Commentary & Analysis
FREE: Better Tax Rates, Good Cost Performance and a Strong Digital Business contribute to Kodak’s Performance: Summary of Q3 Earnings Call
By Pat Veverica November 1,
By WhatTheyThink Staff
Published: November 1, 2004
By Pat Veverica November 1, 2004 -- Eastman Kodak Company today announced third quarter earnings from continuing operations of $226 million or $0.79 per share. Net income was $479 million or $1.67 per share as compared to $112 million or $0.42 per share for the same period last year. Sales were $3.364 billion, a 1% increase over the $3.346 billion for the third quarter of 2003. Topics of this summary: Quarter Overview Emerging Markets Segment Performance Guidance Q & A Quarter Overview Kodak officials cited substantial help from a better than expected tax rates, and stronger performance in their digital business as contributing factors in their earnings performance. Gross profit as a percent of sales declined 4.8% year-over-year, to 33.7%. The decline resulted primarily from “unfavorable price and mix,” according to Kodak’s CFO. While revenues continued to be soft, positive foreign exchange provided a lift, and improved tax rates increased earnings by 10 cents per share. China’s national holiday in early October drove strong unit sales at the end of the quarter. Aggressive cost reduction actions continue, with 2825 positions being eliminated during the quarter. Year to date Kodak has cut about 5,900 jobs from the end of 2003 number of 64,000 employees. Raine Radar Take: Analysts were quick to criticize the top line increase of only 1% citing that the erosion of film products is happening faster than had Kodak estimated. In addition, there is no confidence that Kodak is gaining any significant digital photography market share. As Kodak increasingly bets on the future of digital photography, investors remain skeptical that Kodak will ever restore profitability from the days of the “yellow box”. Kodak continues to tout the commercial printing arena as the area for growth leading with their NexPress and Versamark products. Raine believes that the long term viability of this strategy will not bear fruit. The current middleware “front-end” race is coming from both HP and Xerox and they are working hard to connect a collapsing value chain for B2B and B2C. One that Kodak seems content to focus primarily on the production back-end. Segment Performance Emerging Markets posted a solid quarter with China’s total sales rebounding nicely- growing 14%. Kodak’s China consumer operations which were hard hit by SARS in the second quarter saw a significant moderation in film sales decline. India and Russia showed strong growth, with India up 23% and Russia up 15%. Mexico was down 8%. Sales in the European markets were up 7%. The Company also announced today a new cooperative agreement with Lucky Film, China’s largest national film brand. Consumer Digital Products and Services: Digital cameras sales are growing 117% year over year. Market response to the Company’s Easy Share printer dock continues to exceeded expectations, while paper sales were up 33% and photo sales up 43%. Digital and Film Imaging: Sales totaled $2.3 billion, down 17%. Highlights for the quarter included a 41% increase in the sales of KODAK Picture Maker kiosks and related media; a 41%increase in consumer digital capture sales, which includes the KODAK EASYSHARE cameras; and continued strong sales of motion-picture origination and print film. For the quarter, the Company estimated the consumer film industry volume declined about 20% compared to Q3 2003. Health Imaging sales were up 11% to $672 million. This segment experienced strong sales in computer radiography and health images. The computer x-ray business continues its middle single digit decline. Kodak expects operating margins to return to the mid-teens. Highlights included a 24% increase in sales of digital products and services. The acquisition of Practice Works moves the Company’s dental business into a leadership position in the direct radiology business and data practice management software arena. Graphic Communications sales were $195 million, up 138%, largely reflecting the acquisition this year of Kodak Versamark and NexPress. The integration plans are on or ahead of schedule for both Kodak Versamark and NexPress, and both subsidiaries are enjoying solid demand for their products and services. Growth Strategy and Investments Kodak plans a series of carefully targeted investments and acquisitions, to be centered on the health imaging businesses as well as the growing opportunity they see in commercial printing, (where they currently participate via their NexPress and Kodak Polychrome Graphics joint venture). They also have initiatives underway in the ink jet space, but stated that they “have much of the technology we need to make a new contribution to this industry, and we’ll be in a position to say more on this in the coming months and quarters.” Guidance Kodak reaffirms its full-year operational earnings guidance of $2.44 to $2.64 and GAAP earnings of $2.49 to $2.69 per share. Q & A SG&A was lower, even on the higher revenues. The cost-cutting is starting to pay off. The digital business and profitability of cameras were the real source of the upside. But historically, the Company sees a sizeable dip in earnings from the third to the fourth quarter, due to the seasonality of some of their business. (Even as the fourth quarter typically produces 40% of the volume for the year.) The retail price environment in the film business is heating up and they expect it to be very intense in Q4. There was good growth in many parts of the digital business: photo was up 47%, ink jet papers up 33%. Kiosks and the associated media were strong. The company does not comment on the profitability of the total digital business. In the Health Imaging business, Q3 was a bit behind, but they still expect Q4 to be as planned. The introduction of many products and educating the customers as to what they have played a role, as well as training of the sales force. The Company expects Q4 to be back on track The staff reductions announced in the second quarter did not have a material impact on Q3, since most of the action is taking place now. The material impact of staff reductions will show up in Q1 2005. The company is firm in its commitment to take costs out, as it sees Europe following the US in secular decline, expecting Western Europe to “go down the same path” as the US market. The Company twice declined to comment on the rumors from the German press about discussions with Heidelberg and the opportunity to increase the stake in NexPress.