pressure on the gross margin driven by the higher inventory costs in our surgical business. In the fourth quarter, we invested $79 million in adjusted R&D, or approximately 7% of revenue. Fourth quarter adjusted EBITDA was $231 million, which represents 28% growth versus the fourth quarter of 2022. For the full year, adjusted EBITDA was $738 million. Full year 2023 adjusted EBITDA was negatively impacted by currency headwinds of $51 million, and Lynchburg-related disruptions of $30 million. Excluding the impact of currency, adjusted EBITDA grew 10% compared to last year.

Net interest expense for the quarter was approximately $96 million, and $252 million for the full year, excluding the one-time upfront financing costs directly related to the Xiidra acquisition. The full year 2023 adjusted tax rate was 4%, which is slightly lower than our previous guidance of approximately 6%. The lower tax rate was mainly driven by the geographic mix of our earnings. Adjusted EPS for the quarter was $0.24 and $0.73 for the full year 2023. Adjusted cashflow from operations was $28 million in the fourth quarter, and CapEx was $84 million. Turning now to our 2024 guidance on Slide 15. We’re saying 2024 revenue guidance at a range of $4.6 billion to $4.7 billion. This reflects expected constant currency growth of approximately 12% to 14%.

We expect the fundamentals of the eye care market to remain strong, and we expect each of our segments to deliver growth in 2024. Along with solid momentum in our base business, the recent and upcoming product launches will be an important driver. Following the relaunch of Xiidra in the fourth quarter, we expect to build on the performance throughout 2024. For the full year 2024, we expect Xiidra to generate approximately $400 million in revenue. As I noted earlier, the Miebo launch is off to a great start. Miebo has been the strongest launch in dry eye disease in recent years. We expect the positive momentum to continue in 2024, and we plan to invest to position the brand to reach its full potential. We expect Miebo to contribute approximately $95 million of revenue in 2024.

We’ve continued to see currency headwinds moderate. Based on current exchange rates, we estimate currency headwinds to have a negative impact on revenue of approximately $40 million for the full year. Shifting to adjusted EBITDA, we are setting our adjusted EBITDA guidance for 2024 to a range of $840 million to $890 million. At the midpoint of the guidance range, this reflects margin expansion of approximately 80 basis points compared to full-year 2023. The margin expansion is driven by a number of factors, including our strategy shift mix to high margin products, our efforts to continue to drive operational excellence, and our focus on maintaining cost discipline. As we continue to make investments to fully capture the value potential ahead of us, we expect to sustainably build on the margin expansion in 2024 over multiple years, with the growth of our recent and upcoming launches.

I told you in the past, and I will continue to remind you that there is natural seasonality in our business. We expect 2024 phasing to follow a similar trend as we saw in 2023, with the first quarter being the lowest and the fourth quarter being the highest. As we continue to drive pipeline innovation, we may enter into collaborations with external partners. It should be noted that our adjusted EBITDA guidance does not reflect any one-time upfront payments that may be made as part of such arrangements. In terms of the other key assumptions underlying our guidance, we expect gross margin to be approximately 62%. We anticipate investments in R&D to be approximately 7% to 8% of revenue, and interest expense to be approximately $385 million for the full year.

Our adjusted tax rate is expected to be roughly 15%, which takes into consideration our tax geographic mix and the Pillar Two minimum tax rules. Full-year CapEx is expected to be approximately $250 million. We are pleased with our financial performance in 2023 and the solid momentum entering 2024. As we continue to drive growth in our current portfolio and the launch of new products, we have a clear strategy to deliver strong growth and drive sustainable margin expansion. And now, I’ll turn the call back to Brent.

Brent Saunders: Thanks, Sam. Let’s focus on what we need to do to win in 2024. Recent and upcoming launches have us positioned for success in each of our businesses, but the only way we fully take advantage of those opportunities is by reaching more customers and consumers and separating ourselves from the pack with how we sell. As Sam outlined, we’re off to a great start with Miebo. Eyecare professionals are prescribing, and consumers are coming back for more. Post-launch excitement hasn’t waned. In fact, it continues to build. We need to harness that momentum in 2024 and ensure Miebo becomes the category-altering medication it has the potential to be, which means continuing to invest in sales and marketing. In concert with our Miebo push, we need to not only keep working to restore Xiidra to its place as a category leader, but unlock its full potential.

It’s important to remember that Xiidra sales and marketing operation we inherited was not in the same condition when at its peak. I’m a dog lover, so I’ll use an abandoned pet analogy. We took it in and are nursing it back to health so it can thrive once again. Sam also pointed to daily SiHy success. There’s growing demand for these lenses, which is why we’re expanding our offerings, including the launch of a multifocal in the US. Demand is also a theme in dry eye, as we’ve made clear, and while the focus is often on prescription medications, we’ve built a formidable stable of OTC dry eye brands on a global scale, most notably Artelac. That stable expanded with the acquisition of Blink, which we expect will be a steady and growing contributor for years to come.

Finally, premium IOLs continue to represent our biggest opportunity in surgical, where sales are influenced by relationships first and foremost. As we’ve prepared to push deeper into higher margin offerings, including expansion of our enVista product line, its incumbent on our sales force to turn their deep relationships into conversions. Last quarter, we stressed a practical approach to supply chain. That hasn’t changed and won’t. What has changed is my comfort level and how the challenges we faced are being addressed. We brought Al Waterhouse to Bausch + Lomb with a simple yet incredibly complex remit, take a full accounting of our global manufacturing and distribution network, put a comprehensive plan in place to turn that network into a competitive advantage, and execute with the understanding that we won’t cut corners ever.

It’s early days, but I’m very pleased with initial returns, and more importantly, the path forward. In 2024, our focus will continue to be on reducing complexity, while streamlining how we put product in the hands of customers and consumers, with DTC efforts in China being the most prominent example. We’ll also continue to digitize operations using lessons learned from our distribution center in Lynchburg, Virginia. Remediation is near complete, and we’ve turned our attention to gaining efficiency over the next few quarters. Optimizing our supply chain will take time. Incremental improvements will be reflected in margin expansion, and long-term success will be foundational for a future-proof Bausch + Lomb. Talk of R&D investment is often taken with a grain of salt and for good reason.

Some companies invest because they think they have to or need to hit a self-imposed minimum. We invest because innovation has been the lifeblood of Bausch + Lomb for 170 years. In 2023, we invested more than $300 million in a new look older and better R&D department, and we’ve infused it with talent. In the last two years, we grew the team by more than a third, including hiring top scientists who want to be part of what we’re building here, but money and talent only get you so far. We’ve refocused the team to better support a reloaded robust pipeline that cuts across every business. While in-house capabilities are non-negotiable, we can’t do it all ourselves. As previously mentioned, our business development team has been working hand in hand with R&D leadership to identify and vet potential products and therapies that would benefit from our scale and know-how.

As long as we keep adding products, we’ll keep showcasing our launch slide. There’s a nod to what we accomplished in 2023 and a preview of what’s to come this year. This view best represents the opportunity in front of us. Innovation provides new offerings. Operational and selling excellence leads to revenue growth and margin expansion Sam highlighted. It’s not a terribly complicated formula, but one that requires a relentless focus on doing the small things incredibly well. In my regular conversations with eyecare professionals and visits to industry meetings, there are two consistent themes around Bausch + Lomb, excitement and anticipation. That’s echoed within our company walls. My travels take me all over the globe, and from Berlin to Bridgewater, colleagues are anxious to make 2024 a defining year in our company’s history.

I look forward to keeping you updated on our progress. One quick note. I’m still on the mend from rotator cuff surgery just a few days ago, so take it easy on me in the Q&A. 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 Matt Miksic with Barclays.

MattMiksic: Hey, good morning, and thanks so much for taking the questions, and congrats on a really strong finish here to 2023. I have one question if I could on Xiidra. I think you did a pretty great job last year of sort of framing out expectations for Xiidra and Miebo, and how they would kind of interplay, and ended up finishing, as you mentioned, a bit stronger out of the gate. Could you maybe talk a little bit about how we should maybe recalibrate the trajectory of what we are expecting from Xiidra, assuming you’re still going to invest behind it as you mentioned, but is that just a quarter or two ahead of plan here, or is there some kind of ups and downs we should expect in the coming quarters? And I have one follow up.

Brent Saunders: Sure. Thanks Matt. So, look, Xiidra is an incredibly important focus for us in 2024. I have to give a nod to our sales team in the fourth quarter, right? We got a product that had been kind of left behind. And what’s interesting when you look at the fourth quarter, there’s some seasonality there. Fourth quarter is always the best for chronic prescription demand because of deductibles and the like. But when you look at what happened was, in the fourth quarter, we brought the Novartis sales team in, made them a Bausch + Lomb sales team, and they – really, we just focused on basic execution. And you saw what happens, right? We saw really good performance in the fourth quarter. I think that should give us optimism for what can be done.

And in early January, we actually integrated the field force and they’re actually in their sales meeting, their annual sales meeting as we speak this week in Orlando. And so, I’m pretty optimistic. When you look at tactics and when you look at execution on the ground and couple that now with reinvesting in marketing, right? We’re back on TV as of mid-January. So, we’ve been on TV for a couple of weeks with Xiidra. I’m pretty optimistic that this can be a growth driver. So, if you think about it just in basic terms, Novartis, in the quarters they had it, they did about $250 million. We did $106 million in the fourth quarter. So, you’ve got a performance of $355 million. Sam, in his comments, guided to $400 million. That’s a 13% growth if we pull that off.

When we bought it and we announced a deal model, we talked about mid-single digit growth. So, we feel like we can get back on track and make this a real growth driver. Now, in all dry, including Miebo, there is seasonality. The first quarter, because of deductibles, is always the weakest, and the fourth quarter is always the strongest. So, I wouldn’t just divide the $400 million by four and look for it that way, but you’ll see a nice steady build as we execute and we drive marketing and the seasonality that is a factor, I think we’re going to set ourselves up for a very nice year in Xiidra.

MattMiksic: That’s great. Thanks for that. And then one other area that was – you had a pretty strong finish, important category within surgical is around IOLs, and I know you have a pipeline of new products you’ve talked about, planned out for this year on the IC-8 IOL side, but some of the sort of just underlying growth of that business was quite strong in Q4. Just wondering if you could comment on whether that was a market phenomenon, whether you feel like some of the products in the market currently are gaining momentum and how sustainable that is. Thanks.

Brent Saunders: Yes, so you’re right. We did see some strong demand for IOLs in the quarter and throughout the year. I think it really is a foreshadowing of what we want this business to look like. So, premium IOLs were up 30%, Sam, about 30% in the fourth quarter. I think it’s off a small number, right? And what we need to transition to, if you look at surgical for the year, packs were up about 9% for the year. Equipment was up about 11% for the year. So, better – we’re taking market share. We’re growing faster than the market. What we need to do in 2024 and really in 2025 and 2026 is drive that IOL mix and drive it towards the premium side of the IOL. That actually is the way you run a surgical business, and it has a tremendous benefit of driving margin improvement.

And so, when we talk about margin improvement, mix is critical and one of our most important strategies is to drive from the lower margin packs and equipment to pull through the higher margin IOL. So, really good foreshadowing. I see that the new launches, we have the Aspire that we launched. We have the IC-8, which we’re still launching. We have a trifocal getting approved at the back end of the year, and then we have our EDOF lens hopefully getting approved in later 2025. So, the setup there is really nice for constant new product, new innovation and higher margin products to drive through that business. And that’s my reason I get excited about surgical is pulling that off, but it is going to take two years to get there.

MattMiksic: Right. Well, that’s super helpful and congrats again, Brent, and to the team on the solid results. Thanks.

Operator: Your next question is from Patrick Wood with Morgan Stanley.

Patrick Wood: Amazing. Thank you for taking the questions. I’ve got one and then a quick follow-up. I guess for the first one, sort of a bit more high level, obviously on the consumer side and then the pharma business, you’ve got meaty scale now. And so, I guess, how are you thinking about things going forward? You mentioned the BD team a bunch of times, but organically and inorganically, how are you splitting your energy between the segments? And going forward, where do you think the biggest opportunities are? You obviously talked a little bit about premium IOLs. There’s other areas like custom packs, glaucoma. It’s a big market, right? How do you see the direction strategically and where you feel the biggest gaps that you might like to bulk up in are?