Eastman Kodak Company (KODK) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Eastman Kodak Third Quarter Earnings Conference Call. At this time, all participants lines on the telephones are in a listen-only mode to reduce background noise. Later we will be conducting a question-and-answer session. Instructions will follow at that time [Operator Instructions]. I would now like to introduce your first speaker for today, David Bullwinkle. You have the floor sir.

Thank you. Good afternoon. My name is David Bullwinkle, Director, Global Financial Planning and Analysis and Investor Relations for Kodak. Welcome to the third quarter 2015 Kodak 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 of 2015. 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 United States Private Securities Act of 1995. These forward-looking statements are subject to a number of uncertainties and risk, which are clearly described in the Company’s 10-K and 10-Qs and the Company’s other SEC filings. And which are qualified by the Safe Harbor provisions in our filings. We advise listeners to read these important cautionary statements in their entirety as any forward-looking statement needs to be evaluated in light of these important risks and/or uncertainties. 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 has been provided with the release and within the presentation on our Web site in our Investor Center at investor.kodak.com. Speakers on today’s call will be Jeff Clarke, Chief Executive Officer of Kodak and John McMullen, Chief Financial Officer of Kodak. Jeff will provide some opening remarks, his perspectives on the quarterly financial performance, and an update on the outlook for the Company. Then John will take you through a cost reduction update, additional details of our third quarter results and cash flow results and outlook before we open it up to questions. I will now turn this over to Kodak’s CEO, Jeff Clarke.

Thanks, Dave. Welcome, everyone and thank you for joining the Q3 investor call for Kodak. I will start by giving you an overview of the quarter. John McMullen will follow with more details and then of course we’ll welcome your questions. We also like to invite you to join the webcast of our Analyst and Investor Day tomorrow, when we will talk more about the outlook for the rest of the year and for 2016, and 2017. Dave will provide details of the meeting in case you miss some and we will be webcasting for those who cannot join us in person. The link is on our Web site. We met our operational EBITDA expectations for the quarter, and are on track for the year as we drive the transformation of Kodak. Now onto Slide 5 of the earnings presentation please. Revenue for Q3 2015 totaled $446 million for the quarter, a 21% decline from the same period in 2014. On a constant currency basis, revenues in Q3 declined by 14% versus Q3 2014. The remaining decrease was primarily driven by the expected continued decline in legacy consumer and printer cartridge sales as well as non-recurring intellectual property revenues realized in the third quarter of 2014. When adjusted for foreign exchange and these items, revenues were down 4% year-over-year. On Slide 6, total Company operational EBITDA for Q3 was $39 million. In the same period in 2014, operational EBITDA was $90 million, again with one-time items. When adjusted for the non-recurring intellectual property revenues realized in the third quarter of 2014 and foreign exchange impact year-over-year, operational EBITDA improved by $9 million. This represents solid performance in the quarter given the challenges created by the strong U.S. dollar, the economic slowdown in China and weakening Latin America economy. On a year-to-date basis, operational EBITDA is $74 million, down from $121 million for the same period in 2014. On a comparable basis, this represents an improvement in operational EBITDA of $43 million year-over-year, well within the range of the full year improvement we expected. On Slide 7, we are reiterating our guidance for 2015. Adjusting for the foreign exchange impact, as well as non-recurring IP revenues, our base line 2014 operational EBITDA was $67 million. As we have guided previously, we expect 2015 operational EBITDA to be in the range of $100 million to $120 million. On Slide 8, I want to highlight the improvement in the quality of our earnings. Over the past year, our strategic growth businesses have grown from 15% of revenues to 23% of revenues. This is an important metric for our progress. The growth engines include; SONORA plate revenues, revenue growth of 20% or 36% in constant currency. Software & Solutions division revenue growth of 11% or 22% in constant currency, PROSPER revenue growth of 27% or 36% in constant currency, FLEXCEL NX revenues growth of 11% or 29% in constant currency. Micro 3D is currently in invested mode and there were minimal revenues in the third quarter. It’s also important to note that that majority 81% of our revenues year-to-date comes from annuity. Sales of consumables and services to customers who’ve installed Kodak print systems, the growth of the installed base of SONORA, FLEXCEL NX packaging and PROSPER systems ensures continued strong annuity sales growth in the future. Slide 9 please, now I’ll talk about the business by division, starting with the Print Systems division, our large business. PSD revenues for Q3 were $278 million, a 13% decline compared to Q3 2014, operational EBITDA performance of $28 million, down from $31 million in the same period year ago. These results were achieved despite the tough challenge without the unfavorable impact of foreign exchange rates, PSDs revenues would’ve declined by 4% while operational EBITDA would have increased by $1 million. Revenue decline is due to competitive pricing pressures, plate volume was essentially flat. We continue to add customers for our SONORA Process Free Plates and plate volumes increased for SONORA by 41% for the quarter. Two important new products we launched in the Q3, electromech digital plates are designed to address the demanding needs of UV apps and print application. This reversible thermal plate has the ability to print on a variety of substrates using UV lens including those used in the rapidly growing packaging space. In addition, the new Libra VP Digital Plate expand Kodak’s position in the newspaper segment. Libra VP is a violet exposed simple process plate solution for newspapers which have an existing investment in violet CTP systems. Libra VP is a strong addition to our industry leading thermal digital plate solutions for the newspaper segment. Moving on to the enterprise inkjet systems division, which includes our PROSPER systems. Revenues for Q3 were $39 million, down from $43 million in same period last year. On a constant currency basis, revenues were flat. Operational EBITDA was a negative $4 million compared to a negative $12 million in the third quarter of 2014 for an improvement of $8 million. On a constant currency basis, operational EBITDA improved by $9 million. For the second half of 2015, we’ll see operational EBITDA before to us compared close to breakeven for this division. However, we will not achieve our earlier objective of breakeven for the division for the full year. The key issues are faster than expected decline in the sales of legacy Versamark product, foreign exchange impact and investment and the development of the next generation PROSPER systems, which we launched at Drupa in May 2016. The PROSPER business model is based on the profitable ink and service revenue streams supporting our installed base. We will discuss this in more depth during the Analyst and Investor Meeting tomorrow. Briefly PROSPER revenues grew year-over-year for the third quarter by 27% or 36% on a constant currency basis. So the PROSPER annuity growth for the year today’s period is 30% growth on a constant currency basis, in line with our expectations. We previously shared our ambitious goal of installing 25 new PROSPER systems this year. This is significant growth over the 2009 to 2014 cumulative buy year install base of 29 times. We expect to have contract in hand and system on site for the 25 PROSPER systems by the end of the year. However, revenue recognition for these systems in 2015 will fall short of the 25 units due to the complexity of the installations. Separately I am pleased to inform you Kodak in Collins Inkjet have reached an agreement to settle the court case dropped by Collins against Kodak concerning the use of Collins being on Kodak’s Versamark print-heads. Moving on to the Micro 3D printing and packaging division, which includes the FLEXCEL NX systems and plates as well as touch sensor film with the silver mesh and copper mesh technology. Revenues for division for Q3 were $32 million, flat with the same period a year ago. However, on a constant currency basis, revenues increased by $4 million or 13% from Q3 2014. On a constant currency basis, operational EBITDA improved by $5 million driven by the success of the Kodak’s FLEXCEL NX system. FLEXCEL NX packaging business has strong momentum. FLEXCEL NX plate volumes increased by 32% year-over-year and the install base is now over 450 FLEXCEL NX CPT. Due to growth of this business, we’ll commence a multiyear capital expansion project, beginning in January 2016 to approximately double the global capacities of our flexographic plates manufacturing. In Micro 3D printing, we’re moving ahead with both copper mesh and silver mesh cut sensors. With our copper program, we have shifted sample quantities for design integration activities in online computer and industrial applications. We’re refining our manufacturing process to further improve product features while maintaining high double-digit record yield. We expect a loss of approximately $16 million on our micro 3D printing business in 2015 and continued investment loss in 2016 with breakeven modest profit in 2017. This is a reset for this business from prior expectation of approximately $25 million of profit in 2016. This start up business is based on technology designed to radically [disintermediate] and trenched $6 billion IPO touch screen sensor industry. We are committed to this business and believe continued investment is warranty. The Software and Solutions Division which includes PRINERGY workflow software had a strong quarter. Q3 revenues were $30 million, up 11% from the $27 million in the same period last year. Operationally, they doubled 1 million to 2 million for the quarter. A key highlight within the quarter was completion of a $5 million contract to produce ballots for the presidential election in Argentina. The Consumer and Film Division includes consumer inkjet printer cartridges, motion picture, commercial film and synthetic chemicals as well as our brand licensing program. For Q3 revenues CFD were $64 million, down from $92 million in Q3 of 2014. Operational EBITDA declined from $24 million to $12 million. These declines were expected in building our plans for the year. We anticipate these reduction in revenues and earnings from the consumer inkjet printer cartridge business. For the third quarter in a row film reported profitable quarter on basis of operational EBIT for corporate cost which was our goal. We are continuing to find new opportunities in brand licensing. During Q3 we signed deals with several new partners including manufacturers of LED and flash cards. The Intellectual Property Solutions Division is pursuing partnerships and other opportunities to commercialize Kodak inventions. Just this week we signed a Memorandum of Understanding with Carbon 3D a promising Silicon Valley start up company which aims to ship 3D printing beyond prototyping to achieve 3D manufacture, work together in multiple projects of materials, hardware and systems design. We are maintaining a robust research effort and actively pursuing several opportunities to monetize Kodak inventions ranging from anti-microbial particles to unique material solutions for 3D printing to light-blocking materials. As a reminder, when comparing year-over-year performance for this division in Q3 of 2014, we realized a one-time gain from IP sales of $52 million which contribute $45 million to operational EBITDA. Continuing through our final division, Eastman Business Park, we are pleased to learn a few weeks ago Eastman Business Park will be the manufacturing site for the federal and state supported hub for developmental of Photonics technologies. Now, I will take you on our 2016 financial targets. As I discussed in prior earnings calls, we established a preliminary 2016 operational EBITDA goal for $175 million based on our expected run rates for the end of the year and the performance of our growth businesses. We are making two adjustments to this goal's outline at slide 10. First, as discussed earlier in my remarks, we are resetting the plan for our start up micro 3D printing business. This business is based on advanced science and technology designed to radically disintermediate and trench $6 billion IPO touch screen sensor industry. We have nearly completed our manufacturing facilities in Rochester and Xiamen, China and continue to make meaningful progress in improving product yields and performance. While we have a growing pipeline of opportunities for design wins, we believe it's prudent to plan for continued investment and losses in 2016 and profitability in 2017. The combination of modest operating loss in 2016 and a reset of planned profitability in the preliminary 2016 goal results in a $25 million downward adjustment in 2016. Second, the impact of foreign exchange since we established a preliminary 2016 goal is approximately $12 million. As such the adjusted 2016 financial target will be in the range of a $130 million to $150 million of operational EBITDA which results in a 27% year-over-year improvement for midpoint of 2015 guidance to the midpoint of 2016 target range. At the Analyst and Investor Meet, would find additional detail into the 2016 financial targets as well as providing preliminary financial targets for 2017. I will now hand it over to John. John?

Thanks Jeff and good afternoon. Today the Company filed its Form 10-Q for the quarter ended September 30, 2015 with the SEC. I recommend that you read this filing in its entirety. As Jeff noted in his opening remarks, we are pleased with our third quarter results and the overall year-to-date results of the Company. I will now provide a little more detail on several areas of our third quarter performance. As we reported in our earnings release the net loss for the quarter on a GAAP basis was a 21 million compared to a net gain of 19 million in Q3 of 2014, a decline of 40 million. Adjust in Q3 2014 for one-time non-recurring IT licensing revenues of $52 million, third quarter performance reflects an improvement of 12 million year-over-year. This information is taken directly from the companies, consolidated statement of operations in the 10-Q. We are pleased with the year-over-year improvement. Next, let me provide an update on our cost reduction programs. As we share with you over the course of the year, we expect greater than a $100 million and operational SG&A and R&D cost reductions for the full year 2015. As you can see on Slide 12, we have made significant progress to the first three quarters towards this objective. In Q3 2015, the reduction in operational SG&A and R&D was $15 million year-over-year. On a year-to-date basis, we’ve reduced operating expenses by $85 million year-over-year. And on a run rate basis, the reductions made and actions taken year-to-date would yield full year savings of approximately $101 million with no further actions. As you can see, we expect to achieve our goal of greater than $100 million in operating expense and cost reductions with one quarter of a fiscal year remaining. Key drivers of these difficult but necessary cost improvements are Company’s headcount, which has been reduced by approximately 12% year-over-year and benefit reductions effective at the beginning of 2015 which provide approximately $20 million in annual operating expense savings. We continue to see opportunities for further efficiencies within our divisional structure, and are focused on opportunities to further reduce our cost structure going forward by driving a simpler, more efficient and more execution oriented organization consistent with our divisional structure. We have made significant progress to-date and we will continue to take actions as appropriate based on the business model needs of each of our divisions. Now, let’s focus on cash. As shown on Slide 13, the Company ended the quarter with $521 million. This reflects a $55 million decrease in cash from Q2 of 2015. During the quarter, the Company used cash primarily for interest expenses and debt repayments, capital expenditures, employee severance payments, working capital, funding of planned cash tax payments and pension plans, the negative impact of foreign exchange and reorganization and legacy payments related to our Chapter 11 and reemergence process. It is important to note within our cash results we continue to face an unplanned headwind from foreign exchange impacts. Year-to-date, our cash position has been reduced by $14 million as a result of negative foreign exchange impact. We are also seeing unplanned impacts on our working capital balances as a result of currency translation effects and headwind and velocity of our working capital versus our goals for 2015 with current economic softening and volatility, primarily outside of the U.S. We are comfortable with Kodak’s liquidity position and support of the operating and investment piece of the Company and expect to grow our ending cash balance by year end and in 2016. However, given the headwinds noted, we now expect our ending cash position to be between $550 million and $600 million. We will provide more detail on the Company’s cash trajectory in our Analyst and Investor Day event tomorrow. In summary for the quarter, we are pleased with the Company’s continued progress. We are executing well within the divisional structure and we are making the progress necessary in our key businesses to drive future growth. We’re also meeting our aggressive cost goals to ensure the appropriate cost structure of the Company going forward with the capacity we need to invest in growth and to return the Company sustained profitability and cash generation going forward. We are excited to be hosting our Analyst and Investor event tomorrow, and we look forward to discussing the Company’s view of our current and future business model for each division, future growth opportunities and state of financial affairs, including earnings and cash generation. Now, I’ll turn it back over to Dave for Q&A.

Thanks John. Andrew we are now ready to open the Q&A session. Please remind callers of the instructions for asking questions.

[Operator Instructions] Our first question is from the line of Shannon Cross from Cross Research. Your line is open.

Thank you very much. Had a couple of questions for you, can you talk a bit more about the 3D or the Micro 3D printing business? And just what exactly sort of changed relative to last quarter in terms of your expectations. Is this incremental investment because you have new products in the pipeline? Just any more color you can give, and I know won’t smile, but just given the significant reset for next year. And then I have a follow up question. Thank you.

First of all, I think you have to look at it in the context of all of the technologies that Kodak is bringing to market. If you look at the four growth engine, or the five growth engines, we’ll start with SONORA. SONORA is a part of our Company that took a relatively long time to get into place, and now you see enormous growth and significant profitability. It has passed the point of customer acceptance, but yet it was a breakthrough technology. FLEX NX as well, took about four-five years for FLEX NX to become accepted in the marketplace and now it is growing at very strong levels and has material improvement to our Company in terms of profitability in fact just this quarter year-over-year it improved by $5 million on a constant currency basis. So run rate of over $20 million improving year-over-year. So when you introduce new technologies it take a little while to get into market and then when they do they start working well. And the two areas that today are at an inflection is -- one piece is inflection that is PROSPER, so our PROSPER after many years of investment and lots of losses is at the point now where it's scaling quite significantly. You need to take about micro 3D printing as an absolute start up business. This is a business going an ambitious attempt to bring a brand new science to [disintermediate] a large market. And the reality of it is we have got the technology so works now and that’s taken a long time. So I am very pleased that our ability to both manufacture and design touch screen sensors. What is difficult is getting them into design wins. And while we are working very hard and have a nice pipeline around that, the fact is the pipeline does not develop as fast as we would have hoped. One of the mitigating factors is that the technology that we are trying to disintermediate has reduced its price materially. Over the last four years ITO has reduced its price by 60% in the marketplace. So originally, when we built this plan, even earlier in the year and even six months, we saw a material cost advantage as well as optical performance advantages. Now the material cost advantage is less so. So when you are going into large vendors and large contract manufacturers they see a cost curve that's gone down so fast, they will see lot of reasons to replace the technology and that what was changed as the ITO market has moved and they brought their prices down. And so the disintermediation is less difficult. We will get in the world this tomorrow but the reality is we still have significant advantages versus ITO, both on a cost and on a resolution basis, however winning these design wins are more difficult, and we are committed to it based on the pipeline and the conversations we are having with multitude of vendors and the progress we are moving into design wins. However improvement here, this is one where we have overshot in the past and this is one that it needs time and I think the reset is appropriate, even that direct to the businesses are growing quite well, overall we are still showing 27% improvement. And so we want to be a little bit more conservative than we have been in the past.

Okay. Thank you. That was helpful. And then as we think about your EBITDA guidance for next year, what are sort of the key areas we should focus on that would drive EBITDA to like the higher end. So what you think those potentials flex up or you might be conservative just in terms of the other divisions? And then also if you can just let us know what currency levels you are using now for the 12 million so we can make sure we watch that as we go through the Q4?

The [indiscernible] is calculated as of a couple of days ago and I wouldn’t think days weights on that, so the 12 million would be comparison from the beginning of the year till now.

Okay.

And we don’t speculate where it forwards move. So as we give this direction we said it for today on the currency. So what are the drivers? Obviously $130 million to $150 million wide range. We expect kind of in the largest business a [PST] business we expect that business to be within a couple million dollars, our expectation is a big, it's a big business, it's relatively slow growth, it's a great contributor but it's not going to be a major swing factor, it's the base line really of our company. So the swing factors will be how fast PROSPER moves into basket already. You saw the 30% that we reported in annuities, that certainly is a good indicator that if that continues and with replacements that move us more to the higher end. How micro 3D performs is a big one as you know we have brought that down but as I stated that's probably or now probably move from aggressive parts of that and our forecast being more conservative. So one design win can swing that one quite a bit as when of the business like the big mover on the Company. I think we are counting on continued exemplary performance in the micro -- in the FLEXCEL NX business. That was pretty predictable because it's a very much an annuity business. So that will have good year-over-year, we don’t think there is a lot of upside there because we have -- we are expecting very strong results out of that. Software business will have solid impact but those are pretty predictable. So really when it comes down to in terms of it is our two businesses that are the most new to our business which is the continuing improvement on PROSPER and the continuing position of how micro 3D business goes. The rest of the business as I mentioned pretty much 81% annuity based and pretty predictable.

Great, thank you very much. We will see you tomorrow.

Thank you Shannon appreciate it. Next call, next question please.

Thank you. Our next question is from the line of Jen Ganzi from Newmark. Your line is open.

Hi guys thanks very much for taking the questions. And just quickly and this is, what's the total net impact on revenue EBITDA this quarter of FX?

I talked about year-over-year?

Yes, year-over-year growth versus what you had projected initially. I mean if there’s the way to kind of give up those numbers.

Okay, so let’s go to Slide 9. What you see, pull up the Slide 9 please, we’ll pull up those everybody to have. So in Slide 9, we cleared it out for you. So you see if you go to the bottom, you see that’s been totally year-over-year impact of revenue at the $122 million and then we give it to by division. And then we give it currency adjusted for you. So all you have to do is just crack cumulative numbers and you will see the impact.

And I mean I guess when you think about what you were expecting for the FX rate for this quarter versus what was actual, can you give us a sense of what the impact was there on an EBITDA basis?

Your question, what we expected?

I guess given what you expected I guess EBITDA to be versus where it is now and like what impact FX may have had on that, if at all?

So maybe I can give you more color on this. So, we gave guidance in the beginning of the year of $100 million to $120 million. We expect to meet that guidance despite a year-over-year headwind about $12 million of foreign exchange on EBITDA. And so the bottom line is we will deliver -- we're going to deliver $100 million to $120 million even though $12 million of win ahead in that. John earlier explained what balance sheet impact of that was. So, yes, it’s going to be a headwind, we worked our way through it, made a much trade off and then that’s getting there.

And it sounds like I guess, so it sounds like for the full you’re sort of on track with -- even with FX you don’t expect any significant misses through the year end?

And so again we’re reconfirming the guidance of $100 million to $120 million despite that $12 million headwind as you saw in earlier slide, we’re at $74 million at this stage and so we’re very comfortable on where we are relative to the guidance.

And in Q4 is that supposed to be like a stronger quarter seasonally?

Yes, Q4 is our strongest seasonal quarter. So, we’re very early in it obviously but we’re trending as you’ve expected so far here in October.

You just add on like the whatever the $39 million this quarter, which is probably seasonally stronger than you still be seeing pretty well in that guidance.

So again I want to stick with the guidance we’ve given you, I don’t want to plug it in there. I know that those doing model love to do that and we’ll watch you do the latitude -- to have the latitude to do that. But we are expecting -- we'll meet our guidance and we’re certainly well ahead of our plan so far this year on EBITDA.

Our next question comes from the line of Craig Carlozzi from Bulwark Bay. Your line is open.

Just a couple of quick ones on my end. Given the continued progress in business visibility, what do you guys believe the right cash balance needed to run the businesses?

Great question. I think over time and also subject to a little bit of the geographic mix of that, in the 300s plus is probably a reasonable number, it has set in more percent of the safe mode.

When you say over time, do you mean just so you have time to execute your 2016 operating plan, or do you mean over time i.e. the full development of your 3D printing, ’17, ’18, time period?

The way I would think about it is that if you look at over the last two years and we’ll go into a lot of detail around this. But we put a lot of things behind us from reorganization and legacy cost point of view, where we have the year in 2015, we have obviously made big investments in restructuring as a Company over the last two years. As Jeff talked about and discussed Micro 3D, the Company has made decision to invest into businesses like PROSPER, like Micro 3D. And the impact of that is within our operational EBITDA performance. But it is cash flow gone at some level. So as we turn the quarter with those businesses, we have things behind us. Our ability to operate at a lower cash level comes into play. So it’s not years from now. It’s relatively soon relatively to how we perform in 2016. But by no means of projection of where the cash flow be a bit easy and I think you’re asking more of a comfort level just operationally and more of a steady state.

Yes, and actually continuation of that question or your answer, you guys have done a tremendous job from Eastman Kodak several years ago, right? I mean, there’s been a lot of cost saves and you’ve done a tremendous amount of restructuring. You’ve seen the development of several new products start to gain traction. And now you’re one quarter closer to positive 2016 free cash flow, that was your latest guidance. This month high yield I believe has had the largest inflows ever, I could be wrong, but I mean like I am reading a run now that just says yowser, so I am imagining it's quite large. The markets clearly robust. Have you thought about addressing your capital structure perhaps refinancing your legacy capital structure? And if so, would you do anything that would be equity friendly along with that given your cash balance incur a little bit debt have a one-time debt, are you thinking along those lines, are you purely focused on the operational execution at this stage?

I think it's very fair to assume that we are watching the market very closely and would always consider being opportunistic if there was a good opportunity for us to do something different with our capital structure. So you can be sure that myself and our treasure build up are monitoring this on an ongoing basis.

You don’t have any more questions in the queue at this time. So I would like to turn the call back over to management for closing remarks.

Thank you very much. Well I look forward to discussing our outlook for the rest of 2015 as well as our goals for the next couple of years tomorrow at our Analyst and Investor Day Meeting. I appreciate everyone joining the call tonight and I look forward to seeing many of you tomorrow. For those who won’t be able to make it here at the New York Stock Exchange, I encourage you to dial in. We’ve got a lot of material to go through over five or six hours, so I think you will know a lot about Kodak at the end and then looking forward to spending some time with you. Thanks so much.

Thank you.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your lines at this time. Everyone have a great evening.