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Edited Transcript of KODK earnings conference call or presentation 8-Aug-19 9:00pm GMT

Q2 2019 Eastman Kodak Co Earnings Call

ROCHESTER Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Eastman Kodak Co earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Bullwinkle

Eastman Kodak Company - CFO & Senior VP

* James V. Continenza

Eastman Kodak Company - Executive Chairman & CEO

* William G. Love

Eastman Kodak Company - Director of IR & Treasurer

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Eastman Kodak Q2 2019 Earnings Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Bill Love. You may begin.

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William G. Love, Eastman Kodak Company - Director of IR & Treasurer [2]

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Thank you, and good afternoon, everyone. I am Bill Love, Eastman Kodak Company's Treasurer and Director of Investor Relations. Welcome to Kodak's Second Quarter 2019 Earnings Call.

At 4:15 p.m. this afternoon, Kodak filed its quarterly report on Form 10-Q and issued its release on financial results for the second quarter of 2019. 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 Kodak's 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 Kodak's 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 the 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 or 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-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 Continenza, Kodak's Executive Chairman; and Dave Bullwinkle, Chief Financial Officer of Kodak.

I will now turn the call over to Jim.

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James V. Continenza, Eastman Kodak Company - Executive Chairman & CEO [3]

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Thank you, Bill. Welcome, everyone. Thank you for joining the second quarter investor call for Kodak.

Turning to Slide 4. I would like to start by discussing the progress we have made on several significant initiatives to strengthen the company.

As mentioned on our last call, the company completed the sale of Flexographic Packaging Division in the second quarter to use the proceeds to repay a significant portion of the term loan outstanding under the company's senior secured lien credit agreement. Additionally -- excuse me, outstanding loan under the company's senior secured first lien term credit agreement.

Additionally, the company closed on the issuance and sale of its secured convertible notes due 2021, allowing the company to repay in full the remaining term loan under the senior secured first lien term credit agreement. The result of completing these transactions is the delevering of our company by approximately $300 million and will be further reduced by $100 million if the company notes convert to equity. This significantly reduces the interest expense and will defer interest payment on debt and strengthen our financial position.

Also, on August 3, 2019, the company announced reaching an agreement with Lucky HuaGuang Graphics Ltd to establish a strategic relationship in the People's Republic of China. The transaction includes the sale of Kodak's offset printing plates facility in Xiamen, China, a supply agreement to help Kodak fulfill its existing customer demand and IP agreement, under which Kodak licensed technology to HuaGuang to expand the market in China. The deal will leverage the combined strength of HuaGuang's market leadership, Kodak's world-class technology, which together are expected to accelerate the conversion to Kodak's SONORA Process Free Plates in China, Hong Kong, Taiwan and Macau. We expect to close this deal in the third quarter 2019.

In the last 5 months, we have completed transactions which significantly improved the financial health of the company. We also have been moving forward, and we'll continue to concentrate on the print business, the film business, advanced materials. This will shape the structure of the management team and provide better alignment with our customers' needs.

We are in the process of revisiting our reporting structure, and we'll be announcing changes within the second half of 2019. As we continue to reduce costs and focus on the business, we have reduced the size of our Board also to reflect the reduction in the size of our business and gain better efficiencies. We continue to work on plans to generate cash in 2020.

With that said, I'm going to turn this over to Dave now to discuss the 2019 second quarter and first half financial results.

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David E. Bullwinkle, Eastman Kodak Company - CFO & Senior VP [4]

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Thanks, Jim, and good afternoon. Today, the company filed its Form 10-Q for the quarter ended June 30, 2019, with the Securities and Exchange Commission. As always, I recommend you read this filing in its entirety.

As Jim mentioned, the company completed the sale of its Flexographic Packaging Division in the second quarter. The net proceeds from the transaction were used to repay $312 million of our outstanding first lien term debt.

Additionally, the company closed on the issuance and sale of $100 million aggregate principal amount of its secured convertible notes due in November of 2021 to funds managed by Southeastern Asset Management. Concurrent with the closing of the convertible notes issuance, the company repaid in full the approximately $83 million of remaining first lien term debt.

On July 12, 2019, the company filed a preliminary information statement in connection with the issuance and sale of the convertible notes, adoption of a new protective amendment to restrict certain transfers of common stock in order to preserve the tax benefits of the company's U.S. net operating losses and foreign tax credits and adoption of a tax asset protection plan to deter certain transfers of the common stock in order to preserve the tax benefit of the company's U.S. net operating losses and foreign tax credits.

In addition, as Jim mentioned, earlier this week, we signed an agreement with Lucky HuaGuang Graphics Co. Ltd to form a strategic relationship in the People's Republic of China. This transaction is designed to accelerate the growth of Kodak's SONORA Process Free Plates in China. Kodak will maintain its current go-to-market structure in China with the expectation that SONORA volumes will continue to ramp, alongside growing sales of the full portfolio of Kodak solutions.

We expect to close on this deal in the third quarter of 2019, subject to the satisfaction of customary closing conditions. Further details are disclosed in our Form 10-Q.

I will now share further details on the company's results, operational EBITDA and cash flow for the second quarter and first half of 2019. Please note the results of FPD have been reported as discontinued operations for the second quarter and year-to-date June 30, 2019, and the comparable 2018 periods due to the sale of the division.

On Slide 5, as we reported in our earnings release, net income for the second quarter of 2019 on a U.S. GAAP basis was $201 million compared to net income of $4 million in the prior year quarter. For the 6 months ending June 30, 2019, the reported net income was $183 million compared with a net loss of $21 million for the 6 months ended June 30, 2018.

Excluding the impact from the gain on sale of the flexographic packaging business of $207 million and the related changes in the fair value for the derivatives embedded in the Series A preferred stock and convertible notes, the net loss for the second quarter of 2019 was $9 million compared to a net loss of $3 million in the prior year quarter. The year-to-date loss on this basis for 2019 was $26 million compared to a loss of $14 million in the prior year period, which primarily reflects reduced noncash pension income and nonrecurring costs of completing the FPD sale.

Turning to Slide 6. For the second quarter of 2019, we reported revenues of $307 million compared to $332 million in the prior year quarter for a decline of 8%. On a constant currency basis, revenue declined by 5%. Operational EBITDA for the quarter was a negative $1 million compared to a negative $2 million in the prior year quarter. Excluding the favorable impact of aluminum costs, operational EBITDA declined by $1 million. Foreign exchange did not have an impact on operational EBITDA.

For the first half of 2019, we reported revenues of $598 million compared to $650 million in the prior year period for a decline of 8%. On a constant currency basis, revenue declined by 5%.

Operational EBITDA for this period was a negative $7 million compared to a negative $11 million in the prior year period. Excluding the favorable impact of aluminum costs, operational EBITDA improved by $1 million or 9%. Foreign exchange did not have an impact on operational EBITDA.

We continued to deliver strong performance in our key growth engines. On a year-over-year basis, volumes for SONORA Process Free Plates grew by 25% and 24%, and the annuity revenue for PROSPER grew by 9% and 10%, respectively, in the second quarter and year-to-date period ended June 30, 2019.

The profitable growth of these products has accelerated compared to the full year 2018, during which SONORA Plates volume grew by 19%, and PROSPER annuities grew by 8% on a year-over-year basis. We also continue 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 $216 million in cash and cash equivalents, a decrease of $30 million from December 31, 2018. Restricted cash increased by $21 million to arrive at a use of cash, cash equivalents and restricted cash of $9 million in the year-to-date period.

The current year includes a cash prepayment of $15 million received in the U.S. for transition services and products and services from the sale of FPD, which was secured by a corresponding restricted cash deposit in China. This restricted cash in China will be released as transition services and products and services are provided to the buyer over the next 12 months. There was also an increase of $6 million in restricted cash related to the impact on the ABL from the sale of FPD assets.

Looking forward, we expect restricted cash to increase in the third quarter of 2019 with the completion of the transaction with Lucky HuaGuang Graphics Co. Ltd. We continue to evaluate opportunities to reduce restricted cash and to benefit from our cash positions around the world.

For the 6 months ending June 30, 2019, cash used in operating activities was $13 million driven primarily by cash use from net earnings of $35 million, partially offset by cash generated from balance sheet changes of $22 million, including a change in working capital of $17 million and a decrease in other liabilities of $5 million.

Within working capital, accounts payable increased by $9 million, inventory increased by $14 million, and accounts receivable decreased by $22 million. We continue to expect ongoing improvement in working capital for the remainder of 2019.

Cash provided by investing activities was $297 million in the first half of 2019 as compared to a use of $16 million in the prior year period. The current year included proceeds from the sale of the Flexographic Packaging Division. The prior year included capital expenditures for the packaging manufacturing expansion in Weatherford, Oklahoma, which was completed and sold as a component of the packaging division. This accounts for the majority of the decrease in capital expenditures compared to the prior year.

Cash used in financing activities was $294 million in the first half of 2019 compared to a use of $8 million in the prior year period. The current 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.

Finally, as disclosed in our Form 10-Q, we remain in compliance with covenants under our credit agreements.

I will now turn the discussion back to Jim.

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James V. Continenza, Eastman Kodak Company - Executive Chairman & CEO [5]

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Thanks, Dave. With that, I don't have anything else. Are there any other questions? Want to turn it over to questions, Dave?

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David E. Bullwinkle, Eastman Kodak Company - CFO & Senior VP [6]

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Yes. So the operator, could you please remind people of the instructions to ask questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from [Jeremy Chang], investor.

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Unidentified Participant, [2]

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So I just had a quick question. Even with the key product lines achieving strong year-over-year growth, the newly issued $100 million worth of secured convertible notes, interest payments, lease and purchase obligations and preferred dividends coming due between now and 2021 worries me that strengthening the balance sheet really just means taking on heavier amounts of debt, mainly deferring debt obligations. How do you plan on generating enough cash to fund these continued net operating losses? And do you think that Kodak will face liquidity issues before then?

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James V. Continenza, Eastman Kodak Company - Executive Chairman & CEO [3]

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So as we continue to cut costs, which we have been doing and continue to consolidate and stay focused, right? We're going to continue to try to sell our products, launch new products, get more focused around our customers and far more efficient. That's one. Two, shed costs in our business by redundancies that we have. Then also as we get closer, as you start generating cash, we'll go to the market when necessary and then if needed, right? Seek another form of capital and change our debt structure. But we -- first, we have to generate cash and continue to generate cash. And that's step 1. It's all about making money.

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Operator [4]

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At this time, I am showing no further questions. I would like to turn the call back over to Jim Continenza for closing remarks.

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James V. Continenza, Eastman Kodak Company - Executive Chairman & CEO [5]

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First, I want to thank the person for that question because that is the absolute right question or the question that we focus on every single day since I've been here day 1: delever, strengthen the balance sheet, get healthy and operate your way out of the business because you can't get it by just selling assets and burning money. So we will continue to take expense out of the business and become lean and profitable and continue to accelerate our profits and generate free cash flow. So you'll be seeing more and more of this, and you can see it as an accelerated path. That was a great question, and it's exactly what we focus on every day, and we have the same conversations over and over. So that's a great question. And that's our focus.

And we have a lot of other things that were going on in the business that really we shouldn't be doing. We can't afford to fund. When you're not making money, you can't be funding things that don't make money. And you need to stop those activities and focus on the things that make money. And that means you're a smaller profitable business and you're a smaller profitable business, and that's what we're going to become. Just want to be very clear.

So thanks, everyone, for dialing. I appreciate the question. And we have a lot of work ahead of us still. All we've done is fixed some of the balance sheet and some of the customer-focused pieces. But as you have seen, though, and we've got a lot of feedback from our customer and we've gotten very close to them in the last 5 months, they appreciate the direction we're going. And we can continue to focus on them and meeting their needs. So you'll be seeing more and more of that, and you'll be seeing our revenues increasing because we are definitely getting aligned with our customers. So thanks, everyone.

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Operator [6]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.