Earnings Call Transcript - KODK Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Eastman Kodak Q1, 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Mr. Paul Dils. Thank you. Please go ahead.

Paul Dils, Chief Tax Officer and Director of Investor Relations

Thank you, Jimmy, and good afternoon everyone. I am Paul Dils, Eastman Kodak Company's Chief Tax Officer and Director of Investor Relations. Welcome to Kodak's first quarter 2020 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. You may access the presentation and webcast for today's call on 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 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 as of the date of this 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 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. 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 David Bullwinkle, Chief Financial Officer of Kodak. I will now turn the call over to Jim.

Jim Continenza, Executive Chairman

Thanks Paul. Good afternoon, everyone. First off, I hope everyone is healthy and safe during the COVID-19 pandemic that we have been experiencing, and no tragedy has come upon you, your friends, family or loved ones. We'd like to take the time to recognize that currently we're sitting in 2020. In 2019, Kodak took drastic measures in cleaning up its balance sheet. We also took significant measures in focusing the business into three primary areas: print, advanced materials, and chemistry and chemicals. In doing so, we were able to end 2020 with a robust balance sheet of $233 million in cash and cash equivalents, and for the first time in many years, we are not losing more than $100 million. In 2020, we're off to a great trajectory, building on the accomplishments of 2019. Our new simplified organizational structure for 2020 better aligns us with our customers. As you've heard repeatedly, we are implementing 'One Kodak' with a customer-first approach. We care about our employees, and part of this is taking care of our customers together. We retain a functional, accountable, measurable, and trackable business. We are much better focused on cash generation and serving our customers. We are focused on profitable growth in revenue, reducing operating expenses, and eliminating or delaying product development programs that do not yield appropriate returns. We remain committed to these industries throughout this crisis and will continue to double down on digital in the near future. We continue to invest approximately $25 million a year in developing leading-edge technologies to serve our customers' needs and thrive in the industry as a change agent. We're also focused on the packaging segment, which continues to grow. We have revolutionary technologies with the UTECO Sapphire EVO Wide press, a flexible packaging machine powered by Kodak ULTRASTREAM inkjet technology. Additionally, we’re launching exciting new products this month. We had planned a press conference later in June to discuss the range of products we'll be launching, including our process-free plates and groundbreaking digital print equipment and technologies. We were excited to launch in Germany; however, the pandemic delayed that for a whole year. We are still moving forward with the introduction and launching of these products. As for the COVID-19 update, Kodak took this situation seriously. We meet constantly to ensure our employees' safety. Our business is considered essential, and we did not shut down. We are leveraging our advanced materials and chemicals manufacturing expertise to assist during the pandemic, not just producing Kodak products, but also providing IPA for hand sanitizer and using our experience in PPE to produce face shields. We are also looking inside our PCB group for making film and circuitry for ventilators. We are committed to elevating our efforts in addressing this pandemic. Each time we face severe challenges, we adapt and make decisions based on our knowledge acquired daily. Kodak aims to serve both this country and the globe by providing capabilities to help in this situation. We have undertaken considerable work in reducing costs. We have implemented salary reductions, targeted furloughs, and have acted promptly. Unfortunately, most government relief programs are geared towards small businesses, which does not apply to Kodak as a global multinational company. Despite these challenges, our efforts over the last 18 months position us well to navigate through the pandemic. We prioritize our employees' safety by enforcing social distancing and providing sanitizers. We have also supported our customers, sending face shields to several clients beyond hospitals to meet their needs. While managing costs and cash flow, we are also witnessing some advantages as our customers receive government funding, helping them settle their dues with us. There is a turning point, but this pandemic has been unprecedented in nature, and we are all diligently managing through it. With that, I’d like to turn it over to Dave to discuss our first quarter 2020 financials.

David Bullwinkle, Chief Financial Officer

Thanks Jim, and good afternoon. Today the company filed its form 10-Q for the quarter ended March 31, 2020 with the Securities and Exchange Commission. As always, I recommend you read this filing in its entirety. Before we get into the details for the quarter, I would like to make a few comments regarding the COVID-19 pandemic impacts. The pandemic did not have a material impact on our first quarter sales. However, sales volumes in the second quarter of 2020 are expected to be negatively impacted, and collections of accounts receivable are expected to slow based on the impacts we have seen to-date in collections. The company has been able to maintain operations to serve our customers, but this may change in the future due to the evolving governmental responses to COVID-19. We've worked closely with government officials in the jurisdictions where we operate to keep manufacturing facilities open during the pandemic. Kodak has been dedicated to addressing actions recommended by government and health authorities to protect employees worldwide, particularly those working in plants and distribution facilities. We intend to continue collaborating with government authorities and implementing safety measures so that production and distribution can proceed safely. However, uncertainty from the pandemic could result in unforeseen disruptions to Kodak's operations or supply chain. As such, we are reducing operating costs through the use of temporary furloughs and pay reductions for employees, as well as deferring expenditures. Our operations have been negatively impacted by COVID-19. Additionally, late in the first quarter, governments worldwide began to respond with economic relief programs. The majority of relief packages are aimed at individuals, small businesses, or the healthcare sector. Kodak has implemented government relief for which we are eligible, which mainly includes tax deferrals and job retention assistance. The relief had minimal impact on the first quarter, as most programs were not operational until the second quarter. Employee retention-related relief is available to Kodak in some countries, including job retention, wage subsidies, social benefits relief, and payroll tax relief. Tax relief unrelated to human resources is also limited to certain countries and primarily includes the deferral of various tax payments. Kodak remains ineligible for most government-subsidized loan programs, but we are evaluating eligibility in jurisdictions such as the U.S., England, and Germany. As the situation with COVID-19 evolves, we will continue to monitor new government relief programs for which the company may qualify. I will now share further details on the company's results, operational EBITDA, and cash flow for the first quarter. As reported in our earnings release, we generated revenues of $267 million compared to $291 million in the prior year quarter, representing a decline of $24 million. On a constant currency basis, revenue declined by $21 million. During the first quarter, volumes for SONORA Process-Free Plates grew by 18%, while annuity revenue for PROSPER declined by 4%, attributable to the market downturn resulting from the pandemic. We continued to invest in future growth areas of ULTRASTREAM and advanced materials, which will lead to the new product introductions Jim referenced earlier. On a U.S. GAAP basis, we reported a net loss of $111 million for the first quarter, compared to a net loss of $18 million in the prior year quarter. The results for both 2020 and 2019 include income of $53 million and an expense of $1 million, respectively, related to changes in the value of the derivative embedded in Series A Preferred Stock. The first quarter of 2020 also includes the impact of a trade name impairment for $3 million, an increase in accounts receivable reserves of $4 million, and a $167 million non-cash expense due to increased deferred tax valuation allowances outside the U.S. Given the difficulties in predicting the effects of COVID-19 at present, there is a high degree of uncertainty as to future profitability in individual jurisdictions worldwide. As previously stated, the company continues to prioritize generating positive cash flow by managing operations on a consolidated basis, making individual jurisdictional results less certain. The reliability of deferred tax assets outside the U.S. is also uncertain, resulting in the establishment of valuation allowances. Excluding current and prior year items, income for 2020 was $10 million compared to a loss of $17 million in the prior year quarter. Operational EBITDA for the quarter was a negative $8 million compared to a negative $5 million in the prior year quarter. Excluding the impact of an increase in accounts receivable reserves, operational EBITDA for the current quarter was a negative $4 million, an increase of $1 million from the prior year. Entering 2020, we initiated actions to reduce operating expenses by approximately $40 million for the year. These actions were expected to significantly progress toward positive cash flow from operations. However, given the uncertainty related to the COVID-19 situation, we have revised our expectations to more than $60 million in annualized cost reductions. Incremental cost measures were implemented early in the second quarter of 2020. We expect these impacts to be visible in our second quarter results. Turning to company cash performance, we concluded the first quarter with $209 million in cash and cash equivalents, a decrease of $24 million from December 31, 2019. Cash used in operating activities was $41 million, driven primarily by a change in working capital of $6 million, and a decrease in other liabilities of $27 million. Accounts payable increased by $1 million, inventory increased by $26 million, and accounts receivable decreased by $19 million compared to December 31, 2019. As mentioned earlier, accounts receivable collections have slowed and inventory levels are elevated compared to our expectations. We are working closely with our customers and suppliers to manage this situation. Additionally, cash used for the reduction of other liabilities includes pension payments, severance payments for restructuring actions, VAT and income tax payments, and accrued interest. First quarter 2020 payments have increased, with income tax and restructuring payments offset by a reduction in accrued interest. Cash used in investing activities was $1 million in the first quarter, versus a use of $3 million in the prior year period. Cash used in financing activities was $3 million in the quarter, compared to cash provided by financing activities of $3 million in the prior year. On our last call, I indicated the company was focused on reducing restricted cash in 2020 to fund operations and our ongoing restructuring activities. In the first quarter of 2020, restricted cash decreased by $25 million due to our efforts, including amending our ABL facility. Restricted cash at the end of the quarter was $32 million. We will continue to focus on alternatives to reduce restrictions on cash. Finally, as disclosed in our form 10-Q, we remain in compliance with our financial covenants under our credit agreements. Jim and I are now happy to take your questions. Jimmy, please remind listeners of instructions.

Operator, Operator

Jim Continenza: Great. Well, thank you. First off again, I want to thank everyone for joining. And I want to thank the entire Kodak team for the immense effort they have put into this quarter. It has been incredible the amount of work this pandemic has caused. During late nights and everyone working from home, we were able to mobilize within a week. Everyone is now working from home using Microsoft Teams, utilizing WiFi cloud technology, doing virtual meetings and still ensuring that the company runs smoothly. I also want to truly recognize our employees who come to work every day, keeping the factories operational and maintaining the supply chain. The courage they exhibit to do this while returning to their families is truly commendable. We cannot express enough gratitude. Lastly, I urge everyone to stay safe. But importantly, let's acknowledge those who must go to work every day in this environment and return home to their families. We are committed to ensuring their safety. With that, thank you for joining the call. Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect.