Eastman Kodak Company

Thank you for standing by and welcome to the Eastman Kodak Q3 2022 earnings conference call. At this time, all participants are on a listen-only mode. As a reminder, today's call is being recorded. I will now turn the conference over to your host, Mr. Paul Dills. Sir, 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 2022 earnings call. At 4.15 p.m. this afternoon, Kodak filed its Form 10-Q and issued its release on financial results for the third quarter of 2022. 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 materially from these forward-looking statements include, among others, the risk, 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 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 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 an unanticipated event. 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.codec.com. Speakers on today's call, are Jim Continenza, Kodak's chief executive officer and chairman, and David Bowen-Winkle, 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. Thank you for joining the third quarter investor call for Kodak. Please turn to slide five. Starting with the company's financial performance, revenues in the second quarter increased $2 million or 1% compared to prior year quarter. When excluding the impact of foreign exchange, revenue increased 24 million or 8% compared to the prior year quarter. We have recognized six straight quarters of year-over-year revenue growth, which demonstrates our commitment to a customer-first model and our leadership team's experience in managing through challenging business environments. Despite the current economic challenges, our gross profit percentages remained relatively flat compared to the second quarter and has increased from the first quarter. As previously discussed in the second quarter, we exercised our right to draw an additional $50 million term loan pursuant to the term loan agreement established last year with Kennedy Lewis Investment Management. The proceeds were partially used to fund an investment in Wildcat Discovery Technologies, a private technology company that is developing a breakthrough EV and energy storage supercell. We continue to navigate through the ongoing global impact associated with COVID-19 pandemic. the war in Ukraine, inflation, unfavorable exchange rates, and other global events. Like many other companies, Kodak is experiencing supply chain disruption, shortages in materials and labor, and increased costs of labor, materials, and distribution. We have implemented numerous measures to mitigate these challenges, including increasing safety stock and implementing pricing action. Turning to slide six, our long-term strategy continues to focus on our core competencies in print, advanced materials, and chemicals, and driving smart revenue in areas with best potential for growth. We continue to invest in innovation and have launched two key print products, which are industry-leading digital technologies. First is the Prosper Ultra 520 Digital Press. which delivers offset like print quality at a production speed. And we took the original Prosper and made it into a turbo. So we call it the Prosper Turbo 7000 digital press. It is the world's fastest inkjet press. Groundbreaking products like these have helped us bring digital print to the tipping point where it should be considered as a compliment to traditional print. Said differently, it's not digital or traditional. It's digital and traditional. They need to work together and they should mitigate each other's risk and bring additional flexibility and profitability to your business. Another key factor to digital print is the carbon footprint associated with it. If you look at traditional print, the amount of chemicals, aluminum, transportation, harvesting, yielding, the carbon footprint is quite large. With digital print, it's much smaller and we will continue to support a much smaller carbon footprint. As discussed on prior calls, we are also working on new growth initiatives within our advanced materials and chemicals group to leverage our deep experience in chemistry and strength in coating, layering, roll-to-roll manufacturing that comes from over a century of experience in film manufacturing. I would now like to turn this over to Dave to discuss the third quarter 2022 financial results.

Thanks, Jim, and good afternoon. Today the company filed its Form 10-Q for the quarter ended September 30, 2022 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 investment transaction the company made in the third quarter. As previously discussed in our second quarter earnings call, Kodak exercised its right to draw down the term loan credit agreement and received net proceeds of $49 million. On July 13th, Kodak invested $25 million of the proceeds received from the delayed draw term loans to acquire a minority stake in Wildcat Discovery Technologies. I would also like to comment on the global macroeconomic conditions that are impacting our financial results. Kodak's products are sold and serviced in numerous countries across the globe with more than half of sales generated outside the U.S. Current global economic conditions remain highly volatile due to the ongoing COVID-19 pandemic, heightened levels of inflation, unfavorable foreign exchange rates, the war in Ukraine, and other global events which impact Kodak's operations. Kodak is experiencing supply chain disruptions, shortages in materials and labor, and increased labor, material, and distribution costs, as well as volume declines for certain businesses. We've implemented numerous measures to mitigate these challenges, including increasing safety stock and implementing pricing actions. Our overall focus is on continuing to supply our customers to help them stay productive. I will now share details on the full company results, operational EBITDA, and cash flow for the third quarter and nine-month period ending September 30, 2022. On slide seven for the third quarter of 2022, we reported revenues of $289 million compared to $287 million in the prior year quarter for an increase of $2 million. Adjusting for the unfavorable impact of foreign exchange of $22 million in the current year quarter, revenue increased by $24 million compared to the prior year quarter. On a U.S. GAAP basis, We reported net income of $2 million for the third quarter compared to net income of $8 million in the prior year quarter. The 2022 and 2021 third quarter results include income of $5 million and $1 million, respectively, related to non-cash changes in workers' compensation reserves. The third quarter of 2021 results also include income of $3 million related to changes in the fair value of embedded derivative liabilities and $1 million related to a net loss on the sale of assets. Excluding these current and prior quarter items, net loss for 2022 was $3 million compared to income of $5 million in the prior year quarter, reflecting a decline of $8 million. Operational EBITDA for the quarter was a positive $7 million compared to a positive $6 million in the prior year quarter. excluding the impact of foreign exchange in the current year quarter and changes in workers' compensation reserves in the current year and prior year quarter, operational EBITDA increased by $3 million when compared to the prior year quarter. Operational EBITDA for 2022 was favorably impacted by the growth in revenue due to improved pricing partially offset by higher continued ongoing global cost increases and the unfavorable impact of foreign exchange. During the third quarter, volumes for Sonora process-free plates declined by 10% due to customer buying patterns and their inventory levels as a result of global economic conditions. Annuity revenue for Prosper declined by 11%, primarily due to the impact of foreign exchange. On a constant currency basis, annuity revenue improved by 1%. As demonstrated by the company's investment in Wildcat Technologies during the quarter, We continue to invest in future growth areas of advanced materials and chemicals. We also continue to invest in multiple areas within print. Turning to slide eight, for the nine months ending September 30, 2022, we reported revenues of $900 million compared to $843 million in the prior year period for an increase of $57 million. Adjusting for the unfavorable impact of foreign exchange, of $51 million in the current year period, revenue increased by $108 million compared to the prior year period. We reported net income of $19 million for the year-to-date period compared to net income of $30 million in the prior year period. The 2022 and 2021 year-to-date results include income of $1 million and $3 million respectively related to changes in fair value for the embedded derivative liabilities an income of $13 million and $4 million, respectively, related to non-cash changes in workers' compensation reserves. The year-to-date period of 2021 results also include income of $7 million related to legal settlements and a net loss on the sale of assets for $1 million. Excluding these current and prior year items, results for 2022 were net income of $5 million compared to net income of $17 million in the prior year reflecting a decline of $12 million from the prior year period. Operational EBITDA for the year-to-date period was a positive $11 million compared to a positive $19 million in the prior year period. Excluding the impact of non-cash changes in workers' compensation reserves in both the year-to-date periods of 2022 and 2021 and the unfavorable impact of foreign exchange in the current year period of $10 million, operational EBITDA decreased by $7 million year-over-year. Operational EBITDA for 2022 was favorably impacted by the growth in revenue due to improved pricing, partially offset by higher continued ongoing global cost increases and the unfavorable impact of foreign exchange. On a year-to-date basis, volumes for Sonora process-free plates improved by 6%, and the annuity revenue for Prosper declined by 4%, primarily due to foreign exchange. On a constant currency basis, prosper annuity revenue improved by 4% in the current year period. Moving on to the company cash performance presented on slide nine. The company ended the third quarter with $216 million in cash and cash equivalents, a decrease of $146 million from December 31st, 2021. For the nine months ending September 30, 2022, cash used in operating activities was $130 million. Current year cash used in operating activities is driven primarily by cash use from net earnings of $36 million and cash used from balance sheet changes of $94 million, including a change in working capital of $76 million and a decrease in other liabilities of $26 million. Accounts payable increased by $5 million inventory increased by $74 million, and accounts receivable increased by $7 million. We use cash in working capital in order to strengthen our ability to supply our customers on an ongoing basis. We have increased safety stock in certain materials, provided suppliers with longer forecasts of future demand, and certified additional sources or substitute materials where feasible. The cash used from operations reflects continued challenges in the cost of labor and materials, as well as utilities consumed in manufacturing our products. These increases have reduced our profitability, which we are mitigating through price increases. Cash used in investing activities was $44 million in the current year period, an increase of $35 million when compared to the prior year period, primarily a result of our investment in Wildcat and an increase in capital expenditures as we continue to invest in growth initiatives. Cash provided by financing activities was $45 million in the current year period compared to $240 million in the prior year period. Cash provided by financing activities in the current year includes $49 million of incremental cash in the year-to-date period after fees and expenses driven by proceeds received related to the delayed draw term loan exercised in the second quarter. Cash provided by financing activities in the prior year included $247 million of incremental cash after fees and expenses driven by the financial transactions announced on March 1st, 2021. Restricted cash at the end of the quarter was $64 million, an increase of $3 million from December 31, 2021. Restricted cash primarily represents cash collateral required under the new letter of credit facility in addition to escrows to secure various ongoing obligations. We will continue to focus on alternatives to reduce these restrictions on cash, and we view this as an upside opportunity for incremental liquidity for the company. As presented on the bottom portion of the slide, excluding the current and prior year impact of net proceeds from refinancing transactions and the effect of exchange rates on cash, in addition to the current year purchase of preferred equity interest and prior year funding of the letter of credit facility, the year-over-year decrease in cash and cash equivalents was $110 million, primarily driven by use of cash from working capital in order to strengthen the company's ability to serve our customers in addition to the unfavorable effects of foreign exchange. Finally, we remain in compliance with applicable financial covenants. I will now turn the discussion back to Jim.

Thank you, Dave. In summary, the long-term strategy we put in place three years ago continues to drive positive results and supports our plan to return Kodak to a profitable growth company. Kodak delivered revenue growth year over year for the third quarter of 2022 and has now recognized six consecutive quarters of growth in revenue in very difficult times. Our ongoing investment in digital print are designed to help customers grow, mitigate risk, lower costs associated with supply, logistics, and other associated risks with traditional pre-press solutions. We continue to make significant investments in recently announced growth initiatives in advanced materials and chemical business, expanding our pilot coating facilities, and taking a minority stake in Wildcat discovery technologies. Looking forward, We will focus on driving smart revenue in areas with the best potential growth. Again, I'd like to remind everyone I'm really proud of what this team has accomplished in these difficult times. After many, many, many years of consecutive losses, we have put together six consecutive quarters of growth, and we will continue to focus on our customers, our products, and smart revenue to deliver in the future. Thank you for attending the call and continued interest in Eastman Kodak.

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