Earnings Call Transcript - KODK Q3 2024

Operator, Operator

Good day and thank you for standing by. Welcome to the Eastman Kodak Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anthony Redding. Please go ahead.

Anthony Redding, Chief Compliance Officer

Thank you and good afternoon, everyone. I am Anthony Redding, Eastman Kodak Company’s Chief Compliance Officer. Welcome to Kodak's third quarter 2024 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 2024. You can access the presentation and webcast for today's call on our website and 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 Kodak’s 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 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 only apply as of the date of the 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 or 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. Reconciliation 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, Executive Chairman and Chief Executive Officer of Eastman Kodak; and David Bullwinkle, Chief Financial Officer and Senior Vice President of Eastman 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.

Jim Continenza, Executive Chairman and CEO

Welcome everyone and thank you for joining the third quarter 2024 investor call. We continue to be committed to execute in our long-term plan. We continue to invest in innovation, increase operational efficiency, and focus on smart revenue. We say focus and invest in innovation; let's be clear, advanced materials and print are what we do today. Inside that, we have digital print, traditional print, advanced materials and chemicals, film, motion picture film, Eastman Business Park, brand licensing, and other large investments that have been building out of our cGMP clean lab including the reagent facility. We're going to keep investing in battery technology. It's one of our core skill sets in substrate coating. So as I walk you through who we are and what we do, let's get into the numbers. Revenue is up $261 million for the third quarter of 2024 versus $269 million for the third quarter of 2023. The decline has slowed and is right where we expected it to be. When we look at the gross profit, we are coming in for the quarter at 17% in 2024 versus 19% for the third quarter of 2023. The numbers are strong, and let me tell you where we are on this. When I look at the impact that we had on our plates business from shifting from China and Japan over the last several years, it has driven the other U.S. manufacturers out of America. The tariffs and pressure put on them made it a hard battle, but we fought hard, automated, and invested to keep these jobs in America and support the U.S. printers. So when I look at gross profit at 17%, it's been a hard battle considering they were getting subsidies on multiple things, and the tariff numbers will reflect that. So let's talk about a big part of our future investments in the last five years: events, materials, and chemicals, which we refer to as AMC, right? As we continue to grow the different initiatives, and I touched on some of them earlier, which really comprise film, chemicals, substrate coating for EVs, and again, the buildout of the reagent facility and the cGMP clean lab. It's exciting to see these dollars come to work and see the productivity increase. Our film sales have increased on motion picture and in still film and other films. In November, we will be having a total shutdown to modernize the plant, which has also caused us to use more cash in the quarter to build up inventories while we do this. But if we continue to see our commitment and our customer commitment to film, still in motion picture, we are going to continue to invest in that space and pursue that growth. We have invested heavily in the infrastructure at the park, and I'm proud to say we just reopened another one of our buildings and have moved into that building. So the park is really coming to life. It's one of our key assets that we cannot forget. Every time I walk through that park, I see power, chemical recovery, waste management, a fire department, electricity, and the power of that park is enormous. We continue to put that to work and bring U.S. jobs back to the park. Let me bring you some highlights on commercial print. As I mentioned earlier, we were granted an affirmative decision, 3 to 1 from the ITC on the plates tariff. Being the last U.S. manufacturer, we have reinvested in our plants, bet on our American workers, and achieved a favorable ruling. What does that mean? The range is anywhere from a 91.83% advantage to a 353.09%. That means Kodak now has a level playing field, we can go out, compete, and sell plates without government interference in the pricing of a commodity and material. A big move for the U.S. and a great move obviously for Kodak and our customers. Now I'll turn it over to Dave to discuss the financial results.

David Bullwinkle, Chief Financial Officer

Thanks, Jim, and good afternoon. This afternoon the company filed its Form 10-Q for the quarter ended September 30, 2024, with the SEC. As I always do, I recommend you read this filing in its entirety. I will share details on the full company results, operational EBITDA, and cash flow for the third quarter and nine months ending September 30, 2024. The company's results reflect the continued focus on executing against our priorities and long-term plan, including driving smart revenue and aligning with the right customers, pricing rationalization, cost reductions, launching new products, and investing in innovation and information technology systems. The company's financial results are within our expectations at this point in our long-term strategy and for the current year. Reported revenues were $261 million for the third quarter of 2024, compared to $269 million in the prior year quarter, a decrease of $8 million or 3%. The decline in revenues slowed notably when compared to recent quarters, reflecting our ongoing focus on driving smart revenue and strong profitability. Gross profit decreased by $5 million or 10% when compared to the prior year quarter. The current year quarter was unfavorably impacted by a net change in employee benefit reserves of $3 million, an inventory reserve adjustment of $4 million in the Electrophotographic Printing Solutions business, and higher aluminum costs of $5 million. Foreign exchange had no impact on gross profit in the current year quarter. Our gross profit percentage was 17% in the third quarter of 2024, compared to 19% in the prior year quarter, unfavorably impacted by the aforementioned factors. On a U.S. GAAP basis, we reported net income of $18 million for the third quarter of 2024, compared to net income of $2 million in the prior year quarter, an increase of $16 million. The third quarter results include expenses of $2 million and income of $3 million respectively, related to non-cash changes in workers’ compensation and employee benefit reserves. The prior year quarter also includes a loss on extinguishment of debt of $27 million from a refinancing transaction. Excluding these current and prior year quarter items, net income for 2024 was $20 million, compared to $26 million in the prior year quarter. Operational EBITDA for the quarter was $1 million, compared to $12 million in the prior year quarter. Excluding the impact of non-cash changes in workers' compensation and employee benefit reserves in the current and prior year quarters, operational EBITDA declined by $6 million compared to the prior year quarter. Our operational EBITDA for the third quarter of 2024 was also adversely impacted by higher manufacturing costs driven by an increase in aluminum costs, changes in employee benefit reserves, an inventory reserve adjustment, as well as an increase in costs associated with certain litigation matters. For the nine months ending September 30, 2024, we reported revenues of $777 million, compared to $842 million in the prior year period for a decline of $65 million or 8%. Adjusting for the unfavorable impact of foreign exchange of $3 million in the current year period, revenue decreased by $62 million or 7%, compared to the prior year period. Gross profit decreased by $11 million or 7% compared to the prior year period. Gross profit for the current year was unfavorably impacted by a net change in employee benefit reserves of $2 million, an inventory reserve adjustment of $4 million in the Electrophotographic Printing Solutions business, and higher aluminum costs of $1 million. Foreign exchange had no impact on gross profit in the current year period. Our gross profit percentage was 20% for the nine months ending September 30, 2024, compared to 19% in the prior year period. On a U.S. GAAP basis, net income was $76 million for the nine months ending September 30, 2024, compared to net income of $70 million in the prior year period, an increase of $6 million. The 2024 year-to-date results include expenses of $1 million related to non-cash changes in workers' compensation and employee benefit reserves, and income of $17 million related to a net gain on the sale of assets. The 2023 year-to-date results include charges of $2 million related to changes in the fair value of embedded derivative liabilities, and $27 million related to a loss in the extinguishment of debt, alongside income of $9 million from a refund by a non-U.S. Governmental authority, and $3 million related to non-cash changes in workers' compensation and employee benefit reserves. Excluding these current and prior-year items, net income for the nine months ending September 30, 2024, was $60 million, compared to net income of $87 million in the prior year period, a decline of $27 million. Operational EBITDA for the period was $17 million, compared to $43 million in the prior year period, a decline of $26 million. Excluding the impact of non-cash changes in workers' compensation and employee benefit reserves in the current and prior year periods, operational EBITDA decreased by $22 million compared to the prior year period. Operational EBITDA for the current year period was unfavorably impacted by lower volumes, higher manufacturing costs, inventory reserve adjustments, changes in employee benefit reserves, increased selling and administrative costs from IT system investments, and costs associated with the drupa trade show and certain litigation matters. The company ended the third quarter with $214 million in cash and cash equivalents, a decrease of $41 million from December 31, 2023, aligning with our expectations. The decline reflects ongoing CapEx investments in supporting AM&C growth initiatives while building working capital to supply customers as we improve our manufacturing facilities. For the nine months ending September 30, 2024, cash used in operating activities was $11 million, primarily driven by cash use from net earnings of $25 million, offset partially by cash flow from balance sheet changes of $14 million, including a change in working capital of $26 million and a decrease in other liabilities of $39 million. Within working capital, accounts payable decreased by $1 million, inventory increased by $25 million, and accounts receivable decreased by $52 million, compared to the prior year period. The decrease in accounts receivable is primarily due to $40 million of cash proceeds received in January 2024 from brand licensing. The team continues to focus on enhancing profitability and working capital performance to improve cash generation. Cash used in investing activities was $22 million for the nine months ending September 30, 2024, an increase of $7 million compared to the prior year period, primarily due to a $24 million increase in capital additions, offset by $17 million in asset sale proceeds. Cash used in financing activities was $21 million for the nine months ending September 30, 2024, compared to cash from financing activities of $87 million in the prior year. This change was primarily driven by net proceeds of $90 million received from refinancing transactions last year and $17 million relating to the repayment of a loan agreement made in Q1 2024 from asset sale proceeds. Restricted cash decreased by $14 million compared to the December 31, 2023 balance of $122 million, driven by strategic efforts to reduce cash collateral and escrow requirements for certain obligations and arrangements. Excluding the effects of foreign exchange, prior year impact of a refund from a non-U.S. Governmental authority, and net proceeds from refinancing transactions, the year-over-year decrease in cash and cash equivalents was $34 million. As I stated earlier, the company's financial results are within our expectations at this point in our long-term strategy. We will continue to focus on maintaining the strength of the foundation we have worked hard to create, supporting ongoing operations and growth investments. Finally, we remain in compliance with applicable financial covenants. I will now turn the discussion back to Jim.

Jim Continenza, Executive Chairman and CEO

Thank you, Dave. Our ongoing investments are going to continue. We are committed to innovation; none of this is going to change. We adhere to our plan. We're going to keep investing in AMC, our growth initiatives and our future, layering, coding, and taking advantage of our skill sets. I was just up in Rochester and we have a large apprenticeship program involving four years of training. Watching these individuals graduate and join our workforce, you know, full-time and highly skilled, makes me so proud of them. It’s a challenging journey. As we continue to create jobs, we're going to keep investing in everything we discussed. To clarify, we will continue to invest in battery technology, which is one of our core skill sets in substrate coating, and we are going to maintain our investment in reagents in a clean lab facility. This is our direction. I want to thank our customers for their loyalty, support, and assistance in helping us bring Kodak back to where it needs to be. More importantly, I need to thank our employees for their hard work during tough times as they consistently exceed expectations on product quality and development. I want to thank everyone for joining us and expressing interest in Kodak, reassuring you that we are doing everything we can to drive value in the business.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.