Eastman Kodak Co (KODK) 2002 Q1 法說會逐字稿

Today's call is being recorded. I would like to turn the conference over to the Director and Vice-President of Investor Relations. Mr. Don Flake.

Good morning, and welcome to our conference call and webcast.

Before we get started, I'd like to call your attention to the safe hard or statement. They maybe forward-looking in nature or as defined in the United States Private Securities Reform Act of 1995.

Actual results may differ from those expressed or implied. The forward-looking statements contained in this discussion will be suggest to a number of risk factors.

A detailed discussion of these risk factors are contained in our press release this morning and the financial discussion document that we have

published, and I would encourage everyone to review these important statements. Now I would like to turn the call over to Mr. Bob Brust.

Thanks, and good morning.

The 1st quarter came in just about as expected and set foundation for our achieving our goals for the remainder of 2002. Many of you will recall that we have indicated for some time, our belief that the 4th quarter of last year and the 1st quarter of this year represent the bottom of our earnings per share performance, with improvement expect going forward from that point.

That remains our view for the rest of the year. Revenue for the quarter was down 9% or 7% if one excludes exchange. This was in line with our internal estimate and planning.

Cost performance was good in the quarter and responded well to the restructuring taking place last year.

Expenses went down 4%. Gross profit was 31.7% in line with analyst estimates but was down 4.5 points from last year.

Price lower the ratio by 1.6%. And mix was off about approximately 1%.

SG & A cost increased by 6% last year or $33 million. Advertising account for about $11 million in the decrease. However, the direct media spending portion of the advertising was up in the quarter. RND spending was $187 million down slightly from last year-- -- declined year-over-year by $37 million of which about half was due to exchange issues with Argentina as well as increased expenditures on next press and FOE. Again, I can partially offset by lower expense. As indicated on January 4th, the tax rate for the quarter and the year declined to 29% resulting from the change in the goodwill rules and some good international tax planning. Net earnings were 3 $3 million or 13 cents per share.

As compared to 66 cents a share last year excluding good bill in both periods and the the plant closer accelerated depreciation a year ago period. As outlined, world-wide consumer film sales to dealer at the climb 13%, 7% due to volume.

5% was mix and price and 2% was exchange. U.S. film sales to dealers decreased 19% and 15% volume, approximately 5% price and mix.

As expected, Kodak's blended U.S. consumer share decreased mid-single digits for the quarter as compared to a difficult compare with the 1st quarter of 2000.

U.S. film industry volume during the [INAUDIBLE] quarter was estimated at plus 2% impacted about an early Easter.

This compares to a minus 3% during the fours or fourth quarter of last year.

Industry trends improved throughout the quarter. It is important to keep in mind that the 1st quarter represents the lowest level of volumes in the year. And relatively small changes in the number of rolls sold to produce relatively large percentage changes. For the quarter, sales increased 8% in both China and India.

Positive progress continued on our health business. Improved execution yielded another jump in operating income margin rate to 14.6% from 11.6% in the 4th quarter and 9.4% in the 3rd quarter of last year.

While that improvement continued, the ratio is still off 4.8% from last year. Our good cost position strengthening in the consumer film [INAUDIBLE] plus the continued up-tick until health margins leads us to reaffirm our guidance of 60-70 cents per share. As stated on January 24th, revenue for the 2nd quarter is estimated to be low last year excluding exchange. Revenue for the second half is made to be modestly above last year on easier compares. As a result, revenue for the year should be flattish with last year. We were very pleased with our cash performance during the quarter. Over the past five years, our use of cash during the 1st quarter has average [56 $1] million. This quarter the use was $48 million and $513 million better than five-year average. As you'll recall, we moved last year to better balance our cash in-flows and out-flows to have a more cost effective financing strategy. As part of that plan, we move to a semiannual dividend payment plan which reduced our 1st quarter cash usage by $128 million we would have paid in the 1st quarter live [INAUDIBLE].

Better inventory balances, lower receivables oooh! Acquisitions expenditures more than offset lower earnings as we reduced our operating cash out-flows by $376 million during the quarter excluding dividends.

Our next dividend payment will be made on July 16th, 2002.

That payment has been prepared and approved by the board. Capital spend was $95 million or 52% below last year which related a reduction of [10 $1] million. We continue to look very carefully at capital expenditures to be sure we were achieving adequate returns. Our planned capital expenditures remain around the $600 million level.

Inventory turns increased to 4.6 from 4.2 last year. The balance of inventories was down over $600 million from last year.

We are on track to achieve our goal of 5 turns this year. Debt declined by $628 million from this time.

Last year's resulted in lower interests costs in the 1st quarter. This reduction served us well in the commercial paper markets during the quarter which were not always stable as you know.

On Tuesday, S&P 500 lowered its long term ratings to triple B-plus, short-term ratings of A-minus.

We were affirmed and current outlook was quieted as -- quoted as stable. We reaffirmed our previous guidance of 60 to 70 cents for the 2nd quarter and $2 to $2.60 for the year.

Now I would like to turn the call over to dan.DAN KERPELMAN; Thanks.

Good morning everyone, and thanks for tying in with us. Now that Bob has reviewed the quarterly results, I would like to take a few minutes to discuss some of the strategic initiatives. We've been focused on cash management and the results reported today are further evidence of the effectiveness of that program. Our second focus has been to drive returns on the investments that we're making. That isn't saying that we're pulling back. It is to say that we're focused on getting the greatest impact from the deployment of our cash. The first and most visible element has been the in retraining -- restraining capital spending. The result has been a substantial reduction in capital spending while still supporting those items necessary for continued growth.

Similarly while we are very intent to moving digital business that's currently making a loss to the profit side of the ledger, it is important to realize that a number of these digital businesses are generating returns currently and it's useful to reflect briefly on the progress that we've made to a company established.

Lets take a minute and look at how far we've come.

Can you imagine the reaction if I would have stood up in 1997, the year I became president, and predicted within five years Kodak would be competing with Sony and Olympics in consumer digital cameras and have introduced the current standard for ease of use with our new easy share system, or be neck-and-neck with HP for number one in photo grade ink jet papers or the on-line print delivery service.

It's not just our opinion.

[INAUDIBLE], the technology writer, has commented that it's his favorite on-line site, or that we replace 35,000 walk up picture Kiosks, or had created a joint venture to create the word's first -- production facility for flat panel display screens.

A new technology for which Kodak has a solid lock. Remember this was essentially growing molecules in a test tube in 1997 or had translated our world-class -- property from our copier programs into exciting new products through the next press joint venture.

More than 60 of these mentioned are in customer hands as we speak today, and we have a real order backlog of 100 units.

Had I made any of these predictions five years ago, I would have confidently predicted that they were greeted with skepticism.

But that's what we've done.

Having achieved that necessary step, we're now in the process of demonstrating we can create shareholder value. And that's our focus, and we're making progress.

As I said earlier, a number of our digital initiatives are profitable now. Photo grade jet paper continues its 50% revenue growth. And this business generates attractive margins today. Our picture maker, Kiosk, are placed in markets and now that the market is broadly based in those markets -- this category is profitable now with attractive margins both to Kodak and to our retail partner.

In the on-line domain or acquisition of Photo looks good every time I look at it.

It is substantial and ultimately it could provide a significant portion of the output for the growing number of digital images being captured today.

Ofoto is growing dramatically. It has proven to be a master of the marketing model.

And even more importantly has demonstrated that it can convert a substantial amount of those who have signed up into paying customers and with the repeat customer rate now exceeding 50%, it's clear that it's giving customers what they want.

The business model is a cell phone type of model.

It's expensive to get started in terms of setting up the underlying infrastructure. But then, each if enough customer again rates higher margin business. As volumes grow, the margins improve and I expect Ofoto will crossover to profitability before the end of next year.

While we're on the subject of Ofoto, one of our 2001 acquisitions we should also talk for a moment about other recent acquisitions. For example, the [Bell and Howl] imaging business has been successfully integrated and has provided an Amtrak active expansion of that business.

Retail.com which is our -- for on-line services is also reaching an attractive scale. At this time we have CBS, Cosco, K-Mart, Rite Aid and Shopper Drug Mart in Canada in the program with more [INAUDIBLE] or retailers to come as well as about 260 individual retail accounts.

I was real impressed at this year's PMA show with how initiatives are starting to come to the storefront to pull digital printing businesses out of the home and into their stores. Kodak is there with products and services to help them in this important effort.

Our digital still camera business is enjoying a great deal of success led by the Kodak easy-share system.

I've always said the key to profits is volume coupled with low-cost manufacturing. We've completed moving manufacturing to China and easy-share success is beginning to give us the volumes.

I continues to feel confident that we will hit the break even point by the end of next year. Oled is another example of Kodak's focus on driving returns. We used a very capital efficient model with San Ohio which gives us excellent level on the cash employee. We have about 20 million directly invested to continue the development of what we expect to become a $500 million revenue business for Kodak.

Our joint venture with [Hide burg] is another -- they continue to make great progress in the on-demand color print market. Our product is shipping to the market now. Customer feedback is excellent and all cases are that we have a winner here. We expect the joint venture to prove to profitability some time in 2000 -- 2004.

They have been a great partner.

Now I could go on, but hopefully, these examples have made the points. This has been a two-step process. We needed to win in the marketplace by giving customers what they wanted by linking up with companies and by leveraging our 125 year knowledge.

From that market success, we can drive to the possible outcomes that we seek.

So in summary, the quarter, it was essentially on our expectations. Consumer markets continue to face challenging market conditions primarily due to the economic environment and of course tough competition.

But while we have our share of challenges, I feel good about our plan and look forward to improving the results in the consumer business as we move through the year. House imaging continues the steady improvement and achieved mid-teen margins the 1st quarter.

The next step was the hiring of a new leader, Dan Kerpelman from GE Medical.

I told you we were going to finds a first-class city leader, and we've accomplished that in spades with Dan coming on board, who can now build on the success.

So things are unfolding about as we expected. No one knows the future, but

we're going to stay focused on executing our plans and benefit from the expected upturn. Now Bob and will be happy to take your questions.

Thank you.

Today's question and answer section will be conducted electronically. If you would like to ask a question at this time, please press the star key followed by

the digit one on your phone. We'll take our first question from Ben Rises.

Good morning.

Let's just go right into it with film down 19%. Let's talk about that number. How much of it snaps back perhaps due to industry inventory reductions? Also, can you quantify the K-Mart impact and whether that was an initial inventory draw-down and that can snap back as well, and how quickly do you think market share can snap back, and what do you think this means for pricing for the year?

Okay.

Well, you put a lot of things in the pot there and that's appropriate, Ben, as you know because you follow the stuff carefully. It's a lot of stuff in the stew so let's take for a moment and talk about the 1st quarter.

Basically we came out where we expected. As I told everyone I think last year, sure last year that we had tough compares on the first half versus the second half and in fact, we knew our share would be down.

And it pretty much was where we thought.

Maybe lower but it did improve sequentially in March versus the two first month a I think our plans are in place just fine for the 2nd quarter, and then you re-evaluate for the 4th quarter so I feel pretty good.

I'm not totally happy with where the share is, but I'm not tense by the in a sense that I feel we have to take some sort of drastic action and as everyone knows, we're committed to holding share, but we're also committed to managing this over a period of time.

And you will not see Dan Kerpelman at the end of the quarter make a number come out.

We're in this thing for the next 100 years, so I don't see any problem in our plans for this year.

Based on what I see in the market conditions, in terms of the volume drop, I think it's important to keep in mind how small the 1st quarter is.

And normal, at least 1st quarter, is less than 20% of the full year's film demand and if anything, it will be a smaller percentage of the first year's demand based on how the years unfolding this year.

If you look at the drop in volume this year versus last year, and I'm not going to give you the exact numbers, but I think it's between 10 and 15 million rolls which is a relatively small drop on a full year industry of 750 million last year.

And that drop came from maybe three major categories.

One was the industry is down. We've been running this baby down since before 9/11 and it's down versus last year.

Second reason is as we said we had a tough share compare, and third, the changes in retail inventories due to the factors you said or just as retailers come out of Christmas and rebalance their inventories in the 1st quarter caused some of that so it's a relatively small unit.

The thing I take heart in for the first time in too long, we see the film industry with positive growth.

We see it as we said in MDA. It was up about 2% last fourth quarter, down about 3%.

That's a good sign. Easter came late and picture taking takes place over the weekends, so I'm not sure how much was in there.

Even if it was minus three and gone back to plus one, that's a good sign. So some of that is share.

I'm not happy with where share is. We've got [INAUDIBLE] plans in place and we're going to deal with it intelligently.

The business off in the 1st quarter, I can pretty account for every role in that and don't see anything disturbing

there and maybe five quarters or six quarters, we've seen an uptick in the U.S. industry and that's a good sign.

Right.

So if you can get your share of that, it looks like going into the spring season, the state industry is you're not seeing cannibalization from digital photography and you're in a situation where picture tag is going to increase sequentially into the spring.

I'd like to know if you agree with that statement that we haven't seen the cannibalization from digital and can you clarify was there any channel inventory reduction in the 1st quarter and do you see any of that snapping back naturally so we're not starting the quarter 19% in the hole?

Where we can get some snap back?

Nothing unusual on digital substitution going on.

That is not an issue in terms of any change. It's a slow process and it's continuing just pretty much as we predicted for the last three or four year.

In terms of the inventory reduction, I think what we saw Ben was smartly so.

Some retailers went into Q4 and stocked up knowing that they had Christmas to get their [INAUDIBLE] in -- inventories in line. One of the large retailers that has got business problems has reduced their inventories permanently until they see their business recover.

Again we're talking 10-15 million rolls in on a market that's 750 million.

If we saw this kind of percentage change in the 2nd quarter, we would have a

totally different discussion but it's not a issue in the 1st quarter.

You did see better share and better activity at the end of the quarter?

We did.

Okay. Thank you.

Next question from -- [Huff].

Two questions.

As you talked about performance and digital and you've got Ofoto will be breaking even at some points. Digital cameras you're confident it will break even in '03 and it seems like the portfolio of businesses are going well particularly given the [INAUDIBLE], so doesn't that mean at some point that on consumer digital that you're at a break even basis and probably profitable in '04 and my related question is, you're focus on returns and invested capital. But if you look at the trends, you're sort of under barely cost of capital and probably under performed -- given on this investment particularly around digital and China, when do you start getting returns to significantly improve coming out of this downturn?

Do we look to be north of that next year, and what would you say digital being a positive contributor rather than a negative.

Okay.

I'm going to give you some general comments, and then I'll probably not answer your question on the return on capital stable today. We'll talk more about that in September.

Bob may have some thoughts. I don't know what stable is anymore after the last 18 months but with that said, I like the [INAUDIBLE] space we're talking.

I like the chips we have on the table. We've got our digital camera business now moving in China.

And there is and another turn of the crank there of getting our platforms more common same lens mount, same sensors so we can put different wraps around them and not get caught with our inventory out of lane line. -- of Ofoto is clearly a leverageable business, and I like our cost structure, and I like our integration on products.

And we've got these guys from outside the company, and they are pretty good in the classic on-line sharing signing somebody-up marketing technique.

Broadband to the home would be a big help.

It still takes too long to up load pictures.

As we've been reading that's still to be done but there is a whole bunch of us that will benefit from it and people trying to make it happen and the final piece is just now getting started.

I predicted it in our 3rd quarter call last year. You saw it at PMA, and I can tell by the contacts with customers in the U.S. now and retailers do see the opportunity to help these digital camera owners get their pictures out of the camera and printed.

So all of that both [INAUDIBLE] for this business now getting profitable, and I don't see a lot of new initiatives right now.

I may go to a meeting this afternoon and find a new way that I haven't seen, but a new initiative to open up for investment rather it's building on digital cameras.

OFoto and easy share lineage and retailers so that it's now more growing those factors versus start UPG new ideas.

But again, I'll say I'm no great visionary in the sense of somebody could be working on something tonight that could come to my desk or we'll see in the labs.

But right now I don't see it so the premise that you're making is right.

We should be getting this stuff profitable and returning a return as digital slowly grows.

Now I'll ask Bob to comment.

We've been as you know working on this hard for the past year or so and have taken analysis to a new level. We're looking at all of our cap-x and we're taking a look at the future partnerships that we do like the San Ohio investment.

In our September analyst meeting when we talked more about the long-term strategy and trends to have a forward discussion on returned and invested capital, we've been working on that.

One of the trends is going to happen in the next three years and we talked by the January 24th, and in light of what Dan just said, we expect cameras and Ofoto and several of these businesses to in fact approach break even and become profitable in the next five years.

And that was what we hope with lower investment should push our return to capital up.

We also expect next press and Dan remarked that next press should be profitable in '04 so you put all of these things together.

We look forward to an improving return on invest in capital in the next couple of years and I'll be prepared to go through that in detail in September.

Let me come back to one other thing. You mentioned China, and we did put a lot of money in China, and the global environment and the markets is developing at its pace, and that money is in place and our market share is good and our brand is terrific.

If any of you have been there, you know how strong we are there and won't go into the details but we have this way of looking at markets about kind of what would be a purchasing power.

That's where people come into to photography. Just to give the [bench mash] water 94% of the households are above that purchasing power.

Maybe not 20 rolls a year but have access to it. In China it looks like 19% or 20% are there. India, I think I saw 16% there. So as long as those countries continues to develop, we'll get return out of that plant there. That's going to be a tremendous growing market given its size and it's relatively low purchasing power consistent with the way we westerners live our life and as that continues to match up and they still have good economic growth in India and China, that's the reason our business was strong there this quarter.

It will have ups & downs and bumps, but it's a great -- it will be a great contributor to the return on the go-forward base [juice digital mini lacks] -- labs, will that be fix [INAUDIBLE] not quite that broken.

As I said in January, I'm a little frustrated that my good competitor got out ahead on me on that but as you've reported things move nowhere near as fast as we would like them to in the consumer space because the investment required is so much so as they start fix picking up.

We'll have our partners in line with the right mini labs and in fact, -- is one our partners and has introduced one of the machines.

So I think we're seeing that fall into place and it's not like it's an on/off switch because retailers have to make their plans and they have at got the same issues we talk about with the Kodak.

Great. Thanks.

Hi.

Couple of quick things. Just to clarify the Argentine peso impacted earnings. We will be looking at 16% per quarter.

Yes.

As we look out to the next quarter in terms of the other net line item, we should be looking at that I'm proving quite a bit sequentially as a result?

Well, you know I hope we don't have another Argentina -- another country devaluation but I would not expect that.

That cost us roughly $13 million to $15 million and I don't expect that to reoccur.

Second question, just talking about general revenue I know Bob you said the outlook is for full year flat revenue. Can you give us a little bit more color on what you expect in the 2nd quarter for revenue?

I know that you guys anticipated a 9% drop or a 7% pre-currency drop but I don't think other people on the street did so given that gap there.

Can we help close that gap by getting a better sense

as to what things ought to look like in the 2nd quarter because what you had in Q1 how you get to flat in the full year?

The profile, we talked about this a little bit on January 24th.

The profile we had last year and at 2001, the first half while still in the general economic slow down was reasonably good for us.

It was off as I recall a point or two from the year before which was a very good year when film revenues the demand was still growing close to double digit.

So the first and 2nd quarter were reasonably good last year and then we really took a dive in the third and fourth quarter when we had the events of September 11th and the subsequent events to our health imaging units.

So when we get to the 3rd and 4th quarter, we'll have a much better and easier compares, both on film and on increasing market share on health imaging and we circle the price declines in health imaging.

On the 2nd quarter I think we said in January that the 1st quarter would be the biggest negative and less negative in the 2nd quarter and then positive in the third and fourth.

Are we looking at a low single digit decline or mid single digit?

I can't be that specific.

But we're forecasting estimating that it will be less than it was in the 1st quarter. The 1st quarter excluding exchange for company was 7%.

I can't predict what exchange will be but we would look for something less than that in the 2nd quarter excluding

exchange. But we're not going the give a specific number going as modestly positive in the third and 4th quarter.

Let's talk about share again for a second in the consumer film business.

Let me defer that hot potato to Dan.

As you look quarter to quarter, what does the market share change look like as we went from Q4 to Q1 and looking at it in a different way if the market share remains at Q1 levels, what would that suggest in terms of the year-on-year performance for market share in the 2nd quarter?

I'm not going to give you a 2nd quarter number only because it's not that I don't have my forecast.

It's only because I'm not going to give

my competitors.

I'm not looking for a forecast. If things stayed where they are today based on where you were a year ago, what would that constitute in terms of year over year performance.

I'm not going to give any of that information because I know the industry better than any and that's a competitive advantage for me.

I will tell that you our 1st quarter share was slightly lower than 4th quarter which is one of the reasons I said I wasn't totally happy with the share situation in the 1st quarter.

But it was a quarter where it didn't make sense to pull a lot of levers to do something on such a small base and, it could have triggered some unintelligent action in the marketplace.

We've got some really good plans in place.

We've adjusted some base on the slight slippage in Q1, moved some money from points A to points b.

And I feel like we have got the rile plan in place and we'll have to wait and see. My feeling is we've got this thing stabilized.

We'll have tough compare in the 2nd quarter and then because we're eight level where we'll be able to beat

the numbers third and 4th quarter.

When you look at the second half of the year and you look at the growth that you anticipate getting, is that going to be largely in the consumer phase that is pretty even throughout the businesses.

Can you give me a flavor for where you expect that growth to come from in the second half?

Revenue growth?

Yes.

As you look at the second half, I expect some positive growth to come in consumer and in the health business as in the 2nd quarter anniversary. I guess is the word, the sharp the second and 3rd quarter sharp price reduction so I'm anticipating revenue growth in the health business during the second half and the other businesses, we have the -- we're assuming no improvement in the economy but in general as we get into the second half w we had such a weak half last year most businesses should share in the growth specifically consumer which was hurt the worst by September 11th and the health business which had the pricing issue.

That's why we're staying tough on cost. And tough on cash here is we we have see a benefit coming by improved compares. But the business is still tough and we don't see a big up tick as we said in the economy.

We see things having bottomed out. Got out of the hole of business decline that was created around those horrible events of September 11th but now the question is what is the slope of the business coming on a normal economic recovery, and I just don't see any reason to be more aggressive than that right now.

Good compares. Got to be tough on costs and conserve cash until we see the real up tick in the economy which I don't think many people say except for a few economist.

One final question.

The health imaging side, the margin expansion there has been pretty solid and I think original least expectation was mid-teens margin

is what you would get back to you. Are we revising that outlook? We [INAUDIBLE] the margins get beyond what you anticipated?

Employees that listen to this call and want to congratulate the health imaging team for what they did.

They have beaten the expectations of how fast they would get back to the mid- teens. I need to see it again in another quarter to be sure it's there and we're going to stay tough there.

The health business I think now needs, assuming this is able to continue and think it is around the 14%, and we'll keep pounding that to take funds and reinvest and reinvest in [INAUDIBLE] business a little bit and now that they are on a more stable platform operationally. They have a got their quality up and they have got their pricing controls in place and management very well.

We need to take a look and see what we need to reinvest.

That's why I brought Dan Kerpelman in with 15 years in the business. He will come in and continue the path on being tough, but start to look at places to invest.

So I don't think it's going to run up much higher because there are areas that we want

to invest in growth and a 15% business is a very good business to be betting on.

Thanks.

Next question from Discovery Communications, Inc Tom Kaplan.

Just some housekeeping notes.

Did you get out a CFFO number? Did I miss that -- a cash flow from operations number?

Yes. This is Dan Flick. We've got all of that published. If you didn't get that, I would be happy to send it to you.

I saw the way you calculate. has this traditionally been presented in the number? I didn't catch that in the press release.

We had a use of cash of $48 million in the quarter.

Right. Okay. Did you give an accounts receivable number.

Yes. I'll look it up for you.

Actually, why don't you call my office after the call.

I'll be happy to do that. Thank you.

And next question from Dale.

Good morning.

Question on calculating inventory turns. I guess I just don't have the same information that you guys have so I get a higher

inventory turn number so my question is for Q2, and for the entire year, how do you see inventory dollars going relative -- sequentially or year-over-year however you want to describe it?

Our inventory balance generally rises seasonally in 2nd quarter because that's our historical strongest quart then later in the year when we'll diminish.

We usually start low now and start building in March.

Build in the second and then pull down. So there probably given that we're assuming that there is no significant economic recovery this year, the inventory balances will rise in the second quarter and then diminish during the year and that would give us around five turns up from -- if there is a big change in the economy one way or another, we'll rapidly a just our inventory balances to accommodate that.

So for the end of the year, you see year-over-year for Q4 not too much change in absolute inventory level?

Well, if we're going to higher turns it would indicate that we have less inventory if we're [flatish] on sales. The inventories will be lower to get the five turns.

Where I'm trying to go is this plays into my calculations of your gross margins and given the guidance I see inventory purchases going way up in the 2nd quarter and it just doesn't seem -- it seems like your gross margin guidance that has been applied in the bottom line guidance seems too low.

The gross margin guidance -- well what normally happens during the 2nd quarter and you'll see the growth margin normally goes up in the 2nd quarter.

You know, by two or three points.

If you take the last two or 3/4 and add them up and divide, you'll get a two or three point. We envision a normal seasonalal up tick because our earnings per share take a big jump in the 2nd quarter. It should be an increase in gross margins 2nd quarter.

Okay. Great.

Let me just make a quick comment.

We're what we're of the fact that some of the numbers like inventory turns and things like that are not as easy to get to from our published data because in these calculations we cut and slice and dice the cost.

We're working to address this so everyone will be able to calculate the numbers and get of the same answers that we do.

Having said that when we do provide these numbers, they are subsequently consistent. When we talk about these

movements and directions, they are accurately stated.

Go for it. Thank you very much.

We'll take our next question.

Considering your emphasis on the return in invested capital, I'll come back to an old question.

You are locally producing a number of the volume hardware you're doing but this uses up a lot of capital invested in making them it also are also using capital in raw materials and work in process.

Have you given in -- about [INAUDIBLE] where your cost are very low?

I didn't hear the beginning? Are you talking about material or equipment side?

You have considerable amount of money invested in equipment.

Right? For example [INAUDIBLE] probably nobody makes them more cheaper than you do but you have a considerable amount of money invested in making them.

Over and above that, you're making them employees capital in terms of raw materials and the work in process.

First of all, we do some of that actually in Europe with a company I think based in Eastern Europe.

I don't want know exactly where, but we'll do that for buffer levels but we find with the emphasis on -- fast change of model cycles and with the need is to continue to increase our percent of cameras that are recycable.

I would because the quality of that camera and the reality of the profitability [inaudible] is heavily tied to how clever in the positive sense you are in your recycling.

It's more efficient for us to keep that capital investment and continue to run that camera line.

Now I will tell that you this effort to reduce inventories is not limited to finished goods inventory.

A big part of that inventory reduction has come from by shortening our cycle times and driving work in process down and reacting we're nowhere near where we want to be.

We do have in our sites keep driving down the amount of money in inventories and work in process and raw material. Right now primarily use of outsourcing on single use materials tends to be buffer stock and we take advantage of the recycling and lower manufacturing cost and the faster product turn over that we can get by having it inside.

Now that's different than some of the more other fixed hardware or like traditional cameras, APS cameras, big parts of the digital cameras outside of Kodak.

That's different than one time use.

Our next question is from Shannon Cross from Meryl Lynch.

Good morning.

There was some comments in the press that [hide burg] might be interested in purchasing your next press. So could you comment on that and where your overall

relationship with [hide burg] stands and then in terms of your digital cameras for profitability, can you give us some idea of unit growth if you're planning on taking additional share -- just give us an idea of how you're going to get there?

On the second one, first, we're very happy with where our share is in digital camera, but I'm a firm believer if you are not trying to take share you lose share. We see the price declines continuing pretty much like they have been in the digital camera space and the next front for us is get our manufacturing settled down in China.

It's coming along fine but there is more work to do.

And about -- --get more of a platform approach to digital cameras and I'm confident that we'll be at these volumes coming next year profitable.

That's forecast. You've got to ask [hide berg] that question. I love next [INAUDIBLE] and I like working with [hide berg].

And with that said, I've often said that my job is to create

shareholder value so everything but my family is for sale at the right please. I'm sure they are glad to hear that.

But I will tell you it will be high price on next press because we really like that product.

We really like the fact that color EP and on demand

printing will move toward some of the professional labs and the consumer labs and we'll wants to pull that technology probably working with [hide berg] to build machines toward the consumer professional lab pace so there is no reason for us to part our ways on that.

Okay.

And can you give us some idea of Photogenics again? INAUDIBLE] the pipeline or have you come up with pricing in terms of the chemical film processor that goes with that.

I don't have any numbers that you can give you on Photogenics. I know we had an excellent show a lot of interest. The product seems to be getting good acceptance but I just don't have that numbers. And we'll have to get them to you in some way.

Okay. Thanks guys.

Again, that's star one to ask a question. We'll take the next question.

Thank you.

Just a couple questions. First on the health imaging side aside from the impact of the [INAUDIBLE] contract, can you give us an update in terms of what you're seeing in the various markets. I noticed some additional language about lower sales due to restrained spending by health care providers.

Not a huge surprise but it's new language relative to to what we were hearing in the

4th quarter. Can you give us an update?

The health environment is not immune to pullbacks and capital spending.

And one of our big partners is GE and they have been selling fewer of the laser printers and we're not surprised because we're selling fewer of the laser printers.

It's not that there is any fundamental change.

The demand is still there. It's just that everybody is pulling back a bit, and I think that's just the way it will be probably for this quarter, and then our guess is whatever it is going forward.

But I don't think there is no structural problem. It's a competitive market and others are trying to catch up with us and we're being very prudent about placing the printers in the right place.

Anything as hot as laser printers, there is a 10 [INAUDIBLE] to place one where there is a plug and that doesn't mean somebody is going to run film through it.

The health people are more selective.

But there is nothing else going on there. What was your first question?

That was it.

I thought you had something else.

Based on backlog current backlog, you expect similar sort of trend at least going into the 2nd quarter you said.

I think it will get -- we'll have to see you really don't know.

Backlogs are dangerous. You get people saying I want to reserve an order. My experience is reserving an order and an order are two different things, so I'm very cautious until I see orders come in.

And it's just too early to tell how that will

pick up in the 2nd quarter. We did move a whole bunch of the lace air printers last year in the first quarter. It slowed down.

And then the other question is as it relates to receivables and the cash flow, you kicked off your factoring program in the quarter. The free cash flow numbers that you cited, does that include the impact of receivables that were factored and do they also contribute to your full year targets?

We have a factoring facility of approximately 300 to $400 million that was established.

We did not use more than a third of that in the 1st quarter. It shows up as short-term debt with an offset to cash. We are using this facility only to the extent that that has a lower interest rate now. Interest rate that we can use by other methods of financing. If the commercial paper markets and everything else is working out okay, we'll not use the factor is until it's just to lower cost.

I can't give you an estimate because we'll just do that quarter by quarter. But we'll show what that is every quarter in short-term debt.

$136 million I think in the 1st quarter and we'll tell you every quarter what that is but

it does not reduce the receivable balance. It goes against a debt and cash.

So it doesn't play at all into your free cash flow operation?

No. No it has nothing to do with free cash. It's purely borrowing.

Including asset sales.

They are not.

Now I understand the [INAUDIBLE]. Thanks.

Thanks very much.

Yes. A couple of questions. Can you gives some sense of film profitability necessity merging markets.

It seems like that's where we're going to expect where the growth is coming from.

Profitable.

I'm not trying to be flip, but I'm not going to get into that.

The film business is very profitable on a global basis and in the emerging markets. To [INAUDIBLE] profitable you have to keep volume growing because that puts a lot through the plant. We have a good plant there in China.

It's producing world-class quality at a competitive cost and at the same safety and environmental standards of any of the Kodak plants so it's away very profitable business that we can continue to drive improving productivity.

Next, Bob commented I think when when he gave the first guidance range, that an improving economy would put on on the high side of range.

Do you have any indications as to whether you think that figures into your guidance?

Are we in an improving economy that would put you at the

high-end of the range or is it more uncertain at this point?

That's a good question.

And you're on the key issue here. The visibility what this economy is doing has got all of us scratch scratching our [INAUDIBLE].

It is clear that we've bottomed out but the bigger question is what is the slope of the recovery? But I would have to say best we can call, it is the range we gave. And we're not calling for a big up tick and we're also not calling for a another double dip here.

We think we're on a slow [INAUDIBLE]-- and our best stab at that is what is the shape of the recovery?

That's about our best stab at that.

Just a couple more brief ones.

I'm not sure in my mind at least what you're going to clearly use to recover the share and restore the mid

single digit loss that took place over the course of the year other than the marketing effort that you're doing, but it doesn't seem like there is any large retailers that you can regain includes activity or am I [INAUDIBLE] about that What are the tools that you have and how do you prioritize them?

That's another very good question.

The issue is we've primarily work with our retailers on two front. One front is promotion and one front is kind of what I'll call display and merchandising.

And we know we can change display and merchandising and get our share to go up. And promotions will get our shares to go up so that's two front that we work on.

The other front is we go to the end consumer and we've been able to hold our media in this downturn.

I grew up just a tad in the 1st quarter and we'll continue to go to the consumer directly. As I think you're aware, we're going to be launching [I-lab] in the mid-west.

With our brand affiliation and loyalty, we know we get increased share there.

And retailers come and go. Some are hot on Kodak at one point and if they go somewhere else another retailer jumps on the Kodak product.

All retailers want to make sure they get a good play of the Kodak business.

How dizzy it fit with their strategies?

There is one talking about their strategy is to get photography one of the top three categories in their store to get traffic and you can bet we're right there with them helping them to gain share of industry so it's account by account and then going to the consumer and holding the brands strong and adding to it a think the Kodak perfect touch will do it this year.

If there is a recovery and people buy more premium film, they may [INAUDIBLE] revert back to your brand potentially.

In regard to the digital

cameras, are you concerned that docking stations may become something that's common in the industry and therefore the easy share may not have some sort of exclusive on that ease of use element?

You're making good point by the way on economy -- those private label ugly things that sticks its head up during recessions and then goes down so like that game we played as kids where you hammer the toy back down, but that's a good point.

But I do think that will happen as the economy improvements.

I'm kind of a little surprised that we haven't seen more docking stations, but the battle is moving off just having a piece of equipment.

It's moving to the software and you're going to see another turn of the Kodak easy share software coming pretty soon.

And it looks pretty good to me so that's where I think the battle will come and through build [INAUDIBLE]knowing your customer and doing it.

Okay. Thanks very much.

That does conclude today's question and answer session. I'll turn it back over to you.

Thank you everyone for tying in today.

We had a good quarter. We did what we said we were going to do and coming through last year with all of the different things going on.

I feel very pleased with what we delivered in the 1st quarter. Good cash. Good job. INAUDIBLE] The CI business was good in terms of seeing the industry come back.

Not quite satisfied on share but nothing I would over react to. I'm happy to reaffirm our range of earnings for the 2nd quarter and the full year.

I admit there are still clouds about the economic condition, but this management team has got their heads focused on the center line and we're marching forward.

1st quarter small quarter. 1st quarter good quarter for Kodak.