Good morning, and welcome to Bausch + Lomb's Fourth Quarter 2022 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 Mr. Art Shannon. Please go ahead.

Thank you very much. Good morning, everyone, and welcome to our fourth quarter and full year 2022 financial results conference call. Participating on today's call are Chief Executive Officer, Mr. Joe Papa; and Chief Financial Officer, Mr. Sam Eldessouky. Additionally, incoming Chief Executive Officer and Chair of the Board of Directors, Mr. Brent Saunders, will provide remarks, but will not address Q&A during the call today. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the Investor Relations section. Before we begin, we would like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking statement legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures and ratios. For more information about these measures, please refer to Slide 2 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 Joe.

Thank you, Art, and thank you, everyone, for joining us today. Before we get into the results, I'd like to say a few words about last week's announcement that Brent Saunders will become Bausch + Lomb's next CEO on March 6th. Brent has a long and esteemed track record as a healthcare industry leader, including as Chief Executive Officer of Bausch + Lomb from 2010 to 2013. I have personally known Brent for many years, and I am confident that he is the right skills and experience to lead Bausch + Lomb at this pivotal time in the company's history. Brent is here with us today and I'd like to invite him to say a few words. It's my pleasure to introduce Brent Saunders, the incoming CEO of Bausch + Lomb.

Thank you, Joe. Let me begin by saying what an honor it is to have this opportunity and how excited I am to be here today. Bausch + Lomb was the first company I led as CEO. So in many ways, this feels like coming home. Ophthalmology and eye health are two areas that I cared deeply about and have stayed close to due to Allergan's presence in the eye care space. I strongly believe that there is a great need in the marketplace for an integrated company that is solely focused on advancing eye health. And I'd like to thank the Board for their trust that they have placed in me to grow this great company into the future. I would also like to thank Joe Papa and the entire team for the further strengthening Bausch + Lomb's strong foundation and focusing the company's strategic priorities. I joined Bausch + Lomb because I believe in this company, I believe in its products, I believe in its people, and I believe there is a tremendous unmet need in the eye health space along with the opportunity to make a real difference through innovation. The overall eye health market is growing, driven by favorable demographic trends that are creating strong demand for eye health products around the world. As a company with great brand awareness, an amazing team and a global footprint in approximately 100 countries, Bausch + Lomb is well positioned to meet this demand by delivering on its mission to help people see better to live better. Bausch + Lomb has always stood at the forefront of cutting-edge scientific and technological optical advancements, and I believe continued innovation will be key to the company's success going forward. Finally, I want to recognize Joe Papa and thank him for all he has done to advance the eye health safety and wellness of patients around the world. I look forward to working closely with Joe in the coming weeks to ensure that we have a seamless transition. I am grateful for the opportunity to once again lead this great company, and I'm eager to get started in just a few weeks.

Thank you, Brent. I appreciate those kind words. Let me conclude by saying that my years here with Valeant, Bausch Health and Bausch + Lomb have been a truly memorable journey for me, and the successes we have achieved since I joined the organization in May 2016 are a credit to our outstanding colleagues around the world. Thank you for your tireless work, trust and support in building Bausch + Lomb into a global company dedicated to protecting and enhancing the gift of sight for the millions of people around the world. Now let's come to the agenda for today's call. I will begin with an update on the separation process and a brief review of the 2022 highlights. Sam Eldessouky, our CFO, will then review the fourth quarter and full year financial results in detail and discuss our outlook. Finally, I will conclude by discussing the upcoming catalysts before opening the line for questions. Sam and I will be taking your questions today, and Brent will be available beginning on March 6. Beginning with Slide 5. As the most integrated eye care company operating today, Bausch + Lomb is uniquely positioned in the eye health market, building on 170 years of success as a leading eye health brand. Bausch + Lomb is a company with the highest brand awareness in eye care. And as the third largest eye health company, Bausch + Lomb is a global leader in consumer eye health. Turning to Slide 6. We continue to see compelling opportunities for standalone Bausch + Lomb as a pure-play eye health company. We believe the company is well positioned for growth in large, durable markets. We continue to see potential margin expansion over the long-term, and we expect to have balance sheet flexibility to expand investment in the business.…

Thank you, Joe. Before we get into the details, I will remind listeners that when we talk about the organic revenue growth, we mean on a constant currency basis adjusted to remove the impact of acquisitions, divestitures and discontinuations. Turning now to our financial results on Slide 9. Our fourth quarter results demonstrate the continued momentum of our business and the durability of our diverse portfolio. Throughout 2022, we continue to deliver predictable and consistent organic revenue growth, driven by the strength of our diversified eye care platform. Total company revenue of $996 million grew organically by 5% in the fourth quarter, marked our seventh consecutive quarter of consolidated organic growth. For the full year, total company revenue of $3.768 billion also grew organically by 5%. The business has now demonstrated solid organic growth in each of the last two years following the COVID downturn in 2020. The fourth quarter was the second consecutive quarter where we saw organic growth in each of our three segments: Vision Care up 5%; Surgical up 4%; and OpthoRx up 7%. This broad-based growth reflects a strong durable portfolio we have established across our segments, which enabled us to perform despite macroeconomic headwinds on market volatility. We have continued to see volatility in foreign exchange. During the fourth quarter, FX headwinds impacted revenue by approximately $54 million. Adjusted EBITDA was negatively impacted by approximately $80 million in the quarter. We are encouraged by the COVID policy changes in China and the consumer sentiment towards a full reopening. However, the mobility restriction in the early part of Q4 and the rising number of cases in the later parts of the quarter have highlighted the stop and go nature we have seen throughout the year. Our top line results were negatively impacted by 200 basis points…

Thank you, Sam. I will now comment on some of the upcoming catalysts we are anticipating. On Slide 19, Lumify is a strong, established $125 million plus brand with reported revenue growth of 21% in 2022 compared to the prior year. In the U.S., Lumify is the number one physician recommended redness reliever in the category with approximately a 50% weekly market share, building on the phenomenal success of this product. And using the power of our B&L fully integrated eye care platform, we are planning to expand the brand geographically and through line extensions. Lumify is now launched in six countries, and we recently acquired the rights for 18 additional countries. In addition to geographic expansion into new markets, we're expanding Lumify's beauty positioning to a specialty eye care and have a number of new products planned, including a line scientifically developed for the sensitive eye area to help enhance the eyes’ natural beauty, which we expect to launch in the first quarter of 2023. We expect to submit our single-dose, preservative-free eye drops in the second quarter of 2023 and a combination product with ketotifen for allergy symptom control in the first quarter of 2024. Turning to Slide Number 20 for an update on the expansion of our daily SiHy launch, we have launched the spherical lenses in approximately 25 countries to date and expect about five additional spherical country launches coming in 2023, including China. We also anticipate the launch of the multifocal and toric lenses in the 2023, 2024 timeframe. These additional launches are expected to be key drivers of future growth. Looking back at 2022, we are pleased to report 46% reported revenue growth compared to 2021, including 85% reported revenue growth in the fourth quarter compared to the fourth quarter of 2021, due to…

Thank you very much. We will begin the question-answer-session. [Operator Instructions] Thank you. Your first question is coming from Craig Bijou of Bank of America. Craig, your line is live.

Good morning guys. Thanks for taking the questions. Let me – I guess, I want to ask about EBITDA margin in 2023. And obviously, you had some headwinds in Q4. And you're not providing guidance for the full year. But Sam, maybe you can walk through some of the puts and takes that are going to affect the EBITDA margin kind of looking at the headwinds, the macro headwinds that you're seeing, if they're going to get better. And then do you still have an ability to expand margin in 2023 relative to where you ended 2022?

Very good morning. So let me take the question in different parts here. And maybe stepping back and just looking at what we have done through 2022 and what we have communicated as we got P&L to standalone after the IPO was we outlined the road map of how we think about our business. And one of our immediate steps was to continue to drive top line growth in a consistent and durable way. And you've seen that, and I highlighted that in my remarks this morning that we've seen seven consecutive quarters of organic growth. Also, we highlight that Q4 was the second consecutive quarter that we've seen all our three segments growing. And that's an important factor here because now you are seeing that our businesses, especially the Opto business have pivoted from or moved from discussions around LOE to focus more on growth and positioning them for what is coming next in 2022, which is the PDUFA of NOV03 and the launch of NOV03. Now there is a number of levers when you think about where we think about our margin and how margin progresses for us as we go forward. First one was really the shift of our portfolio to more of a premium category. And that is really very pronounced in our surgical business. We've seen the steps that we've taken in 2022 to be able to introduce Lens Smart in Europe. It's a premium IOL. We've also completed the acquisition of AcuFocus, which we're very excited about, will give us the opportunity to be able to go forward with another premium IOL in the U.S. And also, we spent more in 2022 behind R&D to be able to expedite our pipeline and bring our own IOL, which we expect to come in, in 2024.…

Yes. Maybe I agree with absolutely everything Sam said. I said the other thing maybe I'd add to it is just on that last point. The positive is that over time, the operational efficiency of our teams like on SiHy dailies, we believe will improve. A simple example, the supply chain team has installed all of our SiHy capital equipment, they validated, they are ramping it up. But we know that output in yields will get better over time. In year one of any new piece of equipment like that, you may only get a 60% yield out of it. By year two and three, about 70%, 80%, and at some point above 80%. So that will also add to the comments that Sam has in terms of the operational efficiency over time, not – I'm not trying to suggest right now, but over time, that will also help us to your question of 2023 and beyond.

Just following up on that, guys. I mean, so does that – can some of those positives offset some of the negatives or the pressures – the positives in the second half offset some of the negatives and maybe the first half so that we see expansion for the full year?

Yes. And Craig, we'll have more to say on this in the first quarter, when we give guidance for the full year of 2023. But the way I would think about those levers that I spoke to, it's important to keep in mind that they are not all linear in terms of how they will actually play out. So I think they will plant over time, as we said in the past. I think the other part that I would just point you to is again, back to the NOV03. NOV03 is an important launch. I did make comments on it in my remarks this morning that we are going to be making sure that we spend behind NOV03 in terms of the launch. And we'll see that accelerate as we go forward into 2023.

Okay operator we have our…

Thanks for all the color.

Thank you.

Sorry, Joe.

Operator next question please.

Your next question is coming from Cecilia Furlong of Morgan Stanley. Cecilia your line is live.

Great. Good morning. And thank you for taking the questions. I wanted to ask just your underlying assumptions for Q1 and stated expectations to grow in line with the market. If you could talk just about how you're thinking about China recovery there, surgical, any impact from some of the backlogs and cata. And then also just as you're thinking about the daily SiHy growth that we saw in 2022. How you're thinking about your relative growth versus the overall SiHy market in 2023 in the first quarter?

So let me take the first part of your question, as we think about the market growth. We always think about our – the market growth is roughly about mid-single digits. So that's how we think about it from our perspective. I think there's different data points that we look at and probably the same data points that everyone looks at as well. So we think the mid-single digits is probably a good way to think about it. In terms of China, we're very pleased with what we've seen in China thus far in terms of reopening. And we think it's a very positive step as you move forward. However, when you step back and you look at how sort of the process in China shifted from a complete lock down restrictions to a full opening. You probably have to look to places like the U.S. or other parts in Europe, where you see as a proxy of how actually the reopening after COVID took place. And why that educate us in terms of understanding the rise indicators of – and that would result in more quantity in time. Also, it does result in potential shortages in labor as well as special impacts on the health care system within China. So we will expect that to be a short-term pressure that we will probably, we start to see some of that in Q4 2022. We expect that will be a spillover into 2023, at least in the early part. That we expect also a gradual improvement in China as we go forward. So overall, long-term we think it's very positive momentum in terms of where China is heading.

So I'll take the backlog portion for cataracts. You're absolutely correct. It's there. It exists. It goes back to COVID. I think many of the centers that are doing cataracts around the world have attempted to try to catch up. They've had some staffing shortages. But just order of magnitude, in the United States, 4 million cataract procedures. We lost probably about 15% of the procedures. We are clearly making up for that. And we are seeing the, as Sam was saying, the opportunity for a cataract surgery, implantable IOL growing somewhere in that almost double-digit range, at least that's what the external sources are saying, and we're certainly looking at that opportunity in terms of what we're seeing there. So I guess that gives you kind of a view on the backlog. One of the things that – it's a related question is we look historically at what happens in potential times of recession, and we have not seen any real input or impact on the recessionary times. So I don't know what exactly will happen with that. But certainly, we think that the need for cataract surgeries will continue going forward. I think there's – the second part of the question was about the SiHy growth versus the market in the first quarter of 2023. As we – as Sam said during his comments, we absolutely see SiHy growth continuing in terms of that kind of growth not only that we saw last year, we talked about what we saw with our infuse; the revenue was up 46% versus the 2021. In our fourth quarter, we had about 85% growth versus the fourth quarter of 2021. So we continue to see tremendous demand for SiHy dailies and especially our new infuse based on what we've been able to do with infused by putting osmoprotectants and electrolyte into the formulation giving patients all-day comfort. We expect to see continued strong demand for our infused and for the entire SiHy daily market.

Thank you for taking the question.

Operator, next question please.

Thank you. Your next question is coming from Matt Miksic of Barclays. Matt your line is live.

Hi. Thanks so much for talking the question. I had a just a question on how you're thinking about outlook this year, understanding you're only providing color on Q1, and then a bit of a longer-term question on the outlook. Wondering if you could give us a sense of what sort of variables do you see as you're thinking about the full year guide in terms of top line or cadence of the top line that's a consideration? Or I assume that some of the headwinds in componentry and inflationary costs are part of the construction of a new outlook for the year, but just maybe some of the bigger puts and takes on top and bottom line? And then I have 1 follow-up.

Let me just – I'll just hit the first part about why we're going to wait until May and the same you can take some of the variables. Obviously, I hope everyone understands that as we announced Brent Saunders joining the company last week and then obviously, it started as the CEO on March 6. We really want to give, Brent, a chance to really get into the numbers and all the things that we are putting forth in terms of our process. So it gives him a chance to do that, and we'll have a chance to talk more in May, but we clearly believe with right person to take on this role and importantly, comes both with the knowledge of working with other companies, but also were very much beneficial is that he has the past history of B&L. So, we think clearly it's the right person. But Sam, why don't you talk a little bit more about the outlook, some of the puts and takes on that.

Sure. And good morning Matt. Maybe I'll start with the top line and just think about it from the all three different segments here. And when you think about our Vision Care segment, and I think a big part of our Vision Care segment is within our consumer business. And we've seen a really good progress in terms of the growth rates that we've seen in both the consumer brands and expectation of what we will do from line extensions as well as do expansion in the consumer business. So you see that we've got Ocuvite, PreserVision who is going very nicely throughout 2022. We've seen also LUMIFY continue to demonstrate very nice growth in 2022. And you expect that momentum to carry forward with us as you go into 2023. From a length perspective, I think probably the highlight is we talk a lot about daily SiHy, but we're also seeing nice growth in both ULTRA and Biotrue. And they're all – they are the base brands as well. So we've seen growth on both all three different brands or families that we have in our lens business. And when you think about the SiHy side of it, the 46% sequential growth, I rehighlighted that because it's an important factor, was how you start thinking about 2023 because you're seeing that we're – we did have the challenge with the output and meeting the end market demand in the second half. So we're able to really do a nice job with the supply chain team have done a fantastic job to be able to get us back to where we need to be. And we're – right now, we're actually ramping up that demand and position us very well for 2023 as we go forward. On the surgical front, really when you think about surgical about, I'll call it, 70% of the portfolio is staying between implantables and IOLs. And those two parts have been growing very nicely in 2022. And we expect with the comments that Joe made earlier regarding the backlog and the surgical procedures that will continue. On the equipment front, we've seen down in 2022. But I think we are working through the number of the supply constraints that I highlighted in my remarks. I think that will continue to gradually improve as we go forward. So just on balance, you'll see between the two of them, you'll see that overall we expect the surgical business to continue to perform pretty well. And then the last one, the ophthalmology is – it's really a very good story in terms of pivoting from the LOE. And again, it's going to be an investment year for ophthalmology. We're really, we launched XIPERE last year. We are now expanding between XIPERE and VYZULTA on a geo expansion, and we're focused to push forward more on expanding beyond that with the NOV03 launch in the second half of 2023.

That's super helpful. And then just a follow-up on surgical and some of the launches that you talked about in premium IOLs towards the end of the year. I guess, as we think about the cadence of those and the impact on growth, but also importantly, margins, two things, I guess. One is how do you see yourselves as positioning to sort of take share in a market that you've been a little bit behind in relative to your large competitors in the U.S. in particular. So what's your – what's the edge of the strategy or the product differentiation to do that in particular? And then is that a mid-2024, late 2024, where we start to see some of the margin benefit of these things coming through mix? Or what's the cadence of the margin lift that you hope to achieve through these products? Thanks.

Yes. I'll start and Sam can add in that you think I left out. But I think it comes down to a couple of things. Number one, as we launch these premium IOLs, we clearly believe that we're coming forward with new innovation. The easy example is what we just did with acquiring the AcuFocus, where a very specific technology that we will have and that we will be able to bring to the marketplace. And at least as we've seen so far, very early, I will caveat that but we've seen great response from the physicians the KOLs that have implanted the lenses. But I think that's certainly 1 simple example. I remind you we've done the same thing with our LuxSmart or Lux platform. Predominantly, that's around the world, but we put that forth outside the U.S. and to Western Europe, Central Europe, Israel and then continue to add it into Latin America or Russia, Iran. A lot of things that we're doing there in terms of our LuxSmart portfolio, I think we're in like 20 countries over thereabout. Also, clearly, I think as part of this in terms of the margin. I think you realized that we'll fill a Monofocal IOLs were somewhere in the $100 to $150 per lens, whereas the premium lenses are somewhere in the, let's call it, $750 to $1,000 per lens, and the cost of goods is not dramatically different. So that's probably is going to help that that margin opportunity for the long-term. But to the slide that I have in the deck, I give the exact page here, but there really is a focus there on what we're thinking about in terms of doing some things starting in 2023, bolting on these additional assets like the AcuFocus. And then 2024 and 2025 will be the continued delivery on the platform. Our view is this integrated strategy we have at Bausch + Lomb. The reputation that Bausch + Lomb has will help us as we go forward with what we believe are quality led quality IOLs for patients. And I think that those relationships with the doctors will really help us over the long term. Sam, anything you want to add?

Yes. And Matt, I just want to maybe remind you, comments I made previously is when you think about launches as well, it's important to think about how that launch translates between top line from the time of launch to the margin. And on average, depending on where – what products you're launching and where you're launching that product, it's anywhere between 18 to 24 months before you start seeing the sort of the impact of that launch start to translate to a meaningful impact on that margin because you're investing behind that launch as you prepare for and you go forward with it.

Great, super helpful. Thank you.

Operator, next question please.

Certainly. Your next question is coming from Vijay Kumar of Evercore ISI. Vijay, your line is live.

Hey guys. Thanks for taking my question. I had two-parter, and I'll ask them upfront. First, on margins here. Your Q1 gross margins, that's a pretty big sequential step-up from Q4. What drives the Q1? What are you assuming for pricing and inflation? And my second, below the line items. When I look at interest expense, FX losses, is that something that's expected to sustain here or any changes below the line? Thank you.

Yes. So Vijay, let me take the first part of your question first. When I think about the margins and I think about Q1 2023, one thing I did highlight is we're seeing a couple of things on the margin is you're seeing the inventory working its way through that was built in the second half of 2022. You're seeing that working its way through the P&L. And because of just the way inflation played out, we see inflation ramp up throughout 2022, start to monitor towards the end, but you're seeing at a higher rate. So you're building up inventory with higher costs and you're working that inventory through the P&L, and that will give you an impact on the margin in Q1 as you start thinking through it from that perspective. There's other elements. Obviously, you'll see the top line. We talked about the market growth in Q1. So we expect that, and we expect also the fact that we're ramping up the benefits of the data side with the ramp up and scale that's going on the flip side of the margin pressure and giving an opportunity as you go forward in. And the second part of your question regarding below the line, the most notable items that we've seen below the line in Q4 was the $18 million of currency headwinds. That was something that it really impacts us in the later part of Q4. And what we saw in currency throughout 2022 was really the volatility of the currency and hitting the peak in the second half of 2022. One unique factor we saw is that all currencies were relatively moving in the same direction with the USD, but then we start to see also with the USD sort of weakening towards the end of the year, we start to see movement in currencies happening and not all of the same magnitude and not all in the same direction. So we've seen different currencies moving. As I reminded you in the past, we are naturally hedged in certain currencies within our P&L. So when you start seeing several movements across currencies, that does have an impact to us in the P&L that will be more pronounced in the EBITDA than on the top line. That's why you see on the bottom line.

The only thing I'd add, Vijay, is that you asked about pricing. And I did want to just comment that similar to 2022, we did take mid-single-digit price increases in selected markets specifically for the Opto Rx business, our contact lens business and our consumer business. Mostly, we looked at those markets that were impacted most by inflation as we go through and made decisions on our pricing. But we did take what I refer to as mid-single-digit price increase. Now please realize that, for example, in our Opto business, if we take a mid-single-digit price increase, not all of that drops to the bottom line. Some of that, of course, does not Usually, I think about whatever price increase I take I usually get in the Opto side, something about half of that, that goes to the bottom line. So just to give you some sense on that part of the question on pricing.

Operator, we have time maybe for one more question.

Okay. No problem. Your next question is coming from Joanne Wuensch of Citi. Joanne, your line is live.

Thank you very much and good morning. NOV03 gets a lot of attention and I appreciate that PDUFA date in June and the launch at the end of the year and a large market opportunity. But how do you think about it ramping and contributing to in the early days as well as how it will launch? And I'm looking for an idea of penetration rate and salespeople that may or may not be needed? And is it just a switch that flips and sales go?

So I think let me start with the first part of your question. We are very excited about NOV03. We think that the opportunity here for NOV03 to help millions of Americans who have dry eye disease, especially now that we have some data that shows the impact on the meibomian gland dysfunction for dry eye disease. We think it's very excited. So if we get approved by the FDA we're really excited about what that opportunity will be for us. As it would relate to the question of ramping, I think, as you know, with new product launches, there's always some type of formulary process that we will go through. We've already started that process of working with the market access and managed care teams to think through the opportunity. We do believe this meibomian gland dysfunction is an important part of that question simply because at this time there's no other products that have that specific pharmaceutical application of the evaporator of dry eye disease, where we believe somewhere about in the call today, about 90% of patients have the evaporative dry eye disease. So we do think there's a big opportunity. We will also state though that we will need to work through market access, managed care to gain that formulary position. But we think the data is compelling. The data says that the product works based on two Phase 3 clinical trials, and it could start working as early as day 15. We think that's important to patients. So we're excited about that. Relative to the actually part of the question you asked was the actual number of sales reps. We feel good about the number we have today. We will reallocate them, of course, from other products. But we do feel very good about our capabilities. And the teams have been building up, not just sales rep capabilities, but also working with key opinion leaders, working on this meibomian gland dysfunction in terms of a concept with the KOL. So a lot of activity. We're excited about it. It will take a while to ramp up. But long-term, we see it as being a very important product for us.

Thank you very much.

Everyone, that concludes our call today. Thank you very much for your interest in Bausch + Lomb. We look forward to talking to you over the next several days and weeks ahead. Have a great day, everyone.

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