Eastman Kodak Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 4 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Eastman Kodak Second Quarter 2023 Earnings Conference Call. All participants are in a listen only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Anthony Redding.

Operator

Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. I am Anthony Redding, Eastman Kodak Company's Chief Compliance Officer. Welcome to Kodak's 2nd 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 Q2 of 2023. You may access the presentation and webcast for today's call at our Investor Center at investor. .KoDAC dot 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 or 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 There may be other factors That may cause Kodak's actual results to differ materially from the forward looking statements. All forward looking statements attributable to Kodak or 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 the presentation, Kodak undertakes no obligation to update All revised forward looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

Speaker 1

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. Speakers on today's call are Jim Continenza, Kodak's Executive Chairman And Chief Executive Officer and David Bullwinkle, Chief Financial Officer of Kodak. We will not be holding a formal Q and A during today's call.

Speaker 1

As always, the Investor Relations team I will now turn the call over to Jim Continenza. Thank you.

Speaker 2

Welcome everyone and thank you for joining the Q2 2023 investor call for Kodak. I am pleased with the ongoing improvements reported in the company's results for the Q2 2023. Over the last 4 years, we have prioritized investing in innovation, efficiency and driving smart revenue. And today, we're starting to see the benefits of these long term investments. We're seeing them through increased gross profit, cash performance despite ongoing External challenges which affect the markets worldwide.

Speaker 2

It's important to note that the progress we have made reflects Our commitment to our ongoing execution of our long term plan, staying focused on our core business of print, advanced materials and chemicals, Continuing to invest in products and infrastructure that allows us to better serve our customers and constantly streamline our business operations. Some highlights from the Q2. As part of the controlled introduction of our new inkjet presses, We are completing the placement of 2 new machines, a Prosper Ultra 520 press, which offers offset quality At unmatched production speeds and the Prosper 7,000 Turbo, which is the world's fastest inkjet press. Both presses are scheduled to be in production in the Q3 this year. Reflecting in our commitment to digital print During the Q2, we expanded and strengthened our position with the acquisition of Graphic Systems Services, known as GSS.

Speaker 2

We've had a long term relationship with GSS over the years in the product portfolio, including making transport and other components. GSF is critical to Kodak as a supplier for supporting Prosper for well over 20 years. Their expertise and resource will enable us to design, build or complete integrated solutions for customers on the Stream and UltraStream platforms. We continue to invest in previously announced long term growth initiatives in Advanced Materials and Chemicals, Including Kotilux Light Blocking Technology and Coating Substrates for EV Batteries. We are starting to see revenue contributions from these businesses.

Speaker 2

In addition, we continue to see growing demand in our still in motion picture film business, a great example Of the ongoing relevance of film as an artistic medium is Christopher Nolan's Oppenheimer, which was shot on Kodak large format film, Including both color film and the 65 millimeter black and white film created by Kodak specifically for the production. In addition, Oppenheimer is being screened in the IMAX format using large format film prints, Which produce an eye popping viewing experience for the audience who see this masterpiece film. We'd like to thank Christopher Nolan And IMAX for their continued support of film. We recently renewed our supply agreement for film With our long term customer codec Alaris in a deal that will run through 2028. We are committed to manufacturing film as long as there is demand from the filmmakers and photographers worldwide.

Speaker 2

We are also pleased to announce the Vision Care Industry Leader, Essilor Mazzotica, has chosen to add the Kodak brand To an extraordinarily broad portfolio of licensed brands, this perpetual license agreement grants Essilor Mazzotica The exclusive right to use Kodak registered trademarks for products and services in a full range of product categories. We recently concluded the transactions to strengthen our financial position by refinancing Kodak's debt. We took this action proactively to extend our maturity of our debt and to eliminate our asset base revolving credit facility ABL More will be covered on this later by Dave Bowling Cole, our CFO. The requirements under the new financing are consistent with how we run our business. Doing this now will provide increased financial and operational flexibility as we continue to execute our long term strategic plan.

Speaker 2

Performance highlights for the Q2. Revenues were $295,000,000 a decline of $26,000,000 or 8% compared to the prior year. The decline in revenue reflects a conscious decision that we are making to prioritize, Increased productivity, investing in innovation and driving smart revenue globally. This strategy enabled us to increase gross profit by $12,000,000 or 24% compared to the prior year. Our gross profit percentage was 21% in the Q2 of 2023 compared to 16% the prior year.

Speaker 2

A lot of these contributions have come through advancements in efficiencies And investment in Advanced Materials and Chemicals. Our cash performance also improved year over year for the first half, An increase of $6,000,000 in the 6 months ending June 30, 2023, compared with a decrease $73,000,000 in the prior year period, an improvement of $79,000,000 These improvements are encouraging and provide a clear indication that we are on the right track In terms of executing our long term strategy, however, we recognize that we still have a lot of work to do in terms of Continuing to generate free cash flow, pay down our debt and delivering the leading edge solutions to our customers. We always keep in mind, right, we prioritize the customer. We're a customer first company. We only win when they win.

Speaker 2

We need to continue I will now turn over to Dave to discuss our Q2 2023 financial results.

Speaker 3

Thanks, Jim, and good afternoon. Today, the company filed its Form 10 Q for the quarter ended June 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 comment on a financing transaction that the company announced and closed in July. As previously discussed, the company's ABL and cash collateralized letter of credit facility was set to mature on June 12, 2024.

Speaker 3

The company has utilized the capacity under these facilities primarily to issue letters of credit to support its legacy self insured On June 30, 2023, The company entered into an amendment to the existing term loan credit agreement among the company and certain funds affiliated with Kennedy Lewis Investment Management, LLC To provide the company with a commitment to provide refinancing term loans in an aggregate principal amount of $450,000,000 On July 21, 2023, the amended and restated term loan credit agreement became effective and the company completed its borrowing. The company received net proceeds from the refinancing term loans of approximately $435,000,000 of which $318,000,000 represents the aggregate principal amount of the term loans plus accrued paid in kind or unpaid Cash interest was paid by the company to refinance the existing term loan credit agreement. Approximately $28,000,000 of the net proceeds from the refinancing 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, the company's obligations under the convertible notes were canceled. The company also amended and The existing term loan credit agreement to, among other things, extend the maturity date to the earlier of August 15, 2028, The refinancing term loans bear interest at a rate of 7.5 percent per annum payable in cash and 5 percent per annum payable in kind or in cash at the company's option for an aggregate interest rate of 12.5 percent per annum.

Speaker 3

The company's previous interest rate under the term loans was 8.5% per annum in cash and 4% per annum in kind for the same aggregate interest rate of 12.5 percent per annum. The amended and restated term loan credit agreement Also on June 30, 2023, the company entered into an amendment to the existing letter of credit facility agreement with Bank of America, which became effective on July 21, 2023. Under the terms and conditions of the June 2023 LC Facility Amendment, 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 will reduce to $50,000,000 With the funding from the net proceeds from the refinancing term loans, the balance on deposit in the LC cash collateral account was increased by an additional $59,000,000 The LC facility agreement does not include a minimum liquidity or financial maintenance covenant, but does require the company at all times to post cash collateral in an amount greater than or equal to 104% The company expects to directly Cash collateralize all or a substantial portion of its undiscounted actuarial workers' compensation obligations With the New York State Workers' Compensation Board to reduce the aggregate LC facility commitments to $50,000,000 prior to August 30, 2023.

Speaker 3

Lastly, the company repaid in full the amounts outstanding under its existing ABL credit agreement And the agreement was terminated. The lender's security interest in any of the companies or its subsidiaries' assets or properties securing the existing ABL Credit Agreement was released. 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 second quarter and first half of twenty twenty three.

Speaker 3

On Slide 7, For the Q2 of 2023, we reported revenues of $295,000,000 compared to $321,000,000 in the prior year quarter, A decline of $26,000,000 or 8%. Foreign exchange had no impact on revenue in the current year quarter. As Jim mentioned, pricing, cost reductions and customer focused innovations continue to be a priority for the company and we continue to recognize significant improvements in profitability as a result of the collective impact of these initiatives. Gross profit increased by $12,000,000 or 24% when compared to the prior year quarter. Foreign exchange had no impact on gross profit in the current year quarter.

Speaker 3

Our gross profit percentage was 21% Q2 2023 compared to 16% in the prior year quarter. In addition, we have seen an improvement in gross profit margin From the 18% we reported in the Q1 of 2023. This improvement is a result of the many actions our team has taken to mitigate the effects of the global economy and to make our operations more efficient. On a U. S.

Speaker 3

GAAP basis, we reported net income of $35,000,000 for the Q2 compared to net income of $20,000,000 in the prior year quarter. The 2023 20222nd quarter results include expense of $1,000,000 and income of $4,000,000 respectively, Related to changes in the fair value of embedded derivative liabilities and income of $1,000,000 $4,000,000 respectively, related to non cash changes in workers' compensation and employee benefit reserves. Excluding these current and prior year Order items. Income for 2023 was $35,000,000 compared to income of $12,000,000 in the prior year quarter, reflecting an improvement of $23,000,000 Operational EBITDA for the quarter was $22,000,000 compared to $11,000,000 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, Operational EBITDA improved by $14,000,000 when compared to the prior year quarter.

Speaker 3

Operational EBITDA for the Q2 of 2023 was Favorably impacted by improved profitability related to pricing actions and improved operational efficiency, partially offset by higher continued ongoing global cost increases and lower volumes. During the Q2, volumes for Sonora Process Free Plates declined by 9%, but increased by 3% when including volume pursuant to a license agreement under which Kodak receives royalties. Annuity revenue for Prosper declined by 9%, which was attributable to industry print volumes. On a constant currency basis, annuity revenue for Prosper declined by 8%. Turning to Slide 8 for the first half of twenty twenty three, we reported revenues of $573,000,000 compared The $611,000,000 in the prior year period for a decrease of $38,000,000 Adjusting for the unfavorable impact Foreign exchange of $10,000,000 in the current year, revenue decreased by $28,000,000 compared to the prior year.

Speaker 3

We reported significantly higher gross profit with an increase of $29,000,000 or 35% when compared to the prior year period. Excluding the unfavorable impact of foreign exchange, gross profit improved $31,000,000 or 37% when compared to the prior year. Our gross profit percentage was 20% for the first half of twenty twenty three 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 $68,000,000 for the first half of twenty twenty three Compared to net income of $17,000,000 in the prior year, the 2023 first half results include charges of $2,000,000 related changes in the fair value of embedded derivatives liabilities and income of $9,000,000 related to a refund from a non U. S. Governmental authority.

Speaker 3

The 2022 first half results include income of $1,000,000 related to changes in the fair value of the embedded derivative liabilities And income of $8,000,000 related to non cash changes in workers' compensation and employee benefit reserves. Excluding these current and prior year items, income for 2023 was $61,000,000 compared to income of 8,000,000 in the prior year period, reflecting an increase of $53,000,000 from the prior year period. Operational EBITDA for the period was $31,000,000 compared to $4,000,000 in the prior year period. Excluding the unfavorable impact of foreign exchange in the current year and non cash changes in workers' compensation and employee benefit reserves in the prior year, Operational EBITDA increased by $36,000,000 Operational EBITDA for 2023 was favorably impacted by growth in gross profit due to the factors described. On a year to date basis, volumes for Sonora Process Free Plates declined by 11% or 5% when including volume pursuant to a license agreement under which Kodak receives royalties.

Speaker 3

And the annuity revenue from Prosper declined by 7%, which is attributable to industry print volumes. On a constant currency basis, annuity revenue for Prosper declined by 4%. Moving on to the company's cash performance presented on Slide 9. The company ended the 2nd quarter with $223,000,000 in cash and cash equivalents, an increase of $6,000,000 from December 31, 2022. This is compared with a cash use of $73,000,000 in the prior year period, reflecting an improvement of $79,000,000 For the 6 months ending June 30, 2023, cash provided by operating activities was $21,000,000 driven primarily by positive cash flow from net earnings of $18,000,000 and cash provided by balance sheet changes of $3,000,000 including a use of cash for working capital of $1,000,000 and a decrease in other liabilities of $9,000,000 Within working capital, accounts payable decreased by $7,000,000 inventory increased by $11,000,000 And accounts receivable decreased by $17,000,000 Cash provided by operating activities improved by $124,000,000 from the prior year, driven by an $82,000,000 improvement And balance sheet changes, including an improvement in working capital cash flows of $62,000,000 We are comfortable with our levels of working capital and have maintained our focus on serving our customers throughout this difficult economic period.

Speaker 3

Cash used in investing activities was $11,000,000 in the first half, an increase of $2,000,000 when compared to the prior year period. Cash used in financing activities was $2,000,000 in the first half of twenty twenty three compared to cash provided by financing activities of $47,000,000 in the prior year period. Cash provided by financing activities in the prior year includes $49,000,000 of incremental cash in the first half of twenty twenty two after fees and expenses driven by proceeds received related to the delayed draw term loan. Restricted cash at the end of the quarter was $69,000,000 Unchanged from December 31, 2022. Restricted cash primarily represents cash collateral required under the existing Letter of credit facility and certain aluminum supply contracts in addition to escrows to secure various ongoing obligations.

Speaker 3

We will continue to focus on alternatives to reduce restrictions on cash. As presented on the bottom portion of the slide, Excluding the prior year impact of net proceeds from the delayed draw term loan financing, the current year receipt of a refund From a non U. S. Governmental authority and the current and prior year effective exchange rates on cash, the year over year increase in cash and cash equivalents was $117,000,000 Finally, we remain in compliance with all applicable financial covenants. And now I'll turn the discussion back to Jim.

Speaker 2

Thank you, Dave. In summary, Kodak delivered continued strong performance in the 2nd quarter, Increasing gross profit and improving our cash performance despite a challenging business environment globally. Our performance demonstrates a positive impact of our commitment to our long term strategy and the incredible efforts Of all of our employees and execution of our strategy, we have made significant strides and are starting to see the benefits of our efforts. But make no mistake, we still know we have a long way to go. We will continue to take these actions and strengthen our financial position and create a strong foundation for investment and growth.

Speaker 2

We will continue to invest in print, Advanced Materials and Chemicals, we will continue to streamline our operations as a commitment we make to our customers We will continue to put our customers first, Delivering the solutions they need, while driving efficiency improvements that they expect. I want to thank everyone for joining this call And your interest needs to be in Kodak.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Eastman Kodak Q2 2023
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