Eastman Kodak Company

Thank you for standing by and welcome to the Eastman Kodak's Q4 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 would now like to call on 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 fourth quarter and full year 2022 earnings call. At 4.15 p.m. this afternoon, Kodak filed its Form 10-K and issued its release on financial results for the fourth quarter and full year 2022. You may access the presentation and webcast for today's call on our Investor Center at investor.kodak.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 Codex expectations and various assumptions. Future events or results may differ from those anticipated or those expressed in the forward-looking statements. Important factors that could cause actual events or results that 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 US 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 presentation provided contains certain measures that are deemed non-GAAP 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 Contonanza, Kodak's Chief Executive Officer and 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 year-end 2022 investor call for Eastman Kodak. I'm excited to talk to the transformation we've made over the last four years and the journey and the results are starting to follow the efforts that we've taken as a team. I'm very pleased with the company's fourth quarter and full year performance. We continue to see the effects of our long-term strategy we put in place four years ago. and the actions we've taken thus far. These actions have repositioned the company, enabling us to focus on initiatives that drive positive results and which continue to drive smart revenue and support our plan to return Kodak to sustainable, profitable growth. Our past actions include stabilizing our balance sheet, allowing us to focus on overall business model, customers and growth initiatives, If you recall, when we went out and raised initial capital, they were to reinvest in these initiatives and the businesses you see today. Recognizing one codec and focusing on our core competencies in print, advanced materials, and chemicals, providing environmentally sustainable solutions, and turning the business focus on innovation, growth, and smart revenue. In 2022, our priorities included Continue to navigate through the ongoing global economic impacts. Like many other companies, Kodak is experiencing supply chain disruptions, shortages in materials and labor, and increased cost, labor, materials, distribution, shipping, and effects. Despite the above shortages and cost increases, we have taken steps to ensure uninterrupted supply for our customers, including increasing safety stock, and building inventories to help our customers stay productive and profitable. We only win when our customers win. Improving our cost controls resulting in reduction of operating expenses and implemented price actions that realize the value of our offerings. Combining these actions with improved inventory management, operational excellence has resulted in improved cash flow. We continue to invest in initiatives including updating our infrastructure, our facilities for better efficiency throughout the company to help drive our advanced materials and chemicals group. These actions continue to provide positive momentum in 2022 and we expect to continue in 2023. Turning to slide six, performance highlights for the fourth quarter include revenue decrease of 2 million or 1% compared to the prior year quarter. When excluding the impact of foreign exchange, revenue increased 17 million or 6% compared to the prior year quarter. Our focus on smart revenue, pricing, cost reduction, customer focused initiatives have been the priority for the team for the entire year and have resulted in significant improvements. Growth profit increased 10 million or 30% compared to the prior year quarter or 14 million excluding foreign exchange, an increase of 42%. Our gross profit percentage was 14% in quarter four 2022 compared to 11 in fourth quarter 2021. Performance highlights for the full year 2022 include we have recognized consecutive years of revenue growth for the first time in decades. revenues increased $55 million or 5% compared to the prior year. When excluding the impact from foreign exchange, revenue increased $125 million or 11% compared to the prior year. Gross profit improved $6 million or 4% when compared to the prior year. Excluding the impact of foreign exchange, gross profit improved $22 million or 13% compared to the prior year. Our gross profit percentage was 14% for the full year of 2022, flat one compared to 2021. Despite rising costs and difficult macro economic conditions, this is the result of many actions our team has taken to mitigate the effects of a global economy, including cost cutting efforts and implementing smart revenue actions. Turning to slide seven, we continue to invest in innovation and have launched two key print products, which are at the leading edge of digital technology. I am pleased to let you know that we are now releasing the Prosper Ultra 520 Digital Press, which delivers offset-like print quality at production speed, and the Prosper 7000 Turbo Digital Press, the world's fastest inkjet press. We are pleased to announce that we have two verbal commitments, one for the Prosper Ultra 520 digital press and one for the Prosper 7000 Turbo. Codec debuted the new Prosper Ultra 520 press and our new Chrotochrome inks at Hunkler Innovation Day's print industry event. Hunkler is a premier industry showcase of innovation in digital print and finishing. We received an extremely positive reaction from our customers and prospects who are excited about the new press's ability to increase productivity by delivering offset quality at 150 meters per minute. These groundbreaking products have helped bring digital print to the tipping point where it should be considered as a compliment to traditional print in virtually every print shop. Digital, especially our inkjet technology, now provides printers the ability to offer customers offset-like print quality while mitigating the supply and cost risk of traditional printed plates and eliminating the significant carbon footprint associated with manufacturing and distributing these items. Just to be clear what I stated earlier, the digital print is not a total replacement for offset. We'll continue to manufacture plates and CTPs and supply in our customers. It is a mitigation of risk and a new technology to help drive new business at lower cost. As discussed in our prior calls, we are also working on a new initiative within the AMC group to leverage our deep experience in chemistry and strength in layering and coding on multiple substrates that come from over a century of experience in film manufacturing. We are committed to changing the company's culture to focus on customer first, promote teamwork to support our customers, and encourage bold and courageous actions to simplify and standardize processes throughout the company, especially in support functions. We are investing in modernization of our IT infrastructure. In January 2023, we finalized the upgrade of SAP P20, our ERP system. The upgrade is a huge step forward in modernizing our infrastructure reflecting our commitment to long-term investment in Kodak and serving our customers' needs. Our goal is to build on the momentum we've generated to continue our transformation in 2023. I will now turn it over to Dave to discuss our 2022 financial results.

Thanks, Jim, and good afternoon. Today, the company filed its Form 10-K for the year ended December 31st, 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 a financing transaction that occurred in the first quarter of 2023. On March 14, 2023, the company entered into an amendment to the amended ABL credit agreement and letter of credit facility agreement to, among other things, extend the maturity date from February 26, 2024 to June 12, 2024. to maintain daily minimum liquidity of $50 million in addition to maintaining the existing quarterly minimum liquidity of $80 million, and upon the maturity of the amended ABL credit agreement on February 26, 2024, decrease the aggregate amount of commitments from $90 million to $81 million. This extension will provide us with more flexibility and additional time to find an optimal solution to our capital structure given the macroeconomic conditions. This extension is also more fully disclosed in our Form 10-K filed today. As Jim mentioned, we are pleased with Kodak's strong performance in 2022, growing revenue in consecutive years for the first time in decades, launching new products and investing in our future despite ongoing inflationary and supply chain challenges. Our performance reflected the success of our strategic plan, which began four years ago. I will now share details on the full company results, operational EBITDA, and cash flow for the fourth quarter and full year 2022. On slide 8, for the fourth quarter of 2022, we reported revenues of $305 million compared to $307 million in the prior year quarter for a decrease of $2 million, or 1%. Adjusting for the unfavorable impact of foreign exchange of $19 million in the current year quarter, revenue increased by $17 million, or 6%, compared to the prior year quarter. As Jim mentioned, pricing, cost reduction, and customer-focused initiatives have been the priority for the team for the entire year and have resulted in significant improvements in profitability. We have recognized improvements in gross profit with an increase of $10 million, or 30%, when compared to the prior year quarter. Excluding foreign exchange, gross profit improved $14 million or 42% when compared to the prior year quarter. Our gross profit percentage was 14% in the fourth quarter of 2022 compared to 11% in the prior year quarter. Excluding the impact of foreign exchange, our gross profit percentage was 15% in quarter four 2022 compared to 11% in the prior year quarter. This improvement is a result of the many actions our team has taken to mitigate the effects of the global economy, including cost-cutting efforts and implementing pricing actions. These actions have established positive momentum as we continue to drive profitable growth going forward. On a U.S. GAAP basis, we reported net income of $7 million for the fourth quarter compared to a net loss of $6 million in the prior year quarter, an increase of $13 million, or 217%. The 2022 and 2021 fourth quarter results include income of $2 million and $4 million, respectively, related to changes in the fair value of embedded derivative liabilities. The fourth quarter of 2022 results also include income of $1 million related to legal settlements, an expense of $1 million related to asset impairments, and income of $2 million related to non-cash changes in workers' compensation and employee benefit reserves. Excluding these current and prior quarter items, net income for 2022 was $3 million compared to net loss of $10 million in the prior year quarter, reflecting an increase of $13 million, or 130%. Operational EBITDA for the quarter was a positive $7 million compared to a negative $8 million in the prior year quarter, an increase of $15 million, or 188%. Excluding the impact of non-cash changes in workers' compensation and employee benefit reserves and foreign exchange in the current year, operational EBITDA increased by $12 million, or 150%, when compared to the prior year quarter. Operational EBITDA for 2022 was favorably impacted by improved profitability related to pricing actions partially offset by higher continued ongoing global cost increases as well as cost reductions driven by operational initiatives. Moving on to the company's fourth quarter cash performance presented on slide nine. The company had a year-end cash balance of $217 million compared with $216 million at the end of the third quarter of 2022, an improvement of $19 million from the prior year comparable period. For the quarter ending December 31, 2022, cash provided by operating activities was $14 million compared to a use of $14 million in the prior year quarter, reflecting an improvement of $28 million. Current quarter cash provided by operating activities is driven primarily by cash use from net earnings of $1 million and cash provided by balance sheet changes of $15 million, including a change in working capital of $21 million and a decrease in other liabilities of $12 million. Cash provided by working capital was driven by actions taken to mitigate inflation and rising costs, including cost-cutting efforts, improved inventory management, and implementation of pricing actions. Our efforts have more than offset these negative impacts of the global economy and have resulted in cash generation in the fourth quarter of 2022. Cash used in investing activities was $12 million in the current year period, an increase of $1 million when compared to the prior year period, primarily resulting from an increase in capital expenditures as we continue to invest in growth initiatives. Cash used in financing activities was $2 million in the current year period, flat when compared to the prior year period. Restricted cash increased by $15 million when compared to the prior year period as a result of cash collateral required under certain aluminum supply contracts in addition to escrows to secure various ongoing obligations. As presented on the bottom portion of the slide, excluding the effects of foreign exchange, the quarter-over-quarter increase in cash and cash equivalents was $12 million. Due to our team's astounding level of discipline and performance, we have more than offset the various impacts of the global economy, resulting in a cash-neutral position in the fourth quarter. On slide 10, as we reported in our earnings release for the full year 2022, the company had revenues of $1.205 billion compared to $1.15 billion in the prior year for an improvement of $55 million, or 5%. adjusting for the unfavorable impact of foreign exchange of $70 million, revenue increased by $125 million, or 11%, compared to the prior year. This is the second consecutive full year of revenue growth for the company in several decades. Gross profit improved $6 million, or 4%, when compared to the prior year, excluding the impact of foreign exchange gross profit improved $22 million, or 13% compared to the prior year. Our gross profit percentage was 14% for the full year 2022, flat when compared to 2021. Including the impact of foreign exchange, our gross profit percentage was 15% in 2022, compared to 14% in the prior year. This is a result of the many actions our team has taken to mitigate the effects of the global economy, cost-cutting efforts and implementing pricing actions. On a U.S. GAAP basis, we reported net income for 2022 of $26 million compared to net income of $24 million in 2021, an improvement of $2 million, or 8%, from the prior year. The 2022 and 2021 results include income of $3 million and $7 million, respectively, related to changes in fair value for the embedded DERIVATIVE LIABILITIES, INCOME OF $1 MILLION AND $7 MILLION, RESPECTIVELY, FOR LEGAL SETTLEMENTS AND INCOME OF $15 MILLION AND $4 MILLION, RESPECTIVELY, RELATED TO NONCASH CHANGES IN WORKER'S COMPENSATION AND EMPLOYEE BENEFIT RESERVES. THE 2022 RESULTS ALSO INCLUDE EXPENSE OF $1 MILLION RELATED TO ASSET IMPAIRMENTS. THE 2021 RESULTS ALSO INCLUDE $1 MILLION RELATED TO A NET LOSS ON THE SALE OF ASSETS. Excluding the impact of these current and prior year items, the 2022 adjusted net income was $8 million compared to income of $7 million in the prior year, an improvement of $1 million or 14% from the prior year. Operational EBITDA for 2022 was a positive $18 million compared to a positive $11 million in 2021, an improvement of $7 million or 64% from the prior year. Excluding the impact of non-cash changes to workers' compensation and employee benefit reserves in 2022 and 2021, and the unfavorable impact of foreign exchange in the current year of $9 million, operational EBITDA increased by $5 million, or 71% from the prior year. Operational EBITDA for 2022 was favorably impacted by 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 FULL YEAR BASIS, VOLUMES FOR SONORA PROCESSORY PLATES IMPROVED BY 2%, INCLUDING VOLUME UNDER A LICENSING AGREEMENT WHICH KODAK RECEIVED APPROXIMATELY $1 MILLION IN ROYALTIES IN 2022, VOLUMES FOR SONORA IMPROVED BY 9%. THE ANNUITY REVENUE FOR PROSPER DECLINED BY 6%, PRIMARILY DRIVEN BY FOREIGN EXCHANGE FLUCTUATIONS. ON A CONSTANT CURRENCY BASIS, PROSPER ANNUITY REVENUE IMPROVED BY 2% IN THE CURRENT YEAR. WE ALSO CONTINUE TO INVEST IN FUTURE GROWTH AREAS OF ULTRA STREAM AND ADVANCED MATERIALS AND CHEMICALS, AS PREVIOUSLY DISCUSSED. MOVING ON TO THE COMPANY FULL YEAR CASH PERFORMANCE PRESENTED ON SLIDE 11, THE COMPANY ENDED 2022 WITH $217 MILLION IN CASH AND CASH EQUIVALENCE, A DECREASE OF $145 MILLION FROM DECEMBER 31 DURING 2022, CASH USED IN OPERATING ACTIVITIES WAS $116 MILLION. CURRENT YEAR CASH USED IN OPERATING ACTIVITIES IS DRIVEN PRIMARILY BY CASH USE FROM NET EARNINGS OF $37 MILLION AND CASH USE FROM BALANCE SHEET CHANGES OF $79 MILLION, INCLUDING A CHANGE IN WORKING CAPITAL OF $55 MILLION AND A DECREASE IN OTHER LIABILITIES OF $38 MILLION. Within working capital, accounts payable decreased by $12 million, inventory increased by $31 million, and accounts receivable increased by $12 million. Cash used in investing activities was $56 million in the current year, an increase of $36 million when compared to the prior year, 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 $43 million in the current year compared to $238 million in the prior year. Cash provided by financing activities in the current year includes $49 million of incremental cash after fees and expenses driven by proceeds received related to the delayed draw term loan exercise in the second quarter of 2022. 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 year was $69 million, an increase of $8 million from December 31, 2021. Restricted cash primarily represents cash collateral required under the new letter of credit facility and certain aluminum supply contracts in addition to escrows to secure various ongoing obligations. As our financial performance continues to improve, we will explore alternatives to secure our obligations and ways to gain more access to the cash which is currently supporting these facilities. 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 the prior year funding of the letter of credit facility, year-over-year decrease in cash and cash equivalents was $98 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, as disclosed in our Form 10-K, we remain in compliance with all applicable financial covenants. I will now turn the discussion back to Jim.

In summary, Kodak delivered strong performance in 2022, growing smart revenues in consecutive years for the first time in decades, launching new products and investing in our future despite ongoing inflationary and supply chain challenges. Our performance reflected the success of our strategic plan, which began over four years ago. We're stabilizing our balance sheet, reorganizing as one codec, and refocusing on our customer and our core businesses. Our priorities for 2022 include providing our customers with uninterrupted supply, reducing costs by improving efficiencies, and implementing price actions that realize the value of our offerings, which contribute to year-over-year increase in gross profit for the fourth quarter. We continue to invest in the business, including updating our infrastructure and developing growth businesses in our advanced materials and chemicals group. On top of that, we also continue to invest heavily in digital transformation of the printing industry. As we debuted the groundbreaking Prosper Ultra 520 inkjet press and the new Chrotochrome inks at Hunkler Innovation Days, The event, again, received very positive reaction from our customers. We're going to continue to build up this momentum into 2023. Thank you all for attending the call and your continued interest in Eastman Kodak. Have a great day.

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