Q3 2020 Bausch Health Companies Inc Earnings Call
Good morning, and welcome to the Bombshells third quarter 2020 earnings call.
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I would now like to turn the conference over to Art Shannon. Please go ahead.
Thank you Sarah good morning, everyone and welcome to our third quarter 2020 financial results conference call participating on today's call, our chairman and Chief Executive Officer, Mr., Joe Papa and Chief Financial Officer Mr., Paul apparently in addition to this live webcast a copy of today's slide presentation. A replay of this conference call will be available on our website under the Investor Relations.
Section before we begin we'd 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 for more information about these measures. Please refer to slide two 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 is our policy to generally not update guidance until the following quarter and not to update or.
From 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, we want to spend a bulk of today's call focused on the business fundamentals. So I'll start with our current perspective uncovered 19 and briefly cover some of the third quarter highlights before turning the call over to Paul Herendeen, Our CFO to review the financial results in detail and discuss our 2020 Guy.
Well finish with updates and how our businesses are recovering and on the previously announced plans to spin off Bausch and lomb before opening the line for questions.
Beginning with slide five the cobot has impacted the market over the past every month, we have been able to adapt to the challenges of the current market conditions by following the strategy, we outlined on our last call my specifically focusing on our key promoted brands managing our operational expenses and and that's.
I think in innovation and new growth technologies like E. Commerce. For example, we are continuing to innovate the watch infuse our side high daily life in the USA. We are conducting clinical trials on our November three product for dry eye disease.
Indra Faxon and received FDA orphan designation for sickle cell disease, a very exciting development.
And we're also conducting cobot focused research that may help advance science.
Right. The Darrin, it's being studied as a possible cobot related therapeutic in Italy in Canada, and our Ivor Mexican product is being studied as a covert therapeutics in Latin America.
Our global sold the business is well positioned to capitalize on emerging trends such as the news do culture, which we believe is driving the demand for our static which is a key driver for salt is outstanding third quarter revenue growth compared to the third quarter 2019, finally, our efforts to accelerate and strengthen our E commerce capabilities result.
More than a 100% increase in ecommerce sales of our U.S. cuts your fitness products year to date compared to the same period in the prior year moving to slide six the impact of the global pandemic is still profit, but our third quarter results demonstrated that's about health care operation recovery.
He is in progress our team worked hard revenue third quarter to make sure we had ample supply of our products for patients and customers and to manage our operating expenses. Our total company organic you reported revenue declined by 3% compared to the third quarter of 2019, Bausch and Lomb had an outstanding quarter relative to the second quarter of 2000.
20, and our therapeutic businesses failing dermatology international in neurology, all demonstrated 20% to 30% sequential growth relative to the second quarter of 2020, thanks to a great team effort and the continued engagement of over 21000 employees about health company, we were able to preserve cash.
Well supporting each of our businesses, including investments in R&D to build and advanced our new product pipeline with that I'll turn the call over to Paul cover the financial results in more detail yeah.
Thanks, Joe we had a nice bounce back quarter, it's all because all of our business has recovered to varying degrees from the depths of the cobot impact that we saw in Q2 overall revenue was down 3% organically from Q3 of 2019 and 28% sequentially from the second quarter, considering the many ongoing challenges that's an inquiry.
Turning in an indicator that our businesses are on the road to regaining pre pandemic levels of revenue and profitability. We're very diverse company by types of revenue and by geographic footprint, while our businesses are rebounding. The pace has been more rapidly some more muted for others. The differences are based on the types of revenue for example, surgical valve.
Consumer products and geography with parts of the U.S. BNL business recovering more quickly than those seen businesses outside the U.S.
Adjusted EBITDA was $948 million in the quarter was quite strong and in fact was up 4% on a constant currency basis compared with Q3 of 2019 important safety chip. So the operating margin you see in Q3, that's adjusted EBITDA divided by revenue is not sustainable.
As we continue to recover we will allocate more resources to promotional activities to drive the return to sustainable revenue and profit growth above pre cobot levels for the boys sit down we expected our fourth quarter operating expenses will be considerably higher than what you see on the board in Q3 were.
We're very proud of how quickly we're able to reduce operating expenses to preserve cash and to protect as best we could near term profits with recovery from covert underway, it's time for us to ratchet up our promotional support for our many growth opportunities. If we knew our investments in R&D well, obviously have to monitor this given the dynamic situation.
But that's how we see things today, Okay. Let's talk about Q3 of course COVID-19 was a story driving reduced revenues. If you turn to slide eight this shows revenue by segment and business unit compared with Q3 of 2019 reminder, when we talk about organic growth, we need on a constant currency basis and adjusted for the impact of acquired.
Divested assets total.
Total company revenue was down 3% organically with BNL International flat sales down, 10%, what theyre doing down 3% a diversified down to.
There are some bright spots and I want to highlight and some areas where our recovery from coal which is in process, it's coming at a slower pace.
Within BNL International the start of the quarter was our international pharma business up 9% organically from Q3 of 2019 on very strong performance in our lap Ham and eastern European regions in Mexico, We saw a surge in demand for a product called fiber Mexican a broad spectrum in a parasitic is being used for the treatment of Cove. It.
Next up with global consumer plus 2% organically with the U.S., leading the way it was up 11% and that was on Scranton preservation up 17% Biotrue multipurpose solution up 9% and a large one time purchase as we collaborated with one of our key accounts to include our suit dry eye product in an exclusive.
One time offer to their customers.
Consumer revenues outside the U.S. were down 5% organically as various regions recover at different rates for example, consumer revenues and lab Cam Eastern Europe, and Canada. All grew organically versus Q3 of 2019, while China was flat in Russia, and France saw meaningful declines versus the prior year quarter to be clear glow.
Well consumer like all our businesses showed major improvement in Q3 versus Q2, but the degree of recovery is very different depending on the region.
Global vision care was down 2% organically, but was up 20% in the U.S. and that was on strong sales of our ultra family of monthly silicone hydrogel lenses.
USBC get benefited from the rebalancing of channel inventories in the quarter as demand picked up so bear that in mind as well.
In the quarter, we sold less than $2 million of infuse lenses, but we're very excited about the long term prospects for infuse.
As we developed infuse our goal was designed to design lenses with real points of difference relative to competing lenses. We succeeded and now entered the fastest growing segment of the U.S. and international vision care markets, we'd lenses made using next generation materials to deliver exceptional performance.
Sold in the U.S. under the infused brand name and outside the U.S. as Ultra one day. These lenses are expected to be a growth driver for us for years to come of course, they were talented people behind this important project, including Jim Debello, Joe off feel right now and Vicki Barry Akamai allows us driven by our people BNL vision care, it's coming.
On strong.
International Vision care was down 13% organically driven by the Asia Pac region, where contact lenses are sold mostly in retail settings.
Even though social restrictions were eased consumers remain cautious due to concerns over collected in the states of their economies and that resulted in restrained spending in generally less lens utilization.
Global surgical declined 7% organically with the U.S. surgical business down 3% international surgical down nine.
The U.S. is recovering more quickly the U.S. surgical markets, while some markets in Western Europe were flat to slightly positive to Q3 of 2019, the Asia Pac region in the UK were not yet back to pre cobot levels.
To wrap up the BNS International segment Global Opto, Iraq was down 9% organically down 9% in the U.S. and down 10% outside U.S.
The continued erosion in the low to Max franchise in the U.S. do the yellow we was the biggest factor in the decline.
In the U.S. versus Q3 of 2019 buys auto was up 32% relenza up 35% and low to match that Sam up 37%.
The U.S. awful Rx business also benefited from a rebalancing of channel inventories outside the U.S. the decline versus Q3 of 2019 mirrored the decline in surgical revenues as many of our opto Rx products are used pre and post surgery.
On the sales Salix revenue was down 10% organically yellow, we have a pre though and the expected decline of Glumetza together accounted for about 8.5% of that 10% decline.
Backfill was down 3% from Q3 of 2019 down 4% in volume and up 1% in net price to 4% volume decline is consistent with the year over year decline inside Babson extended unit Trx is.
On the plus side, despite the environment truly its limit 57% growth versus Q3 2019.
Sales also benefited from the rebalancing of channel inventories as demand picked up in Q3.
Sequentially Salix revenue was up 23% versus Q2 in fact facts and revenue was up 21%.
You also during the second was down 3% organically versus Q3 of 2019. The beat goes on Solta up 53% organically on very strong revenue out of the Asia Pac region and that was led by China.
Although statics business, especially the Thermonics platform has been remarkably resilient in the face of cobot.
Our thesis is that consumers have higher socioeconomic standing saw they travel options limited intros to invest in their appearance, particularly how they appear on HD video.
So it does lead to calm Hart has done a marvelous job of setting sold on a path that even coal, but could not to rail I want to give a tip of the hat to our BNL colleague cave.
We play a team sport here in cave reached across reporting lines and pitched in to help drive sold this impressive performance, especially in China.
From our sales were up 70% and from our steps were up 79% compared with the year ago quarter. All I can say is wow.
Medical Derm was down 29% versus the Q3, 2019, elouise and royalty revenues accounted for roughly 20% of that 29% decline.
The League re Holly do overnight and I will treat all grew versus Q3 of 2019, but could not overcome the declines across the balance of the portfolio.
With so many of our med derm products reliant upon the flow of new patients in the Dermatologists office offices. This business has been and continues to be more impacted by colder than other of our businesses.
Diversified was down 2% organically from Q3 of 2090 neuro was up 8% on trends well putrid aplenty advent and perhaps it in.
In the quarter neural saw an improvement in realized net selling prices while future. This was driven by aggressive management of managed care contracts for wellbutrin that has resulted in strong realized net selling prices throughout 2020, but especially in Q3.
A quick forward look managing rebate for a product like well be if there is a dynamic situation. We are enjoying a good year in 2020, but expect that well be front in 2021 will revert to levels more consistent with what you saw in 2019.
Right out of the end in 2019 and into early 2020, we had some supply challenges will add it back.
As we reestablished supply we fill the channel inventory and are now able to meet demand and that was a helper in Q3 pets.
Yes. It is an interesting one as printed a dean was pulled from the market demand for perhaps it into networks of Pepcid surged. The generic companies were not able to ramp up supply as quickly as BDC. So our brand Pepcid has enjoyed a nice run year to date in 2020, and especially in Q3.
Supplies of generic increase our sales revert to lower levels, great work by our commercial and manufacturing colleagues and that allowed us to capitalize on this fumigations opportunity in 2020, the 12% decline in generics revenue was mainly due to comparisons with a very strong Q3, a year ago dentistry was down 21% versus Q.
We have 19 dentistry is recovering at a consistent pace is up from $8 million of revenue in Q2 to $19 million. This quarter, let's turn to slide nine the quarterly PNM I've covered the revenue start with gross profit our gross profit margin decreased 120 basis points from Q3 of 2019. This is impart due to mix.
But it's also reflective of Colby driving negative manufacturing variances and other hits the cost of goods sold mix in these manufacturing variances will be a headwind for gross profit margin as we move ahead into Q4 and into 2021.
Operating expenses here you can see the results of our efforts to conserve cash and soften the earnings flow as we work our way through code.
Selling advertising and promotion costs were down $54 million on a reported basis compared with Q3 of 19 DNA expenses were down $28 million in R&D was down 20 million as the third quarter progressed, we being excuse me began the process of ramping up activities that will help us return our revenues to pre corporate levels and then we will.
Grow from there.
The level of expense management during Q3 was necessary, but we think it would be unhealthy for us to continue to constrain commercial functional support and R&D spending at these levels. The short term benefit as a constrained spending a list that we put a very strong adjusted EBITDA number on the board 948 million.
Flipping to slide 10 cash flow summary on a GAAP basis, we generated 256 million of cash from operating activities that upwards reduced by $48 million due to the settlement, meaning the actual cash payment a legacy legal settlements in the quarter, that's mainly the FCC matter I bring this up because sitting in our $1.98 billion of cash.
Cash is $1.21 billion of cash to settle the USA truck drop case when those funds are paid it will reduce our GAAP cash generated from UBS. So bear that in mind, we remain on track to deliver in roughly $1 billion of cash from operations in 2020 adjusted for the payment of legacy legal liabilities and in the future separation.
And related payments.
On to slide 11, the balance sheet summary, one call out here during the quarter, we used 100 million of cash generated from ops to reduce debt year to date to today, we repaid $420 million of debt and we recently announced that on November Thirtyth, we will repay another $150 million of notes from a liquidity standpoint remain a solid cash gena.
Later, even in a covered world and at September Thirtyth, We had no borrowings outstanding under our revolving credit facility and the ability to draw 1.1 billion if needed.
On to slide 12, we have no debt maturities are mandatory amortization of term loans until 2023, a lot from a liabilities management standpoint, we're in very good shape onto slide 14, we're keeping our revenue and adjusted EBITDA guidance range is unchanged from our last update in August note that these ranges are broader than we would normally have with only two months from now.
In the year that said these are not normal times, even as we prepared for this call various geographies returned to lock down or locked down light stated.
Parts of Europe, including Germany, France, Ireland, and England have announced lockdowns of various lenses the restrictions this.
A very fluid situation were monitoring it closely.
One item to call out as the expected increase in continued consideration milestones and licensing agreements going from roughly 80 million to 100 million. The increase is mainly due to the allegro and I know vs transactions.
As you see on slide 15, better expected performance across our businesses are expected to offset the impact of unfavorable FX and more rapid than expected erosion of the yellow we assets.
Last thing for me if you take the Midpoints of our guidance for the full year less the year to date results Youd expect our Q4 revenue to be just south of $2.1 billion in our Q4 adjusted EBITDA to be just less than 850 million.
Here are a few things to consider as you look at the Q3 to Q4 progression suggested by our current guidance first revenue in Q3, there were a number of favorable items that won't persist into Q4, including one rebalancing of channel inventories in many of our businesses as demand picked up from the Q2 cobot floor note that this has.
Not pipeline expansion, it's the natural increase in the dollar value of channel inventories that you see when sales grow as they did from Q2 to Q3 two in the BNL segment, we had a onetime.
Q3 order in us consumer three in Vienna, we had the Colby driven but perhaps less durable increases in sales of ivermectin and better yet in our international pharma business for in diversified we have the nondurable portion of the improved net pricing for while Buker and finally number five also in diversified.
We have the bump in revenue from the reestablished supply of advent and the lift from that.
While we expect that all our businesses will continue their recoveries the items I, just highlighted and others will dampen the progression of revenue from Q3 into Q4.
At gross margin I highlighted that mix and unfavorable impacts of up to cost of goods sold due to coal that will carry forward into Q4 and even into 2021.
We're guiding to a full year margin of roughly 72% with year to date margin at 72.4% that implies a gross margin of a little less than 71% in Q4. Finally, I mentioned that we are resuming more typical spending in SGN a in R&D and our guidance suggests that we will substantially increase spending in Q4 with SGN eight.
Forecast to be up some 60 million from Q3 and R&D to be up some $24 million put all these things together and adjusted EBITDA from Q3 to Q4 based on the midpoint of our guidance is expected to be just south of $850 million. That's it for me back you Joe.
Thank you Paul I will now give an update on the Bausch health recovery in progress on slide number 17. The highlight here is US vision gear reported revenue grew by 20% compared to third quarter of 2019, driven by the Bausch and Lomb Ultra lenses.
Chart in the top right shows the change in fuel consumption in the U.S. year over year, which started to recover in June after significant declines in April and May while the recovery in Europe and Asia is proceeding more slowly international vision care is also returning to pre cobot Nike level I want to spend a minute on infuse our site Hi daily land.
Which launched in the US in August once you get product during a pin debit card innovative thinking and the ability to adapt Joe Gordon is teams their credit for a great launch at a challenging time, the infuse Len is doing exceptionally well patients who experienced contact Glenn dryness, approximately 77% of new fit are from existing lens wearer.
And who are switching from another led and roughly 23% are from new contact lens, where are the patients with contact lens dryness, 73% agree. Thank.
Infuse helped minimize the symptom of contact lens dryness, we plan to launch daily Sightlines in Australia, Hong Kong and Canada in the fourth quarter, turning now to global consumer on Slide 18. The chart in the left shows the percent change in us Bausch and lomb consumption year to date on a year over year basis before covered during this.
Stay at home orders and now we see a recovery in progress turning to limit by on the other side of the page. We also see a recovery in progress. We also received FDA approval for Alway preservative free and I have to me I drop at the end of September the first and only LTC preservative free formulation eyedrop of it Scott.
Moving now to global surgical on slide 19.
Although the recovery in the surgical business has been somewhat slower both cataract in retinal procedures grew versus the third quarter of 2019, we show newest data largely lead procedures, both retinal and cataract and the chart on the left international surgical revenue is also seeing a recovery in progress.
On slide 20, global Opto prescription business code had limited negative impact on Vice also even during the period of February through July as you can see from the Trx trend on the chart on the top right inside sales Ulta is now approved in seven countries and we are excited about its future prospects.
We also completed several business development deals that will help build out our eye health portfolio in the areas of macular degeneration and myopia ill highlight two now.
First we acquired an option to purchase all of the ophthalmology assets of Allegro, including the global rights for eliminate which is an investigational treatment expected to help reverse vision loss due to dry macular degeneration, an area of significant unmet medical need the phase two top line data show a promising improve.
In visual acuity with 48% of patients gaining more than eight letters at week.
28.
We also acquired an exclusive license USA and Canada for my Novia for the development and commercialization of an investigational micro dose device of atrophy ophthalmic solution, which is being investigated for the reduction of near site Mis and children ages three to 12 Theres clinical evidence for the use of low dose atrophy as a way to.
You bet Progressive myopia in children, we believe I know he is delivery technology is particularly well suited for this application.
As slide 21, we have master mapped out our systemic approach to rebuild our BNL product development portfolio in areas of unmet medical need based abashed analog integrated health platform. We can develop solutions for areas of unmet medical need more efficiently than many of our other health care company.
We are focusing on three primary areas myopia, dry and macular degeneration and working to build a comprehensive package of new treatment options for each disease.
First let me talk about myopia, which is a global megatrends driving demand for eye Health solutions studies have predicted that 50%, 50% for the world's population EUR 5 billion people will have myopia by 2050.
In addition to the exclusive license from my Novia I mentioned earlier, we recently acquired an exclusive license for myopia controlled content lenses designed by BHP My.
Myopia is a leading cause of visual impairment and children and we plan to appear this novel contact lens design with our contact lens technology to develop potential treatments to slow the progression of myopia in children.
We are also pursuing their rights ortho care technology system, which is a cloud based lens fitting software that enables eye care professionals to produce highly customized lenses to treat myopia.
Dry eye is another therapeutic area with the huge unmet need more than 16 million page views are diagnosed with dry eye disease and contact lens dryness experienced by about half of the $45 million lens wearers in the United States comp.
Combat this problem, we licensed noble leak investigational treatment for dry eye disease associated with my Bovie gland dysfunction as.
As a unique mechanism of action that differentiates it from other agents for dry eye disease, and as I mentioned earlier, we're expanding the launch of the infuse daily side lenses, which may help reduce the symptoms of contract blends dryness.
Repeat my comments on age related macular degeneration generation, but as you can see we're strengthening our being now product portfolio.
Turning now to slide 22 for an update on sales, let's start with our largest product set back then which has been slower to recover from the impact of covered Nike declines have primarily been driven by the IBSD indication, which is more episodic and more reliant on new patient than the 80 indication Gastroenterologist had.
Been prioritizing the backlog of calling out Kobi and endoscopy over regular office visits or new IBSD patients would be diagnosed in primary care patient priority is changed and it cobot, Nike and environment with less urgent visits being delayed or deferred until conditions normalize that said, we are seeing signs and Rick.
Covered with but Saxon 5% trx growth from the second quarter to the third quarter of 2020.
I also want to highlight that reflects been recently received FDA orphan designation for the treatment of sickle cell disease early data demonstrated that rifaximin may be beneficial and reducing the debilitating pain from basal occlusive crisis that sickle cell patients often experience.
We expect to start a phase two trial in the first half of 2021 with a novel and let me repeat that word novel reflects men formulation for sickle cell patients. Finally, we were able to resolve the side effects and IP litigation with Sun Pharmaceuticals. In addition to our prior prior resolutions with Teva and Sandoz.
Turning now to slide 23 for updates on Trulia and Relistor.
We've plotted truly us weekly trx trend on the left compared to the same period in 2019 compared to third quarter Nike Trulia prescriptions grew by 46% in the third quarter versus last year, while the market grew only 4% to list also grew sales sequentially.
By 7%.
Finally on the right we show the data for Relistor, which also gained market share and outpaced the market year over year Trx volume was up 9% versus last year compared to the overall market, which was down 5% importantly, trx growth for oral relistor was up approximately 14% compared to the prior year quarter.
Summarize, we're seeing signs that business recovery is in progress.
Turning to orphan dermatological on slide 24, starting with Thermonics on the top right of the slide with sequential reported revenue growth of 68%. We are seeing solta recover faster than we expected largely due to pent up demand for extended procedures, especially in our Asian business.
The customer base for cosmetic procedures to expanding and we believe the increased demand may be partly due to the fact that portion of the population is diverting travel spend to self care measures. Jublia is another example of a product that gain market share during the pandemic on the bottom left usually third quarter trx market share.
It's up 130 basis points compared to last year finally.
Finally, do ovary for psoriasis in the bottom right chart, you see the Orange light got off to a great start in 2000 Tony.
But because he will bring his predominantly for new patients new patient starts were impacted significantly when koby 19 hit.
But compared to non biological products like and start I know Tesla do over is battling its way back and we're not picking up roughly one third of those new patient starts we are making progress, but it is still going slower than we would like.
Moving now to slide 25, well covert has impacted our business. We have a plan to first focus on positioning our business for growth in 2021 beyond driven by Mega trends and demand for our new product second we are investing in key promoted brands, where we have demonstrated that we can gain market share third.
We are improving our overall operational efficiency and what weve referred to internally as project core to optimize our cost structure and enable us to generate strong cash flows finally.
Supporting each of our businesses with investment in future growth drivers, including R&D innovation and growth technologies like E. Commerce. These actions are all designed to position our businesses for the future as we continue our preparations to create two separate well capitalized businesses with attractive growth opportunities.
Before I wrap up I want to give you a quick update on the planned spinoff about and I'm on page 27.
Since announcing our intention to separate bausch and lomb into an independent company. Our goal has been to unlock value across our Q attractive businesses as soon as possible. Our team has been working diligently with all the necessary actions, which include the items listed on the right of Slide 27, we are making great progress and expect internal organ.
Innovation designed to be completed by the end of the third quarter of 2021.
Finalizing the capitalization structure is more complicated and we are actively pursuing all available options to expedite leverage improvement. Our focus is our position is too strong, but dissimilar businesses. So that the financial markets see attractive growth opportunity for both entities with that operator, let's open up the line for questions.
Thank you we will now begin the question and answer session to.
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Our first question comes from Chris Schott with JP Morgan. Please go ahead.
Great. Thanks, so much further questions just a couple on eye care and a quick one on the separation on eye care one of your competitors talked about some of their third quarter lends recovery driven by an inventory rebuild did you see anything like that in your results or is this more just like a true organic kind of recovery in the business.
And second can you talk about the dynamics in the eye care business as we look out to Fourq and beyond I guess should we expect a continued recovery in for Q1, because some of that take a pause with the second wave of Copel. We're seeing currently and just my quick one on the separation I think you mentioned the internal organizational processes completed by Threeq of 21.
The company conceptually separate out BNL at that point, assuming your capital structure needs were addressed or is there a gap we should think about between when those internal processes are completed and when you could actually separate the business due to actually see requirements or other report reporting requirements et cetera. Thanks, so much.
Thanks, Chris for the question first on the Eyeq here question on inventory rebuild I think as Paul stated I think what happens with any business as you showed growth.
Customer orders that product for for a patient.
They are going to spend that but that as their revenue goes up they are going to naturally need to buy more inventory. So while the overall inventory position has not increased it's just natural as the volume goes up to expect to see more demand.
More demand goes up you're going to see more purchases. So we don't feel that there was any overall build inventory during the quarter in terms of obviously they had to order not only for dispensing, but obviously to replace those items.
Dispense more.
And the second question that dynamic if I hear businesses in the in the fourth quarter and beyond I don't think we're going to give any specific comments right now other than to say, we see a recovery in progress. We're excited about what that means for the continued.
Growth of the BNS business, we we are seeing a very strong recovery and progress in total and I think the way I would phrase it across all of our businesses is that we're going to be continue.
We continue to monitor the COVID-19 to be clear, but we are seeing that recovery and progress across all of our business.
Maybe I think the final question.
Whether or not we are ready to to split the company out in terms of spending out in the third quarter third.
Third quarter 2021, we will be ready to say so safe to say if our capital structure is in place, but again 21, we can it can be feasible, but.
We'd have to make sure we worked through all the major questions out there as we've said publicly the best way for us to.
Reduce the overall leverage is what we're focused on is continuing to grow our EBITDA grow our business and as we do that as.
As well as actively pursuing all available options to improve our leverage we're going to try to do this as expeditiously as possible, while you probably want to add something as well.
I actually wanted to add some Don the eye care piece, because I think Chris. The your question was was was to pull was inventory build but but also we'll pull through important it was both as Joe articulated it's the rebalancing of channel inventories as dumb as demand picks up but importantly.
Demand in the West was up.
In a strong way.
And outside the U.S. it was up at a more modest way. So we saw great improvement from Q2 to Q3 in the global vision care business at different different paces, I, specifically called out the inventory with respect to the west part part of the business because I think a lot of folks.
Look and said she is this is going to be something that's going to come back to us and say well by and large.
Most of our channel inventories have rebalanced to reflect the increased demand from Q2 to Q3. Thanks.
Thanks.
Operator next question please.
Our next question comes from Terence Flynn with Goldman Sachs. Please go ahead.
Hi, Thanks for taking the questions.
I was just wondering you obviously talked a lot about the puts and takes going into fourth quarter. Just as we look into 2021 can you maybe expand on those as we think about that particularly on the Opex side is any of the potential savings likely to be more more permanent and then just had one quick one on the side high launch there in terms of.
The the share capture is that mainly coming from competitors or is any of that people switching from from any of the BNL brands. Thank you.
Well, let me take the first one on the 2021 puts and takes in Opex that you've made some comments on that but and then I'll take the high daily worth of share coming from sure. Yes. Thanks for the question Terence It's a great question I'd say that yes.
Through the cobot experiences to kind of be forced to experiment on many companies about how effective.
Dollars, if you deploy the various activities.
Can be and if you see what you see what it what occurs when you when you take them away.
We would think that our opex intensity going forward ought to be something more akin to what you saw in 2019.
Versus what you are seeing certainly in Q3 I had made it made it a point to say the level of Opex spending in Q3 produced a nice a nice EBITDA number.
But not one that would be sustainable over the long term. If you wanted to grow at the top line and wants to grow profitability over an extended period extend.
Extended period of time, so I would think that as we look ahead to 2021 years.
Going to see Opex intensity or similar to 2019, then what it will end up being.
Our year to date 2020, or your estimate of what you expect it to be 2020, we have the rationale for that by the way is driven in large part.
By the large number of products that we have.
In launch Phase you asked a question about infuse I mentioned it in my remarks, it's you infuse is really exciting for us.
It takes promotional resources and dollars.
[music] established franchises into driver over a long period of time, it's not just confused it's ultra one day outside the United States, where we're launching currently in a couple of other markets like Canada, Australia, and we are more markets to calm within few so that's one example, but we have a large number of products that require.
Greater level of promotional support that you certainly than what you saw in Q3 would be more consistent with what you saw perhaps in 2019.
And then the second part of that question.
Use where the share coming from the.
The EU as data in front of me first and foremost is coming from an expansion of the overall market for.
And what's happening there the high market is the fastest growing part of the market.
In terms of what's happening with that product nine states and around the world for that matter number two of the actual percentages as I mentioned, 75% of them are from patient switches, 25% from approximately new new.
Patient starts so thats the first place to start of the switches.
We're getting about 20% of its coming from our own.
Biotrue, one day, but the remaining part of it the 40 plus percent that's coming from competitor lenses. Some of the best in class lenses of like an Oasis our daily total. So we're very pleased with what we're seeing so far I will also comment that we're also seeing very strong support for this product.
Japan, we're having continuous record sales months in Japan.
So thats also moving forward with it so we do feel we've got a great product and it's really helping patients as I mentioned on the call that 73% of the patients who use infuse believe it's helping minimizes symptoms of contact lens eye dryness, which is obviously an issue and we're pleased to see this kind of results.
It's very early but very pleased with what we think the opportunity is for the future in order to continue to build what we hope will be a best in class products for the contact lens wearer through the site high daily.
Operator next question please.
Our next question comes from Arafat with Evercore. Please go ahead.
Hi, Thanks, so much for taking my questions I.
I think perhaps the first one is.
The obvious one from the print which is the.
The numbers look really good but the cash flows are really weak.
Perhaps even when adjusting them for the onetime FCC provision so any color on that beyond any color on that beyond and then secondly also.
Paul when I run the math on.
Your leverage ratios by the time of the spin and you guys were mentioning four times for the Bausch and five and a half on the Remainco by my math.
You'd have to generate perhaps $2 billion plus via equity issuance by the time of spin is that consistent with the way you're thinking about it and your expectations.
Thank you so much.
So why don't you take both parts of the question the cash flow question in the.
Being no leverage sharp I'll now, let's start with the cash flow because it's a great question and I'd say that if you look back to the actual results in 2019, we converted.
About 42%.
Of our net revenues I'm sorry.
Of our adjusted EBITDA.
Two cash my Im looking at my numbers here. It was a little over one point just over 1.5 billion of cash from ops and three spot 0.5. Several one we adjusted EBITDA 40 to any any normal non air quotes non noncovered world that's pretty good.
Yes, meaning normalized meaning circa 3.5, B plus all the other adjusted of adjusted EBITDA now this year I think once koby to hit and we provided the guidance we expected adjusted excuse me cash from ops again adjusted for those for that for the settlement of legacy items to be circa billion Bucks.
Yeah.
That implies like a 32% ish.
32% of adjusted EBITDA conversion and.
Is that it's obviously not as good as 42, but it's still it's still not bad point out that as adjusted EBITDA drops you got interest, which does not drop in proportion to adjusted EBITDA Alex.
Actually it's been made me productive for me go through the math, how you get to the circa billion box or you can see the pieces and then Pete will highlight why it's got to be in the low thirtys. This year versus what had been so low fortys of conversion last year, yes.
Take the midpoint of our adjusted EBITDA guidance range 3.225.
Interest is 1.53 per our guidance slide restructuring is 75 million per our guidance slide milestones 100 million per our guidance slide taxes, using the 8% is about 100, and so 15 or $16 million.
And then the piece that you can't see yet and we'll see we'll see is working capital. This year. So far is a use it's a pretty subset substantial use.
Year to date, it's circa $385 billion.
And that gets you to the billion 18 or something like that one bill just to just above $1 billion or to be that 32%.
Inversion.
To cash so working capital is a challenge like if you are looking at this quarter. One of the biggest uses of working capital in this quarter is the increase in receivables from Q2 to Q3. If you are looking at the quarter in isolation. So that's a big number when you're when your revenue goes up sequentially help me I.
Who's crack a focus at 28% sequentially yes.
Going to see a big use in receivables and as you'll see later when you see our full balance sheet that working capital is a big deal here, if you're looking at the quarter in isolation and why is it not a stronger cash flow quarter. Its accounts receivable. If you look at it relative to last year sales inventory is the big.
Item, but it but again I think the important points are as we work our way through out throughout out through this kobe situation.
We do convert an awful lot of our earnings to cash how we continue to reduce debt and as we continue to reduce debt that conversion rate great well ratio will go up or percentage will go up because it will reduce our cash interest interest cost as well so.
Thanks.
Our in the quarter it kind of was what it was all we are on track to deliver 1 billion EUR 1 billion thereabouts from op Bops over the course of the year and as we continue to improve and dig ourselves out of the cobot Paul.
Yes, we will get back to generating even more cash which is obviously critically important to us continue to reduce our debt, yes, I think on the on last.
Yes, segway into your other question regarding capitalization structure is EMEA importantly, you you.
You get to choose if you're spending out BNL what the leverage is is of the entity that you spent so we suggested short before.
And with respect to remain coal that is a function of where you store at the time of the spin and of course, the things that we need to do between here and there are as Joe said, we need to grow our operating earnings at a rapid rate and we need to prioritize the use of our cash.
In order to in order to be able to reduce our debt to get to our leverage ratio that would enable us to effect, yes, yes, yes actually.
I'm pleased that this this spin up the other thing that we can do of course is say, except that we have the option to accelerate that process by.
By selling a fable a high multiple assets that can act certainly accelerate the process I think what I articulated last quarter was if we went ahead with something or perhaps it might have been on the Morgan Stanley Conference was that if we went forward or something like what I'll call. The plain vanilla spin where we were.
Get paid the company up Levered up circa four times pay a dividend back to us.
Back to Ramco.
And then completed 20% IPO at that point in time, and now raise that money. They said thats the plain vanilla and that is something that could be accomplished by somewhere towards the latter part of 2022.
But yes, it involves raising equity.
At some point in that example, raising equity in the spawn entity I'll stop there.
Thank you operator next question please.
Our next question comes from Rick well costs to Ari with Wolfe Research. Please go ahead.
Thanks, a lot.
Just.
Could you break it down kind.
Kind of clearly what was the contribution on for revenues from inventory stocking it looks like you're on euro at Opto all were sequentially up.
So how did that affect Rev. And then can you walk through how the inventory effect negatively contributed towards cash flow from operations and I think just.
Going forward.
You're going to have a billion dollars in cash flow from operations. This year debt pay down looks like 500 and $600 million as we think about 2021 and beyond as your businesses rebound what is the steady true free cash flow run rate for Bausch, where do you think debt paydown will kind of.
Average out to organically do you think it's going to be more in the $1.5 billion range or is this more kind of chronically up a $1 billion range. Thank you.
Hi, guys. This is Paul I'm going to take the first one contribution on inventory stocked in any all in kind of.
How did that affect revenue revenue in the quarter, how does it how does it affect as well.
Well.
Talking about inventory stocking in the channel and again this is not expansion to pipeline inventories. This.
This is the amount of inventory that our channel partners hold in order to be able to provide a high service rate to their customers, meaning some calls up they want product thats.
They have they are able to deliver some.
100% of the time or 98% at 98% of the time so in order to do that as late as demand rises they continue to expand their inventory to provide that service level, but it generally is the same number of months or weeks on hand.
That they have and so trying to quantify what was that impact in the quarter. It was certainly in Q3. It was certainly a tailwind in the quarter broadly equal to what the headwind was to us in Q2, when people stop buying inventory as the.
Man fell.
It's not an item I, Paul I would say Oh, it's easily quantifiable fight by business and it's this number.
It's just the natural ebb and flow of channel inventories with with a change.
Yes.
The change in demand there.
Good question I believe was how does the inventory affect cash flow from operation I think we again, we're not talking about here channel inventory I think you're talking about our level of the inventories we've had our challenges as with the with managing our inventories this year 2020 and.
Can you think about where we were entering 2020. We were we were in great shape and we were we had a great fourth quarter, we had a great start to the year, we had a manufacturing plant that was geared up to meet what we expect it to be as strong demand year across all of our businesses and saw that fall apart.
In a February March March timeframe, where it we have lots of inventory on hand, more inventory than we need so as that inventory balance is high that is a use of cash waiting.
Waiting its cash waiting to be liquidated buying guides by conversion from inventory into an accounts receivable and ultimately to cash.
Yes, but it's it's been a challenge for us in 2020, and it will be a challenge for us.
Until now.
Demand for each one of our businesses returns to a more normalized normalized level.
I think the third part of the question was 2021 and beyond kind of what sorry, good cash flow runway over.
Were asked a question earlier.
About thinking about the projected cash from ops. This year and I think I went through a pretty I think thats a decent way to think about it is we were clicking along it in 2019 and 2019 it was 42% conversion of adjusted EBITDA.
Well, assuming a level of profitability L 3.5, D plus it's a pretty darn good measure of what you would expect our cash from generation from ops to be remember, though that as we go forward and we continue to reduce debt you have the opportunity for that.
42% to improve based on the continued reduction of our of our cash interest costs I think in our in the slide deck is up and I don't have the slide number right in front of me, but in the back you can see what our cash interest cost was our year to date in 2020 versus 2019 in it.
It's a nice improvement year over year as we continue to prioritize use of our cash.
And the reduction of debt so.
One thing that our company is yes, we are many things one thing that we are we are a strong cash generator I think we've proven that especially during an unprecedented.
No headwind from a global pandemic that we can continue to generate in this from.
Difficult year circa 1 billion box.
From operation, So I hope that answers items like will have the opportunity to speak later, if that didnt cover it.
The only thing I'd exercising positive.
But the only thing I'd add to cash is that on page 36 of our presentation in the appendix. You'll also see those months on hand data and you can see months on hand versus a year ago, just due to year over year.
Both our GI business, our derm business are down opto and and they're up slightly but for the most part there is really no material change there all at about one month, approximately so just to be clear on that inventory quick.
Operator, let's take our next question please.
Our next question comes from David Risinger with Morgan Stanley. Please go ahead.
Yes. Thanks.
And thanks for all the sales.
So.
I have.
Two questions first with respect to business divestiture priorities not only the two.
Frame for us what.
What some businesses might be that you would consider divesting just so we have a little bit better sense for how you how you would envision potentially the structures of each of the two new companies and then second with respect to separating the Companys Paula.
You could.
Comment on the stand up costs to achieve the separation the magnitude and how youll be reflecting those and.
In the financials, thanks very much.
Sure on the first question part of the question David on the business development priorities I think I'm going to have to stay stand with what we said previously.
We will do is we will look to.
Divest assets and we have a history of looking at this from the point of view of the last four years since.
Since going I have joined the company, we divested approximately $3.8 billion of proceeds that we received.
For asset divestitures, we received approximately I think it was about 11 times EBITDA multiple for those assets that we divested over over those first four years a majority of the coming early in our time here. So we're going to look at some assets and if there are appropriate.
Activities out there, where we think we can get a fair price for those assets that will help us to move this along we're going to as I said in the call actively pursue all options to.
Enhanced or de lever. This company so that we can get to the unlocking of the value of the BNL and we'll do it as quickly as we can as evidenced by the previous question that we said, yes, technically we could be ready as early as.
One year from.
Third quarter 2020, so about one third quarter 2021, we could be ready, but obviously you've got to deal with the question of the leverage and we'll deal with that as.
As expeditiously as possible by pursuing all available options out there obviously, the first one being just growing our EBITDA ourselves in and that would obviously help the delevering significantly.
Significantly there are some additional things we'll look at from a working capital point of view to help also address the the ability to generate cash Paul on the question of the separation and the stand up costs that we've identified the dis synergies already but you want to take that call.
Yes, but this reflects the Israeli duplicative costs and the cost of actually completing the separation I think thats getting at David and our intention is that we would we would add those back in arriving at adjusted EBITDA and we would guide to those numbers include it in the in the line that in the debt.
You see in the back under the restructuring and other is that's where it would appear I can tell you that our year to date unexpected yeah for for 2020, it's minimal it's it's not a lot not a lot of money yet but.
And in the future as it becomes important we will call it out for you.
Operator, we have time, probably for one last question. Please.
Our next question will come from Greg Gilbert with Trust Securities. Please go ahead.
Thanks. Good morning, Thanks for forget me in there first for for Paul curious on your comments on your willingness to issue equity comments, you've made in the past or your open mindedness lets say can you confirm that that open mindedness relates to the separation timing as opposed to material.
Early sooner than that.
And then secondly.
Question about salt.
How does that business fit into your long term vision of the company. It's been a great story for some time, but I'm not sure. It moves the needle enough to matter a whole lot in the Grand scheme of the company unless it helps other products or businesses. So can you speak to that as a possible.
Sort of gem of a business that could either attract additional investment.
To build out that franchise or or possibly the opposite thank you.
Thank you Greg.
Take the equity I don't think so.
Yes. Good question Greg. Thanks, Thanks for the question I mean, they think yes, I've been focused on the equity raise as attributable to the separation.
Suffice it to say that where we trade today were not all that enthused about right.
Raising capital at the company level in order to advance advance.
Advanced the process, so, yes that relates mainly to the separation versus versus something horse.
Versus something else I think is relatively straightforward answer Joe.
Certainly and then on that sold the question Greg we are.
Very very pleased with what we're seeing with Solta as as I mentioned that 74% improvement in the revenue versus a year ago is outstanding.
And importantly.
EBITDA is even even stronger so we are very pleased with what we're seeing with our salt business as the question of what's happening with that we see significant growth drivers with Solta number one we still are seeing this move to aesthetics and as I referred to that zoom culture of people sitting on.
On.
Their computers and seeing their face and they want to steadily improve it number two we still believe there is a significant upside opportunity for us in the European business with salt as well.
We have a strong us business and even stronger Asian business, we are continuing to develop our European business.
Relative to the question of where this fits in the company. We're very pleased with our overall term portfolio in terms of how it fits but we always will look at opportunities to.
Across all of our businesses, especially as Weve said with the BNS spin, we realize we have to reduce leverage and if theres ways to reduce leverage we're going to actively pursue them across our business because we need to do this to unlock the value of being now as we split up to we think very highly attractive.
Companies with both the var. The BL spend plus the remaining BHP business, we think it will be very exciting for all of our shareholders.
Thank you very much for the question Greg.
Operator that concludes what we wanted to do today I. Thank everyone for joining us and look forward to talking to you in the future. Thank you everyone glad vote today have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.