Eastman Kodak Company

Ladies and gentlemen, thank you for standing by, and welcome to the Eastman Kodak Q3 2020 earnings conference call. At this time, all participants are in a listen-only mode. If you require any further assistance, please press star zero. I would now like to hand the conference to your speaker today, Paul Dills. Please go ahead, sir.

Thank you, and good afternoon, everyone. I am Paul Dills, Eastman Kodak Company's Chief Tax Officer and Director of Investor Relations. Welcome to Kodak's third quarter 2020 earnings call. At 4.15 p.m. this afternoon, Kodak filed its third quarter 2020 Form 10-Q and issued its release for financial results for the third quarter. You may access the presentation and webcast for today's call on our Investor Center at investor.kodak.com. During today's call, we will be making certain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. All forward-looking statements are based upon Codex expectations and various assumptions. 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 Codex filings with the U.S. Securities and Exchange Commission from time to time. There may be other factors that may cause Codex 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 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 contain certain measures that are deemed non-GATT measures. Reconciliations to the most directly comparable GATT measures have been provided with release and within the presentation on our website in our investor center at investor.kodak.com. Speakers on today's call are Jim Contanzanza, Kodak's Executive Chairman, and David Bowenkel, Chief Financial Officer of Kodak. We will not be holding a formal Q&A during today's call. As always, the Investors Relations team is available for follow-up. I will now turn the call over to Jim.

Welcome, everyone, and thank you for joining the third quarter investor call for Kodak. Beginning on slide four, third quarter results, were impacted by COVID-19 as the pandemic continues to present challenges for companies around the world. However, we began to see some improvement in several areas of the company throughout the quarter. Despite the challenges the pandemic has presented, we remain focused on maintaining the safety of our employees and customers as a top priority as we continue to manage our business cost, and cash until the pandemic is resolved. Dave will provide more details on the third quarter and year-to-date results shortly. I would like to begin with comments on the July announcement by the U.S. International Development Finance Court for a potential government loan to support the launch of Kodak Pharmaceuticals and to clarify some important points about the potential transactions. The announcement on July 28 was about the U.S. International Development Finance Court, DFC, signing a letter of interest for an application for a potential loan, not a subsidy or a grant. This is an opportunity for the company to apply for a loan only. The application process has been placed on hold by the DFC. As part of our long-term strategy, we will continue to move forward with expanding the the existing pharmaceutical business, regardless of whether we received the potential DFC loan. The scale and speed of the expansion will depend on the availability of capital and our assessment of the business opportunity at various production levels, taking into account, among other factors, any Buy American initiatives. We remain 100% committed to our core business of print, advanced materials, and chemicals, including unregulated key starting materials. This combined with the continued dedication of our employees in the United States and globally gives us tremendous confidence that we are on the right track to restoring Kodak to its rightful place as an iconic global brand. Turning to slide five, I want to share some exciting news for our products and technologies. The industry is starting to recognize the company's achievements as a technology leader in print. As I mentioned last quarter, the company had announced the launch of several new exciting products to support our vision for the print and digital packaging business. Kodak recently won a total of eight awards in three prestigious competitions. Our Uteko Sapphire EVO-M Digital Web Press, powered by Kodak Stream Inkjet Technology and the Kodak Prosper QD Packaging Inks and Films Optimizer Agent, FOA, won awards in the InterTech Technology Awards. The InterTech Technology Awards honors technologies that are expected to have major impact on the graphics, communication, and related industries. Our Kodak Prosper Ultra 520 Press, Kodak Prosper Plus Imprinting Systems, Kodak Prosper QD Packaging Inks and Film Optimized Agent, FOA again, and Uteco Sapphire EVOM and W presses powered by Kodak Stream Inkjet Technology won awards at the Keypoint Intelligence Buyers Lab Outstanding Innovation Award in Production Print. The KeyPoint Intelligence Buyer's Lab Outstanding Innovation Award assessed the product and solution submitted with respect to quality, productivity, connectivity, workflow, and media range, as well as environmental impact. We are honored to win this award. Lastly, Kodak Prosper QD packaging inks and film optimizer agent won an award in digital inks, industrial and packaging category at the Printing United Alliance Product of the Year Award. I want to again congratulate the Kodak employees for their dedication in creating and developing these products. The winning products are all related to a digital print technologies in the winning presses are all powered by our proprietary high-speed continuous inkjet platform. This concentration of excellence reflects our deep expertise in inkjet technology and related chemistry and material science, and our continued multimillion-dollar investment in research and development. Kodak is at the forefront of helping customers drive innovation and profitability in print, including the groundbreaking digital products I just mentioned, and the industry-leading traditional print products, such as the environmentally-friendly Sonara process replays. I will now turn it over to Dave to discuss the 2020 third quarter and year-to-date financial results.

Thanks, Jim, and good afternoon. Today, the company filed its Form 10-Q for the quarter ended September 30, 2020, and 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 an important transaction that occurred in the third quarter of 2020. During the quarter, $100 million of the company's 5% secured convertible notes due 2021 were converted into shares of the company's common stock. The delivery of the conversion shares and the payment of the accrued interest satisfies the company's obligations under the notes. As a result of the conversion of all of the notes, the lien granted by the company on certain of its assets to secure the notes was released. Turning to slide six, the company has recognized a reduction of $367 million in our net debt position since March 2019. This includes the repayment of $395 million of the first lien term loans with the net proceeds received from the sale of the flexographic packaging division and issuance of the 5% secured convertible notes in 2019. As I just indicated, during the third quarter of 2020, the $100 million 5% secured convertible notes were fully converted into common stock. The improvement in our net debt position illustrates the company's efforts to strengthen its balance sheet and the financial health of the company. Moving on, the increased value associated with the derivative liability embedded in the convertible notes driven by the increase in our stock price was reflected in our financial statements at the time of conversion, which resulted in a non-cash charge of $416 million. The derivative liability and the carrying value of the convertible notes at the time of conversion was then written off against the fair value of the shares issued to the note holders, reflecting a $2 million loss on extinguishment of the notes. During the third quarter, the company discovered deficiencies in controls required to safeguard its assets. The company did not prevent the unauthorized issuance of the company's common stock when previously forfeited non-qualified stock options were exercised by five former company executives in July of 2020. The company determined that controls were inadequate with regard to the timely input and verification of master data updates for equity grants, and therefore resulted in errors or misstatements in employee equity account balances. This control weakness did not result in the misstatement of any current or prior period financial statements. Additionally, the company expects to have these deficiencies remediated by December 31, 2020. Additionally, I would like to make a few comments regarding the COVID-19 pandemic impacts. The COVID-19 pandemic did have a negative impact on our third quarter sales volumes and collections of accounts receivable. The conversion of accounts receivable to cash is taking longer and collection risk has increased since the onset of the pandemic. The company has been able to maintain our operations to serve our customers and adapt to the changes in their businesses. I will now share further details on the company's results, operational EBITDA, and cash flow for the third quarter and nine-month period ending September 30, 2020. On slide seven for the third quarter of 2020, we reported revenues of $252 million compared to $315 million in the prior year quarter for a decline of $63 million. Adjusting for the favorable impact of foreign exchange of $4 million in the current year quarter and license revenue received from the Ha-Gwang transaction of $13 million in the prior year quarter, revenue declined by $54 million compared to the prior year quarter. On a U.S. GAAP basis, we reported a net loss of $445 million for the third quarter compared to a net loss of $5 million in the prior year quarter. The third quarter of 2020 results include expense of $431 million related to changes in value for the derivative embedded in the Series A preferred stock and convertible notes. $2 million related to the loss and extinguishment of debt, $9 million related to the increase in workers' compensation reserves, and $1 million related to a decrease in accounts receivable reserves. The third quarter of 2019 results include expense of $4 million related to changes in value for a derivative embedded in the Series A preferred stock and convertible notes, $2 million related to the increase in workers' compensation reserves, and $7 million related to a net loss on the sale of assets. Excluding these current and prior quarter items, loss for 2020 was $4 million compared to income of $8 million in the prior year quarter, reflecting a decline of $12 million. Operational EBITDA for the quarter was a negative $1 million compared to a positive $14 million in the prior year quarter. Excluding the impact of license revenue received from the Ha Guang transaction in the prior year quarter and adjusting for a decrease in accounts receivable reserves and the impact of an increase in workers' compensation reserves due to a change in discount rates, operational EBITDA increased by $4 million. Operational EBITDA for the third quarter was unfavorably impacted by volume declines of $10 million partially offset by cost savings, including furloughs and pay reductions. Foreign exchange did not have an impact on operational EBITDA. During the third quarter, volumes for Sonora process-free plates declined by 4%, and the annuity revenue for Prosper declined by 2%. which was attributable to the market downturn related to the COVID-19 pandemic. However, the company began to recognize some recovery of volumes during the quarter. As we mentioned on our second quarter call for Q2 2020, Sonora process-free plates and the annuity revenue for Prosper had declined 33% and 25% respectively. Overall, Prosper revenue has increased by 4% year-over-year as a result of growth in printhead component sales attributable to increased demand in packaging and personal care applications. We continue to invest in future growth areas of UltraStream and advanced materials. Turning to slide eight, for the nine months ending September 30, 2020, we reported revenues of $732 million compared to $913 million in the prior year period for a decline of $181 million. Adjusting for the unfavorable impact of foreign exchange of $1 million in the current year period and license revenue received from the hag wang transaction of $13 million in 2019, revenue declined by $167 million compared to the prior year period. We reported a net loss of $561 million for the year-to-date period compared to a net income of $178 million in the prior year period. The 2020 and 2019 year-to-date results include expense of $382 million and $3 million respectively related to change in value for the derivative embedded in the convertible notes and Series A preferred stock. The year-to-date period of 2020 results also include $2 million related to a loss on the extinguishment of debt, $9 million related to an increase in workers' compensation reserves, income of $9 million related to a net gain on the sale of assets, the impact of a trade name impairment for $3 million, an increase in accounts receivable reserves of $3 million, and a $167 million non-cash expense as a result of the increase in deferred tax valuation allowances outside the U.S. The year-to-date period of 2019 also includes $2 million related to the increase in workers' compensation reserves and income of $202 million related primarily to the impact of the gain on sale of the flexographic packaging business. Excluding these current and prior year items, results for 2020 were a net loss of $4 million compared to a loss of $19 million in the prior year. This improvement reflects the impacts of our cost reduction initiatives as we continue the transformation of our business focused on the key areas of print, advanced materials, and chemicals. Operational EBITDA for the period was a negative $16 million compared to a positive $8 million in the prior year period. Excluding the impact of the increase in workers' compensation reserves, the increase in accounts receivable reserves of $3 million in the year-to-date period of 2020, and license revenue received from the Ha-Gwang transaction of $13 million in the year-to-date period of 2019, operational EBITDA declined by $1 million year-over-year. Operational EBITDA for the nine months ended 2020 was unfavorably impacted by higher manufacturing costs driven by unfavorable cost absorption due to volume declines of $25 million, partially offset by cost savings, including furloughs and pay reductions. foreign exchange did not have an impact on operational EBITDA. On a year-to-date basis, volumes for Sonora process-free plates declined by 8% and the annuity revenue for Prosper declined by 10%, which was attributable to the market downturn related to the COVID-19 pandemic. Overall, Prosper revenue increased 3% compared to the prior year period as a result of growth in printhead component sales attributable to increased demand in packaging and personal care applications. We expect to continue to place our solutions with new and existing customers in these areas. We also continue to invest in future growth areas of UltraStream and advanced materials. Moving on to the company cash performance presented on slide 9. The company ended the third quarter with $193 million in cash and cash equivalents a decrease of $40 million from December 31, 2019. For the third quarter of 2020, the company generated $13 million in cash, which includes items for stock option exercise proceeds offset by previously unpaid preferred stock dividends, convertible note interest, and an increase in restricted cash. When adjusting for these items, cash generated for the third quarter was $17 million. For the nine-month period ended September 30, 2020, cash used in operating activities was $48 million, driven primarily by cash use from net earnings of $32 million and cash use from balance sheet changes of $16 million, including a change in working capital of $1 million and a decrease in other liabilities of $24 million. Accounts payable decreased by $33 million, inventory increased by $19 million, and accounts receivable decreased by $53 million. Included in the balance sheet changes is a $14 million historical obligation to Kodak Alaris that was eliminated by offsetting $11 million of accounts receivable and the recognition of a $3 million gain. In addition, cash used for the reduction of other liabilities includes pension payments, severance payments for restructuring actions, VAT and income tax payments, and accrued interest. Payments for the current year have increased for income taxes and restructuring payments offset by a reduction in accrued interest. Cash used in investing activities was $9 million during the nine-month period ended September 30, 2020, as compared to cash provided by investing activities of $315 million in the prior year period. The prior year included proceeds from the sale of the Flexographic Packaging Division. Cash provided by financing activities was $10 million in the current year period compared to a use of $295 million in the prior year period. The current year includes $29 million of stock option exercise proceeds partially offset by $19 million related to preferred stock dividend payments. The prior year included $395 million of cash used for the full repayment of the senior secured first lien term credit agreement, partially offset by the issuance of the secured convertible notes of $100 million. As I have indicated on past calls, The company has been focused on reducing restricted cash in 2020 in order to fund operations on our continued restructuring activities. In the nine months of 2020, restricted cash was reduced by $9 million due to our efforts, which included the amendment of our ABL facility during the first quarter. Restricted cash at the end of the quarter was $48 million. We will continue to focus on alternatives to reduce restrictions on cash. Finally, our Form 10-Q discloses that we remain in compliance with applicable financial covenants. To summarize, the COVID-19 pandemic had a significant impact on our operations in the quarter and the company was able to reduce costs to offset this impact. The company's balance sheet and financial position have been significantly strengthened due to the conversion of secured convertible notes and the release of the lien associated with the notes converted to stock during the quarter. I will now turn the discussion back to Jim.

In summary, I am extremely proud of Kodak and our ability to navigate the past few months. Despite the challenges from the pandemic, we continued to innovate and move our business forward. The eight awards won on our print products and solutions illustrate our commitment towards restoring Kodak to its rightful place at the forefront of print. Kodak is well positioned to capture the opportunity presented by the accelerated shift to the environmentally friendly print that the world is now experiencing. Thank you for your time today, and we look forward to speaking with you again on next quarter's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.