By Susan Kelly July 24, 2003 - Eastman Kodak Company (NYSE: EK) Rochester, NY, a worldwide leader in imaging products and services for businesses and consumers reported its second quarter results for 2003. Mr. Robert Brust, Kodak's CFO, initiated the conference to stress the positive results that were above the most recent guidance. Every business unit exceeded the estimate for earnings including Kodak Polychrome Graphics (KPG) and NexPress. The earnings call proceeded without any introductory statements from the Chairman, Mr. Dan Carp, and went directly to discussing the financial summary. Revenues for the second quarter were $3.35 billion, increasing $16 million from second quarter 2002. Without the benefits from exchange rates, revenues actually declined 6% overall primarily due to their photography division. The company reported a net income of $112 million, or $0.39 per share, which was a 61% decline from $284 million, or $0.97 per share, from second quarter 2002. Topics of this summary: * Financial Summary * Commercial Imaging Division: Kodak Polychrome Graphics (KPG) and NexPress * Q & A Summary Financial Summary Regional highlights: China suffered 19% in sales in the second quarter due to SARS. Sales in U.S. were down 7% and up the same amount in non-US regions. Other major shifts include: Russia up 32% and Brazil down 12%. Gross profit was 33.6% as percentage of sales, down 4% for the same quarter last year. SG&A was up 1.7% for the same period and net earnings have decreased by 5.3% overall. It was noted that Other Income increased $13 million contributed by additional income from KPG and reduced losses at NexPress. Kodak is forecasting free cash for the full year 2003 to be $500 million which meets current guidance. These monies will be available for debt reduction or potential acquisitions. Restructuring charges will be in the range of $350-450 million in the next 12 months. This includes changes to Corporate Administration, R&D, infrastructure and rationalization of global manufacturing. There will be a 4500-6000 reduction of employees beginning later this year. Worldwide employment at Kodak was 70,000 at the end of last year. They expect to generate $300-400 million in savings from the restructuring changes with most of savings being realized in 2004. Acquisition of PracticeWorks took place on July 21st, 2003 for approximately $500 million in cash. As part of Kodak's Health Imaging Group, this acquisition is to help Kodak transition from their traditional dental imaging business to a leadership position in the emerging digital radiography markets. Net debt is expected to be $2.1 - $2.4 billion by year end even with the newest acquisition. No significant maturities are due this year. Dividend discussions will not take place until September of this year. Chairman Statement: Mr. Dan Carp, Chairman of Kodak, made the following statement: "This has been a volatile quarter for us as we didn't get the economic rebound we expected, SARS in Asia, Western Europe remains soft, yet consumer enthusiasm for digital photography continues to grow. I remain extremely confident that 2003 will end up as per our original guidance." Mr. Carp's comments were primarily focused on Consumer Imaging products. The company expects earnings of $0.85 to $1.15 per share and GAAP earnings of $0.25 to $0.65 per share for the second half of 2003. Of note was a recent Digital Transition Study on film which confirmed that the digital adoption rates are closer to 8-10%; which are almost double from the 4-6% in Kodak's original business plan. Mr. Carp explains that this accounts for the majority of film sales decline in the U.S. today. Kodak's strategy is to become the low cost producer in every segment, differentiate in regional markets, and manage smartly its alignment and restructuring activities to move from traditional businesses into digital ones. Commercial Imaging Division Revenues for the segment were $382 million for the second quarter which was a 6% increase, excluding favorable impact of exchange, from second quarter 2002. Revenues from Kodak Polychrome Graphics, in which Kodak has a 50% ownership interest, decreased 16% in the current quarter compared to second quarter of 2002, primarily reflecting volume declines in graphic arts film. KPG's operating profit has been positive for 12 consecutive quarters. KPG contributed to positive earnings results with digital proofing and digital plates. NexPress, in which Kodak and Heidelberg each have 50% ownership interest published little to no information this quarter; only that losses were not as heavy as first quarter. Q&A 1. Analysts wanted additional information about the impact of SARS in Asia. The CFO did not have a detailed breakdown but explained that SARS is fading from the scene as an ongoing issue. Dan Carp could not comment on the timing of any rebound in Asia as too much depends on tourism. 2. The restructuring savings of $300 million will occur throughout the year with most of it being realized in 2004. The CFO says it is too early to tell how much of the savings will be used to cut price and they will know better after the fall planning meetings in September. 3. Cost reductions and restructurings will be centered in the U.S. as this is where they have the highest costs (for example corporate and administrative staffs). Kodak does not expect the restructuring will require a significant cash outlay in 2003. 4. Net debt and free cash flow projections were heavily questioned by many analysts as to how Kodak could make their guidance estimates based on their first half results for 2003. Bob Trust, CFO, did not reveal any new details to help meet the forecasts and repeated with "I'm very confident, as confident can be, that we will generate $500 million pre-dividends and acquisitions for the year and that our debt expectations will be in the range of $2.1-2.4 billion." 5. Implications of doubling rates for digital substitution occupied much of the conference call. Dan Carp responded that accelerating rates makes it hard to see any economic rebound. "It's time for us to get on with the reality, but this is still a high volume business. Consumer demand for digital imaging is exploding and a growth industry. OFOTO is the leading online service with over a million users. At some point the model will move to a fee-based model. The trick is to get cost structure of traditional business in line with digital imaging opportunities." 6. Again analysts did the math another way by citing that 20% of households today have digital cameras and how soon will this shift to 30-40% and what will be the impact on demand for traditional film. Analysts tried to pinpoint potential revenue decline in the mid-teen percentages but Kodak executives would not confirm. 7. When questioned about outsourcing in the digital space, the newly appointed President and COO, Mr. Antonio Perez responded "We play in the low-end of the market. We generate large volumes and have achieved breakeven status which is one of the most difficult things to do. More and more we need to do some manufacturing in-house to learn new processes and to put in practice new ideas. Scaling up for large volumes will come from outsourcing, which should be about 50%. Single-use camera manufacturing production is moving to Mexico…and digital camera production is 100% in China." 8. Capital expenditures for 2003 will be $500 million and 2004 will be similar to 2003. 9. Ink jet paper business is a "solid margin business" according to the Kodak Chairman, and no metrics were given as to profitability and growth rates. When pressed for 2004 expectations, no answer was given. Note: No questions were asked by analysts about the Commercial Imaging Division