Bausch + Lomb Corporation

Good morning and welcome to the Bosch and LOMS first quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Alice and Ryan. Please go ahead.

Thank you. Good morning, everyone, and welcome to our first quarter 2023 financial results conference call. Participating on today's call are Chairman and Chief Executive Officer, Mr. Brent Saunders, and Chief Financial Officer, Mr. Sam Eldosuke. In addition to this live webcast, a copy of today's slide presentation and a replay of this conference call will be available on our website under the investor relations section. Before we begin, I would like to remind you that our presentation today contains forward-looking information. We would ask that you take a moment to read the forward-looking legend at the beginning of our presentation as it contains important information. This presentation contains non-GAAP financial measures and ratios. For more information about these measures and ratios, please refer to slide one of the presentation. Non-GAAP reconciliations can be found in the appendix to the presentation posted on our website. Finally, the financial guidance in this presentation is effective as of today only. It is our policy to generally not update guidance until the following quarter unless required by law and to not update or affirm guidance other than through broadly disseminated public disclosure. With that, it is my pleasure to turn the call over to Brent.

Thank you, Allison, and thank you, everyone, for joining us today. It's great to be here. I'll start off by sharing some high-level comments about my first 50 days as Chairman and CEO of Bausch & Long and briefly discuss the first quarter financial highlights. I will then turn the call over to Sam, our CFO, to review the first quarter financial results in detail and discuss our 2023 guidance. Finally, I'll cover our key franchises and a few upcoming catalysts before opening the line for questions. Beginning with slide three. I've been involved in eye health for the better part of my career. It's a dynamic industry that is always evolving, full of innovation and collaboration, and with many talented practitioners, surgeons, ophthalmologists, optometrists, and significant unmet needs for millions of people. It is an area that I care deeply about and have continued to stay close to. Having an opportunity to work in this great industry again was an important factor in my decision to rejoin Bausch & Lomb. The eye health industry operates an attractive part of the healthcare space with a large addressable market and growth driven by demographic trends and lifestyle changes that create significant unmet needs. Companies that can meet these needs are rewarded for innovation in a favorable competitive environment with significant barriers to entry. There are many other reasons why I returned to Bausch & Lomb. An iconic brand, 170 years in the making, a broad, diverse commercial platform, products that touch patients throughout their lives, a massive global infrastructure, and a competitive landscape where we have the most comprehensive footprint. And most importantly, a team of talented and dedicated colleagues who are passionate about making Bausch & Lomb the best eye health company in the world. My first 50 days here reaffirmed all of this. Our challenge and opportunity is to how to reach our company's full potential. To possibly oversimplify our situation, our biggest issue as a company is underutilization. That is, we have a very broad commercial structure and supply chain touching almost every eye health professional in the world, but not enough product flow to utilize it efficiently. Historically, we have invested significant resources into building a global infrastructure. But due to inadequate sales volumes, our infrastructure is not being utilized to its full potential, resulting in inefficiencies and wasted resources. Given this, the best plan for a sustainable future for our company, although easy to say but hard to do, is to focus on driving profitable growth. I'll discuss our path forward to doing just that in a moment. After careful thought, I developed a plan with input from the executive team designed to take Bausch & Lomb to the next level. We're calling it the Roadmap to Accelerate Growth. This is a multi-year plan with three phases, all with measurable, clear objectives. Let me give you some of the details. Let's start with a deeper dive into phase one of the roadmap. If we do all the following things correctly, we will advance to our next phase, innovate and execute. First, grow revenue at or above market, which we achieved in the first quarter of 2023. Clearly, this is foundational to our plan. We're growing, but we need to do this consistently. Next is a focus on our frontline sales teams with a view toward achieving selling excellence by building enduring bonds with our customers. Our sales teams are a talented and dedicated group. And when customers think of Bausch & Lomb, it's our sales reps that come immediately to mind. They are our face to our customers. But the infrastructure around them needs to be improved by giving them the best tools, training, and support that we can. I cannot understate it. Our sales teams are crucial to our success, and we are pivoting to making them the priority for an entire company, creating an environment that is viewed throughout the industry as the best place for sales representatives to work. Third, build an industry-leading business development platform. As I mentioned earlier, this is a tremendously dynamic industry with countless opportunities for growth and innovation. We need to build best in industry capabilities to seek out and evaluate the right opportunities and collaborate with smart, thoughtful partners. I want Bausch & Lomb to be known industry-wide as the best partner. Next, we need to enhance the use of technology and build leading digital capabilities across our company, from marketing to manufacturing, that support the business and enable it to run more efficiently and effectively, and eventually for it to become a competitive advantage for our company. This investment will pay off by increasing our efficiency, improving our customer experience, and expanding our market reach. The final part of the roadmap's first phase is to make work easier, eliminate bureaucracy, and increase accountability. We will reduce complexity and promote clear accountability. Empowering our colleagues with accountability not only increases their sense of ownership and pride in their work, but also fosters a culture of trust, responsibility, and continuous improvement. As we fold these capabilities into Bausch & Lomb, we look to build on our legacy and establish ourselves as the best eye health company in the world. Turning now to the quarterly results on slide seven. I'm going to talk about our numbers in constant currency, as Sam will explain in more detail. The year is off to a good start, with first quarter revenue of $931 million, up 8% year-over-year on a constant currency basis. Adjusted EBITDA of $141 million was impacted by $14 million currency-related headwind and higher levels of commercial investment to support key product launches, which we will believe will be the future growth drivers. Importantly, we saw continued high-quality growth across all three reporting segments and in most significant geographies. Revenue from VisionCare was up 8% on a constant currency basis, driven by growth in key franchises, including Lumify, DailySciHi, BioTrue OneDay, and Ultra. Increased demand, improving supply, and expansion in the premium IOL portfolio drove the surgical segment 9% constant currency growth. And the ophthalmic pharmaceutical segment grew by 7% on a constant currency basis driven by U.S. generic execution and international portfolio growth. Achieving growth across so many areas of our business in the face of continued headwinds underscores the strength of the Bausch & Lomb platform, brand, and team. My focus going forward will be to build on this foundation and execute the roadmap to accelerate growth that will enable the company to move into its next stage of growth. I will now turn the call over to Sam to cover the first quarter results in more detail.

Thank you, Brent, and good morning, everyone. Before we begin, I would like to point out that most of my comments today and in the future will be focused on growth expressed on a constant currency basis. This is consistent with how we operate the business, and we believe it helps us more closely align our reporting to a broader group of comparable companies. Turning now to our financial results on slide eight, our first quarter results demonstrate strong growth, and the business is continuing to build on a solid track record of durable revenue performance. Thorough company revenue of $931 million for the quarter reflects growth of 8 percent on a constant currency basis and 5 percent on a reported basis compared to the prior year quarter. As Brent mentioned, revenue growth was broad-based and spanned across all three of our reporting segments, VisionCare, Surgical, and OptRx. Consistent with the expectations noted in our last earnings call, while we saw gradual improvement in China in the quarter, we continue to be cautiously optimistic about the pace of the recovery. We remain confident that our business in China is well-positioned to return to stable growth over time. We'll continue to monitor the economic activity, giving the stop-and-go recovery we saw last year. In the quarter, foreign currency headwinds were approximately $31 million to revenue and approximately $14 million to adjusted EBITDA. As mentioned on our last call, we expect that these currency headwinds to persist in the first half of 2023 before improving in the second half of the year. Now, let's discuss the results in each of our segments. VisionCare revenue of $587 million increased by 8% on a constant currency basis, driven by both the consumer and contact lens portfolios. The consumer business grew by 8% on a constant currency basis, and our strategic brands, Lumify, Preservision, and BuyTrue Multipurpose Solutions continue to hold market-leading positions. Lumify reported revenue grew by 23% globally compared to the prior year, and achieved a record revenue of $38 million in the quarter. The brand has continued the momentum in the U.S., where it reached a market share of 50% in the redness reliever category. The launch in Canada has also been very successful, and to leverage the brand platform and continue to expand the franchise, we are now in early stages of launching the Lumify Eye Illuminations Beauty line. Revenue from Artelac A key brand in our dry eye franchise in Europe grew by 29% on a constant currency basis in the quarter. The growth was mainly driven by increased demand. First quarter revenue from our eye vitamins, Preservision and Acuvite, was flat on reported basis and up low single digits on a constant currency basis. We expect our recent launches of Preservision with AcuSorb and Preservision plus CoQ10 to continue to drive the growth. From a broader macroeconomic perspective, we are encouraged by inflation levels trending lower and will continue to balance the price and volume dynamic as we progress through the year. We're committed to making the appropriate investments to support launches and drive consumption, as we believe consumers will continue to reward our trusted brands and innovation. In the Lance portfolio, we saw 10% constant currency growth in the quarter with strong performance in our key franchises. Reported revenue from our daily side high grew by 38% in the first quarter, driven by strong market demand. We continue to anticipate a U.S. launch of the daily side high multifocal lens in the second quarter, which would expand the product family and provide a catalyst to continued growth. The lens growth in the quarter was broad-based across the major product families, On a constant currency basis, Ultra grew by 18%, BioTrue delivered 8% growth, and our legacy brand, SoftLens Daily, grew by 15%. Moving now to the surgical segment. First score of revenue was $183 million, an increase of 9% on a constant currency basis. Implantables grew by 2% on a constant currency basis, driven by strong performance in the high-margin premium IOL portfolio. which was up 32 percent in constant currency. We continue to see momentum in our Invista franchise, which includes both the monofocal and TORIC IOLs. On a constant currency basis, the Invista franchise grew by 26 percent in the quarter. We're also in early stages of the U.S. launch of the Apathura IC8 premium IOL, which has generated strong interest and has received very positive feedback. We expect to make further investments to support the phase launch process as we continue to train our associates and onboard surgeons. The consumables portfolio grew by 13% in constant currency compared to the first quarter of 2022, with higher demand for Stellaris and custom packs. Revenue from equipment was up 7% versus Q122 on a constant currency basis, mainly driven by demand for our Stellaris system. While market demand in our surgical business continues to be strong, the availability of supply has not yet fully recovered. Our team continues to implement various mitigating measures, including purchasing components from secondary vendors at spot prices. We anticipate that supply will remain volatile as we progress through the year. At a broader level, we continue to believe demand for B&L surgical products will remain strong. driven by the need for cataract procedures across the various markets. In Q1, we saw strong demand in the U.S. and parts of Europe, impacted by revenue decline in China, which is continuing to recover. We're also pleased to announce the early launch of the CLUMA visualization platform in the U.S. and in Europe. This platform adds to our many product launches in 2023, and we plan to make the appropriate investments to support the commercial execution. Lastly, revenues in the OptoRx segment were $161 million, representing constant currency growth of 7%, with strong performance across all major markets. U.S. genetics grew by 16% as we continued to actively capitalize on challenges faced by our competitors. 5% constant currency growth in the international portfolio was mainly driven by 14% constant currency growth in the Minims franchise. Byzolta reported revenue grew by 25% in the first quarter. In the U.S., TRXs were up by 25% compared to the prior year. As a reminder, we have a June 28, 2023 PDUFA date for NOVA III and are anticipating a launch in the second half of the year. Our pre-launch activities are ongoing and we continue to expect the level of investment to increase as we progress through the year. Now that we have covered revenues for each of the segments, let me walk through some of the key non-gap line items on slide nine. As a reminder, the 2022 first score financial statements were prepared prior to the BNL IPO in May 2022 and do not fully reflect run rate stand-alone costs. Along the same lines, the basis of interest expense and taxes reporting Q1 2022 financial statements also does not fully reflect the B&L operations as a standalone entity. As we have previously mentioned, this impacts the comparability between 2022 and 2023 results. Adjusted gross margin for the quarter was 60%, a decrease of 90 basis points compared to Q1 2022. The change in gross margin was mainly driven by higher cost of inventory, product mix, and pockets of supply challenges meaning our surgical business. As we noted in our Q4 earnings call, we expect the higher cost of inventory we built in 2022 to increase pressure on gross margin as it flows through the P&L, meaning the first half of 2023. First quarter adjusted EBITDA was $141 million. The adjusted EBITDA in Q1 was impacted by currency headwinds of approximately $14 million. which we previously estimated to be approximately $10 million in the outlook communicated in our Q4 earnings call. Adjusted EBITDA was also impacted by an incremental $17 million of standalone costs relative to the prior year. Additionally, adjusted EBITDA was impacted by inflation, higher cost of shipping and distribution, and investment related to supporting product launches. In the quarter, the investment in R&D was approximately 8% of revenue. INTEREST EXPENSE FOR THE CORPS WAS APPROXIMATELY $47 MILLION, REFLECTING THE RISING INTEREST RATE ENVIRONMENT. FOR COMPARABILITY PURPOSES, THE LOWER INTEREST EXPENSE IN Q1 2022 DID NOT FULLY REFLECT BNL STAND-ALONE CAPITAL STRUCTURE. ADJUSTED TAX RATING IN THE FIRST CORPS WAS APPROXIMATELY 6%, WHICH IS IN LINE WITH OUR EXPECTATIONS FOR THE FULL YEAR 2023. LASTLY, ADJUSTED EPS FOR THE CORPS WAS 10 CENTS. ADJUSTED CASH FLOW used by operations was $24 million in the first quarter. Cash flow operations was mainly impacted by approximately $70 million of strategic inventory built to mitigate potential future supply disruptions and to ensure sufficient inventory levels related to product launches. First quarter CapEx was $37 million, mainly driven by investments in the vision care segment. Turning now to our 2023 guidance on slide 12. Our revenue guidance for 2023 is a range of $3.9 billion to $3.95 billion, which reflects a constant currency growth rate of 5% to 6%. Based on current exchange rates, we anticipate currency headwinds to revenue in Q2, followed by tailwinds in the back half of the year. We expect the net impact to be 50 million headwinds for the full year. While we're pleased with the strong Q1 2023 revenue growth performance, we remain cautiously optimistic for the remainder of the year. We have taken a number of mitigating steps to improve the stability of supply in the surgical business and believe it remains a work in progress. We also monitor the pace of the recovery in China and the potential impact of broader macroeconomic uncertainties. While we saw an improvement in consumer activity in China in the latter part of the quarter, we will assess additional data points over the coming months to determine the sustainability of the pace of the recovery and impact on the full year. In the meantime, we believe we are well positioned to capture the market opportunity and we're optimistic that the market will return to stable growth over time. Overall, our 2023 revenue guidance reflects our expectation that the business will continue to grow in line with the market for the balance of the year. Our adjusted EBITDA guidance for 2023 is a range of $700 million to $750 million. We expect full-year currency headwinds to adjust the EBITDA of approximately $35 million. Excluding the impact of currency, the midpoint of our adjusted EBITDA guidance is $760 million. With a number of recent and upcoming launches in 2023, we remain committed to prioritizing investments to drive revenue growth. As we mentioned in our last call, The quarterly phasing will be an important consideration. We expect adjusted EBITDA to increase as we progress throughout the year. This is mainly driven by a number of factors, including the natural phasing of our businesses and the timing of our investments to support launches. We are fully committed to disciplined cost management, and we will prioritize our spend and optimize our cost structure to drive operating leverage and accelerate growth. we expect our 2023 adjusted gross margin to be approximately 60%. This represents a moderate margin improvement relative to full year 2022. While we have increased the production output and efficiencies related to our daily size high lenses, we expect gross margin to be impacted by the higher cost inventory we built in 2022, supply availability in our surgical portfolio, as well as potential variability driven by product mix. In terms of the other key assumptions underlying our guidance, we anticipate investment in R&D to be approximately 8 percent of revenue. We accelerate the level of R&D spending in 2022 and will continue to prioritize R&D investment to enhance our pipeline opportunities. Consistent with our previous communications, we expect interest expense to be approximately $215 million for the full year. The interest expense reflects our current interim capital structure. which is based on variable rate debt at so far plus 3.25%. As a reminder, we plan to transition to a longer-term capital structure upon full separation from BHC. We expect our adjusted tax rate to be roughly 6%, and we expect full-year CAPEX to be approximately $200 million. As I already mentioned, keep in mind that comparability between 2022 and 2023 results for the full year will be impacted by the timing of the BNL IPO. Overall, we're pleased with our first quarter performance and continued growth across our segments. Our 2023 guidance reflects our strategy to increase investment in the business to support product launches that we expect to become important drivers of profitable growth. And now, I'll turn the call back to Brent.

Thank you, Sam. Let's spend a few minutes on a few of our key franchises and some upcoming catalysts we expect to drive business results. On slide 14, given the prevalence of dry eye disease and the size of the market, we believe our dry eye disease platform will be a key driver of future growth and is a good example of the benefits of an integrated platform in addressing a large market with unmet need. We can reach patients and consumers through multiple access points, leveraging long-standing relationships with the eye health professionals as well as key retailers and e-commerce channels that reach a broad consumer base. The franchises on this platform, primarily Artelac, BioTrue, and Soothe, generate approximately $250 million in annual sales on a combined basis. In addition to a number of line extensions for our consumer products, we are looking forward to Novo 3's Paducah date on June 28th, as the next potential catalyst to further advance this platform with the addition of a pharmaceutical product. More specifically, this is a category that has long been defined by treatments that work along the inflammatory pathway, and we have an opportunity to launch a potential first treatment for evaporative dry eye in a large and growing market, which is currently estimated to be approximately $2 billion in the United States. Our Lumify franchise on slide 15 is another example of the power of a fully integrated eye care platform to launch, promote, and drive the performance of our products. Today, Lumify is a $125 million franchise with approximately 50% market share in the redness reliever category and the number one doctor recommended brand. Our strategy is to build on this success by expanding into new geographies and adjacent categories. We recently acquired the rights to market Lumify in 18 additional countries. This year, we will launch Lumify Eye Illuminations, a line of hyperallergenic eye care scientifically developed for the sensitive eye area. Finally, we are working on a single-dose preservative-free eye drops and a combination product with ketotypin for allergy symptom control. Moving to slide 16. The iVitamin franchise, OccuVitamin Preservation, is Bowser & Lomb's largest brand, with more than $350 million of annual reported revenue and more than 90% share of the AirReds category. This franchise has a global footprint with products available in 40 countries and a wide variety of formulations to address unique patient needs. Our strategic focus is on growing the franchise and driving consumer demand with innovative new products and category expansions. We are working on launching new products that help support eye and heart health, are more easily absorbed, and help to support healthy cell function. The good news is that despite our leading position in this market, we have a lot of room to expand. Approximately 70 percent of households with moderate to advanced AMD are not treated with ARIDS II product. Moving to surgical segment on slide 17. I have been impressed with the surgical team's ability to deliver results while dealing with significant supply constraints. In addition to creative problem solving, this agile resourceful team is demonstrating selling and marketing excellence and building trusted relationships with eye surgeons that can be a model for our broader organization. On this slide, we show the evolution of the IL portfolio towards premium higher margin offerings to give surgeons a wide variety of lenses to address their patient's eye health needs, including trifocal and extended depth of focus lenses. We are also entering new categories in fast-growing markets, like glaucoma procedures, and focusing on digital interconnectivity with the CLUMA 3D microscope and the eye intelligence digital platform. In closing, we stand here today with a durable foundation, a powerful, globally recognized brand, established products, a talented and dedicated team of colleagues, and we operate in an attractive part of the healthcare market. At the same time, we clearly understand what our issues are. Underutilization of our global infrastructure, challenges to our supply chain, and gaps in our innovation cycle. While we have our work in front of us, we now have a plan in place to overcome these obstacles, the roadmap to accelerate growth. I have faced similar situations in my career, and I have led similar efforts. I know from those experiences that with the support of our colleagues around the world, we can turn this plan into reality. You cannot underestimate the collective power of 13,000 colleagues who are aligned, focused, and motivated. Our roadmap to accelerate growth will be my focus, along with that of all of our colleagues around the world. Although change can be daunting, I am confident that we will come together and accomplish great things. With hard work, dedication, a commitment to excellence, and to our mission of helping people see better to live better, our company has the potential to thrive and succeed in the years to come. I'm excited about the days ahead and will continue to keep you apprised of our progress as we execute against our roadmap. Thank you. And with that, operator, let's open the line for questions.

Certainly. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Your first question is coming from Vijay Kumar at Evercore ISI.

Hey, guys. Congrats on the ice sprints here, and thanks for taking my question. I guess my first one is on the organic performance and the guidance. AID was a pretty big number. We've seen utilization come strong across the group. With that 8%, a clean number, were there any catch-up, worn-off items? And I think the guide implies back half of medicine. So I'm curious why the AID perhaps wouldn't sustain, given comps don't seem to be too hard.

Yeah, great. Well, thank you for the question. Yeah, it was a good quarter, and I think we're off to a good start for the year. I think specifically to answer your question, I'll turn it over to Sam on any one-offs.

I don't think there were, but go ahead. Good morning, Vijay. No, we really didn't have anything outside of the normal course of business. Just one thing I would remind you, as you think about our first quarter, one of the things we're benefiting from Q1 is the timing of the pricing. This is lapping a full year of now pricing. As a reminder, we did take pricing last year, and we did take pricing again this year, so there's an impact of that. And you will see that probably more pronounced in the vision care segment, specifically in the consumer side, just offset inflation. But that's really one of the areas I would just highlight, just the timing of the pricing and getting the benefit of the tailwind of that. Thanks, Vijay.

And Brett, one maybe follow-up on, I think you, looking at second half, you mentioned NOAA three years ago. a key catalyst, what would be like a positive good outcome in your mind and what would be suboptimal? And how should we, you know, think of the contribution from this product in a bull case?

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

So, thanks guys.

But big opportunity for us.

Your next question is coming from Robbie Marcus at JPMorgan.

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

Yeah, so let me take a high-level stab at both and then give it to Sam for some more detail. Look, I think as you look at the bottom line EBITDA or EPS, long-term, obviously, we absolutely want to see leverage in the P&L. We want to see margin expansion or improvement. And we want to see, as I mentioned, real utilization of this massive infrastructure we have built over years at Bausch & Lomb, which truly is a competitive advantage if, and I stress if, if utilized well. And so tremendous opportunity, you know, in the medium to long term to create that leverage. In the short term, you know, I think we need to see improvement. We have some challenges and some investments that need to be made throughout the year. On the challenge side, I would put supply chain. You know, being here 50 days You know, we still have some unknowns there, and I need some more time to really get comfortable and understand what's happening there. I think we have to make investments in important launches like Novo 3 and continue to support Lumify as a top growth driver for a long period of time. And so, you know, we're just balancing those two things and probably have more clarity as we move forward. You know, on organic growth... I would say the same thing. I'm not sure we'll see acceleration again 50 days in. This is the guidance I'm comfortable with. I think we still have supply issues throughout all the businesses. Some of them are hangovers from COVID. Some are just new technologies or tough technologies or third-party suppliers that we're working to corral. But it's quite complex. You know, I think we're trying to put out guidance that's realistic based on what we know today or what I feel comfortable with today, but that will evolve as I get my feet, you know, firmly on the ground here. But let me give it to Sam first, some more color.

Thanks, Brent. And good morning, Robbie. And let me take in two parts here. The first one on EPS, as you know, we don't guide EPS, but when you think about just EPS and the dynamics of it, one big factor we spoke about quite a bit is the currency and We've seen the currency headwind year over year. We're estimating for full year 2022, that's about $35 million, which we saw about 14 of that come through in Q1. The other big factor you have to keep in mind is interest expense. We've seen quite a rise in the interest expense. Just as a reminder, our debt and capital structure today, we're sitting with a A variable capital structure is so far plus 3.25%. So we're all seeing what's happening with the Feds and sort of the impact on the interest expense that we're seeing that we're guiding for roughly about $250 million. That's versus about roughly $150 of last year. So that incremental element does provide headwind on EPS for us as we go through 2023. Keep in mind that we also, on the capital structure, we did talk about This is an interim structure that we will transition out of at the time of the separation. So just putting all the different pieces together will give you a sense of how we're thinking about the EPS. In terms of just organic growth, and Brent covered it pretty well, and maybe I'll take a step back. For Q1, we're very pleased with what we performed in Q1. There's a lot of data points in Q1 that we're excited about and we're pleased for the good start of the year. But that's one core, and as you start evaluating for the rest of the year, we start thinking about all the puts and takes that you have in the rest of the year. And when you factor all those items in and bake into your guidance, you have to be balanced and prudent to be able to think through what the level of uncertainties are. You touch on China. China, we saw China recover. To be very clear, it didn't really see that data point of recovery until March, so the first part of our Q1 was not that strong in China. So we need to see that level repeat of the steadiness of that recovery before we can call it fully recovered, just given the nature of what we saw last year with the stop-and-go nature of the China market. And supply chain is an area where Brent touched on. I think we highlighted in our past remarks, and I think in probably a couple of areas here, I will go a little bit deeper. When you think about our supply chain surrounding our surgical business, that's an area we had a good quarter Q1 for surgical. We have demand in our product, but we also are not where we want to be with our supply chain and availability of steady supply for us in the surgical business. So that's an area we kept in mind as we were thinking about our guidance. Same as for Sai Hai, we've done a very nice implementation output improvement, but that's still work in progress for us. So factoring all those items plus the macro market conditions and just the uncertainties that's coming in with inflation, that's all played into our thinking as we thought it was guidance to make it a balanced guidance as we think for the rest of the year.

Great. Thanks, Ravi. Yep. Of course. Next question, Oprah.

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

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

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

Thank you.

Anything else you want to add, Seth? Do you mind just to add in terms of the price-volume mix here of contact lenses? The growth this quarter was mainly in the contact lens side was mainly volume. So we've seen the volume being a majority of the growth. We've seen a little bit of price, but majority of volume. And just Brent covered it pretty well on data size and where the growth is coming from. One thing I'll just also highlight is when you look at the rest of the portfolio of the lenses, we've seen also nice growth in the other parts. the brands such as ultra I called it out this morning it's going at 18% and buy through at 8% and the soft lens daily which is a legacy brand outside the US is going nicely at 50% so the the team is doing a good job managing the days I highest was sort of along in detail on the other brands as well yeah and I should reiterate that that's really important because the way to success is

is by not having a leaky bucket. And this quarter, I think, was a good example of exactly that. And so real kudos to our team for managing across all these different platforms.

Thank you. Thanks.

Your next question is coming from Larry B. Jolson at Wells Fargo.

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

Yeah, so since you asked Sam first, go ahead, Sam. All right. Good morning, Larry, and a very good question. And phasing is very important, and you picked on it, and I made it sort of a feature in my remarks this morning. Because when you think about our phasing, especially between Q1 and the rest of the year, it's an important factor as you think about 2023 is that we started – Maybe I'll step back and just reflect back on last year's phasing. When you look at the natural phasing of our business, we tend to have our lowest point in phasing in the first quarter with the highest point being at the end of the year. So you tend to have the second half much stronger than the first half. As you think about this year, that phasing follows the same natural phasing, but it's actually more pronounced in a couple of factors. And there's a couple of things that you have to factor in. When you think about our first half, adjusted for currency is a big factor. So we see currency headwind in Q1, roughly about $14 million. EBITDA, we got it for the full years, roughly about $35 million. So we see most of that coming into the first half. We expect currency to be more of a tailwind or not an issue as we go into the second half. So that flips between the two elements. Second part, which I called out, was the gross margin. and the impact of the gross margin from the higher level of inventory that we capitalized at the end of 2022 and as this inventory works its way through the pnl uh we're seeing that come through with a headwind in gross margin that you don't expect to play out in the second half uh and most of that usually will some of it came in q1 and will be coming also in q uh q and then the third factor you have to put in is the higher investment in uh launches so we're Getting up for Novo 3 as one of our major launches, but there's other also launches that we have throughout the business. And that's taking investments that majority of the investment coming into the first half and a bulk of it coming into the second quarter. So factoring all those items and factoring the leverage in the revenue and the increase in the revenue in the second half and how that impacts the P&L, you'll be able to be able to see that the phasing is really heavy weighted towards the end of 2021. second half of this year the q3 and q4 so when you look at q1 with our lowest point we expect maybe out one one and a half point into q improvement as we go into q2 and then after that we'll see the ramp up in the second half of the year great so so larry i'll kind of address what you mentioned with under utilization but to be clear i think we have tremendous opportunities but you know we have three challenges that i mentioned under utilization of our infrastructure

challenges in our supply chain and gaps in our innovation. And they're all kind of somewhat related. But as you think about underutilization, think of the opportunity here, right? It's a very favorable competitive environment. And Bausch & Lomb itself has probably the most integrated and comprehensive portfolio or focus on this industry, right? Touching all four areas in a meaningful way. But we have, you know, we have operations in virtually every country. We have a massive supply chain and distribution center. We have relationships with almost every eye care professional in the world, and we've been doing it for 170 years. But we don't have any big blockbuster brands. We don't have big, high-margin products. We're kind of a workhorse. We do it with a big portfolio, lots of SKUs, lots of products, and we do that well considering the complexity of that. But that being said, you know, the easiest thing to solve here is to put more sales through that channel, right? We can do a lot without adding a whole lot of additional costs by leveraging our distribution and sales relationships. And so, you know, clearly we want to do more. We want to sell more. And so that starts with first making the most of the things you have, right? So making sure we continue to launch great products like Infuse, our daily Sci-Hi, keep Lumify chugging along, keep Preservision moving forward, doing great things with the things that are already in the market. IOLs and the like, like Invista had a great performance in the IOL segment. The second thing we do is we launch well, right? Launch excellence. And so we have some important launches we've discussed that will hopefully take place in the second half of this year, like Novo 3. And then the third thing is we source innovation from outside, right? And today, you know, we have a very modest BD team, pretty powerful, but a one-person show more or less. We need more people seeking and searching. We need more people connected to the innovation centers around the world in eye care, and there are a lot of them. And so we need to be really best in class at doing that to bring more product flow into our business. You're right, the second part of that is trimming that infrastructure. And we are gonna take a hard look at that as well. But to be fair, it was built over a long period of time and it is a huge competitive advantage. Are there markets or countries or product lines that are unprofitable and don't have a path to profitability? Yeah, likely so, but that's gonna be small cuts around the corners, not necessarily the way to win. And so we have to do all those things. They're all equally important. But that's what I mean by solving the underutilization problem. Hopefully that gives you some clarity, Larry. It does. Thank you.

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

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

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

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

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

Great. And if I could follow up as well, just some of the comments you talked about just around supporting product launches. Can you speak to what in one queue was reflected around Novo3, how you're thinking about that through the balance of the year in terms of the investment side, and then really how we should think about launch cadence, whether it's reimbursement, getting on formularies, assuming a positive decision in June. Thank you for taking the question.

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

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

Great. Next question, Oprah.

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

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

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

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

Yeah, look, I mean, you know, I can tell you as you guys get reacquainted with me at this business, I'm pretty much a straight shooter about this stuff. Look, I think we have a massive opportunity for out-year margin expansion. That being said, 50 days in, I wanted to make sure we had good guidance for this year, so I'm not sure I'm ready to give you for next year just yet. Give me a little bit more time to get my feet on the ground. That being said, the easiest way to think about it and the way I really look at this is all the massive investment in building out infrastructure has been made, right? We have a presence everywhere. We have a global field force across four different unique businesses. We have relationships around the world with every ECP imaginable, right? So the significant investments were made. The question is, how do you put more through this channel, right, that we call Bausch & Lomb, to get expansion, right? And so... That's the key. We've got to get more product flow through this. And if you do that, margin should expand very quickly and very naturally. And so to me, that's the massive opportunity. And frankly, I guess it's our last question, so it's a good point to end on. That's what makes me so excited about being here. I see this massive opportunity to grow this business profitably, right, with all the things you want to see. It may take us a year or so, maybe longer. I can't, you know, 50 days in, I can't put an exact date on it. But the opportunity is there, and this is such a dynamic industry. We'll have multiple choices on how to seize those opportunities. We just have to do it smartly. Thanks, Jess. Okay. Well, I believe, Operator, that concludes the remarks or the Q&A. I would just add a closing comment of thanking everyone for joining us. I'm super excited to be here. I think, as I just mentioned to Craig, the opportunities are real and exciting. But just give me some time to get my feet on the ground, and we will be hopefully keeping you updated as we go. And I look forward to staying in touch and getting to know those that I haven't interacted with better over time. So thank you again for your time this morning.

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