Eastman Kodak Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 4 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eastman Kodak Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded. I would like now to turn the conference over to your speaker today, Anthony Redding.

Operator

Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. I'm Anthony Redding, Eastman Kodak Company's Chief Compliance Officer. Welcome to Kodak's 3rd quarter 2023 earnings call. At 4:15 p. M.

Speaker 1

This afternoon, Kodak filed its Form 10 Q and issued its release on financial results for the Q3 of 2023. You may access the presentation and webcast for today's call at our Investor Center at investor. Kodak.com. During today's call, we'll be making certain forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. All forward looking statements are based upon Kodak's expectations and various assumptions.

Speaker 1

Future events or results may differ from those anticipated or expressed in the forward looking statements. Important factors that could cause actual events For results to differ materially from these forward looking statements include, among others, the risks, Uncertainties and other factors described in more detail in Kodak's filings with the U. S. Securities and exchange commission from time to time. There may be other factors that may cause Kodak's actual results to differ materially from the forward looking statements.

Speaker 1

All forward looking statements attributable To Kodak, all persons acting on its behalf apply only as of the date of this presentation and are expressly qualified in their entirety by the cautionary statements included or referenced in this presentation. Kodak undertakes no obligation to update or revise forward looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In addition, the release just issued and the presentation provided contains certain measures that are deemed non GAAP measures. Reconciliations to the most directly comparable GAAP measures have been provided with the release and within the presentation on our website in our Investor Center at investor. Kodak.com.

Speaker 1

Speakers on today's call are Jim Continenza, Kodak's Executive Chairman and Chief Executive Officer and David Bullwinkle, Chief Financial Officer of Viessman Kodak Company. We will not be holding a formal Q and A during today's call. As always, the Investor Relations team is available for follow-up. I will now turn the call over to Jim Continenza.

Speaker 2

Welcome everyone and thank you for joining the Q3 2023 Investor Call for Kodak. I am pleased with the continuing improvement reported in our company's results for the Q3 2023. Our accomplishments have not come easy. The ongoing challenges that we face, including inflation, high interest rates, bank failures, labor shortages, supply issues and now Another new war. We have overcome these challenges and built a strong foundation by continuing to focus on our existing long term strategic plan, It started almost 5 years ago.

Speaker 2

Improving our operations has been critical for us. The efficiencies that we put in and investing in opportunities to leverage Our strength in industrial manufacturing drive smart revenue and always put our customers first. As a result, we have delivered Increased gross profit and operational EBITDA year over year for the 4th consecutive quarter and improvement and our cash performance during these very difficult times. This shows our investments that we are making are starting to deliver. I'm extremely proud Of our remarkable ability to continue our momentum in the face of unprecedented headwinds, I'd like to thank our employees for their dedication, loyalty and hard work, the resilience that they have shown in supporting our customers and our customers who stayed loyal to us.

Speaker 2

We made a commitment to them that we will try to be as efficient as we can because we can only win when they win. Some highlights from the Q3. We continue to invest in long term growth initiatives in our Advanced Materials and Chemical Group, known as AMC. We are seeing top line revenue growth, but more importantly, we're also seeing a much greater contribution to the net profit of the company. In our substrate coating businesses, we are looking to expand The capabilities of our existing production machine beyond prime foils.

Speaker 2

In our life blocking area, We are focused on entering the Hospitality segment in applications such as room darkening, drapes and curtains. In our test reagent initiatives, we are moving forward with the construction of a cGMP, which means Current Good Manufacturing Practices Facility, which we intend to have operational mid year 2025. The facility is intended to help meet the growing demand for FDA certified test reagents made in the USA. And in our functional printing area, we are now ready to manufacture antennas for automotive windshield applications as an entry point into the Transportation segment. It's important to note That these AMC initiatives are natural extensions of our unique strengths in material science and Layering and Coating and the technologies that we've developed over decades in the film business.

Speaker 2

They are great examples of how we can create New growth opportunities based on skills and infrastructure that are unique to Kodak. We also continue to see growing demand In our still and motion picture film business, we are committed to manufacturing film as long as we have demand from our customers. I'm proud of our role in continuing to make this artistic medium available to photographers, directors, filmmakers who love The unique look and quality of film. We have completed the placement of 2 leading edge Kodak inkjet presses. We placed the 1st Ultra 520 press, which offers offset quality at unmatched production speeds and the new Prosper 7,000 Turbo, which is the world's fastest inkjet press.

Speaker 2

Our press portfolio is now moving into full production And we're excited about the rollout. As I have stressed frequently, we are committed to being the last Major manufacturer standing in the plates business. In our opinion, plates are going away. There are 1,000,000,000 of dollars of CapEx out there in which printing equipment and those offset presses are going to be used. We are continuing to support our customers in the printing business to make sure they have options, Whether they want to use plates on their offset presses or transition to digital, we are committed to support them on both sides of the equation.

Speaker 2

We want to help them convert to the digital transition over a long period of time, that way they can maximize the value of their current investment. We recently have seen a surge in competitors that used to manufacture in the U. S, importing plates from China and Japan. These plates are selling at an unfair low price. As a result, Kodak recently filed petitions with the U.

Speaker 2

S. Department of Commerce and the U. S. International Trade Commission requesting relief from unfair trade imports of aluminum lithographic printing plates from China and Japan. Our goal in taking this action is simple, to restore fairness and pricing and to have a level playing field, so we can preserve U.

Speaker 2

S. Manufacturing jobs and continue to serve our customer. It's vitally important That the U. S. Not lose the last major manufacturer of these plates, because they will be subjected to only imports And you're right back to where we were during the pandemic, having trouble with logistics and supply chain by not having locally sourced products.

Speaker 2

Turning to Slide 6. Let me give some highlights of the Q3. We had a decline in revenue of $20,000,000 which reflects A cautious decision we are making to prioritize increased productivity, investments in innovation and driving smart revenue. The trade off was this strategy enabled us to increase our profit by $7,000,000 or 16%. When we look at the business and we look at our customers and we look at the dollars and the trades that we need to make in these difficult times, we will trade Negative revenue or less profitable revenue for improvement in gross profit.

Speaker 2

So that's something we focused on over the last 3, 4 years and we will continue to do so. And part of that result is we had a cash increase of $29,000,000 in the 9 months ending September 30, 2023 compared with the decrease of $146,000,000 in the prior year, an improvement of $175,000,000 These improvements are encouraging and evidence of our ability to continue making progress Despite unfavorable business conditions never seen before, however, we recognize that the environment will remain difficult and there are more headwinds on the horizon. To continue building our momentum, we will stay committed to executing our long term plan, investing in innovation, improving efficiency and helping our customers stay profitable and productive. We only win when they win. I would now like to turn it over to Dave to discuss the Q3 2023 financial results.

Speaker 2

Steve?

Speaker 3

Thanks, Jim, and good afternoon. Today, the company filed its Form 10 Q for the quarter ended September 30, 2023 with the Securities and Exchange Commission. As always, I recommend you read this filing in its entirety. Before I get into the details for the quarter, I would like to direct your attention to the refinancing transaction that the company announced and closed in the 3rd quarter. On our last call, we provided an overview of the transactions.

Speaker 3

I will summarize those again here. On July 21, 2023, the amended and restated term loan credit agreement became effective and the company completed its borrowing of the term loans. The company received net proceeds from the term loans of approximately $435,000,000 of which $318,000,000 representing the aggregate principal amount of the original term loans plus accrued paid in kind interest, Prepayment premium and $2,000,000 of cash interest was paid by the company to refinance the obligations under the original term loan credit agreement. Approximately $28,000,000 of the net proceeds from the term loans were used to repay in full the company's outstanding convertible notes, representing the aggregate principal amount of the convertible notes plus accrued paid in kind interest. As a result of the early repayment of the term loans and the convertible notes, the company recorded a loss on early extinguishment of debt of $27,000,000 in the Q3 of 2023.

Speaker 3

This is reported in the company's statement of operations for the quarter year to date period. In addition, the company repaid in full the amounts outstanding under its existing ABL credit agreement, Used $59,000,000 of net proceeds from the term loans to fund the LC cash collateral account and paid approximately $1,000,000 in The remaining net proceeds from the term loans of approximately $29,000,000 are being used by the company for general corporate purposes and working capital needs. The term loan amendment also amended and restated the original term loan credit agreement to, among other things, extend the maturity date to the earlier of August 15, 2028 or the date that is 91 days prior to the maturity date or mandatory redemption date of any of the company's then outstanding Series B preferred stock or Series C preferred stock for any extensions or refinancings of the Series B or Series C preferred stock. The term loans bear interest at a rate of 7.5 percent per annum payable in cash and 5% per annum payable in kind or in cash at the company's option for an aggregate interest rate of 12.5 percent per annum. The company had approximately $58,000,000 in letters of credit outstanding under the 2023 amended ABL credit agreement and amended ABL credit agreements as of both June 30, 2023 December 31, 2022.

Speaker 3

As noted above, the company repaid in full the amounts outstanding under its existing ABL credit agreement. Upon the termination of the 2023 amended ABL credit agreements, the letters of credit totaling $58,000,000 were transferred to the letter of credit facility. The lender's security interest in any of the company's or its subsidiaries' assets or properties securing the existing ABL credit agreement was released. The company had approximately $31,000,000 $43,000,000 of letters of credit outstanding under the LC facility agreement as of September 30, 2023 December 31, 2022 respectively. Letters of credit under the 2023 LC facility agreement are collateralized by cash collateral.

Speaker 3

LC cash collateral was $32,000,000 $44,000,000 at September 30, 2023 and December 31, 2022, respectively, which was classified as restricted cash on the company's statement of financial position. On June 30, 2023, the company and the subsidiary guarantors entered into an amendment to the 2023 amended LC Facility Agreement. The June 2023 LC Facility Agreement became effective on July 21, 2023. Under the terms and conditions of the June 2023 LC The LC lender committed to issue additional letters of credit on the company's behalf in an aggregate amount of up to $50,000,000 to an aggregate principal amount of commitments of up to $100,000,000 Until August 30, 2023, upon which the aggregate LC facility commitments reduced to $50,000,000 provided that at all times the company posted cash collateral in an amount greater than or equal to 104% of the aggregate amount of letters of credit issued and outstanding at any given time. With the funding from the net proceeds from the term loans, the balance on deposit in the LC cash collateral account was increased by an additional $59,000,000 to a total of $102,000,000 and with the termination of the ABL credit agreement, commitments increased to $99,000,000 The commitments under the LC facility included letters of credit of $68,000,000 to ensure payment of the company's undiscounted actuarial workers' compensation obligation with the New York State Workers' Compensation Board.

Speaker 3

In August of 2023, the company used $68,000,000 of the fund in the LC cash collateral account Cash collateralized its undiscounted actuarial workers' compensation obligations with the New York State Workers' Comp Board, which decreased commitments to $31,000,000 and the balance on deposit in the LC Cash collateral account to $32,000,000 The LC facility agreement does not include a minimum liquidity or financial Maintenance Covenants. We are pleased with the completion of these transactions to proactively solidify our capital structure and replace our ABL facility. These arrangements provide for an extended term for the term loan and LC facility contingent on our ability to convert, redeem or extend the existing Series B and C preferred stock past their current maturities of May 26, 2026. I will now share further details on the full company results, operational EBITDA and cash flow for the 3rd quarter 9 months ending September 30, 2023. On Slide 7, for the Q3 of 2023, we reported revenues of $269,000,000 compared to $289,000,000 in the prior year quarter, a decline of $20,000,000 or 7%.

Speaker 3

On a constant currency basis, revenue declined by $26,000,000 or 9% compared to the prior year quarter. As Jim mentioned, pricing rationalization, cost reduction and customer focused initiatives continue to be a priority for the company. We continue to recognize significant improvements in profitability as a result of the collective impact of these initiatives in the face of difficult global economic environment. Gross profit increased by $7,000,000 or 16% when compared to the prior year quarter. Excluding the favorable impact of foreign exchange, Gross profit improved $5,000,000 or 12% when compared to the prior year quarter.

Speaker 3

Our gross profit percentage was 19% in Q3 2023 compared to 15% in the prior year quarter. This improvement is a result of the actions our team has taken to mitigate the effects of the global economy to make our operations more efficient and to realize the value of our offerings. On a U. S. GAAP basis, we reported net income of $2,000,000 for the 3rd quarter, flat when compared to the prior year quarter.

Speaker 3

The current year includes the loss and extinguishment of debt resulting from the refinancing transaction of $27,000,000 The 2023 2022 Q3 results include income of $3,000,000 $5,000,000 respectively, related to non cash changes in workers' compensation and employee benefit reserves. Excluding these current and prior year quarter items, Income for 2023 was $26,000,000 compared to a loss of $3,000,000 in the prior year quarter, reflecting an improvement of $29,000,000 Operational EBITDA for the quarter was $12,000,000 compared to $7,000,000 in the prior year quarter. Excluding the impact of non cash changes in workers' compensation and employee benefit reserves in the current and prior year quarters and the favorable impact of foreign exchange in the current quarter, operational EBITDA improved by $6,000,000 when compared to the prior year quarter. Operational EBITDA for the Q3 of 2023 was favorably impacted by pricing, rationalization and improved operational efficiency executing on cost controls, partially offset by higher continued ongoing global cost increases and lower volume. Turning to Slide 8, for the 9 months ending September 30, 2023, we reported revenues of $842,000,000 compared to $900,000,000 in the prior year period for a decrease of $58,000,000 Adjusting for the unfavorable impact of foreign exchange of $4,000,000 in the current year, revenue decreased by $54,000,000 or 6% compared to the prior year.

Speaker 3

We also reported significantly higher gross profit with an increase of $36,000,000 or 28 percent when compared to the prior year period. Foreign exchange had no impact on gross profit in the current year period. Our gross profit percentage was 19% for the 9 months ending September 30, 2023, compared to 14% in the prior year. As we have consistently stated, we will prioritize smart revenue rather than trading profitability for revenue growth. These results reflect our disciplined approach to make our operations more efficient to better serve our customers.

Speaker 3

On a U. S. GAAP basis, net income was $70,000,000 for the 9 months ending September 30, 2023, compared to net income of $19,000,000 in the prior year. The 2023 year to date results include charges of $2,000,000 related to Changes in the fair value of the embedded derivative liabilities, dollars 27,000,000 related to a loss on the extinguishment of debt, Income of $9,000,000 related to a refund from a non U. S.

Speaker 3

Governmental authority and income of in workers' compensation and employee benefit reserves. Excluding these current and prior year items, income for 2023 was $87,000,000 compared to income of $5,000,000 in the prior year period, reflecting an increase of $82,000,000 from the prior year period. Operational EBITDA for the period was $43,000,000 compared to $11,000,000 in the prior year period. Excluding the favorable impact of non cash changes in workers' compensation and employee benefit reserves in the current prior year, Operational EBITDA increased by $42,000,000 Foreign exchange had no impact on the change in operational EBITDA. Operational EBITDA for 2023 was favorably impacted by growth in gross profit due to the factors described above.

Speaker 3

Moving on to the company's cash performance presented on Slide 9. The company ended the 2nd quarter with $246,000,000 in cash and cash equivalents, an increase of $29,000,000 from December 31, 2022. For the 9 months ending September 30, 2023, cash provided by operating activities was $21,000,000 driven primarily by positive cash flow from net earnings of $15,000,000 and cash provided from balance sheet changes of $6,000,000 including a use of cash for working capital of $35,000,000 and an increase in other liabilities of $23,000,000 Accounts payable decreased by $15,000,000 inventory increased by $4,000,000 and accounts receivable increased by $16,000,000 Cash provided by operating activities improved by $151,000,000 from the prior year, driven by a $103,000,000 improvement in balance sheet changes, including an improvement in working capital cash flows of $41,000,000 and an increase in cash flows from liabilities excluding borrowings and trade payables of $49,000,000 We are comfortable with our levels of working capital and have maintained our focus on serving our customers throughout this difficult economic period. Cash used in investing activities was $15,000,000 in the year to date period, an improvement of $29,000,000 when compared to the prior year period. The prior year period includes $25,000,000 equity interest investment in Wildcat Discovery Technologies.

Speaker 3

Cash provided by financing activities was $87,000,000 in the 9 months ending September 30, 2023, compared to cash provided by financing activities of $45,000,000 in the prior year period. The improvement in cash from financing activities is driven by the impacts of the refinancing transaction, which occurred in the Q3 of 2023. Restricted cash at the end of the quarter was $128,000,000 an increase of $59,000,000 from December 31, 2022. Restricted cash primarily represents cash collateral required to support workers' compensation liabilities, cash collateral supporting the existing letter of credit facility and certain aluminum supply contracts in addition to escrows to secure various ongoing obligations. As referred to earlier, the company deposited $68,000,000 of refinancing proceeds with the New York State Workers' Compensation Board during the quarter.

Speaker 3

This is reported as restricted cash on our statement of financial position. We will continue to focus on alternatives to reduce restrictions on cash. As presented on the bottom portion of the slide, Excluding the changes in restricted cash for each period, the impact of net proceeds from the refinancing transaction in the current year and the delayed draw term loan financing in the prior year, the current year receipt of a refund from a non U. S. Governmental authority and the current and prior year effect of exchange rates on cash, the year over year increase in cash and cash equivalents was $175,000,000 This is primarily the results of the improved cash flow from operations of $151,000,000 We are pleased with the company's cash flow performance and the health of our balance sheet.

Speaker 3

We will continue to focus on the execution of our long term strategy. Finally, we remain in compliance with applicable financial covenants. I will now turn the discussion back to Jim.

Speaker 2

Thank you, Dave. Kodak continued to navigate in an extremely challenging business environment. We delivered strong performance in the 3rd quarter, increasing gross profit and operational EBITDA year over year for the 4th consecutive quarter and improving our cash flow performance. Our performance reflects our commitment to our strategy, Our employees' commitment to executing and our customers' loyalty to stay with Kodak during these times. We'll continue to work closely with our customers And overcome these obstacles, we have built a strong foundation that is allowing us to continue to gain momentum And which I would call again some most difficult times that I've ever worked in.

Speaker 2

We continue to invest in our Print business. We'll continue to invest in our Advanced Materials and Chemical business. Inside of Kodak today, it's a fight for capital, where we feel we'll get the greatest return where we will invest those dollars. We will continue to invest in an infrastructure and improvement that make us more efficient and easier to do business with. It's important to us that we make it as simple as possible for our customers to interact with us and efficiently so they can continue to grow their profit and their business.

Speaker 2

We will continue to focus on adapting to the environment and all the challenges that we see, Supporting our employees, investing in our customers and delivering products to help them succeed. I want to thank you all for attending the call and his continued interest in Eastman Kodak.

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