Eastman Kodak Company

Thank you for standing by, and welcome to the Eastman Kodak Q2 2021 Earnings Conference Call. At this time, all participants are going to listen on the mode. We will not be holding a formal hearing on today's conference call. I will now return the conference over to your host, Mr. Paul Dills. Please go ahead.

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 second quarter 2021 earnings call. At 4.15 p.m. this afternoon, Kodak filed its Form 10-Q and issued its release on financial results for the second quarter, 2021. You may access the presentation and the 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 material from these forward-looking statements include, among others, the risks, the uncertainties, and other factors described in more detail. in CODAC filings with the U.S. Securities and Exchange Commission from time to time. There may be other factors that may cause CODAC's actual results to differ materially from the forward-looking statements. All forward-looking statements attributable to CODAC 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. CODAC 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-GAP measures. Reconciliations to the most directly comparable GAP 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 Contenzen, Kodak's Executive Chairman, and David Bonewinkle, Chief Financial Officer of Kodak. We will not be holding a formal Q&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.

Welcome, everyone. and thank you for joining the second quarter investor call for Kodak. Turning to slide four, I am pleased with our strong second quarter performance, reflecting the execution of our long-term plan that we put in place two and a half years ago. We have focused on our strengths and core competencies as an industrial manufacturer, established a customer first model, delivered our balance sheet, and raised additional capital. We are winning in the key marketplaces with our innovative products, solutions, and sales and service execution. The result is improved performance in our businesses and a solid foundation. We continue to execute our long-term plan despite the challenges and uncertainties related to supply chain, commodity, and labor costs created by the pandemic. We plan to continue to focus on our strengths as an industrial manufacturer to drive long-term value and sustainability. Our change in culture to a customer-first model and our simplified organizational structure provide a one-codec customer-first experience. Improvements we have made includes automation of our front-end CRM customer-facing applications, alignment and consolidation of our service organization, improved cost structure and balance sheet, focused on core competencies, raised additional capital to be used for investing in future innovation and growth. We are recognizing strong growth in our businesses, including Sonora process-free points and prosper annuities this quarter and overall volume increase in our other businesses. Our strategy continues to focus on our core competencies and leveraging our deep knowledge-based to continue product innovation to meet our customers' needs and provide environmentally sustainable solutions. I will now turn it over to Dave to discuss the second quarter 2021 financial results.

Thanks, Jim, and good afternoon. Today, the company filed its Form 10-Q for the quarter ended June 30, 2021 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 reiterate that the company is executing on the plan we put in place two and a half years ago to create a growing, sustainable company which provides employment for future generations. We have made improvements in our core businesses by focusing on the areas of print, advanced materials, and chemicals. We have created a strong balance sheet with the capacity for investment and growth. We continue to explore areas for growth where we can leverage our expertise in print, advanced materials, and chemicals. We are pleased with the progress we have made and plan to continue to execute on our long-term plan. I will now share further details on the company results, operational EBITDA, and cash flow for the second quarter and first half of 2021. As I progress through the slides we've prepared, it is worth noting that the company has shown significant improvement in each metric year-over-year for the quarter and first half of 2021. On slide five, for the second quarter of 2021, we reported revenues of $291 million compared to $213 million in the prior year quarter for an improvement of $78 million. Adjusting for the favorable impact of foreign exchange of $10 million in the current year quarter, revenue increased by $68 million compared to the prior year quarter. On a U.S. GAAP basis, we reported net income of $16 million for the second quarter compared to a net loss of $5 million in the prior year quarter. The 2021 and 2020 second quarter results include income of $1 million and expense of $4 million, respectively, related to changes in the fair value of embedded derivative liabilities. The second quarter of 2021 results also include income of $6 million related to legal settlements and income of $3 million related to non-cash changes in workers' compensation reserves. Excluding these current and prior quarter items, income for 2021 was $6 million compared to a loss of $1 million in the prior year quarter, reflecting an improvement of $7 million. Operational EBITDA for the quarter was a positive $10 million compared to a negative $7 million in the prior year quarter. Operational EBITDA for the second quarter was favorably impacted by foreign exchange and a decrease in workers' compensation reserves. When excluding these items, operational EBITDA improved by $13 million. Operational EBITDA for 2021 was favorably impacted by growth in key product areas and improved manufacturing costs, FROM FAVORABLE COST ABSORPTION DUE TO INCREASES IN SALES VOLUME PARTIALLY OFFSET BY SAVINGS FROM TEMPORARY FURLOUGHS AND PAY CUTS IN THE PRIOR YEAR PERIOD THAT LARGELY ENDED IN JANUARY 2021. DURING THE SECOND QUARTER, VOLUMES FOR SONORA PROCESS-FREE PLATES IMPROVED BY 84% AND THE ANNUITY REVENUE FOR PROSPER IMPROVED by 50 percent, which was attributable to the market turnaround as the COVID pandemic impacts lessen. We continue to invest in future growth areas of UltraStream and advanced materials. Turning to slide six for the first half of 2021, we reported revenues of $556 million compared to $480 million in the prior year period for an improvement of $76 million. Adjusting for the favorable impact of foreign exchange of $19 million in the current year, revenue increased by $57 million compared to the prior year. We reported net income of $22 million for the first half compared to a net loss of $116 million in the prior year. The 2021 first half results include income of $7 million related to legal settlements and income of $3 million related to non-cash charges in workers' compensation reserves. The 2020 first half results include income of $49 million related to changes in the fair value of embedded derivative liabilities. The first half of 2020 also includes the impact of a trade name impairment for $3 million, an increase in accounts receivable reserves of $3 million, a $167 million non-cash expense as a result of the increase in deferred tax valuation allowances outside the U.S., and income of $9 million related to the net gain on the sale of assets. Excluding these current and prior year items, income for 2021 was $12 million compared to a loss of $1 million in the prior year period, reflecting an improvement of $13 million from the prior year period. Operational EBITDA for the period was a positive $13 million compared to a negative $15 million in the prior year period. Excluding the favorable impact of foreign exchange and a decrease in workers' compensation reserves in the current year and an increase in accounts receivable reserves in the prior year, operational EBITDA improved by $21 million. Operational EBITDA for 2021 was favorably impacted by growth in key product areas and improved manufacturing costs from favorable cost absorption due to increases in sales volume, partially offset by savings from temporary furloughs and pay cuts in the prior year period that largely ended in January 2021. On a year-to-date basis, volumes for Sonora process-free plates improved by 38%, and the annuity revenue for Prosper improved by 28%, which was attributable to the market turnaround related to the COVID-19 pandemic. We continued to invest in future growth areas of UltraStream and Advanced Materials. Moving on to the company cash performance presented on slide 7, the company ended the second quarter with $395 million in cash and cash equivalents. an increase of $199 million from December 31, 2020. During the second quarter, we used $6 million in cash, an improvement of more than $20 million compared to the prior year quarter, driven by increases in revenue and profit, as I have just described. For the six months ending June 30, 2021, Cash used in operating activities was $21 million, driven primarily by cash use from net earnings of $3 million and a cash use from balance sheet changes of $18 million, including a change in working capital of $2 million and a decrease in other liabilities of $20 million. Accounts payable increased by $27 million, inventory increased by $30 million, and accounts receivable decreased by $1 million. These changes in working capital are expected with the increase in sales and manufacturing volumes the company has experienced in 2021. Included in the decrease in other liabilities are restructuring payments, pension contributions for plans outside the US, and changes in various accruals and liabilities. Cash used in investing activities was $5 million in the first half flat when compared to the prior year. Cash provided by financing activities was $241 million in the first half of 2021 compared to cash used in financing activities of $6 million in the prior year period. Cash provided by financing activities included $247 million of incremental cash in the first half of 2021 after fees and expenses driven by the financial transactions announced on March 1st. Restricted cash at the end of the quarter was $74 million, an increase of $14 million from December 31, 2020. This increase was primarily a result of cash collateral required under the new letter of credit facility. We will continue to focus on alternatives to reduce restrictions on cash, and we view this as an upside opportunity for incremental liquidity for the company. Finally, we remain in compliance with all applicable financial covenants. And I will now turn the discussion back to Jim.

Thank you, Dave. In summary, our strong second quarter performance reflects the impact of improvements we've made and our continued focus on our core competencies as part of our long-term plan. Over the last two and a half years, we have concentrated on our strengths as an industrial manufacturer. established a customer-first model, one codec, delivered our balance sheet, raised additional capital. The result is improved performance in our businesses and a solid foundation for the future. Thank you for attending the call and your continued interest in codec. Have a great evening.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating, and have a great day. You may all disconnect.