Commentary & Analysis
FREE: Kodak uses Q1 to show their Digital Print Connection to Financial Results: Summary of Q1 Earnings Call
Eastman Kodak announced first quarter income of $
By WhatTheyThink Staff
Published: April 27, 2004
Eastman Kodak announced first quarter income of $28 million for the first quarter of 2004 as compared to $12 million for the same period last year. Net income was $0.10 per share this quarter and $0.04 for the first quarter of 2003. Sales were reported at $2.919 billion for the first quarter or an 11% increase from sales of $2.64 billion for the first quarter of 2003.
Earnings from continuing operations, excluding cost reductions and non-operational items were $74 million or $0.26 per share. In the first quarter of 2003, earnings from continuing operations, excluding restructuring and other items, were $31 million or $0.11 per share.
Topics of this summary include:
- Quarter Overview
- Segment Performance
- Q & A
Today’s call began with Kodak officials reiterating its progress on its strategy to drive strong growth in its digital portfolio, increase profitability and managing its traditional portfolio for cash. Kodak will continue to exit or sell parts of its business that are not aligned with its three defined growth areas, specifically, Kodak will focus on the consumer, commercial and health segments. Additionally, the company will continue to align its cost structure to traditional business volume trends.
Digital revenues during the quarter were up 44% while traditional revenues decreased 2%. Emerging markets have seen a double-digit growth with year-to-year gains of 14%, with China showing the strongest increase. Emerging markets accounted for 23% of worldwide sales.
Digital and Film Imaging segment sales increased 7%, totaling $1.93 billion. Kodak reported at 98% increase in consumer digital capture sales with plans to expand into the high-end market. Kodak maintained its U.S. market leadership in 4x6 printers and reported the Kiosk business has shown strong growth, particularly outside the U.S. The new family of Kiosks will be introduced in the U.S. market. On the traditional side of film, Kodak’s estimate is for a 15% decline in film on a year over year basis in the U.S. The company will focus on reducing fixed costs ahead of volume declines and adjust variable costs to market demand. Outside of the U.S. traditional film has seen solid growth especially in China and India.
Health and Imaging segment showed sales of $631 million or a 15% increase over the same period last year. Kodak continues to invest in this market. Recent acquisitions in the segment are performing according to expectations. Margin improvements are expected as the year proceeds.
Commercial Printing recorded sales of $133 million up 51% with the increase largely due to sales by Versamark, a leader in high-speed production. The NexPress acquisition is expected to close in the next several weeks.
Commercial Imaging sales were up 5% at $196 million.
Kodak anticipates second quarter earnings in the range of $.55 - $0.65 per share with earnings for the year at $2.15-$2.45 per share. Full year estimates have been increased over the previously reported expectation of $2.05-$2.35 due to tax benefits realized in the first quarter.
Q & A
- The photo finishing business is one that has low margins and is experiencing a significant decrease in volumes. Kodak is continuing to take cost reduction steps that include closing a number of labs. The company is not yet ahead of the curve, but plans to be ahead of the curve in the upcoming quarters. (Editor’s Note: As part of its transition to digital print, Kodak plans to cut 12,000 – 15,000 jobs and expects to take charges of $1.3 - $1.7 billion over the next three years. Raine believes Kodak will have to carefully manage the media messaging. Kodak will have to demonstrate some positive quarters in amongst their ‘write-down’ quarters to prove traction of their digital strategy and to keep their investors satisfied)
- From previous analyst calls, Kodak indicated its expectation the digital segment would contribute to one half of total earnings by 2006 and the remainder from other businesses. The company has experienced more growth than expected in digital and will fully disclose earnings impact at the upcoming September analyst’s meeting.
- Kodak outperformed competitors in the traditional film segment even through there was a decline in overall industry volume. Performance is thought to be the result of a shorter first quarter and increased inventory levels during the quarter. The company’s plan is to maintain market share in the U.S. and increase market share in this segment worldwide.
- Kodak plans to balance the needs and issue of fairness between consumers and retailers with the introduction of the new Kiosk. Kiosks will be placed in retail stores and will benefit both consumers and retailers. Kodak expects increased sales through Kiosks.
- Although the digital business was profitable in the quarter and it continues to improve, Kodak was unwilling to provide specific numbers on profitability and again cited the September analyst meeting as a forum to give more details. The company continues to invest heavily in different markets and services as well as create opportunities by partnering with telephone companies.
- In the health imaging segment, margins were lower during the quarter due to manufacturing costs and negative mix in hardware.
- Kodak used an average rate in March for silver prices and a spot read on foreign exchange as of 3/31/04 as fixed numbers as a factor to determine guidance for the second quarter.
- During the first quarter, Kodak wrapped up restructuring actions announced last year. During the second quarter, analysts may see an increase in velocity of the restructuring program but not an increase in scope.
- Advertising costs during the quarter were lower than last year due to seasonality. Advertising will be concentrated in the times of the year when it is more effective.
- Charges related to the Olympics have been recorded at $50 million plus during the fourth quarter is due a large part to product in-kind.
- Kodak’s margins in its health imaging segment are currently at the low end and margin improvement is expected. Expectations are to gain share in CR and DR.
- Although the commercial printing industry has been depressed over the past two year, Kodak has seen growth in sales and product mix. With drupa beginning in 2 weeks, the company has expectations, along with others in the print industry, for increased orders concentrated around the time of the show. Kodak is also planning larger offerings in consumables with Versamark.
- Kodak will focus on integrating the $1.2 0r $1.3 billion of recent acquisitions into its portfolio rather than focus on plans for additional acquisitions. Officials did indicate the company would make an acquisition should the right opportunity arise.
- Digital cameras did not make money during the first quarter but Kodak expects profitability for the year. Digital cameras have lower gross margins compared to services, paper and devices.
- Historically, the first quarter is the lowest for gross margins with higher margins coinciding with higher volumes moving into the second quarter.