Q2 2019 Earnings Call

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Thank you and good afternoon, everyone I am Bill on Eastman Kodak, Companys Treasurer, and director of Investor Relations Welcome to Kodak second quarter 2019 earnings call.

415, 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 total for today's call on our Investor Center at Investor Day, Kodak Dot 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.

Kodaks filings with the US Securities and Exchange Commission from time to time.

There may be other factors that may cause kodaks actual results to differ materially from the forward looking statements.

All forward looking statements attributable to Kodak or persons acting on his 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.

Codec 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 on anticipated 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 Dakota Dot Com.

Speakers on today's call are Jim continents, Codecs, Executive Chairman and David Bullwinkle, Chief Financial Officer of Kodak.

I will now turn the call over to Jim.

Thank you Bill.

Welcome everyone. Thank you for joining me second quarter Investor call for Kodak.

Turning to slide four.

I would like to start by discussing the progress we have made on several significant initiatives to strengthen the company's.

As mentioned.

On our last call the company completed the sale of flexible graphics packaging division.

In the second quarter to use the proceeds to repay a significant portion of the term loan outstanding under the Companys senior secured lien.

Credit agreement.

Additionally, which is 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 the de levering of our company by approximately 300 million and will be further reduced by 100 million, yes. The company notes convert to equity.

This significantly reduces the interest expense and will the FERC interest payments on debt and strengthen our financial position.

Also.

On August 32019, the company announced.

Reaching an agreement with Lucky how long graphics and limited.

To establish a straight.

Strategic relationship in the People's Republic of China.

The transaction includes the sale of codecs offset printing plate facility and show me, China, a supply agreement to help Kodak fulfill its existing customers.

Demand and IP agreement.

Under which quarter license the technology to how long.

To expand the market in China, the deal will leverage the combined strength of homeowners market leadership.

Codecs World Class technology, which together are expected to accelerate the conversion to Kodak Sonora process free plates in China, Hong Kong, Taiwan and Macau.

We expect to close this deal in the third quarter 2019.

And the last five months.

We have completed transactions with significantly improved financial health of the company.

We also have been moving forward and 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.

Thanks, Jim and good afternoon today the company filed its Form 10-Q for the quarter ended June 32019, 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 us 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 us net operating losses and foreign tax credits.

In addition, as Jim mentioned earlier this week, we signed an agreement with Lucky Hug, one graphics company limited to form a strategic relationship in the People's Republic of China.

This transaction is designed to accelerate the growth of Kodak Sonora process free plates in China.

Kodak will meant 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 codec solutions.

We expect to close on this deal 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 SPD have been reported as discontinued operations for the second quarter and year to date June Thirtyth 2019, and the comparable 2018 periods due to the sale of the division.

On slide five as we reported in our earnings release net income for the second quarter of 2019 on a US GAAP basis was $201 million compared to net income of $4 million in the prior year quarter.

For the six months ending June 32019, the reported net income was $183 million compared with a net loss of $21 million for the six months ended June 32018.

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 non cash pension income and nonrecurring costs of completing the SPD sale.

Turning to slide six 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 in 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 32019.

The profitable growth of these products has accelerated compared to the full year 2018, during which Sonora plate volume grew by 19% and prosper annuities grew by 8% on a year over year basis.

We also continued to invest in future growth areas of ULTRASTREAM at advanced materials.

Moving onto the company cash performance presented on slide seven.

The company ended the second quarter with $216 million in cash and cash equivalents.

A decrease of $30 million from December 30, Onest 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 pre payment of $15 million received in the us for transition services and products and services from the sale of SPD, which was secured by a corresponding restricted cash deposits in China.

This restricted cash in China will be released his 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 abbey well from the sale of SPD assets.

Looking forward, we expect restricted cash to increase in the third quarter of 2019 with the completion of the transaction with Lucky Hogwash graphics Company limited.

We continue to evaluate opportunities to reduce restricted cash and to benefit from our cash positions around the world.

For the six months ending June 32019 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 and 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 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.

Thanks.

Thanks, Dave.

Thanks.

Well.

With that I don't have anything else are there any other questions.

Now I'll turn it over to questions Dave.

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

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One moment please for questions.

And our first question is from Jeremy Chang Investor. Your line is now open.

Hello.

Hi, there Hello.

Hi.

So I just had a quick question, even with the key product lines, achieving strong year over year growth the newly issued $100 million quick unsecured 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 and mainly deferring debt obligations.

[laughter].

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 for them.

So as we continue to cut costs.

We have been doing and consistent consolidated say focus right, we're going to continue to try to so.

Our products.

Launch new products get more focused around.

Our customers.

And become more efficient that's one two should cost in our business by redundancies that we have.

And also as we get closer as you start generating cash will go to the market when necessary.

And then if needed right see another form of capital and change your debt structure.

But first we have done is we have to generate cash.

We continue to generate cash.

No Thats step one.

Talk about making money.

Okay. Thank you for your response.

Yes.

Thank you.

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

Oh thanks.

Thank you for that question because that is the absolute.

Great question and the question that we focus on every single day since I've been here day one.

De lever strengthen the balance sheet.

Good healthy and operate your way out of the business.

Because you can get that by just selling assets and burning burning money. So we will continue to take expense out of the business.

And become lean.

And profitable and continue to celebrate our profits and generate free cash flow, so you'll be seeing more and more of this and you'll 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 those are great questions.

And that's that's a focus and we have a lot of other things that were going on the business that really we shouldn't be doing and can afford to fund when you're not making money you can't be funny things that don't make money.

And we need to start those activities and focus on the things that make money and that means you're a smaller profitable business in your smaller profitable business and thats, what we are going to become.

Just want to be very clear.

Well, thanks, everyone for dialing I appreciate the question and.

We have a lot of work ahead of US still all we've done is fix some of the balance sheet and.

Some of the customer focus pieces.

But as you have seen though and we've got a lot of feedback from our customer we've gotten very close to them last five months.

They appreciate the direction we're going.

And we continue to focus on them and meeting their needs. So you'll you'll be seeing more and more of that and you've seen our revenues.

Increasing because we are definitely getting aligned with our customers. So thanks, everyone.

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