By Susan Kelly January 26, 2004 -- Eastman Kodak Company (NYSE: EK) Rochester, NY, a worldwide leader in imaging products and services for businesses and consumers reported its fourth quarter results for 2003. For the fourth quarter of 2003 revenues totaled $3.8 billion, up 10% from $3.4 billion in the fourth quarter of 2002. Excluding foreign exchange, sales declined 4%. The company reported net income of $19 million, or $0.07 cents per share, compared with net income of $113 million, or $0.39 per share, in the fourth quarter of 2002. For the year 2003, sales were $13.3 billion, up 4% compared with $12.8 billion in 2002. Excluding foreign exchange sales were down 1% from 2002. Net earnings for the year totaled $265 million, or $0.92 per share, compared with $770 million, or $2.64 per share in 2002. Editor's Note: On January 22nd (the day of their earnings call), Kodak once again made headlines in the Wall Street Journal with respect to their poor financial results and the announcement of aggressive restructuring plan. The majority of the earnings call focused on their commercial printing strategy. Raine's concern is the late entry of Kodak into these already-crowded digital printing markets and Kodak's simplistic segmentation of their current market share positioning in otherwise very complex product and service offerings. Contrary to the President's claim that Kodak has unique capabilities and market positioning to be the market leader in commercial printing; we don't believe Kodak will lead the way in turning print into a consumable anytime soon. Shareholders and analysts must agree as Kodak's stock tumbled to 20-year lows. Even though some rebound has transpired, questions remain about Kodak's ability to deliver $3 per share in 2006 when they only earned $0.92 in 2003. Topics of this summary: Chairman Comments Financial Summary Commercial Imaging Division: Kodak's Commercial Printing Strategy Guidance 2004 Q & A Summary Chairman Comments Introductory statements were made by the Chairman, Mr. Dan Carp. He stated that Kodak is making progress on their strategy. The digital camera business is exploding as well as their newest acquisitions (Kodak Versamark – formerly Scitex Digital Printing which he said specifically “the more we look at it, the more we like it.”) Kodak's historical business has been declining yet they are looking to increase market share. The plan has been announced to reduce the footprint and the cost structure to be more competitive in emerging markets and maximize cash flow going forward. In addition, Kodak wants to look at the commercial printing business more closely. He believes there is huge growth opportunity here just like in the digital camera business. Forrester Research has confirmed Kodak's brand as a leader in the digital markets. It is expected that Kodak's future growth will come from Commercial Printing and Health Imaging businesses; a 26% CAGR from 2002-2006 which is at a current revenue rate of $4 billion in 2003. In 2004, a lower level of acquisitions is expected as Kodak wants to spend the time with integration activities and achieve targeted results. Kodak Versamark is aiming for a break even in 2004. The Chairman stated their continued commitment to their current core businesses yet they need to reduce cost structure therefore have announced a 21% reduction in staff and a 30% reduction in square footage in the Kodak facilities. The Chairman believes that 2003 was a “bottom out” year, and the future will show continued positive growth. Financial Summary Mr. Robert Brust, Kodak's CFO, initiated the conference to stress the positive results: For the year, operating cash flow was $727 million, excluding acquisitions compared with $1 billion in 2002. The company's debt totaled $3.2 billion at the end of the year, compared with $2.6 billion in 2002. Inventory turns were 5.6x and capital expenditures totaled $500 million for 2003. DSO has been reduced to 42 days from 47 days a year ago. Approximately $749 million was spent on acquisitions in 2003, not including the Scitex Digital Printing. Gross profit on an operational basis was 32.6%, compared with 35.5% in 2002 due to unfavorable price and mix. Selling, general and administrative expenses were 19.2% versus 20.2% a year ago. Advertising expenses were down 16% from a year ago. A $150 million restructuring charge was included to reduce 9500 employees which outside of the most recently announce restructuring plan. Commercial Imaging Division- Commercial Printing Strategy Revenues totaled $432 million for the fourth quarter of 2003 up 9% from the prior year quarter. Kodak President, Mr. Antonio Perez, introduced the Commercial Printing Strategy stating that Kodak has unique capabilities (i.e. world class workflow expertise and color/imaging science expertise), as well as a superior market position with over $2 billion in joint ventures with leading market share. Their analysis shows that the transformation in commercial printing is due to disruptive digital technology driving targeted and personalized print AND that the industry needs someone to lead it. Perez believes Kodak is the leader and can turn printing into a consumable. Jim Langley, from the Commercial Printing Group gave a 30 minute presentation about digital printing providing analysts with detailed examples of variable data printing, print on demand, and transaction printing opportunities. The market research presented by Kodak showed an addressable target market for Kodak of $17 billion in 2003 and will grow to $23 billion by 2008. Mr. Langley stated their current market share position for their four divisions: Kodak Polychrome (KPG -50% joint venture with Sun Chemical) is #1 in market share, NexPress (50% joint venture with Heidelberg) is #2 in market share, EnCad is #3 market share, and Kodak Versamark is #1 in market share for Digital Direct Mail. Kodak's commitment is to investments and technologies that take a leadership role in personalized printing through “revolutionary” continuous inkjet technology. Kodak is planning to make big announcements of new products at Drupa this year. Scalability of the businesses will be through product leverage, cross-selling, distribution, and end-to-end solutions. 2004 Guidance Revenues are expected to grow 5% to approximately $13.8-$14.2 billion; 26% growth in digital portfolio. Gross profit will decline to around 31% in 2004. R&D is expected to stay around 5.5% and SG&A is expected to be 17.7% in 2004. Kodak is forecasting free cash for the full year 2004 to be $485-$615 million. Net debt is expected to be $1.9 – $2.1 billion by year end even with the newest Scitex Digital Printing acquisition. A $900 million debt maturity is due this year and Kodak expects to pay down $600 million. The company expects operational earnings of $2.25 to $2.55 per share, and GAAP earnings of $0.80 to $1.30 per share, for 2004. Q&A Kodak is budgeting more of a film decline than the industry average to make sure that there are no surprises. Retail space is consolidating inventories especially in the U.S. where the supply chain is the most developed. Kodak believes this will trough out by the end of 2004. Reduction of people and assets are limited to the consumer and professional businesses as well as photofinishing services and support businesses. Some reductions will be in the health imaging business but not nearly as intense as the consumer businesses. Long term profit margins of the digital businesses should be in the mid-to-high teens according to the Chairman. Capacity utilization of the analog business is “pretty good” according to Dan Carp and declined to give specifics numbers. Analysts were concerned that shrinking the traditional film business sends a bad message to their distributors and retailers. Kodak's response was that retailers are excited about the digital print opportunities through the growth of kiosks and digital camera sales. Kodak believes their commercial printing strategy is well positioned in the equipment space; which is the underlying engine for new products and growth. They are currently spending time on how to serve customers on the workflow issues for high quality, high speed digital print. Partnerships and relationship discussions are underway. They have an “ambitious” Dell OEM program for Kodak cameras and printers. Antonio Perez would not reveal details at this time. Formal agreement does not include Kodak's inkjet technologies. For commercial printing, Kodak has 800 people in the service organization which can capably handle customer needs. KPG has 4,000 employees with 1,000 in the field and Versamark has their own direct sales force of about 100 people. Heidelberg also has strong presence in the commercial printing channel which helps sales overall. Questions arose about the investment in R&D requirements so as to have a leadership position in inkjet and digital print technologies. According to Perez, Kodak is in the process of learning and they are working on various deals with potential partners. Growth is expected to be 26% in digital for the next five years to offset the decline in the traditional film business. In the last five years, Kodak has had total restructuring charges of almost $5 billion and analysts believe it would be more intellectually honest to show this as part of normal operating costs of doing business. Kodak is looking into how to account for these charges in the future.