By Ann Levine July 27, 2004 -- Eastman Kodak Company recently announced second quarter earnings from continuing operations of $253 million or $0.88 per share. Net income was $154 million or $0.54 per share as compared to $112 million or $0.39 per share for the same period last year. Sales were $3.469 billion, a 6% increase over the $3.259 billion for the second quarter of 2003. Topics of this summary: Quarter Overview Segment Performance Guidance Q & A Quarter Overview Today’s call began with Kodak officials giving a top line overview of the company’s performance. Kodak experiences a strong June and the entire company was said to benefit from cost cutting. Kodak reported continued progress on its strategy for growth in its digital portfolio and in managing its traditional portfolio of products. The digital portfolio grew 48%. At the end of the second quarter, acquisitions are on or ahead of plan for the year. Kodak’s relentless attack of cost within its traditional portfolio is expected to intensify going forward. Gross profit as a percent of sales was 33.1%. Kodak expects full-year advertising to decline year over year, with an upward trend during the second half due to the Olympics and increase in demand for digital products. In continuing with cost reduction program, as of the second quarter, 2700 positions have been eliminated and plans an additional reduction of 800 to 1300 positions through the end of the year. Segment Performance Digital and Film Imaging segment sales were $2.396 billion, up 2%. The Kodak Picture Maker Kiosks reported at 93% increase in operating earnings, and a 91% increase with digital capture sales. Officials expected strong performance within the digital portfolio, but were surprised at the magnitude of performance. The home printer doc has also experienced strong growth. US consumer film volumes have declined 15%. Products sales to retailers decreased 20% on a volume basis. Kodak anticipates the U. S. decline will be 18-20% on a volume basis in 2004. Although the U.S. market declined, international markets experienced growth particularly in China, Russia and India. To stay ahead of this decline curve, Kodak has accelerated is cost structure activities to compensate for the decline. 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. The Graphic Communications segment continues to operate on plan and is influenced by the dilution associated with NexPress. Kodak anticipates eliminating the incremental dilution by next year. Guidance Due to volatility in the market, Kodak has declined to give a quarter by quarter guidance and instead gave guidance for the second half of 2004 with earnings expected in the range of $1.25-$1.55 per share. Full year EPS are expected at $2.39-$2.69. Q & A Kodak’s plan for the year was to decrease debt by $800 million. During the first quarter, debt was reduced by $280 million, but went up slightly during the second quarter. Although Kodak has only minor quarter-to-quarter improvement in debt, the company is on track and following its original plan. Margins on Kiosk sales were not released, however, Kodak did stipulate it expected a good quarter for sales and expressed surprise at how good sales were in actuality. Officials states Kiosks are behind on the availability side and some Kiosks had to be shipped by air to meet customer demand. Currently Kodak is building an install base with the benefits of burning to be realized for years to come. In commenting on the company’s guidance, officials reiterated the difficulty in forecasting on a quarter-to-quarter basis. The company indicated quarterly forecasts would be more accurate once trends on digital growth become clear. The projected decline in film for the second half is affected by an increase in sales of digital cameras during the second quarter. An increase in digital sales was experienced last year and is expected again this year. Kodak plans to compensate for this decline with cost structure measures. Further discussing the decline in film, this year Kodak expects about 30% of U.S. households to have digital cameras which affects film consumption. There has been growth in film in China and Eastern Europe. Total percent of sales of traditional film was not disclosed and it is part of a larger portfolio of products. The entire Traditional Products portfolio was $9.1 billion. Providing granularity on the trend in the digital segment, Kodak entered the digital market on the low end and it is currently moving up in price. The company has increased the speed in which it produces new products. There is still significant growth potential, but growth will decline as other digital devices come to the market. Future growth potential will be much less. Kodak officials today were hopeful the upcoming Olympics would moderate the decline in traditional film. KPG provides a strategic opportunity for Kodak as it touches a large number of commercial printers. The greatest opportunity is to reach the printers that are using analog and are migrating to digital. Kodak was unable to speak to a question on the trend in Kiosk growth citing a lack of understanding of all the variables that are contributing to growth and success. President and CEO, Antonio Perez promised a more thorough discussion on the topic at the September analyst’s meeting. Continuing to discuss kiosks, Kodak is seeing a substantial increase in burn rates particularly with large chains and in Europe. Although there was a recent Kodak give-away associated with the purchase of a Dell computer, Kodak sees Dell as a strategic partner and stated there was nothing more to announce on the relationship. The company characterized the give-away as a way to start-up their partnership and take advantage of Dell’s large channel. With the traditional film business, Kodak is not expecting an inventory contraction, unless end use of sales drops. Recently observed price deals do not indicate pricing pressures. Ofoto sales have shown strong growth. In the first quarter sales were $12 million and they have continued to grow and strengthen. Kodak has recently introduced a new product, Kodak Perfect Touch that will be rolled into the Ofoto products. Since Kodak is a major sponsor of the upcoming Olympics, there will be increased advertising associated with the event, but the company will not get revenues that will be specifically identifiable as a result of the Olympics. The company spent $98 million for severance during the second quarter.