Eastman Kodak Co (KODK) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Eastman Kodak Third Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, today's conference may be recorded.

I would now like to turn the call over to Bill Love.

Sir, you may begin.

Thank you, and good afternoon, everyone.

I am Bill Love, Eastman Kodak Company's Treasurer and Director of Investor Relations.

Welcome to Kodak's Third Quarter 2018 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 third quarter 2018.

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 only 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 the 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 Jeff Clarke, Chief Executive Officer of Kodak; and David Bullwinkle, Chief Financial Officer of Kodak.

Jeff will provide some opening remarks, review Kodak's third quarter financial results and divisional performance.

Dave will summarize net earnings for the third quarter, provide updates on operational EBITDA and review cash performance before we open it up to questions.

I will now turn the call over to Kodak's CEO, Jeff Clarke.

Thank you, Bill.

Welcome everyone, and thank you for joining the Q3 investor call for Kodak.

On the call today, I'll talk about the company and divisional results for the third quarter of 2018.

Additionally, I'll provide an update on the initiatives we are taking to strengthen our capital structure presented last quarter.

Dave will then follow with more details on net earnings, a cost reduction update, a discussion of cash flow and our 2019 -- 2018 outlook, after which, we will welcome your questions.

The company's in advanced negotiations on an exclusive basis to sell its Flexographic Packaging Division and expects to be in a position to sign a definitive and binding sale agreement in the fourth quarter and to close on the transaction in the first half of 2019.

I'll now discuss the company's performance for the third quarter.

Turning to Slide 5. Kodak delivered third quarter revenues of $366 million, down from $379 million in the prior year quarter.

When adjusted for the unfavorable impact of foreign exchange of $5 million, revenue decreased by $8 million or 2% when compared to the prior year quarter.

Operational EBITDA for the quarter was $20 million, up $7 million compared to the third quarter of 2017.

When adjusted for the unfavorable impact of foreign exchange of $3 million, higher aluminum cost of $6 million and the impact of a reduction in our workers' compensation reserves of $6 million, Kodak's operational EBITDA increased by $10 million or 77% when compared to the prior year quarter.

When we further adjust $1 million for the expected decline in our legacy consumer inkjet business, year-on-year operational EBITDA improvement is $11 million or double from the prior year quarter.

This increase in adjusted operational EBITDA reflects the impact to Kodak's cost-cutting efforts, operational improvements and strengthening of its product portfolio.

Now I'll talk about the business results by division, which is presented on Slide 6 for the third quarter of 2018 with comments supporting each division's performance presented on Slide 7. All year-over-year comparisons will be discussed in a constant currency basis unless otherwise noted.

Starting with the Print Systems Division.

Third quarter revenues were $217 million, a 5% decline compared to the prior year quarter.

Operational EBITDA increased by $1 million compared to the prior year quarter.

When excluding the impact of higher aluminum cost of $6 million, operational EBITDA increased $7 million.

Plate volume was down 4%, and price erosion was flat when compared to the prior year quarter.

We included a slide in the appendix representing historical London Metal Exchange aluminum prices over the last 7 years.

The LME euro price continues to trade at levels well above the average of the past 7 years.

The impact of aluminum costs and associated tariffs in 2018 is forecasted as a year-over-year headwind of $26 million; again, $26 million headwind on aluminum this year.

As presented on Slide 8, by the end of the third quarter, the number of PSD customers testing SONORA X Process Free Plates rose dramatically to over 1,000 accounts, and over 600 of those converted to continuous supply after the product successfully completed its beta test program in Europe, Asia and Japan.

Beta testing is going smoothly in the United States and Canada and Latin America, and SONORA X Plates are expected to be fully commercialized in those regions by the end of the year.

SONORA X Plates offers several improvement over Kodak's previous process-free plate and competitive process-free plates.

These improvements have made plate very attractive to medium- and large-volume printers and printers with challenging print environments.

Longer run lengths, better durability and faster imaging speeds are driving printers to switch to SONORA X Plates.

These printers can now benefit from all the environmental and cost savings of process-free plates while maintaining the level of productivity and efficiency they need for their business.

In October, I'm pleased to say we won a large multi-site commercial printing account in the United States, following extensive trials, which proved the capability of SONORA X Plates to meet the quality, productivity and ROI requirements across this printer's various sites, presses and printing applications.

The major win proves the increased bandwidth of SONORA X technology beyond publishing and newspaper applications.

Based on these results, this customer will convert nearly 1 million square meters annually of processed plates to SONORA X.

In Q4, we expect our sales volume of SONORA X Plates to accelerate with a greater conversion of large volume accounts and process plates.

We expect approximately 40% of Q4 process-free unit sales will be SONORA X, and on a full year basis, we expect SONORA X will represent 25% of process-free unit sales.

Returning to Slides 6 and 7. The Enterprise Inkjet Systems Division for the third quarter revenues were $39 million, an increase of $6 million from the prior year quarter.

This increase is the result of higher volume in PROSPER equipment placements and PROSPER consumables, partially offset by the expected volume decline in VERSAMARK.

Operational EBITDA for the third quarter was $2 million, an improvement of $2 million compared to the prior year quarter, reflecting cost improvements.

For the quarter, PROSPER annuities continued their strong performance with 9% year-over-year growth.

We continue to invest in ULTRASTREAM, the next-generation inkjet technology in the third quarter.

This investment is focused on the ability to place ULTRASTREAM writing systems in original equipment manufacturers and hybrid applications.

In the quarter, we began shipping evaluation kits.

And product availability remains on track for commercialization in 2019, and we expect meaningful impacts to the business starting in 2020.

The Flexographic Packaging Division.

Revenues for the quarter were $36 million, an increase of $4 million compared to the prior year quarter, primarily the result of volume improvements in FLEXCEL NX consumables due to the larger installed base of FLEXCEL NX CTP systems.

Operational EBITDA was $8 million, an increase of $3 million year-over-year, primarily reflecting volume improvements in FLEXCEL NX consumables offset by investment in product development, marketing and sales activities.

For the quarter, FLEXCEL NX revenues increased 16%, and FLEXCEL NX Plate volume increased 17% compared to the prior year quarter.

We continue to invest in new product development, infrastructure and expansion of our Weatherford, Oklahoma factory to fulfill increased demands for FLEXCEL NX Plates.

Site acceptance, testing is currently underway at our Weatherford plant, and we're on track to begin full production in the site by early 2019.

Additionally, in September, we now see introduction of the FLEXCEL NX Ultra Solution.

This next-generation product is enabled by new, innovative and patent pending Kodak Ultra Clean technology.

This technology will provide consistent high-volume, high-performing FLEXCEL plates in a low maintenance, environmentally friendly solution.

For the Software and Solutions Division, revenues for the quarter were $21 million, flat year-over-year.

Operational EBITDA was flat when compared to the prior year quarter.

We're continuing to make focused investments in packaging and digital workflow software as well as cloud and analytic services, which are important enhancements to our portfolio of offerings.

The Consumer and Film Division third quarter revenues were $48 million, a decline from the prior quarter -- prior year quarter of $7 million.

When excluding a onetime royalty payment of $6 million received in Q3 2017 due to the modification of a brand licensing agreement, revenue declined by $1 million primarily due to the declines in consumer inkjet.

Operational EBITDA was a negative $2 million, flat compared to the prior year quarter.

Cost improvements in motion picture, industrial films and chemicals and brand licensing earnings were offset by the expected reduction in consumer inkjet and the impact from the onetime $6 million brand license payment received in the prior year quarter.

The Advanced Materials and 3D Printing Technology Division had operational EBITDA of negative $2 million in the third quarter of 2018, which represents a $4 million improvement when compared to the prior year quarter, primarily due to a reduction into the cost structure and reprioritized investments as well as an increase in intellectual property revenue.

In October, we announced the introduction of KODALUX technology, a new class of light control materials, which can be coded directly on fabrics for use in the management of light.

The Precision Fabrics Group is offering the world's first Prepared-For-Print blackout fabric incorporating KODALUX Light Control Technology for wide format digital print applications.

KODALUX Light Control Technology eliminates the carbon layer common in current blackout technologies, replacing it with a simpler solution for delivering various degrees of light blocking performance.

Continuing to our final division, Eastman Business Park.

Revenue and operational EBITDA did not change significantly for EBP, when compared to the prior year quarter.

EBP's rental income helps absorb the fixed cost of other business units.

Now turning to Slide 9. I'll provide an update on our overall portfolio.

The growth engines, which include SONORA, PROSPER, FLEXCEL NX, Software and Solutions, brand licensing and advanced technologies now account for 32% of total revenues, which is a 4 point increase from the prior year quarter.

These businesses grew at 11% when compared to the prior year quarter.

The strategic other businesses, which include plates, CTP and service, NEXPRESS and related toner business and other packaging products, film, Eastman Business Park, IP licensing represent 61% of our total revenues.

As we stated in the past, these businesses provide consistent revenues and strong cash flow for the company.

The planned declining businesses, which include consumer inkjet, VERSAMARK and DIGIMASTER account for 7% of total revenues.

As we've stated in the past, these are product lines where the decision has been made to stop new product development and to manage an orderly expected decline in the installed product and annuity base.

I'll now turn it over to Dave to discuss details on net earnings, cash flow performance and our 2018 full year outlook.

Dave?

Thanks, Jeff, and good afternoon.

Today, the company filed its Form 10-Q for the quarter ended September 30, 2018, with the Securities and Exchange Commission.

As always, I recommend you read this filing in its entirety.

As Jeff described, we are in advanced negotiations on an exclusive basis to sell the Flexographic Packaging business.

The net proceeds from the completion of a sale transaction will be used to reduce the outstanding balance of the company's term debt.

In addition, the company has entered into a nonbinding work letter with an existing lender and another potential financing source to negotiate a binding commitment letter.

The nonbinding work letter replaces the nonbinding letter of intent entered into during the third quarter.

The proceeds from the new facility, if consummated, would be used to refinance the loans under the first lien term credit agreement in full.

Exclusive negotiations between Kodak and the potential financing sources expire on November 12, 2018, in accordance with the terms of the nonbinding work letter.

I will now share further details on the company's -- on the full company results and update on our cost structure and cost actions for 2018.

I will also discuss the cash flow and our full year outlook for revenue, operational EBITDA and cash.

Now for the GAAP financial results for the third quarter.

On Slide 11, as we reported in our earnings release, the net income for the third quarter of 2018 on a GAAP basis was $19 million, an increase of $65 million compared with the third quarter of 2017.

For the 9 months ending September 30, 2018, the reported net loss is $2 million compared with a net loss of $35 million for the 9 months ended September 30, 2017.

Excluding the impacts of changes in the value for the derivative embedded in the Series A preferred stock, reductions and the liabilities for workers' compensation and legal reserves, goodwill impairment charges and depreciation and amortization expense related to PROSPER asset remeasurement, net earnings was flat for the quarter and a decrease of $1 million for the year-to-date period on a year-over-year basis.

Turning to Slide 12.

We are presenting our divisional results for the 9-month period ending September 30, 2018 and 2017.

Through to September 30, 2018, operational EBITDA was $30 million compared to $31 million in the prior year period.

On a constant currency basis, operational EBITDA increased by $1 million.

Further excluding impacts of aluminum costs, operational EBITDA increased by $23 million or 74% year-over-year.

Details by division include: a decline of $11 million in PSD, mainly driven by pricing pressures and increased aluminum cost of $22 million, which are offset by productivity improvements and cost reductions; a decline of $3 million in CFD is driven primarily by expected declines in consumer inkjet systems.

These declines were offset by a $1 million improvement in EISD as a result of cost improvements partially offset by the expected decline in VERSAMARK revenue and earnings; $4 million in FPD as a result of growth in FLEXCEL NX Plates volumes; and $10 million in AM3D operational EBITDA due to cost actions taken to sharpen our focus on the investments announced last year.

On Slide 13, we are presenting an operational EBITDA bridge from the 2017 results to our full year 2018 outlook of $55 million to $60 million.

As presented, we expect unfavorable impacts of $26 million related to the increased aluminum costs and tariffs, $2 million related to foreign exchange impacts in 2018 and a $6 million favorable impact from the reduction in the liabilities for workers' compensation reserves.

Our expected declines in consumer inkjet and VERSAMARK are projected to have a $13 million unfavorable impact on full year 2018.

Changes in our product mix, pricing and volumes will result in a $15 million unfavorable impact to the full year.

Implemented cost reductions and manufacturing improvements will provide a $65 million favorable impact to the full year.

Manufacturing productivity savings include improvements in waste and yields, improvements in logistics costs, and purchasing improvements.

Additional annualized savings of approximately $40 million from pre-revenue areas and reductions in operating cost for mature businesses will result from the elimination of approximately 325 positions and non-headcount-related cost reductions of approximately $5 million.

As of the beginning of November, the company has completed the reduction of approximately 90 positions and has developed plans for an additional 220 position eliminations.

Annual savings from these actions are projected at approximately $37 million.

Moving on to the company cash performance presented on Slide 14.

The company ended the third quarter with $256 million in cash, cash equivalents and restricted cash, a decrease of $113 million from December 31, 2017.

Cash and cash equivalents reported on the balance sheet were $238 million, down $106 million from $344 million at December 31, 2017, and down $37 million from $275 million as of June 30, 2018.

During the 9 months ending September 30, 2018, cash used in operating activities was $79 million, driven primarily by our seasonal build in inventory of $42 million and lower trade accounts payable of $25 million; a decrease in liabilities excluding trade payables of $20 million, partially offset by $28 million of cash from lower receivables.

The decrease in the company's liabilities, excluding trade payables of $20 million, was primarily due to cash payments related to taxes, rebates, restructuring and foreign pension plans.

Cash used in operating activities year-to-date increased by $2 million compared to the 9-month period ending September 30, 2017, primarily related to a decrease of $9 million in cash flow from net earnings and an increase of $7 million in cash flow from balance sheet changes as presented.

Cash used in investing activities was $16 million during the 9-month period ending September 30, 2018, as compared to a use of $25 million in the prior year period.

The company has substantially completed the capital requirements of the flexographic packaging plate line expansion in Weatherford.

We expect to begin production in the first quarter of 2019.

Year-to-date for 2018, we have spent $6 million in capital expenditures for this project.

Cash used in financing activities was $10 million year-to-date 2018 compared to $19 million in the prior year period, primarily reflecting the dividend payment on the Series A preferred stocks.

Moving to Slide 15.

I will provide our latest outlook for revenue, operational EBITDA and cash.

Our 2018 full year revenue expected guidance is revised to a range of $1.475 billion to $1.525 billion.

Our 2018 operational EBITDA guidance remains at $55 million to $60 million.

We expect to generate cash in the fourth quarter of 2018 with the projected year-end cash balance range of $260 million to $265 million before debt repayments.

Expected generation of cash includes operational EBITDA of a range of $25 million to $30 million, a Korean withholding tax refund of $16 million, proceeds of transactions net of expenses of $16 million and working capital of $8 million.

This will be partially offset by cash uses, which include net legacy payments of $11 million comprised of foreign pension contributions, workers' compensation payments, contingent consideration related to the sale of a business and long-term disability payments, interest of $9 million, capital expenditures of $7 million, taxes of $5 million, restructuring of $4 million and other cash uses of $6 million.

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

In particular, the company's EBITDA used in a secured leverage ratio, as calculated under the first lien term loan credit agreement, exceeded the EBITDA necessary to satisfy the covenant ratio by $31 million.

To summarize the third quarter 2018 performance, the company's use of cash primarily reflects the seasonal build of working capital and the seasonal nature of the company's earnings.

We expect to generate cash in the fourth quarter and to strengthen our liquidity.

We are continuing to execute actions to reduce operating costs, including driving greater efficiencies in investment spending and operations of our mature businesses.

We will now open the call to your questions.

Operator, please remind participants of the instructions to ask questions.

(Operator Instructions)

So I want to thank everyone for joining the call.

And as noted, we had some good momentum this year on SONORA, FLEXCEL NX and PROSPER, and we're looking forward to talking to you in the New Year after our fourth quarter results.

Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may all disconnect.

Everyone have a great day.