Eastman Kodak Company

Ladies and gentlemen, thank you for standing by and welcome to the Eastman Kodak Q3 2021 earnings call. At this time, all participants are in a listen-only mode. If you require operator assistance, please press star zero. I would now like to turn the call over to your host, Paul Dills. You may begin.

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 2021 earnings call. At 415 p.m. this afternoon, Kodak issued its release on financial results for the third quarter 2021. 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 CODAC's 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 only apply 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 an unanticipated event. In addition, the release just issued and the presentation provided contain 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 Contenanza, Kodak's Executive Chairman and Chief Executive Officer, and David Bowenkel, 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.

Thank you, Paul, and welcome everyone to the third quarter 2021 investor call for Kodak. I am happy with the third quarter results. The plan we put in place two and a half years ago will continue to execute on it. And we've had some additional challenges. Despite the rapid inflationary pressures, including the rising cost of raw materials, shipping, supply chain, additional challenges in labor, we will continue to focus as one Kodak and on our customer. The conditions are the same for everyone. And we all have to work through those and we have to execute. We are taking action to mitigate these impacts. We're looking to make sure that we buy core products that we need to continue our manufacturing process. And with that, I'm proud to say our revenues are up $111 million year-to-date, $90 million after FX, year-over-year. We are committed to continue innovation in digital print. That hasn't changed. We're going to meet customer needs. We're going to innovate. Some examples, we continue to innovate with the Prosper platform. and UltraStream. We are also opening up new opportunities for our printers with the announcement of the Kodak Ascend Digital Press. It opens up new, profitable applications and opportunities in retail, point of sale, and small packaging for printers. We're also continuing to invest in PrintG on Demand, making the printing industry's most secured and highest performing software platform affordable for more printers. I want to discuss plates. Strategically, we are well-positioned. We manufacture in the U.S., Asia, and Europe. And to be clear, we are now the last standing large U.S. manufacturer in plates. I'm pleased to also say that we saw strong growth in our Sonora process free plate, up 35% for the quarter. Sonora Extra has been well accepted in the marketplace. I want to thank the printers. for supporting sustainability in printing by using the eco-friendly Sonora processor plates. I also want to note our growth is also coming from new customer growth. As we moved into one codec and a customer-first model, we're seeing, as you saw, the growth in revenues. We're also seeing our customer base grow in plates. I'm also pleased to announce that we received the 2021 Pinnacle Intertech Award for Kodak Sonora Extra Process Replace. I want to talk a little bit about film. I'm pleased to report that we are seeing a resurgence in our film business. More people are shooting still film, and the motion picture industry is choosing film as the ideal medium for their productions. As a result, we are increasing the capacity of our film factory. As we continue to execute on our long-term strategy, We are going to continue to focus on our core competencies in print, advanced materials, and chemicals. Provide environmentally sustainable solutions, both products and internally, turning the business to focus on innovation, growth, and profitability. Now I'd like to turn it over to David Bolinkle, our CFO.

Thank you, Paul. Thanks, Jimmy. Good afternoon. Today, the company filed its Form 10-Q for the quarter ended September 30, 2021 with the Securities and Exchange Commission. As always, I recommend you read this filing in its entirety. I will now share further details on the full company results, operational EBITDA and cash flow for the third quarter and nine-month period ending September 30, 2021. On slide five, for the third quarter of 2021, we reported revenues of $287 million. compared to $252 million in the prior year quarter for an increase of $35 million. Adjusting for the favorable impact of foreign exchange of $2 million in the current year quarter, revenue increased by $33 million compared to the prior year quarter. On a U.S. GAAP basis, we reported net income of $8 million for the third quarter compared to a net loss of $445 million in the prior year quarter. The 2021 and 2020 third quarter results include income of $3 million and expense of $431 million, respectively, related to changes in the fair value of embedded derivative liabilities. The third quarter of 2021 results also include income of $1 million related to non-cash changes in workers' compensation reserves and $1 million related to a net loss on the sale of assets. The third quarter of 2020 results include expense of $9 million related to non-cash changes in workers' compensation reserves, $2 million related to the loss and extinguishment of debt, and income of $1 million related to a decrease in accounts receivable reserves. Excluding these current and prior quarter items, income for 2021 was $5 million compared to a loss of $4 million in the prior year quarter, reflecting an improvement of $9 million. Operational EBITDA for the quarter was a positive $6 million compared to a negative $1 million in the prior year quarter. Excluding the impact of foreign exchange and changes in workers' compensation reserves in the current year quarter and changes in accounts receivable and workers' compensation reserves in the prior year quarter, operational EBITDA decreased by $1 million when compared to the prior year quarter. Operational EBITDA for 2021 was favorably impacted by growth in key product areas and improved manufacturing costs from favorable cost absorption resulting from increases in volume partially offset by savings from temporary furloughs and pay cuts in the prior year period that largely ended in January 2021. Ongoing global cost increases and changes in workers' compensation reserves. we are taking actions to address the current inflationary pressures. During the third quarter, bonds for Sonora Process Replace improved by 35%, and the annuity revenue for Prosper improved by 17%, reflecting volume growth with our customers, including growth in our customer base. We continue to invest in future growth areas, ultrastream, and advanced materials. Also, as Jim discussed, the newly announced product innovations reflecting Codex's continued commitment to developing breakthrough solutions that support Codex's customer-first model. We continue to deliver on our promise to provide a complete range of solutions that offer print that pays. Turning to slide six, for the nine months ending September 30, 2021, we reported revenues of $843 million compared to $732 million in the prior year period, for an increase of $111 million. Adjusting for the favorable impact of foreign exchange of $21 million in the current year period, revenue increased by $90 million compared to the prior year. We reported net income of $30 million for the year to date period compared to a net loss of $561 million in the prior year period. The 2021 and 2020 year to date results include income of $3 million and expense of $382 million, respectively, related to changes in fair value for the embedded derivative liabilities. The year-to-date period of 2021 results also include income of $7 million related to legal settlements, income of $4 million related to non-cash changes in workers' compensation reserves, and a net loss in the sale of assets for $1 million. The year-to-date period of 2020 results also include the impact of a trade name impairment for $3 million, an increase in accounts receivable reserves of $3 million, expense of $9 million related to non-cash changes in workers' compensation reserves, $2 million related to a loss on the extinguishment of debt, income of $9 million related to a net gain on the sale of assets, and the $167 million non-cash expense as a result of the increase in deferred tax valuation allowances outside the US. Excluding these current and prior year items results for 2021 net income of $17 million compared to a loss of $4 million in the prior year period, reflecting an improvement of $21 million from the prior year. Operational EBITDA for the year to date period was a positive $19 million, compared to a negative $16 million in the prior year period. Excluding the impact of changes in workers' compensation reserves in both the year-to-date periods of 2021 and 2020 and the increase in accounts receivable reserves in the year-to-date period of 2020, operational EBITDA increased by $20 million year-over-year. 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, ongoing global cost increases, and changes in workers' compensation reserves. We are taking actions to address the current inflationary pressures and supply chain challenges. On a year-to-date basis, buy-ins for Sonora process-free plates improved by 37%, and the annuity revenue for Prosper improved by 24%, reflecting the return to pre-COVID sales volume levels, in addition to growth in our customer base. We continue to invest in future growth areas of UltraStream and Advanced Materials. Moving on to the company cash performance presented on slide seven. The company ended the third quarter with $380 million in cash and cash equivalents, an increase of $184 million from December 31, 2020. For the nine months ending September 30, 2021, cash used in operating activities was $33 million. Cash used for operating activities in the prior year period was $48 million, representing an improvement of $15 million. Current year cash used in operating activities is driven primarily by cash use from net earnings of $11 million and cash use from balance sheet changes of $22 million, including a change in working capital of $1 million and a decrease in other liabilities of $26 million. Accounts payable increased by $33 million, inventory increased by $38 million, and accounts receivable decreased by $6 million. These changes in working capital are expected with the increase in sales and manufacturing volumes the company is experiencing. Included in the decrease in other liabilities are restructuring payments, pension contributions for plans outside the U.S., and changes in various accruals and liabilities. Cash used in investing activities was $9 million in the current year period flat when compared to the prior year period. Cash provided by financing activities was $240 million in the current year period compared to $10 million in the prior year period. Cash provided by financing activities included $247 million of incremental cash after fees and expenses driven by the financial transactions announced on March 1st of 2021. Restricted cash at the end of the quarter was $71 million, an increase of $11 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 to invest in growth. Finally, our Form 10Q discloses that we remain in compliance with applicable financial covenants. I will now turn the discussion back to Jim.

In summary, a strong third quarter performance reflects the impact of our business we've made as we mitigate inflationary pressures and our continued focus on our core competencies as part of our long-term plan. Over the past few years, we have concentrated on our strengths as an industrial manufacturer, established customer first model, one codec, delivered our balance sheet, and raised additional capital The result is improved performance in our business and a solid foundation. We're well aware of the challenging times ahead of us, but we are committed to continue to work through them. Thank you all for attending the call and your interest in Kodak.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.