Q2 2023 Eastman Kodak Co Earnings Call

Participants

Anthony Redding

David Edward Bullwinkle; CFO, President of Eastman Business Park & Senior VP; Eastman Kodak Company

James V. Continenza; Executive Chairman & CEO; Eastman Kodak Company

Presentation

Operator

Good day, and thank you for standing by. Welcome to the Eastman Kodak Second Quarter 2023 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would like to hand the conference over to your speaker, Anthony Redding. Please go ahead.

Anthony Redding

Thank you, and good afternoon, everyone. I am Anthony Redding, Eastman Kodak Company's Chief Compliance Officer. Welcome to Kodak's Second Quarter 2023 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 of 2023. You may access the presentation and webcast for today's call at 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 this presentation and are expressly qualified in their entirety by the cautionary statements included or referenced in the presentation.
Kodak undertakes no obligation to update or revise forward-looking statements to reflect events or circumstances that arise after the date made ought to reflect the occurrence of unanticipated events. 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.kodak.com.
Speakers on today's call are Jim Continenza, Kodak's Executive Chairman; and Chief Executive Officer; and David Bullwinkle, 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 Continenza. Thank you.

James V. Continenza

Welcome, everyone, and thank you for joining the Second Quarter 2023 investor call for Kodak. I am pleased with the ongoing improvements reported in the company's results for the second quarter 2023. Over the last 4 years, we have prioritized investing in innovation, efficiency and driving smart revenue. And today, we're starting to see the benefits of these long-term investments. We're seeing them through increased gross profit, cash performance despite ongoing external challenges, which affect the markets worldwide.
It's important to note that the progress we have made reflects our commitment to our ongoing execution of our long-term plan, staying focused on our core business of print, advanced materials and chemicals, continuing to invest in products and infrastructure that allows us to better serve our customers and constantly streamline our business operations.
Some highlights in the second quarter. As part of the controlled introduction of our new inkjet presses, we are completing the placement of 2 new machines, PROSPER ULTRA 520 Press, which offers offset quality at unmatched production speeds and the PROSPER 7000 Turbo, which is the world's fastest inkjet press. Both presses are scheduled to be in production in the third quarter this year.
Reflecting on our commitment to digital print during the second quarter, we expanded and strengthened our position with the acquisition of Graphic Systems Services, known as GSS. We've had a long-term relationship with GSS over the years in the product portfolio, including making transport and other components. GSS is critical to Kodak as a supplier for supporting PROSPER for well over 20 years. Their expertise and resource will enable us to design, build or complete integrated solutions for customers on the Stream and ULTRASTREAM platforms.
We continue to invest in previously announced long-term growth initiatives in advanced materials and chemicals, including KODALUX light blocking technology and coating substrates for EV batteries. We are starting to see revenue contributions from these businesses. In addition, we continue to see growing demand in our still in motion picture film business. A great example of the ongoing relevance of film as an artistic medium is Christopher Nolan's Oppenheimer, which was shot on Kodak large-format film, including both color film and a 65-millimeter black and white film created by Kodak, specifically for the production.
In addition, Oppenheimer is being screened in the IMAX format using large-format film prints, which produced an eye-popping viewing experience for the audience who see this masterpiece (inaudible). We'd like to thank Chris Nolan and IMAX for their continued support of film. We recently renewed our supply agreement for film with our long-term customer, Kodak Alaris in a deal that will run through 2028. We are committed to manufacturing film as long as there is demand from the filmmakers and photographers worldwide.
We are also pleased to announce the vision care industry leader, EssilorLuxottica has chosen to add the Kodak brand to an extraordinarily broad portfolio of licensed brands. This perpetual license agreement grants EssilorLuxottica, the exclusive right to use Kodak registered trademarks for products and services in a full range of product categories. We recently concluded the transactions to strengthen our financial position by refinancing Kodak debt. We took this action proactively to extend our maturity of our debt and to eliminate our asset-based revolving credit facility, ABL more will be covered on this later by Dave Bullwinkle, our CFO.
The requirements under the new financing are consistent with how we run our business, Doing this now will provide increased financial and operational flexibility as we continue to execute our long-term strategic plan. Performance highlights for the second quarter. Revenues were $295 million, a decline of $26 million or 8% compared to the prior year. The decline in revenue reflects a conscious decision that we are making to prioritize, increase productivity, investing in innovation and driving smart revenue globally. This strategy enabled us to increase gross profit by $12 million or 24% compared to the prior year.
Our gross profit percentage was 21% in the second quarter 2023 compared to 16% a the prior year. A lot of these contributions have come through advancements in efficiencies and investments in advanced materials and chemicals. Our cash performance also improved year-over-year for the first half, an increase of $6 million in the 6 months ending June 30, 2023, compared with a decrease of $73 million in the prior year period, an improvement of $79 million. These improvements are encouraging and provide a clear indication that we are on the right track in terms of executing our long-term strategy.
However, we recognize that we still have a lot of work to do in terms of continuing to generate free cash flow, pay down our debt and delivering the leading edge solutions to our customers. We always keep in mind, right, we prioritize the customer. We're a customer-first company. We only win when they win. We need to continue to invest profitably in innovation, efficiencies and technology to help them grow and drive their business.
I will now turn it over to Dave to discuss our Q2 2023 financial results.

David Edward Bullwinkle

Thanks, Jim, and good afternoon. Today, the company filed its Form 10-Q for the quarter ended June 30, 2023, 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 our financing transaction that the company announced and closed in July.
As previously discussed, the company's ABL and cash collateralized letter of credit facility was set to mature on June 12, 2024. The company has utilized the capacity under these facilities primarily to issue letters of credit to support its legacy self-insured workers' compensation liability with various jurisdictions. On June 30, 2023, the company entered into an amendment to the existing term loan credit agreement among the company and certain funds affiliated with Kennedy Lewis Investment Management LLC to provide the company with a commitment to provide refinancing term loans in an aggregate principal amount of $450 million.
On July 21, 2023, amended and restated term loan credit agreement became effective, and the company completed its borrowing. The company received net proceeds from the refinancing term loans of approximately $435 million, of which $318 million represent the aggregate principal amount of the term loans plus accrued paid-in-kind or unpaid cash interest, was paid by the company to refinance the existing term loan credit agreement.
Approximately $28 million of the net proceeds from the refinancing term loans were used to repay in full, the company's outstanding convertible notes, representing the aggregate principal amount of the convertible notes plus accrued paid-in-kind interest. As a result, the company's obligations under the convertible notes were canceled. The company also amended and restated the existing term loan credit agreement to, among other things, extend the maturity date to the earlier of August 15, 2028, or the date that is 91 days prior to the maturity date or mandatory redemption date of any of the company's then outstanding Series B preferred stock or Series C preferred stock or any extensions or refinancings.
The refinancing term loans bear interest at a rate of 7.5% per annum, payable in cash and 5% per annum payable in kind or in cash at the company's [option] for an aggregate interest rate of 12.5% per annum. The company's previous interest rate under the term loans was 8.5% per annum in cash and 4% per annum in kind for the same aggregate interest rate of 12.5% per annum. The amended and restated term loan credit agreement does not include a financial maintenance covenant.
Also on June 30, 2023, the company entered into an amendment to the existing letter of credit facility agreement with Bank of America, which became effective on July 21, 2023. Under the terms and conditions of the June 2023 L/C Facility amendment, the L/C lender committed to issue additional letters of credit on the company's behalf in an aggregate amount of up to $50 million to an aggregate principal amount of commitments of up to $100 million until August 30, 2023, upon which the aggregate L/C Facility commitments will reduce to $50 million.
With the funding from the net proceeds from the refinancing term loans, the balance on deposits in the L/C cash collateral account was increased by an additional $59 million. The L/C Facility agreement does not include a minimum liquidity or financial maintenance covenant but does require the company at all times to post cash collateral in an amount greater than or equal to 104% of the aggregate amount of letters of credit issued and outstanding at any given time.
The company expects to directly cash collateralize all or a substantial portion of its undiscounted actuarial workers' compensation obligations with the New York State Workers' Compensation Board to reduce the aggregate L/C Facility commitments to $50 million prior to August 30, 2023.
Lastly, the company repaid in full, the amounts outstanding under its existing ABL credit agreement and the agreement was terminated. The lenders security interest in any of the company's or its subsidiaries assets or properties securing the existing ABL credit agreement was released. We are pleased with the completion of these transactions to proactively solidify our capital structure and replace our ABL facility.
These arrangements provide for an extended term for the term loan and L/C Facility contingent on our ability to convert, redeem or extend the existing Series B and C preferred stock past their current maturities of May 26, 2026. I will now share further details on the full company results, operational EBITDA and cash flow for the second quarter and first half of 2023.
On Slide 7, for the second quarter of 2023, we reported revenues of $295 million compared to $321 million in the prior year quarter, a decline of $26 million or 8%. Foreign exchange had no impact on revenue in the current year quarter. As Jim mentioned, pricing, cost reductions and customer focused innovations continue to be a priority for the company and we continue to recognize significant improvements in profitability as a result of the collective impact of these initiatives.
Gross profit increased by $12 million or 24% when compared to the prior year quarter. Foreign exchange had no impact on gross profit in the current year quarter. Our gross profit percentage was 21% in Q2 2023 compared to 16% in the prior year quarter. In addition, we've seen an improvement in gross profit margin from the 18% we reported in the first quarter of 2023. This improvement is a result of the many actions our team has taken to mitigate the effects of the global economy and to make our operations more efficient.
On a U.S. GAAP basis, we reported net income of $35 million for the second quarter compared to net income of $20 million in the prior year quarter. The 2023 and 2022 2nd quarter results include expense of $1 million and income of $4 million, respectively, related to changes in the fair value of embedded derivative liabilities and income of $1 million and $4 million, respectively, related to noncash changes in workers' compensation and employee benefit reserves.
Excluding these current and prior quarter items, income for 2023 was $35 million compared to income of $12 million in the prior year quarter, reflecting an improvement of $23 million. Operational EBITDA for the quarter was $22 million compared to $11 million in the prior year quarter. Excluding the impact of noncash changes in workers' compensation and employee benefit reserves in the current and prior year quarters, operational EBITDA improved by $14 million when compared to the prior year quarter.
Operational EBITDA for the second quarter of 2023 was favorably impacted by improved profitability related to pricing actions and improved operational efficiency, partially offset by higher continued ongoing global cost increases and lower volumes. During the second quarter, volumes for SONORA Process-Free Plates declined by 9%, but increased by 3% when including volume pursuant to a license agreement under which Kodak receives royalties. Annuity revenue for PROSPER declined by 9%, which was attributable to industry print volumes. On a constant currency basis, annuity revenue for PROSPER declined by 8%.
Turning to Slide 8. For the first half of 2023, we reported revenues of $573 million compared to $611 million in the prior year period for a decrease of $38 million. Adjusting for the unfavorable impact of foreign exchange of $10 million in the current year, revenue decreased by $28 million compared to the prior year. We reported significantly higher gross profit with an increase of $29 million or 35% when compared to the prior year period.
Excluding the unfavorable impact of foreign exchange, gross profit improved $31 million or 37% when compared to the prior year. Our gross profit percentage was 20% for the first half of 2023 compared to 14% in the prior year. As we have consistently stated, we will prioritize smart revenue rather than trading profitability for revenue growth. These results reflect our disciplined approach to make our operations more efficient to better serve our customers.
On a U.S. GAAP basis, net income was $68 million for the first half of 2023 compared to net income of $17 million in the prior year. The 2023 1st half results include charges of $2 million related to changes in the fair value of embedded derivatives liabilities, an income of $9 million related to a refund from a non-U.S. governmental authority. The 2022 1st half results include income of $1 million related to changes in the fair value of the embedded derivative liabilities and income of $8 million related to noncash changes in workers' compensation and employee benefit reserves.
Excluding these current and prior year items, income for 2023 was $61 million compared to income of $8 million in the prior year period, reflecting an increase of $53 million from the prior year period. Operational EBITDA for the period was $31 million compared to $4 million in the prior year period. Excluding the unfavorable impact of foreign exchange in the current year and noncash changes in workers' compensation and employee benefit reserves in the prior year, operational EBITDA increased by $36 million.
Operational EBITDA for 2023 was favorably impacted by growth in gross profit due to the factors described. On a year-to-date basis, Volumes for SONORA Process-Free Plates declined by 11% or 5% when including volume pursuant to a license agreement under which Kodak receives royalties and the annuity revenue for PROSPER declined by 7% which was attributable to industry print volumes. On a constant currency basis, annuity revenue for PROSPER declined by 4%.
Moving on to the company's cash performance presented on Slide 9. The company ended the second quarter with $223 million in cash and cash equivalents, an increase of $6 million from December 31, 2022. This is compared with a cash use of $73 million in the prior year period, reflecting an improvement of $79 million for the 6 months ending June 30, 2023, cash provided by operating activities was $21 million, driven primarily by positive cash flow from net earnings of $18 million and cash provided by balance sheet changes of $3 million, including a use of cash for working capital of $1 million and a decrease in other liabilities of $9 million.
Within working capital, accounts payable decreased by $7 million. Inventory increased by $11 million and accounts receivable decreased by $17 million. Cash provided by operating activities improved by $124 million from the prior year, driven by an $82 million improvement in balance sheet changes, including an improvement in working capital cash flows of $62 million.
We are comfortable with our levels of working capital and have maintained our focus on serving our customers throughout this difficult economic period. Cash used in investing activities was $11 million in the first half, an increase of $2 million when compared to the prior year period. Cash used in financing activities was $2 million in the first half of 2023 compared to cash provided by financing activities of $47 million in the prior year period. Cash provided by financing activities in the prior year includes $49 million of incremental cash in the first half of 2022 after fees and expenses driven by proceeds received related to the delayed draw term loan.
Restricted cash at the end of the quarter was $69 million, unchanged from December 31, 2022. Restricted cash primarily represents cash collateral required under the existing letter of credit facility and certain aluminum supply contracts in addition to escrows to secure various ongoing obligations. We will continue to focus on alternatives to reduce restrictions on cash.
As presented on the bottom portion of the slide, excluding the prior year impact of net proceeds from the delayed draw term loan financing, the current year receipt of a refund from a non-U.S. governmental authority and the current and prior year effect of exchange rates on cash, the year-over-year increase in cash and cash equivalents was $117 million. Finally, we remain in compliance with all applicable financial covenants.
And I will turn the discussion back to Jim.

James V. Continenza

Thank you, Dave. In summary, Kodak delivered continued strong performance in the second quarter, increasing gross profit and improving our cash performance despite a challenging business environment globally. Our performance demonstrates the positive impact of our commitment to our long-term strategy and the incredible efforts of all of our employees and execution of our strategy. We have made significant strides and are starting to see the benefits of our efforts. But make no mistake, we still know we have a long way to go.
We will continue to take these actions and strengthen our financial position and create a strong foundation for investment and growth. We will continue to invest in print, advanced materials and chemicals. We will continue to streamline our operations as a commitment we make to our customers to be as efficient as we can be as we supply them and support them in their businesses.
We will continue to put our customers first delivering the solutions they need while driving efficiency improvements that they expect. I want to thank everyone for joining this call and your interest in Eastman Kodak.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.